1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Timothy T. Scott (SBN 126971) tscott @ sidley.com Robert B. Martin III ( SBN 235489) rbmartin @ sidley.com SIDLEY AUSTIN LLP 555 California Street, Suite 2000 San Francisco , California 94104 Telephone : (415) 772-1200 Facsimile : (415) 772-7400 Attorneys For Defendants CUTERA, INC., KEVIN P. CONNORS, and RONALD J. SANTILLI UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION In re CUTERA SECURITIES LITIGATION This Document Relates to : All Actions Master File No.: C-07-2128 VRW CLASS ACTION DEFENDANTS ' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISS PLAINTIFFS' CONSOLIDATED AMENDED CLASS 1 ACTION COMPLAINT Date: April 3, 2008 Time: 2:30 p.m. Before: The Honorable Vaughn R. Walker DEFENDANTS' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISS PLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT - CASE No. C-07-2128 VRW
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Cutera Securities Litigation 07-CV-02128-Defendants' Request For Judicial Notice In Support Of
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Timothy T. Scott (SBN 126971)[email protected] B. Martin III (SBN 235489)[email protected] AUSTIN LLP555 California Street, Suite 2000San Francisco, California 94104Telephone : (415) 772-1200Facsimile : (415) 772-7400
Attorneys For Defendants CUTERA, INC.,KEVIN P. CONNORS, and RONALD J. SANTILLI
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
In re CUTERA SECURITIES LITIGATION
This Document Relates to : All Actions
Master File No.: C-07-2128 VRW
CLASS ACTION
DEFENDANTS' REQUEST FOR JUDICIALNOTICE IN SUPPORT OF THEIRMOTION TO DISMISS PLAINTIFFS'CONSOLIDATED AMENDED CLASS
1 ACTION COMPLAINT
Date: April 3, 2008Time: 2:30 p.m.Before: The Honorable Vaughn R. Walker
DEFENDANTS' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISSPLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT - CASE No. C-07-2128 VRW
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REOUEST FOR JUDICIAL NOTICE
Defendants Cutera, Inc., Kevin P. Connors, and Ronald J. Santilli ("Defendants )
respectfully request that the Court take judicial notice, pursuant to Federal Rule of Evidence 201(d),
of the documents set forth below and attached hereto as exhibits, in support of Defendants' Motion
to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint ("Complaint ), filed
concurrently with this request. The exhibits are true and correct copies of the referenced documents,
as set forth in the attached Declaration of Robert B. Martin III.
Exhibit A: Cutera, Inc. Form 10-K for the year ended December 31, 2005, filed with the
Securities and Exchange Commission ("SEC ) on March 16, 2006.
Exhibit B: Cutera, Inc. Form 10-K for the year ended December 31, 2006, filed with the
SEC on March 16, 2007.
Exhibit C: Cutera, Inc. Form 10-Q for the quarter ended March 31, 2006, filed with the SEC
on May 10, 2006.
Exhibit D: Cutera, Inc. Form 10-Q for the quarter ended September 30, 2006, filed with the
SEC on November 8, 2006.
Exhibit E: Cutera, Inc. Press Release titled "Cutera Reports Fourth Quarter and Full Year
2006 Results , dated January 31, 2007.
Exhibit F: Cutera, Inc. Press Release titled "Cutera Reports Preliminary First Quarter 2007
Revenue and EPS, dated April 5, 2007.
Exhibit G: Cutera, Inc. Press Release titled "Cutera Reports First Quarter Ended March 31,
2007 Results , dated May 7, 2007.
Exhibit H: Cutera, Inc. Earnings Conference Call Transcript for the fourth quarter 2005,
dated February 13, 2006.
Exhibit I : Cutera, Inc. Earnings Conference Call Transcript for the first quarter 2006, dated
May 8, 2006.
Exhibit J: Cutera, Inc. Earnings Conference Call Transcript for the second quarter 2006,
Idated August 7, 2006.
DEFENDANTS' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISSPLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT - CASE No. C-07-2128 VRW
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Exhibit K: Cutera, Inc. Earnings Conference Call Transcript for the third quarter 2006, dated
November 6, 2006.
Exhibit L: Cutera, Inc. Earnings Conference Call Transcript for the fourth quarter 2006,
dated January 31, 2007.
Exhibit M: Cutera, Inc. Earnings Conference Call Transcript for the first quarter 2007, dated
May 7, 2007.
Exhibit N: RBC Capital Markets Equity Research Comment on Cutera, Inc., dated February
1, 2007.
Exhibit 0 : Table of Cutera, Inc. Common Stock Published Prices (from Yahoo.com) from
January 31, 2007 to May 8, 2007.
Exhibit P : Table of Stock Sales of Cutera, Inc. Common Stock by Defendants Connors and
Santilli from January 1, 2005 through May 8, 2007, accompanied by the respective SEC Forms 3
and 4 reporting the transactions.
In evaluating Defendants' motion to dismiss, the Court may consider documents incorporated
by reference (either explicitly or implicitly ) in the complaint, and other publicly-available documents
capable of accurate and ready determination and not reasonably subject to dispute. Fed. R. Evid.
201(b); In re Silicon Graphics Sec. Litig., 183 F.3d 970, 986 (9th Cir . 1999) (the incorporation by
reference doctrine "permits a district court to consider documents whose contents are alleged in a
complaint and whose authenticity no party questions , but which are not physically attached to the
plaintiff' s pleading. (alterations omitted)); Parrino v. FHP, Inc., 146 F.3d 699 , 706 (9th Cir. 1998)
(where a complaint is "predicated upon a document, courts may consider the document at the
pleading stage "even if plaintiffs complaint does not explicitly refer to it ). The Court may also
take judicial notice of corporate public filings made with the SEC, a corporation ' s press releases, its
published stock prices , and transcripts of its earnings conference calls. See In re Finisar Corp.
Deriv. Litig., 2008 U. S. Dist . LEXIS 4590, at *23 n. 4, 2008 WL 131867 (N.D. Cal. Jan. 11, 2008)
(taking judicial notice of publicly available stock prices); In re LeapFrog Enter., Inc. Sec. Litig.,
2DEFENDANTS' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISSPLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT - CASE No. C-07-2128 VRW
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12007 U. S. Dist . LEXIS 76530, at *17 n.3, 2007 WL 2900566 (N.D. Cal. Sep. 30 , 2007) (taking
judicial notice of earnings calls transcripts ); In re Portal Software Sec. Litig., 2005 U.S. Dist. LEXIS
120214, at *11_14, 2005 WL 1910923 (N.D. Cal. Aug. 10, 2005) (Walker, J.) (taking judicial notice
of corporate public filings with the SEC, From 4s reflecting the stock transactions of corporate
officers, and corporate press releases).
Moreover, although courts typically must consider allegations within a complaint as true,
"the court need not accept as true allegations that contradict matters properly subject to judicial
notice . Portal Software, 2005 U.S. Dist. LEXIS, at *17. Thus, in the event of a factual conflict
between the complaint and the judicially-noticed documents, the latter control. Id.
Here, Exhibits A-D are public documents filed by Cutera with the SEC; Exhibits E-G are
I press releases issued by Cutera; Exhibit H-M are transcripts of Cutera's earnings conference calls;
Exhibit N is an analyst investment report regarding Cutera, which is cited in the Complaint at ¶ 82
and is thus incorporated by reference into the Complaint; Exhibit 0 is a compilation of publicly
available stock prices; and Exhibit P is a compilation of data reflected in public documents filed by
Cutera with the SEC. The Court should thus take judicial notice of those exhibits.
Respectfully submitted,
Dated: January 31, 2008 SIDLEY AUSTIN LLP
By: /s/ Robert B. Martin III
Robert B. Martin IIIAttorneys For Defendants Cutera, Inc.,Kevin P. Connors, and Ronald J. Santilli
3DEFENDANTS' REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF THEIR MOTION TO DISMISS
SF11486424v.1 PLAINTIFFS' CONSOLIDATED AMENDED CLASS ACTION COMPLAINT - CASE No. C-07-2128 VRW
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Timothy T. Scott (SBN 126971)[email protected] B. Martin III (SBN 235489)[email protected] AUSTIN LLP555 California Street, Suite 2000San Francisco, California 94104Telephone : (415) 772-1200Facsimile : (415) 772-7400
Attorneys For Defendants CUTERA, INC.,KEVIN P. CONNORS, and RONALD J. SANTILLI
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
In re CUTERA SECURITIES LITIGATION Master File No.: C-07-2128 VRW
CLASS ACTION
DECLARATION OF ROBERT B. MARTINIII IN SUPPORT OF DEFENDANTS'REQUEST FOR JUDICIAL NOTICE
This Document Relates to : All Actions
DECLARATION OF ROBERT B. MARTIN III IN SUPPORT OF DEFENDANTS' REQUEST FORJUDICIAL NOTICE - CnsE No. C-07-2128 VRW
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DECLARATION OF ROBERT B. MARTIN III
I, Robert B. Martin III, declare as follows:
1. I am admitted to practice law before all the courts of the State of California and the
U. S. District Court, Northern District of California. I am an attorney with the law firm of Sidley
Austin LLP, counsel of record for Defendants Cutera, Inc., Kevin P. Connors, and Ronald J. Santilli
("Defendants ). I submit this Declaration in support of Defendants' Request for Judicial Notice
filed in support of its Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint.
I have personal knowledge of the facts set forth herein and if called as a witness, I could and would
competently testify thereto.
2. Attached as Exhibit A to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Form 10-K for the year ended December 31, 2005, filed with the Securities
and Exchange Commission ("SEC ) on March 16, 2006.
3. Attached as Exhibit B to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Form 10-K for the year ended December 31, 2006, filed with the SEC on
March 16, 2007.
4. Attached as Exhibit C to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Form 10-Q for the quarter ended March 31, 2006, filed with the SEC on May
10, 2006.
5. Attached as Exhibit D to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Form 10-Q for the quarter ended September 30, 2006, filed with the SEC on
November 8, 2006.
6. Attached as Exhibit E to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Press Release titled "Cutera Reports Fourth Quarter and Full Year 2006
Results, dated January 31, 2007.
7. Attached as Exhibit F to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Press Release titled "Cutera Reports Preliminary First Quarter 2007 Revenue
and EPS, dated April 5, 2007.
8. Attached as Exhibit G to Defendants' Request for Judicial Notice is a true and correct
2DECLARATION OF ROBERT B. MARTIN III IN SUPPORT OF DEFENDANTS' REQUEST FOR
JUDICIAL NOTICE - CASE No. C-07-2128 VRW
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copy of Cutera, Inc.'s Press Release titled "Cutera Reports First Quarter Ended March 31, 2007
Results, dated May 7, 2007.
9. Attached as Exhibit H to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the fourth quarter 2005, dated
February 13, 2006.
10. Attached as Exhibit Ito Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the first quarter 2006, dated May 8,
2006.
11. Attached as Exhibit J to Defendants ' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the second quarter 2006, dated
August 7, 2006.
12. Attached as Exhibit K to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the third quarter 2006, dated
November 6, 2006.
13. Attached as Exhibit L to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the fourth quarter 2006, dated
January 31, 2007.
14. Attached as Exhibit M to Defendants' Request for Judicial Notice is a true and correct
copy of Cutera, Inc.'s Earnings Conference Call Transcript for the first quarter 2007, dated May 7,
2007.
15. Attached as Exhibit N to Defendant's Request for Judicial Notice is a true and correct
copy of the RBC Capital Markets Equity Research Comment on Cutera, Inc., dated February 1,
2007.
16. Attached as Exhibit 0 to Defendants' Request for Judicial Notice is a table reflecting
the true and correct published stock prices (from Yahoo.com) of Cutera, Inc. common stock from
January 31, 2007 to May 8, 2007.
17. Attached as Exhibit P to Defendants' Request for Judicial Notice is a table reflecting
stock sales of Cutera, Inc. common stock by Defendants Connors and Santilli from January 1, 2005
3DECLARATION OF ROBERT B. MARTIN III IN SUPPORT OF DEFENDANTS' REQUEST FOR
JUDICIAL NOTICE - CASE No. C-07-2128 VRW
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SF1 1485951v.1
through May 8, 2007, accompanied by the respective SEC Forms 3 and 4 reporting the transactions.
I declare under penalty of perjury that the foregoing is true and correct.
Dated: January 31, 2008 Respectfully submitted,
By: /s/ Robert B. Martin IIIRobert B. Martin III
4DECLARATION OF ROBERT B. MARTIN III IN SUPPORT OF DEFENDANTS' REQUEST FOR
JUDICIAL NOTICE - CASE No. C-07-2128 VRW
EXHIBIT A
'4'V I ZA DS F L P O W F P 5 F A R C H
FORM 10-KCUTERA INC - CUTR
Filed: March 16, 2006 (period: December 31, 2005)
Annual report which provides a comprehensive overview of the company for thepast year
Al
PART I
tems 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate information by referencefrom
PART 11
tem 5 . Market for the Registrant s Common Stock and Related Shareholder Matters 30
PART
PART 1
PART III
T 10 . DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
T 11 . EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A2
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-23.1 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
EX-31.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION3021
EX-31.2 (CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302)
EX-32.1 (CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906)
A3
Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2005
Commission file number : 000-50644
CUTERA, INC.(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction ofincorporation 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: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes q No q
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 q No q
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 1934during 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 filingrequirements for the past 90 days. Yes q No q
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest 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 thisForm 10-K. q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filerand large accelerated filer" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer q Accelerated filer 0 Non-accelerated filer q
Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No q
The aggregate market value of the registrant's voting and non-voting stock, held by non-affiliates of the registrant as of June 30, 2005 (which is the lastbusiness day of registrant's most recently completed second fiscal quarter) based upon the closing price of such stock on the NASDAQ Stock Market on that
date, was $186 million. For purposes of this disclosure, shares of common stock held by entities and individuals who own 5% or more of the outstandingcommon 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 thatterm 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, 2006 was 12,287,510.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate information by reference from the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report.
Item 3. Legal Proceedings 29Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 30Item 6. Selected Financial Data 31Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
Item 7A. Ouantitative and Oualitative Disclosures about Market Risk 41Item 8. Financial Statements and Supplementary Data 43Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69Item 9A. Controls and Procedures 69Item 9B. Other Information 69
PART III
Item 10 . Directors and Executive Officers of the Reissue 70
Item 11 . Executive Compensation 70Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 70Item 13. Certain Relationships and Related Transactions 70Item 14 . Principal Accountant Fees and Services 70
PART IV
Item 15. Exhibits and Financial Statement Schedules 71
Source : CUTERA INC, 10-K, March 16, 2006
A5
Table of Contents
ITEM 1. BUSINESS
Overview
PART I
We are a global medical device company specializing in the design, development manufacture, marketing and servicing of laser and other light-based aestheticssystems to the professional aesthetic market. Our easy-to-use families of products-CoolGlide, Xeo and Solera-enable dermatologists, plastic surgeons,gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aesthetic procedures for their patients. Wecommercially launched our first CoolGlide product in March 2000 for hair removal, and every year since then we have introduced at least one new product. Weintroduced our first Xeo product in 2003 combining pulsed light and laser treatments in a single platform. In 2004, we introduced our first Solera product a
compact tabletop system designed to support a single technology platform. The first technology available on the Solera platform was the Titan, a heat lamp usedfor deep dermal heating to treat wrinkles, which was introduced initially as an upgrade option on the Xeo platform. In 2005, we added the Solera Opus to ourSolera family. To date, we have received FDA clearance to market our products for hair removal and the permanent reduction of hair; for the treatment ofvascular lesions, including leg and facial veins; for the treatment of wrinkles using laser technology but not using broadband infrared light; for the treatment ofbenign pigmented lesions; and for deep dermal heating.
Each of our products consists of one or more handpieces and a console that incorporates a universal graphic user interface, a laser or other light-based module,control system software and high voltage electronics. We offer our customers the ability to select the system that best fits their practice. We design our productsto allow our customers to cost-effectively upgrade to our multi-application products, which enables them to add applications to their aesthetic practice and
provides us with a source of recurring revenue.
We were incorporated in Delaware in August 1998 as Acme Medical, Inc. We changed our name to Altus Medical, Inc. in July 1999 and to Cutera, Inc. in
January 2004.
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 protectivebarrier for the body. It contains cells that determine pigmentation, or skin color. The underlying layer of skin, the dermis, contains hair follicles and large andsmall 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, sun damage and the human body's diminished ability to repair and renew itself over time, can result in aesthetically unpleasantchanges in the appearance of the skin. These changes can include undesirable hair growth. Additionally, blood vessels can enlarge or swell due to circulatorychanges and become visible at the skin's surface in the form of unsightly veins. Collagen can deteriorate, thereby weakening the skin, leading to wrinkles and
looseness. Long-term sun exposure can result in uneven pigmentation, or sun spots. People with undesirable hair growth or the above mentioned skin conditionsoften seek aesthetic treatments to improve their appearance.
The Market for Aesthetic Procedures
The market for aesthetic procedures has grown significantly over the past several years. The American Society of Plastic Surgeons estimates that its memberstreated approximately 3.1 million people in 2004, representing a 230% increase over 1998 and a 8% increase over 2003. We believe there are several factors
contributing to the growth of aesthetic procedures, including:
• Aging ofthe U.S. Population. The "baby boomer" demographic segment, ages 42 to 60 in calendar 2006, represented approximately 28% of theU.S. population in 2003. The size of this aging segment and its desire to retain a youthful appearance, has driven the growth for aesthetic procedures.
Source : CUTERA INC , 10-K, March 16, 2006
A6
Table of Contents
• Broader Range ofSafe andEffective Treatments. Technical developments have led to safe , effective , easy-to-use and low-cost treatmentswith fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners . In addition, technical developments haveenabled practitioners to offer a broader range of treatments . Finally, these technical developments have reduced the required treatment andrecovery time, which in turn has led to greater patient demand.
• Changing Practitioner Economics. Managed care and government payer reimbursement restrictions in the United States, and similar paymentrelated constraints outside the United States, are motivating practitioners to establish or expand their elective aesthetic practices with procedures thatare paid for directly by patients. As a result in addition to the traditional users such as dermatologists and plastic surgeons, other practitioners, such asgynecologists and primary care physicians, have begun to perform these procedures.
Aesthetic Procedures for Improving the Skin's Appearance and Their Limitations
Many alternative therapies are available for treatment of conditions that affect a person's appearance by treating specific structures within the skin. Theseprocedures utilize injections or abrasive agents to reach different depths of the dermis and the epidermis. In addition, non-invasive treatments have beendeveloped that employ laser and other light-based technologies to achieve similar therapeutic outcomes. Some of these more common therapies and their
limitations are described below.
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and laser and other light-based hair removal. The only
techniques that provide a long-lasting solution are electrolysis and laser and other light-based hair removal. Electrolysis is usually painful, time-consuming andexpensive for large areas, but is the only permanent method for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly into ahair 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 lipmay require numerous visits and up to ten 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-based treatments. With thesetreatments, patients seek to eliminate visible veins and improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline ordetergent-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 positionthe 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 its members performed over 544,000 sclerotherapy procedures in 2004.
Skin Rejuvenation- Non-light-based skin rejuvenation treatments include a broad range of popular alternatives, including Botox and collagen injections,chemical peels and microdermabrasions. With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, and remove other signs
of aging, including mottled pigmentation, diffuse redness and wrinkles. All of these procedures are temporary solutions and must be repeated within severalweeks or months to sustain their effect, thereby increasing the cost and inconvenience to patients. For example, the body absorbs Botox and collagen and patientsrequire supplemental injections every three to six months to maintain the benefits of the treatment.
Other skin rejuvenation treatments, such as chemical peels and microdermabrasions, can have undesirable side effects. Chemical peels use acidic or causticsolutions to peel away the epidermis, and microdermabrasion generally utilizes sand crystals to resurface the skin. These techniques can lead to post-procedurestinging, redness, irritation and scabbing. In addition, more serious complications, such as changes in skin color, can result from deeper chemical peels. Patientsthat 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 2004 its members performed over 2.9 million Botox and over 500,000 collagen injection procedures, over 1.0 million chemicalpeels and over 800,000 microdermabrasion procedures.
Source : CUTERA INC, 10-K, March 16, 2006
A7
Table of ContentsTissue Tightening and the Treatment of Wrinkles- Techniques for treatment of wrinkles include surgery, radiofrequency and light-based technologies. Themost common treatment for lax skin is surgery, which can include a facelift, or rhytidectomy, forehead lift or treatment around the eyes, or blepharoplasty. In thisprocedure, an incision is made along the hairline from the temples down around the ears and extending to the lower scalp. The surgeon then separates the skin
from the fat and muscle below. Excess fat may be removed as part of this procedure to improve the contour of the skin. The surgeon then tightens the underlyingmuscle and membrane, pulls the skin back, and removes the excess fat, creating a tighter appearance to the skin. Surgical procedures have risk, which can includeexcess bleeding, nerve damage, or an adverse reaction to anesthesia. Additionally, a facelift can result in an unnatural, overly tightened appearance of the face.According to the American Society of Plastic Surgeons, there were over 114,000 facelifts and over 233,000 blepharoplasties performed in 2004.
A recent alternative to a facelift is radiofrequency tissue tightening. In this approach, radio-frequency energy is applied to heat the dermis of the skin with thegoal of shrinking and tightening the collagen fibers. This approach may result in a more subtle, and incremental change to the skin than a facelift. Drawbacks tothis approach may include surface irregularities, that can resolve over time, and the risk of burning the treatment area.
Laser and Other Light-Based Aesthetic Treatments
Laser and other light-based aesthetic treatments can achieve therapeutic results by non-invasively affecting structures within the skin. The development of safeand effective aesthetic treatments has created a well-established and growing market for these procedures.
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the skin. Non-ablative skin resurfacing is a methodof improving the appearance of the skin by treating the underlying structure of the skin without damaging the outer layers of the skin. Practitioners use laser andother light-based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as cells responsible for pigmentation in the epidermis,without damaging surrounding tissue. Safe and effective laser and other light-based treatments require an appropriate combination of the following fourparameters:
• Energy Level: the amount of light emitted to heat a target;
• Pulse Duration: the time interval over which the energy is delivered;
• Spot Size: the diameter of the energy beam, which affects treatment depth and area; and
• Wavelength: the color of light, which impacts the effective depth and absorption of the energy delivered.
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner can use a laser or other light source to selectivelytarget 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 durationand 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 finehair, 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 failureto protect the surface of the skin may cause burns, which can result in blistering, scabbing and skin discoloration.
The growth in the demand for aesthetic laser and other light-based procedures has resulted in a significant market for products and technologies that allow
practitioners to perform these treatments. However, the most widely-available systems have been, and in many cases remain, single-application devices.Practitioners interested in treating hair, veins and wrinkles have had to incur the expense of purchasing multiple systems and maintaining them in an oftenconfined clinical office space. The need for multiple devices for different applications is primarily a result of technology constraints of most competing systems.Most competing systems cannot combine
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Table of Contentsthe wide range of energy levels, pulse durations and spot sizes with an effective wavelength to perform a broad variety of aesthetic laser and other light-basedapplications using a single system.
Our Products
Our unique CoolGlide, Xeo and Solera families of products provide the long-lasting benefits of laser and other light-based aesthetic treatments. Our technologyallows for a combination of the widest variety of applications available in a single system. Key features of our solution include:
• Multiple Applications Available in a Single System. Our technology platforms enable practitioners to perform multiple aesthetic procedures using a
single device. These procedures include hair removal, treatment of unsightly veins, skin rejuvenation treatment of pigmented lesions and tissuetightening. Because practitioners can use our systems for multiple indications, the cost of a unit may be spread across a potentially greater number ofpatients and procedures, and therefore may be more rapidly recovered.
• Technology andDesign Leadership. We offer innovative and advanced laser and other light-based solutions for the aesthetic market. Our lasertechnology combines long wavelength, adjustable energy levels, variable spot sizes and a wide range of pulse durations, allowing our users tocustomize treatments for each patient and condition. Our proprietary pulsed light handpieces for the treatment of pigmented lesions, hair removal andvascular treatments, optimize the wavelength used for treatments and incorporate a monitoring system to increase safety. Our Titan handpieces utilizea novel light source that had not been previously used for aesthetic treatments.
• Upgradeable Platform. We design our products to allow our customers to cost-effectively upgrade to our multi-application products, whichprovides our customers the option to add additional applications to their existing systems and provides us with a source of recurring revenue. Webelieve that product upgradeability is a competitive advantage because it allows our users to take advantage of our latest product offerings and
provide additional treatment options to their patients, thereby expanding the opportunities for their aesthetic practices.
• TieatmentsforBroadRange ofSkin 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 toeffectively treat patients with both fine and coarse hair. Practitioners may also use our products to treat spider and reticular veins, whichare unsightly small veins in the leg, as well as small facial veins. The ability to customize treatment parameters enables our customers tooffer safe and effective therapy to a broad base of their patients.
• Ease of Use. We design our products to be easy to use. Our proprietary handpieces are lightweight and ergonomic , minimizing user fatigue. OurClearView handpiece allows practitioners to view an area as it is being treated, reducing the possibility of unintended damage to the skin andincreasing the speed of application . Our control console contains a universal graphic user interface with three simple, independently adjustablecontrols from which to select a wide range of treatment parameters to suit each patient ' s profile.
Risks involved in the use of our products include risks common to laser and other light-based aesthetic procedures, including the risk of burns, blistering and skindiscoloration.
Strategy
Cutera's mission is to maintain and expand its position as a leading, worldwide, provider of light based aesthetic devices by:
• Continuing to Develop New Products. We have introduced at least one new product every year since 2000. In 2005, we introduced the Solera Opusplatform; and added ProWave 770 and AcuTip 500
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Table of Contents
pulsed light handpieces for hair removal and vascular treatments. Our products are currently marketed for hair removal, treatment of veins, skinrejuvenation, treatment of pigmented lesions and tissue tightening, and we are developing our existing technology platforms with the intent of treatingadditional conditions.
Increasing Sales ofExisting Products in the United States. We believe there is significant growth potential for our current products in the UnitedStates, and we plan to continue to expand our domestic sales force to capitalize on this opportunity . In 2005 , we expanded our United States salesforce by assembling a new dedicated sales team that is primarily focused on the price - sensitive medi-spa market, which is comprised of physicians
offering aesthetic treatments in a spa environment.
• Expanding our International Presence. We believe that the International market will be a significant growth driver for us. As such, we are focusedon increasing our market penetration overseas and building global brand-recognition. In July 2005, we opened an office in Zurich, Switzerland. The
Zurich office serves as our sales, marketing, and service headquarters for all of our direct sales organizations and distributors in greater Europe. Inaddition, we have a Pacific Rim hub in Tokyo, Japan. For 2005 and 2004, approximately 28% and 34% of our revenue, respectively, originatedoutside of the United States. As of December 31, 2005, we had a direct international sales force of 16 employees in Australia, France, Germany,Japan, Spain, Switzerland and the United Kingdom; and distributors in over 25 countries. We intend to add international direct sales employees,distributors and support staff to increase sales and strengthen customer relationships in international markets.
Broadening our Customer Base. We believe we have an opportunity for significant growth targeting non-traditional aesthetic practitioners.Dermatologists and plastic surgeons have generally been regarded as the traditional customers for laser and other light-based aesthetic equipment. Inthe United States, in 2005, approximately 72% of our business was from non-traditional aesthetic practitioners, including from gynecologists, primary
care physicians, physicians offering aesthetic treatments in a spa environment, and other qualified practitioners. We plan to continue to focus salesand marketing efforts on this broader customer base. In the fourth quarter of 2005, we assembled a new subset of our sales organization that isfocused on non-traditional aesthetic practitioners, which includes the medi-spa market. Our Solera family of products, which includes a compacttable top console with a lower price point is targeted towards this market segment.
• Leveraging our InstalledBase with Sales of Upgrades. Each time we have introduced a new product, we have designed it so existing customers mayupgrade their previously purchased systems to offer additional capabilities. For the year ended December 31, 2005, our upgrade revenue was $6.6million. Providing upgrades to our existing installed base of customers represents a significant opportunity for recurring revenue. We also believe thatour upgrade program aligns our interest in generating revenue with our customers' interest in improving the return on their investment by expanding
the range of applications they can perform.
Generating Revenuefmm Services and Titan Refills. Our Titan product includes a disposable component, which provides us with a source ofrecurring revenue from our existing customers . Our extended service contracts are also a source of recurring revenue. We will continue to look for
opportunities to leverage our relationships with our existing customers for additional revenue opportunities.
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Table of ContentsProducts
Our CoolGlide, Xeo and Solera families of products allow for the delivery of multiple laser and other light-based aesthetic applications from a single system. Thefollowing table lists our products and the aesthetic applications that can be performed by each.
CoolGlide CV 2000 XCoolGlide Excel 2001 X XCoolGlide Vantage 2002 X X XCoolGlide Genesis 2002 XXeo 2003 X X X XXeo with Titan 2004 X X X X XSolera with Titan 2004 XSolera Opus 2005 X X X X
Each of our products consists of a control console and one or more handpieces, depending on the model.
Control Console
Our control console includes a universal graphic user interface, control system software and high voltage electronics. All CoolGlide systems and some models of
the Xeo family include our laser module which consists of electronics, a visible aiming beam, a focusing lens and a flashlamp or an Nd:YAG laser that functionsat wavelengths that permit penetration over a wide range of depths and is effective across all skin types. The interface allows the practitioner to set theappropriate laser or flashlamp parameters for each procedure through a user-friendly format. The control system software ensures that the operator's instructionsare properly communicated from the graphic user interface to the other components within the system. Our high voltage electronics produce over 10,000 watts ofpeak 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 todrive our flashlamp handpiece while the Solera Titan console is designed specifically to drive the Titan handpieces. The control system software is designed toensure that the operator's instructions are properly communicated from the graphical user interface to the other components within the system and includesreal-time calibration to control the output energy as the pulse is being delivered during the treatment.
Handpieces
ClearView Handpiece- Our ClearView handpiece delivers laser energy to the treatment area for hair removal , leg and facial vein treatment, and skin
rejuvenation procedures . The ClearView handpiece consists of an energy-delivery component consisting of an optical fiber and lens, and a copper cooling platewith imbedded temperature monitoring . The handpiece weighs approximately 14 ounces, which is light enough to be held with one hand . The lightweight natureand ergonomic design of the handpiece allows the operation of the device without user fatigue. Its design allows the practitioner an unobstructed view of thetreatment area, which reduces the possibility of unintended damage to the skin and can increase the speed of treatment. The ClearView handpiece alsoincorporates 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 handpiece is available in either a fixed 10 millimeter spot size, for our CoolGlide CV, or a user-controlled variable 3, 5, 7 and 10millimeter spot size, for our other models.
Pulsed Light Handpieces- The OPS600, LP560, ProWave 770 and AcuTip 500 handpieces are designed to produce a pulse of light over a wavelengthspectrum to treat pigmented lesions, such as age and sun spots, hair
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Table of Contentsremoval or superficial vessels. The handpieces consist of a custom flashlamp, proprietary wavelength filter, closed-loop power control and embeddedtemperature monitor, and weigh approximately 13 ounces. The filter in the OPS600 and AcuTip 500 eliminates long and short wavelengths, transmitting only thetherapeutic range required for safe and effective treatment. The filter in the LP560 and ProWave 770 eliminates short wavelengths, allowing longer wavelengths
to be transmitted to the treatment area. In addition, the wavelength spectrum of the ProWave 770 can be shifted based on the setting of the control console. Ourpower control includes a monitoring system to ensure that the desired energy level is delivered. The handpieces protect the epidermis by regulating thetemperature of the handpiece window through the embedded temperature monitor. These handpieces are available on the Xeo and Solera Opus families ofproducts.
Titan Handpiece- The Titan handpiece is designed to produce a sustained pulse of light over a wavelength spectrum tailored to provide heating in the dermis totreat wrinkles (although it is cleared in the United States only for deep dermal heating). The handpiece consists of a custom light source, proprietary wavelengthfilter, closed-loop power control, sapphire cooling window and embedded temperature monitor, and weighs approximately three pounds. The temperature of theepidermis is controlled by using a sapphire window to provide cooling before, during and after the delivery of energy to the treatment site. The Titan handpiece is
available on the Xeo and Solera families of products. The Titan handpiece requires a periodic "refilling" process, which includes the replacement of the opticalsource, after a set number of pulses has been performed.
Cutera Applications and Procedures
Our products are designed to allow the practitioner to select an appropriate combination of energy level, spot size and pulse duration. The ability to manipulatethe combinations of these parameters allows our customers to treat the broadest range of conditions available with a single light-based system.
Hair Removal- Our laser technology allows our customers to treat all skin types and hair thicknesses. Our Nd:YAG laser permits energy to safely penetratethrough 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, thepractitioner sets parameters to deliver therapeutic energy with a large spot size and variable pulse durations, allowing the practitioner to treat fine or coarse hair.
Both our ClearView handpiece and our ProWave 770 handpiece, with its pulsed light technology, allow our customers to treat all skin types quickly andeffectively. Using the interface, the practitioner selects the appropriate mode and fluence to achieve the desired result.
To remove hair, the treatment site on the skin is first cleaned and shaved. Using the ClearView handpiece, the practitioner applies a thin layer of gel to glideacross the skin. The practitioner next applies the ClearView handpiece directly to the skin to cool the area to be treated and then delivers a laser pulse to thepre-cooled area. For the ProWave 770 handpiece, 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 handpieces, delivery of the energy destroys the hair folliclesand prevents hair regrowth. 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 thecondition being treated. On average, there are six to eight weeks between treatments.
Leg and Facial Veins- 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 ClearView handpiece's adjustable spot size of 3, 5, 7 or 10 millimeters allows the practitioner to control treatment depth to target differentsized veins. Selection of the appropriate energy level and pulse duration ensures effective treatment of the intended target. Our AcuTip 500 handpiece, with its 6millimeter spot size, is designed for the treatment of facial vessels.
The vein treatment procedure is performed in a substantially similar manner to the hair removal procedure. In addition to pre-cooling the area to be treated usingthe ClearView handpiece, the handpiece is also used to cool
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Table of Contentsthe treatment area after the practitioner applies the laser pulse . With the AcuTip 500, the pulse of light is delivered while the treatment area is being cooled withthe sapphire tip. The delivered energy damages the vein and, over time, it is absorbed by the body. Patients receive on average between one and six treatments,with six weeks or longer between treatments.
Skin Rejuvenation- Our laser technology allows our customers to perform non-invasive treatments that improve facial skin tone and texture by reducingredness and pore size, and treating other aesthetic conditions. Our products deliver a combination of high laser energy and a very short pulse duration to affectthe desired target, minimizing risk of damage to the surrounding tissue.
To perform a skin rejuvenation procedure, cooling is not applied and the handpiece is held directly above the skin. A large number of pulses are directed at thetreatment 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 treatmenttypically takes less than a half hour and there are typically two to four weeks between treatments.
Pigmented Lesions- Our flashlamp technology allows our customers to safely and effectively treat pigmented lesions, such as age spots and sun spots. The
practitioner delivers a narrow spectrum of light to the surface of the skin through our OPS600 or LP560 pulsed-light handpieces. These handpieces include one ofour proprietary wavelength filters, which reduce the energy level required for therapeutic effect and minimize the risk of skin injury.
In treating pigmented lesions, the handpiece is placed directly on the skin and then the light pulse is triggered. The cells forming the pigmented lesion absorb thelight energy and will darken and then flake off over the course of two to three weeks. Several treatments may be required to completely remove the lesion. Thetreatment takes a few minutes per area treated and there are typically three to four weeks between treatments.
Tissue Tightening- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The practitioner delivers a spectrum of light tothe skin through our Titan handpiece. This handpiece includes our proprietary light source and wavelength filter which tailors the delivered spectrum of light toprovide heating at the desired depth in the skin.
In treating skin laxity, the handpiece 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 regrowth. Several treatments may be required to obtain thedesired degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four weeks between treatments.
Our CE Mark allows us to promote the Titan in the European Union, Australia and certain other countries outside the United States for the treatment of wrinklesthrough skin tightening. However, in the United States we have a 510(k) clearance for only deep dermal heating. We are continuing to gather data in an effort toobtain other clearances from the FDA to market Titan for additional indications.
Product Upgrades
Our products are designed to allow our customers to cost-effectively upgrade to our newest technologies, which provides our customers the option to addapplications to their Cutera system and provides us with a source of recurring revenue. When we introduce a new product, we notify our customers of theupgrade 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 a few cases, where substantial upgrades are necessary, the customer will receive a fully-refurbishedsystem before sending their prior system back to our headquarters.
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Table of ContentsSales and Marketing
We sell, market and distribute our products in the United States through a direct sales force supported by a team of technical service specialists. Our strategy toincrease U.S. market penetration relies on selling directly to our historic customer base of plastic surgeons and dermatologists. In addition, we are targeting anon-traditional aesthetic practice opportunity consisting of gynecologists, primary care physicians, physicians offering aesthetic treatments in a spa environment
and other qualified practitioners. As of December 31, 2005, we had a 52-person North American direct sales force, four of whom were regional managers, andone Vice President of North American Sales. We plan to continue hiring additional sales representatives. In addition, in November 2003 we entered into adistribution agreement with Physician Sales and Service, Inc., or PSS, World Medical. PSS operates medical supply distribution service centers withapproximately 700 sales representatives serving physician offices in all 50 states of the United States. The agreement with PSS continues indefinitely unlessterminated by one of us upon 90 days written notice. PSS sales representatives work in coordination with our sales force to locate additional customers for ourproducts. For the years ended December 31, 2005 and 2004, sales to PSS World Medical accounted for 16% and 12%, respectively, of our net revenue.
As of December 31, 2005, we had a direct sales force of 16 employees in Australia, France, Germany, Japan, Spain, Switzerland and the United Kingdom; anddistributors in over 25 additional countries. We generally require our distributors to invest in service training and equipment, to attend certain exhibitions and
industry meetings, and in some instances, to commit to minimum sales amounts to gain or retain market exclusivity.
The percentage of our revenue from customers located outside the United States was approximately 28%, 34%, and 23% in fiscal 2005, 2004 and 2003,respectively. Though in 2005 we experienced positive revenue growth in the international market, as a whole, domestic revenue grew at a faster pace. The
percentages of our revenue by region are presented in the table below:
Year EndedDecember 31,
2005 2004 2003
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J.ih.in 6 14 1kcst ol'\iId1 _ 2n 18
Total 10011'^ 100% 10U" "
Revenue is attributed to regions based on the shipping location of external customers. Our long-lived assets maintained outside the United States areinsignificant.
We seek to establish strong ongoing relationships with our customers through the upgradeability of our products; sales of extended service contracts, the refillingof Titan handpieces, and ongoing training and support. We primarily target our marketing efforts to practitioners through office visits, workshops, trade shows,webinars and trade journals. We also market to potential patients through brochures and our website. We offer clinical forums with recognized expert panelists topromote advanced treatment techniques using the CoolGlide, Xeo and Solera families of products to further enhance customer loyalty and uncover new salesopportunities.
Competition
Our industry is subject to intense competition. Our products compete against conventional non-light-based treatments, such as electrolysis, Botox and collageninjections, chemical peels, microdermabrasion and sclerotherapy. Our products also compete against laser and other light-based products offered by publiccompanies, such as Candela, Cynosure, Laserscope, Lumenis, Palomar Medical Technologies and Syneron, as well as private companies, including Thermageand Reliant.
Competition among providers of laser and other light-based devices for the aesthetic market is characterized by extensive research efforts and technologyprogress. While we attempt to protect our products through patents and
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Table of Contentsother intellectual property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that wouldcompete directly with ours. There are many companies, both public and private, that are developing innovative devices that use both light-based and alternativetechnologies. Many of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as
international distribution channels that are more effective than ours. Additional competitors may enter the market and we are likely to compete with newcompanies in the future. To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments bydifferentiating our products on the basis of performance, brand name, reputation and price. We have encountered and expect to continue to encounter potentialcustomers who, due to existing relationships with our competitors, are committed to, or prefer the products offered by these competitors. Competitive pressuresmay result in price reductions and reduced margins over time for our products.
Research and Development
Our research and development group develops new products to address unmet or underserved market needs. The major focus of this group is to leverage ourexisting technology platforms for new aesthetic applications. As of December 31, 2005, our research and development activities were conducted by a staff of 17employees with a broad base of experience in lasers and optoelectronics. We have developed relationships with outside contract engineering and designconsultants, giving our team additional technical and creative breadth. We work closely with thought leaders and customers, both individually and through our
sponsored seminars, to understand unmet needs and emerging applications in aesthetic medicine. Research and development expenses for 2005, 2004 and 2003,were $5.1 million, $4.1 million and $3.1 million, respectively. We expect that we will continue to invest approximately 7-9% of net revenue in research anddevelopment activities in order to bring new products to market.
Services 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 easilybe removed and replaced. We believe that quick and effective delivery of service is important to our customers. We strive to respond to service calls within 48
hours to minimize disruptions for our customers. As of December 31, 2005, we had a 28 person global service department. Internationally, we provide directservice support through our Tokyo and Zurich offices, and also through distributors and third-party service providers. We provide initial warranties on ourproducts to cover parts and service and offer extended warranty packages that vary by the type of product and the level of service desired. Our base warranty onsystem sales covers parts and service for a period of one to two years. Customers are notified before their initial warranty expires and are able to choose from twodifferent extended service plans covering preventative maintenance and replacement parts and labor. One plan allows the customer to pay only for time and
materials at a reduced rate and a second provides yearly preventative maintenance for a fixed fee. In the event one of our customers declines an additionalwarranty, we will continue to service our products and charge customers for time and materials.
Manufacturing
We manufacture our products with components and subassemblies supplied by vendors. We assemble and test each of our products at our Brisbane, Californiafacility. 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 ofcomponents 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
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Table of Contentssubassemblies. We reduce the potential for disruption of supply by maintaining sufficient inventory and identifying additional suppliers. The time required toqualify new suppliers for some components, or to redesign them, could cause delays in our manufacturing. To date, we have not experienced significant delays inobtaining 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 managementprogram. 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 anddocumentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA enforces theQSR through periodic unannounced inspections. We were inspected by the FDA in 2000 and again in 2001 at our former Burlingame facility. Our current facility
in Brisbane was inspected by the FDA in 2004 and 2005. There were no significant findings as a result of these audits and our responses have been accepted bythe FDA. Our failure to maintain compliance with the QSR requirements could result in the shut down of our manufacturing operations and the recall of ourproducts, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our qualityrequirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We have opted to maintain quality assurance andquality management certifications to enable us to market our products in 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. In February 2000, our former facility was awarded the ISO 9001and EN 46001 certification. In March 2003, we received our ISO 9001 updated certification as well as our certification for ISO 13485 which replaced our EN46001 certification. We have transferred these certifications to our new facility.
Patents and Proprietary Technology
We rely on a combination of patent, copyright trademark and trade secret laws and confidentiality and invention assignment agreements to protect ourintellectual property rights. As of December 31, 2005, we had five issued U.S. patents primarily covering our ClearView handpiece design and cooling method.
Of the five issued patents, three expire in 2019; one expires in 2020; and one expires in 2021. At December 31, 2005, we had sixteen pending U.S. patentapplications. We intend to file for additional patents to continue to strengthen our intellectual property rights. CoolGlide is a registered trademark in the UnitedStates, Canada, the European Union and Japan. CoolGlide Excel, Coolglide CV and Cutera are registered trademarks in the United States. Our other trademarksinclude CoolGlide Genesis, CoolGlide Genesis Plus, CoolGlide Vantage, CoolGlide Xeo, CoolGlide Xeo SA, Titan, Solera Opus, Prowave 770, Titan XL, TitanV and AcuTip.
All employees and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationshipswith 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 intellectualproperty, unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary.
Our patent applications may not result in issued patents, and we cannot assure you that any patents that issue will protect our intellectual property rights. Any
patents issued to us may be challenged by third parties as invalid or parties may independently develop similar or competing technology or design around any ofour patents. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countrieswhere the laws may not protect our proprietary rights as fully as in the United States.
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Table of ContentsGovernment 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 orexported internationally are safe and effective for their intended uses:
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance orpre-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 Ior II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device. This process isgenerally known as 5 10(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such aslife-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in classIII, requiring pre-market approval. All of our current products are class II devices.
510(k) Clearance Pathway
When a 5 10(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to a previouslycleared 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 applications, or PMA. By regulation, the FDA is required to clear or deny a 510(k), pre-market notification within 90 days of submission of theapplication. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make adetermination regarding substantial equivalence.
Laser devices used for aesthetic procedures, such as hair removal, have generally qualified for clearance under 510(k) procedures. We received FDA clearance tomarket our products for the treatment of vascular lesions in June 1999, for hair removal in March 2000, and for permanent hair reduction in January 2001. Inaddition, in June 2002, we received FDA clearance to market our products for the treatment of benign pigmented lesions, for the treatment of pseudofolliculitisbarbae, commonly referred to as razor bumps, and for the reduction of red pigmentation in scars. In October 2002, we received FDA clearance to market our
products for the treatment of wrinkles, which we have utilized to market our products for skin rejuvenation. In March 2003, we received FDA clearance tomarket our pulsed-light handpiece for the treatment of pigmented lesions.
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Table of ContentsIn February 2004, we received FDA clearance to market our infrared Titan handpiece for deep dermal heating for the temporary relief of minor muscle and jointpain and for the temporary increase in local circulation where applied. In October 2004, we received FDA clearance to market our Titan tabletop console for usewith the Titan handpiece. In January 2005, we received FDA clearance to market our Solera tabletop console for use with our pulsed-light handpieces In March
2005, we received FDA clearance to market our pulsed light handpieces for hair removal and vascular treatments.
In May 2005, the FDA determined that our 510(k) application with respect to marketing our Titan product in the United States for wrinkle reduction was notsubstantially equivalent to predicate devices for the treatment of wrinkles. We continue to gather additional data to seek a clearance from the FDA to marketTitan for additional indications.
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 notlimited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device.
No device that we have developed has required pre-market approval, nor do we currently expect that any future device or indication will require pre-marketapproval.
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 thesemodifications . 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 new510(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 ceasemarketing and distribution and/or recall the modified device until 510(k) clearance or pre- market approval is obtained . Also, in these circumstances, we may besubject to significant regulatory fines or penalties.
Clinical Trials
When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device presents a "significant risk," as defined by the FDA,to human health, the device sponsor is required to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior tocommencing the human clinical trial. If the device is considered a "non-significant" risk, IDE submission to the FDA is not required. Instead, only approval fromthe 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 testingresults, 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 FDAfor 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 theappropriate institutional review boards at the clinical trial sites. Future clinical trials of our products may require that we submit and obtain clearance of an IDEfrom 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.
We currently do not have any clinical trials underway. We will hold clinical trials in the future if required to do so by the FDA or if we believe additionalindications on our products may be obtained by conducting such trials.
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Table of ContentsOur clinical department continues to work with physicians and other experts in the medical aesthetic market to gather additional data that may provide the basisfor physician-authored white papers, the promotion of our existing products, or seeking the approval for additional indications on our existing and any futureproducts.
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 uncleared, 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 orserious 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 datafor 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 ofthe California Department of Health Services, or CDHS, to determine our compliance with the QSR and other regulations, and these inspections may include themanufacturing facilities of our subcontractors. In the past, our prior facility has been inspected, and observations were noted. There were no findings thatinvolved a material violation of regulatory requirements. Our responses to these observations have been accepted by the FDA and CDHS, and we believe that weare in substantial compliance with the QSR. Our current manufacturing facility has been inspected by the FDA but not by the CDHS. The FDA noted
observations, but there were no findings that involved a material violation of regulatory requirements. Our responses to those observations have been accepted bythe FDA.
We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, includingdesign 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:
• fines, injunctions, consent decrees and civil penalties;
• recall or seizure of our products;
• operating restrictions, partial suspension or total shutdown of production;
• refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;
• withdrawing 510(k) clearance or pre-market approvals that are already 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.
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Table of ContentsWe 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 andquality assurance. We believe that compliance with these laws and regulations as currently in effect will not have a material adverse effect on our capitalexpenditures, 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 toobtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may bedifferent.
The primary regulatory environment in Europe is that of the European Union, which consists of twenty-five countries encompassing most of the major countriesin Europe. Three member states of the European Free Trade Association have voluntarily adopted laws and regulations that mirror those of the European Unionwith respect to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medicaldevices 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 thatcomply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essentialrequirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, the memberstates of the European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformityvaries 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 consistof 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 theEuropean Union, the European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is required in order for amanufacturer 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 ISO13485:1996 which replaced our EN 46001 certification. In March 2004, we received our ISO 13485:2003 certification, which is the most current ISOcertification for medical device companies.
Employees
As of December 31, 2005, we had 195 employees, with 87 employees in sales and marketing, 38 employees in manufacturing operations, 28 employees in
technical service, 11 employees in research and development 25 employees in general and administrative, and 6 employees in clinical, regulatory and qualitycontrol. 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 isrepresented by a labor union, and we believe our employee relations are good.
Available Information
We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the
Securities and Exchange Commission , or SEC, including reports on the following forms: annual report on Form 10- K, quarterly reports on Form 10- Q, currentreports 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. Thesereports and other information concerning the company may be accessed through the SEC's website at http ://www.sec . gov and our website athttp://www.cutera . com. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC.
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Table of ContentsOur most recent charter for our Audit and Compensation Committees and our Code of Ethics are available on our website at www.cutera.com. In the event thatwe grant a waiver under our Code of Ethics to any of our officers and directors we will publish it on our website.
ITEM IA. RISK FACTORS
Unfavorable results in our intellectual property litigation with Palomar Medical Technologies may result in significant decline to our stock price
Since February 2002, we have been involved in litigation with one of our public company competitors, Palomar Medical Technologies, which alleges that themanufacture, use and sale of our products for laser hair removal infringe a certain United States patent. Public announcements concerning this litigation that areunfavorable to us have in the past resulted, and may in the future result, in significant declines in our stock price. For example, on December 13, 2005, the date ofthe public announcement of the denial of our motion for summary judgment, our stock price declined 34.4%. The parties are now preparing for trial, which is
expected to start on May 30, 2006. An adverse ruling or judgment in this matter could cause our stock price to decline significantly.
Even if we prevail in this litigation, we do not believe that will end the dispute with Palomar. It is likely that the party who loses at the trial court level will file anappeal. Additionally, in 2005, we became involved in a second litigation against Palomar concerning our products that use pulsed light technology for hair
removal, and whether these products infringe two United States patents. Consequently, even following a favorable determination in the litigation set for trial, weexpect our stock to be subject to volatility from the Palomar dispute.
Our intellectual property litigation with Palomar is costly and may prevent usfrom selling many of our products and generating anticipated revenue
If we do not prevail in our action against Palomar, we may be ordered to pay substantial damages for past sales (including compensatory and treble damages) andan ongoing royalty for future sales of products found to infringe. We could also be ordered to stop selling any products that are found to infringe. Most of our
products include an application for laser-based hair removal, the alleged infringing application. If found liable, we do not know whether we could redesign ourproducts to avoid future infringement with respect to this application. Consequently, we could have to remove the infringing application. Alternatively, we couldseek a license to the technology from Palomar, but they have indicated publicly that they will not give us a license.
Litigation with Palomar has been and will continue to be expensive and protracted, and our intellectual property position may be weakened as a result of anadverse ruling or judgment. Whether or not we are successful in the pending lawsuits, litigation consumes substantial amounts of or financial resources anddiverts management's attention away from our core business. See Item 3 "Legal Proceedings." We believe the cost of the Palomar litigation will increase in2006, and that the increased cost will be substantial as the matter approaches and enters the trial stage.
We may be involved in future costly intellectual property litigation, which could impact ourfuture business andfinancial performance
As with Palomar, our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. In addition, wedo not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import ourproducts. 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 asuccessful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and marketing ourproducts and our business would suffer as a result.
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Table of ContentsWe 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 ownintellectual property. For example, we have been, and may hereafter become, involved in litigation to protect the trademark rights associated with our companyname 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. We do not know whether necessary licenses would be available to us on satisfactory terms, orwhether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, 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 andfinancial condition.
Intellectual property rights may not provide adequate protection for some or all of our products, which may permit thirdparties to compete against us moreeffectively.
We rely on patent, copyright trade secret and trademark laws and confidentiality agreements to protect our technology and products. At December 31, 2005, wehad five issued U.S. patents, some covering our ClearView handpiece design and cooling method. Some of our other 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 notissue 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, formeremployees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized usesand 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 andattempt to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop theirown 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 could be adversely affected, as could our business.
We compete against companies that have longer operating histories, more establishedproducts and greater resources, which may prevent us from achievingsignificant market penetration or increased operating results.
Our products compete against similar products offered by public companies, such as Candela, Laserscope, Lumenis, Palomar, and Syneron as well as privatecompanies such as Reliant Technologies and Thermage. Competition with these companies could result in price-cutting, reduced profit margins and loss of
market share, any of which would harm our business, financial condition and results of operations. We also face competition from medical products, such asBotox, an injectable compound used to reduce wrinkles, and collagen injections. Other alternatives to the use of our products include sclerotherapy, a procedureinvolving the injection of a solution into the vein to collapse it electrolysis, a procedure involving the application of electric current to eliminate hair follicles,and chemical peels. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. Our ability tocompete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and includes such factors as:
• intellectual property protection;
• product performance;
• product pricing;
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• quality of customer support;
• success and timing of new product development and introductions; and
• development of successful distribution channels, both domestically and internationally.
Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. For example,we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additionalproducts from our competitors. Potential customers also may need to recoup the cost of expensive products that they have already purchased from ourcompetitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unable
to compete effectively and our business will be harmed.
In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketingresources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and market
share, as well as new technologies or products that could effectively compete with our existing product lines. For example, ESC Medical purchased Coherent'smedical business in 2001 and the surviving company, Lumenis, incorporated competitive product lines and technologies of the predecessor companies into itscurrent products. Given the relatively few competitors currently in the market, any business combination could exacerbate any existing competitive pressures,which could harm our business.
Competition amongproviders of laser and other light-based devices for the aesthetic market is characterized by rapid innovation, and we must continuouslydevelop new products or our revenues may decline
While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants orexisting competitors from developing products that compete directly with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, orlong wavelength, laser system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently introduced systems that utilizeNd:YAG lasers, and received FDA clearances to market these products as treating all skin types. We expect that any competitive advantage we may enjoy from
other current and future innovations, such as combining multiple handpieces in a single system to perform a variety of applications, may diminish over time, ascompanies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve ourproducts and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue will decline asour customers purchase our competitors' products.
Our ability to compete depends upon our ability to innovate, to develop and commercialize new products andproduct enhancements, and to identify newmarkets for our technology.
We have created products to apply our technology to hair removal, treatment of veins, skin rejuvenation, treatment of pigmented lesions and treatment ofwrinkles. Currently, these applications represent the majority of laser and other light-based aesthetic procedures. To be successful in the future, we must developnew and innovative applications of laser and other light-based technology, identify new markets for our existing technology, and develop new technology that isnot light-based. To successfully expand our product offerings, we must:
• develop or acquire new products that either add to or significantly improve our current products;
• convince our target customers that our new products or product upgrades would be an attractive revenue-generating addition to their practices;
• sell our products to non-traditional customers;
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• identify new markets and alternative applications for our technology;
• protect our existing and future products with defensible intellectual property; and
• satisfy and maintain all regulatory requirements for commercialization.
Every year since 2000, we have introduced at least one new product and a corresponding upgrade to our existing products. Historically, these introductions havebeen a significant component of our financial performance. Our business strategy is based, in part, on our expectation that we will continue to make annualproduct introductions that we can sell to new customers and to existing customers as upgrades. In the future, we plan to invest between 7-9% of net revenue inour research and development department. Even with a significant investment in research and development, we may be unable, however, to continue to develop
new products and technologies annually, or at all, which could adversely affect our projected growth rate.
If our public guidance or ourfuture operatingperformance does not meet investor expectations, our stock price could decline
We provide guidance to the investing community regarding our anticipated future operating performance, both for the coming quarter and fiscal year end. Ourbusiness typically has a short sales cycle, we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully issubject to many uncertainties, as discussed herein. In light of those factors, it is difficult for us to estimate with accuracy our future results. In the past, our actual
performance had turned out to be significantly different from our prior guidance. For example, at the beginning of 2005, we indicated that we expected our 2005revenue to increase by 25% over 2004. Actual 2005 growth was higher, at 44% over 2004. Earlier this year, we stated publicly that we expected our revenue togrow 25% in 2006, compared to 2005. As we stated at the time, such expectations are subject to numerous risks and uncertainties which could make actualresults differ materially, either higher or lower. If our actual results do not meet our public guidance, or our results or guidance as to the future were to be belowthe expectations of third party financial analysts, our stock price could decline significantly.
Ifwefail to obtain clearance from the U.S. Food and DrugAdministration to market our Titan productfor additional indications, our revenuefrom thisproduct may be adversely affected
Our Titan product, introduced in 2004, is a material component of our growth strategy. We currently have FDA clearance to market Titan in the United States fordeep dermal heating. The FDA has denied our initial 510(k) application to market Titan for wrinkle reduction on the basis that Titan is not substantiallyequivalent to predicate devices for the treatment of wrinkles. We are continuing to seek a clearance from the FDA to market Titan for additional indications, but
there are no assurances as to when, or whether, we will ever obtain such a clearance. We cannot promote or advertise our Titan product in the United States forany indications other than deep dermal heating until we receive additional FDA clearances. In the event that we do not obtain additional FDA clearances, ourability to market Titan in the United States and revenue derived therefrom, including revenue from both Titan unit sales and handpiece refills, may be adverselyaffected.
Ifwefail to obtain or maintain necessary FDA clearances for our products and indications, if clearances forfuture products and indications are delayed ornot issued, or if there arefederal or state level regulatory changes, 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 mustfirst receive either 510(k) clearance or pre-marketing approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. In theevent that we do not obtain additional FDA clearances, our ability to market future products or applications in the United States and revenue derived therefrommay be adversely affected.
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Table of ContentsMedical devices may be marketed only for the indications for which they are approved or cleared and if we are found to be marketing our products for off-label,or non-approved, uses we might be subject to FDA enforcement action or have other resulting liability. We have obtained 510(k) clearance for the indications forwhich 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 wouldlikely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which are, in many instances, in flux. Changes in stateregulations may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, "licensed practitioners," as determined on astate-by-state basis. As a result in some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time,thereby disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement actionby the FDA or state agencies, which may include any of the following sanctions:
• warning letters, fines, injunctions, consent decrees and civil penalties;
• repair, replacement, refunds, 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, they could harm our business.
Ifwefail to comply with the FDA's Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and ourbusiness 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 ofour 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. Thelaser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixingwarning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performancestandards through periodic unannounced inspections. We have been, and anticipate in the future to be, subject to such inspections. Our failure to take satisfactory
corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcementactions, 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.
Ifwe modem one of our FDA-approved devices, we may need to seek re-approval; which, ifnot granted, wouldprevent usfrom selling our modifiedproducts
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 usewould require a new 510(k) clearance or possibly a pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals fornew
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Table of Contentsproducts or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearance wouldadversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability. We havemade 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 themodified 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 orfuture products and indications, which couldharm 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 andtime-consuming process and approval is not certain. The time required to obtain clearance or approvals, if required by other countries, may be longer than thatrequired for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may be unableto obtain or maintain regulatory qualifications, clearances or approvals in other countries. We may also incur significant costs in attempting to obtain and inmaintaining 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 orenhancements in international markets effectively, or at all, which could have a material adverse effect on our business and growth strategy.
To successfully market and sell our products internationally, we must address many issues with which we have little or no experience.
For the year ended December 31, 2005, approximately 28% of our revenue was derived from international customers, which are a material component of ourgrowth strategy. We depend on third-party distributors and a relatively new direct sales operation to sell our products internationally, and if these distributors ordirect sales personnel under-perform, we may be unable to increase or maintain our level of international revenue. We will need to attract additional international
distributors to grow our business and expand the territories in which we sell our products. Distributors may not accept our business or commit the necessaryresources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are unable to engagedistributors in particular geographic areas, we may not realize projected international revenue growth. Additionally, we expect to expand our direct sales force inEurope and Asia. If we are unable to hire, retain and obtain satisfactory performance from such additional personnel, our revenue from international operationsmay be adversely affected.
We believe that an increasing amount of our future revenue will come from international sales as we expand our overseas operations and develop opportunities inadditional international territories. International sales are subject to a number of risks, including:
• difficulties in staffing and managing our foreign operations;
• difficulties in penetrating markets in which our competitors' products are more established;
• reduced protection for intellectual property rights in some countries;
• export restrictions, trade regulations and foreign tax laws;
• fluctuating foreign currency exchange rates;
• foreign certification and regulatory requirements;
• lengthy payment cycles and difficulty in collecting accounts receivable;
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• customs clearance and shipping delays;
• political and economic instability;
• lack of awareness of our brand in international markets; and
• preference for locally-produced products.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding a
solution, our revenue may decline.
The expense andpotential unavailability of insurance coveragefor our customers and our company could adversely affect our ability to sell our productsand ourfinancial condition.
Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of ourproducts. 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, industry-wide, potential customers may opt against purchasing laser and other light-based products due to thecost of or inability to procure insurance coverage.
We have been experiencing steep increases in our product liability insurance premiums. If our premiums continue to rise, we may no longer be able to affordadequate insurance coverage. If we are unable to maintain adequate coverage, potential product liability claims would be paid out of cash reserves, harming ourfinancial condition, operating results and profitability.
Because we do not require trainingfor users of our products, and sell our products to nonphysicians, there exists an increasedpotentialfor misuse of our
products, which could harm our reputation and our business.
Federal regulations allow us to sell our products to or on the order of "licensed practitioners." The definition of "licensed practitioners" varies from state to state.As a result, our products may be purchased or operated by physicians with varying levels of training, and in many states by non-physicians, including nursepractitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers oroperators of our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. We, and ourdistributors, generally offer but do not require purchasers or operators of our products to attend training sessions. In addition, we sometimes sell our systems tocompanies that rent our systems to third parties and that provide a technician to perform the procedure. 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 expose us to costly productliability litigation.
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 ofsubstantial 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, andunderlying 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 inthe future be involved, in litigation related to the use of our products. Product liability claims could divert management's attention from our core business, beexpensive 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 toobtain 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
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Table of Contentsincrease our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales.Product liability claims in excess of our insurance coverage would be paid out of cash reserves, thereby harming our financial condition and reducing ouroperating results.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages andpricefluctuations, which could harmour business.
Many of the components and materials that comprise our products are currently manufactured by a limited number of suppliers. A supply interruption or anincrease in demand beyond our current suppliers' capabilities could harm our ability to manufacture our products until a new source of supply is identified andqualified. 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 commercially 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;
• delay in delivery due to our suppliers prioritizing other customer orders over ours; and
• fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptableprices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
Components used in our products are complex in design, and any defects may not be discoveredprior to shipment to customers, which could result inwarranty obligations, reducing our revenue and increasing our cost.
In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significant degree oftechnical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, or we, use defective materials or workmanship inthe manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
• loss of customer orders and delay in order fulfillment;
• damage to our brand reputation;
• increased cost of our warranty program due to product repair or replacement;
• inability to attract new customers;
• diversion of resources from our manufacturing and research and development departments into our service department; and
• legal action.
The occurrence of any one or more of the foregoing could materially harm our business.
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Table of ContentsWeforecast sales to determine requirements for components and materials used in our products and if ourforecasts are incorrect, we may experience eitherdelays in shipments or increased inventory costs.
We keep limited materials and components on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders andmaterial requirements to predict our inventory needs up to nine months in advance and enter into purchase orders on the basis of these requirements. Our limited
historical experience may not provide us with enough data to accurately predict future demand. If our business expands, our demand for components andmaterials would increase and our suppliers may be unable to meet our demand. If we overestimate our component and material requirements, we will have excessinventory, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventory, which couldinterrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level ofsatisfaction our customers have with our business.
Ifthere is not sufficient demandfor the procedures performed with our products, practitioner demandfor our products could be inhibited, resulting inunfavorable operating results and reduced growth potential
Continued expansion of the global market for laser- and other light-based aesthetic procedures is a material assumption of our growth strategy. Most proceduresperformed using our products are elective procedures not reimbursable through government or private health insurance, with the costs borne by the patient. Thedecision to utilize our products may therefore be influenced by a number of factors, including:
• the cost of procedures performed using our products;
• the cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser- or other light-based technologies andtreatments which use pharmaceutical products;
• the success of our sales and marketing efforts; and
• consumer confidence, which may be impacted by economic and political conditions.
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 bereduced, resulting in unfavorable operating results and lower growth potential.
Lack of demandfor our products in the medi-spa market would harm our anticipated revenue growth.
An increasing portion of our revenue is derived from sales to customers in the medi-spa market, which is comprised of physicians offering aesthetic treatments in
a spa environment. Achieving further penetration into this new market is a material assumption of our growth strategy. Demand for our products in the medi-spamarket could be weakened by factors including poor financial performance of medi-spa businesses, reduced patient demand for aesthetic treatments in a spaenvironment, price sensitivity of medi-spa patients and demand for alternative treatments and services in the medi-spa setting. If we do not achieve anticipateddemand for our products in the medi-spa market our expected revenue growth may not be achieved.
IfPSS World Medicalfails to perform to our expectations, we may fail to achieve anticipated operating results.
We have a distribution agreement with PSS World Medical, which operates medical supply distribution service centers with approximately 700 salesrepresentatives serving physician offices in all 50 states of the United States. PSS World Medical sales representatives work in coordination with our sales forceto locate new potential customers for our products. For the year ended December 31, 2005, approximately 16% of our revenue was from PSS.
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Table of ContentsIf PSS World Medical does not perform adequately under the arrangement or terminates our relationship, which it can do at any time upon 90 days notice, it mayhave a material adverse effect on our business, financial condition, results of operations or future cash flows.
We depend on skilled and experiencedpersonnel to operate our business effectively. Ifwe are unable to recruit, hire and retain these employees, our abilityto manage and expand our business will be harmed, which would impair ourfuture revenue andprofitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. We do not have employment contracts with any of ourofficers or other key employees. Any of our officers and other key employees may terminate their employment at any time. In addition, we do not maintain "keyperson" life insurance policies covering any of our employees. The loss of any of our senior management team members could weaken our managementexpertise and harm our business.
Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we willbe successful in the future. We may not be able to meet our future hiring needs or retain existing personnel. We will face particularly significant challenges andrisks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical and
sales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
Ourfinancial results will be affected by accounting rules governing the recognition ofstock-based compensation expense.
Beginning in the first quarter of fiscal 2006, we, like other companies, will be required to measure and record stock-based compensation expense using the fairvalue method, which will adversely affect our results of operations by increasing our cost by the amount of such stock option charges.
In the year ending December 31, 2006, we estimate that the adoption of FAS 123(R) will increase our cost of goods sold and operating expenses byapproximately $3.6 million. However, our estimate of future stock-based compensation expense is affected by our stock price, the number of stock-based awardsour board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuationassumptions include, but are not limited to, the volatility of our stock price, employee stock option exercise behaviors, and interest rates.
Failure to maintain effective internal control overfinancial reporting could have a material adverse effect on our business, operating results and stock price.
Beginning with this annual report for our fiscal year ended on December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a reportby our management on our internal control over financial reporting . Such report must contain an assessment by management of the effectiveness of our internalcontrol over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal control is effective. Such report must alsocontain a statement that our independent registered public accounting firm has issued an attestation report on management's assessment of such internal control.
Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operationalresources and the diversion of management's attention. If our management identifies one or more material weaknesses in our internal control over financial
reporting, we will be unable to assert that such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective
as of our fiscal year end in future years, our business may be harmed.
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Table of ContentsOur effective income tax rate may vary significantly
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in taxlaws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by changes in thevaluation of our deferred tax assets and liabilities, future levels of R&D spending, deductions for employee stock option exercises being different to what we
projected, and changes in overall levels of income before taxes.
Any acquisitions that we make could disrupt our business and harm ourfinancial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies. We may also consider joint ventures and othercollaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate anybusinesses, products or technologies that we acquire. Furthermore, the integration of any acquisition and management of any collaborative project may divertmanagement's time and resources from our core business and disrupt our operations. We do not have any experience with acquiring companies or products. If we
decide to expand our product offerings beyond laser and other light-based products, we may spend time and money on projects that do not increase our revenue.
Any cash acquisition we pursue would diminish our available cash balances to us for other uses, and any stock acquisition would be dilutive to our stockholders.
While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and technologies, and anticipate continuing to makethese evaluations, we have no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.
Anti-takeover provisions in our Amended and Restated Certificate ofIncorporation and Bylaws, and Delaware law, contain provisions that could discouragea takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist a
takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
• a classified board of directors;
• advance notice requirements to stockholders for matters to be brought at stockholder meetings;
• a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
• limitations on stockholder actions by written consent; and
• the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions couldadversely 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 commonstock.
We have not paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment may be limited to the value of our
stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The
payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time asour board of directors may consider relevant. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur ifour stock price appreciates.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters and U.S. operations are located in a 66,000 square foot facility in Brisbane, California. We lease these premises under anon-cancelable operating lease which expires in 2014. In addition, we have leased office facilities of approximately 2,690 square feet and 3,700 square feet in
Switzerland and Japan, respectively. The lease in Switzerland expires in July 2008 and the lease in Japan expires in May 2007. In September 2005, we terminatedour 1,400 square foot Germany office lease. We believe that these facilities are adequate for our current and future needs.
ITEM 3. LEGAL PROCEEDINGS
In February 2002, Palomar Medical Technologies filed a lawsuit against us in the United States District Court, District of Massachusetts. A trial date has been setfor May 30, 2006. The plaintiff alleges that by making, using, selling or offering for sale our CoolGlide CV, CoolGlide Excel, CoolGlide Vantage and CoolGlideXeo products, we are willfully and deliberately infringing U.S. Patent No. 5,735,844. This patent concerns a method and apparatus for removing hair with lightenergy. Massachusetts General Hospital later joined the lawsuit as an additional plaintiff, since Palomar is the exclusive licensee, and MGH is the owner, of thepatent at issue in the lawsuit. Palomar and MGH are seeking to enjoin us from selling products found to infringe the patent, and to obtain compensatory and
treble damages, reasonable costs and attorney's fees, and other relief as the court deems just and proper. We are defending the action vigorously, asserting thatour products do not infringe applicable claims of the patent, and that these claims are invalid and unenforceable. Additionally, we have filed a counterclaimalleging that the patent should be declared unenforceable because of inadequate disclosures made to the U.S. Patent and Trademark Office by the plaintiffsduring that patent's prosecution with the U.S. Patent and Trademark Office.
In April 2005, the plaintiffs filed a second lawsuit in this same court, alleging that by making, using, selling or offering for sale products that utilize pulsed-lighttechnology for hair removal, we are willfully and deliberately infringing U.S. Patent Nos. 5,735,844 and 5,595,568. The plaintiffs are seeking to enjoin us fromselling our products found to infringe those patents, and to obtain compensatory and treble damages, reasonable costs and attorney's fees, and other relief as thecourt deems just and proper. We have responded by filing a motion to dismiss this second lawsuit on the grounds of lack ofjurisdiction, and by filing complaints
for declaratory relief against these plaintiffs in California and Delaware. This motion is pending with the court.
We believe that we have meritorious defenses of non-infringement and invalidity in these actions. However, litigation is unpredictable and we may not prevail insuccessfully defending or asserting our position. If we do not prevail, we may be ordered to pay substantial damages for past sales and an ongoing royalty for
future sales of products found to infringe. We could also be ordered to stop selling any products that perform hair removal. Most of our products include anapplication for hair removal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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Table of ContentsPART II
ITEM 5. MARKET FOR THE REGISTRANT ' S COMMON STOCKAND RELATED SHAREHOLDER MATTERS
Stock Exchange Listing
Cutera's common stock trades on The NASDAQ National Market under the symbol "CUTR." At February 28, 2006, the closing sale price of our common stockwas $27 . 09 per share.
Common Stockholders
We had 16 stockholders of record as of February 28, 2006, one of whom was CEDE & CO, a large clearing house that holds shares in its name for banks, brokersand institutions, in order to expedite the sale and transfer of stock. Since many stockholders' shares are listed under their brokerage firm's name, we believe the
actual number of stockholders is over 8,000.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal periods. In the first quarter of 2004, we hadthe initial public offering of our common stock.
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable future. The Board of Directors currently intends to
retain any future earnings for use in our business.
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III Item 12 of thisAnnual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation plans.
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Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The table set forth below contains certain consolidated financial data for each of the last five fiscal years of Cutera. This data should be read in conjunction withthe detailed information, financial statements and related notes, as well as Management's Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere herein.
Consolidated Statements of Operations Data (in thousands, except per share data):
Net rcccnuc (I )Copt of rcccnuc ( I
61(,s', prol it
Opcr.itiii cxhcn,c,:Salc".iiid mancetin
I:c,c.irch mid developmentGcncril tndl ^ulmini,trllicc.Al11 oIti/ati l1 oI ^tocl,-ki cd colllpell,atioil (2
Iot.il c,hcr.riil1 Cspcne^
Income li0m ohcraion,lntcrc,t mid other income, net
Income I cli,rc income t.Ixc,Ployyl iOn lot irna,mc taycs
Net income
Net income mailable to common shmrcholdcrs used in basic cnrnino,s hcr,harc
Net income hcr,h.irc:Basic
Diluted
\lciuhtcd-a\ crags number of Iiarcv uvcd in per ^harc c^Ilcul.iti(,ns:
I3.i is
I)ilutccl
(1) Include, .Imortii.Ition of,tocl,-Nll e l comhcn,.Ition rcl.itcd to:
Net rcy enue
C0»t of rcccnuc
Year ended December 31,
2005 2004 2003 2002 2001
7 -61() ti 2.(111 ti 39.1ti^ ti 5.327 C 193 -2 819.792 14689 12317 9.991 6.941
82^ 3792 20.771 1833036 12.387
24 ^U I I 9Ui2 I3.-l I n R2 3(> 5.-l31^_nb 4130( 3097 2701 2_ I n87983 8.344 3910 100 I .B43
Workink" c.,hit.,l 98_ 18 68.519 I4_2))^ 8.896 7.854Iot.,l a,^ct, I I I 958 549 24198 I542(, 12.475Redeemable Coln el ti hl c hrclcncd ,tack 7372 7.272 7272Retainedcarnins^ 21 743 7942 4.I82 1_076 416
total stockholders equity 97,177 68,456 7,875 3,106 1,226
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Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thefollowing discussion should be read in conjunction with the attachedfinancial statements and notes thereto, and with our auditedfinancial statements andnotes thereto for the fiscal year endedDecember 31, 2005. This Annual Report on Form 10-K, including thefollowing sections, containsforward-lookingstatements within the meaning ofthe Private Securities Litigation Reform Act of1995. These statements include, but are not limited to, statements relating to ourexpectations as to future capital expenditures and requirements, growth in our operations, the impact ofexchange rate volatility, and the current litigationagainst Palomar Medical Technologies. Theseforward-looking statements involve risks and uncertainties. The cautionary statements setforth below and those
contained in Item JA "Risk Factors" commencing on page 18, identify importantfactors that could cause actual results to differ materiallyfrom thosepredicted in any suchforward-looking statements. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflectmanagements analysis only as ofthe date ofthis Annual Report on Fonn 10K. We undertake no obligation to update forward-looking statements to reflectevents or circumstances occurring after the date ofthis Form 10-K.
Introduction
The 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 theopportunities, 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.addition, it includes a summary of recent accounting pronouncements that may be applicable to us.
• Results of operations. This section provides our analysis and outlook for the significant line items on our consolidated statement of operations.
• Liquidity and capital resources . This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments thatexisted as of December 31. 2005.
• Recent accounting pronouncements. This section describes the issuance and effects of new accounting pronouncements that are applicable to our
Company.
Executive Summary
Company Description. We are a global medical device company specializing in the design, development, manufacture, marketing and servicing of laser andother light-based aesthetics system to the professional aesthetic market. Our easy-to-use families of products CoolGlide, Xeo and Solera enabledermatologists, plastic surgeons, gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aesthetic
procedures for their patients.
Our corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our manufacturing, warehousing, research, regulatory,sales, marketing and administrative activities. Outside the United States, we have a direct sales presence in Australia, Canada, France, Germany, Japan, Spain,
Switzerland and the United Kingdom. As of December 31, 2005, we had 63 direct sales employees worldwide, a global network of distributors located in morethan 25 countries, and a distributor relationship in the United States with PSS World Medical. PSS's Physician Sales and Service business operates medicalsupply distribution service centers with approximately 700 sales representatives serving physician offices in all 50 of the United States.
Products. Our revenue is derived from the sale of products, product upgrades, amortization of pre-paid service contracts, revenue from out-of-warrantyservices, and Titan handpiece refills. Product revenue represents the sale
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Table of Contentsof a system console that incorporates a universal graphic user interface, a laser or other light-based module, control system software, high voltage electronics, andone or more handpieces. 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 addapplications as their practice grows. This enables customers to upgrade their systems whenever they want and provides us with a source of recurring revenue,
which we classify as product upgrade revenue. Service revenue relates to amortization of pre-paid maintenance and support contract revenue and receipts forservices on out-of-warranty products. Titan handpiece refill revenue is associated with our Titan handpiece, which requires a periodic "refilling" process, whichincludes the replacement of the optical source, after a set number of pulses has been performed.
Significant Business Trends. We believe that revenue growth has been and will continue to be primarily attributable to the following:
Investments made in our global sales and marketing infrastructure, including the expansion of our sales force and improved productivity, to increase
our market penetration in an expanding aesthetic laser market.
• Continuing introduction of new aesthetic products and applications.
• Marketing to physicians outside the core dermatologist and plastic surgeon specialties, including the medi-spa market.
During 2005, our business continued to experience significant growth. Net revenue for the year ended December 31, 2005 increased by $23 million, or 44%,compared to 2004, while net revenue for 2004 increased by $13.6 million, or 35%, compared to 2003. On a geographical basis, for 2005, compared to 2004, ourU.S. revenue increased by $19.7 million, or 57%, and our international revenue increased by $3.3 million, or 19%. We experienced stronger U.S growth, versusinternational growth, due primarily to our increased sales and marketing efforts and our higher concentration of direct sales employees in the United States. Theslower international growth was partly attributable to reduced revenue to a national chain of clinics in Japan, who purchased systems for all their membersbeginning in early 2004 and ending in the first quarter of 2005. Our revenue is seasonally strong in the fourth quarter of our fiscal year and accounted for 32%
and 31% of our net revenue for 2005 and 2004, respectively.
Due to our patent litigation set for trial on May 30, 2006 see Item 3 Legal Proceedings we expect our general and administrative expenses to increase to
$3.5 million in each of the quarters ending March 31, 2006 and June 30, 2006. After the trial is completed, anticipated for June 2006, we expect our general andadministrative expenses to be in the range of 8%-10% of revenue for the remainder of 2006.
Starting from January 1, 2006, we will recognize compensation expense for employee stock options using the fair-value based method see the section on
"Recent Accounting Pronouncements" below. As a result for the year ending December 31, 2006, we expect stock-based compensation expense to increase toapproximately $4.5 million. However, our estimate of future stock-based compensation expense is affected by our stock price, the number of stock-based awardsour board of directors may grant in 2006, as well as a number of complex and subjective valuation assumptions and the related tax effect. These valuationassumptions include, but are not limited to, the volatility of our stock price, employee stock option exercise behaviors, and interest rates.
Factors that May Impact Future Performance. Our industry is impacted by numerous competitive, regulatory and other significant factors. The growth of ourbusiness relies on our ability to continue to develop new products and innovative technologies, obtain regulatory clearances and compliance 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. Our industry is subject to extensive government regulation, including the regulation by the United States Food andDrug Administration. Failure to comply with regulatory requirements could have a material adverse effect on our business. Additionally, our industry is highlycompetitive and our success depends on our ability to compete successfully. A detailed discussion of these and other factors that could impact our futureperformance are provided in Item IA "Risk Factors" section above.
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Table of ContentsCritical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us tomake judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 to theConsolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.
We consider the accounting policies described below to be affected by critical accounting estimates. Such accounting policies are impacted significantly byjudgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from theamounts reported based on these policies.
Revenue Recognition
We recognize distributor and non-distributor revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104,Revenue Recognition. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the fee is fixed and determinable; and collectibility is reasonably assured. Determination of whetherpersuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered are based on management's judgments regardingthe fixed nature of the fee charged for services rendered and products delivered, and the collectibility of those fees. In instances where final acceptance of theproduct is specified by the customer or collectibility has not been reasonably assured, revenue is deferred until all acceptance criteria have been met. Revenueunder 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. Total deferred revenue for service contracts was $3.1 million and $1.9 million as of December 31, 2005 and December31, 2004, respectively. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognizedfor any reporting period could be adversely affected.
Allowancefor Doubtful Accounts
Our accounts receivable balance, net of allowance for doubtful accounts, was $6.5 million as of December 31, 2005, compared with $6.6 million as of December
31, 2004. The allowance for doubtful accounts as of December 31, 2005, was $177,000, compared with $487,000 as of December 31, 2004. We perform periodiccredit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, as determined by our reviewof current credit information. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon ourhistorical experience and any specific customer collection issues that have been identified. While our credit losses have historically been within our expectationsand the allowance established, we may not continue to experience the same credit loss rates that we have in the past.
Allowancefor Inventory
We state our inventory 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 marketbeing determined as the lower of replacement cost or net realizable value. Standard costs are monitored on a monthly basis and updated annually and asnecessary to reflect changes in raw material costs and labor and overhead rates. Our inventory balance was $5.2 million as of December 31, 2005, compared with$3.0 million as of December 31, 2004. Our inventory allowances as of December 31, 2005 were $992,000, compared with $378,000 as of December 31, 2004.
We provide inventory allowances 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 allowances are measured as the difference between the cost of inventory andestimated market value. Inventory reserves are charged to cost of revenue and establish a lower cost basis for the inventory. We balance the need to maintainstrategic inventory levels with the risk of obsolescence due to changing technology and customer
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Table of Contentsdemand levels. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact our gross margins.Conversely, favorable changes in demand could result in higher gross margins when product is sold.
Warranty Reserve
The liability for product warranties, included in other accrued liabilities, was $2.0 million as of December 31, 2005, compared with $1.9 million as of December31, 2004. Our products sold are generally covered by a warranty for periods ranging from one to two years. We accrue for warranty costs as part of our cost ofsales at the time revenue is recognized. Product warranty cost is based on associated material costs, technical support labor costs, and associated overhead. Weprovide for the estimated cost of product warranties by considering historical material, labor and overhead expenses and applying the experience rates to theoutstanding warranty period for products sold. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected
failure rates and warranty costs. Should actual product failure rates, material usage, service delivery costs or overhead costs differ from our estimates, revisions tothe estimated warranty liability would be required. For more information on warranty reserves, see Note 4 to the Notes To Consolidated Financial Statements.
Stock based compensation
We have stock option plans to reward our employees. We account for these plans under the recognition and measurement principles ofAccounting PrinciplesBoard, or APB, Opinion No. 25 and related interpretations and apply the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148. We have
recorded stock-based compensation expense for the fair market value of restricted stock granted to employees in 2005; and the difference between the deemedfair value of our common stock on the date of grant and the option exercise price with respect to stock options granted to employees prior to our initial publicoffering in 2004. We amortize employee stock-based compensation on a straight-line basis over the vesting terms of the underlying options.
We issue stock options to non-employees , generally for services, which we account for under the provisions of SFAS No. 123 and Emerging Issues Task Force,or EITF, No. 96- 18. These options are valued using the Black- Scholes option valuation model and are subject to periodic adjustment as the underlying optionsvest . Changes in fair value are amortized over the vesting period on a straight- line basis.
Provision for Income Taxes
We are subject to income taxes in both the U.S. and other foreign jurisdictions, where we have a presence. Significant judgment is required in evaluating our tax
positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which theultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additionaltaxes and interest will be due. These reserves are established when, despite our belief that our tax return positions are fully supportable, we believe that certainpositions are likely to be challenged and may not be sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances,such as the closing of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered
appropriate, as well as any related net interest.
Our effective tax rates differ from the statutory rate primarily due to research and development tax credits, state taxes, benefits from disqualifying dispositions ofincentive stock option exercises, tax exempt interest income, and the tax impact of foreign operations. Our effective tax rate was 26%, 35% and 40% for the year
ended December 31, 2005, 2004 and 2003, respectively. Our future effective tax rates could be adversely affected by earnings being lower than anticipated incountries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, or by changes in tax laws orinterpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue
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Table of ContentsService and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of ourprovision for income taxes.
Undistributed earnings of the Company's foreign subsidiaries of approximately $515,000 at December 31, 2005, are considered to be indefinitely reinvested and,accordingly, no provision for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends orotherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to variousforeign countries.
Contingencies
We record charges for the costs we anticipate incurring in connection with litigation and claims against us when we can reasonably estimate these costs. Asdisclosed in Part I, Item 3-Legal Proceedings, we are involved in patent litigation with Palomar Medical Technologies, Inc. Since the outcome of this litigationis unpredictable, no expense has been recorded with respect to the contingent liability associated with this matter. Legal fees in connection with losscontingencies are recognized as the fees are incurred.
Recent Accounting Pronouncements
In December 2004, the FASB originally issued SFAS No. 123(R). SFAS No. 123(R) will require companies to measure all stock-based compensation awardsusing a fair value-based method and record such expense in their financial statements, including grants of employee stock options. In addition, the adoption ofSFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting fromshare-based payment arrangements. SFAS No. 123(R), as amended, is effective for public companies for the first annual period beginning after June 15, 2005.
Accordingly, the provisions of SFAS No. 123(R) will be effective January 1, 2006 for us. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No.107, "TOPIC 14: Share-based payment." SAB No. 107 addresses the interaction between SFAS No. 123(R) and certain SEC rules and regulations and providesviews regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 was effective immediately.
We plan to adopt SFAS No. 123(R) using the modified prospective method, under which compensation cost is recognized beginning with the effective date (a)based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the previous requirements of SFAS123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The amounts disclosed withinour consolidated financial statement footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of SFAS No. 123(R).Compensation expense calculated under SFAS No. 123(R) may differ from amounts currently disclosed within our consolidated financial statement footnotes
based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits andchanges in interest rates or other factors. The adoption of SFAS No. 123(R) is expected to increase our cost of goods sold and operating expenses byapproximately $3.6 million in 2006 based upon employee stock options outstanding as of December 31, 2005 and estimated 2006 option grants to employees.We expect the adoption of SFAS 123(R) to have a significant impact on our consolidated income statements and the presentation of the consolidated statementsof cash flows. SFAS 123(R) also requires excess tax benefits from the exercise of stock options to be presented in the consolidated statement of cash flows as a
financing activity rather than an operating activity, as currently presented.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement ofAPB Opinion No. 20 and FASB Statement No. 3. SFAS
154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154 requires retrospective application to priorperiod financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effectof the change. SFAS 154 also requires that retrospective application of a change
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Table of Contentsin accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of theaccounting change. SFAS 154 further requires a change in depreciation, amortization, or depletion method for long-lived, non-financial assets to be accounted for
as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on its financial condition or results ofoperations.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net total revenue.
Year endedDecember 31,
2005 2004 2003
RC\ell lie mix I) ^cu^rapIn
Revenue from I Inited States customers 72i,, 6h" 77",,
(icncral and Idl11ini,traticc III"., I6"" III"..\morti/.Itionot'vtoch-ba^cd cc,mhcns,ition
101a1 ohcrati l
II1conlc I loin operatioIl^ 22 1II°u 13°0
lntcrc,t .Ind othcl inconic _ net '' I " n °^o
Income before income taxes 111 I i°„
Pro\ i,ion Ior inco me lase, 7 " 4 '"
'Net income 18° 7".,
Net Revenue
Revenue is derived primarily from the sale of products, product upgrades, service related to our products, and Titan handpiece refills. For the year ended
December 31, 2005, compared to the year ended December 31, 2004, net revenue increased $23.0 million , or 44%. The $23.0 million increase was the result of a$19.8 million, or 45%, increase of product revenue ; $ 1.5 million, or 61%, increase in service revenue; and $ 1.7 million increase in revenue from Titan handpiecerefills. Upgrade revenue for the year ended December 31, 2005, when compared to
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Table of Contentsthe same period in 2004, remained unchanged at $6.6 million due primarily to an increasing number of existing customers choosing to purchase a second system,primarily from our Solera family of products, instead of upgrading their existing systems.
Of the $23.0 million increase in net revenue, $19.7 million was attributable to higher U.S. revenue and $3.3 million was attributable to higher internationalrevenue. The primary contributors to our revenue growth were the continued expansion of our direct sales force, higher revenue from our multi-applicationCoolGlide Xeo product, the introduction of our new Solera family of products, the strong market acceptance of our products in the medi-spa market, increasedservice revenue due to the increased number of units installed at customer sites and the increase of Titan handpiece refill revenue resulting from the periodic need
for refilling the handpiece and an increased number of units sold.
For the year ended December 31, 2004, compared to the year ended December 31, 2003, net revenue increased $13.6 million, or 35%. Product revenue increased
$10.3 million, due primarily to sales of our multi application Xeo product; upgrade revenue increased by $2.1 million, due primarily to the release of the Titanupgrade product in 2004; and service and other revenue increased by $1.2 million due partly to a higher installed base of customers. The geographical source ofthe $13.6 million revenue increase was, $8.9 million from international sales and $4.7 million from U.S. sales. The large growth internationally occurredprimarily in the Pacific Rim countries resulting from our sales force expansion and new product introductions.
Cost ofRevenue
Our cost of revenue consists primarily of material, labor and manufacturing overhead expenses. For the year ended December 31, 2005, compared to the yearended December 31, 2004, cost of revenue increased $5.1 million, or 35%. Cost of revenue as a percentage of net revenue, decreased to 26% for the year endedDecember 31, 2005, from 28% for the year ended December 31, 2004. This improvement in margins was primarily attributable to lower overhead expensesresulting from the leveraging of our manufacturing operations, a favorable product mix towards our multi-application Xeo products, and reduced warranty andservice costs associated with improved product reliability.
For the year ended December 31, 2004, compared to the year ended December 31, 2003, cost of revenue increased $2.4 million, or 19%. Key contributors to thisincrease include; $1 .4 million of increased labor and overhead costs and $ 1.0 million of higher material costs associated with increased unit shipments.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs and expenses associated with customer-attended workshops, trade shows and advertising. Forthe year ended December 31, 2005, compared to the year ended December 31, 2004, sales and marketing expenses increased by $5.7 million, or 30%. Thisincrease was primarily attributable to approximately $4.7 million of higher personnel expenses associated primarily with the increased expenses relating to higherheadcount, higher commission expense due to increased revenue and higher recruiting expenses and $354,000 of higher travel expenses attributable with thehigher headcount. As a percentage of net revenue, for the year ended December 31, 2005 sales and marketing expenses decreased by three percentage points
from 36% in the year ended December 31, 2004 to 33% in the same period in 2005. This decrease was primarily attributable to improved leveraging andproductivity that resulted from the higher revenue growth, compared to the expense growth.
For the year ended December 31, 2004, compared to the year ended December 31, 2003, sales and marketing expenses increased $5.6 million, or 42%. This
increase was primarily attributable to an increase of $2.2 million in promotional expenses, $2.5 million of personnel costs and $734,000 in travel costs.Promotional expenses result primarily from customer workshops and industry trade shows.
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Table of ContentsResearch and Development
Research and development expenses consist primarily of personnel, clinical , regulatory and material costs. For the year ended December 31, 2005, compared tothe year ended December 31, 2004, research and development expenses increased $929,000 or 22%. This increase was primarily attributable to $888,000 ofhigher personnel expense due primarily to increased headcount. As a percentage of net revenue, research and development expenses for the year ended December
31, 2005, compared to the same period in 2004, decreased by one percentage point from 8% to 7% due to the higher net revenue in 2005.
For the year ended December 31, 2004, compared to the year ended December 31, 2003, research and development expenses increased $1.0 million or 34%. Thisincrease was primarily attributable to higher facility related expenses of $353,000 associated with the move to our new Brisbane, California location in 2004,
$272,000 of higher third party expenses associated with clinical projects and $243,000 of higher material and personnel related costs for new productdevelopment.
General andAdministrative
General and administrative expenses consist primarily of personnel costs, legal and accounting fees and other general administrative expenses. For the year endedDecember 31, 2005, compared to the same period in 2004, general and administrative expenses decreased by $361,000, or 4%. This decrease was primarily
attributable to lower legal expenses of $1.4 million, partly due to the timing of our litigation with Palomar, and expenses incurred in 2004 but not in 2005,including costs of $291,000 associated with moving our facilities from Burlingame, California to Brisbane, California and a litigation settlement of $175,000.This was offset by $1.7 million of higher personnel expenses, due to higher headcount and a net increase of $340,000 in accounting, tax and audit consultingfees, due primarily to our Sarbanes Oxley implementation in 2005. As a percentage of net revenue, general and administrative expenses decreased from 16% in2004 to 10% in 2005.
For the year ended December 31, 2004, compared to the same period in 2003, general and administrative expenses increased by $4.4 million, or 113%. Thisincrease was primarily attributable to $1.2 million in increased outside service costs, primarily associated with our initial public offering and being a publiccompany, $1.1 million of higher legal expenses, $611,000 of higher facilities costs primarily associated with the move to our new Brisbane, California location
and $444,000 in increased personnel costs.
Interest and Other Income, Net
For the year ended December 31, 2005, compared to the same period in 2004, interest and other income increased $1.4 million. This increase was primarilyattributable to higher tax-exempt interest income, resulting from higher investment balances and rising yields in 2005, compared to 2004.
For the year ended December 31, 2004, compared to the same period in 2003, interest and other income, net increased by $602,000. This increase in interestincome was primarily a result of higher cash and investment balances resulting from the proceeds of our initial public offering in April 2004.
Provision for Income Taxes
For the year ended December 31, 2005, 2004 and 2003, our effective tax rate was 26%, 35% and 40%, respectively. The decrease in the effective tax rate in
2005, compared to 2004, was primarily attributable to higher incentive stock option exercises that became tax deductible due to a disqualifying disposition by theoption holders, and higher benefit from research and development credits resulting from increased research and development expenses. For the year endedDecember 31, 2004, compared with the same period in 2003, this decrease in effective tax rates resulted primarily from higher tax-exempt interest income andlower stock-based compensation charges on incentive stock options that are not tax deductible.
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Table of ContentsAmortization ofStock-Based Compensation
Stock-based compensation consists of amortization of deferred stock-based compensation related to restricted stock units, stock options to purchase commonstock issued to employees below their deemed fair market value and the value of options to purchase common stock issued to non-employees. Deferredstock-based compensation is amortized on a straight-line basis to the respective departments that benefit from the services of the individuals who were granted
the equity instruments.
In 2005, instead of granting employees stock option, we granted them a mix of stock options and restricted stock units. During the year ended December 31,2005, we granted 71,500 shares of restricted stock units that vest in four equal, annual installments on the anniversaries of the date of grant. We recorded
$1,448,000 of deferred stock-based compensation for these restricted stock unit grants, which is being amortized over a four year expected service period of theemployees.
As of December 31, 2005, we had $2.2 million of deferred stock-based compensation cost related to non-vested stock options and restricted stock awards, that
will be expensed over the next three and a half years.
During each of the years ended December 31, 2005, 2004 and 2003, we recorded $1.4 million of deferred stock-based compensation
Liquidity and Capital Resources
Net Cash Provided by OperatingActivities
For the year ended December 31, 2005, net cash provided by operations was $20.4 million. This was primarily attributable to net income of $13.8 million; cashprovided from tax benefits related to employee stock option exercises of $7.4 million; add back for non-cash amortization of deferred stock-based compensationof $1.4 million; and an increase in deferred revenue resulting primarily from an increase in customer service contracts sold in 2005. This was offset by cash usedto increase inventory by $3.1 million to support anticipated shipments and a broader product offering; and an increase in other assets of $2.9 million that resultedfrom income taxes paid prior to the fourth quarter of 2005 becoming refundable due to an increase in employee stock option deductions in the fourth quarter of
2005.
For the year ended December 31, 2004, net cash provided by operating activities was $9.2 million, which primarily resulted from net income of $3.8 million;
adjusted for $2.5 million from an increase in accrued liabilities, primarily due to higher employee related accruals; and $1.4 million of non-cash stock-basedcompensation expense. This was partly offset by $1.1 million cash used to increase inventory for anticipated revenue shipments and a reduction in accountspayable of $720,000.
Net Cash Used in Investing Activities
For the year ended December 31, 2005, net cash used in investing activities was $28.3 million. Of this amount $27.6 million, net, was used to purchase
additional marketable investments from the cash generated by operations, the exercises of stock options and employee stock purchases. In addition, $539,000 wasprimarily used to purchase research and development and manufacturing equipment; and $165,000 was used to purchase intangibles associated with the set up ofa new office in Zurich, Switzerland through the acquisition of a distributor.
For the year ended December 31, 2004, net cash used in investing activities was $59.8 million. Of this amount $59.2 million net was used to purchasemarketable investments and $854,000 was used for purchasing property and equipment primarily for our manufacturing, research and development in our newBrisbane, California location. This was partly offset by $250,000 from the removal of restrictions on cash deposits with our bank.
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Table of ContentsNet Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2005, was $6.1 million, which was attributable to proceeds from the issuance of stockthrough our stock option and employee stock purchase plans.
Net cash provided by financing activities for the year ended December 31, 2004 was $47.3 million. Of this amount, $46.3 million, net was from the sale ofcommon stock associated with our initial public offering and $1.0 million was attributable to the proceeds from the purchase of stock through our stock optionand employee stock purchase plans.
As of December 31, 2005, we had cash, cash equivalents and marketable investments of $92 .0 million, which we believe are sufficient to meet our anticipatedcash needs for working capital and capital expenditures for at least the next 12 months.
As disclosed in Note 5 to the Notes to Consolidated Financial Statements "Contingencies," we are involved in patent litigation with Palomar MedicalTechnologies, Inc. Since the outcome of this litigation is unpredictable, and since management believes that a significant adverse result for the Company is notprobable, no expense has been recorded with respect to the contingent liability associated with this matter. If we do not prevail in this litigation, we could beordered to pay substantial damages, which could adversely impact the working capital available for use in future operations. See Item IA "Risk Factors"
relating to this litigation. Our 2006 expense projections include significant spending on this litigation.
Contractual Cash Obligations
The following table discloses aggregate information about the Company's contractual obligations for minimum lease payments related to facility leases, net ofsub lease income in 2006, and the periods in which these payments are due as of December 31, 2005.
Payments Due by Period ($'000's)
Less Than 1-3 3-5 More ThanGotraet^^al OhligaHoo^ Total 1 Year Years Years 5 Years
O^ rt tin Ict s ti .778 ti 080 1.077 2.1 3ti ti 4_277
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships , such as entities often referred to asstructured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes . As of December 31, 2005, we were not involved in any unconsolidated transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due tofluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our futureinvestment 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 havedeclined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same timemaximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies,
municipal bonds and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. Tominimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity (interest reset date for auction-ratesecurities and variable
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Table of Contentsrate demand notes) of generally less than eighteen months. For maturities of our marketable investments, see Note 3 to the Notes to Consolidated FinancialStatements. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of our total investment portfolio as of December 31, 2005would have potentially declined by $313,000.
We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatilityhas not been significant. We cannot assure that there will not be a material impact in the future. Although the majority of our sales and purchases aredenominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products. We do not believe, however,
that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.
We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any
material fashion.
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Table of Contents
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:
Page
Report of Independent Registered Public Accounting Firm 44
Consolidated Balance Sheets 46
Consolidated Statements of Operations 47
Consolidated Statements of Stockholders' Equity 48
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 50
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended December 31, 2005, 2004 and 2003 is filed asa 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 andits subsidiaries:
Sehednle
II Valuation and Qualifying Accounts
Page
68
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 theConsolidated Financial Statements or the Notes thereto.
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders ofCutera, Inc.:
We have completed an integrated audit of Cutera, Inc.'s 2005 consolidated financial statements and of its internal control over financial reporting as ofDecember 31, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company AccountingOversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cutera, Inc.
and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Ourresponsibility 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 andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the "Report of management on internal control over financial reporting" appearing under Item 9A,that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in InternalControl Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all materialrespects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control IntegratedFramework issued by the COSO. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financialreporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis forour opinions.
A company' s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles . A company's internal control overfinancial reporting
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Table of Contentsincludes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail , accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition , 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 compliancewith the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, CaliforniaMarch 15, 2006
Source : CUTERA INC, 10-K, March 16, 2006
45
A48
Table of ContentsCUTERA, INC.
CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)
December 31,
2005 2004
\sscts
(ulTCnt .i cI :
( h and cash cquicalcnts 5 ^ 2( 7.O7OM.u;ctailc incc,tmcnt, 86736 59-2nU
I'LIICII.1tic of 111.llkctill)Ic 111Ac stll1C11ts_ ]let IO1
( II. ilue ill Iestii tcd C.1s11 2O (190 )
Net cash ii cd ill Incc^stina acticitic^ 28_342 ) I (779 )
Cash flocs from financiii activ itics:Proceeds l'ronl cvucisc ol'stock option, wid cmhlovee stock purchase piwi 0.144 1 .07 I nR
I'rocccd, I"ronl cvcreise oI'vv,lrrant tooI'IOCdC(IS IIoill ISS1I III C 01'C0111111011 StoCL_ ]let 40 12
Net cash j)l v idcd hv linancino, activ itic, 6.144 47 349 2118
Net (decrcasc) incrcase in cash ^111d cash cynic IIcl1k I.81O1 13.22() 2J) I4
Cash anal c.1,11 cyuiv IIdl1k it hcwnniii 0I vcar 7_)7() I II_,9n 8.276
( 1511 Cind C.1sl1 CI]1IiA111dlltk Clt cud of A c.II 5 ^_20() 7.070 Is I O IOO
Supplemental and nun -cash disclosure of cash flow information:C,nvclsion 0! p etched stock to a,nlnlon stud, ti S 7.372
Chwi c ill deterred ,tack-ha,cd coillpdu1 Ition_ net of tcrnliimtion, I X87 S „71Cash pail I'M inconlc ta'cs I.8;7 2_^20
The accompanying notes are an integral part of these consolidated financial statements
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Table of Contents
NOTE 1-ORGANIZATION:
Formation and business of the Company
CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cutera, Inc. (the "Company") designs, develops, manufactures, and markets the CoolGlide, Xeo and Solera families of products for use in laser and otherlight-based aesthetic applications. The Company's products enable dermatologists, plastic surgeons, gynecologists, primary care physicians, and other qualifiedpractitioners to offer safe, effective and non-invasive aesthetic treatments to their patients.
Initial public offering
On April 5, 2004, the Company completed an initial public offering in which it sold 3,100,000 shares of common stock at $14.00 per share. On April 28, 2004,the underwriters exercised the over-allotment option to purchase an additional 529,800 shares at $14.00 per share. The Company's initial public offering raised
approximately $46.3 million, net of underwriting discounts, commissions and other offering costs of $4.5 million. Upon the closing of the offering, all theCompany's outstanding shares of redeemable convertible preferred stock converted on a one-to-one basis into 4,725,000 shares of common stock.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis ofpresentation
As of December 31, 2005, the Company has eight wholly-owned subsidiaries in Switzerland, France, Germany, United Kingdom, Japan, Canada, Australia andSpain. The purpose of these subsidiaries is to market sell and service the Company's products outside of the United States. The consolidated financial statements
include the accounts of the subsidiaries. All inter-company transactions and balances have been eliminated.
Use of estimates
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires managementto make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, cash equivalents and investments
Cash equivalents or short-term financial investments that are readily convertible to cash are stated at cost, which approximates market value. The Companyconsiders all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Management determinesthe appropriate classification of its short-term and long-term marketable investment securities at the time of purchase and reevaluates such determination as ofeach balance sheet date. The Company's marketable investments are classified as "available-for-sale" securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in other comprehensive income. All investments are held for usein current operations and are classified in current assets. All realized gains and losses and unrealized losses and declines in fair value that are other thantemporary are recorded in earnings in the period of occurrence. The specific identification method is used to determine the realized gains and losses oninvestments.
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Fair value offinancial instruments
Carrying amounts of the Company's financial instruments, including cash and cash equivalents, marketable investments, accounts receivable, accounts payableand accrued liabilities, approximate their fair values. The fair value of marketable investments is based on quoted market prices.
Concentration of credit risk and other risks and uncertainties
Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents, marketable investments and
accounts receivable. The Company's cash and cash equivalents are primarily invested in deposits and money market accounts with two major banks in the UnitedStates. In addition, the Company has operating cash balances in each of the international locations that it operates in. Deposits in these banks may exceed theamount of insurance provided on such deposits, if any. Management believes that these financial institutions are financially sound and, accordingly, minimalcredit risk exists. The Company has not experienced any losses on its deposits of cash and cash equivalents. Accounts receivable are typically unsecured and arederived from revenues earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses. Concentrations of accounts receivable balances are presented in Note 3 and Segment, geographic and majorcustomer information is presented in Note 11.
The Company invests in debt instruments of the U.S. Government and its agencies, municipal bonds and high-quality corporate issuers, and, by policy, restrictour exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, the Companymaintains investments at an average maturity (interest reset date for auction-rate securities and variable rate demand notes) of generally less than eighteenmonths.
The Company is subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependenceon key personnel, dependence on key suppliers, protection of proprietary technology, product liability and compliance with government regulations. To continueprofitable operations, the Company must continue to successfully design, develop, manufacture and market its products. There can be no assurance that currentproducts will continue to be accepted in the marketplace. Nor can there be any assurance that any future products can be developed or manufactured at an
acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed, if at all. These factors could have amaterial adverse effect on the Company's future financial results and cash flows.
Future products developed by the Company may require additional approvals from the Food and Drug Administration or international regulatory agencies prior
to commercial sales. There can be no assurance that the Company's products will continue to meet the necessary regulatory requirements. If the Company wasdenied such approvals or such approvals were delayed, it may have a materially adverse impact on the Company.
Inventory
Inventory is 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) andmarket being determined as the lower of replacement cost or net realizable value.
The Company includes demonstration units within inventory. Demonstration units are carried at cost and amortized over their estimated economic life of twoyears. Amortization expense related to demonstration units is recorded in cost of revenue or in the respective operating expense line based on how the equipment
is used. Proceeds from the sale of demonstration units are recorded as revenue.
Source : CUTERA INC, 10-K, March 16, 2006
A54
Table of Contents
Property and equipment
CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, which is generally two tofive years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimateduseful life of the related assets. Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are removed from the balancesheet and the resulting gain or loss is reflected in other income/expense. Maintenance and repairs are charged to operations as incurred.
Intangible assets
Purchased technology sublicense and other intangible assets are presented at cost net of accumulated amortization. The technology license is being amortizedover its expected useful life of 10 years and the other intangibles are being amortized over their expected useful life of two years.
Impairment oflong-lived assets
In accordance with the provisions of Statement of Financial Accounting Standards Board ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," the Company reviews long-lived assets, including property and equipment for impairment whenever events or changes in businesscircumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS No. 144, an impairment loss would be recognized whenestimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment ifany, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Through December 31, 2005, there have been no suchimpairments.
Revenue recognition
Product revenue, including upgrade revenue and revenue from Titan handpiece refills, is recognized when title and risk of ownership has been transferred,provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, remaining obligations are insignificant and collectibility isreasonably assured. Transfer of title and risk of ownership generally occurs when the product is shipped to the customer or when the customer receives theproduct, depending on the nature of the arrangement. Revenue is recorded net of customer and distributor discounts.
The Company generally offers a warranty with its products. The Company provides for the estimated cost to repair or replace products under warranty at the timeof sale. Revenue under service contracts is recognized on a straight-line basis over the period of the applicable service contract. Service revenue, not under aservice contract, is recognized as the services are provided. Service revenue for the years ended December 31, 2005, 2004 and 2003, was $3,879,000, $2,414,000
and $1,617,000, respectively.
Research and development expenditures
Costs related to research, design and development of products are charged to research and development expense as incurred . They primarily include employeerelated expenses ; clinical and regulatory expenses ; third party contractor fees; facilities expenses; and expensed material costs associated with research,development and testing.
52
Source : CUTERA INC, 10-K, March 16, 2006
A55
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Advertising costs
Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising expense for the years ended December 31, 2005,2004 and 2003, were $1,201,000, $1,314,000 and $886,000, respectively.
Stock-based compensation
Stock-based compensation consists of amortization of deferred stock-based compensation related to restricted stock units; stock options to purchase common
stock issued to employees below their deemed fair market value on the date of grant; and the values of options to purchase common stock issued tonon-employees. The Company accounts for stock-based employee compensation arrangements using the intrinsic value method and has adopted thedisclosure-only provisions of Statement of Financial Accounting Standard (`SFAS") No. 123 "Accounting for Stock-Based Compensation," as amended bySFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure." The Company is required to disclose the pro forma effects on netincome as if it had elected to use the fair value approach to account for all its stock-based employee compensation plans.
The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation arrangements (in thousands, except per share data):
Year Ended December 31,
2005 2004 2003
Net income- .t, reported 13X0 I 3_700 n6ti 3100
Add: Stock- based employee compensation expense included in reported net income, net ofrelated tax effects 857 1.184 1.137
1 fatal ,tc,ck-ha^cd cmhloycc comhcn',aion dctcrmincd undcr fair-c,11 ucd kwcd method ora^^^^r^l,. net oI related t.Iv ellcck (1I,6 ) 1.8'3 ) 1424 )
Pro li,rmu net income I 2_^2 S 3.1 ' I S 2.819
Net income her hare:
Iii: .1, reported 1.1() 038 016
] LI ic: pn, lo() O02 042
Diluted_ .1, reported 17)5) 7-0111 n.,i
Diluted: pro S ). )I 5 O.20 031
53
Source : CUTERA INC, 10-K, March 16, 2006
A56
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In computing these pro forma amounts, the Company has used the minimum value method for options granted prior to January 15, 2004 (the date of the firstfiling of the Company's Form S-1 in connection with its initial public offering) and the fair value method for options granted after that date. The followingweighted average assumptions were used to measure the value of stock options and employee stock purchase plan (ESPP) shares granted in the periods
presented:
Risk-Gcc intcrc^t rate I,,r,toch option
Rich-Ircc intcic^t mtc for ISI'I'
Ixhcctcd lilt lor,tock ohtioii (in car,)
Eyhcctcd Iilc for ISI'I' ohtiom (ill C.11^ l
I\hcctcd stoch price v Iatilitv I',r ^toch o,ptiornv
Eyhcctcd,tochpricevol.Itilitv I',rISIT
I)icidendl vicld
Year Ended December 31,
2005 2004 2003
;.^X x.12 ,, 1 W1111
300'',, I . 14" ,,3. 3.03 4.0)
67° 69""
Based on the above assumptions, the weighted-average estimated fair values of options granted for the years ended December 31, 2005, 2004 and 2003, were$9.45, $6.98 and $3.94 per share, respectively, and the weighted average fair value of ESPP shares granted for the years ended December 31, 2005 andDecember 31, 2004 were $4.25 and $3.34, respectively.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods orServices." Equity instruments issued to non-employees are recorded at their fair value on the measurement date. The compensation expense for non-employeeoption grants is recognized over the expected service period on a straight-line basis and was $262,000, $0 and $106,000, for the year ended December 31, 2005,
2004 and 2003, respectively.
Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities, measured at tax ratesthat will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. The effective tax rate for the years ended December 31, 2005, 2004 and 2003 were 26%, 35%, and 40% respectively. These
rates reflect applicable United States federal and state tax rates and the tax impact of foreign operations, offset by research and development tax credits, taxexempt interest income and deductions for disqualifying incentive stock option exercises.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for
anticipated tax audit issued in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments areprobable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in whichwe determine the liability is no longer necessary.
Comprehensive income
Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. The
Company's unrealized loss on marketable investments represents the only component of other comprehensive income that is excluded from net income.
54
Source : CUTERA INC, 10-K, March 16, 2006
A57
Table of Contents
Foreign currency
CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 atperiod end and historical exchange rates, respectively. Sales and expenses are remeasured at average exchange rates in effect during each period, except for thoseexpenses related to non-monetary assets which are remeasured at historical exchange rates. Gains or losses resulting from foreign currency transactions areincluded in net income and are insignificant for each of the three years ended December 31, 2005. 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, 2005.
Recent Accounting Pronouncement
In December 2004, the FASB originally issued SFAS No. 123(R). SFAS No. 123(R) will require companies to measure all stock-based compensation awardsusing a fair value-based method and record such expense in their financial statements, including grants of employee stock options. In addition, the adoption ofSFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. SFAS No. 123(R), as amended, is effective for public companies for the first annual period beginning after June 15, 2005.Accordingly, the provisions of SFAS No. 123(R) will be effective January 1, 2006 for the Company. In March 2005, the SEC issued Staff Accounting Bulletin(SAB) No. 107, "TOPIC 14: Share-based payment." SAB No. 107 addresses the interaction between SFAS No. 123(R) and certain SEC rules and regulations andprovides views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 was effective immediately.
The Company plans to adopt SFAS No. 123(R) using the modified prospective method, under which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the previousrequirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The
amounts disclosed within our consolidated financial statement footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption ofSFAS No. 123(R). Compensation expense calculated under SFAS No. 123(R) may differ from amounts currently disclosed within our consolidated financialstatement footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatmentof tax benefits and changes in interest rates or other factors. The adoption of SFAS 123(R) will have a significant impact on the Company's consolidated incomestatements and the presentation of the consolidated statements of cash flows. SFAS 123(R) also requires excess tax benefits from the exercise of stock options tobe presented in the consolidated statement of cash flows as a financing activity rather than an operating activity, as currently presented.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement ofAPB Opinion No. 20 and FASB Statement No. 3. SFAS154 provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154 requires retrospective application to prior
period financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effectof the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirecteffects of a change in accounting principle should be recognized in the period of the accounting change. SFAS 154 further requires a change in depreciation,amortization, or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate affected by a change in accountingprinciple. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does
not expect the adoption of SFAS 154 to have a material impact on its financial condition or results of operations.
55
Source : CUTERA INC, 10-K, March 16, 2006
A58
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 3-BALANCE SHEET DETAIL:
Cash, Cash Equivalents and Marketable Investments
The Company considers all highly liquid investments, with an original maturity of three months or less at the time of purchase, to be cash equivalents.Investments in debt securities are accounted for as "available-for-sale" securities, carried at fair value with unrealized gains and losses reported in othercomprehensive income, held for use in current operations and classified in current assets as "Marketable Investments." The following is a summary of cash, cashequivalents and marketable investments.
Gross FairAmortized Unrealized Unrealized Market
Deeemher 31.2005 (in thnusandsl Cost Gains Losses Value
CIicckiiig iiid I11OI1mA I118II : et IUll'k ^_2 O ^_200
Uaii.iI IC Life dclll.llld Ilotc^ 12_40) 12401
Auction Life sectllitic^ alld IlitiIlicip iI bonds 74,44 ( 112 ) 374333
9,_I118 S 112 1 91.996
IRcp l tcd :I :
Cash and cash equivalents S 5.260 S S S 5.260N1wIcctahIc incc^tnlcI1k x__848 112 ) M730
$ 92,108 $ $ (112 ) $ 11,996
Gross FairAmortized Unrealized Unrealized Market
ileremher 31 , 2004 !fin thnncand^l Cost Gains Losses Value
Lhc Iall, alld lllrnlcv I118rk,et lulldk S 7.0711 ti S ti 7_()7OUaii.iI IC Life dclll.llld Ilotc^ 19439 19439
Cash and cash cquiyalcnts S 7_07U S S S 7,U7UMall:ctahlc incc^tIllCll[ >91U9 (9 ) ^9__Ul)
66,279 $ $ (91 $ 66,270
The Company ' s marketable investments are classified as available -for-sale securities and classified in current assets. The contractual maturiti es of cash, cashequivalents and marketable -investments as of December 31, 2005, are as follows (in thousands):
11r mh r 31 zoos
I)uc in Ic^^ than (,nc v carDuc in I to 3 vcw,I)uc in 3 to vc.u,
I)uc in ^ to In c.u
Due ill arcntcrthan I11vea
Total
56
I ,_007
3-W1 ow)
37.31
$ 91,996
Source : CUTERA INC, 10-K, March 16, 2006
A59
Table of Contents
Accounts Receivable
CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate ofthe amount of probable credit losses existing in accounts receivable and is based on historical write-off experience and any specific customer issues that havebeen identified. Account balances are charged off against the allowance when it is probable the receivable will not be recovered. As of December 31, 2005 and2004, one customer accounted for 27% and 37% of the Company's total accounts receivable balance, respectively.
Inventory
Inventory consists of the following (in thousands):
December 31,
2005 270-4 -
16\% matcriak 3J)7] 1510
Fini,hcd L"oo'k 2174 I_494
ti 5__'4 ti 004
Other current assets
Other current assets consist of the following (in thousands):
December 31,
2005 2004
fay IeccicaI Ic S 3_017 S 199
I'rclrIid cxhcn,c, yin -'()2
I)cpo its Ill 194
Prclriid commi„iom, 193ti i_72k ti7X
Property and equipment, net
Property and equipment, net consists of the following (in thousands):
December 31,
2005 2004
IcaKcholdimprovcmcnt^ li)O ' 67
Uflicccyuilmicnt.indlfurniturc I^6; I340
f'i Iiincn_ andcquihmcnt I_42 1.141
1( -^ l8
I.c^^: /\ccurnul.rted dchrcciaiom and anuortii.riicm (2_U7I (1477 )
1,015 $ 1,071
Depreciation and amortization expense related to property and equipment was $594,000, $470,000 and $389,000 for the years ended December 31, 2005, 2004
and 2003, respectively.
57
Source : CUTERA INC, 10-K, March 16, 2006
A60
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Intangible Assets
Intangible assets principally comprised of a technology sublicense acquired in 2002 at a cost of $538,000 and other intangible assets acquired in 2005 of$165,000. The components of intangible assets at December 31, 2005 were as follows (in thousands):
Gross Accumulated
Carrying Amortization NetAmount Amount Amount
ICCIIllolo4\Sl Ihl i cell SC ^3ti I93 S 34^
Ulhcr illtwiaihIc I6^ 41 124
I lltal ti 7()3 ' -34 ti 409
At December 31, 2004, the technology license had a net carrying amount of $399,000.
For the year ended December 31, 2005, 2004 and 2003, amortization expense for intangible assets was $95,000, $54,000 and $54,000, respectively.
Based on intangible assets recorded at December 31, 2005, and assuming no subsequent additions to, or impairment of the underlying assets, the remainingestimated annual amortization expense is expected to be as follows (in thousands):
Fiscal y rnr ending December 31
1000 1302007 90
211119 14uIO ^-t
I hereafter 75
Total 5-169
Accrued liabilities
Accrued liabilities consist of the following (in thousands):
1'a-roil and rchutcd cxpcnsc,` nrrAnIYPlofe„iollal fees
Incoillc tax ir ii lcS,tlcs and nlv < cti]I accrualS.IIc, taxCuWl,nlcr dIclx,'iKOther
Source : CUTERA INC, 10-K, March 16, 2006
58
A61
December 31,
2005 2004
4.094 ti 200
2043 IX;)
;44 1 X
7ti3322 7234X 329
0 0 2 491
l).131 ti ti.194
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 4-WARRANTYAND SERVICE CONTRACTS:
The Company has a direct field service organization in the United States, Canada, Switzerland and Japan that provides service for its products in these countries.The Company has third party service providers in all other locations. The Company generally provides a warranty with its products, depending on the type ofproduct. After the warranty period, maintenance and support are offered on a service contract basis or on a time and materials basis. The Company currentlyprovides for the estimated cost to repair or replace products under warranty at the time of sale.
Warranty Reserve (in thousands):
Year endedDecember 31,
Balance at heoillilim-, (,I,-\ cm
Add: Accruals for warranties issued during the YearI c^s: Scttlcmcnt^ m.mdc dorm, the _vcm
Balance at end of year
Deferred service contract revenue (in thousands):
2005 2004
' 1.8511 17 )
2.78 2.1122.?92 1 (1902 )
$ 2,041 $ 1,850
Year endedDecember 31,
2005 2004
Balance at bcLinnins of N car 1900.$ 1. 27
Add: I'.ivmcnt,rccciccd 4.921 _'_16-1
I:cccnuc rcco L,ni/cdl 13.714 1 I _^
Balance at end of year $ 3,117 $ 1,906
Service contract revenue is recognized on a straight-line basis over the period of the applicable service contract.
Costs incurred under service contracts during the years ended December 31, 2005, 2004 and 2003 amounted to $1,130,000, $702, 000, and $780,000,respectively, and are recognized as incurred.
NOTE 5-COMMITMENTS AND CONTINGENCIES:
Facility Lease
The Company leases its office and manufacturing facility under a non-cancelable operating lease, which expires in 2014. In addition, the Company has leasedoffice facilities of approximately 2,690 square feet and 3,700 square feet, in Switzerland and Japan, respectively. The lease in Switzerland expires in July 2008and the lease in Japan expires in May 2007. In September 2005, the Company terminated its Germany facility lease and incurred a termination charge of $31,000.
On January 11, 2005, the Company entered into a three year agreement to sublease a portion of its Brisbane , California, facility to an unaffiliated third-party. InFebruary 2006, the Sublessee gave notice to terminate the sublease effective September 14, 2006.
59
Source : CUTERA INC , 10-K, March 16, 2006
A62
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2005, the Company was committed to minimum lease payments for facilities and other leased assets under long-term non-cancelableoperating leases (net of non-cancelable sublease income receivable) is as follows: (in thousands).
Year Fnding n--h- Al
(00 O^O
2007 8441008 X332009 990
101 1.1-18
2U 11 and thereafter 4.277I uturc rninirnurn rcnt,II p P IUCnts S 8J7X
For the years ended December 31, 2005, 2004 and 2003, gross rent expense was $1.3 million, $1.2 million and $193,000, respectively.
Contingencies
In February 2002, Palomar Medical Technologies ("Palomar") filed a lawsuit against the Company in the United States District Court, District of Massachusetts.
The plaintiff alleges that by making, using, selling or offering for sale the Company's CoolGlide CV, CoolGlide Excel, CoolGlide Vantage and CoolGlide Xeoproducts, the Company is willfully and deliberately infringing U.S. Patent No. 5,735,844. This patent concerns a method and apparatus for removing hair withlight energy. Massachusetts General Hospital (`MGH") later joined the lawsuit as an additional plaintiff, since Palomar is the exclusive licensee, and MGH is theowner, of the patent at issue in the lawsuit. Palomar and MGH are seeking to enjoin the Company from selling products found to infringe the patent, and toobtain compensatory and treble damages, reasonable costs and attorney's fees, and other relief as the court deems just and proper. The Company is defending the
action vigorously, claiming that its products do not infringe applicable claims of the patent and that these claims are invalid and unenforceable. Additionally, theCompany has filed a counterclaim alleging that the patent should be declared unenforceable because of inadequate disclosures made to the U.S. Patent andTrademark Office by the plaintiffs during that patent's prosecution with the U.S. Patent and Trademark Office. The litigation is active, and the court has set atrial date for May 30, 2006.
In April 2005, the plaintiffs filed a second lawsuit in this same court, alleging that by making, using, selling or offering for sale products using pulsed-lighttechnology for hair removal, the Company is willfully and deliberately infringing U.S. Patent Nos. 5,735,844 and 5,595,568. The plaintiffs are seeking to enjointhe Company from selling products found to infringe those patents, and to obtain compensatory and treble damages, reasonable costs and attorney's fees, andother relief as the court deems just and proper.
The Company responded by filing a motion to dismiss this second lawsuit on the grounds of lack of jurisdiction, and by filing complaints for declaratory reliefagainst these plaintiffs in California and Delaware. This motion is pending with the court. The Company believes that it has meritorious defenses ofnon-infringement and invalidity in these actions.
Since the outcome of this litigation is unpredictable, and since management believes that a significant adverse result for the Company is not probable, no expensehas been recorded with respect to the contingent liability associated with this matter. If the Company does not prevail, it may be ordered to pay substantial
damages for past sales and an ongoing royalty for future sales of products found to infringe. The Company could also be ordered to stop selling any products thatperform hair removal. Most of the Company's products include an application for hair removal.
60
Source : CUTERA INC, 10-K, March 16, 2006
A63
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 6-STOCKHOLDERS' EQUITY:
Preferred Stock
On January 12, 2004, the Board of Directors approved an amendment to the Company's amended and restated certificate of incorporation increasing the numberof authorized preferred stock to 5,000,000 shares. The Company's Board of Directors is authorized to determine the designation, powers, preferences and rightsof preferred stock.
Common stock
On January 12, 2004, the Board of Directors approved an amendment to the Company's amended and restated certificate of incorporation increasing the numberof authorized common stock to 50,000,000 shares.
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available andwhen declared by the Board of Directors, subject to the prior rights of the preferred stockholders.
2004 Employee Stock Purchase Plan
On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. A total of 200,000 shares of common stock were reserved forissuance pursuant to the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan ("2004 ESPP"), eligible employees are permittedto purchase common stock at a discount through payroll deductions. Shares of common stock eligible for purchase are increased on the first day of each fiscal
year by an amount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such date or (iii) an amount as determined bythe Board of Directors. Each offering period includes two six-month purchase periods. The Company added 219,144 reserved shares to the 2004 ESPP onJanuary 1, 2005. The price of the common stock purchased shall be the lower of 85% of the fair market value of the common stock at the beginning of anoffering period or at the end of a purchase period. The Company issued approximately 58,323 and 35,235 shares of common stock under the ESPP in fiscal years2005 and 2004, respectively. At December 31, 2005, 325,586 shares remained available for future issuance.
2004 Equity Incentive Plan and 1998 Stock Plan
In 1998, the Company adopted the 1998 Stock Plan (the "1998 Plan") under which 4,650,000 shares of the Company's common stock have been reserved forissuance 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 reserved for issuancepursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved butunissued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares.
Shares of common stock approved under the 2004 Equity Incentive Plan will be increased on the first day of each fiscal year, commencing in 2005, by an amountequal to the lesser of. (i) 5% of the outstanding shares of the first day of such year; (b) 2 million shares; or, (c) an amount determined by our board. On January 1,2005, the Company added 547,860 shares to the 2004 Equity Incentive Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights mayalso be granted under the Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which optionsbecome exercisable, however, except in the case of options granted to officers, directors and consultants, options shall
61
Source : CUTERA INC, 10-K, March 16, 2006
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
become exercisable at a rate of no less than 20% per year over five years from the date the options are granted. Options are to be granted at an exercise price notless than the fair market value per share on the grant date for incentive options or 85% of fair market value for nonqualified stock options. For employees holdingmore than 10% of the voting rights of all classes of stock, the exercise price shall not be less than 110% of the fair market value per share on the grant date.
Options granted under the Plan generally become exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48th of the totalnumber of shares subject to the option shares shall become exercisable on the last day of each calendar month thereafter until all of the shares have becomeexercisable. Unvested options that have been exercised are subject to repurchase upon termination of the holder's status as an employee, director or consultant.The term of the options is ten years.
During the year ended December 31, 2005, under the 2004 Equity Incentive Plan, the Company's Board of Directors approved the grant of 71,500 shares ofrestricted stock to selected members of the Company's management. These restricted stock units generally vest in four equal, annual installments on theanniversaries of the date of grant. The Company recorded the $1,448,000 of deferred stock-based compensation for these restricted stock grants as a componentof stockholders' equity and is amortizing that amount over the service period of four years. The value of the restricted stock awards was based on the closing
market price of the Company's common stock on the date of award. Amortization expense for these awards for the year ended December 31, 2005 was $211,000.
Activity under the 1998 Stock Plan and 2004 Equity Incentive Plan is summarized as follows:
I lanccs_ I)cccmhcr 3I.2OU2Uptic,ii arantcdlOptions cycrci,cdUhtio i c.inccllcd
I3.tlanccs_ December 31 . 2003Additiomil ,Imic, ic,cn cd
( )htioii "milted
Uhlio i cxcrci,cd
Options c.inccllcd
B.il.incc^_ December 31 - 2004
/VdIditional ^haic rc,cned
Uhlioii "milted
Rc1irictcd ^l( unit, arinicdlUhlio i cxcrci,cd)plions cancelled
Balances, December 31, 2005
Source : CUTERA INC, 10-K, March 16, 2006
62
A65
Options Outstanding
Weighted-Shares Average
Available Number of Exercisefor Grant Shares Price
Rcnclit for rc , c.irch .ind ^Iccclolmicnt credit 17.891 (3.71 I4.6'Stod -h.i,cd cc , mpcnsatioil (3.17) 1.07 )2
1.^^ cscmht intcrc,t (3.20) (3.37)rihcr 0 .61 I .4^ .;
Provision for taxes 26.22 ° ,, 35.00",^ 40.20",,
64
Source : CUTERA INC, 10-K, March 16, 2006
A67
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Management evaluates on a periodic basis the recoverability of deferred tax assets and the need for a valuation allowance.
Undistributed earnings of the Company's foreign subsidiaries of approximately $515,000 at December 31, 2005, are considered to be indefinitely reinvested and,accordingly, no provision for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends orotherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to variousforeign countries.
NOTE 8--NET INCOME PER SHARE:
Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common sharesoutstanding for the period. Diluted net income per share is computed by giving effect to all potential dilutive common stock, including options and restrictedstock unit awards. The following table sets forth the computation of basic and diluted net income per share (in thousands):
Year Ended December 31,
2005 2004 2003
Numcr.itor:
Net inconic Ii_Bi)I 3_7(() 3_106
1 C^^ Amount.iII ..itcd to h,uticih.^tin_ hrclcrrcd,tockholdci : (470 ) 143 )Net income .Ic,iiIiI Ic to common ,tochholdcr, 13.i,ic S 13-W I S 3_284 963
Net incomc.IvLtilA)lcto common,tocldioldlcrs I)ilutcdl S 138)I ti 170() 3_I06
I )ern om i nato r:'v\ciLhtcd-.Iv MI LC rnumhcr 0fc0nmi0n ,hares (,ut,tarndiii u,cd in computin, h.i,ic net iii conic per ^h.irc I I.53^ 8. 73 1-1()0
I)iluticc Ix,tenti.iI common ,h.ire, u,cd in co1111)util1 dlilutedl net income her,h.ire 2_,29 3_649 6.729
total \\ ciUdhted- Ivcni )c numhcrol hares used in Coll) hutin diluted net 111C01 11C her shmre IiM-l 11111 8.^ i^
Anti-dilutive securities
The following outstanding options (prior to the application to the treasury stock method) were excluded from the computation of diluted net income per commonshare for the periods presented because including them would have had an anti-dilutive effect (in thousands):
( )1)ti011v to purch.t^c cornnu,rn ^tod,
NOTE 9-DEFINED CONTRIBUTION PLAN:
Year Ended December 31,
2005 2004 2003
7 X66 7I
In the United States, the Company has an employee savings plan (the "Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the InternalRevenue Code. Eligible employees may make voluntary contributions to the Plan up to 100% of their annual compensation, subject to statutory annuallimitations. Since
65
Source : CUTERA INC, 10-K, March 16, 2006
A68
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
April 1999, the Company has made discretionary matching contribution of 50% to 75% of all employees ' contributions in each Plan year. During the years endedDecember 31, 2005, 2004 and 2003, the Company made discretionary contributions of $420,000, $227,000 and $174,000, respectively, under the Plan.
For some of the Company's foreign subsidiaries, the Company has a defined contribution plan for their employees. Consistent with the requirements of locallaws, the Company deposits funds for these plans with insurance companies, third-party trustees, or into government-managed accounts and have been fullyfunded or accrued as of December 31, 2005. The Company's contributions for its foreign employees was not material in each of the years ended December 31,2005, 2004 and 2003.
NOTE 10-SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment which encompasses the designing, developing, manufacturing, marketing and servicing of aesthetic lasersystems for dermatologists, plastic surgeons, gynecologists, primary care physicians and other practitioners worldwide. Management uses one measurement ofprofitability and does not segregate its business for internal reporting.
The Company's long-lived assets maintained outside the United States are insignificant.
Revenue is attributed to geographical regions based on the shipping location of the external customers.
For the years ended December 31, 2005, 2004 and 2003, the Company had one customer that represented 16%, 12% and 2%, respectively, of net revenue.
The following table summarizes revenue by geographic region and product category (in thousands):
RCycnuc mix I) !_'cu_,raphN:IInited States
kaj1aii
vv^^rlllI1)C,t of theC llxolidatcd total
Rcvcnuc miz by pruductcatc^_,ury:Product"
I 'i dii t ullor.ulc,scrcice
Titan rclilk
Coii 1idatcd total
Source : CUTERA INC, 10-K, March 16, 2006
2005 2004 2003
54.5116 1; 34.926 30102
4.H42 7.400 1.77916272 111.311 7.2117
ti 7^.(1'II ti ^1.(14I ti 3().II8ti
ti 0334934O c 4 3. ^4(i c 3? 991
0_030 6.61 ^ 4_47S
3-W 2.414 1.619
1.7( 7'
7^.020 ti ^104I ti 39.0ti8
66
A69
Table of ContentsSUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands , except per share amounts)
Dec 31 , Sept 30 , June 30 , March 31 , Dec 31 , Sept 30 , June 30 , March 31,.Quarters ended 2005 2005 2005 2005 2004 2004 2004 2004
Net rcccnuc ti 13_953 ti I 5.9 i ti 17.57O S I ^.I47 10_()94 ti I2 7 i 3 I 2 2(l I I.^8O
Ymci^ioll for irnavnlc taycs I _^25 I 147-1 ) (972 1 1630 1 1034 ) (472 ) 1377 ) 142
Net inconlc ti 5.til I ti 3.ti0I ti 2704 ti I.4M ti 2072 ti ti77 ti 5VI ti 111
Net income m i ilablc to conlmon ^tockholdei
u cd in Ni is c n lllin pci "hare : 5 I I ti 3.x01 27O4 1.480 2072 ti X77 57(1 C 72
Net income per share basic S 11.45 S U.3; S 0.24 S 0.13 S 0.19 S 11.115 S 0.06 S 0.03Net inconlc per Aare diluted) ' 0.41 027 ' 0.20 S U. I I S 0.10 ' 0.((7 S ((((5 S 0.02
Weight-average number of shares used in pershare calculations:
Yc^u ended I)cccmhcr3l -'()()4 307 293 S I 13 487Ycarcnded I)cccmhcril. 2IIII^ S 487 S 8 S ;18 177
Rc^crv c 1,01 cscc^^ anal ohm'lctc iI1v cntl,r_vYcarcnded I)cccmhcril_ 2nli3 S 124 S 13') 8^ S 178Yc^u ended December 31. 211()4 178 3nll S I nU S 378
Year ended December 31, 2005 S 378 S 905 S 291 S 992
68
Source : CUTERA INC, 10-K, March 16, 2006
A71
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls andprocedures
Based on their evaluation as of December 31, 2005, our Chief Executive Officer and the Chief Financial Officer, have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information
required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and such information was accumulated and communicated to management, including the Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding required disclosure.
Report ofmanagement on internal control overfinancial reporting
Our 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 Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the UnitedStates ofAmerica . Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United Stales of
America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;and (iii ) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that couldhave a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management usedthe criteria set forth in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based onits assessment and those criteria, management concluded that Cutera maintained effective internal control over financial reporting as of December 31, 2005.Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) during our fourth quarter that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
69
Source : CUTERA INC, 10-K, March 16, 2006
A72
Table of ContentsPART III
Certain information required by Part III is omitted from this Annual Reporton Form 10-K because the Company will file a Definitive Proxy Statement with the
Securities and Exchange Commission within 120 days after the end of Cutera's fiscal year ended December 31, 2005.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's directors and executive officers as required by this Item 10 is incorporated by reference to the Definitive ProxyStatement for our 2006 Annual Meeting of Stockholders under the headings "Election of Directors," "Management," and "Section 16(a) Beneficial Ownership
Reporting Compliance," respectively.
ITEM 11. EXECUTIVE COMPENSATION
Certain information concerning executive compensation is incorporated herein by reference from the information contained in the section entitled "Compensationand Other Information Concerning Directors and Officers" in the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS
Certain information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the information
contained in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning certain relationships and related transactions is incorporated herein by reference from the information contained in the sectionentitled "Certain Relationships and Related Transactions" in the Definitive Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Certain information concerning principal accountant fees and services is incorporated herein by reference from the information contained in the section entitled"Principal Accountant Fees and Services" in the Definitive Proxy Statement.
70
Source : CUTERA INC, 10-K, March 16, 2006
A73
Table of ContentsPART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
( 1) The financial statements required by Item 15(a) are filed as Item 8 of this annual report.
(2) The financial statement schedules required by Item 15(a) are filed as Item 8 of this annual report.
(3) Exhibits.
Exhibit No. fleri ri^n
3 2 ' 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(1) 2004 Employee Stock Purchase Plan.
10.5(1) Amended and Restated Investor Rights Agreement dated November 12, 1999 by and among the Registrant and certain
stockholders.
10.6(1) Brisbane Technology Park Lease dated August 5, 2003 by and between the Registrant and Gal-Brisbane, L.P. for office spacelocated at 3240 Bayshore Boulevard, Brisbane, California.
10.7(1)t Sales AgentAgreement dated February 14, 2003 by and between the Registrant and PSS World Medical, Inc. and the
Amendments thereto.
10.8(2)t Third, Fourth and Fifth Amendments to the Sales Agent Agreement dated February 14, 2003 by and between Registrant andPSS World Medical, Inc.
10.9(4) Sixth Amendment to the Sales Agent Agreement dated November 10, 2004 by and between Registrant and PSS WorldMedical, Inc.
14.1(3) Amended and Restated Code of Ethics for Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney (see page 72).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared effective on March 30, 2004.
(2) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 12, 2004.
(3) Incorporated by reference from our Current Report on Form 8-K filed on April 29, 2004.
(4) Incorporated by reference from our Annual Report on Form 10-K filed on March 25, 2005.
71
Source : CUTERA INC, 10-K, March 16, 2006
A74
Table of ContentsSIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Brisbane, State of California, on the 16th day of March 2006.
CUTERA, INC.
By: /s/ KEVIN P. CONNORS
Kevin P. Connors
President and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin P. Connors, hisattorney-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 theretoand 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 inthe capacities and on the dates indicated.
/s/ KEVIN P. CONNORS President Chief Executive Officer and Director (Principal March 16, 2006Kevin P. Connors Executive Officer)
/s/ RONALD .T SANTTT T.T Chief Financial Officer and Vice President of Finance and March 16, 2006Ronald J. Santilli Administration (Principal Financial and Accounting
Officer)
/s/ DAVID A GOT.r.NTCK Vice President of Research and Development and March 16, 2006
David A. Gollnick Director
/s/ DAVID R APFFT.RFRG Director March 16, 2006David B . Apfelberg
Director
Annette J. Campbell-White
/s/ MARK T.0RTZ Director
Mark Lortz
/s/ TTM O'SHPA Director
Tim O'Shea
/s/ JERRY P. WTDMAN Director
Jerry P. Widman
72
March 16, 2006
March 16, 2006
March 16, 2006
Source : CUTERA INC, 10-K, March 16, 2006
A75
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-114149 and 333-123495) of Cutera, Inc. of our reportdated March 15, 2006 relating to the consolidated financial statements, financial statement schedule, management's assessment of the effectiveness of internalcontrol over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, CaliforniaMarch 15, 2006
Source : CUTERA INC, 10-K, March 16, 2006
A76
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin P. Connors, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant ' s internal control over financial reporting that occurred during the registrant ' s most recent fiscal quarter(the registrant ' s fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant ' s internalcontrol 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'sRegistered Public Accounting Firm and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 16, 2006 /s/ KEVIN P. CONNORS
Kevin P. ConnorsPresident , Chief Executive Officer and Director
(Principal Executive Officer)
Source : CUTERA INC, 10-K, March 16, 2006
A77
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Santilli, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant ' s internal control over financial reporting that occurred during the registrant ' s most recent fiscal quarter(the registrant ' s fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant ' s internalcontrol 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'sRegistered Public Accounting Firm and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 16, 2006 /s/ RONALD J. SANTILLI
Ronald J. SantilliChief Financial Officer and Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
Source : CUTERA INC, 10-K, March 16, 2006
A78
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Cutera Inc. on Form 10-K for the fiscal year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and
results of operations of Cutera Inc.
Date: March 16, 2006
By: /s/ Kevin P. Connors
Kevin P. ConnorsPresident Chief Executive Officer and Director
(Principal Executive Officer)
I, Ronald J. Santilli, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Cutera Inc. on Form 10-K for the fiscal year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition andresults of operations of Cutera Inc.
Date: March 16, 2006
Created by lOKWizard www. lOKWizard.com
By: /s/ Ronald J. Santilli
Ronald J. Santilli
Chief Financial Officer and Vice President of Finance andAdministration(Principal Financial and Accounting Officer)
Source : CUTERA INC , 10-K, March 16, 2006
A79
EXHIBIT B
'4'V I Z DS F L P O W F P 5 F A R C H
FORM 10-KCUTERA INC - CUTR
Filed: March 16, 2007 (period: December 31, 2006)
Annual report which provides a comprehensive overview of the company for thepast year
BI
Part ill
incorporates by reference certain information from the registrant s definitive proxy statem
PART I
PART II
PART Ill
IT 10 . DIRECTORS. EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART IV
B2
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-10.4 (2004 EMPLOYEE STOCK PURCHASE PLAN)
EX-23.1 (CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)
EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION3
EX-31.2 (CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302)
EX-32.1 (CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906)
B3
Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2006
Commission file number : 000-50644
Cutera, Inc.(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction ofincorporation 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 Farh Clasc Namr. of Farh Fvrhangr nn Whirh Registered
Common Stock, $0.001 par value per share The NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes q No q
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 q No q
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 1934during 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 q No q
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest 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. q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer
and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer q Accelerated filer q Non-accelerated filer q
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No q
The aggregate market value of the registrant's common stock, held by non-affiliates of the registrant as of June 30, 2006 (which is the last business day ofregistrant's most recently completed second fiscal quarter) based upon the closing price of such stock on the NASDAQ Global Market on that date, was $244million. For purposes of this disclosure, shares of common stock held by entities and individuals who own 5% or more of the outstanding common stock andshares 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 underthe 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, 2007 was 13,528,119.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrant's definitive proxy statement for the 2007 Annual Meeting of Stockholders.
Item 2 . Properties 29Item 3. Legal Proceedings 29Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32Item 7A. Ouantitative and Oualitative Disclosures About Market Risk 44Item 8. Financial Statements and Supplementary Data 45Item 9. Changes in and DisaUeements with Accountants on Accounting and Financial Disclosure 75Item 9A. Controls and Procedures 75Item 9B. Other Information 76
PART III
Item 10 . Directors Executive Officers and Corporate Governance 77Item 11 . Executive Compensation 77Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 77Item 13. Certain Relationships and Related Transactions , and Director Independence 77Item 14 . Principal Accounting Fees and Services 77
PART IV
Item 15. Exhibits and Financial Statement Schedules 78
Source : CUTERA INC, 10-K, March 16, 2007
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Table of Contents
ITEM 1. BUSINESS
PART I
We are a global medical device company specializing in the design, development manufacture, marketing and servicing of laser and other light-based aestheticssystems for practitioners worldwide. We offer easy-to-use products based on three platforms CoolGlide ®, Xeo and Solera which enable dermatologists,plastic surgeons, gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aesthetic procedures fortheir customers.
CoolGlide- Our first product platform, CoolGlide, was launched in March 2000. This product offers hair removal, treatment of a range of vascularlesions, including leg and facial veins, and laser genesis-a non-ablative procedure to promote healthy looking skin, reduce pore size and improveskin texture.
Xeo- In 2003, we introduced the Xeo platform of products, which combine pulsed light and laser applications in a single platform. The Xeo is afully upgradeable platform on which a customer can use every application that we offer, in order to perform such procedures as hair removal, skinrejuvenation, vascular and pigmented lesion therapies and wrinkle treatment.
• Solera- In 2004, we introduced our Solera platform-a compact tabletop system designed to support a single technology platform.
Solera Titan- The first technology available on the Solera platform was the Titan-, an infrared heat lamp used for deep dermal heating to
treat wrinkles. In 2006, we introduced two new handpieces Titan V and Titan XL that improve the efficiency of the Titan procedures.Titan V allows practitioners to effectively treat delicate areas such as the skin around the eyes and nose, and the Titan XL designed fortreating large body areas, such as arms, abdomens and legs.
Solera Opus- In 2005, we introduced a product called Solera Opus that offers applications for hair removal, skin rejuvenation and
treatment of facial vascular conditions.
In addition, in 2006, we also introduced a product called LimeLightTm a three-in-one hand piece for skin rejuvenation, pigmented lesions and facial vascularlesions. LimeLight can be used with our Xeo or Solera platforms.
Each of our products consists of one or more handpieces and a console that incorporates a universal graphic user interface, a laser or other light-based module,control system software and high voltage electronics. We offer our customers the ability to select the system that best fits their practice. We design our productsto allow our customers to cost-effectively upgrade to our multi-application products, which enables them to add applications to their aesthetic practice andprovides us with a source of recurring revenue.
The Structure of Skin and Conditions that Affect Appearance
The skin is the body's largest organ and is comprised of layers called the epidermis and dermis. The epidermis is the outer layer, and serves as a protectivebarrier for the body. It contains cells that determine pigmentation, or skin color. The underlying layer of skin, the dermis, contains hair follicles and large andsmall 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, sun damage and the human body's diminished ability to repair and renew itself over time, can result in aesthetically unpleasantchanges in the appearance of the skin. These changes can include undesirable hair growth. Additionally, blood vessels can enlarge or swell due to circulatorychanges and become visible at the skin's surface in the form of unsightly veins. Collagen can deteriorate, thereby weakening the skin, leading to wrinkles andlooseness. Long-term sun exposure can result in uneven pigmentation, or sun spots. People with undesirable hair growth or the above mentioned skin conditionsoften seek aesthetic treatments to improve their appearance.
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Table of ContentsThe 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 in2005 there were 8.4 million minimally-invasive aesthetic procedures performed, a 13% increase over 2004 and a 53% increase over 2000. We believe there areseveral factors contributing to the growth of these aesthetic procedures, including:
• Aging ofthe U.S. Population. The "baby boomer" demographic segment, ages 42 to 60 in calendar 2006, represented approximately 28% of theU.S. population in 2003. The size of this aging segment and its desire to retain a youthful appearance, has driven the growth for aesthetic procedures.
• Broader Range ofSafe andEffective Treatments. Technical developments have led to safe , effective , easy-to-use and low-cost treatmentswith fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners . In addition, technical developments haveenabled practitioners to offer a broader range of treatments . Finally, these technical developments have reduced the required treatment andrecovery time, which in turn has led to greater patient demand.
• Changing Practitioner Economics. Managed care and government payer reimbursement restrictions in the United States, and similar paymentrelated constraints outside the United States, are motivating practitioners to establish or expand their elective aesthetic practices with procedures thatare paid for directly by patients. As a result in addition to the traditional users such as dermatologists and plastic surgeons, other practitioners, such asgynecologists, primary care physicians and other practitioners, or non-core customers, are performing these procedures.
Non-Surgical Aesthetic Procedures for Improving the Skin's Appearance and Their Limitations
Many alternative therapies are available for improving a person's appearance by treating specific structures within the skin. These procedures utilize injections orabrasive agents to reach different depths of the dermis and the epidermis. In addition, non-invasive treatments have been developed that employ laser and otherlight-based technologies to achieve similar therapeutic results. Some of these more common therapies and their limitations are described below.
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and laser and other light-based hair removal. The onlytechniques that provide a long-lasting solution are electrolysis and light-based hair removal. Electrolysis is usually painful, time-consuming and expensive for
large areas, but is the most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly into a hair follicle andactivates 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 requirenumerous visits and up to ten 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 light-based treatments. With these treatments,patients seek to eliminate visible veins and improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline or detergent-basedsolution 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 theinside 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 PlasticSurgeons estimates that its members performed over 590,000 sclerotherapy procedures in 2005.
Skin Rejuvenation- Non-light-based skin rejuvenation treatments include a broad range of popular alternatives, including Botox and collagen injections,chemical peels and microdermabrasions. With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, and remove other signsof 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 patientsrequire supplemental injections every three to six months to maintain the benefits of these treatments.
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Table of ContentsSome skin rejuvenation treatments, such as chemical peels and microdermabrasions, can have undesirable side effects. Chemical peels use acidic or causticsolutions to peel away the epidermis, and microdermabrasion generally utilizes sand crystals to resurface the skin. These techniques can lead to post-procedurestinging, 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 ofPlastic Surgeons estimates that in 2005 its members administered 3.8 million injections of Botox and over 870,000 injections of collagen and other soft-tissuefillers, and performed 1.0 million chemical peels and over 800,000 microdermabrasion procedures.
Tissue Tightening and the Treatment of Wrinkles- Non-surgical techniques for treating wrinkles include radiofrequency and light-based technologies. Inradio-frequency tissue tightening energy is applied to heat the dermis of the skin with the goal of shrinking and tightening the collagen fibers. This approach mayresult in a more subtle and incremental change to the skin than a surgical facelift. Drawbacks to this approach may include surface irregularities that can resolveover time, and the risk of burning the treatment area.
Laser and Other Light-Based Aesthetic Treatments
Laser and other light-based aesthetic treatments can achieve therapeutic results by non-invasively affecting structures within the skin. The development of safeand effective aesthetic treatments has created a well-established and growing market for these procedures.
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the skin. Non-ablative skin resurfacing is a methodof improving the appearance of the skin by treating the underlying structure of the skin without damaging the outer layers of the skin. Practitioners use laser andother light-based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as cells responsible for pigmentation in the epidermis,without damaging surrounding tissue. Safe and effective laser and other light-based treatments require an appropriate combination of the following fourparameters:
• Energy Level: the amount of light emitted to heat a target;
• Pulse Duration: the time interval over which the energy is delivered;
• Spot Size: the diameter of the energy beam, which affects treatment depth and area; and
• Wavelength: the color of light, which impacts the effective depth and absorption of the energy delivered.
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner can use a laser or other light source to selectivelytarget 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 durationand 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 finehair, 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 failureto protect the surface of the skin may cause burns, which can result in blistering, scabbing and skin discoloration.
Our Products
Our unique CoolGlide, Xeo and Solera platforms provide the long-lasting benefits of laser and other light-based aesthetic treatments. Our technology allows for acombination of a wide variety of applications available in a single system. Key features of our solution include:
Multiple Applications Available in a Single System. Our technology platforms enable practitioners to perform multiple aesthetic procedures usingsingle device. These procedures include hair removal,
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Table of Contents
treatment of unsightly veins, skin rejuvenation, treatment of pigmented lesions and tissue tightening. Because practitioners can use our systems formultiple indications, the cost of a unit may be spread across a potentially greater number of patients and procedures, and therefore may be morerapidly recovered.
• Technology andDesign Leadership. We offer innovative and advanced laser and other light-based solutions for the aesthetic market. Our lasertechnology combines long wavelength, adjustable energy levels, variable spot sizes and a wide range of pulse durations, allowing our users tocustomize treatments for each patient and condition. Our proprietary pulsed light handpieces for the treatment of pigmented lesions, hair removal and
vascular treatments, optimize the wavelength used for treatments and incorporate a monitoring system to increase safety. Our Titan handpieces utilizea novel light source that had not been previously used for aesthetic treatments.
• Upgradeable Platform. We design our products to allow our customers to cost-effectively upgrade to our multi-application systems, which provides
our customers the option to add additional applications to their existing systems and provides us with a source of recurring revenue. We believe thatproduct upgradeability is a competitive advantage because it allows our users to take advantage of our latest product offerings and provide additionaltreatment options to their patients, thereby expanding the opportunities for their aesthetic practices.
• TieatmentsforBroadRange ofSkin 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 toeffectively treat patients with both fine and coarse hair. Practitioners may also use our products to treat spider and reticular veins, whichare unsightly small veins in the leg, as well as small facial veins. The ability to customize treatment parameters enables our customers tooffer safe and effective therapy to a broad base of their patients.
• Ease of Use. We design our products to be easy to use. Our proprietary handpieces are lightweight and ergonomic, minimizing user fatigue. Ourcontrol console contains a universal graphic user interface with three simple, independently adjustable controls from which to select a wide range oftreatment parameters to suit each patient ' s profile. Our ClearView handpiece allows practitioners to view an area as it is being treated, reducing the
possibility of unintended damage to the skin and increasing the speed of application . The Titan V handpiece has a treatment tip that extends beyondthe handpiece housing to give an unobstructed view of the skin ' s surface, thus making it easier to treat delicate areas such as the skin surrounding theeye and nose areas. In addition to increased visibility, the Titan XL handpiece has a larger spot size than the original Titan, for treating large bodyareas, such as arms, abdomens and legs. The clinical navigation user interface on the Xeo platform provides recommended clinical treatmentparameter ranges based on patient criteria entered.
Risks involved in the use of our products include risks common to laser and other light-based aesthetic procedures, including the risk of burns, blistering and skindiscoloration.
Strategy
Cutera's mission is to maintain and expand its position as a leading, worldwide provider of light-based aesthetic devices by:
Continuing to Develop New Products. We have introduced at least one new product every year since 2000. In 2006, we introduced two new Titan
handpieces Titan V and Titan XL added the LimeLight pulsed light handpiece for treating veins and pigmented lesions, and introduced theNavigation feature for the Xeo platform. We are continuing to develop our existing technology platforms and are developing other platforms with theintent of expanding applications for our customers.
• Increasing Sales ofExisting Products in the United States. We believe that the U. S. market for aesthetic systems is growing rapidly. As a result, in2006 we expanded our U.S. direct sales force,
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Table of Contents
excluding management and customer relations, to 46 employees. We plan on continuing to hire additional sales representatives to take advantage ofour growing U.S. market opportunity.
• Expanding our International Presence. We believe that the international market continues to be a significant growth opportunity for us. As such, weare focused on increasing our market penetration overseas and building global brand-recognition. In 2006, we increased our direct international salesforce to 25 employees, from 18 employees as of December 31, 2005. In addition to direct sales employees, in 2006 we expanded our distributorterritories to over 30 countries. We plan on continuing to hire additional international direct sales employees, distributors and support staff to increase
sales and strengthen customer relationships in the international markets.
• Broadening our Customer Base. We believe we have an opportunity for significant growth targeting non-traditional aesthetic practitioners.Dermatologists and plastic surgeons had generally been regarded as the traditional customers for laser and other light-based aesthetic equipment.
However, in the United States, in 2006 and 2005, approximately 78% and 72%, respectively, of the number of our orders were received fromnon-traditional aesthetic practitioners, which include gynecologists, primary care physicians, physicians offering aesthetic treatments in a spaenvironment, and other qualified practitioners.
• Leveraging our InstalledBase with Sales of Upgrades. Each time we have introduced a major new product, we have designed it to allow existingcustomers to upgrade their previously purchased systems to offer additional capabilities. We believe that providing upgrades to our existing installedbase of customers continues to represent a significant opportunity for recurring revenue. We also believe that our upgrade program aligns our interestin generating revenue with our customers' interest in improving the return on their investment by expanding the range of applications they canperform.
• Generating Revenuefrom Services andDisposables. Our Titan product includes a disposable component, which provides us with a source ofrecurring revenue from our existing customers. Our extended service contracts are also a source of recurring revenue. We will continue to focus ourresearch and development and our sales and marketing efforts on opportunities that can leverage our relationships with our existing customers for
additional revenue opportunities.
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsProducts
Our CoolGlide, Xeo and Solera platforms allow for the delivery of multiple laser and other light-based aesthetic applications from a single system. With our Xeoand Solera platforms, practitioners can purchase customized systems with a variety of our multi-technology applications. The following table lists our productsand each checked box represents the incremental applications that were added to the respective platforms in the years noted.
CoolGlide CV 2000 XI xccl 7Oi)I XV.Intaac 2(^^ -1 X
\co ()I'SO()() -,n(); \ X XII'^(( -,nn4 X
Titan S 2UU4 X
1ccutip 2n(i5
Titan V \^ YI. 2 )( YIimcl.iaht X X
Solo, Titan S 2 4 X1,1ovvacc 2^^lli X
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Limelight 2006 X X
Each of our products consists of a control console and one or more handpieces , depending on the model.
Control Console
Our control console includes a universal graphic user interface, control system software and high voltage electronics. All CoolGlide systems, and some models ofthe Xeo platform, include our laser module which consists of electronics, a visible aiming beam, a focusing lens and a flashlamp or an Nd:YAG laser that
functions at wavelengths that permit penetration over a wide range of depths and is effective across all skin types. The interface allows the practitioner to set theappropriate laser or flashlamp parameters for each procedure through a user-friendly format. The control system software ensures that the operator's instructionsare properly communicated from the graphic user interface to the other components within the system. Our high voltage electronics produce over 10,000 watts ofpeak laser energy, which permits therapeutic effects at short pulse durations. Our Solera console platform comes in two configurations Opus and Titan bothof 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 handpiece while the Solera Titan console is designed specifically to drive the Titan handpieces. The control system software is designed toensure that the operator's instructions are properly communicated from the graphical user interface to the other components within the system and includesreal-time calibration to control the output energy as the pulse is being delivered during the treatment.
Handpieces
ClearView Handpiece- Our ClearView handpiece delivers laser energy to the treatment area for hair removal, leg and facial vein treatment, and skin
rejuvenation procedures. The ClearView handpiece consists of an energy-
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Table of Contentsdelivery component, consisting of an optical fiber and lens, and a copper cooling plate with imbedded temperature monitoring. The handpiece weighsapproximately 14 ounces, which is light enough to be held with one hand. The lightweight nature and ergonomic design of the handpiece allows the operation ofthe 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 ClearView handpiece also incorporates our cooling system, providing integrated pre and post cooling ofthe treatment area through a temperature-controlled copper plate to protect the outer layer of the skin. The handpiece is available in either a fixed 10 millimeterspot size, for our CoolGlide CV, or a user-controlled variable 3, 5, 7 or 10 millimeter spot size, for our other models.
Pulsed Light Handpieces- The OPS600, LP560, ProWave 770, AcuTip 500 and LimeLight handpieces are designed to produce a pulse of light over awavelength spectrum to treat pigmented lesions, such as age and sun spots, hair removal and superficial facial vessels. The handpieces each consist of a customflashlamp, proprietary wavelength filter, closed-loop power control and embedded temperature monitor, and weigh approximately 13 ounces. The filter in theOPS600 and AcuTip 500 eliminates long and short wavelengths, transmitting only the therapeutic range required for safe and effective treatment. The filter in theLP560 and ProWave 770 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 thatthe desired energy level is delivered. The handpieces protect the epidermis by regulating the temperature of the handpiece window through the embeddedtemperature monitor. These handpieces are available on the Xeo and Solera Opus platforms.
Titan Handpieces- The Titan handpieces are designed to produce a sustained pulse of light over a wavelength spectrum tailored to provide heating in thedermis to treat wrinkles (although it is cleared in the United States by the U.S. Food and Drug Administration, or FDA, only for deep dermal heating). Thehandpiece consists of a custom light source, proprietary wavelength filter, closed-loop power control, sapphire cooling window and embedded temperaturemonitor, and weighs approximately three pounds. The temperature of the epidermis is controlled by using a sapphire window to provide cooling before, duringand after the delivery of energy to the treatment site. We offer three different Titan handpieces Titan S, Titan V and Titan XL.
Titan S: the standard Titan handpiece
Titan V has a treatment tip that extends beyond the handpiece housing to provide enhanced visibility of the skin' s surface to effectively treat delicate areassuch as the skin around the eyes and nose
Titan XL: like the Titan V, extends beyond the housing for improved visibility. It also has a larger treatment spot size to more quickly treat larger body areassuch as the arms and legs.
The Titan handpieces can be used on the Xeo and Solera platforms. The Titan handpiece requires a periodic "refilling" process, which includes the replacementof the optical source, after a set number of pulses have been used.
Cutera Applications and Procedures
Our products are designed to allow the practitioner to select an appropriate combination of energy level, spot size and pulse duration. The ability to manipulate
the combinations of these parameters allows our customers to treat the broadest range of conditions available with a single light-based system.
Hair Removal- Our laser technology allows our customers to treat all skin types and hair thicknesses. Our Nd:YAG laser permits energy to safely penetratethrough 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.Both our ClearView handpiece and our ProWave 770
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Table of Contentshandpiece, with its pulsed light technology, allow our customers to treat all skin types quickly and effectively. Using the interface, the practitioner selects theappropriate mode and fluence to achieve the desired result.
To remove hair, the treatment site on the skin is first cleaned and shaved. Using the ClearView handpiece, the practitioner applies a thin layer of gel to glideacross the skin. The practitioner next applies the ClearView handpiece directly to the skin to cool the area to be treated and then delivers a laser pulse to thepre-cooled area. For the ProWave 770 handpiece, 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 handpieces, delivery of the energy destroys the hair follicles
and prevents hair regrowth. This procedure is then repeated at the next treatment site on the body, and can be done in a gliding motion to increase treatmentspeed. 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 thecondition being treated. On average, there are six to eight weeks between treatments.
Leg and Facial Veins- Our laser technology allows our customers to treat the widest range of aesthetic vein conditions, including spider and reticular veins andsmall facial veins. Our ClearView handpiece's adjustable spot size of 3, 5, 7 or 10 millimeters allows the practitioner to control treatment depth to target differentsized veins. Selection of the appropriate energy level and pulse duration ensures effective treatment of the intended target. Our AcuTip 500 handpiece, with its 6millimeter spot size, is designed for the treatment of facial vessels.
The vein treatment procedure is performed in a substantially similar manner to the hair removal procedure. In addition to pre-cooling the area to be treated usingthe ClearView handpiece, the handpiece is also used to cool the treatment area after the practitioner applies the laser pulse. With the AcuTip 500, the pulse oflight is delivered while the treatment area is being cooled with the sapphire tip. The delivered energy damages the vein and, over time, it is absorbed by the body.
Patients receive on average between one and six treatments, with six weeks or longer between treatments.
Skin Rejuvenation- Our laser technology allows our customers to perform non-invasive treatments that improve facial skin tone and texture by reducingredness and pore size, and treating other aesthetic conditions. Our products deliver a combination of high laser energy and a very short pulse duration to affect
the desired target, minimizing risk of damage to the surrounding tissue.
To perform a skin rejuvenation procedure, cooling is not applied and the handpiece 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 occursand collagen growth is stimulated to rejuvenate the skin and reduce wrinkles. Patients typically receive four to six treatments for this procedure. The treatmenttypically takes less than a half hour and there are typically two to four weeks between treatments.
Pigmented Lesions- Our flashlamp technology allows our customers to safely and effectively treat pigmented lesions, such as age spots and sun spots. Thepractitioner delivers a narrow spectrum of light to the surface of the skin through our OPS600, LP560 or LimeLight pulsed-light handpieces. These handpiecesinclude 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, the handpiece is placed directly on the skin and then the light pulse is triggered. The cells forming the pigmented lesion absorb thelight energy and will darken and then flake off over the course of two to three weeks. Several treatments may be required to completely remove the lesion. Thetreatment takes a few minutes per area treated and there are typically three to four weeks between treatments.
Tissue Tightening- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The practitioner delivers a spectrum of light tothe skin through our Titan handpiece. This handpiece includes our
10
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Table of Contentsproprietary 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 handpiece 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 regrowth. Several treatments may be required to obtain thedesired degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four weeks between treatments.
Our CE Mark allows us to promote the Titan in the European Union, Australia and certain other countries outside the United States for the treatment of wrinklesthrough skin tightening. However, in the United States we have a 510(k) clearance for only deep dermal heating. We continue to work with physicians and otherexperts in the medical aesthetic market to gather additional data on the clinical effectiveness of Titan.
Product Upgrades
Our products are designed to allow our customers to cost-effectively upgrade to our newest technologies, which provides our customers the option to addapplications to their Cutera system and provides us with a source of recurring revenue. When we introduce a new product, we notify our customers of theupgrade 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 a few cases, where substantial upgrades are necessary, the customer will receive a fully-refurbishedsystem before sending their prior system back to our headquarters.
Sales and Marketing
In the United States, we market and sell our products primarily through a direct sales force of 46 employees as of December 31, 2006. In addition, we have adistribution relationship with PSS World Medical Shared Services, Inc., or PSS, a wholly-owned subsidiary of PSS World Medical, that operates medical supplydistribution service centers with over 700 sales representatives serving physician offices throughout the United States. For the years ended December 31, 2006,2005 and 2004, revenue from PSS accounted for 15%, 16% and 12%, respectively, of our total revenue.
International sales are generally made through a direct sales force of 25 employees as of December 31, 2006, as well as independent sales representatives anddistributors in over 30 countries worldwide. We have direct sales offices located in Australia, Canada, France, Germany, Japan, Spain, Switzerland and theUnited Kingdom. Our international revenue represented 31%, 28% and 34% of total revenue for the years ended December 31, 2006, 2005 and 2004,
respectively.
We also sell certain items like Titan handpiece refills and marketing brochures via the web.
Although specific customer requirements can vary depending on applications, customers generally demand quality performance, ease of use, and highproductivity in relation to the cost of ownership. We have responded to these customer demands by introducing new products focused on these requirements inthe markets we serve. Specifically, we believe that we differentiate our products from those of our competitors, by introducing new products and applications that
are innovative, address the specific aesthetic procedures in demand, and are upgradeable on our customers' existing systems. In addition, we provide attractiveupgrade pricing to new product families, as and when they are introduced and are responsive to our customer's financing preferences. To increase marketpenetration, in addition to marketing to our historic customer base of plastic surgeons and dermatologists, we remain focused on selling to the non-core aestheticpractices consisting of gynecologists, primary care physicians, physicians offering aesthetic treatments in a spa environment and other qualified practitioners.
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Table of ContentsWe seek to establish strong ongoing relationships with our customers through the upgradeability of our products, sales of extended service contracts, the refillingof Titan handpieces, and ongoing training and support. We primarily target our marketing efforts to practitioners through office visits, workshops, trade shows,webinars and trade journals. We also market to potential patients through brochures, workshops and our website. We offer clinical forums with recognized expert
panelists to promote advanced treatment techniques using the CoolGlide, Xeo and Solera platforms to further enhance customer loyalty and uncover new salesopportunities.
Competition
Our industry is subject to intense competition. Our products compete against conventional non-light-based treatments, such as electrolysis, Botox and collageninjections, chemical peels, microdermabrasion and sclerotherapy. Our products also compete against laser and other light-based products offered by public
companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar Medical Technologies, Syneron and Thermage, as well as other private companies,including, Alma, Aesthera, Lumenis, Reliant Sciton and several other smaller companies.
Competition among providers of laser and other light-based devices for the aesthetic market is characterized by extensive research efforts and technology
progress. While we attempt to protect our products through patents and other intellectual property rights, there are few barriers to entry that would prevent newentrants or existing competitors from developing products that would compete directly with ours. There are many companies, both public and private, that aredeveloping innovative devices that use both light-based and alternative technologies. Many of these competitors have greater financial and human resources thanwe do and have established reputations, as well as international distribution channels that are more effective than ours. Additional competitors may enter themarket 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, reputation and price. We have encounteredand expect to continue to encounter potential customers who, due to existing relationships with our competitors, are committed to, or prefer the products offeredby these competitors. Competitive pressures may result in price reductions and reduced margins over time for our products.
Research and Development
Our research and development group develops new products to address unmet or underserved market needs. The major focus of this group is to leverage our
existing technology platforms for new aesthetic applications. As of December 31, 2006, our research and development activities were conducted by a staff of 19employees with a broad base of experience in lasers and optoelectronics. We have developed relationships with outside contract engineering and designconsultants, giving our team additional technical and creative breadth. We work closely with thought leaders and customers, both individually and through oursponsored seminars, to understand unmet needs and emerging applications in aesthetic medicine. Research and development expenses for 2006, 2005 and 2004,were $6.5 million, $5.4 million and $4.5 million, respectively.
Services 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 easilybe removed and replaced. We believe that quick and effective delivery of service is important to our customers. As of December 31, 2006, we had a 34-personglobal service department. Internationally, we provide direct service support through our Australia, France, Germany, Japan, and Switzerland offices, and alsothrough the network of distributors in over 30 countries and third-party service providers. We provide initial warranties on our products to cover parts and service
and offer extended warranty packages that vary by the type of product and the level of service desired. Our base warranty on system sales covers parts andservice for a standard period of one year. From time to time, we also have promotions whereby we include a two year warranty with the sale of our products.Customers are notified before their initial
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Table of Contentswarranty expires and are able to choose from two different extended service plans covering preventative maintenance and replacement parts and labor. One planallows the customer to pay only for time and materials at a reduced rate and a second provides yearly preventative maintenance for a fixed fee. In the event oneof our customers declines an additional warranty, we will continue to service our products and charge customers for time and materials. We have invested
substantial financial and management resources to develop an international infrastructure to meet the 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, Californiafacility. 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 ofcomponents and subassemblies as well as the delivery schedules. The forecasts we use are based on historical demands and sales projections. Lead times forcomponents 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 managementprogram. 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 theQSR through periodic unannounced inspections. Our single manufacturing facility located in Brisbane, CA, was inspected by the FDA in 2004 and 2005. Therewere no significant findings as a result of these audits and our responses have been accepted by the FDA. We are scheduled to have another inspection in March2007. Our failure to maintain compliance with the QSR requirements could result in the shut down of our manufacturing operations and the recall of ourproducts, which would have a material adverse effect on business. In the event that on 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 andquality management certifications to enable us to market our products in the United States, the member states of the European Union, the European Free TradeAssociation and countries which have entered into Mutual Recognition Agreements with the European Union. Our manufacturing facility is ISO 9001 and ISO13485 certified.
Patents and Proprietary Technology
We rely on a combination of patent, copyright trademark and trade secret laws, non-disclosure, confidentiality and invention assignment agreements to protectour intellectual property rights. As of December 31, 2006, we had seven issued U.S. patents and 21 pending U.S. patent applications. Cutera, CoolGlide, Xeo,Titan, Solera Opus, Prowave 770 and AcuTip are only some of our trademarks. We have trademark rights in these and others trademarks in the United States andhave registrations issued and pending in the United States and other countries for these and others of our trademarks. We intend to file for additional patents andtrademarks to continue to strengthen our intellectual property rights.
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Table of ContentsIn conjunction with the settlement of our patent litigation with Palomar and Massachusetts General Hospital, or MGH, in June 2006, Palomar the exclusivelicensee of the patents owned by MGH-granted us an irrevocable sublicense to the patents for removing hair using lasers or pulsed-light technology. Thepatents are set to expire in February 2015. The royalty rate for hair-removal-only systems is 7.5% of net revenue and for multi-application systems containing
hair-removal functionality it is either 3.75% or 5.25% of net revenue, depending on whether there is one or more hair removal technologies included in thesystem, respectively. Our revenue from systems that do not include hair-removal capabilities (such as our Titan) and revenue from service contracts are notsubject to royalties.
Our employees and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationshipswith 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 assurancethat employees and consultants will abide by the confidentiality or assignability terms of their agreements. Despite measures taken to protect our intellectualproperty, 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 orexported internationally are safe and effective for their intended uses:
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance orpre-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 Ior II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device. This process isgenerally known as 5 10(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such aslife-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 5 10(k) clearance is required, we must submit a pre -market notification demonstrating that our proposed device is substantially equivalent to a previouslycleared 510(k) device or a device that was in commercial
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Table of Contentsdistribution before May 28, 1976 for which the FDA has not yet called for the submission of Pre-Market Approval, or PMA. applications, By regulation, theFDA 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 takessignificantly 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. We received FDA clearance tomarket our products for the treatment of vascular lesions in June 1999, for hair removal in March 2000, and for permanent hair reduction in January 2001. Inaddition, in June 2002, we received FDA clearance to market our products for the treatment of benign pigmented lesions, for the treatment of pseudofolliculitis
barbae, commonly referred to as razor bumps, and for the reduction of red pigmentation in scars. In October 2002, we received FDA clearance to market ourproducts for the treatment of wrinkles, which we have utilized to market our products for skin rejuvenation. In March 2003, we received FDA clearance tomarket our pulsed-light handpiece for the treatment of pigmented lesions.
In February 2004, we received FDA clearance to market our infrared Titan handpiece for deep dermal heating for the temporary relief of minor muscle and jointpain and for the temporary increase in local circulation where applied. In October 2004, we received FDA clearance to market our Titan tabletop console for usewith the Titan handpiece. In January 2005, we received FDA clearance to market our Solera tabletop console for use with our pulsed-light handpieces In March2005, we received FDA clearance to market our pulsed light handpieces for hair removal and vascular treatments. In May 2005, the FDA determined that our
510(k) application with respect to marketing our Titan product in the United States for wrinkle reduction was not substantially equivalent to predicate devices forthe treatment of wrinkles. We continue to evaluate opportunities for future submissions to the FDA to expand our marketing claims.
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 notlimited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device.
No device that we have developed has required pre-market approval, nor do we currently expect that any future device or indication will require pre-marketapproval.
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 thesemodifications . After a device receives 510(k) clearance or a PMA, any modification that could significantly affect its safety or effectiveness, or that wouldconstitute 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 new510(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 besubject to significant regulatory fines or penalties.
Clinical Trials
When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device presents a "significant risk," as defined by the FDA,to human health, the device sponsor is required to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to
commencing the human clinical trial. If the device is considered a "non-significant" risk, IDE submission to the
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Table of ContentsFDA is not required. Instead, only approval from the Institutional Review Board, or IRB, overseeing the clinical trial is required. Human clinical studies aregenerally 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 byappropriate 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 theapplication is reviewed and cleared by the FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our products mayrequire 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 aclinical 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 anunacceptable health risk.
Our clinical department continues to work with physicians and other experts in the medical aesthetic market to gather additional data that may provide the basisfor physician-authored white papers, the promotion of our existing products, or seeking the approval for additional indications on our existing and any futureproducts.
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 orserious 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 datafor 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 ofthe California Department of Health Services, or CDHS, to determine our compliance with the QSR and other regulations, and these inspections may include themanufacturing facilities of our subcontractors. In the past, our prior facility has been inspected, and observations were noted. There were no findings thatinvolved a material violation of regulatory requirements. Our responses to these observations have been accepted by the FDA and CDHS, and we believe that weare in substantial compliance with the QSR. Our current manufacturing facility has been inspected by the FDA but not by the CDHS. The FDA noted
observations, but there were no findings that involved a material violation of regulatory requirements. Our responses to those observations have been accepted bythe FDA.
We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, includingdesign 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;
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• operating restrictions or partial suspension or total shutdown of production;
• refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;
• withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed . If any of these
events were to occur, they could have a material adverse effect on our business.
We are also subject to a wide range of federal, state and local laws and regulations, including those related to the environment health and safety, land use and
quality assurance. We believe that compliance with these laws and regulations as currently in effect will not have a material adverse effect on our capitalexpenditures, 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 toobtain 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 twenty-five countries encompassing most of the major countriesin Europe. Three 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 medicaldevices that meet European Union requirements. The European Union has adopted numerous directives and European Standardization Committees havepromulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices thatcomply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essentialrequirements 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 conformityvaries depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessmentby a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consistof 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 theEuropean 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 ISO9001 and EN 46001 certification. In March 2003, we received our ISO 9001 updated certification (ISO 9001:2000) as well as our certification for ISO13485:1996 which replaced our EN 46001 certification. In March 2004, we received our ISO 13485:2003 certification, which is the most current ISOcertification for medical device companies.
Employees
As of December 31, 2006, we had 221 employees, of which 99 were in sales and marketing, 45 in manufacturing operations, 34 in technical service, 19 inresearch and development and 24 in general and administrative. We believe that our future success will depend in part on our continued ability to attract hire andretain qualified personnel . None of our employees is represented by a labor union, and we believe our employee relations are good.
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Table of ContentsAvailable 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 theSecurities and Exchange Commission , or SEC, including reports on the following forms: annual report on Form 10- K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15 (d) of the Securities Exchange Act of 1934. These
reports and other information concerning the company may be accessed through the SEC's website at http ://www.sec.gov and our website athttp://www.cutera . com. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC.
Our most recent charter for our Audit and Compensation Committees and our Code of Ethics are available on our website at http://www.cutera.com. In the event
that we grant a waiver under our Code of Ethics to any of our officers and directors we will publish it on our website.
ITEM IA. RISK FACTORS
We compete against companies that have longer operating histories, more establishedproducts and greater resources, which may prevent us from achievingsignificant market penetration or increased operating results.
Our products compete against similar products offered by public companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar, Syneron and Thermage,
as well as private companies such as Alma, Aesthera, Lumenis, Reliant Technologies, Sciton and several other smaller companies. Competition with thesecompanies could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and resultsof operations. We also face competition from medical products, such as Botox, an injectable compound used to reduce wrinkles, and collagen injections. Otheralternatives to the use of our products include sclerotherapy, a procedure involving the injection of a solution into the vein to collapse it electrolysis, a procedureinvolving the application of electric current to eliminate hair follicles, and chemical peels. We may also face competition from manufacturers of pharmaceutical
and other products that have not yet been developed. Our ability to compete effectively depends upon our ability to distinguish our company and our productsfrom our competitors and their products, and includes such factors as:
• intellectual property protection;
• product performance;
• product pricing;
• quality of customer support;
• success and timing of new product development and introductions; and
• development of successful distribution channels, both domestically and internationally.
Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. For example,
we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additionalproducts from our competitors. Potential customers also may need to recoup the cost of expensive products that they have already purchased from ourcompetitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unableto compete effectively and our business will be harmed.
In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketingresources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and marketshare, as well as new technologies or products that could effectively compete with our existing product lines. For example, ESC Medical purchased Coherent'smedical business in 2001 and the surviving company, Lumenis,
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Table of Contentsincorporated competitive product lines and technologies of the predecessor companies into its current products. Given the relatively few competitors currently inthe market, any business combination could exacerbate any existing competitive pressures, which could harm our business.
Competition amongproviders of laser and other energy-based devices for the aesthetic market is characterized by rapid innovation, and we mustcontinuously develop new products or our revenue may decline.
While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants orexisting competitors from developing products that compete directly with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, orlong wavelength, laser system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently introduced systems that utilizeNd:YAG lasers, and received FDA clearances to market these products as treating all skin types. We expect that any competitive advantage we may enjoy from
other current and future innovations, such as combining multiple handpieces in a single system to perform a variety of applications, may diminish over time, ascompanies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve ourproducts and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue will decline asour customers purchase our competitors' products.
Our ability to compete depends upon our ability to innovate, to develop and commercialize new products andproduct enhancements, and to identify newmarkets for our technology.
We have created products to apply our technology to hair removal, treatment of veins, skin rejuvenation, treatment of pigmented lesions and treatment ofwrinkles. Currently, these applications represent the majority of laser and other energy-based aesthetic procedures. To be successful in the future, we mustdevelop new and innovative aesthetic applications, identify new markets for our existing technology, and develop new technology from various platforms. Tosuccessfully expand our product offerings, we must:
• develop or acquire new products that either add to or significantly improve our current products;
• convince our target customers that our new products or product upgrades would be an attractive revenue-generating addition to their practices;
• sell our products to a broad customer base;
• identify new markets and alternative applications for our technology;
• protect our existing and future products with defensible intellectual property; and
• satisfy and maintain all regulatory requirements for commercialization.
Every year since 2000, we have introduced at least one new product and a corresponding upgrade to our existing products. Historically, these introductions havebeen a significant component of our financial performance. Our business strategy is based, in part, on our expectation that we will continue to make annualproduct introductions that we can sell to new customers and to existing customers as upgrades. For the year ending December 31, 2006, we invested $6.5 millionor 6% of net revenue, in our research and development department. Even with a significant investment in research and development, we may be unable, however,
to continue to develop new products and technologies annually, or at all, which could adversely affect our projected growth rate.
Ifthere is not sufficient demandfor the procedures performed with our products, practitioner demandfor our products could be inhibited, resulting inunfavorable operating results and reduced growth potential
Continued expansion of the global market for laser- and other energy-based aesthetic procedures is a material assumption of our growth strategy. Mostprocedures 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:
• the cost of procedures performed using our products;
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• the cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser- or other energy-based technologiesand treatments which use pharmaceutical products;
• the success of our sales and marketing efforts; and
• consumer confidence, which may be impacted by economic and political conditions.
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 bereduced, resulting in unfavorable operating results and lower growth potential.
IfPSS World Medicalfails to perform to our expectations, we may fail to achieve anticipated operating results.
We have a distribution agreement with PSS World Medical Shared Services, Inc., or PSS, a wholly-owned subsidiary of PSS World Medical. PSS salesrepresentatives work in coordination with our sales force to locate new potential customers for our products throughout the United States. For the year endedDecember 31, 2006 approximately 15% of our revenue came from PSS.
If PSS does not perform adequately under the arrangement, or terminates our relationship, it may have a material adverse effect on our business, financialcondition, results of operations or future cash flows.
If our public guidance or ourfuture operatingperformance does not meet investor expectations, our stock price could decline
We provide guidance to the investing community regarding our anticipated future operating performance, both for the coming quarter and fiscal year. Ourbusiness typically has a short sales cycle, we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully is
subject to many uncertainties, as discussed herein. In light of those factors, it is difficult for us to estimate with accuracy our future results. In the past, our actualperformance had turned out to be significantly different from our prior guidance. For example, at the beginning of 2006, we indicated that we expected our 2006revenue to increase by 25%, compared with 2005. Actual 2006 growth, compared with 2005, was higher, at 33%. As we stated at the time, such expectations aresubject to numerous risks and uncertainties which could make actual results differ materially, either higher or lower. On January 31, 2007, we guided that our2007 revenue is expected to increase by 25%, compared with 2006. If our actual results do not meet our public guidance, or our results or guidance as to the
future were to be below the expectations of third party financial analysts, our stock price could decline significantly.
The price of our common stock mayfluctuate substantially.
The public market price of our common stock has in the past fluctuated substantially and may do so in the future. The market price for our common stock will beaffected by a number of factors, including:
• quarterly variations in our, or our competitors,' results of operations;
• changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' earning estimates;
• the announcement of new products or service enhancements by us or our competitors;
• regulatory developments or delays concerning our, or our competitors', products;
• the initiation of litigation by us or one of our competitors; and
• general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.
Actual or perceived instability in our stock price could reduce demand from potential buyers of our stock, thereby causing our stock price to decline.
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Table of ContentsWe may be involved in future costly intellectual property litigation, which could impact ourfuture business andfinancial performance
We settled our patent litigation with Palomar in June 2006- see Item 3 - "Legal Proceedings." As with that case, our competitors or other patent holders mayassert that our present or future planned products and the methods we employ are covered by their patents. In addition, we do not know whether our competitorswill apply for and obtain patents that will 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, wecannot obtain a license or redesign our products, we may have to stop manufacturing and marketing our products and our business would suffer as a result.
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 companyname 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. We do not know whether necessary licenses would be available to us on satisfactory terms, orwhether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, 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.
Intellectual property rights may not provide adequate protection for some or all of our products, which may permit thirdparties to compete against us moreeffectively.
We rely on patent, copyright trade secret and trademark laws and confidentiality agreements to protect our technology and products. At December 31, 2006, wehad seven issued U.S. patents. Some of our other 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 beadvantageous to us. Any patents we obtain may be challenged, invalidated or legally circumvented by third parties. Consequently, competitors could marketproducts and use manufacturing processes that are substantially similar to, or superior to, ours. We may not be able to prevent the unauthorized disclosure or useof our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally ofconfidentiality 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 ourintellectual 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 theirown 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 could be adversely affected, as could our business.
Ifwefail to obtain clearance from the U.S. Food and DrugAdministration to market our Titan productfor additional indications, our revenuefrom this
product may be adversely affected
Our Titan product, introduced in 2004, is a material component of our growth strategy. We currently have FDA clearance to market Titan in the United States fordeep dermal heating. The FDA has denied our initial 510(k) application to market Titan for wrinkle reduction on the basis that Titan is not substantiallyequivalent to predicate devices for the treatment of wrinkles. We cannot promote or advertise our Titan product in the United
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Table of ContentsStates for any indications other than deep dermal heating until we receive additional FDA clearances, but there are no assurances as to when, or whether, we willever obtain such clearances. In the event that we do not obtain additional FDA clearances, our ability to market Titan in the United States and revenue derivedtherefrom, including revenue from both Titan unit sales and handpiece refills, may be adversely affected.
Ifwefail to obtain or maintain necessary FDA clearances for our products and indications, if clearances forfuture products and indications are delayed ornot issued, or if there arefederal or state level regulatory changes, 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 mustfirst 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 therefrommay be adversely affected. For example, we filed a regulatory submission with the FDA in December 2006 for a new 2790 nm wave-length based lasertechnology for skin rejuvenation. However, unless and until the FDA issues a clearance or pre-marketing approval for that product, we will not be able to marketor sell it in the United States.
Medical devices may be marketed only for the indications for which they are approved or cleared and if we are found to be marketing our products for off-label,or non-approved, uses we might be subject to FDA enforcement action or have other resulting liability. We have obtained 510(k) clearance for the indications forwhich we market our products. However, our clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical DeviceReporting regulations, which require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would
likely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which are, in many instances, in flux. Changes in stateregulations may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, "licensed practitioners," as determined on astate-by-state basis. As a result in some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time,thereby disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement actionby the FDA or state agencies, which may include any of the following sanctions:
• warning letters, fines, injunctions, consent decrees and civil penalties;
• repair, replacement, recall or seizure of our products;
• operating restrictions or partial suspension or total shutdown of production;
• refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;
• withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• criminal prosecution.
If any of these events were to occur, they could harm our business.
Ifwefail to comply with the FDA's Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and ourbusiness 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 regulatoryscheme that covers the methods and documentation of the design,
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Table of Contentstesting, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, ourproducts 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 have been informed of a planned inspection in late March 2007 and could be subject to additional future inspections. Our failure to take satisfactorycorrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcementactions, 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.
Ifwe modify one of our FDA-approved devices, we may need to seek re-approval; which, ifnot granted, wouldprevent usfrom selling our modifiedproductsor 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 usewould require a new 510(k) clearance or possibly a pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals fornew 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 havemade 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 clearanceor approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing themodified 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 orfuture products and indications, which couldharm 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 ofmedical devices from the United States are regulated by the FDA. Complying with international regulatory requirements can be an expensive andtime-consuming process and approval is not certain. The time required to obtain clearance or approvals, if required by other countries, may be longer than thatrequired for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may be unableto 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 ourproducts outside the United States, or if we fail to receive those qualifications, clearances or approvals, we may be unable to market our products orenhancements in international markets effectively, or at all, which could have a material adverse effect on our business and growth strategy.
To successfully market and sell our products internationally, we must address many issues with which we have little or no experience.
For the year ended December 31, 2006, approximately 31% of our revenue was derived from international customers, which are a material component of our
growth strategy. We depend on third-party distributors and a relatively new direct sales operation to sell our products internationally, and if these distributors ordirect sales personnel under-perform, we may be unable to increase or maintain our level of international revenue. We will need to expand the territories in whichwe sell our products and attract additional international distributors to grow our business. Distributors may not accept our business or commit the necessaryresources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are
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Table of Contentsunable to engage distributors in particular geographic areas, we may not realize projected international revenue growth. Additionally, we expect to expand ourdirect sales force in Europe and Asia. If we are unable to hire, retain and obtain satisfactory performance from such additional personnel, our revenue frominternational operations may be adversely affected.
We believe that an increasing amount of our future revenue will come from international sales as we expand our overseas operations and develop opportunities inadditional international territories. International sales are subject to a number of risks, including:
• difficulties in staffing and managing our foreign operations;
• difficulties in penetrating markets in which our competitors' products are more established;
• reduced protection for intellectual property rights in some countries;
• export restrictions, trade regulations and foreign tax laws;
• fluctuating foreign currency exchange rates;
• foreign certification and regulatory requirements;
• lengthy payment cycles and difficulty in collecting accounts receivable;
• customs clearance and shipping delays;
• political and economic instability;
• lack of awareness of our brand in international markets; and
• preference for locally-produced products.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding asolution, our revenue may decline.
The expense andpotential unavailability of insurance coveragefor our customers could adversely affect our ability to sell our products, and therefore ourfinancial condition.
Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of ourproducts. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, ourcustomers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other energy-based products due to
the cost of, or inability to, procure insurance coverage. The unavailability of insurance coverage for our customers could adversely affect our ability to sell ourproducts, and therefore our financial condition.
Because we do not require trainingfor users of our products in North America, and we sell our products to nonphysicians, there exists an increasedpotentialfor misuse of our products, which could harm our reputation and our business.
Federal regulations allow us to sell our products to or on the order of "licensed practitioners." The definition of "licensed practitioners" varies from state to state.As a result, our products may be purchased or operated by physicians with varying levels of training, and in many states by non-physicians, including nurse
practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers oroperators of our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. We, and ourdistributors, generally offer but do not require purchasers or operators of our products to attend training sessions. In addition, we sometimes sell our systems tocompanies that rent our systems to third parties and that provide a technician to perform the procedure. The lack of training and the purchase and use of ourproducts by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product
liability litigation.
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Table of ContentsProduct liability suits could be brought against us due to a defective design, material or workmanship or misuse of our products and could result in expensiveand time-consuming litigation, payment ofsubstantial 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 costlylitigation 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 inthe future be involved, in litigation related to the use of our products. Product liability claims could divert management's attention from our core business, beexpensive 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 toobtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought againstus, with or without merit could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in theindustry and reduce product sales. In addition, we have been experiencing steep increases in our product liability insurance premiums. If our premiums continue
to rise, we may no longer be able to afford adequate insurance coverage.
If we are unable to maintain adequate insurance coverage, or we have product liability claims in excess of our insurance coverage, claims would be paid out of
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages andpricefluctuations, which could harmour business.
Many of the components and materials that comprise our products are currently manufactured by a limited number of suppliers. A supply interruption or anincrease 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 commercially 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;
• delay in delivery due to our suppliers prioritizing other customer orders over ours; and
• Fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
Components used in our products are complex in design, and any defects may not be discoveredprior to shipment to customers, which could result inwarranty obligations, reducing our revenue and increasing our cost.
In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significant degree oftechnical expertise to produce. If our suppliers fail to produce
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Table of Contentscomponents to specification, or if the suppliers, or we, use defective materials or workmanship in the manufacturing process, the reliability and performance ofour products will be compromised.
If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
• loss of customer orders and delay in order fulfillment;
• damage to our brand reputation;
• increased cost of our warranty program due to product repair or replacement;
• inability to attract new customers;
• diversion of resources from our manufacturing and research and development departments into our service department; and
• legal action.
The occurrence of any one or more of the foregoing could materially harm our business.
Weforecast sales to determine requirements for components and materials used in our products and if ourforecasts are incorrect, we may experience eitherdelays in shipments or increased inventory costs.
We keep limited materials and components on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders andmaterial requirements to predict our inventory needs up to twelve months in advance and enter into purchase orders on the basis of these requirements. Ourlimited historical experience may not provide us with enough data to accurately predict future demand. If our business expands, our demand for components and
materials would increase and our suppliers may be unable to meet our demand. If we overestimate our component and material requirements, we will have excessinventories, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventories, whichcould interrupt delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and thelevel of satisfaction our customers have with our business.
Lack of demandfor our products in the non-core market would harm our anticipated revenue growth.
Most of our revenue in the United States is derived from sales to customers outside of the core dermatologist and plastic surgeon specialties, such as familypractitioners, primary care physicians, gynecologists and medi-spas. Continuing to achieve further penetration into this new market is a material assumption ofour growth strategy. Demand for our products in the non-core market could be weakened by several factors including poor financial performance of businessesintroducing aesthetic procedures to their practice or medi-spas, reduced patient demand for alternative treatments and services being provided by non-corepractitioners and an increase in malpractice law suits against non-core practitioners. If we do not achieve anticipated demand for our products in the non-core
market our expected revenue growth may not be achieved.
We depend on skilled and experiencedpersonnel to operate our business effectively. Ifwe are unable to recruit, hire and retain these employees, our abilityto manage and expand our business will be harmed, which would impair ourfuture revenue andprofitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. We do not have employment contracts with any of ourofficers 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 ofany of our senior management team members could weaken our management expertise and harm our business.
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Table of ContentsOur ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we willbe successful in the future. We may not be able to meet our future hiring needs or retain existing personnel. We will face particularly significant challenges andrisks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical and
sales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
Failure to maintain effective internal control overfinancial reporting could have a material adverse effect on our business, operating results and stock price.
Beginning with the annual report for our fiscal year ended on December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 required us to include a reportby our management on our internal control over financial reporting. Such report contained an assessment by management of the effectiveness of our internalcontrol over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal control is effective. Also included in our Annual
Report on Form 10-K was an opinion by our Independent Registered Public Accounting Firm on management's assessment of such internal control.
Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, and take up a significant amount ofmanagement's time and operational resources. Though we did not identify any material weaknesses in our internal control over financial reporting during the
years ended December 31, 2006 and 2005, if we are unable to assert that our internal control over financial reporting is effective as in our 2007 and future years,our stock price may decline and it could have an adverse effect on our business.
Stock-based compensation expense adjustments could adversely affects our reportedfinancial results, which could cause the price of our stock to decline
As of January 1, 2006, we adopted SFAS 123(R), which requires us to measure and record stock-based compensation expense using a fair value method, whichcan adversely affect our results of operations by increasing our cost by the amount of such stock-based compensation charges. Determining the appropriate fair
value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, which involve inherentuncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensationexpense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantlydifferent from what we have recorded in the current period. Actual stock-based compensation expense significantly higher than our expectations would
materially decrease our net income and adversely affects our reported financial results, which could cause the price of our stock to decline.
Our effective income tax rate may vary significantly.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changinginterpretations of existing tax laws or regulations, changes in estimates of prior years' items, unanticipated decreases in the amount of revenue or earnings incountries with low statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, future levels of research & development spending,
deductions for employee stock option exercises being different to what we projected, and changes in overall levels of income before taxes.
The quarterly royalty payments under our patent sublicense with Palomar are subject to an annual audit Any material adjustments from this audit couldresult in a material adverse effect on our business and our stock price.
We pay royalties to Palomar after each fiscal quarter for applicable product sales made in that quarter. These royalty amounts are subject to an annual review byan independent public accountant hired by Palomar. The
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Table of Contentsindependent public accountant's interpretation of the applicable royalty rate for any new products, or combination of products, and the net revenue for which tocalculate the royalty, could be different from ours. In the event that the independent public accountant's assessment of the accuracy of our estimated royaltypayments to Palomar is materially different from our calculations, we could owe a higher amount to Palomar than we accrued for, and would then have to report
it as an additional expense in our financial statements for the applicable period. This could result in a material adverse effect on our business and stock price.
Any acquisitions that we make could disrupt our business and harm ourfinancial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies. We may also consider joint ventures and othercollaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate anybusinesses, products or technologies that we acquire. Furthermore, the integration of any acquisition and management of any collaborative project may divert
management's time and resources from our core business and disrupt our operations. We do not have any experience with acquiring companies or products. If wedecide to expand our product offerings beyond laser and other light-based products, we may spend time and money on projects that do not increase our revenue.
Any cash acquisition we pursue would diminish our available cash balances to us for other uses, and any stock acquisition would be dilutive to our stockholders.
While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and technologies, and anticipate continuing to makethese evaluations, we have no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.
Anti-takeover provisions in our Amended and Restated Certificate ofIncorporation and Bylaws, and Delaware law, contain provisions that could discouragea takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist a
takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
• a classified board of directors;
• advance notice requirements to stockholders for matters to be brought at stockholder meetings;
• a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
• limitations on stockholder actions by written consent; and
• the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions couldadversely 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 commonstock.
We have not paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment may be limited to the value of our
stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Thepayment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time asour board of directors may consider relevant. If we do not pay dividends, our stock may be less valuable because a return on investment will only occur if ourstock price appreciates.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters and U.S. operations are located in a 66,000 square foot facility in Brisbane, California. We lease these premises under anon-cancelable operating lease which expires in 2014. In addition, we have leased office facilities of approximately 3,700 square feet, 2,690 square feet and
1,240 square feet in Japan, Switzerland, and France, respectively. The lease in Switzerland expires in July 2008, the lease in Japan expires in May 2008, and thelease in France expires in December 2009. We believe that these facilities are adequate for our current and future needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2006, we are not a party to any material pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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Table of ContentsPART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES
Stock Exchange Listing
Our common stock trades on The NASDAQ Global Market under the symbol "CUTR." At February 28, 2007, the closing sale price of our common stock was$34.95 per share.
Common Stockholders
We had 13 stockholders of record as of February 28, 2007, one of whom was CEDE & CO, a large clearing house that holds shares in its name for banks, brokers
and institutions, in order to expedite the sale and transfer of stock. Since many stockholders' shares are listed under their brokerage firm's name, we believe theactual number of stockholders is over 8,500.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal periods.
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable future. We intend to retain any future earnings for use
in our business.
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III Item 12 of thisAnnual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation plans.
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ITEM 6. SELECTED FINANCIAL DATA
The table set forth below contains certain consolidated financial data for each of the last five fiscal years of Cutera. This data should be read in conjunction withthe detailed information, financial statements and related notes, as well as Management's Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere herein.
Consolidated Statements of Operations Data (in thousands, except per share data):
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thefollowing discussion should be read in conjunction with the attachedfinancial statements and notes thereto, and with our auditedfinancial statements andnotes thereto for the fiscal year endedDecember 31, 2006. This Annual Report on Form 10-K, including thefollowing sections, containsforward-lookingstatements within the meaning ofthe Private Securities Litigation Reform Act of1995. These statements include, but are not limited to, statements relating to ourexpectations as to future capital expenditures and requirements, growth in our operations, the impact ofexchange rate volatility andforecasted operatingexpenses. Theseforward-looking statements involve risks and uncertainties. The cautionary statements setforth below and those contained in Item JA "Risk
Factors" commencing on page 18, identify importantfactors that could cause actual results to differ materiallyfrom those predicted in any suchforward-looking statements. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis onlyas ofthe date of this Annual Report on Fonn 10K. We undertake no obligation to update forward-looking statements to reflect events or circumstancesoccurring after the date ofthis Fonn 10K.
Introduction
The 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 theopportunities, 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.addition, it includes a summary of recent accounting pronouncements that may be applicable to us.
• Recent accounting pronouncements. This section describes the issuance and effect of new accounting pronouncements that are applicable to ourCompany.
• Results ofoperations . This section provides our analysis and outlook for the significant line items on our consolidated statement of operations.
• Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that
existed as of December 31, 2006.
Executive Summary
Company Description. We are a global medical device company engaged in the design, development, manufacture, marketing and servicing of laser and otherlight-based aesthetics systems to the professional aesthetic market. Our easy-to-use platforms CoolGlide, Xeo and Solera enable dermatologists, plasticsurgeons, gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aesthetic procedures for their
customers.
Our corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our manufacturing, warehousing, research, regulatory,sales, marketing and administrative activities. In the United States, we market and sell our products primarily through a direct sales force of 46 employees as of
December 31, 2006 and through a distribution relationship with PSS World Medical Shared Services, Inc., a wholly owned subsidiary of PSS World Medical,which has over 700 sales representatives serving physician offices throughout the United States. In addition, we also sell certain items like Titan handpiece refillsand marketing brochures via the web.
International sales are generally made through a direct sales force, independent sales representatives and distributors in over 30 countries worldwide. Outside theUnited States, we have a direct sales presence in Australia, Canada, France, Germany, Japan, Spain, Switzerland and the United Kingdom.
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Table of ContentsProducts. Our revenue is derived from the sale of products, product upgrades, service, and Titan handpiece refills. Product revenue represents the sale of asystem console that incorporates a universal graphic user interface, a laser and/or other light-based module, control system software, high voltage electronics, andone or more handpieces. 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 as their practice grows. This enables customers to upgrade their systems whenever they want and provides us with a source of recurring revenue,which we classify as product upgrade revenue. Service revenue relates to amortization of pre-paid maintenance and support contract revenue and receipts forservices on out-of-warranty products. Titan handpiece refill revenue is associated with our Titan handpiece, which requires a periodic "refilling" process, whichincludes the replacement of the optical source, after a set number of pulses has been performed.
Significant Business Trends. We believe that revenue growth has been, and will continue to be, primarily attributable to the following:
• Investments made in our global sales and marketing infrastructure, including the expansion of our sales force to increase our market penetration in anexpanding aesthetic laser market.
• Continuing introduction of new aesthetic products and applications.
• Marketing to physicians outside the core dermatologist and plastic surgeon specialties.
• Generating service and Titan handpiece refill revenue from our growing installed base of customers.
During 2006, our business continued to experience significant growth. In 2006, compared to 2005, our U.S. revenue grew 28% and our international revenue
grew 46%. In contrast, in 2005, compared to 2004, our U.S. revenue grew by 57%, while our international revenue grew by 19%. The weaker U.S. revenuegrowth from 2005 to 2006, as compared to 2004 to 2005, was primarily attributable to the slow ramp-up of revenue from newly hired sales representatives. Thestronger international revenue growth from 2005 to 2006, compared to 2004 to 2005, was primarily attributable to significant revenue growth coming fromCanada, Japan, and Switzerland. The growth in revenue from Switzerland was attributable to the setting up of our European hub office in Zurich in July 2005,from where we coordinate our European marketing and service activities. We believe that amongst other factors, if and when we obtain FDA marketing
clearance for our YSGG-based laser technology, our revenue will be positively impacted.
For 2006, our gross margin declined to 70%, compared to 74% in 2005. This decrease was primarily attributable to the royalty expense recorded with effect fromApril 1, 2006 due to the settlement of our litigation with Palomar, which was 3% of net revenue in 2006, and to higher stock-based compensation expense due to
the adoption of the fair value recognition provisions of SFAS 123(R) with effect from January 1, 2006. Given our royalty expense and stock-based compensationexpense will continue in 2007, we expect our gross margin for 2007 to be similar to 2006.
General and administrative expenses for 2006, compared with 2005, increased by $6.4 million, or 73%, to $15.2 million and were 15% of net revenue. In 2007,
we expect our G&A expenses to decrease and be in the range of approximately 10% - 12% of revenue. This expected decrease is primarily attributable to thefollowing expenses which were included in G&A in 2006 but not expected to be incurred in 2007: $3.3 million of legal expenses related to the patent litigationmatter and an estimated charge of $505,000 relating to a liability for sales taxes in jurisdictions that we had believed we did not have a taxable presence.
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 success depends on our
ability to compete successfully. Additionally, the growth of our business relies on our ability to continue to develop new products and innovative technologies,obtain
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Table of Contentsregulatory clearances for our products, protect the proprietary technology of our products and our manufacturing processes, manufacture our products costeffectively, and successfully market and distribute our products in a profitable manner. If we fail to compete effectively, fail to continue to develop new productsand technologies, fail to obtain regulatory clearances, fail to protect our intellectual property, fail to produce our products cost effectively, or fail to market and
distribute our products in a profitable manner, our business could suffer. A detailed discussion of these and other factors that could impact our futureperformance are provided in Part I, Item IA "Risk Factors" section.
Critical Accounting Policies and Estimates
The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP,requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are
based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our accountingpolicies and estimates and make adjustments when facts and circumstances dictate. In addition to the accounting policies that are more fully described in theNotes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, we consider the critical accounting policies described below to beaffected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include, stock-based compensation expense,revenue recognition, valuation of allowance for doubtful accounts, valuation of inventories, valuation of warranty obligations and valuation of income taxes on
earnings. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated FinancialStatements, and actual results could differ materially from these estimates.
Stock-based Compensation Expense
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS No. 123(R), "Share-BasedPayment (revised 2004)," using themodified prospective transition method, which requires the measurement and recognition of compensation expense for all share-based payment awards made toour employees and directors, including stock options, employee stock purchases related to the Employee Stock Purchase Plan and restricted stock unit awards.
Our consolidated financial statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modifiedprospective transition method, our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS123(R). Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest.Share-based compensation expense recognized in our Consolidated Statements of Operations for the year ended December 31, 2006 included compensationexpense for share-based payment awards granted prior to, but not yet vested as of, December 31, 2005 based on the fair value estimated in accordance with the
pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the fairvalue estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), we estimated the fair value of each stockoption on the date of grant using the Black-Scholes option valuation model and elected to attribute the value of share-based compensation to expense using thestraight-line method, which was previously used for our pro forma information required under SFAS No. 123 "A ccountingfor StockBased Compensation," orSFAS 123. The Block-Scholes option valuation model requires the input of subjective assumptions including expected stock price volatility, expected term of
stock option and risk-free interest rate. Due in part to the limited amount of historical data available to us, particularly with respect to stock-price volatility,employee exercise patterns and forfeitures, actual results could differ from our assumptions.
Prior to the adoption of SFAS 123(R), we accounted for stock-based employee compensation arrangements in accordance with the provisions ofAccountingPrinciples Board, or APB, Opinion No. 25, Accountingfor StockIssued to Employees," and its interpretations and complied with the disclosure provisions ofSFAS 123 as
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Table of Contentsamended by SFAS No. 148, "Accountingfor Stock-Based Compensation-Transition andDisclosure an amendment ofFASB Statement No. 123. " Under APBOpinion No . 25, compensation expense is based on the difference , if any, on the date of the grant between the fair market value of our stock and the exerciseprice. Employee stock-based compensation is amortized on a straight- line basis over the vesting period of the underlying options.
Revenue Recognition
We recognize distributor and non-distributor revenue in accordance with the SEC's Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition." SABNo. 104 requires that four basic criteria must be met before revenue can be recognized:
• persuasive evidence of an arrangement exists;
• delivery has occurred or services have been rendered;
• the fee is fixed and determinable; and
• collectibility is reasonably assured.
Determination of whether persuasive evidence of an arrangement exists and whether delivery has occurred or services have been rendered, are based onmanagement's judgments regarding the fixed nature of the fee charged for services rendered and products delivered, and the collectibility of those fees. In
instances where final acceptance of the product is specified by the customer or collectibility has not been reasonably assured, revenue is deferred until allacceptance criteria have been met. Revenue under service contracts is recognized on a straight-line basis over the period of the applicable service contract.Service revenue, not under a service contract, is recognized as the services are provided. Total deferred revenue for service contracts was $6.7 million and $3.1million as of December 31, 2006 and December 31, 2005, respectively. Should changes in conditions cause management to determine these criteria are not metfor certain future transactions, revenue recognized for any reporting period could be adversely affected.
Allowancefor Doubtful Accounts
Our accounts receivable balance, net of allowance for doubtful accounts, was $9.6 million as of December 31, 2006, compared with $6.5 million as ofDecember 31, 2005. The allowance for doubtful accounts as of December 31, 2006, was $34,000, compared with $177,000 as of December 31, 2005. Weperform periodic credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, asdetermined by our review of current credit information. We monitor collections and payments from our customers and maintain an allowance for doubtful
accounts based upon our historical experience and any specific customer collection issues that have been identified. While our credit losses have historically beenwithin our expectations and the allowance established, we may not continue to experience the same credit loss rates that we have in the past.
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 changesin raw material costs, labor to manufacture the product and overhead rates. Our inventories balance was $5.2 million as of December 31, 2006 and 2005. Ourinventories allowances as of December 31, 2006 were $851,000, compared with $992,000 as of December 31, 2005. We provide inventory allowances whenconditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand andreductions in selling prices. Inventory allowances are measured as the difference between the cost of inventory and estimated market value. Inventory reserves
are charged to cost of revenue and establish a lower cost basis for the inventories. We balance the need to maintain strategic inventory levels with the risk of
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Table of Contentsobsolescence due to changing technology and customer demand levels. Unfavorable changes in market conditions may result in a need for additional inventoryreserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when product is sold.
Warranty Obligations
We provide a standard one-year warranty coverage on our systems and from time to time have promotional offers when we offer a twenty-four month warranty.Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. We provide for the estimated future costs ofwarranty 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 asreviewed and updated quarterly, of the total costs that we expect to incur in repairing or replacing product parts that fail while still under warranty. Accruedwarranty costs include costs of material, technical support labor and associated overhead. The amount of accrued estimated warranty costs obligation for
established products is primarily based on historical experience as to product failures adjusted for current information on repair costs. For new products,estimates will include historical experience of similar products, as well as reasonable allowance for start-up expenses. Actual warranty costs could differ from theestimated amounts. On a quarterly basis, we review the accrued balances of our warranty obligations and update the historical warranty cost trends. The accruedbalance for product warranties was $3.1 million and $2.0 million as of December 31, 2006 and 2005, respectively. For more information on warranty reserves,see Note 3 to the Notes to Consolidated Financial Statements. 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, whichwould negatively impact our operating results.
Provision for Income Taxes
We are subject to taxes on earnings in both the United States and numerous foreign jurisdictions. As a global taxpayer, significant judgments and estimates arerequired in evaluating our tax positions and determining our provision for taxes on earnings. The calculation of our tax liabilities involves addressinguncertainties in the application of complex tax regulations. We maintain reserves for potential tax contingencies arising in the jurisdictions in which we do
business. Such reserves are based on our assessment of the likelihood of an unfavorable outcome and the potential loss from such contingencies, and may beadjusted from time to time in light of changing facts and circumstances. These reserves are maintained until such time as the matter is settled or the statutoryperiod for adjustment has passed. Adjustments could be required in the future if we determine that our reserves for tax contingencies are inadequate. Theprovision for taxes on earnings includes the effect of changes to these reserves that are considered appropriate. In addition, the carrying value of our net deferredtax assets assumes that we will be able to generate sufficient future taxable earnings in certain tax jurisdictions to utilize these deferred tax assets.
Earnings derived from our international regions are generally taxed at different rates than in the United States. Our effective rate is impacted by existing tax lawsin both the United States and in the respective countries in which our international subsidiaries are located. A change in the mix of total earnings from our United
States operations and the respective international regions among particular tax jurisdictions could change our effective income tax rate. Also, our currenteffective tax rate does not assume U.S. taxes on undistributed profits of foreign subsidiaries. These earnings could become subject to incremental foreignwithholding or U.S. federal and state taxes, should they either be deemed or actually remitted to the United States.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, "The Fair Value Optionfor Financial Assets andFinancial
Liabilities" (`SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains andlosses on items
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Table of Contentsfor which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We arecurrently evaluating the impact of implementing SFAS 159 on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements. " This standard defines fair value, establishes a framework for measuring fairvalue in accounting principles generally accepted in the United States, and expands disclosure about fair value measurements. This pronouncement applies underother accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. Thisstatement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS
No. 157 in the first quarter of fiscal year 2008. We are currently assessing the impact that SFAS 157 may have on our consolidated financial position, results ofoperations or cash flows.
In September 2006, the SEC issued SAB No. 108, "Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements," or SAB 108 , to address diversity in practice in quantifying financial statement misstatements . SAB 108 requires the quantification ofmisstatements based on their impact on both the balance sheet and the income statement to determine materiality. The guidance provides for a one-timecumulative effect adjustment to correct for misstatements that were not deemed material under a company's prior approach but are material under the SAB 108approach . SAB No. 108 has not had any impact on our annual financial statements for the year ended December 31, 2006.
In July 2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income Taxes-an interpretation ofFASB Statement No. 109, or SFAS 109.This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. TheInterpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting for interimperiods, disclosure, and transition. This interpretation is effective for us in the first quarter ending on March 31, 2007. Based on a preliminary evaluation of theimpact of adopting this Interpretation, we believe that it will not have a material effect on our financial position or results of operations in 2007.
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Table of ContentsResults of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net total revenue.
Year endedDecember 31,
2006 2005 2004
Operatin" Ratios:
Net revenue I001111 I 001111 I001111Co,t 01 rcv cnuc 3n " , 20 ''',
Gro»^ profit 7011 1 1 74",, 71,,„
Opcratin-, expenses:
S,ilc,.indl m.irhetiii >>",, „",, 37",,I c^cmch.mcldcyc1opmcnt 7"0 8°..Genci iI indl.ulmini,tr.IticcI.itiaatic,n ,ettlcment I )
101.11 opcnhiiu1 cvhcn,c, 73'',, 62'',^
Inconlc( logs) Ironl opcr.uiioui (3)°0 22 IO"u
lntcrc,t .ind other inconic_ net 4 '' '' I '/o
Income before income taxes I"..Pro\ i,ion ( henclit ) Ior incon1c t.Ivc, II 7 ' 4 ''
Net income I 7"
Total Revenue
Year ended December 31,
(Dollars in thousands) 2006 % Change 2005 % Change 2004
Rem ol' thc vvorId 7.777 I2n"„ 3_543 I I'll, ,_198
Total intcmution.iI rcccnuc 30797 40' ?1.114 IO"') I7 I5
Co11,o1i1kitcd tot.il recenuc I00692 „"„ 76C0 44 ^2_64 1l Initcd St.itc, ai .1 pcrcenta''c of vital rccenuc 09"o 72",, 06""
Intcrn.itioui iI .1,.1 hcrce]ILILc 0I"tot.il rccenuc it"^, 8 4,,,
Revenue n , ix h. product cate_'or.:Product, 84_095 4'',, 03349 45 43.4
Product Llj)U ides 0_()U0 (9)'' 6.610 r)°o 6.61
Sercicc 5_89n i2"„ 3_88I 61'" 2.414
Titan h.indpiccc rclilh, 4_1W 133' I.7(() N A 72
Consolidated total S 100,692 33'/„ $L7 5 ,620 -4-4'/„ S 52,641
The total revenue increase in 2006 and 2005 , compared with the respective prior years, was primarily attributable to product revenue growth, especial ly from our
multi-application Xeo and Solera platforms, both of which
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Table of Contentsinclude the Titan product. In addition, the overall revenue growth was attributable to the expansion of our direct sales force and the penetration of customer basesoutside the core specialties of dermatologists and plastic surgeons. Service revenue continued to increase as a result of an increase in our installed base ofcustomers purchasing extended service contracts. Growth in Titan handpiece refills reflected increased adoption of the Titan product by new and existing
customers as well as an increased consumer demand for Titan procedures. Upgrade revenue declined in 2006 and was flat in 2005, due primarily to an increase inthe number of customers choosing to purchase a new system from our Solera platform, instead of upgrading their existing systems. We believe that, amongstother factors, if and when we obtain FDA marketing clearance for our YSGG-based laser technology, our revenue will be positively impacted.
International revenue growth in 2006 was primarily attributable to growth from Canada, Japan and Switzerland. The growth in revenue from Switzerland wasattributable to the setting up of our European hub office there in July 2005. In 2005, compared to 2004, the slower international growth was primarily attributableto reduced sales to a national chain of clinics in Japan, who purchased systems for all their members beginning in early 2004 and ending in the first quarter of2005.
Gross Margin
(Dollars in thousands)
ail[)SS niwniii
As a percentage of total rwcimc
Year Ended December 31,
2006 % Change 2005 % Change 2004
70, 33 17"11 C >.82^ 47",, ti 37.052
7V'o 74io 72io
Our cost of revenue consists primarily of material, labor, employee stock-based compensation, royalty expense, warranty, and manufacturing overhead expenses.The decrease in gross margin in 2006, compared to 2005, was primarily attributable to the following two expense items which were recorded in 2006 but not in
2005-$3.3 million, or 3% of net revenue, of royalty expense recorded with effect from April 1, 2006 as a result of the Palomar patent licensing agreement seeNote 10 of Notes to Consolidated Financial Statements for further details and accounting of the settlement agreement and $551,000, or 1% of revenue, of
higher stock-based compensation expense due to the adoption of the fair value recognition provisions of SFAS 123(R) with effect from January 1, 2006. Givenour royalty expense and stock-based compensation expenses will continue in 2007, we expect our gross margin for 2007 to be similar to our gross margin in2006.
The improvement in gross margin in 2005 over 2004 was primarily attributable to a favorable product mix towards our multi-application Xeo and Soleraplatform products, the growth of which was fueled by our launch of the Titan product as well as reduced warranty and service costs associated with improvedproduct reliability.
Sales and Marketing
(Dollars in thousands)
S iIc^ and markctina
As a pereeilluge of toted revenm^
Year Ended December 31,
2006 % Change 2005 % Change 2004
C 32-X(N) 31"o ' 2. .1121 IO.3'()
33% 33% 3 77%
Sales and marketing expenses consist primarily of personnel cost, stock-based compensation expense and expenses associated with customer-attendedworkshops, trade shows and advertising. Even though our sales and marketing expenses increased in 2006, compared with 2005, by $1.3 million due to thehigher stock-based compensation expenses associated with the adoption of FAS 123(R) in 2006, our sales and marketing expenses as a percentage of totalrevenue remained flat at 33%. This, as well as the decrease in sales and marketing expenses as a percentage of revenue in 2005, compared to 37% in 2004, was aresult of the improved operating leverage due to the higher revenue growth and improved productivity. Compared with 2006, due to our planned increase in
headcount, we expect our sales and marketing expenses to increase in 2007.
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Table of ContentsOf the $7.9 million increase in sales and marketing expenses in 2006, compared with 2005, $4.7 million was attributable to personnel expenses associatedprimarily with increased headcount, $1.3 million of stock-based compensation expenses and $1.6 million of advertising and promotional expenses. The $5.7million increase in sales and marketing expenses in 2005, compared to 2004, was primarily attributable to $4.7 million of personnel expenses associated
primarily with the increased headcount.
Research and Development (R&D)
Year Ended December 31,
(Dollars in thousands) 2006 %Change 2005 % Change 2004
RcnC,Ir h .111'1 decclopment S 0_473 I"o .3? i 18° S 4. 49
As a perceni<{ge of total reve,iii 6io 7/o IN%
Research and development expenses consist primarily of personnel cost, stock-based compensation expenses and clinical, regulatory and material costs. R&Dexpenses as a percentage of total revenue decreased in 2006 and 2005, compared to the respective prior years, due to the improved operating leverage resulting
from higher revenue growth, compared to the expense growth. Compared with 2006, due to a planned increase in R&D activities and headcount, we expect ourR&D expenses to increase in 2007.
Of the $1.1 million increase in R&D expenses in 2006 over 2005, $565,000 was attributable to personnel related expenses associated primarily to increased
headcount, and $492,000 was attributable to stock-based compensation expenses associated with the adoption of FAS 123(R) in 2006. The $804,000 increase inR&D expense in 2005, over 2004, was primarily attributable to $888,000 of personnel expense associated primarily with increased headcount, partially offset bya $125,000 decrease in stock-based compensation expenses.
General andAdministrative (G&A)
(Dollars in thousands)
Gcncr I .ind admiIli ^tritiv C
As a percentage oftotal revemic
Year Ended December 31,
2006 % Change 2005 % Change 2004
15% 12% 17%
General and administrative expenses consist primarily of personnel costs, stock-based compensation expenses, legal fees, accounting fees and other general andadministrative expenses. The increase in G&A expenses in 2006, compared with 2005, was primarily attributable to $2.6 million of legal expenses associatedprimarily with the then-active Palomar litigation matter, $759,000 of stock-based compensation expenses associated with the adoption of FAS 123(R) in 2006,$673,000 of personnel expenses, due in part to increased headcount, $602,000 of audit and tax consulting fees related primarily to the audit of our internal controlover financial reporting, and an estimated charge of $505,000 recorded in 2006 relating to a liability for sales taxes in jurisdictions that we previously believed
we did not have a taxable presence. In 2007, we expect our G&A expenses to decrease and be in the range of approximately 10% - 12% of revenue due primarilyto the expected reduction in legal expenses.
In 2005, compared to 2004, G&A expenses decreased by $142,000 and were 12% of total revenue, compared with 17% in 2004. This decrease was attributableprimarily to lower legal expenses of $1.4 million partly due to the timing of our litigation with Palomar and expenses incurred in 2004 but not in 2005, includingcosts of $291,000 associated with moving our facilities from Burlingame, California to Brisbane, California and a litigation settlement of $175,000. This wasoffset by $1.7 million of higher personnel expenses due in part to higher headcount, higher stock-based compensation expenses of $219,000, and a net increase of$340,000 in audit fees, tax and audit consulting fees due primarily to the implementation and audit of our internal control over financial reporting in 2005.
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Table of ContentsLitigation Settlement
On June 2, 2006, we settled all patent litigation brought against us by Palomar and MGH. Under the terms of the settlement agreement, we owed Palomar $20.2million relating to royalties on sales of infringing systems, accrued interest and reimbursement of Palomar's legal costs, through March 31, 2006. Of the $20.2million, we recorded $18.9 million as a litigation settlement expense and $1.2 million as the intangible asset representing the value of the ongoing sublicense
agreement obtained as part of the settlement agreement. See Note 10 of Notes to Consolidated Financial Statements, for further details and accounting of thesettlement agreement.
Interest and Other Income, Net
(Dollars in thousands)
Inlclvs/ and ollwr incamr. nrl
Year Ended December 31,
2006 % Change 2005 % Change 2004
i, 596 1,034 S 6)-
The increase in interest and other income, net, in 2006 and 2005, compared to the respective prior years, was primarily attributable to improved tax-exemptinterest yields on investments in government bonds from 2004 to 2006 and an increased amount invested. Our cash, cash equivalents and marketable investment
balances was at $108.1 million, $92.0 million and $66.3 million as of December 31, 2006, 2005 and 2004, respectively.
Benefit (Provision) for Income Taxes
Fiscal Years
(Dollars in thousands) 2006 Change 2005 Change 2004
Income bcloOrc incom c laycs 939 17.707) I x_7()6 5 1-1911 z,_7X^
Pr(,v kin I h c n c l i l l to rincomic l.Ixc, 1.184) (0-OV) 49(0 loo
Our effective tax rate reflects applicable United States federal and state tax rates and the tax impact of foreign operations, offset by research and development tax
credits, tax exempt interest income and deductions for disqualifying incentive stock option exercises. The change in the effective tax rate for 2006, compared
with 2005, was primarily due to the reduction of income as a result of the litigation settlement expense, the tax exempt interest income, the R&D tax credits, and
the decrease in benefits from disqualifying dispositions of incentive stock options. In 2006, given the litigation settlement expense resulted in a significantly
lower level of income before income taxes, the impact of deductible permanent items R&D tax credits, tax-exempt interest income and deductions for
disqualifying incentive stock option exercises resulted in a substantially more pronounced impact on our effective income tax rate, as they represented a larger
percentage of our income before income taxes.
The reduction in our effective income tax rate in 2005, compared with 2004, was primarily attributable to the increase in the benefits from disqualified incentivestock option exercises, higher benefit from research and development credits resulting from increased research and development expenses and higher tax-exempt
interest income.
Net Income and Net Income Per Diluted Share
(Dollars in thousands , except per share data)
Net income
Net income per diluted share
Source : CUTERA INC, 10-K, March 16, 2007
41
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Fiscal Years
2006 % Change 2005 % Change 2004
52.123 13.801 207° S17(
$ 0.15 (85,) $ 1.00 223,11, S u.31
Table of ContentsThe decrease in net income and the net income per diluted share in 2006, compared with 2005, was primarily attributable to:
• $11.7 million, or $0.82 per diluted share, relating to the patent litigation settlement expense of $18.9 million, net of the marginal tax impact of $7.2million;
• $2.0 million, or $0.14 per diluted share, relating to the $3.1 million of increased stock-based compensation expenses recorded in 2006 due to the
adoption of FAS 123(R), net of the marginal income tax benefit of $1.1 million;
• $2.3 million, or $0.16 per diluted share, as a result of $3.3 million of royalty expenses for the Palomar patent sublicense, net of the $1.0 million tax
benefit; and
• $1.8 million, or $0.13 per diluted share, due to the $2.6 million increase in legal expenses associated primarily with the Palomar patent litigationmatter, net of $817,000 of tax benefit.
These decreases were offset by a $6.2 million net after tax, or $0.40 per diluted share, increase in net income due primarily to:
• 33% growth in revenue;
• the leveraging of our operating expenses, due to revenue growing faster than our manufacturing and operating expenses; and
• a decrease in our effective income tax rate.
The increase in net income and income per diluted share in 2005, compared with 2004, was primarily attributable to the 44% increase in total revenue, animprovement in gross margins to 74% in 2005, compared with 72% in 2004, the leveraging of our operating expenses due to revenue growing faster than ourmanufacturing and operating expenses and a decrease in our effective income tax rate to 26%, from the 35% in 2004.
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. Oursources of cash include operations, stock option exercises and employee stock purchases and interest income. We actively manage our cash usage and investmentof liquid cash to ensure the maintenance of sufficient funds to meet our daily needs.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes our cash, cash equivalents and marketable securities:
As ofDecember 31,
(Dollars in thousands) 2006 2005 Increase
aA_ c.ish cquiv.IIcnts and m.Irl:ctahlc sccuritic^:
Cash and cash equivalents S 1 I .BUU S 5.260 S 6.540Nlarhet.1blc incc^tmcii 90'8^ M730 9.549
Total $ 108,085 $ 91,996 $ 16,089
The net increase in cash and cash equivalents and marketable investments of $16.1 million in 2006, was primarily a result of $12.5 million generated by
operations after $20.2 million cash used to pay Palomar in settlement of our patent litigation and $4 . 4 million of cash provided by the issuance of commonstock related to stock option exercises and employee stock purchases . As of December 31, 2006, we had cash, cash equivalents and marketable investments of$ 108.1 million, which we believe are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
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Table of ContentsCash Flows
(Dollars in thousands)
Net cash !1ovv hrov ided I,v (used in ):Opemtino' .Icticitic,
Im c,lih g acticitic^Iin.incina.icticitic,
Net increase (decrease) in cash ^11111 cash cyuicalent^
Net Cash Provided by OperatingActivities
Year ended December 31,
2006 2005 2004
S I2_466 S 2030 S 9.244
I I 1^ i (28342) o9_813)x_42) 0 144 47_349
ti ft 40 (1-M m (3220 )
We generated net cash from operating activities of $12.5 million in 2006, compared to $20.4 million and $9.2 million, in 2005 and 2004, respectively. The $7.9million decrease in net cash from operating activities in 2006, compared to 2005, was driven by a decrease in net income of $11.7 million due primarily to thepatent litigation settlement in June 2006 and higher stock-based compensation expenses as a result of the adoption of FAS 123(R) in 2006-a $6.1 million
decrease in non-cash items (primarily $5.6 million of lower tax benefit from stock option exercises that could be utilized due to the lower income before taxes,and $2.0 million of higher deferred tax assets recorded ), offset partially by $9.8 million of cash generated by a net change in operating assets and liabilities.
The $11.1 million increase in cash from operating activities in 2005, compared to 2004, was driven by an increase in net income of $10.0 million, an increase in
non-cash items by $6.6 million (primarily due to tax benefits from the employee sales of stock options and ESPP stock), offset partially by $5.5 million of cashused by a net increase in operating assets and liabilities.
Net Cash Used in Investing Activities
We used $11.4 million of cash in investing activities in 2006. Of this amount, $9.5 million was used to invest in marketable securities, $1.2 million was used tcpurchase an ongoing patent sublicense from Palomar and $642,000 was used to purchase capital equipment for R&D and manufacturing departments. In 2006,
compared to 2005, we experienced a $17.0 decrease in our investing activities, due primarily to the decrease in investment balances as a result of the Palomarlitigation settlement payment in June 2006.
In 2005, we used $28.3 million for investing activities. Of this amount, $27.6 million was used to purchase additional marketable investments from the cashgenerated by operations, the exercises of stock options and employee stock purchases. In addition, $539,000 was primarily used to purchase research anddevelopment and manufacturing equipment; and $165,000 was used to purchase intangibles associated with the set up of a new office in Zurich, Switzerland. Incomparing 2005 to 2004, there was a $31.5 million decrease in cash used for investing activities, given in 2004 we raised $46.3 million of cash through the initialpublic offering of our common stock.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in 2006, 2005 and 2004, was $5.4 million, $6.1 million and $47.3 million, respectively. This was primarily attributableto the proceeds from the issuance of stock through our stock option and employee stock purchase plans, and in 2004, to $46.3 million raised from the sale ofcommon stock through our initial public offering.
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Table of ContentsContractual Cash Obligations
The following summarizes our contractual obligations as of December 31, 2006 for minimum lease payments related to facility leases.
Payments Due by Period ($' 000's)
Less Than 1 -3 3-5 More ThanContractu a l Ohligation, Total 1 Year Years Years 5 Years
OpCrati1141ciSC S 5.301 ti I.023 I.91^ ' 2.4 6 S 2.070
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to asstructured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As of December 31, 2006, we were not involved in any unconsolidated transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to
fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our futureinvestment 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 havedeclined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same timemaximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies,municipal bonds and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To
minimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity (interest reset date for auction-ratesecurities and variable rate demand notes) of generally less than eighteen months. For maturities of our marketable investments, see Note 2 to the Notes toConsolidated Financial Statements. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of our total investment portfolio asof December 31, 2006 would have potentially declined by $519,000.
We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatilityhas not been significant. We cannot assure that there will not be a material impact in the future. Although the majority of our sales and purchases aredenominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products. We do not believe, however,
that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.
We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in anymaterial fashion.
44
Source : CUTERA INC, 10-K, March 16, 2007
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Table of Contents
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:
Page
Report of Independent Registered Public Accounting Firm 46
Consolidated Balance Sheets 48
Consolidated Statements of Operations 49
Consolidated Statements of Stockholders' -4uity 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 52
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended December 31, 2006, 2005 and 2004 is filed asa 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 andits subsidiaries:
Schedule Page
II Valuation and Qualifying Accounts 74
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 theConsolidated Financial Statements or the Notes thereto.
45
Source : CUTERA INC, 10-K, March 16, 2007
B48
Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders ofCutera, Inc.:
We have completed integrated audits of Cutera, Inc.'s (the "Company") 2006 and 2005 consolidated financial statements and of its internal control over financialreporting as of December 31, 2006, and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cutera, Inc.
and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Ourresponsibility 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 andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation for the yearended December 31, 2006.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "management's report on internal control over financial reporting" appearing under Item 9A, that theCompany maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on thosecriteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2006, based on criteria established inInternal Control Integrated Framework issued by the COSO. The Company'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. Our responsibility is toexpress opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
46
Source : CUTERA INC, 10-K, March 16, 2007
B49
Table of ContentsA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, CaliforniaMarch 15, 2007
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Source : CUTERA INC, 10-K, March 16, 2007
B50
Table of ContentsCUTERA, INC.
CONSOLIDATED BALANCE SHEETS(in thousands , except share and per share data)
December 31,
2006 2005
\sscts
(anent .1„ct,:Ca,h and cash cquicalcnts 5 11 _WII i?(i()
M.111;ctatilc incc,tmciik 96_-,8^ 86.736
\ccounk lecek ablc_ nct ol all(,vv II1 C thr douhttill .I000Unty in ?UO6 mid 2H ol`S34 mid 5177_ Ic^hcctiv clv 9.601 0_478
Net c.wh prc,cidcd hv Iin.Incirng activ itics 5.429 6.144 47.349
Nei incrc.I,c (1Iccrc.I,c) ill c.I,h Mid c.I,h cyuiv Ilcnt, 6.54(( I.8I n 13.2201mid C.1sI7 c I LiA,IICIIts at heLllllllllL of _Aci 5.26 (1 7.0 70 IO_2t)O
Cash Mid c.I,h cJill c,IId]lk .It cndl 0I'v c.u S I I.Bn ( 5260 7070
Supplemental and non -cash disclosure of cash flow information:Cancer,ion oI hrclcrrcd stock to common stock S S 7.372
Ch.In,c ill delcrrcd si d -hied cc,mpcnsatioil- net ofterminaions 11.271 S 1387 S (227(
Lash paid (received) for income taxes S (1,990) S 1,837 S 2,526
The accompanying notes are an integral part of these consolidated financial statements
51
Source : CUTERA INC, 10-K, March 16, 2007
B54
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations and Principles of Consolidation.
Cutera Inc. ("Cutera" or the "Company") is a global provider of laser and other light-based aesthetic systems for practitioners worldwide. The Company, designs,develops, manufactures, and markets the CoolGlide, Xeo and Solera product platforms for use by dermatologists, plastic surgeons, gynecologists, primary carephysicians, and other qualified practitioners to offer safe, effective and non-invasive aesthetic treatments to their customers.
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada, France, Germany, Japan, Spain, Switzerland andUnited Kingdom. The purpose of these subsidiaries is to market, sell and service the Company's products outside of the United States. The ConsolidatedFinancial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.
Management Estimates.
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ofAmerica requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ fromthose estimates.
Cash, Cash Equivalents andlnvestments.
Cash equivalents or short-term financial investments that are readily convertible to cash are stated at cost, which approximates market value. The Company
considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. Management determinesthe appropriate classification of its short-term and long-term marketable investment securities at the time of purchase and reevaluates such determination as ofeach balance sheet date. The Company's marketable investments are classified as "available-for-sale" securities in the accompanying financial statements.Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in other comprehensive income. All investments are held for usein current operations and are classified in current assets. All realized gains and losses and unrealized losses and declines in fair value that are other than
temporary are recorded in earnings in the period of occurrence. The specific identification method is used to determine the realized gains and losses oninvestments.
Fair Value of Financial Instruments.
Carrying amounts of the Company's financial instruments, including cash and cash equivalents, marketable investments, accounts receivable, accounts payableand accrued liabilities, approximate their fair values. The fair value of marketable investments is based on quoted market prices.
52
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 andaccounts receivable. The Company's cash and cash equivalents are primarily invested in deposits and money market accounts with two major banks in the UnitedStates. In addition, the Company has operating cash balances in each of the international locations that it operates in. Deposits in these banks may exceed theamount of insurance provided on such deposits, if any. Management believes that these financial institutions are financially sound and, accordingly, minimal
credit risk exists. The Company has not experienced any losses on its deposits of cash and cash equivalents. Accounts receivable are typically unsecured and arederived from revenue earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers andmaintains reserves for potential credit losses. Concentrations of accounts receivable balances are presented in Note 2 and segment, geographic and majorcustomer information is presented in Note 9.
The Company invests in debt instruments of the U.S. Government and its agencies, municipal bonds and high-quality corporate issuers, and, by policy, restrictsits exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, the Companymaintains investments at an average maturity (interest reset date for auction-rate securities and variable rate demand notes) of generally less than eighteen
months.
The Company is subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependenceon key personnel, dependence on key suppliers, protection of proprietary technology, product liability and compliance with government regulations. To continue
profitable operations, the Company must continue to successfully design, develop, manufacture and market its products. There can be no assurance that currentproducts will continue to be accepted in the marketplace. Nor can there be any assurance that any future products can be developed or manufactured at anacceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed, if at all. These factors could have amaterial adverse effect on the Company's future financial results and cash flows.
Future products developed by the Company may require additional approvals from the Food and Drug Administration or international regulatory agencies priorto commercial sales. There can be no assurance that the Company's products will continue to meet the necessary regulatory requirements. If the Company wasdenied such approvals or such approvals were delayed, it may have a materially adverse impact on the Company.
Inventories.
Inventories are stated at the lower of cost or market, cost being determined on a standard cost basis (which approximates actual cost on a first-in, first-out basis)and market being determined as the lower of replacement cost or net realizable value.
The Company includes demonstration units within inventories. Demonstration units are carried at cost and amortized over their estimated economic life of twoyears. Amortization expense related to demonstration units is recorded in cost of revenue or in the respective operating expense line based on which function andpurpose 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 arecharged to cost of revenue.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, which is generally threeyears. Amortization of leasehold improvements is computed using
53
Source : CUTERA INC , 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related assets. Upon sale or retirement of assets, the costsand related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.Maintenance and repairs are charged to operations as incurred.
Intangible Assets.
Purchased technology sublicense and other intangible assets are presented at cost net of accumulated amortization. The technology licenses are being amortizedon a straight-line basis over their expected useful life of 9-10 years and the other intangibles are being amortized over their expected useful life of two years.
Impairment ofLong-livedAssets.
In accordance with the provisions of Statement of Financial Accounting Standards Board, or SFAS, No. 144, "Accountingfor the Impairment orDisposal of
Long-livedAssets, " the Company reviews long-lived assets, including property and equipment, and intangible assets, for impairment whenever events or changesin business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS No. 144, an impairment loss would berecognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carryingamount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Through December 31, 2006,there have been no such impairments.
Warranty Obligations.
The Company provides a standard one-year warranty coverage on its systems and from time to time has promotional offers when it offers a twenty-four monthwarranty. Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimatedwarranty cost as a charge to costs of revenue, when revenue is recognized. The estimated warranty cost is based on historical product performance. Utilizingactual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates todetermine the estimated warranty charge. The Company updates these estimated charges every quarter.
Revenue Recognition.
Product revenue, including upgrade revenue, and revenue from Titan handpiece refills, is recognized when title and risk of ownership has been transferred,provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, remaining obligations are insignificant and collectibility isreasonably assured. Transfer of title and risk of ownership generally occurs when the product is shipped to the customer or when the customer receives theproduct, depending on the nature of the arrangement. Revenue is recorded net of customer and distributor discounts.
The Company generally offers a warranty with its products. The Company provides for the estimated cost to repair or replace products under warranty at the timeof sale. 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 contract, is recognized as the services are provided. Service revenue for the years ended December 31, 2006, 2005 and2004, were $5,890,000, $3,881,000, and $2,414,000 respectively.
Shipping and Handling Costs.
Shipping and handling costs are included as a component of cost of revenue.
54
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 primarilyrelate to employees, facilities, material, third party contractors and clinical and regulatory fees.
Advertising Costs.
Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising expense for the years ended December 31, 2006,
2005 and 2004, were $1,546,000, $1,201,000 and $1,314,000, respectively.
Stock-based Compensation.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-BasedPayment (revised 2004), " or SFAS123(R), using the modified prospective transition method, which requires the measurement and recognition of compensation expense for all share-based paymentawards made to the Company's employees and directors, including stock options, employee stock purchases related to the Employee Stock Purchase Plan and
restricted stock units. The Company's consolidated financial statements for the year ended December 31, 2006 reflects the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect,and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based paymentawards that is ultimately expected to vest. Share-based compensation expense recognized in the Company's Consolidated Statements of Operations during theyear ended December 31, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of, December 31, 2005
based on the fair value estimated in accordance with the pro forma provisions of SFAS No. 123 "Accountingfor StockBased Compensation, " or SFAS 123, andcompensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the fair value estimated in accordance with theprovisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company estimated the fair value of each stock option on the date of grantusing the Black-Scholes option valuation model and elected to attribute the value of share-based compensation to expense using the straight-line method, whichwas previously used for its pro forma information required under SFAS 123.
Prior to the adoption of SFAS 123(R) the Company recognized stock-based compensation expense in accordance with Accounting Principles Board, or APB,Opinion No. 25, "Accountingfor Stocklssued to Employees. " In March 2005, the SEC issued Staff Accounting Bulletin No 107, "Share-BasedPayment, " orSAB 107, regarding the SEC's interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R). See Note 5 for a further discussion on stock-based compensation.
Income Taxes.
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets andliabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFASNo. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be
realized. The Company has determined that its future taxable income will be sufficient to recover all of the deferred tax assets. However, should there be achange in their ability to recover the deferred tax assets, the Company could be required to record a valuation allowance against its deferred tax assets. Thiswould result in an increase to the Company's tax provision in the period in which they determined that the recovery was not probable.
55
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Companyrecognizes liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on the Company's estimate of whether additional tax paymentsare probable. If the Company ultimately determines that payment of these amounts is not probable, the Company will reverse the liability and recognize a taxbenefit during the period in which the Company makes the determination. The Company will record an additional charge in the Company's provision for taxes inthe period in which the Company determines that the recorded tax liability is less than the Company expects the ultimate assessment to be.
Comprehensive Income.
Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. TheCompany's unrealized loss on marketable investments represents the only component of other comprehensive income that is excluded from net income.
Foreign Currency.
The U.S. dollar is the functional currency of the Company's subsidiaries. Monetary and non-monetary assets and liabilities are remeasured into U.S. dollars atperiod end and historical exchange rates, respectively. Sales and operating expenses are remeasured at average exchange rates in effect during each period,except for those expenses related to non-monetary assets which are remeasured at historical exchange rates. Gains or losses resulting from foreign currencytransactions are included in net income and are insignificant for each of the three years ended December 31, 2006. The effect of exchange rate changes on cashand cash equivalents was insignificant for each of the three years presented in the period ended December 31, 2006.
Recent Accounting Pronouncements.
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, "The Fair Value Optionfor Financial Assets andFinancialLiabilities" (`SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains andlosses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007. The Company is currently evaluating the impact of implementing SFAS 159 on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements, " or SFAS No. 157. This standard defines fair value, establishes a frameworkfor measuring fair value in accounting principles generally accepted in the United States ofAmerica, and expands disclosure about fair value measurements. This
pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any newfair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. TheCompany will be required to adopt SFAS 157 in the quarter ended March 31, 2008. The Company is currently assessing the impact that SFAS 157 may have onits consolidated financial position, results of operations and cash flows.
In September 2006, the SEC issued SAB No. 108 , "Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements," or SAB 108 , to address diversity in practice in quantifying financial statement misstatements . SAB 108 requires the quantification ofmisstatements based on their impact on both the balance sheet and the income statement to determine materiality . The guidance provides for a one-timecumulative effect adjustment to correct for misstatements that were not deemed material under a company's prior approach but are material under the SAB 108
approach . SAB 108 has not had any impact on the Company ' s annual financial statements for the year ended December 31, 2006.
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In July 2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income Taxes--an interpretation ofFASB Statement No. 109, or SFAS 109.This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. TheInterpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting for interimperiods, disclosure, and transition. This interpretation is effective for the Company's first quarter ending on March 31, 2007. Based on a preliminary evaluationof the impact of adopting this Interpretation, we believe that it will not have a material effect on our financial position or results of operations in 2007.
NOTE 2-BALANCE SHEET DETAIL:
Cash, Cash Equivalents and Marketable Investments
The Company considers all highly liquid investments, with an original maturity of three months or less at the time of purchase, to be cash equivalents.Investments in debt securities are accounted for as "available-for-sale" securities, carried at fair value with unrealized gains and losses reported in other
comprehensive income, held for use in current operations and classified in current assets as "Marketable Investments." The following is a summary of cash, cashequivalents and marketable investments.
Chcchin, and rnorncv nuul<ct lundkVuiiI Ic r.itc dcmund note,
l\uction rate ^ccuritic, and muni. ip.il holl1k
Rcpol tcdl .1^ :C.i,h . i i i d . i Ii C Iiv iIciit,
Mm1'etable ill%C,tment,
108.143
GrossUnrealized
Gains
ti
ti
FairUnrealized Market
Losses Value
c II.Si)il8 ) 96.28
8 ) 9028 5
`; oX) S I ()ti-( )X
90343
ti 1( )I 43 ti
AmortizedCost
12.41)3
74.44
()I- I OX
`; x__'00
S 92,108
57
GrossUnrealized Unrealized
Gains Losses
C ti
112
(II
II I
112 )
FairMarketValue
12.40374.33
`; 91.99O
.'(ill
86.7_30
S 91,996
Source : CUTERA INC, 10-K, March 16, 2007
B60
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The contractual maturities of cash, cash equivalents and marketable-investments as of December 31, 2006, are as follows (in thousands):
necemher 31. 2006
I )tic in Ic^^ th.in one v car
Duc in I to 3 vcw
I)ucin ito^vcMr,
I)uc iii to H) emI)uc in _rcatcr thin 10 N ems (hrim.Irilv auction rate ,ccuritic,, that cml he rcadih liquidated)
Total
Accounts Receivable:
Amount
S X1.313
_'6_-176
3(I_-'60
S 1 88,085
Trade accounts receivable are recorded at the invoiced amount and do not bear interest . The allowance for doubtful accounts is the Company ' s best estimate of
the amount of probable credit losses existing in accounts receivable and is based on historical write - off experience and any specific customer issues that havebeen identified . Account balances are charged off against the allowance when it is probable the receivable will not be recovered . As of December 31, 2006 and2005, one customer accounted for 28% and 27% of the Company ' s total accounts receivable balance, respectively.
Inventories:
Inventories consist of the following (in thousands):
R m\ material"
Fini,llcd aouuk
Other Current Assets:
Other current assets consist of the following (in thousands):
kIy rccciy.thlcYrcjuid cxhcn,c,
I)cj its
Source : CUTERA INC, 10-K, March 16, 2007
58
B61
December 31,
2006 2005
ti 2.M( ti 30711_404 1.174
ti u _45
December 31,
2006 2005
I.7,9 S3017698 )
(» I I
$2,702 $3,728
Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Property and Equipment, net:
Property and equipment, net consists of the following (in thousands):
December 31,
Icaschold Improccmcnts S 140 IOUUflicc equipment mid furniture I 9,6 I ^6 i
Depreciation and amortization expense related to property and equipment was $628, 000, $594 , 000 and $470,000 for the years ended December 31, 2006, 2005and 2004, respectively.
Intangible Assets:
Intangible assets principally comprised of a technology sublicense acquired in 2002, a patent sublicense acquired from Palomar in 2006; and other intangibleassets acquired in 2005. The components of intangible assets at December 31, 2006 and 2005 were as follows:
Gross Accumulated
Carrying Amortization NetAmount Amount Amount
ileremher 31. 200fi !in thnncan,k
Talent mihIICcn c ti 1218 S 104 11141cd1I1oIonA , UhIICcn c l 38 '47 2) I
)lhCI IIIL.lllo-iblc ^ I0^ 124 41
Tot.il S 1911 S 47: S 1,446
1)....mh-.. 3i zoos ran Ih",n':.nd'i
IccI111 Io0v vuhliccnvc C 538 S 19; S 34^Other int.inaihlc , I 41 124
I ot.il ti 703 S -34 409
For the year ended December 31, 2006, 2005 and 2004, amortization expense for intangible assets was $241,000, $95,000 and $54,000, respectively
59
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Based on intangible assets recorded at December 31, 2006, and assuming no subsequent additions to, or impairment of the underlying assets, the remainingestimated annual amortization expense is expected to be as follows (in thousands):
Year endinu n--h- 11
1007 ti 232nn8 1922000 19^2010 I2W I 192
2U 12 and thereafter 445
I ('L11 1440
Accrued Liabi sties:
Accrued liabilities consist of the following (in thousands):
December 31,
2006 2005
PIv ill and rchutcd c' pcn,cs $ ^_ I nl 4.691
V.Irr.Int_v 3_055 2 O4
IovI1tv I_3H4
I'rolc„iowll Icc, 2n, 344
Income tax h'Ivahlc 78.5
S.iIc, .indl m.irhetina .iccru.iI 698 322Sales tax I. I U7 48?Cu,tomicr dclxo,it, 781 X81
(rihcr 042 062
S 13,675 S 9,131
NOTE 3-WARRANTY AND SERVICE CONTRACTS:
The Company has a direct field service organization in the United States. Internationally, the Company provides direct service support through its ofwholly-owned subsidiaries in Australia, France, Germany, Japan and Switzerland as well as through a network of distributors and third-party service providers inseveral other countries where it does not have a direct presence. The Company generally provides a warranty with its products, depending on the type of product.After the warranty period, maintenance and support are offered on a service contract basis or on a time and materials basis. The Company currently provides forthe estimated cost to repair or replace products under warranty at the time of sale.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of Contents
Warranty Accrual (in thousands):
CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Year EndedDecember 31,
2006 2005
HLtIancc ^ll hcainnina of v car 2_043 ti I _s^l)
Add: Accruals for warranties issued during the vear
I C.,": Scttlcmci t imidc duiin'-, the vcm I4_^40 1
Balance at end of year $ 3,055 $ 2,043
Deferred Service Contract Revenue (in thousands):
Year EndedDecember 31,
2006 2005
Balance at bcLinnins of s car 311717 $ I.9n0
Add: Pivments received 7,455 4,925
Ic^^: Revcnuc rcco_nizcd (3_92()) (3.714)
Balance at end of year $ 6,652 $ 3,117
Service contract revenue is recognized on a straight-line basis over the period of the applicable service contract.
Costs incurred under service contracts during the years ended December 31, 2006, 2005 and 2004 amounted to $1,642,000, $1,130,000, and $702,000,
respectively, and are recognized as incurred.
NOTE 4-COMMITMENTS AND CONTINGENCIES:
Facility Leases.
The Company leases its office and manufacturing facility under a non-cancelable operating lease, which expires in 2014. In addition, the Company has leasedoffice facilities of approximately 3,700 square feet 2,690 square feet and 1,240 square feet, in Japan, Switzerland and France, respectively. The leases in Japan,Switzerland and France expire in May 2008, July 2008 and December 2009, respectively. In September 2005, the Company terminated its Germany facility leaseand incurred a termination charge of $31,000.
On January 11, 2005, the Company entered into a three year agreement to sublease a portion of its Brisbane , California, facility to an unaffiliated third-party. InFebruary 2006, the Sub lessee gave notice to terminate the sublease effective September 14, 2006.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of December 31, 2006, the Company was committed to minimum lease payments for facilities and other leased assets under long-term non-cancelableoperating leases is as follows (in thousands):
Year Fndjng v--h- 11
2007 ti I.0232nn8 )25
2000 LU2U2nI I_I491011 I_3U7
2U 12 and thereafter 2.970
I LIWrc rninirnurn renl,II p 111C]l1 S 8.394
For the years ended December 31, 2006, 2005 and 2004, gross rent expense was $ 1.3 million, $ 1.3 million and $1.2 million , respectively.
NOTE 5-STOCKHOLDERS' EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE:
Stock Option Plans.
As of December 31, 2006, the Company had the following stock-based employee compensation plans.
2004 Employee Stock Purchase Plan.
On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. A total of 200,000 shares of common stock were reserved forissuance pursuant to the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted topurchase common stock at a discount through payroll deductions. Prior to November 1, 2006, the Company had a rolling one-year offering period, each with two
six-month purchase periods. Beginning with the offering period that started on November 1, 2006, all future offering periods will run for approximately sixmonths, each with one purchase period. Shares of common stock eligible for purchase are increased on the first day of each fiscal year by an amount equal to thelesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such date or (iii) an amount as determined by the Board of Directors. TheCompany added 244,269 reserved shares to the 2004 ESPP on January 1, 2006. The price of the common stock purchased shall be the lower of 85% of the fairmarket value of the common stock at the beginning of an offering period or at the end of a purchase period. The Company issued 40,651 and 58,323 shares ofcommon stock under the 2004 ESPP in fiscal years 2006 and 2005, respectively. At December 31, 2006, 529,204 shares remained available for future issuance.
2004 Equity Incentive Plan and 1998 Stock Plan.
In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company's common stock have been reserved forissuance 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 reserved for issuancepursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved butun-issued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Shares of common stock approved under the 2004 Equity Incentive Plan will be increased on the first day of each fiscal year, commencing in 2005, by an amountequal to the lesser of. (i) 5% of the outstanding shares of the first day of such year; (b) 2 million shares; or, (c) an amount determined by our board. On January 1,2006, the Company added 610,674 shares to the 2004 Equity Incentive Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights mayalso be granted under the Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which optionsbecome exercisable, however, except in the case of options granted to officers, directors and consultants, options shall become exercisable at a rate of no less
than 20% per year over five years from the date the options are granted. Options are to be granted at an exercise price not less than the fair market value per shareon the grant date for incentive options or 85% of fair market value for nonqualified stock options. For employees holding more than 10% of the voting rights ofall classes of stock, the exercise price shall not be less than 110% of the fair market value per share on the grant date. Options granted under the Plan generallybecome exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48 of the total number of shares subject to the optionshares shall become exercisable on the last day of each calendar month thereafter until all of the shares have become exercisable. Unvested options that have
been exercised are subject to repurchase upon termination of the holder's status as an employee, director or consultant. The term of the options is either five,seven or ten years.
During the year ended December 31, 2005, under the 2004 Equity Incentive Plan, the Company's Board of Directors approved the grant of 71,500 shares ofrestricted stock to selected members of the Company's management. These restricted stock units generally vest in four equal, annual installments on theanniversaries of the date of grant. The Company recorded $1,448,000 of deferred stock-based compensation for these restricted stock grants as a component ofstockholders' equity and is amortizing that amount over the service period of four years. The value of the restricted stock awards was based on the closing market
price of the Company's common stock on the date of award. Amortization expense for these awards for the year ended December 31, 2006 was $326,000.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Option Activity.
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Bal.incc,_ December 31. 2004Additional ,halti', ic'cncdOption, LimitedRcAlictecl ^tocl, urniM,rantcd
Optiom, cxcrci,cd
Optioii cancelled
Bal.incc,_ December 31. 20n0
lVdditiowal ^halc^ rc^cncrlOption, LimitedOptic,I1 exclci^cdOption cancelled of Iorlcitcd
Rc^tllctcd ^toch Unlt^ IOricltcd
Bal.incc,_ December 31. 2006
IxcluIhlc n^ of December 31. 2U06
Options Outstanding
Weighted-Average
Weighted - Remaining AggregateShares Average Contractual Intrinsic
Available Number of Exercise Life Valuefor Grant Shares Price (in years) (in $ millions)*
22i »II 17)I.9 13 _1ti3
1.7^n_nnn
(099,37 5) 699.37 13.34(319.643) 2.2o
221 217 (2232 17 9.90
1497392 3.948.42 4.39
^47_SGI I
1682.62 682.62 1 803(71_^n11)
1.197.9491 4.(
I ^X.-l) I ti. l) 74
1479022 3.244.609 6.91
6111.67416113.9431 603.943 24.37
(073940) x.22
I 890I 189.11 I 17.46
7312 I G.87
I _68174( 2_98^_^ 31 1010 x.69 i().3
1.^04.43 4.30 4.^2 ti 42.3
* Based on the closing stock price of $27.^ , ^ for the Company's common stock on December 29, ,^ , ^6, the last day of trading for the , ^ , ^6 fiscal year.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company's closing stock price
on the last trading day of the fiscal year 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by theoption holders had all option holders exercised their options on December 31, 2006. This amount changes based on the fair market value of the Company'scommon stock. Total intrinsic value of options exercised in the twelve months ended December 31, 2006 was $13.5 million. Total fair value of vested andexpensed stock options, restricted stock units and ESPP shares for the twelve months ended December 31, 2006 was $3.0 million, net of tax. The Companyissues new shares upon the exercise of options, restricted stock units and ESPP shares.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The options outstanding and exercisable at December 31, 2006 were in the following exercise price ranges:
Options Outstanding
Rangr of Fverrisr. Prires
tiU.IUSII.IS n. ;n c nn
4.2; 4.2>ti13.30
513.80 SI0.2
SI7.O) '202>
I 2II. ) ti24
S2;.7^ 52;.7
5-,.73 ti2h.32
527.30 527.30
S (00O S-27.36
Weighted-Average
RemainingNumber Contractual
Outstanding Life (in years)
X9040) 2.70, 12 565 402
33840(1 6.O9
3_3_7_0 7.116
311.5 2 7.41
3 1 1_W ^.-l^51100) 9.,6
348.738 6.44
147_()0() 8.7^511_1 II II I 830
Options Exercisable
Weighted-Average
Number ExerciseOutstanding Price
5911UI10 S 0.I0212 56^ I . l^
302_257 4.2179.(47
100074 14.00I07(4 I9.I4
12249 -1 ^.7ti
I.804_4 5 S 4.30
As of December 31, 2005 , there were 1,977,301 outstanding options that were exercisable at a weighted average exercise price of $2.18.
Impact of Adoption of SFAS 123(R).
The Company elected to adopt the modified prospective application method as provided by SFAS No. 123(R). Accordingly, in 2006, the Company recordedstock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS
No. 123, valued under SFAS No. 123 for the pre-January 1, 2006 grants and under SFAS No. 123(R) for the 2006 grants.
In November 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 123(R)-3, "Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards" ("FSP 123R-3"). The Company has elected not to adopt the alternative transition method provided
in the FSP 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The Company followed paragraph 81 of SFASNo. 123(R) to calculate the initial pool of excess tax benefits and to determine the subsequent impact on the APIC pool and Consolidated Statements of CashFlows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R).
65
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The effect of adopting SFAS No. 123(R) in the year ended December 31, 2006 was as follows:
Year EndedDecember 31,
Tin thnncandc , r rrnrt,per chart datal 2006
stock-based Coil] pen S : l ti o n expense IlV award r.1lc:
I IllpIoAcc Stoch optioilti _ milted IlcloAA ihciIr dcclllcd iii1ri ll SIc 1"'11F A,lllle prior- to the Co111p IIlA ti IIlltKI1 public 0I!criI1 I I (?09)
EIIII)lov CC ,i k IIIIrCII.1,C Illall (331)kc tIICtcd ^io l Ulli k (320 )
I otal ,tech-Irked Colllpcll,.i1ioll I442 M18A clicci oil ^t k-hLiScd ChlllpcllLti t1ioll at the Loiiip tllA ^ lll.llo iiial laA 1810 I _^6K
])tie to ICA CISiI of HIMIllorIi/cd dclciicd ^i c1 -hi cd Coll)pcll tiIti oil upoll adopiioll I_237)
I )tie to ICA CI'.11 0I llll.lllloIti/cd dclcrrcd ^i ch-II i cd col1Ipol1 I1ioll or letllliimtioil^ oI ClllllloAcc Loch op1Ioll^
L?I.111Lcd IICloAA LI1cil dcciiicd IlltllllUC I.11I A,IIuIC prior to the L.oIIIIIwIA ^ illitKII public 0I1clillo ( I 1 (34 )
ti 1 271 I
Effect oil Cash tlllAA s:
Cash Ilovv, fronl opcraioI1 I _U32 )
Cash flows from financing activities 1,032
(1) This amount would also have been recorded under the provisions ofAPB prior to the adoption of FAS 1, ,(R).
As of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to stock options of $7.1 million before estimatedforfeitures. In the Company's pro forma disclosures prior to the adoption of SFAS 123(R), the Company accounted for forfeitures when they actuallyoccurred. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ fromthose estimates. Under SFAS 123(R), the Company estimated that $160,000 of the unrecorded deferred stock-based compensation amount as of January 1, 2006will not be recognized due to forfeitures.
During the twelve months ended December 31, 2006, the Company granted stock options for 603,943 shares of common stock with an estimatedweighted-average fair values of $ 14.16 and a total grant-date fair value of $8.5 million. Of the grant-date fair value of options granted in the twelve monthsended December 31, 2006, the Company estimates that the amount of unrecorded deferred stock-based compensation that is not expected to vest due to forfeiture
is $278,000. As of December 31, 2006, the unrecognized compensation cost, net of expected forfeitures, related to non-vested stock options was $8.5 million,which will be recognized using the straight-line attribution method over an estimated weighted-average amortization period of 1.3 years.
66
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
As of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to restricted stock unit awards of $1.2 million beforeestimated forfeitures. Under SFAS 123(R), the Company estimated that $343,000 of the unrecorded deferred stock-based compensation amount as of January 1,2006 will not be recognized due to forfeitures. As of December 31, 2006, the unrecognized compensation cost related to restricted stock unit awards was
$673,000, after estimated forfeitures, which will be recognized over an estimated weighted average amortization period of 2.4 years.
As of December 31, 2006, the unrecognized compensation cost related to ESPP shares was $102,000, which will be recognized using the straight-line attributionmethod over 0.3 years. The weighted-average estimated fair values of each stock issuance under the ESPP for the years ended December 31, 2006 was $8.97 per
share.
Valuation Assumptions.
The Company estimates the fair value of employee stock options and stock issued under the ESPP using the Black-Scholes option-pricing model, consistent withthe provisions of SFAS 123(R), SAB 107 and the Company's prior period pro forma disclosures of net income, including stock-based compensation (determinedunder a fair value method as prescribed by SFAS 123). The fair value of each option grant and each stock issuance under the ESPP was estimated on the date of
grant using the Black-Scholes model with the following weighted-average assumptions:
Year EndedDecember 31,
2006
]RiA-free intcrc,t rate h0r,tod, option, -1.90"1,RiA-free intcrc,t mte h r ISI'I' 438",,Expected lilc Ihr stack options (in v cars) ^.n?Eyhcctcd lilc 161 ISI'I' optiom (ill c.ir,l 07^1yhectcd ^tock price vol.Itilitv ]ur,toch options (i-P',,
H:xhectcd ,tech price col.ltilitv 1,01 1 SIT
I)ividIcndviclJ
Option-pricing models require the input of various subjective assumptions, including the following:
Expected Volatility: The expected stock price volatility is based on a combination of the Company's historical volatility combined with the weighted averageof the volatility of other similar companies in the same industry. With effect from April 2006, the expected stock price volatility was based on a combination ofthe Company's historical volatility combined with the implied volatility of the Company's quoted stock options. The Company believes these methods of
computing volatility are more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of acomparable company in the same industry.
Expected Term: The expected term often year contractual term options granted in 2006, was based on the Company's historical exercise behavior for theseoptions. For five and seven year contractual term options, that the Company started granting from April 2006, the expected term was derived from the short-cutmethod described in SEC's SAB 107.
Risk-Free Interest Rate : The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future.
67
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior based on actual historical information.
Non-employees Option Grants.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force, or
EITF, No. 96-18, "Accountingfor Equity Instruments ThatAre Issued to Other than EmployeesforAcquiring, or in Conjunction with Selling, Goods orServices. " Equity instruments issued to non-employees are recorded at their fair value on the measurement date. The compensation expense for non-employeeoption grants is recognized over the expected service period on a straight-line basis and was $0, $262,000 and $0, for the year ended December 31, 2006, 2005and 2004, respectively
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2006.
Periods Prior to the Adoption of SFAS 123(R).
Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and measurement provisions ofAPB 25. Accordingly, theCompany generally recognized compensation expense only when it granted options with a discounted exercise price. Any resulting compensation expense was
recognized ratably over the associated service period, which was generally the option vesting term of four years. Effective January 1, 2006, the Company adoptedSFAS 123(R), using the modified prospective application transition method, which requires the presentation of pro-forma information for periods prior to theadoption of SFAS 123(R) regarding the net income and net income per share as if the Company had accounted for its stock options under the fair value methodof SFAS 123. For the purpose of this pro-forma disclosure, the estimated value of the stock awards is recognized on a straight line basis over the vesting periodsof the awards. If compensation had been determined based upon the fair value at the grant date for employee compensation arrangements, consistent with the
methodology prescribed in SFAS 123, the Company's pro-forma net income and pro-forma net income per share under SFAS 123 would have been as shown inthe table below (in thousands, except per share data):
Year EndedDecember 31,
2005 2004
Net incomes as iepoitcd Ii_^UI 3_70)
Add: Stoch-tied cmhl(,v cc comhcn,.Ition Cxhcn,c included in rcjmrtcd net income_ net of rcl.itcd t.Iv cflcct, 8^7 I _I 8l
1 C,^ total ,loch-haled cmhl0v cc com)hen,ation determined under fair-^ alucd b^sc^l mcth^^d lur all w%nick- net
of related tax cll'cct^ (_'_ 12O ( 1.8'3 )
Pro l'Mmw net incomlc I2_^i2 ' 3.121
Net income her ^Imie:
13.»ic:.» reported I.2O 0.3B
13.I,i : pro S 1.09 o.;2
I)ilutcd:.» reported I.IIII I).iI
Diluted: pre, lormu U.^)I ti 0?6
68
Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In computing these pro forma amounts, the Company has used the minimum value method for options granted prior to January 15, 2004 (the date of the firstfiling of the Company's Form S-I in connection with its initial public offering) and the fair value method for options granted after that date. The fair value ofeach option grant and each stock issuance under the ESPP was estimated on the date of grant using the Black-Scholes model with the following
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The differences between the U.S. federal statutory income tax rate to the Company's effective tax are as follows:
I at IcdcriI ^l.ItIIto Iv rite
State_ net of Icdural hcnclit
Nlcal, anal entertainmenI
Benefit or rc,c.irch .ind dccclolmicnt creditSleek-lased compcns.itioil
I.1A-CAL 11ht Interest
Wier
Provision (benefit) for income taxes
Year Ended December 31,
2006 2005 2004
4.9X 4.4k 4.117
11.8" n.45 O.89
(I 09.8I 7.89i i3.71
I O.V (3.17) 1.07i I I2.(I A 6.20) 6.37)24.7 06I 1.45
1(26.15 )°,, 26.22",, 35.00",,
Management evaluates the recoverability of deferred tax assets and the need for a valuation allowance on a periodic basis.
Undistributed earnings of the Company's foreign subsidiaries of approximately $1.1 million at December 31, 2006, are considered to be indefinitely reinvestedand, accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends orotherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to variousforeign countries.
As of December 31, 2006, the Company had cumulative net operating loss carry-forwards for federal and state income tax reporting purposes of approximately$5.0 million and $11.2 million, respectively. The federal net operating loss carry-forwards expire through the year 2026 and the state net operating losscarry-forwards expire at various dates through the year 2026. Such net operating losses consist of excess tax benefits from employee stock option exercises andhave not been recorded in the Company's deferred tax assets in accordance with FAS 123(R). The Company will record $2.4 million as a credit to additional paid
in capital as and when such excess tax benefits are ultimately realized.
As of December 31, 2006, the Company had cumulative carry-forwards for research and development credits for federal and state income tax purposes of
approximately $770,000 and $1.2 million, respectively. These federal research and development tax credits expire through the year 2024. The state research anddevelopment credits can be carried forward indefinitely, except for $284,000, which will expire at various dates through the year 2020. Furthermore, theCompany has federal alternative minimum tax credits of approximately $116,000 that can be carried forward indefinitely. Certain tax credit carryovers areattributable to excess tax benefits from employee stock option exercises and have not been recorded in the Company's deferred tax assets in accordance withFAS 123(R). The Company will record $450,000 as a credit to additional paid in capital as and when such excess tax benefits are ultimately realized.
NOTE 7-NET INCOME PER SHARE:
Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common sharesoutstanding during the period. Diluted earnings per share is calculated by using the weighted-average number of common shares outstanding during the periodincreased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock hadbeen issued. The dilutive effect of outstanding options, ESPP shares and restricted stock units is reflected in diluted earnings per share by application of thetreasury stock method, which
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
includes consideration of stock-based compensation required by SFAS No. 123(R) and SFAS No. 128, "Earnings Per Share. "
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Net income .Iv iilahlc to coninion ,tochholdcr, 13.I,ic S 2.12 3 S I3_8) I S 3.284
Net incoI11C.1A;III.Ihle to cons nion titoc holder I )ihmicll 2.123 1 3_XOI 3_700
Denominator:
S CI ^?htcd-.IA CI.1^'_C IIUIIIbCI 01' C0111111011 ^Iiaic ULIL^t.lll111 ll ^? U^Cd ill C01111)Utimi Ni is ]let IIlCo111c
hcrtih:Irc I2.^ II.53> 8.573
Dilutive potential common shares used in computing diluted net income per share 1.720 2.329 3.649
total ^^ci^^hted-Ivcra^^c nunlberofshae, used in a1111)U iI1 diluted net inc0nlc hershare 14278 liM-l I, „2
Anti-dilutive Securities
The following number of outstanding options and ESPP shares, prior to the application to the treasury stock method, were excluded from the computation ofdiluted net income per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
Conlnlon stock optiorn^ anal IS1'1',harc,
NOTE 8-DEFINED CONTRIBUTION PLAN:
Year Ended December 31,
2006 2005 2004
(2I 7 X66
In the United States, the Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal RevenueCode. Eligible employees may make voluntary contributions to the Plan up to 100% of their annual compensation, subject to statutory annual limitations. SinceApril 1999, the Company has made discretionary matching contributions of 50% to 75% of all employees' contributions in each Plan year. During the yearsended December 31, 2006, 2005 and 2004 the Company made discretionary contributions of $557,000, $420,000 and $227,000, respectively, under the Plan.
For some of the Company's foreign subsidiaries, the Company has a defined contribution plan for their employees. Consistent with the requirements of locallaws, the Company deposits funds for these plans with insurance companies, third-party trustees, or into government-managed accounts and have been fullyfunded or accrued as of December 31, 2006. The Company's contributions for its foreign employees were not material in each of the years ended December 31,
2006, 2005 and 2004.
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Source : CUTERA INC, 10-K, March 16, 2007
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Table of ContentsCUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
NOTE 9-SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment which encompasses the designing, developing, manufacturing, marketing and servicing of aesthetic lasersystems for dermatologists, plastic surgeons, gynecologists, primary care physicians and other practitioners worldwide. Management uses one measurement ofprofitability and does not segregate its business for internal reporting.
The Company's long-lived assets maintained outside the United States are insignificant.
Revenue is attributed to geographical regions based on the shipping location of where product is delivered.
For the years ended December 31, 2006, 2005 and 2004, the Company had one customer that represented 15%, 16% and 12%, respectively, of net revenue.
The following table summarizes revenue by geographic region and product category (in thousands):
Rcvcnuc miz I)y productcatc^ury:I'rodluct^ S 84_09^ 63.349 43_i40Product uhar.ulc, 0000 0_030i 6.61
Scn ice ^_R9n 3.M I 1414
Titan haudpiccc rclilL 4.1U1 1.76U 72
Consoli&1tcd tot.tl I (0692 ti 7i_(2U ti X2.641
NOTE 10-LITIGATION SETTLEMENT:
On June 2, 2006, patent litigation between the Company and Palomar Medical Technologies and Massachusetts General Hospital was settled with Palomargranting the Company an irrevocable sublicense to the subject patents. Under the terms of the settlement agreements, the Company agreed to pay Palomar
$20,153,000 representing the royalties due on sales of the infringing systems, plus accrued interest and reimbursement of Palomar's legal costs throughMarch 31, 2006. Of the $20,153,000 settlement amount $18,935,000 relating to past royalties, interest and legal settlement costs, was recorded as a litigationsettlement expense, and $1,218,000, representing the value of the on-going sublicense agreement, was capitalized as an intangible asset. The intangible asset isbeing amortized on a straight line basis over the useful economic life of the patents, which expire in February 2015.
Under the terms of the sublicense granted by Palomar, the royalty rate for sales of hair-removal-only systems is equal to 7.5% of net revenue. Formulti-application systems containing hair-removal functionality, the royalty rate is either 3.75% or 5.25%, depending on whether there is one or two hair-removaltechnologies included in the system, respectively. The Company's revenue from systems that do not include hair-removal capabilities and revenue from servicecontracts is not subject to royalties. The royalty cost incurred from April 1, 2006 has been recorded as a component of cost of revenue. These royalty obligations
will continue for applicable sales made through February 2015 which is the expiration date for the subject patents.
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Table of ContentsSUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands , except per share amounts)
.Quarter ended-
Net rcccnuc
Co,t (,I rcccnuc
(pro'- prolit
Opcnitiii cvhcn,c,:
S'lic,.uidrnarkcti]I
ke^e.llcii .ind dcv ci plildnt
GcncrLti ^n^l.ulministr.^ticc
Litio,ition ,cttlcmcnt
l,t.ll opcritifl cvpcn^c
Ina,mc do,,) li om ohcr.Ition,
tntcrc,t .tnd other incornc_ net
Ina,mc do,,) hck,rc income t.Ivc,
1'n\ i^u,n (hcnclit) 101 income taycs
Net income do„)
Net incomc do,s ) attributable to comnum,tochholdcr^ u^cd in i i"ic carnin_, pel ,h.uc:
Net income do,,) pcr,h.irc tri,ic
Net inaomc I o,s ) per Atic diluted
Weio,ht-.Iv cr.ioc number oI ii iic, u,cd ill pei ii irec.ii iii ition,
13.nic
Diluted
(.tA_ c.wh cqui^.^lcnt,.ind l mtct.thlc invcvtrncnty
Source : CUTERA INC, 10-K, March 16, 2007
Dec 31 , Sept 30 , June 30, March 31 , Dec 31 , Sept 30 , June 30 , March 31,2006 2006 2006 2006 2005 2005 2005 2005
S 30481 ti ?^.(I>V ti 21_;V> C ?IJ_7^7 ti?3V> 3 ti I S.) U ti 17.^7() S I .147
10)S-()85 ti 90672 ti )S I _9(5 ti )5 5 I I ti ) I ))( ti A'-'10 74 719 ' 09 10)
73
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Table of ContentsSCHEDULE II
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS(in thousands)
For the Year Ended December 31, 2006, 2005 and 2004
Balance at BalanceBeginning at End ofof Year Additions Deductions Year
11110AAM1Cc Itvr dM111t1UI lICC(fUn1S 1CCCIA,IhIC
Ycar cndcd I )cccmhcr 3 1 . 2((4 `^ 3(7 293 `^ I 13 487
Yc^ii ended December 31.20(0 487 8 S 318 177Ycarcnded I)cccmhcril_ -'OO6 S 177 S I S 304 S 34
Rc^crv c 1,01 cscc^^ anal ohm'letc i11v cntl,ric^Ycar ended December 31 2nn4 S 17S ;nn Inn 378Ycarended December 31 20(0 S 378 S O(h S 2()l ti 991
Year ended December 31, 2u06 S 992 S 90 S 231 S S51
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation ofDisclosure 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 arerequired 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 completeunderstanding 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 Rules13a-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 ActRules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company's management includingthe 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'sdisclosure controls and procedures were effective at a reasonable assurance level.
Definition ofDisclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Company's reports filed under theExchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. DisclosureControls are also designed to reasonably assure that such information is accumulated and communicated to the Company's management, including the CEO andCFO, as appropriate to allow timely decisions regarding required disclosure. The Company's Disclosure Controls include components of its internal control overfinancial 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'sinternal 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) and15d-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 InternalControl Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company'smanagement concluded that the Company's internal control over financial reporting was effective as of December 31, 2006. The assessment by the Company'smanagement of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 46 of this Report.
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 reportingwill prevent all error and all fraud. A control system, no
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Table of Contentsmatter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the designof 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 theinherent 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 occurbecause 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 bymanagement 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 therecan be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequatebecause 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 materiallyaffected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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Table of ContentsPART III
Certain information required by Part III is omitted from this Annual Reporton Form 10-K because we will file a Definitive Proxy Statement (the "Proxy
Statement") for our 2007 Annual Meeting of Stockholders with the Securities and Exchange Commission within 120 days after the end of our fiscal year endedDecember 31, 2006.
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 STOCKHOLDERMATTERS
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the Proxy Statement.
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Table of ContentsPART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The financial statements required by Item 15(a) are filed as Item 8 of this annual report.
(2) The financial statement schedules required by Item 15(a) are filed as Item 8 of this annual report.
(3) Exhibits.
Exhibit No . flr erinIi^n
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 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 officespace 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 WorldMedical dated October 1, 2006.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power ofAttorney (see page 79).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared effective on March 30, 2004.
(2) Incorporated by reference from our Current Report on Form 8-K filed on June 2, 2006.
(3) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2005.
(4) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 8, 2006.
t Confidential Treatment has been requested for certain portions of this exhibit.
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Table of ContentsSIGNATURES
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 16th day of March 2007.
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, hisattorney-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 theretoand 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 inthe capacities and on the dates indicated.
/s/ KEVIN P. CONNORS President Chief Executive Officer and Director (Principal March 16, 2007Kevin P. Connors Executive Officer)
c/ RONALD T SANTH.T.T Chief Financial Officer and Vice President of Finance and March 16, 2007Ronald J. Santilli Administration (Principal Financial and Accounting
Officer)
c/ DAvrn A Gin .T NTCk Vice President of Research and Development and March 16, 2007
David A. Gollnick Director
/s/ DAVID R APFFT.RFRG Director March 16, 2007David B . Apfelberg
/s/ ANNRTTR I CAMPRRT.i.-WHTTF Director March 16, 2007
Annette J. Campbell-White
/s/ MARK T.0RTZ Director March 16, 2007Mark Lortz
/s/ TIM O'SHEA Director March 16, 2007Tim O'Shea
/s/ JERRY P. WTDMAN Director March 16, 2007Jerry P. Widman
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Exhibit 10.4
CUTERA, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN(as amended and restated on October 20, 2006)
The following constitutes the provisions of the 2004 Employee Stock Purchase Plan of Cutera, Inc.
1. Purpose . The purpose of the Plan is to provide Employees with an opportunity to purchase Common Stock through accumulated payroll deductions. It isthe intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Code. The provisions of the Plan,accordingly, shall be construed so as to extend and limit Plan participation in a manner that is consistent with the requirements of that section of the Code.
2. Definitions .
(a) "Administrator" means the Board or any committee thereof designated by the Board in accordance with Section 14.
(b) "Board" means the Board of Directors of the Company.
(c) "Change of Control" means the occurrence of any of the following events:
(i) 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 Rule13d-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 bythe Company's then outstanding voting securities; or
(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company' s assets; or
(iii) The consummation of a merger or consolidation of the Company, with any other corporation, other than a merger or consolidationwhich would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or bybeing converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the votingsecurities of the Company, or such surviving entity or its parent outstanding immediately after such merger or consolidation.
(iv) A change in the composition of the Board, as a result of which fewer than a majority of the Directors are Incumbent Directors."Incumbent Directors" means Directors who either (A) are Directors as of the effective date of the Plan (pursuant to Section 23), or (B) are elected, or nominatedfor election, to the Board with the affirmative votes of at least a majority of those Directors whose election or nomination was not in connection with anytransaction described in subsections (i), (ii) or (iii) or in connection with an actual or threatened proxy contest relating to the election of Directors of the
Company.
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(d) "Code " means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein shall be a reference to anysuccessor or amended section of the Code.
(e) "Common Stock" means the common stock of the Company.
(f) "Company" means Cutera, Inc., a Delaware corporation.
(g) "Compensation" means an Employee's base straight time gross earnings, commissions (to the extent such commissions are an integral, recurringpart of compensation), overtime and shift premium, but exclusive of payments for incentive compensation, bonuses and other compensation.
(h) "Designated Subsidiary" means any Subsidiary that has been designated by the Administrator from time to time in its sole discretion as eligibleto participate in the Plan.
(i) " Director" means a member of the Board.
(j) "Employee " means any individual who is a common law employee of an Employer and is customarily employed for at least twenty (20) hoursper week and more than five (5) months in any calendar year by the Employer. For purposes of the Plan, the employment relationship shall be treated ascontinuing intact while the individual is on sick leave or other leave of absence approved by the Employer. Where the period of leave exceeds ninety (90) daysand the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated onthe 91st day of such leave.
(k) "Employer" means any one or all of the Company and its Designated Subsidiaries.
( 1) " Enrollment Date" means the first Trading Day of each Offering Period.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder.
(n) " Exercise Date" means the first Trading Day on or after May 1 and November 1 of each year.
(o) " Fair Market Value " means, as of any date, the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for the Common Stock (orthe closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The Wall Street Journal or suchother source as the Administrator deems reliable; or
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(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shallbe the mean of the closing bid and asked prices for the Common Stock on the date of determination, as reported in The 11 all Street Journal or such other source
as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, its Fair Market Value shall be determined in good faith by theAdministrator.
(p) " Offering Periods" means the periods of approximately six (6) months during which an option granted pursuant to the Plan may be exercised,commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the first Trading Day on or after the May 1 andNovember 1 Offering Period commencement date approximately six (6) months later; provided, however, that the first Offering Period after the October 20, 2006amendment and restatement of the Plan shall commence on the first Trading Day on or after November 1, 2006 and shall terminate on the first Trading Day on or
after May 1, 2007; and provided, further, that the second Offering Period after the October 20, 2006 amendment and restatement of the Plan shall commence onthe first Trading Day on or after May 1, 2007. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan.
(q) "Parent ' means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 2004 Employee Stock Purchase Plan.
(s) "Purchase Period" for Offering Periods commencing after the October 20, 2006 amendment and restatement of the Plan, unless the Administratorprovides otherwise, the Purchase Period will have the same duration and coincide with the length of the Offering Period.
(t) "Purchase Price" means an amount equal to eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the EnrollmentDate or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Administrator pursuant to Section 20.
(u) " Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.
(v) "Trading Day" means a day on which the U.S. national stock exchanges and the Nasdaq System are open for trading.
3. Eligibility .
(a) Offering Periods . Any individual who is an Employee as of the Enrollment Date of any Offering Period shall be eligible to participate in suchOffering Period, subject to the requirements of Section 5.
(b) Limitations . Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extentthat, immediately after the grant such Employee (or any other person whose stock would be attributed to such Employee pursuant to
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Section 424(d) of the Code) would own capital stock of the Company or any Parent or Subsidiary of the Company and/or hold outstanding options to purchasesuch stock possessing five percent (5'1'o) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Parentor Subsidiary of the Company, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans (as defined in Section 423 ofthe Code) of the Company or any Parent or Subsidiary of the Company accrues at a rate which exceeds twenty-five thousand dollars ($25,000) worth of stock
(determined at the Fair Market Value of the stock at the time such option is granted) for each calendar year in which such option is outstanding at any time.
4. Offering Periods . The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day onor after May 1 and November 1 of each year, or on such other date as the Administrator shall determine, and continuing thereafter until terminated in accordance
with Section 20; provided, however, that the first Offering Period after the October 20, 2006 amendment and restatement of the Plan shall commence on the firstTrading Day on or after November 1, 2006 and shall terminate on the first Trading Day on or after May 1, 2007; and provided, further, that the second OfferingPeriod after the October 20, 2006 amendment and restatement of the Plan shall commence on the first Trading Day on or after May 1, 2007. The Administratorshall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholderapproval if such change is announced prior to the scheduled beginning of the first Offering Period to be affected thereafter.
5. Participation . An Employee who is eligible to participate in the Plan pursuant to Section 3 may become a participant by (i) submitting to the Company'spayroll office (or its designee), on or before a date prescribed by the Administrator prior to an applicable Enrollment Date, a properly completed subscription
agreement authorizing payroll deductions in the form provided by the Administrator for such purpose, or (ii) following an electronic or other enrollmentprocedure prescribed by the Administrator.
6. Payroll Deductions .
(a) At the time a participant enrolls in the Plan pursuant to Section 5, he or she shall elect to have payroll deductions made on each payday duringthe Offering Period in an amount not exceeding 15% of the Compensation which he or she receives on each such payday.
(b) Payroll deductions authorized by a participant shall commence on the first payday following the Enrollment Date and shall end on the lastpayday in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10.
(c) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentagesonly. A participant may not make any additional payments into such account.
(d) A participant may discontinue his or her participation in the Plan as provided in Section 10, or may change the rate of his or her payrolldeductions during the Offering Period by (i) properly completing and submitting to the Company's payroll office (or its designee), on or
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before a date prescribed by the Administrator prior to an applicable Exercise Date, a new subscription agreement authorizing the change in payroll deduction ratein the form provided by the Administrator for such purpose, or (ii) following an electronic or other procedure prescribed by the Administrator; provided,however, that a participant may only make one payroll deduction change during each Offering Period. If a participant has not followed such procedures to changethe rate of payroll deductions, the rate of his or her payroll deductions shall continue at the originally elected rate throughout the Offering Period and future
Offering Periods (unless terminated as provided in Section 10). The Administrator may, in its sole discretion, limit the nature and/or number of payroll deductionrate changes that may be made by participants during any Offering Period. Any change in payroll deduction rate made pursuant to this Section 6(d) shall beeffective as of the first full payroll period following five (5) business days after the date on which the change is made by the participant (unless theAdministrator, in its sole discretion, elects to process a given change in payroll deduction rate more quickly).
(e) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b), a participant's payrolldeductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate originally elected bythe participant effective as of the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by theparticipant as provided in Section 10.
(f) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan isdisposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the
exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant'scompensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to theCompany any tax deductions or benefits attributable to the sale or early disposition of Common Stock by the Employee.
7. Grant of Option . On the Enrollment Date of each Offering Period, each Employee participating in such Offering Period shall be granted an option topurchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of Common Stock determined by dividingsuch participant's payroll deductions accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the applicablePurchase Price; provided that in no event shall a participant be permitted to purchase during each Offering Period more than 2,500 shares of Common Stock(subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13.
The Employee may accept the grant of such option by electing to participate in the Plan in accordance with the requirements of Section 5. The Administratormay, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common Stock that a participant maypurchase during each Offering Period. Exercise of the option shall occur as provided in Section 8, unless the participant has withdrawn pursuant to Section 10.The option shall expire on the last day of the Offering Period.
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8. Exercise of Option .
(a) Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of shares of Common Stock shall beexercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicablePurchase Price with the accumulated payroll deductions in his or her account. No fractional shares of Common Stock shall be purchased; any payroll deductionsaccumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering
Period, subject to earlier withdrawal by the participant as provided in Section 10. Any other monies left over in a participant's account after the Exercise Dateshall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her.
(b) Notwithstanding any contrary Plan provision, if the Administrator determines that on a given Exercise Date, the number of shares of Common
Stock with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on theEnrollment Date of the applicable Offering Period, or (ii) the number of shares of Common Stock available for sale under the Plan on such Exercise Date, theAdministrator may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase onsuch Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitableamong all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that
the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in
as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchaseCommon Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20. The Company may make pro rataallocation of the shares of Common Stock available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence,notwithstanding any authorization of additional shares of Common Stock for issuance under the Plan by the Company's shareholders subsequent to such
Enrollment Date.
9. Delivery . As soon as administratively practicable after each Exercise Date on which a purchase of shares of Common Stock occurs, the Company shallarrange the delivery to each participant, as appropriate, the shares purchased upon exercise of his or her option in a form determined by the Administrator (in its
sole discretion) and pursuant to rules established by the Administrator. No participant shall have any voting, dividend, or other shareholder rights with respect toshares of Common Stock subject to any option granted under the Plan until such shares have been purchased and delivered to the participant as provided in thisSection 9.
10. Withdrawal .
(a) Under procedures established by the Administrator, a participant may withdraw all but not less than all the payroll deductions credited to his orher account and not yet used to exercise his or her option under the Plan at any time by (i) submitting to the Company's payroll office (or its designee) a writtennotice of withdrawal in the form prescribed by the
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Administrator for such purpose, or (ii) following an electronic or other withdrawal procedure prescribed by the Administrator. All of the participant's payrolldeductions credited to his or her account shall be paid to such participant as promptly as practicable after the effective date of his or her withdrawal and suchparticipant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for suchOffering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period
unless the participant re-enrolls in the Plan in accordance with the provisions of Section 5.
(b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan whichmay hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment . Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to purchase shares of Common Stockunder the Plan shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15, and suchparticipant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice oftermination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during theperiod in which the participant is subject to such payment in lieu of notice.
12. Interest . No interest shall accrue on the payroll deductions of a participant in the Plan.
13. Stock
(a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19, the maximum number of shares of CommonStock which shall be made available for sale under the Plan shall be 200,000 shares of Common Stock plus an annual increase to be added on the first day of theCompany's fiscal year beginning in fiscal year 2005, equal to the lesser of (i) 600,000 shares of Common Stock, (ii) 2% of the outstanding shares of CommonStock on such date or (iii) an amount determined by the Board.
(b) Shares of Common Stock to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of theparticipant and his or her spouse.
14. Administration . The Board or a committee of members of the Board who shall be appointed from time to time by, and shall serve at the pleasure of, theBoard, shall administer the Plan. The Administrator shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, todetermine eligibility, to adjudicate all disputed claims filed under the Plan and to establish such procedures that it deems necessary for administration of the Plan(including, without limitation, to adopt such procedures and sub-plans as are necessary or appropriate to permit the participation in the Plan by employees who
are foreign nationals or employed outside the United States). The Administrator, in its sole discretion and on such terms and
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Source : CUTERA INC, 10-K, March 16, 2007
B89
conditions as it mav provide, mav delegate to one or more individuals all or any part of its authority and powers under the Plan. Every finding, decision anddetermination made by the Administrator (or its designee) shall, to the full extent permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary .
(a) A participant may designate a beneficiary who is to receive any shares of Common Stock and cash, if any, from the participant's account underthe Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of suchshares and cash. In addition, a participant may designate a beneficiary who is to receive any cash from the participant's account under the Plan in the event ofsuch participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall berequired for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant at any time. In the event of the death of a participant and in the absence of abeneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to theexecutor or administrator of the estate of the participant or if no such executor or administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant or if no spouse,dependent or relative is known to the Company, then to such other person as the Company may designate.
(c) All beneficiary designations under this Section 15 shall be made in such form and manner as the Administrator may prescribe from time to time.
16. Transferability . Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive sharesof Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, exceptthat the Company may treat such act as an election to withdraw from an Offering Period in accordance with Section 10.
17. Use of Funds . All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and theCompany shall not be obligated to segregate such payroll deductions. Until shares of Common Stock are issued under the Plan (as evidenced by the appropriateentry on the books of the Company or of a duly authorized transfer agent of the Company), a participant shall only have the rights of an unsecured creditor withrespect to such shares.
18. Reports . Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees atleast annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares of Common Stock purchased and theremaining cash balance, if any.
-8-
Source : CUTERA INC, 10-K, March 16, 2007
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19. Adjustments. Dissolution. Liquidation or Change of Control .
(a) Adjustments . In the event that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or otherproperty), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange ofCommon Stock or other securities of the Company, or other change in the corporate structure of the Company affecting the Common Stock such that anadjustment is determined by the Administrator (in its sole discretion) to be appropriate in order to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan, then the Administrator shall, in such manner as it may deem equitable, adjust the number and class ofCommon Stock which may be delivered under the Plan, the Purchase Price per share and the number of shares of Common Stock covered by each option underthe Plan which has not yet been exercised, and the numerical limits of Sections 7 and 13.
(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall beshortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution orliquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. TheBoard shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's optionhas been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date
the participant has withdrawn from the Offering Period as provided in Section 10.
(c) Change of Control . In the event of a Change of Control, each outstanding option shall be assumed or an equivalent option substituted by thesuccessor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for theoption, any Offering Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and shall end on the New ExerciseDate. The New Exercise Date shall be before the date of the Company's proposed Change of Control. The Board shall notify each participant in writing, at leastten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that theparticipant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10.
20. Amendment or Termination .
(a) The Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19, no such termination can
affect options previously granted under the Plan, provided that an Offering Period may be terminated by the Administrator on any Exercise Date if theAdministrator determines that the termination or suspension of the Plan is in the best interests of the Company and its stockholders. Except as provided inSection 19 and this Section 20, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. Tothe extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule),the Company shall obtain stockholder approval in such a manner and to such a degree as required.
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Source : CUTERA INC, 10-K, March 16, 2007
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(b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," theAdministrator shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period,establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designatedby a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting
and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participantproperly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Administratordetermines in its sole discretion advisable which are consistent with the Plan.
(c) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences,the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequenceincluding, but not limited to:
(i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price;
(ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants.
21. Notices . All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been dulygiven when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares . Shares of Common Stock shall not be issued with respect to an option under the Plan unless the exercise of suchoption and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, withoutlimitation, the Securities Act of 1933, as amended, including the rules and regulations promulgated thereunder, the Exchange Act and the requirements of anystock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to suchcompliance.
As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of anysuch 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 ofcounsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law.
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Source : CUTERA INC, 10-K, March 16, 2007
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23. Term of Plan . The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of theCompany. It shall continue in effect for a term of twenty (20) years, unless sooner terminated under Section 20.
24. Automatic Transfer to Low Price Offering Period . To the extent permitted by any applicable laws, regulations, or stock exchange rules if the FairMarket Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the EnrollmentDate of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after theexercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period.
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Source : CUTERA INC, 10-K, March 16, 2007
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SAMPLE SUBSCRIPTION AGREEMENT
CUTERA, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
Original ApplicationChange in Payroll Deduction Rate
Change of Beneficiary(ies)
Offering Date:
1. hereby elects to participate in the Cutera, Inc. 2004 Employee Stock Purchase Plan (the "Plan") and subscribes to purchase shares of theCompany's Common Stock in accordance with this Subscription Agreement and the Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of % of my Compensation on each payday (from 0 to 15%) during theOffering Period in accordance with the Plan. (Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined inaccordance with the Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automaticallyexercise my option.
4. I have received a copy of the complete Plan. I understand that my participation in the Plan is in all respects subject to the terms of the Plan. I understandthat my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Plan.
5. Shares of Common Stock purchased for me under the Plan should be issued in the name(s) of Employee or Employee and Spouse only.
6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Periodduring which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinaryincome at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares andI will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock . TheCompany may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligationincluding any withholding necessary to make available to the Company any tax deductions or
Source : CUTERA INC, 10-K, March 16, 2007
B94
benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition,and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of theshares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day
of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain.
I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in thePlan.
8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and/or shares due me under the Plan:
NAME: (Please print)
(First) (Middle) (Last)
Relationship
Percentage Benefit
NAME: (please print)
(Address)
(First) (Middle) (Last)
Relationship
Percentage of Benefit (Address)
-2-
Source : CUTERA INC, 10-K, March 16, 2007
B95
Employee's SocialSecurity Number:
Employee's Address:
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODSUNLESS TERMINATED BY ME.
Dated:
Source : CUTERA INC , 10-K, March 16, 2007
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B96
Signature of Employee
Spouse's Signature (If beneficiary other than spouse)
SAMPLE WITHDRAWAL NOTICE
CUTERA, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Cutera, Inc. 2004 Employee Stock Purchase Plan which began on (the "OfferingDate") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned
as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agreesthat his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will bemade for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by
delivering to the Company a new Subscription Agreement.
Name and Address of Participant:
Signature:
Date:
Source : CUTERA INC, 10-K, March 16, 2007
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-114149, 333-123495 and 333-132583) of Cutera, Inc.of our report dated March 15, 2007 relating to the consolidated financial statements, financial statement schedule, management's assessment of the effectivenessof internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, CaliforniaMarch 15, 2007
Source : CUTERA INC, 10-K, March 16, 2007
B98
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin P. Connors, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant ' s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter(the registrant ' s fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant ' s internalcontrol 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'sRegistered Public Accounting Firm and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 16, 2007 /s/ KEVIN P. CONNORS
Kevin P. ConnorsPresident, Chief Executive Officer and Director
(Principal Executive Officer)
Source : CUTERA INC, 10-K, March 16, 2007
B99
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Santilli, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant ' s internal control over financial reporting that occurred during the registrant ' s most recent fiscal quarter(the registrant ' s fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant ' s internalcontrol 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'sRegistered Public Accounting Firm and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 16, 2007 /s/ RONALD J. SANTILLI
Ronald J. SantilliChief Financial Officer and Vice President of Finance and Administration
(Principal Financial and Accounting Officer)
Source : CUTERA INC, 10-K, March 16, 2007
B100
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Cutera Inc. on Form 10-K for the fiscal year ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition andresults of operations of Cutera Inc.
Date: March 16, 2007
By: /s/ Kevin P. Connors
Kevin P. ConnorsPresident Chief Executive Officer and Director(Principal Executive Officer)
I, Ronald J. Santilli, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Cutera Inc. on Form 10-K for the fiscal year ended December 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition andresults of operations of Cutera Inc.
Date: March 16, 2007
Created by IOKWizard www.10KWVizard.com
By: /s/ Ronald J. Santilli
Ronald J. SantilliChief Financial Officer and Vice President of Finance andAdministration
(Principal Financial and Accounting Officer)
Source : CUTERA INC, 10-K, March 16, 2007
B1O1
EXHIBIT C
S F L P O W F P 5 F A R C H
FORM 10-QCUTERA INC - CUTR
Filed: May 10, 2006 (period: March 31, 2006)
Quarterly report which provides a continuing view of a company's financialposition
C1
Part i.
Financial Information 3
Item 1 . Financial Statements (unaudited) 3
PART 1.
PART II
EX-31.2 (CERTIFICATION OF CFO PURSUANT TO SECTION 302)
EX-32.1 (CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906)
C2
Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission file number: 000-50644
CUTERA, INC.(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction ofincorporation or organization)
3240 Bayshore Blvd., Brisbane, California 94005(Address of principal executive offices)
(415) 657-5500(Registrant ' s telephone number, including area code)
77-0492262(I.R.S. employeridentification 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 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes q No q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer andlarge accelerated filer" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer q Accelerated filer 0 Non-accelerated filer q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No El
The number of shares of Registrant ' s common stock issued and outstanding as ofApril 30, 2006 was 12,379,339.
Source : CUTERA INC, 10-Q, May 10, 2006
C3
Table of ContentsCUTERA, INC.FORM 10-Q
TABLE OF CONTENTS
Page
Part I . Financial Information 3
Item 1 . Financial Statements (unaudited) 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 . Management ' s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Oualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
Part II Other Information 20
Item 1 . Legal Proceedings 20
Item IA. Risk Factors 21
Item 6. Exhibits 32
Signature 33
2
Source : CUTERA INC , 10-Q, May 10, 2006
C4
Table of ContentsPART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CUTERA, INC.CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)(unaudited)
March 31 , December 31,2006 2005
ksscts
Current .i„ct,:(Lt li mid cash cyuic^tlcnts S x.951 ti ^?(,U
I'urcha,c of nlancetatllc incc,tnlcnt, I24_98) I4_6_0 1
Net cash pmcidcd bv ( used in) illv cstinu, activ itics _970 21 o
Cash Howes front tinancin-, actil itics:
I'roccc k fmnl cycrci^c of stock optiou1 and cnlplovcc stock purchase plan ^^O I307Ivcc„ tav hcnclit related to ,tack-Irked colllpdu1 ation cv )ell,e ooo
Netct Ii piovidcdbv linanci11 activitic^ I.^ 1307
Net Idccrci cl incrca,c ill ci Ii and ci Ii cyuic,llcnt, (2309 3_192( .hill C.1^I1 c IlllA1IlCI1k at hCL111111I1L [)I IpCliol{ l_20O 7070
C,9I1 ilul 0.1,11 Gattiv,IIdu1 , at Cllll 0I pcrio l 2) I ' 10202Supplemental disclosure Ilt 11011 - C:1sl1 information:
Change in deterred stock- based compensation, net of terminations S (1,255) S 63
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Source : CUTERA INC, 10-Q, May 10, 2006
C7
Table of ContentsCUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of Cutera, Inc. (the "Company"), a Delaware corporation, and its wholly ownedsubsidiaries. All significant intercompany accounts and transactions have been eliminated.
The financial information furnished is unaudited. The condensed consolidated financial statements included in this report reflect all adjustments (consisting onlyof normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and ofthe financial condition of the Company at the date of the interim balance sheet. The December 31, 2005 condensed balance sheet was derived from auditedfinancial statements, but does not include all disclosure required by accounting principles generally accepted in the United States ofAmerica. The results forinterim periods are not necessarily indicative of the results for the entire year or any other interim period. The condensed consolidated financial statements should
be read in conjunction with the Company's financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year endedDecember 31, 2005 filed with the Securities and Exchange Commission ("SEC") on March 16, 2006.
Significant Accounting Policies
The Company' s significant accounting policies are disclosed in the Company' s annual report on Form 10-K for the year ended December 31, 2005 and have notchanged significantly as of March 31, 2006, with the exception of the following policies:
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(revised 2004), "Share-Based Payment" ("SFAS 123(R)"), using the modified prospective transition method and therefore has not restated results for priorperiods. Under this transition method, stock-based compensation expense for the first quarter of fiscal 2006 includes compensation expense for all stock-basedcompensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (`SFAS 123"). Stock-based compensation expense for all stock-based compensationawards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions ofSFAS 123(R). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally thevesting term of four years. Prior to the adoption of SFAS 123(R) the Company recognized stock-based compensation expense in accordance with AccountingPrinciples Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In March 2005, the SEC issued Staff Accounting Bulletin
No. 107 Share-BasedPayment ("SAB 107") regarding the SEC's interpretation of SFAS 123(R) and the valuation of stock-based payments for publiccompanies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). See Note 2 to the Condensed Consolidated FinancialStatements for a further discussion on stock-based compensation.
Net income per share
Basic earnings per share are calculated based on net earnings and the weighted-average number of shares of common stock outstanding during the reported
period. Diluted earnings per share is calculated by increasing the weighted-average number of common shares outstanding during the period, by the number ofadditional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect ofpotential common stock (including outstanding stock options, ESPP shares, non-employee director stock units and restricted stock units) is reflected in dilutedearnings per share by application of the treasury stock method, which includes consideration of stock-based compensation to be recognized for the options, net ofthe tax, as required by SFAS 123(R) in the first quarter of fiscal year 2006.
Source : CUTERA INC, 10-Q, May 10, 2006
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Table of ContentsNote 2. Accounting for Stock-Based Compensation
As of March 31, 2006, as described below, the Company had the following stock-based employee compensation plans. The total compensation expense related tothese plans was $1.1 million for the three months ended March 31, 2006. Prior to January 1, 2006, the Company accounted for these plans under the recognitionand measurement provisions ofAPB 25. Accordingly, the Company generally recognized compensation expense only when it granted options with a discounted
exercise price. Any resulting compensation expense was recognized ratably over the associated service period, which was generally the option vesting term offour years.
The modified prospective transition method of SFAS 123(R), requires the presentation of pro-forma information for periods prior to the adoption of SEAS123(R) regarding the net income and net income per share as if the Company had accounted for its stock options under the fair value method of SFAS 123(R). Ifcompensation had been determined based upon the fair value at the grant date for employee compensation arrangements, consistent with the methodologyprescribed in SFAS 123, the Company's pro-forma net income and pro-forma net income per share under SFAS 123 would have been as shown in the followingtable. For the purpose of this pro-forma disclosure, the estimated value of the stock awards is recognized on a straight line basis over the vesting periods of theawards (in thousands, except per share data):
Three MonthsEnded
March 31,2005
Net ina,mc_ .w rcpoitcd t 1_-1X0
Add: Stack-hied cmhlov cc comhcn,.Ition exhen,c included in reported net income- net of rckitcd t.Iv eflcct, 270
Ic,s total ,tack-hn,cd emplovcc comhen,ation determined under I^1ir-c,1lLied bayed method ti,rall avvvds_ net of related tax cllccts (497 )
I'ro Iorm.i net income .Iv Iil.Ihlc to common ,tochholdcr,_ u,cd in Iri is .indl dlilutcdl cwiiin,,, pel ,I arc I.2 9
13.t is net incornc per ^Ilnlc:,A reported 013
I'ro Ionma ti n.11
Diluted net income hci h.irc:\ reported II
Pro forma S 0.09
2004 Employee Stock Purchase Plan
The Company sponsors the 2004 Employee Stock Purchase Plan ("2004 ESPP"), pursuant to which eligible employees are permitted to purchase common stockat a fifteen percent discount through payroll deductions. The price of the common stock purchased, is the lower of 85% of the fair market value of the common
stock at the beginning of an offering period or at the end of a purchase period. Shares of common stock eligible for purchase are increased on the first day of eachfiscal year by an amount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such date or (iii) an amount asdetermined by the Board of Directors. Each offering period includes two six-month purchase periods. The Company added 244,269 reserved shares to the 2004ESPP on January 1, 2006. The price of the common stock purchased shall be the lower of 85% of the fair market value of the common stock at the beginning ofan offering period or at the end of a purchase period. As of March 31, 2006, 569,855 shares remained available for future issuance.
2004 Equity Incentive Plan and 1998 Stock Plan
The Company has two stock option plans- the 1998 Stock Plan (the "1998 Plan") and the 2004 Equity Incentive Plan (the "2004 Equity Incentive Plan"). Sharesof common stock approved under the 2004 Equity Incentive Plan will be increased on the first day of each fiscal year, by an amount equal to the lesser of. (i) 5%of the outstanding shares of the first day of such year; (b) 2 million shares; or, (c) an amount
Source : CUTERA INC, 10-Q, May 10, 2006
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Table of Contentsdetermined by our board. On January 1, 2006, the Company added 610,674 shares to the 2004 Equity Incentive Plan. As of March 31, 2006, a total of 2,068,896shares of common stock were reserved for issuance pursuant to the 2004 Equity Incentive Plan and the 1998 Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights, orrestricted stock units, may also be granted under the 2004 Equity Incentive Plan. Incentive stock options may only be granted to employees. The Board ofDirectors determines the period over which options become exercisable, however, except in the case of options granted to officers, directors and consultants,options shall become exercisable at a rate of no less than 20% per year over five years from the date the options are granted. Options are to be granted at an
exercise price not less than the fair market value per share on the grant date for incentive options or 85% of fair market value for nonqualified stock options. TheCompany has not granted any discounted options since fiscal 2003. Options granted under the Plan generally become exercisable 25% on the first anniversary ofthe vesting commencement date and an additional 1/48th of the total number of shares subject to the option shares shall become exercisable on the last day ofeach calendar month thereafter until all of the shares have become exercisable. The term of the Company's options is ten years.
During the year ended December 31, 2005, under the 2004 Equity Incentive Plan, the Company's Board of Directors approved the grant of performance unitawards (more commonly referred to as restricted stock units) for a total aggregate of 71,500 shares of restricted stock units to selected members of theCompany's management. These restricted stock unit awards are independent of option grants and will not vest if employment terminates prior to the release of
the restrictions. These restricted stock unit awards vest in four equal, annual installments on the anniversaries of the date of grant. Restricted stock units do nothave the voting rights of common stock, and the shares underlying the restricted stock units are not considered issued and outstanding until they vest and areissued. The Company expenses the cost of the restricted stock unit awards, which is determined to be the fair market value of the shares at the date of grant,ratably over the period during which the restrictions lapse - generally four years from the grant date. As of March 31, 2006, there were no restricted stock unitsvested.
Activity under the 1998 Stock Plan and 2004 Equity Incentive Plan is summarized as follows:
Weighted- Aggregate
Weighted - Average Intrinsic
Shares Average Remaining Value
Available Number of Exercise Contractual (in $for Grant Shares Price Term millions)*
Bahmcc^_ I )cccmticr 31 _ 2004 I 497.3 )2 3.948.428 4.39
Additiolml ^h.ircvresened ^47.86i)
)plioi1 "milted (082_02 682.62 1803
I c^trictcd ,feel: unit, LM111tcd1 (71-:)(0)
Option CyCrci^cd 1.197.9491 4.6^
( )htion, !incited I U_49i ( I U_495 $ x.74
Bahmcc^_ I )cccmticr 31 _ 2((0 I 47) (C2 3244009 6.91
Additional ,h.ires rc^cncd 010074
)plioI1 milted (72000) 7201111 2 60;
)ptiorn^ cycrci^cdl ( 121193) 4.58
Option I6r1Cited 49I0O I49I00l 14. 8
Rc^tiictcd stock omits 16r1citcd1 I.zO(
Balance,- Mw Ii 31. 2000 2768.8o) 3.146_316 7.3 6. 18 S 62
\.T tcj anal cxclci,ahlc a, oI Mauch 31. 20H( 7_O1 3573 2. 4.W t 49
* Based on the closing stock price of the Company ' s common stock of $27. 12 on March 31, 2006.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the lasttrading day of the first quarter of fiscal 2006 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 March 31, 2006. This amount changes based on the fair market value of the Company ' s stock.Total intrinsic value of options exercised for the three months ended March 31, 2006 was $2.7 million . Total fair value of options vested and expensed was$739,000, net of tax, for the three months ended March 31, 2006. The Company issues new shares upon the exercise of options and restricted stock units.
As a result of adopting the fair value recognition provisions of SFAS 123 (R), the impact to the Condensed Consolidated Financial Statements for the threemonths ended March 31, 2006 from stock-based compensation is as follows (in thousands, except per share data):
Source : CUTERA INC, 10-Q, May 10, 2006
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Table of Contents
ThreeMonthsEnded
March 31,2006
Stuck- based compensation expense by am ard type:
Enllll^,^cc ,loch optioi1 "milted a their intrin,ic c,Iluc 17n0I1.n1plovcc ^toch options sntuutcd hclovv thcirdeemed intrinsic fiirvaluc prior to the Compam initi.tl 1 ihIic oflcriuuh;1)111Iov cc ,tack Ilurch.I,c Ilkin I ^n
Rc^tricticc ^tod, unit
101i1 ,loch-tried colllpell,.ltion I -(
Iny cllcct on stack-based collipcn,ation at the ( n1pam s nlaru'inal tav rate 347
LllcCt oil net IllcoI11C (739
I?ffect on net income per share
I3.1,ic (000 )
Diluted S ).(
Effect on cash flows:I:ccI i of cycc „ tax hcnclit related to ^toch-ba,cd con1pcn,:ltion c' pcn,c
Cash 11(m"; Inonl operatin' acti6fien (+ I yyy l
Cash Ilov%s front lII1 Iu1 I1 acticiticv S 9^)9
Ch.ino,c in dclcrrcd ,tack-tied coiiipcn,.ition
I)uc to Icccr^iI of unwnlorti/cd dclcrlcd,loch-haled Coll) pcns^ltioil upon adoption S I I_237)
I)uc to rcccr,.iI 0I"un llllorti/cd dclcrrcd ,tack-kI,cd conlpcn,alion 1,01 tcrnlii mtiouu oI"cnllllovcc ,loch optiouu omlltcd tlclovv theireeiiie l intrinsic lair c,ilue prior to the Conlpanv s initial public ollcring 1 18 1'n
I I2'. )
(1) This amount would also have been recorded under the provisions ofAPB 25, prior to the adoption of FAS 123(R).
As of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to stock options and restricted stock unit awards of$9.9 million before estimated forfeitures. In the Company's pro forma disclosures prior to the adoption of SFAS 123(R), the Company accounted for forfeitureswhen they actually occurred. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actualforfeitures differ from those estimates. Under SFAS 123(R), the Company estimated that $503,000 of the unrecorded deferred stock-based compensation amount
as of January 1, 2006 will not be recognized due to forfeitures.
During the quarter ended March 31, 2006, the Company granted options for 72,000 shares of common stock with an estimated total grant-date fair value of $1.3million. Of this amount, the Company estimates that the amount of unrecorded deferred stock-based compensation relating to awards not expected to vest due to
forfeiture is $36,000. As of March 31, 2006, the unrecognized compensation cost related to non-vested stock options and restricted stock unit awards was $8.6million and will be recognized using the straight-line attribution method over an estimated weighted-average amortization period of 2.3 years.
During the quarter ended March 31, 2006, the Company estimated the grant date fair value of ESPP stock to be $8.01 per share and recorded the forecastedexpense for the quarter ended March 31, 2006 of $150,000. As of March 31, 2006, the unrecognized compensation cost related to ESPP options was $158,000and will be recognized using the straight-line attribution method over 0.6 years.
Valuation Assumptions
The Company estimates the fair value of employee stock options and ESPP using a Black-Scholes option-pricing model, consistent with the provisions of SFAS123(R), SAB 107, and the Company's prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value
method as prescribed by SFAS 123). The fair value of each option grant and each stock issuance under the
Source : CUTERA INC, 10-Q, May 10, 2006
C I I
Table of ContentsESPP were estimated on the date of grant using the Black-Scholes model with the following weighted-average assumptions:
Option-pricing models require the input of various subjective assumptions, including the option's expected life and the price volatility of the underlying stock.The expected stock price volatility is based on a combination of the Company's historical volatility combined with the weighted average of the volatility of other
similar companies in the same industry. The Company believes this is more reflective and a better indicator of the expected future volatility, than using anaverage of a comparable market index or of a comparable company in the same industry. Due to the Company's recent IPO, the expected term of options grantedin the quarter ended March 31, 2006 was derived from the short-cut method described in SEC's SAB No. 107. The risk-free rate for the expected term of theoption is based on the U.S. Treasury yield curve in effect at the time of grant.
Note 3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income and the weighted average number of shares used in computing basic and dilutednet income per share (in thousands):
Three Months EndedMarch 31,
2006 2005
Numcrat(,r:
Nei inconic.Iv Iil.Ihlcto conimon,tochholdcr, I3.i i..ind I)ilutcd I.107 S I_486
I )cnomi n.rior:
Weighted-zveraLe number of common shares outstanding used in computing basic net income per share 12.2 7 11093I)iluticc potcntml common ^harc, used in co11lputin1' diluted net income hcr,hauc 1.917 2.439
Total weighted-average number of shares used in computing diluted net income per share 14,174 13,532
Anti-dilutive securities
The following outstanding options (prior to the application of the treasury stock method) were excluded from the computation of diluted net income per commonshare for the periods presented because including them would have had an anti-dilutive effect (in thousands):
( )1)1[i011, to I)urcha,c common ,tool
Source : CUTERA INC, 10-Q, May 10, 2006
10
C12
Three Months EndedMarch 31,
2006 2005
iO9 1
Table of ContentsNote 4. Inventory
Inventory consists of the following (in thousands):
March 31 , December 31,2006 2005
R.m matcri:I 3498 S 1O713.186 2_ 174
ti ft(4 _24;
Note 5. Warranty and Service Contracts
Warranty reserve
The Company has a direct field service organization in the United States, Canada, Switzerland, Germany, Australia and Japan that provides service for its
products in these countries. The Company has third party service providers in all other locations. The Company generally provides a warranty with its products,depending on the type of product. After the warranty period, maintenance and support are offered on a service contract basis or on a time and materials basis. TheCompany currently provides for the estimated cost to repair or replace products under warranty at the time of sale. The warranty reserve activity for the threemonths ended March 31, 2006 and 2005, was as follows (in thousands):
l lal.mcc .tt December 31. 2()O^ ,end 2UUJ4
Add: ,\ccru.il, I',r vv.urr.Intic, i„ucd in 2000 mid 20)I c.,s: Scttlcmcnt^ m.idc clueing the pciiodl
Balance at March 31, 2UU6 and 2UU5
March 31, March 31,2006 2005
ti 1043 ti I.ti5()
1 -17ti ^^3(87(0 ) (_X3 )
S 2,345, 1, 850
Deferred service contract revenue
Service contract revenue is recognized on a straight-line basis over the period of the applicable service contract. The deferred service contract revenue balances
as of March 31, 2006 and December 31, 2005, were as follows (in thousands):
Costs incurred under service contracts during the three months ended March 31, 2006 and 2005, amounted to $402,000 and $188,000, respectively. All service
contract costs are recognized as incurred.
Note 6. Comprehensive Income
Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. TheCompany's unrealized loss on marketable investments represents the only component of other comprehensive income that is excluded from net income. Thechanges in components of other comprehensive income for the periods presented are as follows (in thousands):
11
Source : CUTERA INC, 10-Q, May 10, 2006
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Table of Contents
Three Months EndedMarch 31,
2006 2005
Net income S I_I07 I_486
Unrealized loss on marketable investments (38 ) (13 )
C,mprchcn,icc incomic I_009 S 1473
Note 7. Income Tax
The interim effective income tax rate is based on management's best estimate of the annual effective income tax rate. The effective tax rate for the three monthsended March 31, 2006 and 2005 was 34% and 30%, respectively. These rates reflect applicable United States federal and state tax rates and the tax impact offoreign operations offset by research and development tax credits in the three months ended March 31, 2005, tax exempt interest income and deductions for
disqualifying incentive stock option exercises.
Undistributed earnings of the Company's foreign subsidiaries of approximately $590,000 and $217,000 at March 31, 2006 and 2005, respectively, are considered
to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those earnings inthe form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholdingtaxes payable to various foreign countries.
Note 8. Contingencies
In February 2002, Palomar Medical Technologies ("Palomar") filed a lawsuit against the Company in the United States District Court District of Massachusetts.The plaintiff alleges that by making, using, selling or offering for sale the Company's CoolGlide CV, CoolGlide Excel, CoolGlide Vantage and CoolGlide Xeo
products, the Company is willfully and deliberately infringing U.S. Patent No. 5,735,844. This patent concerns a method and apparatus for removing hair withlight energy. Massachusetts General Hospital (`MGH") later joined the lawsuit as an additional plaintiff, since Palomar is the exclusive licensee, and MGH is theowner, of the patent at issue in the lawsuit. Palomar and MGH are seeking to enjoin the Company from selling products found to infringe the patent, and toobtain compensatory and treble damages, reasonable costs and attorney's fees, and other relief as the court deems just and proper. The Company is defending theaction vigorously, claiming that its products do not infringe applicable claims of the patent and that these claims are invalid and unenforceable. Additionally, the
Company has filed a counterclaim alleging that the patent should be declared unenforceable because of inadequate disclosures made to the U.S. Patent andTrademark Office by the plaintiffs during that patent's prosecution with the U.S. Patent and Trademark Office. The litigation is active, and the court has set atrial date for May 30, 2006.
In April 2005, the plaintiffs filed a second lawsuit in this same court alleging that by making, using, selling or offering for sale products using pulsed-lighttechnology for hair removal, the Company is willfully and deliberately infringing U.S. Patent Nos. 5,735,844 and 5,595,568. The plaintiffs are seeking to enjointhe Company from selling products found to infringe those patents, and to obtain compensatory and treble damages, reasonable costs and attorney's fees, andother relief as the court deems just and proper.
The Company responded by filing a motion to dismiss this second lawsuit on the grounds of lack of jurisdiction, and by filing complaints for declaratory reliefagainst these plaintiffs in California and Delaware. On May 5, 2006, the court in Massachusetts denied that motion, likely subjecting the subject matter of thatsecond lawsuit to the jurisdiction of that court. The Company believes that it has meritorious defenses of non-infringement and invalidity in these actions.
Since the outcome of this litigation is unpredictable, and since management believes that a significant adverse result for the Company is not probable, no expensehas been recorded with respect to the contingent liability associated with this matter. If the Company does not prevail, it may be ordered to pay substantialdamages for past sales and an ongoing royalty for future sales of products found to infringe. The Company could also be ordered to stop selling any products that
perform hair removal. The Company may also be required to pay substantial amounts, including ongoing royalty payments, in the event that the
12
Source : CUTERA INC, 10-Q, May 10, 2006
C14
Table of Contentsparties enter into a settlement agreement. Most of the Company's products include an application for hair removal.
From time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Management does not believethe final disposition of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
ITEM 2. MANAGEMENT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
Thefollowing discussion should be read in conjunction with the attachedfinancial statements and notes thereto, and with our auditedfinancial statements andnotes thereto for the fiscal year endedDecember 31, 2005 as contained in our annual report on Fonn 10Kfiled with the SEC on March 16, 2006 This quarterly
report, including thefollowing sections, containsforward-looking statements within the meaning ofSection 27A ofthe Securities Act of1933 and Section 21E ofthe Securities Exchange Act of1934 that involve risks and uncertainties. These statements include, but are not limited to, statements relating to our expectationsas to future capital expenditures and requirements, growth in our operations, the impact ofexchange rate volatility, and the current litigation against PalomarMedical Technologies. Theseforward-looking statements involve risks and uncertainties. The cautionary statements setforth below and those contained in PartII, Item IA "Risk Factors" commencing on page 21, identify importantfactors that could cause actual results to differ materiallyfrom those predicted in any
suchforward-looking statements. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysisonly as ofthe date ofthis report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date ofthis Form 10-Q.
Introduction
Management' s discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the accompanying condensed
consolidated financial statements and footnotes contained in Item 1 of this report to provide an understanding of our results of operations, financial condition andchanges in financial condition . The 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. Inaddition, it includes a summary of recent accounting pronouncements that may be applicable to us.
• Results ofoperations. This section provides our analysis and outlook for the significant line items on our consolidated statement of operations.
• Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existedas of March 31. 2006.
Executive Summary
Company Description. We are a global medical device company specializing in the design, development, manufacture, marketing and servicing of laser and
other light-based aesthetic system to the professional aesthetic market. Our easy-to-use families of products-CoolGlide, Xeo and Solera-enabledermatologists, plastic surgeons, gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aestheticprocedures for their patients.
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Table of ContentsOur corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our manufacturing, warehousing, research, regulatory,sales, marketing and administrative activities. Outside the United States, we have a direct sales presence in Australia, Canada, France, Germany, Japan, Spain,Switzerland and the United Kingdom. As of March 31, 2006, we had 78 direct sales employees worldwide, a global network of distributors located in more than
25 countries, and a distributor relationship in the United States with PSS World Medical. PSS's Physician Sales and Service business operates medical supplydistribution service centers with approximately 700 sales representatives serving physician offices in all 50 of the United States.
Products. Our revenue is derived from the sale of products, product upgrades, amortization of pre-paid service contracts, revenue from out-of-warranty services,
and Titan handpiece refills. Product revenue represents the sale of a system console that incorporates a universal graphic user interface, a laser or otherlight-based module, control system software, high voltage electronics, and one or more handpieces. We offer our customers the ability to select the system thatbest fits their practice at the time of purchase and then to cost-effectively add applications as their practice grows. This enables customers to upgrade theirsystems whenever they want and provides us with a source of recurring revenue, which we classify as product upgrade revenue. Service revenue relates toamortization of pre-paid maintenance and support contract revenue and receipts for services on out-of-warranty products. Titan handpiece refill revenue is
associated with our Titan handpiece, which requires a periodic "refilling" process that includes the replacement of the optical source, after a set number of pulseshave been performed.
Significant Business Trends. We believe that revenue growth has been and will continue to be primarily attributable to the following:
Investments made in our global sales and marketing infrastructure, including the expansion of our sales force and improved productivity, to increaseour market penetration in an expanding aesthetic laser market.
• Continuing introduction of new aesthetic products and applications.
• Marketing to physicians outside the core dermatologist and plastic surgeon specialties, including the medi-spa market.
During the three months ended March 31, 2006, compared to the same period in 2005, net revenue, increased by $5.6 million or 37%. On a geographical basis,
for the three months ended March 31, 2006, compared to the same period in 2005, our U.S. revenue increased by $4.5 million, or 44%, and our internationalrevenue increased by $1.1 million, or 23%. We experienced stronger U.S growth, versus international growth, due primarily to our increased sales and marketingefforts and our higher concentration of direct sales employees in the United States.
Due to our patent litigation set for trial on May 30, 2006 see Part II, Item 1 Legal Proceedings our general and administrative expenses were significantlyhigher than the same period in 2005. In the quarter ended June 30, 2006, due to the preparation for the upcoming Palomar trial, we expect our general andadministrative expenses to further increase over the expenses incurred in the quarter ended March 31, 2006. After the trial is completed, anticipated for June2006, we expect our general and administrative expenses to be approximately 9-11% of revenue in the second half of 2006.
Factors that May Impact Future Performance. Our industry is impacted by numerous competitive, regulatory and other significant factors. The growth of ourbusiness relies on our ability to continue to develop new products and innovative technologies, obtain regulatory clearances and compliance 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. Our industry is subject to extensive government regulation, including the regulation by the United States Food andDrug Administration. Failure to comply with regulatory requirements could have a material adverse effect on our business. Additionally, our industry is highlycompetitive and our success depends on our ability to compete successfully. A detailed discussion of these and other factors that could impact our futureperformance are provided in Part II, Item IA "Risk Factors" section below.
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Source : CUTERA INC, 10-Q, May 10, 2006
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Table of ContentsCritical Accounting Policies and Estimates
The accounting policies that we consider to be our most critical (those that are most important to the portrayal of our financial condition and results of operationsand that require our most difficult, subjective or complex judgments), the effects of those accounting policies applied and the judgments made in their applicationare summarized in `Item 7 Management's Discussion andAnalysis ofFinancial Condition andResults ofOperations" in our Annual Report on Form 10-K for
the year ended December 31, 2005 filed with SEC on March 16, 2006. Other than the adoption of SFAS 123(R), there have been no significant changes duringthe three months ended March 31, 2006 to the items that we disclosed as our critical accounting policies and estimates in our Annual Report on Form 10-K forthe year ended December 31, 2005.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and thereforehave not restated prior periods' results. Under this method we recognize compensation expense for all stock-based payments granted after January 1, 2006, and
prior to but not yet vested as of January 1, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognizestock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis overthe requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under APB 25 and accordingly, recognizedcompensation expense for options that were granted at an exercise price below their deemed fair market value and for restricted stock units granted to employees.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of various highly-subjectiveassumptions, including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options.Management determined the expected stock price volatility assumption based on a combination of the Company's historical volatility combined with the
weighted average of the volatility of other similar companies in the same industry. We believe this is more reflective and a better indicator of the expected futurevolatility, than using an average of a comparable market index or of a comparable company in the same industry. Due to the Company's recent IPO, the expectedterm of options granted in the quarter ended March 31, 2006 was derived from the short-cut method described in SEC's SAB No. 107. The risk-free rate for theexpected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used in calculating the fair value ofstock-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. Inaddition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate ismaterially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.See Note 1 and 2 to the Condensed Consolidated Financial Statements for a further discussion on stock-based compensation.
Recent Pronouncements
In May 2005, the Financial Accounting Standards Board, or FASB, issued SFAS 154, "Accounting Changes and Error Corrections, a replacement ofAPB
Opinion No. 20 and FASB Statement No. 3". SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.SFAS 154 requires retrospective application to prior period financial statements for changes in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle belimited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS154 further requires a change in depreciation, amortization, or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning afterDecember 15, 2005. The impact of impact of adopting SFAS 154 has not had a material impact on our financial condition or results of operations.
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Table of ContentsIn November 2005, the FASB issued FASB Staff Position ("FSP") FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments" ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities areconsidered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting
considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The adoption ofFSP 115-1 has not had a material impact on our results of operations and financial condition.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net revenue.
Three Months EndedMarch 31,
2006 2005
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Three months ended March 31, 2006 and March 31, 2005
Net Revenue
Revenue is derived primarily from the sale of products, product upgrades, service related to our products and Titan handpiece refills. For the three months endedMarch 31, 2006, compared to the same period in 2005, net revenue increased by $5.6 million, or 37%, from $15.1 million to $20.8 million. This was the result of
a $4.9 million, or 39%, increase in product revenue; a $371,000, or 49%, increase in service revenue; and an $802,000, or 565%, increase in revenue from Titanhandpiece refills. These increases were partially offset by a decline in upgrade revenue, which for the three months ended March 31, 2006, when
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Table of Contentscompared to the same period in 2005, decreased $458,000 or 29';0. This was primarily due to an increase in the number of customers choosing to purchase newsystems from our Solera family of products instead of upgrading their existing systems.
With respect to the geographical source of the $5.6 million increase in net revenue, $4.5 million was attributable to higher U.S. revenue and $1.1 million wasattributable to higher international revenue. The primary contributors to this revenue growth were the continued expansion of our direct sales force, with ourdomestic sales force growing at a quicker pace than our international sales force.
Cost ofRevenue
Our cost of revenue consists primarily of material, labor and manufacturing overhead expenses. For the three months ended March 31, 2006, compared to thethree months ended March 31, 2005, cost of revenue increased by $1.8 million, or 45%, from $4.0 million to $5.8 million. Cost of revenue as a percentage ofrevenue, increased from 27% for the three months ended March 31, 2005, to 28% for the three months ended March 31, 2006. This increase in cost of revenue asa percentage of net revenue, was primarily attributable to higher stock-based compensation expenses resulting from the adoption of FAS 123(R).
Sales and Marketing
Sales and marketing expenses consist primarily of personnel cost, including costs associated with employee stock-based compensation effective January 1, 2006,and expenses associated with customer-attended workshops, trade shows and advertising. For the three months ended March 31, 2006, compared to the sameperiod in 2005, sales and marketing expenses increased by $2.7 million, or 47%, from $5.8 million to $8.5 million. This increase was primarily attributable toapproximately $1.4 million of higher personnel expenses associated primarily with the increased expenses relating to higher headcount; $534,000 of highermarketing expenses attributable to increased trade show expenses; and $350,000 of higher employee stock-based compensation expenses. As a percentage of net
revenue, sales and marketing expenses increased from 38% in the three months ended March 31, 2005, to 41% in the three months ended March 31, 2006. Thisincrease was primarily attributable to an increase in world wide direct sales headcount, increased marketing related activities and higher stock-basedcompensation expense. For the remainder of 2006, we estimate that sales and marketing expenses will increase in absolute dollar terms, but decrease as apercentage of revenue.
Research and Development
Research and development expenses consist primarily of personnel cost, including costs associated with employee stock-based compensation effective January 1,2006, clinical, regulatory and material costs. For the three months ended March 31, 2006, compared to the three months ended March 31, 2005, research anddevelopment expenses increased by $121,000, or 10%, from $1.2 million to $1.3 million. This increase was primarily attributable to $162,000 of higherpersonnel expense, due partly to increased headcount; $55,000 of higher stock-based compensation expense; which was offset by a decrease in outside servicecosts of $81,000. As a percentage of net revenue, research and development expenses decreased from 8% in the three months ended March 31, 2005, to 6% in the
three months ended March 31, 2006 due to the higher net revenue in the period ended March 31, 2006. For the remainder of 2006, we expect research anddevelopment expenses to decrease as a percentage of net revenue.
General andAdministrative
General and administrative expenses consist primarily of personnel costs, including costs associated with employee stock-based compensation effectiveJanuary 1, 2006, legal and accounting fees and other general and administrative expenses. For the three months ended March 31, 2006, compared to the same
period in 2005, general and administrative expenses increased by $2.1 million, or 89%. This increase was primarily attributable to $1.0 million of higher legalexpenses, due mainly to the Palomar litigation; $339,000 of higher accounting, tax and audit fees, due primarily to the costs of complying with the requirementsof Section 404 of the Sarbanes-Oxley Act; and $113,000 of higher stock-based compensation expense. As a percentage of net revenue, general and administrativeexpenses increased from 15%, for the three months ended March 31, 2005, to 21 % for the three months ended March 31, 2006. As our patent litigation is set fortrial on May 30, 2006 see Part II, Item I -Legal Proceedings-our general and administrative expenses for the quarter ended June 30, 2006 are expected toincrease over the quarter ended March 31, 2006.
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Table of ContentsInterest and Other Income, Net
For the three months ended March 31, 2006, compared to the same period in 2005, interest and other income increased $670,000. This increase was primarilyattributable to higher tax-exempt interest income, resulting from higher yields in the three months ended March 31, 2006, compared to the three months endedMarch 31, 2005, and an increase in the average cash and marketable investments balance.
Provision for Income Taxes
Provision for income taxes for the three months ended March 31, 2006, compared to the same period in 2005, decreased by $69,000. The effective tax rate for thethree months ended March 31, 2006 was 34%, compared to 30% for the same period in 2005. The increase in the effective tax rate in 2006, compared to 2005,was primarily attributable to the expiration of the law relating to the granting of federal research and development credits; due to non tax-deductibility ofstock-based compensation expense for ESPP and international options; and because we have fully utilized the benefit from disqualifying dispositions of incentivestock options that can reduce our effective tax rate.
Liquidity and Capital Resources
Net Cash Provided by OperatingActivities
For the three months ended March 31, 2006, net cash provided by operations was $2.1 million. This was primarily attributable to net income of $1.1 million; addback for non-cash stock based compensation of $1.1 million; cash provided from tax benefits related to employee stock options exercised of $1.0 million; andaccounts payable of $1.0 million for unpaid legal and audit related fees. This was offset by cash used for inventory of $1.4 million to support anticipatedshipments and a broader product offering in our first fiscal quarter of 2006.
For the three months ended March 31, 2005, net cash provided by operations was $1.6 million. This was attributable primarily to net income of $1.5 million;realization of deferred taxes for employee stock option resulting from the reduction of income taxes payable of $553,000; add backs for the non-cashamortization of deferred stock-based compensation of $426,000; and a reduction in accounts receivable of $757,000 due to collections of the cyclically high
revenue generated in December 2004. This was offset by cash used to increase inventories by $989,000 for the planned ramp-up of production for the Soleratabletop products released in the fourth quarter of 2004; and a reduction in accrued liabilities of $659,000 resulting from the settlement of the year-end accruedliabilities.
Net Cash Provided by (Used in) Investing Activities
For the three months ended March 31, 2006, we used $6.0 million, net, for primarily purchasing tax-exempt marketable investments.
Net cash provided by investing activities was $210,000 for the three months ended March 31, 2005, which was primarily due to net proceeds from the sale andmaturities of marketable investments of $340,000, offset by $130, 000 used to purchase property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2006, was $ 1.6 million. This was attributable to proceeds from the issuance ofstock through our stock option and employee stock purchase plans of $556,000; and the inclusion of $1.0 million of excess tax benefits from stock-basedcompensation expense, which was categorized in financing activities starting this fiscal quarter as required by SFAS 123(R). Under SFAS 123(R), the excess taxbenefit from stock-based compensation recorded in the prior period before the adoption of SFAS 123(R) remain categorized in operating activities.
Net cash provided by financing activities for the three months ended March 31, 2005, was $ 1.4 million and was attributable to proceeds from the issuance ofstock through our stock option and employee stock purchase plans.
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Table of ContentsAs of March 31, 2006, we had cash, cash equivalents and marketable investments of $95.5 million, which we believe are sufficient to meet our anticipated cashneeds for working capital and capital expenditures for at least the next 12 months.
As disclosed in Note 8 to the Notes to Condensed Consolidated Financial Statements "Contingencies," we are involved in patent litigation with PalomarMedical Technologies, Inc. Since the outcome of this litigation is unpredictable, and since management believes that a significant adverse result for us is notprobable, no expense has been recorded with respect to the contingent liability associated with this matter. If we do not prevail in this litigation, we could beordered to pay substantial damages, which could adversely impact the working capital available for use in future operations. We may also be required to pay
substantial amounts, including ongoing royalty payments, in the event that the parties enter into a settlement agreement. See Part II, Item IA "Risk Factors"relating to this litigation. Our expense projections for the quarter ended June 30, 2006 include significant spending on this continued litigation as the matterapproaches trial on May 30, 2006.
Contractual Cash Obligations
The following table discloses aggregate information about our contractual obligations for minimum lease payments related to facility leases, net of sub-lease
income in 2006, and the periods in which these payments are due as of March 31, 2006.
Payments Due by Period ($'000's)
Less Than 1-3 3-5 More ThanContractu a l Ohligation, Total 1 Year Years Years 5 Years
OIcntliI1L IC:ISc Cti_744 MO CI .09(i ti 18 ti3.9^II
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to asstructured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As of March 31, 2006, and December 31, 2005, we were not involved in any unconsolidated transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due tofluctuations 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 havedeclined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same timemaximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies,municipal bonds and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. Tominimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity (interest reset date for auction-rate
securities and variable rate demand notes) of generally less than eighteen months. Assuming a hypothetical increase in interest rates of one percentage point, thefair value of our total investment portfolio as of March 31, 2006 would have potentially declined by $363,000.
We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatility
has not been significant partly due to our sales and operating expenses being predominantly denominated in foreign currencies and we do not maintain significantforeign currency cash balances. We cannot assure that there will not be a material impact in the future. Although the majority of our sales and purchases aredenominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products. We do not believe, however,that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.
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Table of ContentsWe do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in anymaterial fashion.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation ofDisclosure Controls andProcedures. Our management evaluated, with the participation of the Chief Executive Officer and the Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure thatinformation we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management as appropriate toallow timely decisions regarding required disclosures.
Inherent Limitations on the Effectiveness ofControls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us 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 ormistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of thecontrols. 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 thatany design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes inconditions 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 was no change in our internal control over financial reporting that occurred during our first fiscalquarter of fiscal 2006 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2002, Palomar Medical Technologies filed a lawsuit against us in the United States District Court, District of Massachusetts. A trial date has been setfor May 30, 2006. The plaintiff alleges that by making, using, selling or offering for sale our CoolGlide CV, CoolGlide Excel, CoolGlide Vantage and CoolGlideXeo products, we are willfully and deliberately infringing U.S. Patent No. 5,735,844. This patent concerns a method and apparatus for removing hair with lightenergy. Massachusetts General Hospital later joined the lawsuit as an additional plaintiff, since Palomar is the exclusive licensee, and MGH is the owner, of the
patent at issue in the lawsuit. Palomar and MGH are seeking to enjoin us from selling products found to infringe the patent, and to obtain compensatory andtreble damages, reasonable costs and attorney's fees, and other relief as the court deems just and proper. We are defending the action vigorously, asserting thatour products do not infringe applicable claims of the patent, and that these claims are invalid and unenforceable. Additionally, we have filed a counterclaimalleging that the patent should be declared unenforceable because of inadequate disclosures made to the U.S. Patent and Trademark Office by the plaintiffsduring that patent's prosecution with the U.S. Patent and Trademark Office. This matter is set for trial on May 30, 2006.
In April 2005, the plaintiffs filed a second lawsuit in this same court, alleging that by making, using, selling or offering for sale products that utilize pulsed-lighttechnology for hair removal, we are willfully and
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Table of Contentsdeliberately infringing U.S. Patent Nos. 5,735,844 and 5,595,568. The plaintiffs are seeking to enjoin us from selling our products found to infringe those patents,and to obtain compensatory and treble damages, reasonable costs and attorney's fees, and other relief as the court deems just and proper. We have responded byfiling a motion to dismiss this second lawsuit on the grounds of lack ofjurisdiction, and by filing complaints for declaratory relief against these plaintiffs in
California and Delaware. On May 5, 2006, the court in Massachusetts denied that motion, likely subjecting the subject matter of that second lawsuit to thejurisdiction of that court.
We believe that we have meritorious defenses of non-infringement and invalidity in these actions. However, litigation is unpredictable and we may not prevail in
successfully defending or asserting our position. If we do not prevail, we may be ordered to pay substantial damages for past sales and an ongoing royalty forfuture sales of products found to infringe. We could also be ordered to stop selling any products that perform hair removal. We may also be required to paysubstantial amounts, including ongoing royalty payments, in the event that the parties enter into a settlement agreement. Most of our products include anapplication for hair removal.
ITEM IA. RISK FACTORS
Unfavorable results in our intellectual property litigation with Palomar Medical Technologies may result in significant decline to our stock price
Since February 2002, we have been involved in litigation with one of our public company competitors, Palomar Medical Technologies, which alleges that the
manufacture, use and sale of our products for laser hair removal infringe a certain United States patent. Public announcements concerning this litigation that areunfavorable to us have in the past resulted, and may in the future result, in significant declines in our stock price. For example, on December 13, 2005, the date ofthe public announcement of the denial of our motion for summary judgment, our stock price declined 34.4%. The parties are now preparing for trial, which isexpected to start on May 30, 2006. An adverse ruling or judgment in this matter could cause our stock price to decline. Additionally, if the parties settle thelitigation, we may be required to pay substantial amounts, including ongoing royalty payment, which could have a material adverse impact on our operating
results and could cause our stock price to decline.
Even if we prevail in this litigation, we do not believe that will end the dispute with Palomar. It is likely that the party who loses at the trial court level will file anappeal. Additionally, in 2005, we became involved in a second litigation against Palomar concerning our products that use pulsed light technology for hair
removal, and whether these products infringe two United States patents. Consequently, even following a favorable determination in the litigation set for trial, weexpect our stock to be subject to volatility from the Palomar dispute.
Our intellectual property litigation with Palomar is costly and may prevent usfrom selling many of our products and generating anticipated revenue
If we do not prevail in our action against Palomar, we may be ordered to pay substantial damages for past sales (including compensatory and treble damages) andan ongoing royalty for future sales of products found to infringe. We could also be ordered to stop selling any products that are found to infringe. Most of our
products include an application for laser-based hair removal, the alleged infringing application. If found liable, we do not know whether we could redesign ourproducts to avoid future infringement with respect to this application. Consequently, we could have to remove the infringing application. Alternatively, we couldseek a license to the technology from Palomar, but they have indicated publicly that they will not give us a license.
Litigation with Palomar has been and will continue to be expensive and protracted, and our intellectual property position may be weakened as a result of anadverse ruling or judgment. Whether or not we are successful in the pending lawsuits, litigation consumes substantial amounts of or financial resources anddiverts management's attention away from our core business. See Item 1 "Legal Proceedings." Similar to our quarter ended March 31, 2006, we believe thecost of the Palomar litigation will be substantial in our second quarter ended June 30, 2006 as the matter approaches and enters the trial stage on May 30, 2006.
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Table of ContentsWe may be involved in future costly intellectual property litigation, which could impact ourfuture business andfinancial performance
As with Palomar, our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. In addition, wedo not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import ourproducts. 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 asuccessful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and marketing ourproducts and our business would suffer as a result.
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 ownintellectual 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. We do not know whether necessary licenses would be available to us on satisfactory terms, orwhether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, 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 andfinancial condition.
Intellectual property rights may not provide adequate protection for some or all of our products, which may permit thirdparties to compete against us moreeffectively.
We rely on patent, copyright trade secret and trademark laws and confidentiality agreements to protect our technology and products. At March 31, 2006, we hadsix issued U.S. patents, some covering our ClearView handpiece design and cooling method. Some of our other components, such as our laser module, electroniccontrol system and high-voltage electronics, are not and in the future may not be, protected by patents. Additionally, our patent applications may not issue aspatents 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 notbe able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or currentemployees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of ourintellectual 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 ofmany 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 andattempt 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 could be adversely affected, as could our business.
We compete against companies that have longer operating histories, more establishedproducts and greater resources, which may prevent us from achieving
significant market penetration or increased operating results.
Our products compete against similar products offered by public companies, such as Candela, Laserscope, Lumenis, Palomar, and Syneron as well as private
companies such as Reliant Technologies and Thermage. Competition with these companies could result in price-cutting, reduced profit margins and loss ofmarket share, any of which would harm our business, financial condition and results of operations. We also face competition from medical products, such asBotox, an injectable compound used to reduce wrinkles, and collagen injections. Other alternatives to the use of our products include sclerotherapy, a procedure
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Table of Contentsinvolving the injection of a solution into the vein to collapse it electrolysis, a procedure involving the application of electric current to eliminate hair follicles,and chemical peels. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. Our ability tocompete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and includes such factors as:
• intellectual property protection;
• product performance;
• product pricing;
• quality of customer support;
• success and timing of new product development and introductions; and
• development of successful distribution channels, both domestically and internationally.
Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. For example,we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additionalproducts from our competitors. Potential customers also may need to recoup the cost of expensive products that they have already purchased from our
competitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unableto compete effectively and our business will be harmed.
In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing
resources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and marketshare, as well as new technologies or products that could effectively compete with our existing product lines. For example, ESC Medical purchased Coherent'smedical business in 2001 and the surviving company, Lumenis, incorporated competitive product lines and technologies of the predecessor companies into itscurrent products. Given the relatively few competitors currently in the market, any business combination could exacerbate any existing competitive pressures,which could harm our business.
Competition amongproviders of laser and other light-based devices for the aesthetic market is characterized by rapid innovation, and we must continuouslydevelop new products or our revenues may decline
While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants orexisting competitors from developing products that compete directly with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, orlong wavelength, laser system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently introduced systems that utilize
Nd:YAG lasers, and received FDA clearances to market these products as treating all skin types. We expect that any competitive advantage we may enjoy fromother current and future innovations, such as combining multiple handpieces in a single system to perform a variety of applications, may diminish over time, ascompanies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve ourproducts and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue will decline asour customers purchase our competitors' products.
Our ability to compete depends upon our ability to innovate, to develop and commercialize new products andproduct enhancements, and to identify newmarkets for our technology.
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Table of ContentsWe have created products to apply our technology to hair removal, treatment of veins, skin rejuvenation, treatment of pigmented lesions and treatment ofwrinkles. Currently, these applications represent the majority of laser and other light-based aesthetic procedures. To be successful in the future, we must developnew and innovative applications of laser and other light-based technology, identify new markets for our existing technology, and develop new technology that is
not light-based. To successfully expand our product offerings, we must:
• develop or acquire new products that either add to or significantly improve our current products;
• convince our target customers that our new products or product upgrades would be an attractive revenue-generating addition to their practices;
• sell our products to non-traditional customers;
• identify new markets and alternative applications for our technology;
• protect our existing and future products with defensible intellectual property; and
• satisfy and maintain all regulatory requirements for commercialization.
Every year since 2000, we have introduced at least one new product and a corresponding upgrade to our existing products. Historically, these introductions havebeen a significant component of our financial performance. Our business strategy is based, in part, on our expectation that we will continue to make annual
product introductions that we can sell to new customers and to existing customers as upgrades. In the future, we plan to invest between 6-7% of net revenue inour research and development department. Even with a significant investment in research and development, we may be unable, however, to continue to developnew products and technologies annually, or at all, which could adversely affect our projected growth rate.
If our public guidance or ourfuture operatingperformance does not meet investor expectations, our stock price could decline
We provide guidance to the investing community regarding our anticipated future operating performance, both for the coming quarter and fiscal year-end. Our
business typically has a short sales cycle, we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully issubject to many uncertainties, as discussed herein. In light of those factors, it is difficult for us to estimate with accuracy our future results. In the past, our actualperformance had turned out to be significantly different from our prior guidance. For example, at the beginning of 2005, we indicated that we expected our 2005revenue to increase by 25% over 2004. Actual 2005 growth was higher, at 44% over 2004. Earlier this year, we stated publicly that we expected our revenue togrow 25% in 2006, compared to 2005 and we have since increased that guidance to 30%. As we stated at the time, such expectations are subject to numerous
risks and uncertainties which could make actual results differ materially, either higher or lower. If our actual results do not meet our public guidance, or ourresults or guidance as to the future were to be below the expectations of third party financial analysts, our stock price could decline significantly.
Ifwefail to obtain clearance from the U. S. Food and DrugAdministration to market our Titan productfor additional indications, our revenuefrom this
product may be adversely affected
Our Titan product, introduced in 2004, is a material component of our growth strategy. We currently have FDA clearance to market Titan in the United States fordeep dermal heating. The FDA has denied our initial 510(k) application to market Titan for wrinkle reduction on the basis that Titan is not substantially
equivalent to predicate devices for the treatment of wrinkles. We are continuing to seek a clearance from the FDA to market Titan for additional indications, butthere are no assurances as to when, or whether, we will ever obtain such a clearance. We cannot promote or advertise our Titan product in the United States forany indications other than deep dermal heating until we receive additional FDA clearances. In the event that we do not obtain additional FDA clearances, ourability to market Titan in the United States and
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Table of Contentsrevenue derived therefrom, including revenue from both Titan unit sales and handpiece refills, may be adversely affected.
Ifwefail to obtain or maintain necessary FDA clearances for our products and indications, if clearances forfuture products and indications are delayed ornot issued, or if there arefederal or state level regulatory changes, 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 mustfirst receive either 510(k) clearance or pre-marketing approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. In theevent that we do not obtain additional FDA clearances, our ability to market future products or applications in the United States and revenue derived therefrommay be adversely affected.
Medical devices may be marketed only for the indications for which they are approved or cleared and if we are found to be marketing our products for off-label,or non-approved, uses we might be subject to FDA enforcement action or have other resulting liability. We have obtained 510(k) clearance for the indications forwhich 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 wouldlikely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which are, in many instances, in flux. Changes in stateregulations may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, "licensed practitioners," as determined on astate-by-state basis. As a result in some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time,thereby disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement actionby the FDA or state agencies, which may include any of the following sanctions:
• warning letters, fines, injunctions, consent decrees and civil penalties;
• repair, replacement, refunds, 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, they could harm our business.
Ifwefail to comply with the FDA's Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and ourbusiness 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 ofour products. Because our products involve the use of lasers, our products also are covered by a
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Table of Contentsperformance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing andproduct labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the designof laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the
future to be, subject to such inspections. Our failure to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply withapplicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, arecall of our products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause our sales andbusiness to suffer.
Ifwe modify one of our FDA-approved devices, we may need to seek re-approval; which, if not granted, wouldprevent usfrom selling our modifiedproductsor 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 usewould require a new 510(k) clearance or possibly a pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals fornew products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearance wouldadversely 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 clearanceor approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing themodified 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 orfuture products and indications, which couldharm 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 andtime-consuming process and approval is not certain. The time required to obtain clearance or approvals, if required by other countries, may be longer than thatrequired for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may be unableto obtain or maintain regulatory qualifications, clearances or approvals in other countries. We may also incur significant costs in attempting to obtain and inmaintaining 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 orenhancements in international markets effectively, or at all, which could have a material adverse effect on our business and growth strategy.
To successfully market and sell our products internationally, we must address many issues with which we have little or no experience.
For the three months ended March 31, 2006, approximately 28% of our revenue was derived from international customers, which are a material component ofour growth strategy. We depend on third-party distributors and a relatively new direct sales operation to sell our products internationally, and if these distributors
or direct sales personnel under-perform, we may be unable to increase or maintain our level of international revenue. We will need to attract additionalinternational distributors to grow our business and expand the territories in which we sell our products. Distributors may not accept our business or commit thenecessary resources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are unableto engage distributors in particular geographic areas, we may not realize projected international revenue growth. Additionally, we expect to expand our directsales force in Europe and Asia. If we are unable to hire, retain and obtain satisfactory performance from such additional personnel, our revenue from international
operations may be adversely affected.
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Table of ContentsWe believe that an increasing amount of our future revenue will come from international sales as we expand our overseas operations and develop opportunities inadditional international territories. International sales are subject to a number of risks, including:
• difficulties in staffing and managing our foreign operations;
• difficulties in penetrating markets in which our competitors' products are more established;
• reduced protection for intellectual property rights in some countries;
• export restrictions, trade regulations and foreign tax laws;
• fluctuating foreign currency exchange rates;
• foreign certification and regulatory requirements;
• lengthy payment cycles and difficulty in collecting accounts receivable;
• customs clearance and shipping delays;
• political and economic instability;
• lack of awareness of our brand in international markets; and
• preference for locally-produced products.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding asolution, our revenue may decline.
The expense andpotential unavailability of insurance coveragefor our customers and our company could adversely affect our ability to sell our productsand ourfinancial condition.
Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of ourproducts. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, ourcustomers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to thecost of or inability to procure insurance coverage.
We have been experiencing steep increases in our product liability insurance premiums. If our premiums continue to rise, we may no longer be able to affordadequate insurance coverage. If we are unable to maintain adequate coverage, potential product liability claims would be paid out of cash reserves, harming our
financial condition, operating results and profitability.
Because we do not require trainingfor users of our products, and sell our products to nonphysicians, there exists an increasedpotentialfor misuse of ourproducts, which could harm our reputation and our business.
Federal regulations allow us to sell our products to or on the order of "licensed practitioners." The definition of "licensed practitioners" varies from state to state.As a result, our products may be purchased or operated by physicians with varying levels of training, and in many states by non-physicians, including nursepractitioners, 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,
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Table of Contentsand our distributors, generally offer but do not require purchasers or operators of our products to attend training sessions. In addition, we sometimes sell oursystems to companies that rent our systems to third parties and that provide a technician to perform the procedure. The lack of training and the purchase and useof our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly
product liability litigation.
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 expensiveand time-consuming litigation, payment ofsubstantial 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 costlylitigation 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 inthe future be involved, in litigation related to the use of our products. Product liability claims could divert management's attention from our core business, beexpensive 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 toobtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought againstus, 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 reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, thereby harming our financialcondition and reducing our operating results.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages andpricefluctuations, 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 anincrease 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 commercially 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;
• delay in delivery due to our suppliers prioritizing other customer orders over ours; and
• fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptableprices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
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Table of ContentsComponents used in our products are complex in design, and any defects may not be discoveredprior to shipment to customers, which could result inwarranty obligations, reducing our revenue and increasing our cost.
In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significant degree oftechnical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, or we, use defective materials or workmanship inthe manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
• loss of customer orders and delay in order fulfillment;
• damage to our brand reputation;
• increased cost of our warranty program due to product repair or replacement;
• inability to attract new customers;
• diversion of resources from our manufacturing and research and development departments into our service department; and
• legal action.
The occurrence of any one or more of the foregoing could materially harm our business.
Weforecast sales to determine requirements for components and materials used in our products and if ourforecasts are incorrect, we may experience eitherdelays in shipments or increased inventory costs.
We keep limited materials and components on hand . To manage our manufacturing operations with our suppliers, we forecast anticipated product orders andmaterial requirements to predict our inventory needs up to nine months in advance and enter into purchase orders on the basis of these requirements . Our limited
historical experience may not provide us with enough data to accurately predict future demand . If our business expands, our demand for components andmaterials would increase and our suppliers may be unable to meet our demand . If we overestimate our component and material requirements, we will have excessinventory, which would increase our expenses . If we underestimate our component and material requirements, we may have inadequate inventory, which couldinterrupt, delay or prevent delivery of our products to our customers . Any of these occurrences would negatively affect our financial performance and the level ofsatisfaction our customers have with our business.
Ifthere is not sufficient demandfor the procedures performed with our products, practitioner demandfor our products could be inhibited, resulting inunfavorable operating results and reduced growth potential
Continued expansion of the global market for laser- and other light-based aesthetic procedures is a material assumption of our growth strategy. Most proceduresperformed using our products are elective procedures not reimbursable through government or private health insurance, with the costs borne by the patient. Thedecision to utilize our products may therefore be influenced by a number of factors, including:
• the cost of procedures performed using our products;
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Table of Contents
• the cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser- or other light-based technologies andtreatments which use pharmaceutical products;
• the success of our sales and marketing efforts; and
• consumer confidence, which may be impacted by economic and political conditions.
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 bereduced, resulting in unfavorable operating results and lower growth potential.
Lack of demandfor our products in the medi-spa market would harm our anticipated revenue growth.
An increasing portion of our revenue is derived from sales to customers in the medi-spa market, which is comprised of physicians offering aesthetic treatments ina spa environment. Achieving further penetration into this new market is a material assumption of our growth strategy. Demand for our products in the medi-spamarket could be weakened by factors including poor financial performance of medi-spa businesses, reduced patient demand for aesthetic treatments in a spaenvironment, price sensitivity of medi-spa patients and demand for alternative treatments and services in the medi-spa setting. If we do not achieve anticipateddemand for our products in the medi-spa market our expected revenue growth may not be achieved.
IfPSS World Medicalfails to perform to our expectations, we may fail to achieve anticipated operating results.
We have a distribution agreement with PSS World Medical, which operates medical supply distribution service centers with approximately 700 salesrepresentatives serving physician offices in all 50 states of the United States. PSS World Medical sales representatives work in coordination with our sales forceto locate new potential customers for our products. For the year ended December 31, 2005, approximately 16% of our revenue was from PSS.
If PSS World Medical does not perform adequately under the arrangement or terminates our relationship, which it can do at any time upon 90 days notice, it mayhave a material adverse effect on our business, financial condition, results of operations or future cash flows.
We depend on skilled and experiencedpersonnel to operate our business effectively. Ifwe are unable to recruit, hire and retain these employees, our ability
to manage and expand our business will be harmed, which would impair ourfuture revenue andprofitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. We do not have employment contracts with any of ourofficers or other key employees. Any of our officers and other key employees may terminate their employment at any time. In addition, we do not maintain "keyperson" life insurance policies covering any of our employees. The loss of any of our senior management team members could weaken our managementexpertise and harm our business.
Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we willbe successful in the future. We may not be able to meet our future hiring needs or retain existing personnel. We will face particularly significant challenges andrisks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical andsales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
Ourfinancial results will be affected by accounting rules governing the recognition ofstock-based compensation expense.
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Table of ContentsWith effect from January 1, 2006, we, like other companies, have adopted SFAS 123(R) that requires us to measure and record stock-based compensationexpense using the fair value method, which adversely affects our results of operations by increasing our cost by the amount of such stock-based compensationcharges. In the year ending December 31, 2006, we estimate that the adoption of FAS 123(R) will increase our cost of goods sold and operating expenses by
approximately $4.5 million. However, our estimate of future stock-based compensation expense is affected by our stock price, the number of stock-based awardsour board of directors may grant in 2006, as well as a number of valuation assumptions and the related tax effect.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions,
including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options. The assumptions used incalculating the fair value of stock-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and theapplication of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materiallydifferent in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If ouractual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded
in the current period.
Failure to maintain effective internal control overfinancial reporting could have a material adverse effect on our business, operating results and stock price.
Beginning with the annual report for our fiscal year ended on December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 required us to include a reportby our management on our internal control over financial reporting. Such report contained an assessment by management of the effectiveness of our internalcontrol over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal control is effective. Also included in our Annual
Report on Form 10-K was an opinion by our Independent Registered Public Accounting Firm of management's assessment of such internal control.
Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operationalresources and the diversion of management's attention. Though management did not identify any material weaknesses in our internal control over financial
reporting during the year ended December 31, 2005, if we are unable to assert that our internal control over financial reporting is effective as of our fiscal yearend in 2006 and future years, our business may be harmed.
Our effective income tax rate may vary significantly.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in taxlaws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by changes in the
valuation of our deferred tax assets and liabilities, future levels of research & development spending, deductions for employee stock option exercises beingdifferent to what we projected, and changes in overall levels of income before taxes.
Any acquisitions that we make could disrupt our business and harm ourfinancial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies. We may also consider joint ventures and othercollaborative 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 divertmanagement's time and resources from our core business and disrupt our operations. We do not have any experience with acquiring companies or products. If wedecide to expand our product offerings beyond laser and other light-based products, we may spend time and money on projects that do not increase our revenue.
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Table of ContentsAny cash acquisition we pursue would diminish our available cash balances to us for other uses, and any stock acquisition would be dilutive to our stockholders.While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and technologies, and anticipate continuing to makethese evaluations, we have no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.
Anti-takeover provisions in our Amended and Restated Certificate ofIncorporation and Bylaws, and Delaware law, contain provisions that could discouragea takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist atakeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
• a classified board of directors;
• advance notice requirements to stockholders for matters to be brought at stockholder meetings;
• a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
• limitations on stockholder actions by written consent; and
• the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions couldadversely 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.
We have not paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment may be limited to the value of ourstock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Thepayment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time asour board of directors may consider relevant. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if
our stock price appreciates.
Item 6. Exhibits
Exhibit No. Drerg. ri^n
3.2(1) Amended and Restated Certificate of Incorporation of the Registrant (Delaware).
3.4(1) Bylaws of the Registrant.
4.1(2) Specimen Common Stock certificate of the Registrant.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared effective on March 30, 2004.(2) Incorporated by reference from our Annual Report on Form 10-K filed with the SEC on March 25, 2005.
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Table of ContentsSIGNATURE
Pursuant to the requirements 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.
CUTERA, INC.
Date: May 10, 2006 /s/ Ronald J . Santilli
Ronald J . SantilliChief Financial Officer(Principal Financial Officer andAuthorized Signatory)
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EXHIBIT 31.1
Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin P. Connors, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) 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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this 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 withgenerally 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 thedisclosure 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'sinternal 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'sauditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financialreporting.
Date: May 10, 2006 /s/ Kevin P. Connors
Kevin P. ConnorsPresident, Chief Executive Officerand Director (Principal Executive Officer)
Source : CUTERA INC, 10-Q, May 10, 2006
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EXHIBIT 31.2
Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Santilli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) 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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this 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 withgenerally 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 thedisclosure 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'sinternal 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'sauditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financialreporting.
Date: May 10, 2006 /s/ Ronald J Santilli
Ronald J. Santilli
Chief Financial Officer(Principal Financial and Accounting Officer)
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Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2006 (the "Report") fully complies with therequirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 10, 2006 /s/ Kevin P Connors
Kevin P. Connors
President, Chief Executive Officer
and Director(Principal Executive Officer)
I, Ronald J . Santilli , certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2006 (the "Report") fully complies with therequirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 10, 2006 /s/ Ronald T Santilli
Ronald J. Santilli
Chief Financial Officer
(Principal Financial and Accounting Officer)
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company forpurposes of Section 18 of the Securities and Exchange Act of 1934, as amended.
Created by lOKWizard www. lOKWizard.com
Source : CUTERA INC, 10-Q, May 10, 2006
C38
EXHIBIT D
S F L P O W F P 5 F A R C H
FORM 10-QCUTERA INC - CUTR
Filed: November 08, 2006 (period: September 30, 2006)
Quarterly report which provides a continuing view of a company's financialposition
D1
PART I
Item 1 . Financial Statements (unaudited): 3
PART
PART II.
OTHER INFORMATION
IT 1. LEGAL PROCEEDINGS
ITEM RISK FACTORS1 A.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURE
EX-10.13 (DISTRIBUTOR AGREEMENT'
EX-31.1 (SECTION 302 CEO CERTIFICATION)
EX-31.2 (SECTION 302 CFO CERTIFICATION)
EX-32.1 (SECTION 906 CEO AND CFO CERTIFICATION)
D2
Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 10-Q
(Mark One)
q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
Commission file number: 000-50644
CUTERA, INC.(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction ofincorporation or organization)
3240 Bayshore Blvd., Brisbane, California 94005(Address of principal executive offices)
(415) 657-5500(Registrant ' s telephone number, including area code)
77-0492262(I.R.S. employeridentification 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 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes q No q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer andlarge accelerated filer" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer q Accelerated filer q Non-accelerated filer q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes q No q
The number of shares of Registrant's common stock issued and outstanding as of October 31, 2006 was 12,755,798.
Source : CUTERA INC, 10-Q, November 08, 2006
D3
Table of ContentsCUTERA, INC.FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Item 1 . Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2 . Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Ina,mc do,,) hcli,rc income t.Ive,l'rov i,ion (henclit) lur income t.Ivc^
Net income do„)
Net income I o.,,v) pct iii ic:
I3.i is
Diluted
Weio,htcd-m cmoc numhcroI i ic, u,cd in hcr,ii is c.Ilculaion,:
7.931 4.746 21 51 n
1 7 1 2 1 42 4 4B 701
tiJ74 1.11,
1.679 1334 4538
9)2 1.924 11,61
544 1 __`)»
13381) 948(I 130(013
3739 4724 11412)^29 549 2.611
4_l()X l273 (^_797
1 . 6 1 8 1.472 1 ( ) S
S 2.)S( 3.WI (4.992
U2i ti ().27 (0.40 )
1 1207.? 11.061 12460
Diluted 14 , 238 13 ,924 12,460
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
1-1-042
17.8543.932
0519
x)720
Lill
Ii 713_I18U
7991
11.70
11309
13,681
Source : CUTERA INC , 10-Q, November 08, 2006
D6
Table of ContentsCUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)
(unaudited)
Nine Months EndedSeptember 30,
2006 2005
('ash Howes front opeI atin! activities:Net inennle I lo") (4992) 7.991\dju,tnlcnts to rc oliuIc nct income I Io ) to nct cash hr^,cidcd I^_^ I u,cd ill I c,hcratiii ^lcticitic,:
Chime, in a„ct, and liahilitic,:\ccoLnlttil Civ thIc ^A3) I GIIAInccnton (4()3) I2_43()thcrcurrcntaYc1 (270 I.63n
,ACCOUnt, hav iIIc 44 430\ ruca liabilities 3414 i ')
I)cIcrrcd rent 246 36
I)clcrrcd lcccnud 2 _ 220 X79
Net ct Ih hrm idcd hv I lKCd ill) 01)cratihl acticitic, ^_ I118 1 I x_818
Cash flows front inNestiii activities:
Acyui,itioll of hrohcrtv cyuihnlcnt (441) (414)\cyui^itilmofiiktllLI lc^ 121`0 110Proceed, frail ,arc, oI nuutctiI Ic incc,tnlcnk I2_303 I8_29}
1'IOCCC(k 1Ioi11 IlMthllitiC^ ul 11lUIkCLUI)IC illV CtitillCllk 70_093 i34373
1urcIii c of nuutctablc incc,tnlcnt, 189.8 (7 1 (711995 )
Net tashlKcdill IM c^tinL ^lctivitic^ (2.47O ) 18_O117 )
Cash flocs front financin-, activities:I'rocce'k I"mrnl cycrci^c ol'stock 014i0h1 andl cnlplovcc st(,ch purchase plan 2.376 3747
Net ci h j)lov idcd I)v linanciiiL acticitic, 2.376 3_747
Net dccrci c in cash and ct Ih cyuic,llcnk (I- O,) (2342)Cn,h anal ci Ii cyuiv IIdh1t, at I)cwnniii 0I"1)cri011 ^_260 7-()7o
( LI I1 and c i h cquicalcIlk at cud oI period i_(oX ' 4.728
Supplemental and non -cash disclosure of cash flow information:
Ch,ingc ill deterred ^tock-kl^ed colllpel1 Ition_ net I,I tcnrninaliohi C 1 1 261 1 t I.39;
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Source : CUTERA INC, 10-Q, November 08, 2006
D7
Table of ContentsCUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of Cutera, Inc. (the "Company"), a Delaware corporation, and its wholly ownedsubsidiaries. All intercompany accounts and transactions have been eliminated.
The financial information furnished is unaudited. The condensed consolidated financial statements included in this report reflect all adjustments (consisting onlyof normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and ofthe financial condition of the Company at the date of the interim balance sheet. The December 31, 2005 condensed consolidated balance sheet was derived fromaudited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Theresults for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The condensed consolidated financial
statements should be read in conjunction with the Company's financial statements and the notes thereto included in the Company's annual report on Form 10-Kfor the year ended December 31, 2005 filed with the Securities and Exchange Commission ("SEC") on March 16, 2006.
Significant Accounting Policies
The Company' s significant accounting policies are disclosed in the Company 's annual report on Form 10-K for the year ended December 31, 2005 and have notchanged significantly as of September 30, 2006, with the exception of the following policies:
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(revised 2004), "Share-Based Payment" ("SFAS 123(R)"), using the modified prospective transition method and therefore has not restated results for priorperiods. Under this transition method, stock-based compensation expense for the first nine months of fiscal 2006 includes compensation expense for allstock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock-based compensation expense for all stock-basedcompensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). TheCompany recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of fouryears. Prior to the adoption of SFAS 123(R) the Company recognized stock-based compensation expense in accordance with Accounting Principles BoardOpinion ("APB") No. 25, "Accounting for Stock Issued to Employees." In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107 ShareBased
Payment regarding the SEC's interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies. The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123(R). See Note 2 for a further discussion on stock-based compensation.
Intangible assets
Purchased technology licenses and other intangible assets are presented at cost, net of accumulated amortization. The technology licenses are being amortized ona straight-line basis over their expected useful life of 9-10 years and the other intangibles are being amortized over their expected useful life of two years.
Recent Accounting Pronouncements
In September 2006, the SEC issued SAB No. 108 regarding the process of quantifying financial statement misstatements. SAB No. 108 states that registrantsshould use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. Theinterpretations in SAB No. 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. Thisinterpretation does not change the requirements within SFAS No. 154, "Accounting Changes and Error Corrections- a replacement ofAPB No. 20 and Financial
Accounting Standards Board ("FASB") Statement No. 3," for the correction of an error on financial statements. SAB No. 108 is effective for annual financialstatements covering the first fiscal years ending after November 15, 2006. The Company will be required to adopt this interpretation by December 31, 2006.Management is currently evaluating the requirements of SAB No. 108 and the impact this interpretation may have on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This standard defines fair value, establishes a framework for measuring fairvalue in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will berequired to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet
determined the impact on the consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" effective for fiscal years beginning after December 15,2006. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting forinterim periods, disclosure, and transition. The Company will decide on its policy for interest and penalty classification by the end of 2006 and adopt theInterpretation beginning with the fiscal year ending 2007. Upon adoption, it is not expected that the Interpretation will have a material effect on the Company'sfinancial position or results of operations.
Note 2. Accounting for Stock-Based Compensation
Periods Prior to the Adoption of SFAS 123(R)
Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and measurement provisions ofAPB 25. Accordingly, theCompany generally recognized compensation expense only when it granted options with a discounted exercise price. Any resulting compensation expense wasrecognized ratably over the associated service period, which was generally the option vesting term of four years. Effective January 1, 2006, the Companyadopted SFAS 123(R), using the modified prospective application transition method, which requires the presentation of pro-forma information for periods priorto the adoption of SFAS 123(R) regarding the net income and net income per share as if the Company had accounted for its stock options under the fair value
method of SFAS 123. For the purpose of this pro-forma disclosure, the estimated value of the stock awards is recognized on a straight line basis over the vestingperiods of the awards. If compensation had been determined based upon the fair value at the grant date for employee compensation arrangements, consistent withthe methodology prescribed in SFAS 123, the Company's pro-forma net income and pro-forma net income per share under SFAS 123 would have been as shownin the table below (in thousands, except per share data):
Source : CUTERA INC, 10-Q, November 08, 2006
D8
Table of Contents
Three Months Nine MonthsEnded Ended
September 30, September 30,2005 2005
Net income- as rcpoiicd ' 3_W I S 7.991
Add: Stoc1, - Ixt,cd cmp1ovcc comhcI1 I1io11 cxhcn,c included in rcportcd net inco III c- net o I'Icl.Itcd t.Iv cflcct 224 716l.cw: Iot.tl ^toch-txt^cd cmpl(,vcc compcn,ation determined under I'tir-y.IItied lased method 1,01 iII avvarnly. ]net of
rclatcdltax cllccts ((C4 ) I
I'ro I,,rm.i net income u,cd in Ixi is mid diluted net income per,hwc S 3_4W 7.149
13n,ic net inconic pel Slime
,A,Iep rtcd S 033 .7U
I'ro Ionma U 2) S 003
I)ilutedl net income per,hwc:A Ieprntcdl p.27 S O.5^
Pro forma $ 0.25 $ 0.53
Stock Option Plans
As of September 30, 2006, the Company had the below mentioned stock-based employee compensation plans.
2004 Employee Stock Purchase Plan
The Company sponsors the 2004 Employee Stock Purchase Plan ("2004 ESPP"), pursuant to which eligible employees are permitted to purchase common stockat a discount through payroll deductions. The price of the common stock purchased is equal to 85% of the fair market value of the common stock at the beginningof an offering period or at the end of a purchase period. Shares of common stock eligible for purchase are increased on the first day of each fiscal year by anamount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such date or (iii) an amount as determined by the Board
of Directors. Each offering period includes two six-month purchase periods. The Company added 244,269 reserved shares to the 2004 ESPP on January 1, 2006,bringing the total authorized shares from inception-to-date of 663,413 shares.
As of January 1, 2006 the Company had 569,855 shares available for purchase. During the nine months ended September 30, 2006, the Company issued 24,798
shares and as of September 30, 2006, 545,057 shares remained available for future purchases. Beginning with the offering period that started on November 1,2006, all future offering periods under the 2004 ESPP will run for approximately six months, each with one purchase period.
2004 Equity Incentive Plan and 1998 Stock Plan
The Company has two stock option plans - the 1998 Stock Plan (the "1998 Plan") and the 2004 Equity Incentive Plan. Shares of common stock approved underthe 2004 Equity Incentive Plan will be increased on the first day of each fiscal year, by an amount equal to the lesser of. (i) 5% of the outstanding shares of the
first day of such year; (b) 2 million shares; or, (c) an amount determined by the Company's board. On January 1, 2006, the Company added 610,674 shares to the2004 Equity Incentive Plan, bringing the total authorized shares from inception-to-date under the 2004 Equity Incentive Plan and the 1998 Plan to 7,558,534shares. As of September 30, 2006, a total of 1,714,734 shares of common stock were available for issuance pursuant to the 2004 Equity Incentive Plan and the1998 Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights, orrestricted stock units, may also be granted under the 2004 Equity Incentive Plan. Incentive stock options may only be granted to employees. The Board ofDirectors determines the period over which options become exercisable, however, except in the case of options granted to officers, directors and consultants,options shall become exercisable at a rate of no less than 20% per year over five years from the date the options are granted. Options are to be granted at an
exercise price not less than the fair market value per share on the grant date for incentive options or 85% of fair market value for nonqualified stock options. TheCompany has not granted any discounted options since fiscal 2003. Options granted under the Plan generally become exercisable 25% on the first anniversary ofthe vesting commencement date and an additional 1/48th of the total number of shares subject to the option shares shall become exercisable on the last day ofeach calendar month thereafter until all of the shares have become exercisable. The terms of the Company's options are either five, seven or ten years from thedate of grant.
During the year ended December 31, 2005, under the 2004 Equity Incentive Plan, the Company's Board of Directors approved the grant of performance unitawards (more commonly referred to as restricted stock units) for a total aggregate of 71,500 shares of restricted stock units to selected members of the
Company's management. These restricted stock unit awards are independent of option grants and will not vest if employment terminates prior to the release ofthe restrictions. These restricted stock unit awards vest in four equal, annual installments on the anniversaries of the date of grant. Restricted stock units do nothave the voting rights of common stock, and the shares underlying the restricted stock units are not considered issued and outstanding until they vest and areissued. The Company expenses the cost of the restricted stock unit awards, which is determined to be the fair market value of the shares at the date of grant,ratably over the period during which the restrictions lapse - generally four years from the grant date. During the nine months ended September 30, 2006, the
Company did not award any additional restricted stock units and issued 17,502 shares with an aggregate fair value of $317,000, or $18.11 per share, upon thevesting of previously awarded restricted stock units.
Option Activity
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows
( )ptioii, c.u,ccllcdl of Ioricitcd 172 194Restricted stock units forfeited 6,187
Weighted-Weighted Average Aggregate
Average Remaining Intrinsic
Number of Exercise Contractual Value (in S
Shares Price Term (in Years) millions)*
32440) 6.91
5,3.943 24.1O
(488_-1)6) c 3.8i i
I72I )4i 17.11
Source : CUTERA INC, 10-Q, November 08, 2006
D9
I I iiiccs_ Scptcmhcr30 2()O( 1.714.734 3I 37.9 2
Exercisable as of September 30, 2006 1,952,651
* Based on the closing stock price of the Company ' s common stock of $26 . 59 on September 29, 2006.
1).X7 5.90 S
$ 4.31 4.82 $ 43.5
Source : CUTERA INC, 10-Q, November 08, 2006
D1O
Table of ContentsThe aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the lasttrading day of the third quarter of fiscal 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by theoption holders had all option holders exercised their options on September 29, 2006. This amount changes based on the fair market value of the Company's
common stock. Total intrinsic value of options exercised in the three and nine months ended September 30, 2006 was $1.9 million and $9.9 million, respectively.Total fair value of vested and expensed stock options, restricted stock units and ESPP shares for the three and nine months ended September 30, 2006 was$858,000 and $2.2 million, net of tax, respectively. The Company issues new shares upon the exercise of options, restricted stock units and ESPP shares.
Impact of Adoption of SFAS 123(R)
As a result of adopting the fair value recognition provisions of SFAS 123(R), the impact to the Condensed Consolidated Financial Statements for the three and
nine months ended September 30, 2006 from stock-based compensation is as follows (in thousands, except per share data) :
Three Months Nine MonthsEnded Ended
September 30, September 30,2006 2006
Stuck- based Coil] pcnsatiun expense IN lm 11rd tNpc:
kill plovcc,tocl, option, "ranted it thciI intri11 ,ic c,lltic S (%2 S
Iillplovcc,to,cl, opti( 11, ranted bcIovv thcirdccnlcdl intrin,ic fairv.IItic prior to the Conlpw1v initial Ilublic
ollcrin, (143) 14281
Fm1)1o ee stock purchase plan (62) (270)
RcAiictcd ^tocl, urnik ((06 ) 1238 1
Iol ul ,feel:-bnsed cnnlpensntinn (1.233) (3.231
fix cllcct on ^tocl;-ba,cd conlpcn,ution nt the C,nlpam nuuuimll tax rite 375 I.64
Effect oil net inconic S 8 8 1 S (2.197 )
Fffect oil net income per sha re:
11.1,ic i0.07 i o08 1Diluted (n.O( (n.1
Chan-'c in deferred stuck - based cumpensatiun
I)uc to rcccr,uI of unwnlorti/cd LIclcrrcd ,toch-based Coll) pcns^ltioil upon adoption S S I.237)
I)uc to rCv Cl', I 0I"ull unlorti/cd dclcrrcd ,toC1 -NI,cd conlpcn,aion or tcrnliii ution, o1'cnlp1o vcc ,tocl, option,
"ranted tlclovv thcirdIccnlcd intrin,ic lurec,uluc prior to the C0III)m , initial Ilul Iic oflcriii I I I (( ) (24 )
(6 ) S (1201
( 1) This amount would also have been recorded under the provisions ofAPB 25, prior to the adoption of FAS 123(R).
As of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to stock options of $7.1 million before estimated
forfeitures . In the Company ' s pro forma disclosures prior to the adoption of SFAS 123 (R), the Company accounted for forfeitures when they actuallyoccurred . SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ fromthose estimates . Under SFAS 123(R), the Company estimated that $ 160,000 of the unrecorded deferred stock- based compensation amount as of January 1, 2006will not be recognized due to forfeitures.
During the nine months ended September 30, 2006, the Company granted stock options for 553,943 shares of common stock with an estimated total grant-datefair value of $7 . 8 million . Of the grant- date fair value of options granted in the nine months ended September 30, 2006, the Company estimates that the amountof unrecorded deferred stock- based compensation that is not expected to vest due to forfeiture is $253,000 . As of September 30, 2006, the unrecognizedcompensation cost net of expected forfeitures, related to non-vested stock options was $9.1 million, which will be recognized using the straight- line attribution
method over an estimated weighted-average amortization period of 1.4 years.
As of September 30, 2006, the unrecognized compensation cost related to ESPP shares was $70,000, which will be recognized using the straight-line attribution
method over 0.4 years.
As of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to restricted stock unit awards of $ 1.2 million beforeestimated forfeitures . Under SFAS 123(R), the Company estimated that $343,000 of the unrecorded deferred stock- based compensation amount as of January 1,
2006 will not be recognized due to forfeitures . As of September 30, 2006, the unrecognized compensation cost related to restricted stock unit awards was$757,000, after estimated forfeitures, which will be recognized over an estimated weighted average amortization period of 2.7 years.
Valuation Assumptions
The Company estimates the fair value of employee stock options and ESPP using a Black-Scholes option-pricing model, consistent with the provisions of SFAS123(R), SAB 107, and the Company's prior period pro forma disclosures of net income, including stock-based compensation (determined under a fair value
method as prescribed by SFAS 123). The fair value of each option grant and each stock issuance under the ESPP was estimated on the date of grant using theBlack-Scholes model with the following weighted-average assumptions:
Three Months Ended, Nine Months EndedSeptember 30, September 30
2006 2005 2006 2005
Fill plo.Ncc stud: options:Risk-free intcrc,t mtc 4.9"„ 4.1",, 4.9"„ 3.9".
Table of ContentsOption-pricing models require the input of various subjective assumptions, including the option's expected life and the price volatility of the underlying stock.
Expected Volatility: The expected stock price volatility is based on a combination of the Company's historical volatility combined with the weighted average ofthe volatility of other similar companies in the same industry. With effect from April 2006, the expected stock price volatility was based on a combination of theCompany's historical volatility combined with the implied volatility of the Company's quoted stock options. The Company believes these methods of computingvolatility are more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of a comparablecompany in the same industry.
Expected Term: The expected term of options granted in the nine months ended September 30, 2006, was based on the Company's historical exercise behaviorfor ten year term options. For five and seven year term options, that the Company started granting in the second quarter of 2006, the expected term was derived
from the short-cut method described in SEC's SAB No. 107.
RiskFree Interest Rate : The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
ExpectedDividend: The Company has not paid and does not anticipate paying any dividends in the near future.
EstimatedPre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior based on actual historical information.
Note 3 - Net income (loss) per share
Basic net income (loss) per share is calculated based on net income (loss) and the weighted-average number of shares of common stock outstanding during thereported period. Diluted net income (loss) per share is calculated by increasing the weighted-average number of common shares outstanding during the period- ifnot anti-dilutive- by the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had
been issued. The dilutive effect of potential common stock (including outstanding stock options, ESPP shares, non-employee director stock units and restrictedstock units) is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of share-based compensation asrequired by SFAS 123(R) in the fiscal quarter and nine months ended September 30, 2006.
A reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Ucishtcd av crasc number oI,common Anle^ out^t.indins Li cd ill c(,mhutinL' ba^ic net income I Io^,1 IM AMCrI2(7^ 11001 12.4611 11.369
Diluticc potenti.iI common ,h.irc, u,cd in comhutino, diluted net income do,,) pcr,h.irc I_^6; 2.26; 2.312
total vvciudhtccl-avcnIc numberof share, used in a,mhutinu, diluted net income doss) her shwrc 14.23 X I3_924 12.400 13_(181
For the quarter and nine months ended September 30, 2006 and 2005, the following stock- based instruments were excluded from the calculation of diluted
earnings per share , as their effect was anti-dilutive (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
( )htiun^ to hurch.nc common ,lochRestricted stock unitsImhlovcc,tech purchase Ilan share,
Note 4. Inventory
Inventory consists of the following (in thousands):
I vv materialsFini,hcd aoo k
7ti3
783
September 30, 2006
.222
1330
2.691 ^ 361 17^I
2,803 70
December 31, 2005
3 071174
;_-1
Source : CUTERA INC , 10-Q, November 08, 2006
D13
Table of ContentsNote 5. Intangible Assets
Intangible assets are principally comprised of a technology sublicense acquired in 2002; a patent license acquired from Palomar in 2006; and other intangibles.The components of intangible assets were as follows (in thousands):
As of September 30, 2006
GrossCarrying Accumulated Net CarryingAmount Amortization Amount
I'^itcntliccn^c I? 18 S (,1J S I.I49lechnoloov sublicense 538 234 304
Other irntansihlc^ 10? 1()3 62
Total $ 1,921 $ 406 $ 1,515
ICCIIII(Ik'sv suhIiccnsc
other lntanglbles
otal
As of December 31, 2005
GrossCarrying Accumulated Net Carrying
Amount Amortization Amount
S 538 ti 193 ti 4
165 41 124ti 71)3 ti 234 401)
For the nine months ended September 30, 2006 and 2005, amortization expense for intangible assets was $172,000 and $61,000, respectively.
Based on intangible assets recorded at September 30, 2006, and assuming no subsequent additions to, or impairment of the underlying assets, the remainingestimated annual amortization expense is expected to be as follows (in thousands):
Fiscal Near ending Ucccmher 31:2006 rcm.iindcr 69
1007 233
20oX 1922009 1922010 192
I hcrcnftcr 637
t otal S 1,515
Note 6. Warranty and Service Contracts
Warranty reserve
The Company has a direct field service organization in the United States, Canada, Switzerland, Germany, Australia and Japan that provides service for itsproducts in these countries . The Company has third party service providers in all other locations. The Company generally provides a warranty with its products,
depending on the type of product . After the warranty period, maintenance and support are offered on a service contract basis or on a time and materials basis. TheCompany currently provides for the estimated cost to repair or replace products under warranty at the time of sale . The warranty reserve activity for the ninemonths ended September 30, 2006 and 2005 was as follows (in thousands):
September 30, September 30,2006 2005
]3.tI.inccat I)c cmbcr3k2ili)5mid2004 ti 2043 I.B^(1
Adel: ,Accr i iI I',r vv.ur.Intie, i„ucd in 200( iiid 20) 4.38; 191 9
Ic^^: settlement, made dwin_ the period -032_ ) I.B 32)
Balance at September 30, 2006 and 20115 S 3,101 S 1,836
Deferred service contract revenue
Service contract revenue is recognized on a straight-line basis over the period of the applicable service contract. The deferred service contract revenue activity forthe nine months ended September 30, 2006 and 2005 was as follows (in thousands):
September 30, September 30,2006 2005
ftiI incc it I )cccmhcr 31. 20 mid 2004 1 3117 S 1900.Add:Pnv ments received 4.836 229oI c^,: Rcccnuc rcc^,^,niiccl 12_740 1 (1041
Balance at September 3U, 2016 and 2015 $ 5,213 $ 2,555
Costs incurred under service contracts during the three months ended September 30, 2006 and 2005, amounted to $419,000 and $304,000, respectively. For thenine months ended September 30, 2006 and 2005, costs incurred under service contracts amounted to $1,261,000 and $795,000, respectively. All service contractcosts are recognized as incurred.
10
Source : CUTERA INC, 10-Q, November 08, 2006
D14
Table of ContentsNote 7. Comprehensive Income
Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. TheCompany's unrealized gains (losses) on marketable investments represent the only component of other comprehensive income (loss) that is excluded from netincome (loss). The changes in components of other comprehensive income (loss) for the periods presented are as follows (in thousands):
Net incomc I o.,,v)
Unrc.Iliicd omn do) on nuutct.iI Ic incc,tmcnt,
Complthcn"icc income Ilo^^l
Three Months EndedSeptember 30,
2006 2005
100 (37 )
3_(00 S 3704
Nine Months EndedSeptember 30,
2006 2005
14.9921 ti 7.991
67 (40 )
S(4.02 7.9 ^I
Note 8. Provision (Benefit) for Income Tax
The interim effective income tax rate is based on management's best estimate of the annual effective income tax rate. The effective tax rates for the three andnine months ended September 30, 2006, were 35% and 43%, respectively. Applying these effective tax rates to income before income taxes for the quarter andnine month ended September 30, 2006, resulted in a tax provision of $1.6 million and tax benefit of $3.8 million, respectively. For the three and nine monthsended September 30, 2005, the effective tax rate was 28%.
Undistributed earnings of the Company's foreign subsidiaries of approximately $901,000 and $383,000 at September 30, 2006 and 2005, respectively, areconsidered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) andwithholding taxes payable to various foreign countries.
Note 9. Litigation Settlement
The Company was the defendant in two lawsuits brought against it by a competitor, Palomar Medical Technologies. ("Palomar"). In the first suit filed inFebruary 2002 in the United States District Court, District of Massachusetts, Palomar alleged that by making, using, selling or offering for sale the CoolGlide
CV, CoolGlide Excel, CoolGlide Vantage and CoolGlide Xeo products, the Company was willfully and deliberately infringing U.S. Patent No. 5,735,844. Thispatent concerns a method and apparatus for removing hair with light energy. Massachusetts General Hospital (`MGH") later joined the lawsuit as an additionalplaintiff, since Palomar is the exclusive licensee, and MGH is the owner, of the patent at issue in the lawsuit. In the second lawsuit, filed with the same court inApril 2005, the plaintiffs alleged that by making, using, selling or offering for sale products that utilize pulsed-light technology for hair removal, the Companywas willfully and deliberately infringing U.S. Patent Nos. 5,735,844 and 5,595,568. In both lawsuits, the plaintiffs were seeking to enjoin the Company from
selling products found to infringe these patents, and to obtain compensatory and treble damages, reasonable costs and attorney's fees, and other relief as the courtdeemed just and proper.
On June 2, 2006, the litigation between the Company and Palomar and MGH was settled - with Palomar granting the Company an irrevocable license to the
subject patents. Under the terms of the settlement agreements, the Company agreed to pay Palomar a good-faith estimated payment of $22.0 million, representingthe Company's estimate of royalties due on past sales of the infringing systems, plus accrued interest and reimbursement of Palomar's legal costs throughMarch 31, 2006.
During the quarter ended June 30, 2006, the Company completed a calculation of the actual amounts owed to Palomar through March 31, 2006 and estimated theamount due to be $19,561,000. In the quarter ended September 30, 2006, after further discussions with Palomar, the Company revised its estimate of the totalsettlement amount owed to Palomar through March 31, 2006 to $20,153,000. The actual amounts owed to Palomar are subject to change after a review by anindependent public accountant hired by Palomar, however, the amount of such change is not expected to be material. This audit is ongoing and is expected to becompleted by December 31, 2006.
Of the $20,153,000 revised settlement amount $18,935,000 relating to past royalties, interest and legal settlement costs, was recorded as a litigation settlementexpense; and $1,218,000, representing the value of the on-going license agreement was capitalized as an intangible asset. The intangible asset is being amortized
on a straight line basis over the useful economic life of the patents, which expire in February 2015. The remaining balance from the $22 million good-faithestimated payment made, of $1,847,000, has been used to offset royalty amounts due to Palomar for the six months ended September 30, 2006.
The royalty rate for future sales of hair-removal-only systems will be equal to 7.5% of net sales. For multi-application systems containing hair-removal
functionality, the royalty rate will either be 3.75% or 5.25%, depending on whether there is one or two hair-removal technologies included in the system,respectively. The Company's revenue from systems that do not include hair-removal capabilities and revenue from service contracts is not subject to royalties.The royalty cost incurred from April 1, 2006 has been recorded as a component of cost of revenue. These royalty obligations will continue for applicable salesmade through February 2015 - which is the expiration date for the subject patents.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
Thefollowing discussion should be read in conjunction with the attachedfinancial statements and notes thereto, and with our auditedfinancial statements andnotes thereto for the fiscal year endedDecember 31, 2005 as contained in our annual report on Fonn 10Kfiled with the SEC on March 16, 2006 This quarterly
report, including thefollowing sections, containsforward-looking statements within the meaning ofSection 27A ofthe Securities Act of1933 and Section 21E ofthe Securities Exchange Act of1934 that involve risks and uncertainties. These statements include, but are not limited to, statements relating to our expectationsas to the ability to continue to grow our business, revenue and operating expense for thefourth quarter ending on December 31, 2006, capital expenditures andrequirements, growth in our operations and the impact ofexchange rate volatility. Theseforward-looking statements involve risks and uncertainties. Thecautionary statements setforth below and those contained in Part 11, Item JA "Risk Factors " commencing on page 17, identify importantfactors that could
cause actual results to differ materiallyfrom those predicted in any suchforward-looking statements. The reader is cautioned not to place undue reliance onthese forward-looking statements, which reflect management 's analysis only as ofthe date ofthis report. We undertake no obligation to update forward-lookingstatements to reflect events or circumstances occurring after the date ofthis Form 10-Q.
Source : CUTERA INC, 10-Q, November 08, 2006
D15
Table of ContentsIntroduction
Management's discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the accompanying condensedconsolidated financial statements and footnotes contained in Item 1 of this report to provide an understanding of our results of operations, financial condition andchanges in financial condition. The 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 theopportunities, 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. Inaddition, it includes a summary of recent accounting pronouncements that may be applicable to us.
• Results ofoperations. This section provides our analysis and outlook for the significant line items on our consolidated statement of operations.
• Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that
existed as of September 30, 2006.
Executive Summary
Company Description. We are a global medical device company specializing in the design, development, manufacture, marketing and servicing of laser andother light-based aesthetic systems to the professional aesthetic market. Our easy-to-use families of products CoolGlide, Xeo and Solera enabledermatologists, plastic surgeons, gynecologists, primary care physicians and other qualified practitioners to perform safe, effective and non-invasive aestheticprocedures for their patients.
Our corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our manufacturing, research, regulatory, sales, marketingand administrative activities. Outside the United States, we have a direct sales presence in Australia, Canada, France, Germany, Japan, Spain, Switzerland and
the United Kingdom. As of September 30, 2006, we had 74 direct sales employees worldwide, a global network of over 30 distributors, and a distributorrelationship in the United States with PSS World Medical Shared Services, Inc. ("PSS"), a wholly-owned subsidiary of PSS World Medical. PSS operatesmedical supply distribution service centers with approximately 700 sales representatives serving physician offices in all 50 of the United States.
Products. Our revenue is derived from the sale of products, product upgrades, amortization of pre-paid service contracts, revenue from out-of-warranty services,and Titan handpiece refills. Product revenue represents the sale of a system console that incorporates a universal graphic user interface, a laser and/ or otherlight-based module, control system software, high voltage electronics, and one or more handpieces. We offer our customers the ability to select the system thatbest fits their practice at the time of purchase and then to cost-effectively add applications as their practice grows. This enables customers to upgrade theirsystems whenever they want and provides us with a source of recurring revenue, which we classify as product upgrade revenue. Service revenue relates to
amortization of prepaid maintenance and support contract revenue and receipts for services on out-of-warranty products. Titan handpiece refill revenue isassociated with our Titan handpiece, which requires a periodic "refilling" process that includes the replacement of the optical source, after a set number of pulseshave been performed.
Significant Business Trends. We believe that our revenue growth has been, and will continue to be, primarily attributable to the following:
• Investments made in our global sales and marketing infrastructure, including the expansion of our sales force to increase our market penetration in an
expanding aesthetic laser market.
• Continuing introduction of new aesthetic products and applications.
• Marketing to physicians outside the core dermatologist and plastic surgeon specialties, including the medi-spa market.
During the three months ended September 30, 2006, compared to the same period in 2005, our International net revenue grew by 70%, while our U.S. revenuegrew by 20%. The stronger International revenue growth was primarily attributable to significant growth coming from Canada, Japan, and Switzerland. Thegrowth in revenue from Switzerland is primarily attributable to the setting up of our European hub office there in July 2005, from where we also coordinate ourEuropean marketing and service activities. For the three months ending December 31, 2006, we expect revenue to be approximately $30.0 million, which willresult in the full-year ending December 31, 2006 revenue of over $100 million and an annual growth rate of 33%.
Our gross margin for the nine months ended September 30, 2006 was 69%, compared to 74% for the nine months ended September 30, 2005. This decrease wasprimarily attributable to $2.0 million, or 3% of net revenue, of royalty expense resulting from the Palomar patent licensing agreement with effect from April 1,2006- see Note 9 of Notes to Condensed Consolidated Financial Statements "Litigation Settlement." Further, the decrease in margins was attributable to $1.1
million, or 2% of net revenue, of higher warranty-related expenses. We expect our margins to remain in the 68%-70% range for the quarter ending December 31,2006.
We settled our patent litigation with Palomar in June 2006. As a consequence of preparing for and settling this litigation, our general and administrative expenseswere significantly higher in the first half of 2006, compared with the same period in 2005. With the litigation matter settled, we expect our general andadministrative expenses to be in the range of 10-12% of revenue in the fourth quarter ending December 31, 2006.
Factors that May Impact Future Performance. Our industry is impacted by numerous competitive, regulatory and other significant factors. The growth of ourbusiness relies on our ability to continue to develop new products and innovative technologies, obtain regulatory clearances and compliance for our products,protect the proprietary technology of our products and our manufacturing processes, manufacture our products cost-effectively, and successfully market anddistribute our products in a profitable manner. Our industry is subject to extensive government regulation, including the regulation by the United States Food andDrug Administration. Failure to comply with regulatory requirements could have a material adverse effect on our business. Additionally, our industry is highly
competitive and our success depends on our ability to compete successfully. A detailed discussion of these and other factors that could impact our futureperformance are provided in Part II, Item IA "Risk Factors" section.
Critical Accounting Policies and Estimates
Source : CUTERA INC, 10-Q, November 08, 2006
D16
The accounting policies that we consider to be critical , subjective, or requiring complex judgments in their application are summarized in "Item7 Management's Discussion andAnalysis ofFinancial Condition andResults ofOperations" in our Annual Report on Form 10-K for the year endedDecember 31, 2005 filed with the SEC on March 16, 2006. Other than the adoption of SFAS 123(R), there have been no significant changes during the ninemonths ended September 30, 2006 to the items that we disclosed as our critical accounting policies and estimates in our Annual Report on Form 10-K for theyear ended December 31, 2005.
12
Source : CUTERA INC , 10-Q, November 08, 2006
D17
Table of ContentsStock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and thereforehave not restated prior periods' results. Under this method we recognize compensation expense for all stock-based payments granted after January 1, 2006, andprior to but not yet vested as of January 1, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize
stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis overthe requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under APB 25 and accordingly, recognizedcompensation expense for options that were granted at an exercise price below their deemed fair market value and for restricted stock units granted to employees.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of various highly-subjectiveassumptions, including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options.Management determined the expected stock price volatility assumption based on a combination of the Company's historical volatility combined with theweighted average of the volatility of other similar companies in the same industry. With effect from April 2006, the expected stock price volatility was based ona combination of the Company's historical volatility combined with the implied volatility of the Company's quoted stock options. We believe these methods of
computing volatility are more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of acomparable company in the same industry. The expected term of options granted in the nine months ended September 30, 2006, was based on the Company'shistorical exercise behavior for ten year term options. For five and seven year term options, that the Company started granting in the second quarter of 2006, theexpected term was derived from the short-cut method described in SEC's SAB No. 107. The risk-free rate for the expected term of the option is based on the U.S.Treasury yield curve in effect at the time of grant. The assumptions used in calculating the fair value of stock-based payment awards represent management's
best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result if factors change and we use differentassumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiturerate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-basedcompensation expense could be significantly different from what we have recorded in the current period. See Note 1 and 2 to the Condensed ConsolidatedFinancial Statements for a further discussion on stock-based compensation.
Recent Accounting Pronouncements
In September 2006, the SEC issued SAB No. 108 regarding the process of quantifying financial statement misstatements. SAB No. 108 states that registrantsshould use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. Theinterpretations in SAB No. 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. Thisinterpretation does not change the requirements within SFAS No. 154, "Accounting Changes and Error Corrections- a replacement ofAPB No. 20 and FinancialAccounting Standards Board ("FASB") Statement No. 3," for the correction of an error on financial statements. SAB No. 108 is effective for annual financial
statements covering the first fiscal years ending after November 15, 2006. We will be required to adopt this interpretation by December 31, 2006. We arecurrently evaluating the requirements of SAB No. 108 and the impact this interpretation may have on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This standard defines fair value, establishes a framework for measuring fairvalue in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be requiredto adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the
impact on the consolidated financial statements.
In July 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" effective for fiscal years beginning after December 15, 2006.The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting for interimperiods, disclosure, and transition. We will decide on a policy for interest and penalty classification by the end of 2006 and adopt the Interpretation beginningwith the fiscal year ending 2007. Upon adoption, it is not expected that the Interpretation will have a material effect on our financial position or results ofoperations.
13
Source : CUTERA INC, 10-Q, November 08, 2006
D18
Table of ContentsResults of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net revenue:
Three Months Ended Nine Months EndedSeptember 30, September 30,
2006 2005 2006 2005
Consolidated Statement of Operations:
Revenue Aiix By Geo_-raphv-:tlrnitcdSt.Itc^ custoiileir 69"(, 76°,, (09°„ 7U"o
Intcrn.Itioii iI cu,tomer, 31 '',
1(0 1)24 ",,
100 11
31 " ,
10)''
;(
1O01)
Relenuc AIiz I3_v Product:
, 1 ,
I'mducty 83°,,Product tlpom lc, 6°', 7" 6°', 9°..
Scrcice 7°^, 0''',
I I.Indlhiccc rcliII 4 "" '' 4""
Operatin-, Ratios:
Net rcycnuc I(H)'' IUII° I(A)" I(H)''
o„t 0frcccnue 2 '', ,^ ", 31 ",
Gn,s, prolit (08 ° 75 " , 091'', 74'',
Operatiii expenses:
Sn Ie".111,1 imill,e nu, 32Oi, 33°u 30°u 3-1°u
I1)C^C.11 .Ii hill deA clopiiicllt 7'' 7'' 0''',
^icllci iI and IJn1inkt ILIAC I2°u IO°o I(^°u I i°u
I itio'.I lioll ^Cttlclllciii
total Opcrati l C'gml,c, „
Income ( loss) front operations I'"^, 161"', 19"..
Intcrc,t and other income, net i "„ '' 4
Income ( loss) before income taxes 18"., I II'roA iSioil (hcnclit) or IIIcoillc t.1AC^ 0 °u ( )°u 0 °u
Net income (loss) 12",^ 20 ",, (7)% 15",^
Three and nine months ended September 30, 2006 and September 30, 2005
Net Revenue
Revenue is derived from the sale of products; product upgrades; amortization of prepaid service contracts and revenue from out-of-warranty services; and Titan
handpiece refills. For the three months ended September 30, 2006, compared to the same period in 2005, net revenue increased by $6.1 million, or 32%, from$19.0 million to $25.1 million. This was the result of a $4.7 million, or 29%, increase in product revenue and $279,000, or 21%, increase in upgrade revenue, dueto increased advertising and promotional activities and the direct sales force expansion that was made in the second half of 2005. Service revenue increased by$549,000, or 52%, due primarily to an increase in the number of customers purchasing extended service contracts. Revenue from Titan handpiece refillsincreased by $539,000, or 112%, due to the increased consumer demand for Titan procedures and the fact that the Titan handpiece requires periodic refilling after
a set number of pulses have been delivered.
For the nine months ended September 30, 2006, compared to the same period in 2005, net revenue increased by $18.5 million, or 36%, from $51.7 million to$70.2 million. This was the result of a $15.3 million, or 35%, increase in product revenue due to increased advertising and promotional activities and the direct
sales force expansion that was made in the second half of 2005. Service revenue for the nine months ended September 30, 2006, compared to the nine monthsended September 30, 2005, increased by $1.5 million, or 55%, due primarily to an increase in the number of customers purchasing extended service contracts.For the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, revenue from Titan handpiece refills increased by $2.0million, or 199%, due to the increased consumer demand for Titan procedures and the fact that the Titan handpiece requires periodic refilling after a set numberof pulses have been delivered. These increases were partially offset by a decline in upgrade revenue, which for the nine months ended September 30, 2006, when
compared to the same period in 2005, decreased $277,000 or 6%. This was primarily due to an increase in the number of customers choosing to purchase newsystems from our Solera family of products, instead of upgrading their existing systems.
For the three months ended September 30, 2006, compared to the same period in 2005, the geographical source of the $6.1 million increase in net revenue wasattributable to $2.9 million in higher U.S. revenue and $3.2 million to higher international revenue. The primary contributors to this revenue growth were thecontinued expansion of our direct sales force, both domestic and international. For the nine months ended September 30, 2006, compared to the same period in2005, the geographical source of the $18.5 million increase in net revenue was attributable to $12.5 million in higher U.S. revenue and $6.0 million to higherinternational revenue. For the three months ending December 31, 2006, we expect revenue to be approximately $30.0 million.
Cost ofRevenue
Our cost of revenue consists primarily of material, labor, employee stock-based compensation, royalty expense effective April 1, 2006, warranty, andmanufacturing overhead expenses. For the three months ended September 30, 2006, compared to the three months ended September 30, 2005, cost of revenueincreased by $3.2 million, or 67%, from $4.7 million to $7.9 million. Cost of revenue as a percentage of revenue, increased from 25% for the three months endedSeptember 30, 2005, to 32% for the three months ended September 30, 2006. This increase in cost of revenue as a percentage of net revenue, was primarilyattributable to royalty expense of $1.0 million, or 4% of net revenue, that resulted from the patent licensing agreement entered in June 2006 and discussed in
greater detail in Note 9 of Notes to Condensed Consolidated Financial Statements "Litigation Settlement;" a $477,000, or 2% of net revenue, increase inwarranty costs resulting from higher material expenses; and $130,000, or 1% of net revenue, increase in stock-based compensation expense resulting fromimplementing FAS 123(R) with effect from January 1, 2006.
For the nine months ended September 30, 2006, cost of revenue increased by $7.9 million, or 58%, from $ 13.6 million to $21.5 million . Cost of revenue as apercentage
14
Source : CUTERA INC, 10-Q, November 08, 2006
D19
Table of Contentsof revenue, increased from 26% for the nine months ended September 30, 2005, to 31",o for the nine months ended September 30, 2006. This increase wasprimarily attributable to $2.0 million, or 3% of net revenue, of royalty expense resulting from the patent licensing agreement with effect from April 1, 2006- seeNote 9 of Notes to Condensed Consolidated Financial Statements "Litigation Settlement;" and $1.1 million, or 2% of net revenue, due to an increase in
warranty costs resulting from higher material expenses. We expect our margins to remain in the 68%-70% range for the three months ending December 31, 2006.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel cost, including costs associated with employee stock-based compensation, and expenses associatedwith customer-attended workshops, trade shows and advertising. For the three months ended September 30, 2006, compared to the same period in 2005, salesand marketing expenses increased by $2.0 million, or 31%, from $6.2 million to $8.2 million. This increase was primarily attributable to $824,000 of higher
personnel expenses and $274,00 higher travel expenses, associated primarily with the higher headcount; $156,000 in higher advertising and promotion expensesdue to increased marketing activity; and $336,000 of higher employee stock-based compensation expenses resulting from the adoption of SFAS 123(R) effectiveJanuary 1, 2006. As a percentage of net revenue, sales and marketing expenses were 32% and 33% for the three months ended September 30, 2006 and 2005,respectively.
For the nine months ended September 30, 2006, compared to the same period in 2005, sales and marketing expenses increased by $7.2 million, or 40%, from$17.8 million to $25.0 million. This increase was primarily attributable to $3.4 million of higher personnel expenses and $776,000 higher travel expenses,associated primarily with the higher headcount; $1.3 million in higher advertising and promotion expenses due to increased marketing activities; and $925,000 ofhigher employee stock-based compensation expenses resulting from the adoption of SFAS 123(R). As a percentage of net revenue, sales and marketing expenses
increased from 34% in the nine months ended September 30, 2005, to 36% in the nine months ended September 30, 2006. This increase was primarilyattributable to an increase in world wide direct sales headcount, increased marketing related activities and higher stock-based compensation expense. For thethree months ending December 31, 2006, we estimate that sales and marketing expenses will be in the range of 29-31% of net revenue.
Research and Development
Research and development expenses consist primarily of personnel cost, including costs associated with employee stock-based compensation, clinical, regulatory
and material costs. For the three months ended September 30, 2006, compared to the three months ended September 30, 2005, research and developmentexpenses increased by $345,000, or 26%, from $1.3 million to $1.7 million. This increase was primarily attributable to $159,000 of higher personnel expensesassociated primarily with higher headcount; $129,000 of higher stock-based compensation expense resulting from the adoption of SFAS 123(R) effectiveJanuary 1, 2006; offset by a decrease in outside service costs by $67,000. As a percentage of net revenue, research and development expenses were 7% in thethree months ended September 30, 2006 and 2005.
For the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, research and development expenses increased by$606,000, or 15%, from $3.9 million to $4.5 million. This increase was primarily attributable to $460,000 of higher personnel expense, due partly to increasedheadcount; $308,000 of higher stock-based compensation expense resulting from the adoption of SFAS 123(R); which was offset by a decrease in outside service
costs of $247,000. As a percentage of net revenue, research and development expenses decreased from 8% in the nine months ended September 30, 2005, to 6%in the nine months ended September 30, 2006. This was primarily due to the higher net revenue in the nine months ended September 30, 2006 period, comparedto the same period in 2005. For the three months ending December 31, 2006, we estimate that research and development expenses will be in the range of 6-7% ofnet revenue.
General andAdministrative
General and administrative expenses consist primarily of personnel costs, including costs associated with employee stock-based compensation, legal andaccounting fees and other general and administrative expenses. For the three months ended September 30, 2006, compared to the same period in 2005, generaland administrative expenses increased by $1.1 million, or 56%, from $1.9 million to $3.0 million. This increase was primarily attributable to $199,000 increasein outside accounting, tax and audit fees, $158,000 increase in personnel expenses due to higher headcount, and $165,000 of higher stock-based compensationexpense resulting from the adoption of SFAS 123(R) effective January 1, 2006. As a percentage of net revenue, general and administrative expenses increased
from 10%, for the three months ended September 30, 2005, to 12% for the three months ended September 30, 2006.
For the nine months ended September 30, 2006, compared to the same period in 2005, general and administrative expenses increased by $5.1 million, or 78%,from $6.5 million to $11.6 million. This increase was primarily attributable to $2.7 million of higher legal expenses- due primarily to the patent litigation which
was settled in June 2006; $732,000 of higher personnel expenses due to higher headcount; and $386,000 of higher stock-based compensation expense resultingfrom the adoption of SFAS 123(R) with effect from January 1, 2006. As a percentage of net revenue, general and administrative expenses increased from 13%,for the nine months ended September 30, 2005, to 16% for the nine months ended September 30, 2006. With the litigation matter settled, we expect our generaland administrative expenses to be in the range of 10-12% of revenue in the fourth quarter ending December 31, 2006.
Litigation Settlement
On June 2, 2006, we settled all patent litigation brought against us by Palomar and MGH. Under the terms of the settlement agreement, we agreed to pay Palomarroyalties on past sales of infringing systems, plus accrued interest and reimbursement of Palomar's legal costs through March 31, 2006. During the quarter endedJune 30, 2006, we completed a calculation of the actual amounts owed to Palomar through March 31, 2006 and estimated the amount due to be $19.6 million. Inthe quarter ended September 30, 2006, after further discussions with Palomar, we revised our estimate of the total amount owed to Palomar through March 31,2006 to $20.2 million.
Of the $20.2 million settlement amount, we recorded $18.9 million that related to past royalties, interest and settlement costs, as a litigation settlement expensefor the nine months ended September 30, 2006. The remaining $1.2 million was allocated to the value of the license agreement obtained and recorded as anintangible asset. See Note 9 of Notes to Condensed Consolidated Financial Statements for further details and accounting of the settlement agreement.
Interest and Other Income, Net
For the three and nine months ended September 30, 2006, compared to the same period in 2005, interest and other income increased by $280,000 and $1.3million, respectively. This increase was primarily attributable to higher tax-exempt interest income from higher yields and an increase in the average cash andmarketable investments balance.
Provision (Benefit) for Income Taxes
The interim effective income tax rate is based on management's best estimate of the annual effective income tax rate. The effective tax rate for the three and ninemonths ended September 30, 2006, was 35% and 43%, respectively. Applying these effective tax rates to our income before income taxes for the quarter and nine
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month ended September 30, 2006, resulted in a tax provision of $1.6 million and tax benefit of $3.8 million, respectively. For both the three and nine monthsended September 30, 2005, our effective income tax rate was 28%. The higher effective tax rate for the three and nine months ended September 30, 2006,compared to the same period in 2005, was primarily due to the impact of the litigation settlement expense being included at the marginal tax rate of 39.28%; theexpiration of the law relating to the granting of federal research and development credits in 2006; and because we have fully utilized the benefit fromdisqualifying dispositions of incentive stock options that can reduce our effective tax rate. For the three months ending December 31, 2006, we expect our
effective income tax rate to be approximately 33%.
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Table of ContentsLiquidity and Capital Resources
As of September 30, 2006, we had cash, cash equivalents and marketable investments of $90.7 million, which we believe are sufficient to meet anticipated cashneeds for working capital and capital expenditures for at least the next 12 months. For the nine months ended September 30, 2006 and 2005, our cash flows andcontractual obligations are summarized below.
Net Cash Provided by (Used in) Operating Activities
For the nine months ended September 30, 2006, net cash used in operations was $2.1 million. This was primarily attributable to a net loss of $5.0 million; anincrease in the deferred tax asset by $3.7 million resulting from the income tax loss carry forward; and cash used to finance an increase in accounts receivable by$2.6 million due to higher revenue. These uses of cash were offset by the adjustment for non-cash stock-based compensation expenses of $3.2 million; cashprovided by an increase in accrued liabilities of $3.4 million, due to $1.1 million higher warranty reserve and higher sales and marketing accruals associated withthe higher revenue; and cash generated by a $2.2 million increase in deferred revenue associated with a larger number of customers purchasing extended service
contracts.
For the nine months ended September 30, 2005, net cash provided by operations was $12.8 million. This was primarily attributable to net income of $8.0 million;
cash provided from tax benefits related to employee stock option exercises of $3.1 million; adjustment for non-cash stock-based compensation expenses of $1.2million; and a reduction of accounts receivable by $1.6 million due to collections of the cyclically high revenue generated in December 2004. This was offset bycash used to increase inventories by $2.4 million for anticipated shipments and a broader product offering; and an increase in other assets of $1.6 million dueprimarily to prepaid income taxes.
Net Cash UsedIn InvestingActivities
For the nine months ended September 30, 2006, net cash used in investing activities was $2.5 million. Of this amount, $1.2 million was used for the acquisitionof the Palomar patent license; $811,000, net, was used to purchase marketable investments with the increase in cash and cash equivalent balance; and $441,000was used to purchase additional property and equipment primarily for research, development and manufacturing operations.
For the nine months ended September 30, 2005, net cash used in investing activities was $18.9 million. Of this amount $18.3 million, net, was used to purchaseadditional marketable investments with the increase in cash and cash equivalent balance, and $579,000 was used to purchase property, equipment and intangiblespartly associated with the set up of a new office in Zurich, Switzerland through the acquisition of a distributor.
Net Cash Provided by Financing Activities
For the nine months ended September 30, 2006 and 2005, net cash provided by financing activities was $2.4 million and $3.7 million, respectively. This was
attributable to proceeds from the issuance of stock through our stock option and employee stock purchase plans.
Contractual Cash Obligations
The following table discloses aggregate information about our contractual obligations for minimum lease payments related to facility leases and the periods inwhich these payments are due as of September 30, 2006.
Payments Due by Period (in thousands)
Less Than 1 -3 3-5 More Than
Total 1 Year Years Years 5 Years
)I1ci:I1II1L IcnI es ti5^0 ' I .I )H) ' I J 72 2. i7^ 3.297
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships , such as entities often referred to asstructured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes . As of September 30, 2006, we were not involved in any unconsolidated transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due tofluctuations 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 havedeclined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same timemaximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies,municipal bonds and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. Tominimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity (interest reset date for auction-rate
securities and variable rate demand notes) of generally less than eighteen months. Assuming a hypothetical increase in interest rates of one percentage point, thefair value of our total investment portfolio as of September 30, 2006 would have potentially declined by $464,000.
We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatility
has not been significant partly due to our sales and operating expenses being predominantly denominated in foreign currencies and we do not maintain significantforeign currency cash balances. We cannot assure that there will not be a material impact in the future. Although the majority of our sales and purchases aredenominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products. We do not believe, however,that we currently have significant direct foreign currency exchange rate risk and therefore have not hedged exposures denominated in foreign currencies.
We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation ofDisclosure Controls andProcedures. Our management evaluated, with the participation of the Chief Executive Officer and the Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that
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information we are
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Table of Contentsrequired to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the timeperiods specified in SEC rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisionsregarding required disclosures.
Inherent Limitations on the Effectiveness ofControls. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting . There was no change in our internal control over financial reporting that occurred during the nine monthsended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material pending litigation.
ITEM IA. RISK FACTORS
We compete against companies that have longer operating histories, more establishedproducts and greater resources, which may prevent us from achieving
significant market penetration or increased operating results.
Our products compete against similar products offered by public companies, such as Candela, Cynosure, Laserscope- now part of American Medical Systems,Lumenis, Palomar, and Syneron as well as private companies such as Reliant Technologies and Thermage. Competition with these companies could result inprice-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations. We also facecompetition from medical products, such as Botox, an injectable compound used to reduce wrinkles, and collagen injections. Other alternatives to the use of ourproducts include sclerotherapy, a procedure involving the injection of a solution into the vein to collapse it, electrolysis, a procedure involving the application of
electric current to eliminate hair follicles, and chemical peels. We may also face competition from manufacturers of pharmaceutical and other products that havenot yet been developed. Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and theirproducts, and includes such factors as:
• intellectual property protection;
• product performance;
• product pricing;
• quality of customer support;
• success and timing of new product development and introductions; and
• development of successful distribution channels, both domestically and internationally.
Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. For example,we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additionalproducts from our competitors. Potential customers also may need to recoup the cost of expensive products that they have already purchased from ourcompetitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unableto compete effectively and our business will be harmed.
In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketingresources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and marketshare, as well as new technologies or products that could effectively compete with our existing product lines. For example, ESC Medical purchased Coherent's
medical business in 2001 and the surviving company, Lumenis, incorporated competitive product lines and technologies of the predecessor companies into itscurrent products. Given the relatively few competitors currently in the market, any business combination could exacerbate any existing competitive pressures,which could harm our business.
Competition amongproviders of laser and other light-based devices for the aesthetic market is characterized by rapid innovation, and we must continuously
develop new products or our revenues may decline
While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants orexisting competitors from developing products that compete directly with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, orlong wavelength, laser system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently introduced systems that utilizeNd:YAG lasers, and received FDA clearances to market these products as treating all skin types. We expect that any competitive advantage we may enjoy fromother current and future innovations, such as combining multiple handpieces in a single system to perform a variety of applications, may diminish over time, as
companies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve ourproducts and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue will decline asour customers purchase our competitors' products.
Our ability to compete depends upon our ability to innovate, to develop and commercialize new products andproduct enhancements, and to identify new
markets for our technology.
We have created products to apply our technology to hair removal, treatment of veins, skin rejuvenation, treatment of pigmented lesions and treatment ofwrinkles. Currently, these applications represent the majority of laser and other light-based aesthetic procedures. To be successful in the future, we must develop
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new and innovative applications of laser and other light-based technology, identify new markets for our existing technology, and develop new technology that isnot light-based. To successfully expand our product offerings, we must:
• develop or acquire new products that either add to or significantly improve our current products;
• convince our target customers that our new products or product upgrades would be an attractive revenue-generating addition to their practices;
• sell our products to non-traditional customers;
• identify new markets and alternative applications for our technology;
• protect our existing and future products with defensible intellectual property; and
• satisfy and maintain all regulatory requirements for commercialization.
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Table of ContentsEvery year since 2000, we have introduced at least one new product and a corresponding upgrade to our existing products. Historically, these introductions havebeen a significant component of our financial performance. Our business strategy is based, in part, on our expectation that we will continue to make annualproduct introductions that we can sell to new customers and to existing customers as upgrades. For the quarter ending December 31, 2006, we plan to invest
approximately 6-7% of net revenue in our research and development department. Even with a significant investment in research and development, we may beunable, however, to continue to develop new products and technologies annually, or at all, which could adversely affect our projected growth rate.
IfPSS World Medicalfails to perform to our expectations, we may fail to achieve anticipated operating results.
We have a distribution agreement with PSS World Medical Shared Services, Inc. ("PSS"), a wholly-owned subsidiary of PSS World Medical, , which operatesmedical supply distribution service centers with approximately 700 sales representatives serving physician offices in all 50 states of the United States. PSS sales
representatives work in coordination with our sales force to locate new potential customers for our products. For the year ended December 31, 2005 and for thenine months ended September 30, 2006, approximately 16% of our revenue came from PSS.
If PSS does not perform adequately under the arrangement, or terminates our relationship, which it can do at any time upon 180 days notice, it may have a
material adverse effect on our business, financial condition, results of operations or future cash flows.
If our public guidance or ourfuture operatingperformance does not meet investor expectations, our stock price could decline
We provide guidance to the investing community regarding our anticipated future operating performance, both for the coming quarter and fiscal year-end. Ourbusiness typically has a short sales cycle, we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully issubject to many uncertainties, as discussed herein. In light of those factors, it is difficult for us to estimate with accuracy our future results. In the past, our actual
performance had turned out to be significantly different from our prior guidance. For example, at the beginning of 2005, we indicated that we expected our 2005revenue to increase by 25% over 2004. Actual 2005 growth was higher, at 44% over 2004. Earlier in the year, we stated publicly that we expected our revenue togrow 25% in 2006, compared to 2005 and we have since revised our guidance for the full year of 2006 to 33%. As we stated at the time, such expectations aresubject to numerous risks and uncertainties which could make actual results differ materially, either higher or lower. If our actual results do not meet our publicguidance, or our results or guidance as to the future were to be below the expectations of third party financial analysts, our stock price could decline significantly.
We may be involved in future costly intellectual property litigation, which could impact ourfuture business andfinancial performance
We recently settled costly patent litigation with Palomar see Note 9 of Notes to Condensed Consolidated Financial Statements "Litigation Settlement." Aswith that case, our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. In addition, we donot know whether our competitors will apply for and obtain patents that will 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 marketing our products and ourbusiness would suffer as a result.
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 companyname 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. We do not know whether necessary licenses would be available to us on satisfactory terms, orwhether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, 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.
Our patent litigation settlement payment to Palomar is subject to audit, which could result in a material adverse effect on our business and our stock price.
On June 2, 2006, we settled our patent litigation with Palomar and MGH - with Palomar granting us an irrevocable license to the subject patents. Under the termsof the settlement agreement, we made a good faith estimated payment to Palomar of $22.0 million, representing our estimate of royalties due on past sales of theinfringing systems, plus accrued interest and reimbursement of Palomar's legal costs through March 31, 2006. The actual amounts owed to Palomar through
March 31, 2006 are subject to review by an independent public accountant hired by Palomar. This audit is expected to be completed by December 31, 2006.
Subsequent to the date of the settlement, the Company completed a calculation of the actual amounts owed to Palomar through March 31, 2006 and estimated theamount due to be $19.6 million. During the quarter ended September 30, 2006, after further discussions with Palomar, we revised our estimate of the total
amount owed to Palomar through March 31, 2006 to $20.2 million. This liability was calculated based on our interpretation of the settlement agreement and ourhistorical records of the underlying transactions that are subject to the royalty. The independent public accountant's interpretation of the applicable royalty ratefor our different product and transaction types, and the net revenue for which to calculate the royalty, could be different from ours. In the event that theindependent public accountant's assessment of the accuracy of our final settlement amount owed by us to Palomar is materially different from our calculations,we could owe a higher settlement amount to Palomar that would then have to be reported as an additional expense in our financial statements for the year ending
on December 31, 2006. This could result in a material adverse effect on our business and stock price.
Intellectual property rights may not provide adequate protection for some or all of our products, which may permit thirdparties to compete against us moreeffectively.
We rely on patent, copyright trade secret and trademark laws and confidentiality agreements to protect our technology and products. At September 30, 2006, wehad seven issued U.S. patents, some covering our ClearView handpiece design and cooling method. Some of our other 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 notissue 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 legallycircumvented 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, formeremployees 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 theirown 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 could be adversely affected, as could our business.
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Table of ContentsIfwefail to obtain clearance from the U.S. Food and DrugAdministration to market our Titan productfor additional indications, our revenuefrom thisproduct
may be adversely affected
Our Titan product, introduced in 2004, is a material component of our growth strategy. We currently have FDA clearance to market Titan in the United States fordeep dermal heating. The FDA has denied our initial 510(k) application to market Titan for wrinkle reduction on the basis that Titan is not substantiallyequivalent to predicate devices for the treatment of wrinkles. We are continuing to seek a clearance from the FDA to market Titan for additional indications, but
there are no assurances as to when, or whether, we will ever obtain such a clearance. We cannot promote or advertise our Titan product in the United States forany indications other than deep dermal heating until we receive additional FDA clearances. In the event that we do not obtain additional FDA clearances, ourability to market Titan in the United States and revenue derived therefrom, including revenue from both Titan unit sales and handpiece refills, may be adverselyaffected.
Ifwefail to obtain or maintain necessary FDA clearances for our products and indications, if clearances forfuture products and indications are delayed ornot issued, or if there arefederal or state level regulatory changes, 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 mustfirst receive either 510(k) clearance or pre-marketing approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. In theevent that we do not obtain additional FDA clearances, our ability to market future products or applications in the United States and revenue derived therefrom
may be adversely affected.
Medical devices may be marketed only for the indications for which they are approved or cleared and if we are found to be marketing our products for off-label,or non-approved, uses we might be subject to FDA enforcement action or have other resulting liability. We have obtained 5 10(k) clearance for the indications forwhich we market our products. However, our clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical DeviceReporting 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 wouldlikely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which are, in many instances, in flux. Changes in state
regulations may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, "licensed practitioners," as determined on astate-by-state basis. As a result in some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time,thereby disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement actionby the FDA or state agencies, which may include any of the following sanctions:
• warning letters, fines, injunctions, consent decrees and civil penalties;
• repair, replacement, refunds, 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, they could harm our business
Ifwefail to comply with the FDA's Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and ourbusiness 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 regulatoryscheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping ofour 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 affixingwarning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performancestandards through periodic unannounced inspections. We have been, and anticipate in the future to be, subject to such inspections. Our failure to take satisfactorycorrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcementactions, 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.
Ifwe modify one of our FDA-approved devices, we may need to seek re-approval; which, ifnot granted, wouldprevent usfrom selling our modifiedproductsor 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 usewould require a new 510(k) clearance or possibly a pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals for
new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearance wouldadversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability. We havemade 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 clearanceor approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing themodified 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 orfuture products and indications, which couldharm our business.
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Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In addition, exports ofmedical devices from the United States are regulated by the FDA. Complying with international regulatory requirements can be an expensive andtime-consuming process and approval is not certain. The time required to obtain clearance or approvals, if required by other countries, may be longer than thatrequired for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We may be unableto 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 ourproducts outside the United States, or if we fail to receive those qualifications, clearances or approvals, we may be unable to market our products orenhancements in international markets effectively, or at all, which could have a material adverse effect on our business and growth strategy.
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Table of ContentsTo successfully market and sell our products internationally, we must address many issues with which we have little or no experience.
For the nine months ended September 30, 2006, approximately 31% of our revenue was derived from international customers, which are a material component ofour growth strategy. We depend on third-party distributors and a relatively new direct sales operation to sell our products internationally, and if these distributorsor direct sales personnel under-perform, we may be unable to increase or maintain our level of international revenue. We will need to attract additional
international distributors to grow our business and expand the territories in which we sell our products. Distributors may not accept our business or commit thenecessary resources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are unableto engage distributors in particular geographic areas, we may not realize projected international revenue growth. Additionally, we expect to expand our directsales force in Europe and Asia. If we are unable to hire, retain and obtain satisfactory performance from such additional personnel, our revenue from internationaloperations may be adversely affected.
We believe that an increasing amount of our future revenue will come from international sales as we expand our overseas operations and develop opportunities inadditional international territories. International sales are subject to a number of risks, including:
• difficulties in staffing and managing our foreign operations;
• difficulties in penetrating markets in which our competitors' products are more established;
• reduced protection for intellectual property rights in some countries;
• export restrictions, trade regulations and foreign tax laws;
• fluctuating foreign currency exchange rates;
• foreign certification and regulatory requirements;
• lengthy payment cycles and difficulty in collecting accounts receivable;
• customs clearance and shipping delays;
• political and economic instability;
• lack of awareness of our brand in international markets; and
• preference for locally-produced products.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding asolution, our revenue may decline.
The expense andpotential unavailability of insurance coveragefor our customers and our company could adversely affect our ability to sell our productsand ourfinancial condition.
Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of ourproducts. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, ourcustomers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to thecost of or inability to procure insurance coverage.
We have been experiencing steep increases in our product liability insurance premiums. If our premiums continue to rise, we may no longer be able to affordadequate insurance coverage. If we are unable to maintain adequate coverage, potential product liability claims would be paid out of cash reserves, harming our
financial condition, operating results and profitability.
Because we do not require trainingfor users of our products, and sell our products to nonphysicians, there exists an increasedpotentialfor misuse of ourproducts, which could harm our reputation and our business.
Federal regulations allow us to sell our products to or on the order of "licensed practitioners." The definition of "licensed practitioners" varies from state to state.As a result, our products may be purchased or operated by physicians with varying levels of training, and in many states by non-physicians, including nursepractitioners, 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 ourdistributors, generally offer but do not require purchasers or operators of our products to attend training sessions. In addition, we sometimes sell our systems tocompanies that rent our systems to third parties and that provide a technician to perform the procedure. The lack of training and the purchase and use of ourproducts by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly productliability litigation.
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 expensiveand time-consuming litigation, payment ofsubstantial 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 costlylitigation by our customers or their patients. Misusing our products or failing to adhere to operating guidelines could cause significant eye and skin damage, andunderlying 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
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D30
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 toobtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought againstus, with or without merit could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in theindustry and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, thereby harming our financialcondition and reducing our operating results.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages andpricefluctuations, which could harmour business.
Many of the components and materials that comprise our products are currently manufactured by a limited number of suppliers. A supply interruption or anincrease in demand beyond our current suppliers' capabilities could harm our ability to manufacture our products until a new source of supply is identified andqualified. 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;
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Table of Contents
• 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 commercially 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;
• delay in delivery due to our suppliers prioritizing other customer orders over ours; and
• fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable
prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
Components used in our products are complex in design, and any defects may not be discoveredprior to shipment to customers, which could result inwarranty obligations, reducing our revenue and increasing our cost
In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significant degree oftechnical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, or we, use defective materials or workmanship in
the manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
• loss of customer orders and delay in order fulfillment;
• damage to our brand reputation;
• increased cost of our warranty program due to product repair or replacement;
• inability to attract new customers;
• diversion of resources from our manufacturing and research and development departments into our service department; and
• legal action.
The occurrence of any one or more of the foregoing could materially harm our business.
Weforecast sales to determine requirements for components and materials used in our products and if ourforecasts are incorrect, we may experience either
delays in shipments or increased inventory costs.
We keep limited materials and components on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders and
material requirements to predict our inventory needs up to nine months in advance and enter into purchase orders on the basis of these requirements. Our limitedhistorical experience may not provide us with enough data to accurately predict future demand. If our business expands, our demand for components andmaterials would increase and our suppliers may be unable to meet our demand. If we overestimate our component and material requirements, we will have excessinventory, which would increase our expenses. If we underestimate our component and material requirements, we may have inadequate inventory, which couldinterrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level of
satisfaction our customers have with our business.
Ifthere is not sufficient demandfor the procedures performed with our products, practitioner demandfor our products could be inhibited, resulting inunfavorable operating results and reduced growth potential
Continued expansion of the global market for laser- and other light-based aesthetic procedures is a material assumption of our growth strategy. Most proceduresperformed 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:
• 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 light-based technologies andtreatments which use pharmaceutical products;
• the success of our sales and marketing efforts; and
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• consumer confidence, which may be impacted by economic and political conditions.
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, resulting in unfavorable operating results and lower growth potential.
Lack of demandfor our products in the non-core market would harm our anticipated revenue growth.
An increasing portion of our revenue is derived from sales to customers outside of the core dermatologist and plastic surgeon specialties, such as familypractitioners, primary care physicians, gynecologists, medi-spas, etc. Continuing to achieve further penetration into this new market is a material assumption ofour growth strategy. Demand for our products in the non-core market could be weakened by factors including, poor financial performance of businesses
introducing aesthetic procedures to their practice or medi-spas, reduced patient demand for alternative treatments and services being provided by non-corepractitioners and an increase in malpractice law suits against non-core practitioners. If we do not achieve anticipated demand for our products in the non-coremarket our expected revenue growth may not be achieved.
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Table of ContentsWe depend on skilled and experiencedpersonnel to operate our business effectively. Ifwe are unable to recruit, hire and retain these employees, our abilityto manage and expand our business will be harmed, which would impair ourfuture revenue andprofitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. We do not have employment contracts with any of ourofficers 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 any of our officers and key employees. In addition, we do not maintain "key person" life insurance policies covering any of our employees. The loss ofany 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 will be a critical factor in determining whether we will
be successful in the future. We may not be able to meet our future hiring needs or retain existing personnel. We will face particularly significant challenges andrisks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical andsales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
Ourfinancial results will be affected by accounting rules governing the recognition ofstock-based compensation expense.
As of January 1, 2006, we adopted SFAS 123(R), which requires us to measure and record stock-based compensation expense using the fair value method, which
adversely affects our results of operations by increasing our cost by the amount of such stock-based compensation charges. In the quarter ending December 31,2006, we estimate that the adoption of FAS 123(R) will increase our cost of goods sold and operating expenses by approximately $1.25 million, before incometaxes. However, our estimate of future stock-based compensation expense is affected by our stock price, the number of stock-based awards our board of directorsmay grant or are forfeited in the fourth quarter ending December 31, 2006, as well as a number of valuation assumptions and the related tax effect.
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions,including the expected life of the stock-based payment awards, our stock price volatility and the expected forfeiture rate of our options; these assumptionsrepresent management's best estimates, and they involve inherent uncertainties and the application of management judgment. As a result, if factors change andwe use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, thestock-based compensation expense could be significantly different from what we have recorded in the current period.
Failure to maintain effective internal control overfinancial reporting could have a material adverse effect on our business, operating results and stock price.
Beginning with the annual report for our fiscal year ended on December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 required us to include a reportby our management on our internal control over financial reporting. Such report contained an assessment by management of the effectiveness of our internal
control over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal control is effective. Also included in our AnnualReport on Form 10-K was an opinion by our Independent Registered Public Accounting Firm of management's assessment of such internal control.
Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational
resources and the diversion of management's attention. Though management did not identify any material weaknesses in our internal control over financialreporting during the year ended December 31, 2005, if we are unable to assert that our internal control over financial reporting is effective as of our fiscal yearend in 2006 and future years, our business may be harmed.
Our effective income tax rate may vary significantly.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax
laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by changes in thevaluation of our deferred tax assets and liabilities, future levels of research & development spending, deductions for employee stock option exercises beingdifferent to what we projected, and changes in overall levels of income before taxes.
Any acquisitions that we make could disrupt our business and harm ourfinancial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies. We may also consider joint ventures and other
collaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate anybusinesses, products or technologies that we acquire. Furthermore, the integration of any acquisition and management of any collaborative project may divertmanagement's time and resources from our core business and disrupt our operations. We do not have any experience with acquiring companies or products. If wedecide to expand our product offerings beyond laser and other light-based products, we may spend time and money on projects that do not increase our revenue.
Any cash acquisition we pursue would diminish our available cash balances to us for other uses, and any stock acquisition would be dilutive to our stockholders.While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and technologies, and anticipate continuing to makethese evaluations, we have no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.
Anti-takeover provisions in our Amended and Restated Certificate ofIncorporation and Bylaws, and Delaware law, contain provisions that could discouragea takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist atakeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
• a classified board of directors;
• advance notice requirements to stockholders for matters to be brought at stockholder meetings;
• a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
• limitations on stockholder actions by written consent; and
• the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
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These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions couldadversely 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 commonstock.
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Table of ContentsWe have not paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment may be limited to the value of ourstock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Thepayment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time asour board of directors may consider relevant. If we do not pay dividends, our stock may be less valuable because a return on investment will only occur if ourstock price appreciates.
ITEM 5. OTHER INFORMATION
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), we arerequired to disclose the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our Independent RegisteredPublic Accounting Firm. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financialstatements of a company. The Audit Committee has approved the engagement of PricewaterhouseCoopers LLP for the following non-audit services: (1) various
tax matter consultations concerning U.S. federal and state taxes and foreign taxes for our expatriates.
ITEM 6. EXHIBITS
Exhibit No. Description
373.2^r' Amended and Restated Certificate of Incorporation of the Registrant (Delaware).
3.4(1) Bylaws of the Registrant.
4.1(2) Specimen Common Stock certificate of the Registrant.
10.13 Distribution Agreement between the Registrant and PSS World Medical Shared Services, Inc., a subsidiary of PSS World Medical dated October1, 2006.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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 ofthe Sarbanes-Oxley Act of 2002.
* Confidential Treatment has been requested for certain portions of this exhibit.
(1) Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared effective on March 30, 2004.(2) Incorporated by reference from our Annual Report on Form 10-K filed with the SEC on March 25, 2005.
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Table of ContentsSIGNATURE
Pursuant to the requirements 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.
CUTERA, INC.
Date: November 8, 2006 /s/ Ronald J Santilli
Ronald J . SantilliChief Financial Officer(Principal Financial Officer andAuthorized Signatory)
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Exhibit 10.13
DISTRIBUTION AGREEMENT
This Distribution Agreement between PSS WORLD MEDICAL SHARED SERVICES, INC., ("PSS") with its offices at 4345 Southpoint Boulevard,Jacksonville, Florida, 32216, and Cutera, Inc. ("Cutera"), a Delaware corporation, with offices at 3240 Bayshore Blvd., Brisbane, CA. 94005, (the "Parties") iseffective this 1st day of October, 2006 ("Effective Date").
WHEREAS Cutera develops, manufactures and markets aesthetic light-based systems and related services.
WHEREAS PSS distributes products and seeks to distribute additional products to its customers; and,
WHEREAS Cutera desires to appoint PSS as an authorized distributor of Cutera products, accessories and related goods and PSS desires to accept suchappointment.
THEREFORE PSS agrees to purchase and Cutera agrees to sell such Products upon the following terms and conditions:
DEFINITIONS
The following terms have the meaning indicated here when used in this Agreement
1.1 "Agreement" means this Agreement, together with all Exhibits which are attached hereto or incorporated by reference herein, and which are an
integral part of herein.
1.2 "Affiliate": With respect to either party, any person, firm, corporation or other legal entity which controls or is controlled by or under commoncontrol with such party.
1.3 "Products": All products, supplies, accessories, parts and related goods listed in Exhibit 1 as well as any and all updates and enhancements of theProducts, and any other products that the parties mutually agree to add by a signed writing to Exhibit 1. Notwithstanding any other term in this Agreement,Cutera may from time to time discontinue the manufacture and/or sale of any or all Products, and/or change its service policies, warranties and productdesigns without any obligation or liability to PSS provided that such discontinuations and/or changes apply to Cutera's customers generally.
1.4 "Territory": The United States.
APPOINTMENT
2.1 Appointment: Subject to the terms and conditions of this Agreement, Cutera hereby appoints PSS as its exclusive third party distributor of the
Products to licensed physicians ("Physicians") in the Territory, and PSS accepts such appointment. Cutera agrees to sell Products to PSS, and PSS agreesto purchase the same from Cutera only for resale to Physicians for delivery and use within the Territory, under the terms and conditions herein. The`exclusivity' of this appointment means that Cutera will not appoint any other third-party
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distributors to resell Products to Physicians for delivery and use within the Territory. For purposes of the foregoing sentence, an entity that is a beauty -orspa chain or franchise or otherwise an entity that may purchase multiple units of Products for itself and its affiliates will not be deemed a `distributor.'Notwithstanding any other term in this Agreement Cutera reserves the right, without any compensation owing to PSS, to market and sell the Products inthe Territory through its employees and third-party leasing companies.
2.2 Competitive Products: During the Term of this Agreement, PSS shall not engage, either directly or indirectly, in the manufacture, marketing,
promotion or sale of products that are similar to or competitive with the Products covered by this Agreement unless Cutera and PSS agree in advance inwriting.
2.3 Orders
a. PSS will submit purchase orders for the Products from time to time, and each order will be subject to Cutera's acceptance. Each order will
specify the types and quantities of requested Products, and the proposed delivery dates and destination points. No other terms or conditionson any PSS order shall be binding on Cutera unless expressly accepted in writing by Cutera. The terms and conditions of this Agreementshall be incorporated into each PSS order. In the event of any conflicts, differences or inconsistencies between the terms and conditions of aPSS purchase order and this Agreement this shall govern. PSS will provide Cutera with the contact information of each entity thatpurchases Products from PSS.
b. Delivery dates provided by Cutera are approximate only. Products may be dropped shipped to PSS' customers. PSS may, without anyliability to Cutera, cancel an order in whole or in part anytime before original scheduled shipment date; provided that written notice ofcancellation must be received by Cutera prior to such date.
c. Title will pass to PSS at Cutera's factory. Products are deemed accepted upon shipment. However, without expanding or modifying theproduct warranty in Exhibit 2, attached hereto, PSS or PSS customer shall have the opportunity to inspect the Products upon delivery andprovide Cutera with written notice of any identified damage or loss.
d. Cutera is responsible for packaging of Products so as to reasonably protect from damage. In addition, Cutera is responsible for selection andpayment of freight carrier and insurance. As such, Cutera, on behalf of PSS, is responsible for filing, managing and collecting on all loss anddamage claims identified and communicated by PSS to Cutera per section 2.3 c.
RELATIONSHIP
3.1 The relationship of PSS to Cutera shall be that of an independent contractor engaged in purchasing Products from Cutera for resale to PSS'scustomers.
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3.2 Nothing contained in this Agreement shall be deemed to create a partnership or joint venture between the Parties. Neither the making nor theperformance of this Agreement shall be construed in any manner to have established a joint venture or partnership.
3.3 Neither Party shall hold itself out as the agent of the other, nor shall they incur any indebtedness or obligations in the name of, or which shall bebinding on the other, without the prior written consent of the other. Each Party assumes full responsibility for its own personnel under laws and regulationsof the governmental authorities of the competent juri sdiction.
3.4 Cutera shall comply, to the extent applicable, with all laws, regulations and orders relating to its performance under this Agreement, includingwithout limitation all anti-fraud and anti-kickback laws, regulations and orders. PSS and Cutera each agrees, warrants and certifies that in performance of
this Agreement it will fully comply with the provisions of the Social Security Act Section 1128B(b) (42 U.S.C. Section 1320a-7b(b)) which prohibit theknowing or willful offer, solicitation or receipt of any remuneration, including discounts and/or rebates, directly or indirectly, in return for purchasing,leasing or ordering, or arranging for or recommending the purchase, lease or order, of any services or items, including any Products, for which paymentmay be made in whole or in part under a federal health care program. Without limiting the generality of the foregoing, Cutera shall not, directly orindirectly, pay any compensation, amounts, benefits or other consideration to any PSS employee, or any family member of a PSS employee, (other than
customary gifts valued under $100 in the course of one year, and business meals in the ordinary course) without the express written consent of PSS.
3.5 Cutera understands that in an effort to control the flow and content of communications, PSS would prefer that Cutera not send any product orsamples of medical, marketing materials or other communications (including without limitation, email, voice mail, direct mail or fax) to a group of morethan five of PSS's employees or agents without written consent from PSS. Therefore, Cutera and PSS agree to discuss this matter in good faith if, in thereasonable opinion of either party, it becomes a problem in their relationship
TERM OF AGREEMENT
4.1 The term of this Agreement shall commence on the Effective Date and continue indefinitely until either party terminates the same, with or
without cause, on one hundred eighty days' written notice, unless sooner terminated by either party pursuant to section 5.1 or 5.2, below.
4.2 In the event of expiration or termination of this Agreement for any reason, this Agreement shall continue to apply to all orders previouslyaccepted by Cutera.
TERMINATION
5.1 If either Party breaches or fails to perform any of the material obligations imposed upon it under the terms of this Agreement the other Partymay terminate the Agreement in the event the breaching Party fails to cure such breach within thirty (30) days after receiving written notice of such breachfrom the non-breaching party.
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5.2 To the extent permitted by law, if either Party becomes insolvent, is unable to pay its debts when due, files for bankruptcy _ is subject ofinvoluntary bankruptcy, has a receiver appointed, or has its assets assigned, the other Party may terminate this Agreement immediately upon written noticeto the other party and may cancel any unfulfilled obligations.
5.3 Either party shall have the right to terminate this Agreement for any reason and without cause by providing written notice to the other party onehundred and eighty (180) days prior to the effective date of such termination. After ninety (90) days following delivery of written notice (1) Cutera may,
without owing any compensation to PSS, appoint third parties to market, sell and distribute the products to Physicians in the Territory and (2) PSS canengage, either directly or indirectly, in the manufacture, marketing, promotion or sale of products that are similar to or competitive with the productscovered by this Agreement. PSS and Cutera agree to work cooperatively in this transition period.
5.4 Immediately upon the termination of this Agreement, PSS will discontinue holding itself out as an authorized Cutera distributor, and will returnall pricelists, catalogs, marketing material and all other sales aids furnished by or through Cutera to PSS.
ASSIGNMENT
6.1 During the term of this Agreement, the rights of either party under this Agreement shall not be assigned nor shall the performance of dutieshereunder be delegated, without the other party's prior written consent, which shall not be unreasonably withheld; provided however, either party may
assign this Agreement (i) to its Affiliate that is such an Affiliate as of date of execution of this Agreement; or, (ii) to its Affiliate whose assets consistentirely of the assets of an Affiliate or Affiliates that were Affiliates of such assigning party as of the date of execution of this Agreement.
6.2 Either party shall have the right to assign this Agreement to a successor to or acquirer of all or substantially all of its assets. Any assignment ofthis Agreement whether due to consent by a party, operation of law or Change in Control, shall not relieve the assigning Party of its obligations hereunder.
SALES PROCEDURE
7.1 The parties agree to meet, discuss and cooperate in good faith in order to agree on and implement mutually beneficial policies and procedureswith respect to the marketing, solicitation and sales of the Products, including without limitation those relating to the identification of leads and
prospective customers ("Prospects"), marketing and solicitation activities, and closing of sales to Prospects. In this regard, the Marketing Manager for PSS("Marketing Manager") and the Vice President of Sales for Cutera shall take the lead in such discussions toward reaching mutual agreement on suchdetails.
7.2 Subject to the specific policies and procedures that are hereafter agreed upon by the parties in writing, the Marketing Manager shall submit theProspect information to Cutera via email. Cutera will then determine whether the Prospect is currently being actively pursued by Cutera (a "CuteraProspect"). For purposes of this Agreement, a Prospect will be
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considered a "Cutera Prospect" if, for example, Cutera has engaged in bilateral discussions with the Prospect (as opposed to, for example, an unansweredsolicitation from Cutera). Cutera shall provide to PSS on a regular basis a current accurate and complete list of all Cutera Prospects.
i. If the Prospect is a Cutera Prospect, then PSS will not sell, nor attempt to sell, any Products to that Prospect for one hundred and twenty days fromthe date that Cutera notified PSS that that is a Cutera Prospect. Notwithstanding the foregoing, but subject to the provisions of Section 2.2, nothingherein shall prohibit PSS from calling, communicating with, marketing to or selling non-Cutera Products to Cutera Prospects.
ii. If the Prospect is not a Cutera Prospect, than Cutera will not sell, or attempt to sell, any Products to that Prospect for one hundred twenty daysfrom the date that PSS first identified it to Cutera as a Prospect.
PRICES AND PAYMENTS
8.1 Prices which PSS shall pay Cutera for the Products purchased, shall be the prices set forth in Exhibit 1. Prices and all price quotations include theProduct, labeling and packaging, freight duties and insurance. Prices exclude taxes, which are PSS' responsibility (excluding taxes based on Cutera'staxable income). Wherever applicable, all such taxes may be added to the invoice or invoiced separately.
8.2 . Notices by Cutera of price decreases will be effective upon delivery, but only with respect to new orders booked after the date such notice wasdelivered. Notices by Cutera of price increases will be effective 90 days from delivery; i.e., they will be effective on new orders booked after the 90th dayfollowing delivery of the notice. All such notices shall be sent to PSS at the following addresses:
Mail:PSS World Medical Shared Services PSS Marketing DepartmentPricing Department Attn: Cutera Marketing Manager4345 Southpoint Blvd. 4345 Southpoint Blvd.Jacksonville, Florida 32216 Jacksonville, Florida 32216
Email:psspricin pssd.com
Facsimile : (904) 332-3452
8.3 Payment Payment terms are fifty (50) days from the date of Cutera's invoice. Delinquent invoices shall have a late payment charge of the lesserof eighteen percent per year or the maximum legal rate assessed against any unpaid balance from the original due date until the date of payment. Cuteramay withhold shipments if PSS is delinquent in making payments or in breach of this Agreement. Until the full purchase price has been received by
Cutera, Cutera shall retain a security interest in the Products (and any proceeds thereof) and the right to immediate possession thereof (without prejudice toany other available remedies). PSS shall, from time to time, take all acts requested by Cutera to transfer, create, perfect preserve and/or enforce thissecurity interest.
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8.4 In competitive situations or as part of a large order, PSS and Cutera may agree on a special price arrangement.
8.5 PSS shall set the end user selling prices at the sole judgment of PSS.
8.6 If PSS is not maintaining gross margins of at least ten percent then the parties will discuss the matter in good faith.
SUPPLY CHAIN SERVICE AND PERFORMANCE REQUIREMENTS
9.1 PSS will submit fax or electronic purchase orders to Cutera, and Cutera will respond by fax or e-mail within two business days with a)verification at the item level of shipment date, ship-from location, and shipment mode/carrier, b) order confirmation number, c) price discrepancies, d)backorders and expected backorder release dates, and e) notification of failure to meet minimum order requirements.
9.2 Cutera agrees to ship all orders within fifteen business days, unless otherwise agreed to by the parties.
9.3 Cutera will use commercially reasonable efforts to install and complete customer training for the Product(s) within thirty (30) days of acceptanceof an order, or the date quoted or acknowledged. Cutera shall give PSS prompt notice of any prospective failure to meet the acknowledged delivery date.
9.4 Cutera shall provide customer service support during its normal business hours.
9.5 Cutera shall provide PSS with annual calendars indicating holiday or other closures of shipping and customer service operations, and willprovide at least thirty (30) days advance noticeof any changes to this calendar.
9.6 Cutera shall preserve, package, handle, and pack Products so as to protect the Products from loss or damage during shipment in conformance
with good commercial practice and any applicable government regulations. Cutera shall be responsible for any loss or damage to the Products duringshipment that occurs due to its failure to properly preserve, package, handle, or pack Products. Cutera will ship Products in the final packaging as intendedto be received by the end user as ordered.
9.7 Cutera will not apply any miscellaneous, transportation, handling, HAZMAT, accessorial, minimum order or pallet charges, surcharges or fees toany PSS purchase orders or deliveries unless (a) specifically approved in this agreement, and (b) detailed in order acknowledgements in accordance withSection 9.1 above.
10. ADVERTISING, PROMOTIONS, TRADEMARKS AND COPYRIGHTED MATERIAL
10.1 Cutera agrees to provide sample quantities of current or new sales literature, artwork, advertising materials, promotional plans and otherinformation or programs reasonably related to this Agreement and the Products ("Advertising Materials"). Cutera warrants that no Advertising Materialswill be misleading, deceptive, unfair or
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otherwise violate any applicable laws, statutes or regulations. PSS specific literature and advertising will be the responsibility of PSS
10.2 PSS, with input from Cutera, will evaluate requirements and define promotional plans to which PSS will utilize in connection with marketingand promoting the Products.
10.3 Cutera hereby grants PSS a revocable license to use any Cutera trademark or trade name associated with the Products solely in theadvertisement and promotion of the Products during the term of this Agreement. Except as provided in this paragraph, PSS shall have no right title orinterest in or to any patent, trademark of trade name belonging to Cutera. Cutera hereby grants PSS a revocable license to reproduce materials provided toPSS by Cutera as is reasonable for promotion, demonstration, sale and support of Cutera Products, including but not limited to posting such materials on
the Internet, Intranet or web.
SALES, MARKETING AND SUPPORT OBLIGATIONS
11.1 PSS shall use commercially reasonable efforts to promote, market and solicit orders for the Products, and to represent the interests of Cutera atall times, to Physicians in the PSS Territory.
11.2 PSS shall, at its expense, maintain a properly trained sales force of adequate size to represent and promote the sale of the Products to Physiciansthroughout the PSS Territory . All of PSS' s sales staff shall be employees of PSS. PSS recognizes and agrees that Cutera will be working cooperativelywith PSS ' s sales persons, including efforts to qualify leads and conduct demonstrations.
11.3 PSS shall use commercially reasonable efforts to handle and resolve feedback from its customers . Subject to the limitations of, and without
expanding, Cutera's product warranty obligations contained in Exhibit 2, attached hereto, Cutera shall (i ) have ultimate responsibility for resolution ofProduct related issues; and, (ii) provide complete technical support to customers for all Products.
11.4 Cutera shall maintain a properly trained sales force of adequate size to provide marketing, demonstration and sales support for PSS ' s sales anddistribution efforts under this Agreement. The sales representatives shall be geographically located strategically throughout the United States and shall beavailable to PSS as reasonably required in support of PSS ' s sales and distribution efforts with respect to Products.
11.5 Cutera shall provide demonstrations of the Products to Prospects as needed, and will provide all installation work for Products. Cutera agrees toprovide sales and promotional support and after- sale service to all Prospects and PSS customers with the same diligence , quality and timelines as Cuteragenerally provides to its Prospects and Customers.
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12. AGREEMENTS WITH CUSTOMERS
12.1 All sales and other agreements between PSS and its customers are PSS exclusively, and shall have no effect on the respective obligations ofCutera and PSS under this Agreement.
13. QUALITY ASSURANCE
13.1 Cutera agrees to maintain appropriate certification status and compliance with the Food and Drug Administration's (FDA) Quality SystemRegulation, the Medical Device Directive and/or all other applicable regulations. As manufacturer, Cutera will comply with all applicable regulations and
standards that pertain to manufacturers for Products.
13.2 Upon request, Cutera agrees to furnish to PSS any information in its possession that is reasonably required to enable PSS to comply with all
applicable regulations and standards that pertain to distributors for the Products.
13.3 If the Products and/or Territory covered in this Agreement are modified, then Cutera will maintain compliance with all laws and regulationsapplicable to manufacturers of Products where Products are manufactured and where Products are sold prior to the time that both Parties agree that thedistribution is to commence.
13.4 Cutera represents, warrants, and covenants to PSS that all Products have been held under the manufacturer's recommended environmentalconditions, including Products returned to Cutera from customers.
13.5 In the event Cutera installs electronic products regulated by the FDA, Cutera shall comply with all applicable Federal and State regulations. Tothe extent required by a government entity, Cutera shall be responsible for the completion and submission of relevant and applicable records to the FDA.
13.6 Cutera agrees to allow reasonable access to federally mandated quality assurance records, policies, and procedures for FDA regulated Products.Cutera agrees to reasonable access to manufacturing facilities for the purpose of performing vendor certification as required by the FDA.
14. MODIFICATION OF PRODUCTS
14.1 Cutera shall provide PSS written notice of all Product discontinuances no less than sixty (60) days prior to the last order date.
14.2 Cutera shall provide PSS with written notice of all material Product modifications or material Product packaging modifications not less thanthirty (30) days prior to the shipment of Products that contain such modifications.
15. REPRESENTATIONS AND WARRANTIES
15.1 Products sold pursuant to this Agreement will come with Cutera's then-current product warranty, which will be solely for the benefit of, andassignable to, PSS'
Cutera / PSS Distributor Agreement October 1, 2006
Source : CUTERA INC , 10-Q, November 08, 2006
D45
customers. Cutera's current product warranty is attached hereto as Exhibit 2; provided, that Cutera may from time to time modify this warranty withoutany obligation or liability to PSS, provided that such modifications are applicable to Cutera's customers generally. If any Product is subject to a mandatoryor voluntary recall issued by Cutera, Cutera shall reimburse PSS for any commercially reasonable and documented direct service and labor costs requiredto cooperate with such recall.
15.2 Cutera represents, warrants and covenants to PSS that:
i. Cutera is and will continue to be a duly formed and validly existing entity in good standing under the laws of the state of its organization
ii. Cutera has the full right power and authority, corporate and/or otherwise, to execute and deliver this Agreement and to otherwiseconsummate the transactions contemplated by this Agreement.
iii. The execution, delivery and performance by Cutera under this Agreement, and the transactions and actions contemplated hereunder, have
been duly authorized by all necessary actions by Cutera. This Agreement, when duly executed and delivered, constitutes a valid, legal and bindingobligation of Cutera enforceable in accordance with its terms.
iv. The execution, consummation of the transactions contemplated by, and/or compliance with the terms and provisions of this Agreement,will not conflict with, result in a breach of, or constitute a default under any of the terms, conditions or provisions of Cutera constituent documentsor any agreement, lease, indenture, mortgage, deed of trust, land contract license or other instrument to which Cutera is a party or by which Cuteramay be bound or affected or to which Cutera is subject or any law, regulation, order, writ, injunction or decree of any court or agency or regulatorybody.
v. Cutera has permission from the FDA to sell its Products throughout the United States to or on the order of licensed practitioners.
15.3 PSS represents, warrants and covenants to Cutera that:
i. PSS is and will continue to be a duly formed and validly existing entity in good standing under the laws of the state of its organization
ii. PSS has the full right, power and authority, corporate and/or otherwise, to execute and deliver this Agreement and to otherwise consummatethe transactions contemplated by this Agreement.
iii. The execution, delivery and performance by PSS under this Agreement, and the transactions and actions contemplated hereunder, have
been duly authorized by all necessary actions by PSS. This Agreement when duly executed and delivered, constitutes a valid, legal and bindingobligation of PSS enforceable in accordance with its terms.
Cutera / PSS Distributor Agreement October 1, 2006
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iv. The execution, consummation of the transactions contemplated by _ and/or compliance with the terms and provisions of this Agreement,will not conflict with, result in a breach of, or constitute a default under any of the terms, conditions or provisions of PSS constituent documents orany agreement lease, indenture, mortgage, deed of trust land contract, license or other instrument to which PSS is a party or by which PSS may bebound or affected or to which PSS is subject, or any law, regulation, order, writ, injunction or decree of any court or agency or regulatory body.
16. COMPLAINTS, QUALITY RECORDS AND RECALLS
16.1 PSS will notify, in writing, Cutera's quality assurance department of all Product complaints or any regulatory/conformance issues that mayaffect the marketability of Products. Cutera shall notify the appropriate regulatory agent(s) if required and shall conduct any safety investigations or othernecessary follow-up activities. PSS will provide any information essential to such activities. Cutera will promptly notify PSS if corrective action isnecessary in the Territory.
16.2 In the event of any recall of a Product required by a governmental agency for safety or efficacy reasons, or requested by Cutera at its solediscretion, Cutera agrees to repair or replace at its own costs and expense all Products subject to the recall and previously delivered to PSS or PSS
customers. Cutera also agrees to consult with PSS to establish a reasonable process for managing the recall. Cutera shall be responsible for all reasonableexpenditures incurred by PSS (including, but not limited to shipping, labor and travel costs) consistent with the recall process agreed to by the Parties, andconsistent with HIDA and HDMA industry guidelines. In the event the recall is not required by a governmental agency for safety or efficacy reasons, but isinstead requested by Cutera at its sole discretion, Cutera will be responsible for determining the scope of the recall, including the number of units,timeframe for the recall, and criteria for completion, at no cost or expense to PSS.
17. FORCE MAJEURE
No Party to this Agreement shall be liable for failure or delay of performance of any of its obligations hereunder if such failure or delay is due to causesbeyond its reasonable control including, without limitation, natural disasters, fires, earthquake or storm, strikes, failures of public utilities or common carriers,acts of war, or intervention, acts restraints or regulations of any governmental authority, including compliance with any order of any governmentalconsiderations; provided that any such delay or failure shall be remedied by such Party as soon as possible using commercially reasonable efforts after removalof the cause of such failure. A Party suffering such delay or which expects to suffer such delay shall promptly notify the other Party in writing of the cause andexpected duration of such delay. In the event a delay lasts or is expected to last more than thirty (30) days, then either Party shall have the option to terminate this
Agreement upon written notice.
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Source : CUTERA INC, 10-Q, November 08, 2006
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18. CONFIDENTIALITY
18.1 Return of Confidential Information . Each party shall return to the other all Confidential Information (as defined below) received from that otherparty, along with all copies, immediately upon the termination of this Agreement.
18.2 Remedies . Each party shall be liable to the other for damages caused by any breach of this Sectionl8 or by any unauthorized disclosure or use ofthe other's Confidential Information by such party or third parties to whom unauthorized disclosure was made. In addition to any other rights or remedieswhich may be available to it each party shall be entitled to seek appropriate injunctive relief or specific performance to prevent unauthorized use ordisclosure of Confidential Information. Each party acknowledges and agrees that the unauthorized use or disclosure of the other party's Confidential
Information will cause irreparable injury to the other party and that money damages will not provide adequate remedy to the other party.
18.3 Confidential Information . The business and technical information developed or acquired by, or entrusted by a third party to, each party,including, but not limited to, customer lists, names, contact information, addresses, telephone numbers, email addresses, Product designs, manufacturingprocesses, Product pricing, pricing strategies and Pricing Information (as defined and subject to the provisions of Section 18.4, below), business plans, andall related trade secrets ("Confidential Information") are the exclusive property of such party, are among such party's valuable assets, and their value tothat party may be lost by their unauthorized use or disclosure to persons or entities not related to such party. Neither party shall, directly or indirectly, use
the other party's Confidential Information received hereunder (other than directly in connection with its obligations hereunder) or disclose or disseminateit to any party or entity during the Term of this Agreement or at any time for three years thereafter (subject to the exceptions below), regardless of thereason for such expiration, without the express written consent of the other party. This obligation of confidentiality shall not apply to any ConfidentialInformation which (i) was properly and lawfully known to the receiving party at the time of receipt without any misconduct on the receiving party's part;(ii) was in the public domain at the time of receipt; (iii) becomes public through no wrongful act of the party obligated to keep it confidential; (iv) is
properly received by the receiving party from a third party who did not thereby violate any confidentiality obligations to the disclosing party; or (v) isrequired by applicable law to be divulged.
19. INDEMNIFICATION
19.1 Cutera shall, except as otherwise provided below, indemnify, and hold PSS harmless, and defend or settle any claim made or any suitproceeding, including reasonable attorneys fees, brought against PSS and its Affiliates, arising out of or relating to an allegation that any Product infringesa patent, copyright trademark, trade secret, or other intellectual property right of any third party. PSS shall (a) promptly notify Cutera in writing of any
such claim, (b) cooperate with Cutera in connection with the defense of such claim, and (c) give Cutera the sole authority to defend or settle the claim (atCutera's expense). Cutera shall pay all damages and costs finally awarded in any such suit or proceeding against PSS, or any settlement amount required tosettle the claim. In the event the Product is held to infringe and the use or sale of said Product is enjoined, Cutera shall have the option at its
Cutera / PSS Distributor Agreement October 1, 2006
Source : CUTERA INC, 10-Q, November 08, 2006
D48
own expense , to procure for PSS the right to continue using or selling said Product, or replace same with a non-infringing Product or modify same so itbecomes non-infringing . In the event Cutera is unable to accomplish either of the foregoing remedies after using commercially reasonable efforts to do so,Cutera shall grant a refund to PSS of the price paid by PSS for any of such Products returned to Cutera by PSS, but only to the extent such Products werein PSS ' inventory and had not been shipped to a customer site. Notwithstanding anything to the contrary above, in no event shall Cutera have any liability
under this Section for any such claims resulting from (a) modifications to the Products by anyone other than Cutera where the unmodified Products do notinfringe and Cutera did not authorize the modification; (b) the combination of the Products with other products not provided or authorized by Cutera; or(c) use of the Products for purposes for which they were not intended . THE FOREGOING IS CUTERA' S SOLE LIABILITY RELATING TO ANYCLAIMS OF INFRINGEMENT OF ANY THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. CUTERA EXPRESSLY DISCLAIMS ALLOTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, RELATING TO CLAIMS THAT ITS PRODUCTS INFRINGE ANY
INTELLECTUAL PROPERTY RIGHTS.
19.2 Cutera shall indemnify, defend and hold PSS and its Affiliates harmless from and against any and all liabilities, claims, demands, damages,
costs and expenses or money judgments (including reasonable attorneys fees) asserted against, incurred by or rendered against any of them from (a) thirdparty claims or actions for personal injury, death or property damage which arise out of Cutera's breach of any of its covenants or representations set forthherein, or a defect due to defective design, parts, packaging, labeling, Cutera provided advertising materials, faulty workmanship of Products of whichCutera is the manufacturer or is the Party responsible for failure to warn except to the extent that such personal injuries, death or property damage arise outof PSS's (or its Affiliates) or any third party's negligence or breach of this Agreement (as set forth in herein), (b) third party claims or actions arising from
Cutera's negligence, breach of this Agreement or willful misconduct and (c) mandatory or voluntary recalls of any Products.
19.3 PSS shall and does hereby agree to indemnify and hold harmless Cutera and its Affiliates from and against any and all liability, loss, cost,claim, injury, damage, demand or expense (including, without limitation, reasonable attorneys' fees) of any kind whatsoever arising out of, relating to, onaccount of, or in connection with (a) any instruction, specification or labeling supplied by PSS regarding the Product, unless Cutera has concurred inwriting with such instruction, specification or labeling; (b) any use of the Product in a manner described by PSS, unless Cutera has prescribed in writtenmaterials; (c) any marketing, sale, installation, servicing or repair of the Product by PSS not in accordance with Cutera's written consent and procedures;
(d) any breach by PSS of this Agreement; or (e) PSS' negligence or willful misconduct. This indemnity shall survive the termination or expiration of thisAgreement.
19.4 The indemnification obligations under this Agreement shall survive termination or expiration of this Agreement for any reason.
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20. LIMITATION OF LIABILITY
EXCLUDING CLAIMS FOR INDEMNIFICATION, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANYINDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF ANY KIND WHATSOEVER INCLUDING BUT NOTLIMITED TO LOST PROFITS, IN CONJUNCTION WITH OR ARISING OUT OF THE PERFORMANCE UNDER THIS AGREEMENT OR THE USE ORPERFORMANCE OF PRODUCTS AND SUPPORT SERVICES EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCHDAMAGES.
21. INTELLECTUAL PROPERTY RIGHTS
21.1 All intellectual property rights relating to Cutera, the Products and this Agreement, including all names, trademarks, copyrights, patents, maskworks, trade secrets, know-how, technology, computer software and related documentation and source code and other intellectual property rights, are andshall remain the property of Cutera and nothing in this Agreement shall be deemed to grant to PSS a license or other right to use Cutera's intellectualproperty except as expressly set forth herein. Cutera hereby grants PSS the right to use its name and trademarks solely in compliance with such rules as
Cutera may establish from time to time. PSS will not create or distribute any marketing or promotional material relating to Cutera or the Products withoutCutera's prior written consent.
22. INSURANCE
Cutera shall obtain, pay for and maintain the following insurance coverages:
22.1 Comprehensive Commercial General Liability insurance, including contractual liability insurance and product liability insurance against claimsregarding the Products and its activities contemplated by this Agreement, in an amount not less than one million dollars ($1,000,000) Combined SingleLimit bodily Injury & Property Damage Each Occurrence / three millions dollars ($3,000,000) Aggregate, including coverage for products and completedoperations, contractual liability insuring the obligations assumed by Cutera under this Agreement independent contractors, and personal and advertising
injury coverages.
22.2 Cutera shall name PSS World Medical Inc. and its Subsidiaries, as an additional insured with respect to its Commercial General Liabilitypolicy. Cutera shall maintain such insurance during the term of this Agreement and thereafter for so long as it maintains insurance for itself covering suchactivities. Coverage shall be written on a Standard ISO Occurrence Form CG00010196 or its equivalent. Upon execution of this Agreement and annuallyfor the term of this Agreement Cutera will provide certificates and renewal certificates of insurance reflecting such policy and coverages as requiredabove. Such certificates shall reflect that the underlying policy has been endorsed to provide at least thirty (30) days prior written notice to PSS of the
cancellation, non-renewal, reduction or material change of any such insurance coverage.
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Cutera / PSS Distributor Agreement October 1, 2006
D50
Please send the Certificate of Liability insurance to:
23.1 Each party shall designate (in writing, if requested by the other party) a relationship manager responsible for the day to day management andcoordination of the party's performance under this Agreement and the parties' communications, transactions and relationship with each other. The
relationship managers shall address conflicts that arise relative to this Agreement. If these relationship managers can not resolve such conflicts, then Cuteraand PSS shall promptly establish a review board comprised of appropriate members of management from Cutera and PSS to resolve the conflict.
23.2 In the event that the review board of the Parties does not resolve a dispute within thirty (30) days from the date the review board is established,then the Parties agree to submit the dispute to non-binding mediation. If the Parties do not resolve the dispute through mediation within four months fromthe date such conflict arose, then either of the Parties may elect to pursue any remedies available at law.
24. GENERAL
24.1 Entire Agreement . This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and supersedes
any prior written or verbal agreements or understandings in connection herewith. No amendment, waiver or modification hereto or hereunder shall be validunless specifically made in writing and signed by an authorized signatory of each of the parties hereto. No form, invoice, bill of lading, shipping document,order, receipt or other document provided by a Party shall operate to supercede, modify or amend any provisions of this Agreement, even if the other Partyhas initialed, signed or otherwise acknowledged such document unless the document expressly states that it modifies or amends this Agreement and issigned by an authorized representative of PSS and Cutera. Neither Party's failure to exercise any of its rights under this Agreement will constitute or be
deemed a waiver or forfeiture of those rights. All Exhibits attached to the Agreement shall be deemed a part of this Agreement and incorporated herein.Terms that are defined in this Agreement, and used in any Exhibit, have the same meaning in the Exhibit as in this Agreement. The provisions of anExhibit shall prevail over any conflicting provisions of the body of this Agreement.
24.2 Publicity. During the term of this Agreement and for three years thereafter for any reason, neither party shall make any media release or otherpublic announcement relating to or referring to this Agreement without the other party's prior written consent. Neither party shall acquire the right to use,and shall not use, without prior written consent, the terms or existence of this Agreement the names, trade names, trademarks, service marks, artwork,designs, or copyrighted materials, of the other party, its related or subsidiary companies, parent, employees, directors, shareholders, assigns, successors orlicensees: (a) in any advertising, publicity, press release, client list, presentation or promotion; (b) to express or to imply any endorsement of the otherparty; or (c) in any manner other than expressly in accordance with this Agreement except when required or necessitated by applicable law.
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24.3 Notices . All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certifiedmail or delivered either by hand or by messenger, or sent via fax, addressed to the address set forth at the foot of this Agreement. Any notice or othercommunication so addressed and mailed by registered or certified mail (in each case, with return receipt requested) shall be deemed to be delivered andgiven when so mailed. Any notice or other communication so addressed and delivered by hand, by messenger or by fax shall be deemed to be given when
actually received by the addressee.
24.4 Venue and Jurisdiction . The laws of the State ofNew York will govern any disputes arising in connection with this Agreement, without regardto its conflicts of laws, rules or principles.
24.5 Attorneys' Fees . In any action relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and othercosts incurred therein, in addition to any other appropriate relief.
24.6 Severability . If for any reason any provision of this Agreement shall be deemed by a court of competent jurisdiction to be legally invalid orunenforceable, the validity of the remainder of the Agreement shall not be affected and the offending provision shall be deemed modified to the minimumextent necessary to make it consistent with applicable law, and, in its modified form, the provision shall then be enforceable and enforced.
24.7 Captions . The section headings and captions of this Agreement are for convenience and reference only and in no way define, limit or describethe scope or intent of this Agreement nor substantively affect it in any way.
24.8 Survival . Sections 4.2, 5.4, 8, 12, 18, 19, 20, 21, 23 and 24, and all other provisions that by their terms the parties' reasonably contemplate asremaining in effect after termination or expiration of this Agreement shall survive termination or expiration of this Agreement for any reason.
IN WITNESS WHEREOF, the parties have executed this Agreement to be executed by their duly authorized representatives.
Cutera, Inc.
a Delaware corporation
By: /s/ Ronald J. Santilli
Printed: Ronald J. SantilliIts: VP & CFO
15
PSS WORLD MEDICAL SHAREDSERVICES, INC., a Florida corporation
By: /s/ Eric S. Miller
Printed: Eric S. MillerIts: VP of Finance PSS
Cutera / PSS Distributor Agreement October 1, 2006
Source : CUTERA INC, 10-Q, November 08, 2006
D52
EXHIBIT 1
PRODUCTS AND PRICE LIST
2006 PSS PRICING MATRIX CARDEffective October 1, 2006
Products are sold with a standard 1 year warranty
Equipment Annual Service ContractPricing Pricing
FRT TTPMFNT • ^...1 ^...1 ^...1 ^...1 ^...1 ^...1
CooIGlide Plutfiuvu:
lsccl
Sole,a Plut/o/vn (Inulud[s cult):sole m Opu \\ itll I 11l1^lllalllp Imildpiece
Solcla Iltall \%itll I itall S Ilalldpic c
St IcI:I IitoIl \\itIl IitlIIl V IlaIldpic C
So I I11 I Ilan \\ i t I I I Ilan XI. II:IIl111)i Ccc
\cl, Varltagc - Yag I,nl\ (a)\C o G,rc \\ I IIL Gcnc , i,. mid 111:I,hlanlp Imildpiece\co I I a i r \\ I I I : . I V I V mid I'n,\\:I\ c 770 handl iccc\c , I all \\ III:. I \': I V Gcnc,i,. anal 111:I,hlanlp Imildpiece
\ I I X 1 op1i l l 5 c a l l ' l l " o illd ti'lc l ltall: I it.Ill S I
l.1lal1 VIitall Xl.
Titan handpieces are not covered under the system contract or warranty, they remain limited to the shot count warranty.
UPGRADES : Requirements andElipibi&ty:
1) Service must be contacted for pricing when equipment is not under warranty or service contract.
2) Upgrades can only be made to CoolGlide and the Xeo Full platforms.
3) 90 day warranty on all upgraded parts
SYSTEM UPGRADE PRICING:
TO PT . ATF()RAIr----> EXCEL VANTAGE XEO Full
,FROM PLATFORM "'1"'1
("u,)/( i1ic% 1'lu1/run1:
S<,lc'nr I /,i/hrm:
)ptl^
V(Q Phc,(/ ni:
Co Iio'ht - 111 oll l vvith I Ila,hlanlp ImildpieceXco I' cjuccnation vv IV GcrIc^,i^_ I Ilat II.tnlp 1C tI Cnat10 1 1 h.tII I I)i Ccc_ co Vwii i ^c - Yao' onlvXcl, C,rc Nv I II:_ ( icncviv. ,Ind I Ili IiIwilp handpiccc
Xeo Hair w/HR, FV, LV, and ProWave 770 handpiece
HANDPIECE, AND TITAN FIELD UPGRADE PRICING:
11Th handpiccc licld up'-rides (one h:lndpicce omllit"IIl XI handpiccc upo'm lc for cvi,h u g Titan cu,1.
AAddlIit^ln vvitll Titan S h.tndpiccc to Xl iI l!ornlAdd Titan vvith Titan V handpiccc to Xl O pl.Itliornladd I itln ^vith'I it.m Xl. Imildpiece to XI O platli,rnl
Source : CUTERA INC , 10-Q, November 08, 2006
D53
NAVIGATION AND LIMELIGHT UPGRADE INTRODUCTORY PRICING FOR XEO ONLY:
Customer shipment date
NI\iu^tti ii
I m1 cl I gull
Nm iuatiom anal IinlcLi_ht
Navigation color scheme ^FFFJ ^FFFJ
SOFTWARE UPGRADES:
Pricing (USD)
Factol-N suliw to uI ,^'rades for usin-, handpicccs intcrchan^c:Ibl^
Noll-Titan application,IIit.tn ^lplllicatioii
Field sufhcale up^_'radcs for usin-, ha ndpieces ill tcrchan-'caIIyN l,u-Titan alllllirltio 1l
(a) Pricing applies when shipped with systemfrom thefactory
(b) Pricing applies when shipped with Titan S or Titan Vfromfactory
[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTEDAND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THESECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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D54
EXHIBIT 2CUTERA'S PRODUCT WARRANTY
Cutera warrants solely to the end- user customer, for one year from initial shipment of a Product manufactured by Cutera (but with respect to a non-laserHandpiece, for the certain period from shipment or for the certain number of shots of that handpiece following its shipment, whichever is first to occur, all asprovided on the face of the applicable purchase agreement), that such Product will be free from defects in workmanship and materials . This warranty is subject toproper use , operation and maintenance of the Product in accordance with the operator manual , and shall not apply if the Product has been damaged after shipmentto the customer, or misused, altered, disassembled or serviced by any person other than Cutera. Cutera' s sole obligation under this warranty shall be, at Cutera's
option , to repair or replace any Product defect that was present when the Product was first shipped . Products repaired or replaced under warranty and componentsthereof will be warranted as provided in this subsection for the remainder of the original Product's original warranty period . Product upgrades and the underlyingsystem consoles (which exclude handpieces) will be warranted as provided in this subsection for the remainder of the consoles' original warranty period.Notwithstanding anything to the contrary : ( i) software and firmware licensed herein will be warranted as provided in this subsection for ninety days fromshipment; and, (ii ) Cutera makes no warranties with respect to a Product ' s removable hand piece window, or to Products not manufactured by Cutera. THE
FOREGOING PRODUCT WARRANTIES AND REMEDIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHERS. EXCEPT AS SO STATED, CUTERADISCLAIMS ALL PRODUCT WARRANTIES, EXPRESS AND IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY ANDFITNESS FORA PARTICULAR PURPOSE.
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D55
Certification of Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Kevin P. Connors, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the 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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure 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'sinternal 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'sauditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 financialreporting.
Date: November 8, 2006
Source : CUTERA INC, 10-Q, November 08, 2006
/s/ Kevin P. Connors
Kevin P. ConnorsPresident, Chief Executive Officerand Director (Principal Executive Officer)
D56
Certification of Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Ronald J. Santilli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the 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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this 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, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally 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 thedisclosure 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'sinternal 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'sauditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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 financialreporting.
Date: November 8, 2006
Source : CUTERA INC, 10-Q, November 08, 2006
/s/ Ronald J Santilli
Ronald J. SantilliChief Financial Officer(Principal Financial and Accounting Officer)
D57
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICER
PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
Exhibit 32.1
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2006 (the "Report") fully complies with therequirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2006 /s/ Kevin P. Connors
Kevin P. ConnorsPresident, Chief Executive Officerand Director(Principal Executive Officer)
I, Ronald J . Santilli , certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2006 (the "Report") fully complies with therequirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2006 /s/ Ronald L Santilli
Ronald J. Santilli
Chief Financial Officer(Principal Financial and Accounting Officer)
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company forpurposes of Section 18 of the Securities and Exchange Act of 1934, as amended.
Created by lOKWizard www. lOKWizard.com
Source : CUTERA INC, 10-Q, November 08, 2006
D58
EXHIBIT E
News Release
C TE (?A
Page 1 of 8
Print Page Close Window
Cutera ( R) Reports Fourth Quarter and Full Year 2006 Results
Company Sets New Records for Quarterly Revenue and EPS
BRISBANE, Calif., ]an. 31 /PRNewswire-FirstCall/ -- Cutera, Inc. (Nasdaq: CUTR), a leadingprovider of laser and other light-based aesthetic systems for practitioners worldwide, todayreported financial results for the fourth quarter and twelve months ended December 31,2006. Key financial highlights are as follows:
Fourth quarter 2006, compared with the same quarter in 2005:
Revenue increased by $6.5 million, or 27%, from $24.0 million to
$30.5 million.
GAAP diluted earnings per share for the fourth quarter of 2006 was
$0.50, compared with $0.41 in the fourth quarter of 2005. Non-GAAP(l)
diluted earnings per share in the fourth quarter of 2006, which
excluded stock-based compensation expenses, was $0.55.
Cash generated by operations increased 93%, from $7.6 million to
$14.6 million.
Full-year 2006, compared with full-year 2005:
Revenue increased by $25.1 million, or 33%, from $75.6 million to
$100.7 million.
GAAP diluted earnings per share was $0.15. Non-GAAP(1) diluted earnings
per share in 2006, which excluded patent litigation settlement and
stock-based compensation expenses, was $1.18.
Cash and marketable investments balance improved to $108.1 million in
2006.
"We are very pleased with our fourth quarter revenue growth in all of our geographicregions and the overall improvements in operations," said Kevin Connors, President andChief Executive Officer. "Our fourth quarter gross margin and operating margin improved to73% and 29%, respectively. We believe the strong revenue growth and improved leveragein our operating model, were primarily attributable to the strength of our multiple productofferings and investments in sales force expansion. As a result of these factors, wegenerated $14.6 million of cash flow from operations in the fourth quarter and ended theyear with over $108 million of cash and marketable securities."
Mr. Connors concluded, "2006 was an exciting year for Cutera -- we maintained strongrevenue growth, resolved our patent litigation and experienced improved financial leveragein our business model. We are very excited about the opportunities for our company in2007, as we continue to focus on developing new products and applications and expandingour distribution channels. We expect these efforts will enable us to continue increasing ourmarket share in the growing market for light-based aesthetic systems."
Guidance:
Management expects revenue for the first quarter and full-year 2007, to be approximately$26 million and $126 million, respectively. This represents a 25% growth from the same
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News Release
periods in the prior year.
Page 2 of 8
For the first quarter and full-year 2007, we expect GAAP diluted earnings per share to be$0.21 and $1.30, respectively. For the same periods, non-GAAP(1) diluted earnings pershare, excluding stock-based compensation expenses, is expected to be $0.28 and $1.57,respectively.
Non-GAAP Presentation:
(1) Effective January 1, 2006, Cutera adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), which required the Company to
recognize compensation expense relating to share-based payment
transactions in the Statement of Operations. In June 2006, the Company
settled its patent litigation. To supplement the condensed
consolidated financial information presented on a GAAP basis,
management has provided non-GAAP net income and non-GAAP diluted
income per share measures that exclude the impact of the litigation
settlement and all stock-based compensation expenses, both net of
income taxes. The Company believes that these non-GAAP financial
measures provide investors with insight into what is used by
management to conduct a more meaningful and consistent comparison of
the company's ongoing operating results and trends, compared with
historical results. This presentation is also consistent with
management's internal use of the measure, which it uses to measure the
performance of ongoing operating results, against prior periods and
against our internally developed targets. A table reconciling the GA-AP
financial measures to the non-GAAP measures is included in the
condensed consolidated financial information attached to this release.
Conference Call:
The conference call to discuss these results is scheduled to begin at 2:00 p.m. PST (5:00p.m. EST) on January 31, 2007. The call will be broadcast live over the Internet hosted atthe Investor Relations section of the Company's website at www.cutera.com and will bearchived online within one hour of its completion. In addition, you may call 877-704-5381 tolisten to the live broadcast. Participating in the call will be Kevin Connors, President andChief Executive Officer, and Ron Santilli, Chief Financial Officer.
A telephonic playback will be available from 5:00 p.m. PST (8:00 p.m. EST) on January 31,2007, through 8:59 p.m. PST (11:59 p.m. EST) on February 14, 2007 by calling 888-203-1112. To access this playback, please enter pass code 8614033.
About Cutera, Inc.
Brisbane, California-based Cutera is a leading provider of laser and other light-based
aesthetic systems for practitioners worldwide. Since 1998, Cutera has been developing
innovative, easy-to-use products that enable dermatologists, plastic surgeons,
gynecologists, primary care physicians and other qualified practitioners to offer safe,
effective and non-invasive aesthetic treatments to their patients. For more information, call
1-888- 4CUTERA or visit www.cutera.com.
This press release contains forward-looking statements within the meaning of the U.S.Private Securities Litigation Reform Act of 1995. Specifically, statements concerning Cutera'sopportunities in 2007, including the development of new products and applications and
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News Release Page 3 of 8
expansion of distribution channels, leading to increased market share, as well as Cutera'sfinancial guidance for the first quarter and full-year 2007, are forward-looking statementswithin the meaning of the Safe Harbor. Forward-looking statements are based onmanagement's current, preliminary expectations and are subject to risks and uncertainties,which may cause Cutera's actual results to differ materially from the statements containedherein. Cutera's fourth quarter and year ended December 31, 2006 financial performance,as discussed in this release, is preliminary and unaudited, and subject to adjustment.Estimates for the first quarter and fiscal year 2007 financial performance are subject to anumber of assumptions regarding the future operation of our business. Further informationon potential risk factors that could affect Cutera's business and its financial results aredetailed in its most recent 10-K and 10-Q as filed with the Securities and ExchangeCommission. Undue reliance should not be placed on forward-looking statements, especiallyguidance on future financial performance, which speaks only as of the date they are made.Cutera undertakes no obligation to update publicly any forward-looking statements to reflectnew information, events or circumstances after the date they were made, or to reflect theoccurrence of unanticipated events.
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, December 31,
2006 2005
Assets
Current assets:
Cash and cash equivalents $11,800 $5,260
Marketable investments 96,285 86,736
Accounts receivable, net 9,601 6,478
Inventory 5,220 5,245
Deferred tax asset 5,792 3,027
Other current assets 2,702 3,728
Total current assets 131,400 110,474
Property and equipment, net 1,029 1,015
Intangibles, net 1,446 469
Total assets $133,875 $111,958
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $2,212 $1,352
Accrued liabilities 13,675 9,131
Deferred revenue 3,514 1,673
Total current liabilities 19,401 12,156
Deferred rent 1,424 1,096
Deferred revenue, net of current
portion 3,258 1,469
Deferred tax liability 60 60
Total liabilities 24,143 14,781
Stockholders' equity:
Common stock 13 12
Additional paid-in capital 86,242 77,705
Deferred stock-based compensation (331) (2,171)
Retained earnings 23,866 21,743
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News Release Page 4 of 8
Other comprehensive loss (58) (112)
Total stockholders' equity 109,732 97,177
Total liabilities and
stockholders' equity $133,875 $ 111,958
CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Mont hs Ended Twelve Mon ths EndedDecember 31, Decembe r 31,
2006 2005 2006 2005
Net revenue $30,481 $23,953 $100,692 $75,620
Cost of revenue 8,349 6,149 29,859 19,792
Gross profit 22,132 17,804 70,833 55,828
Operating expenses:
Sales and marketing 7,865 7,167 32,890 25,021
Research and development 1,935 1,421 6,473 5,353
General and administrative 3,578 2,263 15,192 8,782
Litigation settlement - - 18,935 -
Total operating expenses 13,378 10,851 73,490 39,156
Income (loss) from operations 8,754 6,953 (2,657) 16,672
Interest and other income, net 981 683 3,596 2,034
Income before income taxes 9,735 7,636 939 18,706
Provision (benefit) for income
taxes 2,620 1,825 (1,184) 4,905
Net income $7,115 $5,811 $2,123 $13,801
Net income per share:
Basic $0.56 $0.48 $0.17 $1.20
Diluted $0.SO $0.41 $0.15 $1.00
Weighted-average number of
shares used in per share
calculations:
Basic 12,749 12,026 12,558 11,535
Diluted 14,346 14,291 14,278 13,864
CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2005 2006 2005
Cash flows from operating
activities:
Net income
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
Chance in allowance for
$7,115 $5,811
233 185
$2,123 $13,801
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869 689
News Release Page 5 of 8
doubtful accounts (80) (14) (143) (310)
Provision for excess and
obsolete inventory - 471 90 905Change in deferred tax
asset/liability 919 (1,347) (2,765) (735)
Stock based compensation 1,311 240 4,542 1,442
Tax benefit from stock option
exercises 1,808 4,312 1,808 7,437
Excess tax benefit related toshare-based compensation
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained on Cutera'sInvestor Relations web pages which are not historical facts may be considered forward-looking statements, including, withoutlimitation, statements as to trends, management's beliefs, expectations and opinions, which are based upon a number ofassumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements aresubject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially fromthose in the forward-looking statements. For further information that could cause actual results to differ from Cutera'sexpectations as well as other factors that could affect Cutera's financial statements, please refer to the Cutera's reports filedwith the Securities and Exchange Commission.
E8
EXHIBIT F
News Release Page 1 of 2
C , TE RA Print Page Close Window
Cutera ( R) Reports Preliminary First Quarter 2007 Revenue and EPS
Schedules Date of Earnings Release
BRISBANE , Calif., April 5 /PRNewswire -FirstCall/ -- Cutera, Inc. (Nasdaq : CUTR ), a leadingprovider of laser and other light-based aesthetic systems for practitioners worldwide, todayreported preliminary revenue and estimated earnings per diluted share for the first quarterof 2007.
Based on preliminary financial data, Cutera expects revenue to be approximately $23 millionfor the first quarter ended March 31, 2007, compared with our earlier guidance of $26million provided on January 31, 2007.
GAAP earnings per diluted share for the first quarter of 2007 are expected to be in the rangeof $0.11 to $0.13, compared with our earlier guidance of $0.21 provided on January 31,2007.
"We continue to see strong growth in the laser and light-based aesthetic equipmentmarket," said Kevin Connors, Cutera's President and CEO. He added, "This quarter'sshortfall was due primarily to lower than expected productivity levels of our recent salesexpansion. We are implementing specific initiatives to address this matter and remainconfident in our ability to increase our revenue growth."
Full results for the company's first quarter of 2007, and comments on the company's 2007guidance, will be announced on May 7, 2007, after market close. The company will also holda conference call that is scheduled to begin at 2:00 p.m. PDT (5:00 p.m. EDT) on May 7.This call will be broadcast live over the Internet hosted at the Investor Relations section ofthe Company's website at http://www.cutera.com and will be archived online within onehour of the completion of the conference call. In addition, you may call 800-811-0667 tolisten to the live broadcast. A telephonic playback will be available from 5:00 p.m. PDT(8:00 p.m. EDT) on May 7, 2007, through 8:59 p.m. PDT (11:59 p.m. EDT) on May 21,2007 by calling 888-203-1112. To access this playback, please enter pass code 9191564.
About Cutera, Inc.
Brisbane, California-based Cutera is a leading provider of laser and other light-basedaesthetic systems for practitioners worldwide. Since 1998, Cutera has been developinginnovative, easy-to-use products that enable dermatologists, plastic surgeons,gynecologists, primary care physicians and other qualified practitioners to offer safe,effective and non-invasive aesthetic treatments to their patients. For more information, call1-888- 4CUTERA or visit www.cutera.com
This press release contains forward-looking statements within the meaning of the U.S.Private Securities Litigation Reform Act of 1995. Specifically, statements concerning Cutera'sexpected first quarter 2007 revenue and earnings per share data, and its ability to expandits distribution network, are forward-looking statements within the meaning of the Safe
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News Release Page 2 of 2
Harbor. Forward- looking statements are based on management's current, preliminaryexpectations and are subject to risks and uncertainties, which may cause Cutera's actualresults to differ materially from the statements contained herein. Cutera's first quarter 2007revenue and earnings per share data, as discussed in this release, are preliminary andunaudited, and subject to adjustment, including in the quarter closing process and reviewand auditing by our independent auditors. Further information on potential risk factors thatcould affect Cutera's business and its financial results are detailed in its most recent 10-K asfiled with the Securities and Exchange Commission. Undue reliance should not be placed onforward-looking statements, which speak only as of the date they are made. Cuteraundertakes no obligation to update publicly any forward-looking statements to reflect newinformation, events or circumstances after the date they were made, or to reflect theoccurrence of unanticipated events.
SOURCE Cutera, Inc.
CONTACT: Investor Relations, John Mills of Integrated CorporateRelations, Inc ., +1-310-954- 1100, john.mills@ icrinc.com
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained on Cutera'sInvestor Relations web pages which are not historical facts may he considered forward-looking statements, including, withoutlimitation, statements as to trends, management's beliefs, expectations and opinions, which are based upon a number ofassumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements aresubject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially fromthose in the forward-looking statements. For further information that could cause actual results to differ from Cutera'sexpectations as well as other factors that could affect Cutera's financial statements, please refer to the Cutera's reports filedwith the Securities and Exchange Commission.
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EXHIBIT G
CUTEPA Print Page Close Window
Cutera Reports First Quarter Ended March 31, 2007 Results
BRISBANE , Calif.--(BUSINESS WIRE )--May 7, 2007--Cutera , Inc. (NASDAQ:CUTR), aleading provider of laser and other light-based aesthetic systems for practitionersworldwide , today reported financial results for the first quarter ended March 31 , 2007. Keyfinancial highlights are as follows:
First quarter 2007, compared with the same quarter in 2006:
Revenue increased 12% from $20.8 million to $23.3 million.
-- Diluted earnings per share, which included stock-based
compensation expenses, was $0.12, compared with $0.08 in thefirst quarter of 2006.
-- Non-GAAP(l) diluted earnings per share was $0.18, compared
with $0.13 in the first quarter of 2006.
" While we are pleased with our international revenue which grew 27% when comparingQ1'07 to Q1'06 , the revenue growth in our U. S. business this past quarter did not meet ourexpectations ," said Kevin Connors, President and Chief Executive Officer . He explained, "Webelieve that the primary reasons for the poor performance of our North American sales teamwere the unsuccessful implementation of our junior sales program , unusually high salesemployee turnover , and disappointing results from PSS and other national accounts.
We are taking the following strategic initiatives to improve our performance:
1) We are continuing to restructure our sales-force with senior, experienced sales people,and have discontinued the junior sales program;
2) We have dedicated additional sales personnel to our PSS partnership to facilitateincreased selling efforts; and,
3) We plan to expand our North American sales team and expect to have 64 senior,experienced sales people by the end of 2007."
Mr. Connors continued, "As a result of our aberrant sales employee turnover, many of ourNorth American salespeople have been in their roles for less than six months. We recognizethat it will take time for new employees to achieve target sales productivity, but areconfident that our model will support increased growth by the second half of this year.Additionally, we believe that our introduction of Pearl, which received FDA clearance duringthe quarter, will have a favorable impact on our performance. We are continuing to increaseour investments in the international market, which is experiencing robust growth. We haveone of the most diverse product lines in the aesthetic equipment market, realize highoperating margins, and manage a strong balance sheet with over $111 million in cash andmarketable securities with no debt."
G1
Guidance:
Management expects revenue for the second quarter and full year 2007 to be approximately$23 million and $ 110 million, respectively.
For the second quarter and full year 2007, we expect GAAP diluted earnings per share to be$0.08 and $0.81, respectively. For the same periods, Non-GAAP(1) diluted earnings pershare is expected to be $0.14 and $1.07, respectively.
Non-GAAP Presentation:
(1) Effective January 1, 2006, Cutera adopted Statement of Financial Accounting Standards(SFAS) No. 123R, which required the Company to recognize compensation expense relatingto share-based payment transactions in the Statement of Operations.. In June 2006, theCompany settled its patent litigation. To supplement the condensed consolidated financialinformation presented on a GAAP basis, management has provided Non-GAAP net incomeand Non-GAAP diluted income per share measures that exclude the impact of all stock-based compensation expenses, net of income taxes. The Company believes that these Non-GAAP financial measures provide investors with insight into what is used by management toconduct a more meaningful and consistent comparison of the company's ongoing operatingresults and trends, compared with historical results. This presentation is also consistent withmanagement's internal use of the measure, which it uses to measure the performance ofongoing operating results, against prior periods and against our internally developedtargets. A table reconciling the GAAP financial measures to the Non-GAAP measures, isincluded in the condensed consolidated financial information attached to this release.
Conference Call:
The conference call to discuss these results is scheduled to begin at 2:00 p.m. PDT (5:00p.m. EDT) on May 7, 2007. The call will be broadcast live over the Internet hosted at theInvestor Relations section of the Company's website at www.cutera.com and will bearchived online within one hour of its completion. In addition, you may call 800-811-0667 tolisten to the live broadcast. Participating in the call will be Kevin Connors, President andChief Executive Officer, and Ron Santilli, Chief Financial Officer.
A telephonic playback will be available from 5:00 p.m. PDT (8:00 p.m. EDT) on May 7,2007, through 8:59 p.m. PDT (11:59 p.m. EDT) on May 21, 2007 by calling 888-203-1112.To access this playback, please enter pass code 9191564.
About Cutera, Inc.
Brisbane, California-based Cutera is a leading provider of laser and other light-basedaesthetic systems for practitioners worldwide. Since 1998, Cutera has been developinginnovative, easy-to-use products that enable dermatologists, plastic surgeons,gynecologists, primary care physicians and other qualified practitioners to offer safe,effective and non-invasive aesthetic treatments to their patients. For more information, call1-888-4CUTERA or visit www.cutera.com
This press release contains forward-looking statements within the meaning of the U.S.Private Securities Litigation Reform Act of 1995. Specifically, statements concerning Cutera'sability to grow its business, expectations regarding new products and applications, plans to
G2
expand its sales and distribution network, as well as Cutera's financial guidance for thesecond quarter, and full-year 2007, are forward-looking statements within the meaning ofthe Safe Harbor. Forward-looking statements are based on management's current,preliminary expectations and are subject to risks and uncertainties, which may causeCutera's actual results to differ materially from the statements contained herein. Cutera'sfirst quarter ended March 31, 2007 financial performance, as discussed in this release, ispreliminary and unaudited, and subject to adjustment. Estimates for the second quarter andfiscal year 2007 financial performance are subject to a number of assumptions regarding thefuture operation of our business. Further information on potential risk factors that couldaffect Cutera's business and its financial results include its ability to improve salesproductivity and increase sales performance worldwide; its ability to successfully developand market new products; unforeseen events and circumstances relating to its operations;government regulatory actions; general economic conditions; and those other factorsdescribed in the section entitled, "Risk Factors," in its most recent Form 10-Q as filed withthe Securities and Exchange Commission on May 7, 2007. Undue reliance should not beplaced on forward-looking statements, especially guidance on future financial performance,which speak only as of the date they are made. Cutera undertakes no obligation to updatepublicly any forward-looking statements to reflect new information, events or circumstancesafter the date they were made, or to reflect the occurrence of unanticipated events.
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
Assets
Current assets:
Cash and cash equivalents
Marketable investments
Accounts receivable, net
Inventories
Deferred tax assetOther current assets
Total current assets
Property and equipment, net
Intangibles, net
Deferred tax asset
Total assets
Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
March 31, December 31,
2007 2006---------- -------------
$ 16,876 $ 11,800
94,363 96,285
8,565 9,601
6,516 5,220
5,809 5,792
3,488---------- ---
2,702- -
135,617
- -------
131,400
1,212 1,029
1,398 1,446
361 ----------- -------------
$ 138,588 $ 133,875
$ 1,893 $ 2,212
11,615 13,6753,780
---------- ----3,514
-----
17,288---------- ----
----
19,401---------
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Deferred rent . 1,478 1,424
Deferred revenue, net of current portion 3 , 192 3,258
Income tax liability 1,018 60---------- -------------
Total liabilities 22,976 24,143---------- -------------
Stockholders' equity:Common stock 13 13
Additional paid-in capital 90,304 86,242
Deferred stock- based compensation (190) (331)
Retained earnings 25,530 23,866
Accumulated other comprehensive loss ( 45) (58)---------- -------------
Total stockholders' equity 115,612 109,732
---------- --------_-----
Total liabilities and stockholders' equity $ 138,588 $ 133,815
CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,-------------------
2007 2006--------- ---------
Net revenue $ 23,257 $ 20,757Cost of revenue 7,781 5,811
--------- ---------
Gross profit 15,476 14,946
Operating expenses:Sales and marketing 9,063 8,546Research and development 1,747 1,307General and administrative 3,018 4,375
--------- ---------
Total operating expenses 13,828 14,228--------- ---------
Income from operations 1,648 718Interest and other income, net 1,002 956
--------- ---------
Income before income taxes 2,650 1,674
Provision for income taxes 895 567
Net income $ 1,755 $ 1,107
Net income per share:
Basic $ 0.13 $ 0.09
Diluted $ 0.12 $ 0 . 08
Weighted-average number of shares used in per
share calculations:
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Basic 13,216 12,257
Diluted 14,629 14,174
CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months EndedMarch
-----------31,
2007
--------
2006
Cash flows from operating activities:
--------- - --------
Net income $ 1,755 $ 1,107Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization 226 199Change in allowance for doubtful accounts 62 83Provision for excess and obsolete inventories 18 -
Change in deferred tax asset 60 22Stock based compensation 1,342 1,086Tax benefit from employee stock options 710 1,006Excess tax benefit related to stock-basedcompensation expense (288) (999)
Changes in assets and liabilities:Accounts receivable 974 (252)Inventories (1,314) (1,439)Other current assets (786) (212)Accounts payable (319) 1,035Accrued liabilities (1,605) (258)Deferred rent 54 82Deferred revenue 200 652Income tax liability (26)
Net cash provided by operating activities
--------- -
1,063--------- -
--------
2,112--------
Cash flows from investing activities:
Acquisition of property and equipment (341) (114)Acquisition of intangibles (20) -Proceeds from sales of marketable investments 15,149 439Proceeds from maturities of marketable investments 7,630 18,688Purchase of marketable investments, net (20,844) (24,989)
--------- ---------Net cash provided by (used in) investingactivities 1,574 (5,976)
--------- ---------
Cash flows from financing activities:Proceeds from exercise of stock options andemployee stock purchase plan 2,151 556
Excess tax benefit related to stock-basedcompensation expense 288 999
--------- ---------
Net cash provided by financing activities 2,439 1,555--------- ---------
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Net increase (decrease) in cash and cashequivalents 5,076 (2,309)
Cash and cash equivalents at beginning of period 11,800 5,260--------- ---------
Cash and cash equivalents at end of period $ 16,876 $ 2,951
Supplemental and non-cash disclosure of cash flow
information:
Change in deferred stock-based compensation, net
of terminations $ (8) $ (1,255)
CUTERA, INC.
CONSOLIDATED REVENUE HIGHLIGHTS
(in thousands, except percentage data)(unaudited)
Revenue By Geography:
United States
International
Revenue By Product Category:ProductsProduct upgrades
Service
Titan handpiece refills
Three Months Ended March 31,
-2007--------
2006--------
Change--------
$ 15,845 $ 14,908 +6%-
7,412 5,849 +27%--
$
--------
23,257
-
$
--------
20,757 +12%
$ 18,316 $ 17,556 +4%
1,922 1,136 +69%
1,917 1,121 +7196
1,102 944 +17%-
$ 23,257 $ 20,757 +12%
CUTERA, INC.
NON-GAAP RECONCILIATION OF NET INCOME AND NET INCOME PER SHARE(in thousands, except per share data)
(unaudited)
GAAP net income
Non-GAAP adjustments to net income:Stock-based compensation (a)Income tax effect of stock-basedcompensation (b)
Total Non-GAAP adjustments to net loss
Non-GAAP net income
Three Months Three Months
Ended Ended
3/31/2007 3/31/2006------------- ------------
$ 1,755 $ 1,107------------- ------------
1,342 1,086
(402) (347)------------- ------------
940 739------------- ------------
$ 2,695 $ 1,846
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GAAP diluted net income per share
Non-GAAP adjustments to diluted income per
share
Stock-based compensation, net of income
tax effect (a)(b)
Non-GAAP diluted net income per share
Weighted-average shares used to compute
GAAP and Non-GAAP diluted net income per
share
$ 0.12 $ 0.08
0.06 0.05------------- ------------
$ 0.18 $ 0.13
14,629 14,174
(a) Includes all non-cash stock-based compensation charges recorded inaccordance with SFAS 123R.
(b) The income tax effect is based on the marginal tax impact ofexcluding the stock based compensation expenses from the taxprovision.
CUTERA, INC.
NON-GAAP RECONCILIATION OF GUIDANCE NET INCOME AND NET INCOME PER
SHARE
(in thousands, except per share data)(unaudited)
Guidance GAAP net income
Non-GAAP adjustments to net income
Stock-based compensation (a)
Income tax effect of stock-based
compensation (b)
Total non-GAAP adjustments to netincome
Guidance Non-GAAP net income
Three Months Year EndedEnded December 31,
June 30, 2007 2007------------- -------------
$ 1,150 $ 11,950------------- -------------
1,400 5,812
(462) (1,918)------------- -------------
938 3,894------------- -------------
$ 2,088 $ 15,844
Guidance GAAP diluted net income pershare $
Non-GAAP adjustments to GAAP diluted netincome per share
Stock-based compensation, net of incometax effect (a) (b)
0.08 $ 0.81
0.06 0.26------------- -------------
Guidance Non-GAAP diluted net incomeper share $ 0.14 $ 1.07
Weighted - average shares used to compute
G7
GAAP and Non-GAAP diluted net income pershare 14,750 14,800
(a) Includes all non-cash stock-based compensation charges recorded in
accordance with SFAS 123R.
(b) The income tax effect is based on the marginal tax impact of.excluding the stock based compensation expenses from the taxprovision.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained on Cutera'sInvestor Relations web pages which are not historical facts may be considered forward-looking statements, Including, withoutlimitation, statements as to trends, management's beliefs, expectations and opinions, which are based upon a number ofassumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements aresubject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially fromthose in the forward-looking statements. For further Information that could cause actual results to differ from Cutera'sexpectations as well as other factors that could affect Cutera's financial statements, please refer to the Cutera's reports filedwith the Securities and Exchange Commission.
G8
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Copyright 2006 CCBN, Inc. and FDCH e-Media, Inc.
February 13, 2006
Q4 2005 Cutera Inc Earnings Conference Call - Final
OPERATOR: Good day and welcome to the Cutera , Inc . fourth quarter 2005 earnings
conference call.
[Operator Instructions]
It is now my pleasure to turn the floor over to your host, Mr. John Mills of
Integrated Corporate Relations. Please go ahead, Mr. Mills.
JOHN MILLS, INVESTOR RELATIONS, INTEGRATED CORPORATE RELATIONS: Thank you very
much. By now, everyone should have access to the fourth quarter earnings release
which went out today at approximately 4 PM eastern time. The release is availableon the investor relations portion of Cutera's website at cutera.com and with our
Form 8-K filed with the SEC and available on its website at sec.gov.
Before we begin, Cutera would like to remind everyone that these prepared remarks
contain forward-looking statements, including statements related to guidance about
future financial performance regarding the timing and completion of our planned
Sarbanes-Oxley 404 certification and concerning the outcome of Cutera's patent
litigation with Palomar Medical Technologies, and that management may make
additional forward-looking statements in response to your questions. Factors that
could cause Cutera's actual results to differ materially from these forward-looking
statements include its reliance on a limited product line; its ability to
effectively develop, market and sell future products; unforeseen events and
circumstances relating to its operations; government regulatory actions; general
economic conditions; an adverse ruling in its litigation with Palomar; and those
other factors described in the section entitled 'Factors That May Affect Future
Results' in its most recent 10-K and 10-Q filed with the Securities and Exchange
Commission.
These forward-looking statements do not guarantee future performance and
therefore, you should not rely on them in making investment decisions without
considering the risk associated with such statements. Cutera also cautions you not
to place undue reliance on forward-looking statements, especially those relating to
guidance on future financial performance, which speaks only as of the date they
were made. Cutera undertakes no obligation to update publicly any forward-looking
statement to reflect new information, events or circumstances after the date they
were made or to reflect the occurrence of unanticipated events.
With that, I'll turn the call over to the company's President and Chief Executive
Officer, Kevin Connors.
KEVIN CONNORS, PRESIDENT AND CEO, CUTERA, INC.: Thank you, John. Good afternoon,
everyone, and thanks for joining us today to discuss Cutera's results for the
fourth quarter and year ended December 31st, 2005.
On today's call I'll provide an overview of the fourth quarter and current trends
and Ron Santilli, our CFO, will provide additional detail on operating and
financial results and comment on guidance. We'll then provide some closing comments
and open up the call to your questions.
I'm very pleased with our fourth quarter and 2005 results, which exceeded both our
top and bottom line expectations and proved the key initiatives we have implemented
have been working well for us. During the fourth quarter and full year 2005 we
experienced record revenue growth. Fourth quarter 2005 revenue grew 49% when
compared to the same period last year. Our full year 2005 revenue grew 44% over
2004's. When comparing 2005 to 2004 we achieved revenue growth in the Asia andEurope and are pleased with our 57% growth rate in the United States. Cutera has
become a leading worldwide provider of light-based aesthetic devices.
Earning per share growth was even more significant, $0.41 in the fourth quarter
2005 when compared with $0.16 in the fourth quarter 2004. When comparing full year
2005 to 2004, our earnings per share more than tripled from $0.31 to $1. Our
continuing efforts in leveraging our business model resulted in significantly
improved operating margins.
During this past year we made significant progress in executing our strategic
initiatives. We aggressively expanded our sales force and improved sales
productivity. We entered 2005 with 32 sales territories in North America and ended
the year with 47 territories. Our improved training program helped our sales
organization realize productivity improvements even during this period of rapid
expansion.
As a second initiative, we continued our commitment to annual product and
application introductions. We successfully launched the following in 2005 -- a.
Solera Opus, a new single technology compact platform that offers an entry level
product to an emerging price-sensitive market; b. the ProWave 770, the first light-
based hair removal system that allows practitioners to select the ideal spectrum of
light for each patient and is designed to quickly treat large areas such as legs
and backs; c. we introduced the AcuTip, a tailored handpiece that offers optimized
spectrum flashlamp ideal for treating discrete vascular and pigmented lesions.
As another initiative, we increased our market penetration through the expanding
group of physicians outside of the traditional dermatology and plastic surgery
specialties, including the emerging medi-spa market. These strategic initiatives
have enabled us to achieve record revenue and profitability performance. We are at
record operating profit due to our continued strong gross margins and reduced
operating expenses as a percentage of sales. After Ron has commented on the
financial performance and guidance I will share with you some key initiatives that
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we plan to focus on in 2006.
Page 3
And now, an update about our pending litigation with Palomar. In this lawsuit, now
in its fourth year, Palomar is claiming that our laser-based hair removal systems
violate [three claims] and a patent. We believe that our products do not infringe
that patent and that the applicable claims are invalid. We have also filed a
counter-suit against Palomar for inequitable conduct and we are asking the Court todeclare the entire patent unenforceable. We are eager to get the facts in front ofa jury and are pleased that the Court has scheduled our trial to begin on May 30th,2006.
We believe that we have built a fundamentally different and higher capability
laser-based hair removal system. Even before that product's commercial release, we
obtained an independent legal opinion that it does not infringe that patent. We
even told the U.S. Patent and Trademark office about Palomar's patent when applying
for our own rights and we were granted our own patents for our products.
Although the plaintiffs are asking the Court for a broad reading of the patent,entitled Hair Removal Using Optical Pulses, Cutera believes that it [risks] only
laser-based hair removal application. Cutera has a broad range of product
offerings. We use multiple technology platforms and have product solutions for a
variety of noninvasive applications, including vascular, photo rejuvenation, skin
tightening and pigmented lesion treatments, and our hair removal solution is not
limited to laser-based products named in that suit.
We remain confident in a positive outcome in this lawsuit. Obviously, litigation
is uncertain and we advise interested investors to refer to our quarterly and
annual reports for more information about this matter and the risks associated with
this litigation.
In summary, we're pleased with our performance in 2005 and we're continuing to
build the foundation for further growth. The light-based aesthetic equipment market
is growing at a healthy rate and Cutera is strategically positioned, both
financially, operationally, to harness this growth. We remain committed to annual
product introductions and continued expansion of our direct sales organization in
2006. We have the financial strength to support our growth plans, as we now focus
on new opportunities for 2006 and beyond.
With that, I'd like to turn the call over to Ron to discuss our financials in more
detail. Ron?
RON SANTILLI, CFO, CUTERA, INC.: Thanks, Kevin, and thanks to all of you for
joining us today for our fourth quarter and year ended December 31, 2005 results.
As Kevin discussed, we achieved record revenue in the fourth quarter and year
ended 2005 due primarily to increased demand for our multi-application and multi-
technology products and increased market coverage from our sales expansion efforts.
From a profitability perspective we significantly improved the leverage of our
business model and achieved record operating and pretax profit margins in the
fourth quarter and full year.
Fourth quarter 2005 revenue was $24 million, a 49% increase over the 16.1 million
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recorded in the same quarter last year. Net income for the fourth quarter 2005 was
$5.8 million, or $0.41 per diluted share, compared to 2.1 million, or $0.16 perdiluted share, reported in the fourth quarter of 2004. Cutera's revenue for the
year ended December 31, 2005 was $75.6 million compared to 52.6 million recorded
for 2004, representing a 44% increase. Net income for 2005 was $13.8 million, or $1
per diluted share, compared with net income of 3.8 million, or $0.31 per dilutedshare, for 2004.
During the fourth quarter of 2005 compared to the same quarter in 2004 revenue in
the U.S. increased $7.4 million, or 68%, from 10.9 million to 18.3 million. When
comparing full year 2005 to 2004, U.S. revenue grew 57%, from 34.8 million to 54.5
million. This growth reflects the strong demand for our product offerings and
continuing investment in our sales force expansion.
On the international front fourth quarter 2005 revenue increased 9% when compared
to the same quarter of 2004. When comparing full year 2005 to 2004, international
revenue grew 19%, from 17.8 million in 2004 to 21.1 million in 2005. We are
continuing to invest in our direct international offices and are looking for new
distributors in countries where we have no representation.
For the year 2005 we achieved revenue growth in both our European and Asian
markets. In particular, we experienced significant growth in Europe where we have
been aggressively investing in our infrastructure, including the creation of ourhub office in Switzerland in July of 2005.
Our product revenue grew 50%, from 13.3 million in the fourth quarter of 2004 to
19.9 million in Q4 of 2005. when comparing full year '05 to '04, our product
revenue increased almost $20 million, or 46%, from 43.5 million to 63.3 million.
This was driven by sales of our premium multi-application Xeo platform and our
Solera platform products.
We have seen an increasing number of multi-unit transactions from higher volume
practices. The Titan application continues to remain in high demand on both the Xeo
and Solera platforms. We are very pleased with the market acceptance of our Solera
Titan and Solera opus products, which are targeted to price-sensitive customers and
the medi-spa market.
Our upgrade revenue remained relatively unchanged in the fourth quarter and full
year 2005 compared to the same periods in 2004. This is primarily due to an
increasing number of existing customers choosing to purchase a second system,
typically a Solera product, instead of upgrading their existing system.
Service revenue increased 563,000, or 85%, from 659,000 to 1.2 million when
comparing the fourth quarter of '04 to the fourth quarter of '05. When comparing
full year 2004 to full year 2005, service revenue increased 60%, from 2.4 million
to $3.9 million. A majority of our customers purchased service contracts enabling
us to maintain their products for a fee after the warranty period has expired.
Finally, our Titan resale business, which started in late 2004, grew by 52% to
732,000 in the fourth quarter of 2005 compared to the third quarter of 2005. For
the full year 2005, this annuity business generated $1.8 million in revenue.
quarter of 2005 compared to 38 days in the fourth quarter of 2004.
Moving to guidance, for the first quarter and full year 2006 we expect our revenue
to grow by 25% when comparing to the same periods in 2005. First quarter revenue is
expected to be approximately $19 million with earnings per share of approximately
$0.11. For the full year 2006, we expect revenue to be approximately $94.3 million
and earnings per diluted share of approximately $1.00, excluding FAS123R charges.
This is based on average shares outstanding of approximately 14.5 million for the
year and an expected income tax rate of 35%. These EPS numbers are comparable with
our historical reporting.
For the second, third and fourth quarters of 2006, we believe revenue will be
approximately 23%, 25% and 32% respectively of our full year 2006 guidance.
Effective January 1, 2006, Cutera will be expensing the fair value of our employee
stock options in accordance with FAS123R. Prior to this change, and in accordance
with GAAP rules contained in [APB25], we had stock-based compensation charges
related to restricted stock units, stock options that were deemed to have been
granted below their fair market value prior to our IPO in March 2004, and stock
options granted to non-employees. Without the adoption of FAS123R, our quarterly
expenses resulting from APB25 treatment would have been approximately 230,000 in
the first quarter of 2006 and 940,000 for the full year of 2006.
With the adoption of FAS123R, our quarterly stock-based compensation charges willincrease to approximately $1 million in the first quarter of 2006 and 4.5 millionfor the full year of 2006. After factoring in the impact of the new financialreporting requirements associated with expensing the fair value of employee stock
options in accordance with FAS123R, our EPS numbers changed to $0.08 for Q1 '06 and
to $0.85 for all of 2006.
We evaluated various alternatives to reduce our expense associated with FAS123R,including the acceleration of option vesting prior to January 2006. We chose to
prioritize the best interests of our stockholders over the short-term non-cash
accounting incentives that elected to -- and elected to not change our optionvesting periods. For all of 2006 we will be providing summary non-GAAP comparisons
that exclude the impact of adopting FAS123R that will enable you to better evaluate
our 2006 performance against our historical performance.
Lastly, I am pleased to inform you that we believe we are on track to receiving an
unqualified Sarbanes-Oxley 404 certification, which we expect will be filed with
our Form 10-K on or before March 16, 2006.
Now that I've concluded my overview of Cutera 's financial performance, I'll turn
the call back over to Kevin.
KEVIN CONNORS: Thank, Ron. As you can tell from the results that Ron reviewed,
many aspects of our business contributed to a record year in 2005 and we expect
that momentum to continue into 2006.
Now I'd like to highlight some of our key initiatives that we plan to focus on in
2006. We recently expanded our North American sales force by assembling a new
dedicated sales team that's primarily focused on the price sensitive medi-spa
market. Its a very large emerging market that requires a team committed to
pursuing these customers. We have strategically positioned our entrance into this
fast-growing market with our Solera product line.
As part of our second initiative and in keeping with our commitment to delivering
innovating solutions for our customers annually, we launched just last week two new
Titan offerings to enable enhanced visibility and faster treatments for our
customers. The Titan V handpiece provides practitioners with enhanced visibility
and 50% more pulses than the original Titan handpiece. The Titan Excel handpiece
enables faster treatments as well as enhanced visibility. We remain committed to
investing aggressively in our research and development efforts to deliver
innovative solutions for our customers.
As a third initiative, we intend to continue investing in our international
distribution channels to capture the significant market for our products outside
the United States. We now have two international hubs, one in Japan and one in
Switzerland, that now strategically position us to capture a larger international
market share. Each of these offices provides sales, marketing and service support
to their respective regions.
In concluding, we had an outstanding 2005 and were very enthusiastic about ouropportunities in 2006. We have a strong portfolio of products in addition to a well
trained and expanding sales force. This combination strategically positions Cutera
for continued growth in revenue, market share and profitability in the expanding
market for laser and light-based aesthetic products.
Now I'd like to open up the call for your questions. Operator?
OPERATOR: Thank you. [Operator Instructions]
Our first question will come from [Tom Gunderson] of Piper Jaffray.
TOM GUNDERSON, ANALYST, PIPER JAFFRAY: Hi, good afternoon.
KEVIN CONNORS: Hi, Tom.
RON SANTILLI: Hi, Tom.
TOM GUNDERSON: I've got some fundamental questions I want to ask, but I think we
should just get one out of the way right away and that is you're trading down in
the aftermarket on some pretty heavy volume. This despite the fact that you beat Q4
estimates and you're slightly ahead of in your 2006 yearly guidance what was out
there for consensus. So I have to only conclude that people are a little concerned
about your Qi guidance, which is far below consensus. You've said that you're going
to be spending maybe 1.3 million in Q1 and Q2 and for legal expenses to prepare and
go through trial. Is there anything else in Q1 other than the additional legal
expenses that's making it less profitable than other quarters?
RON SANTILLI: No, the only other thing, Tom, I'd suggest you look at is the
effective tax rate would also jump up to 35%. And let me also point out that our Q1
number of 19 million reflected 25% increase in the revenue in Q1 of '05.
TOM GUNDERSON: Okay. Thanks, Ron. And can you give us a little bit more color as
to what that 1.3 million is buying?
RON SANTILLI: In terms of the litigation defense?
TOM GUNDERSON: In terms of the litigation expense if this is what the focus is
likely to be for the next few months in addition to the normal revenues and unit
sales and earnings from that. Can you give us a little bit more sense of what you
guys are doing to prepare? And I'm assuming that almost all of that is outside
counsel expense.
RON SANTILLI: Yes, it is. It's just about all outside counsel expense. And there's
quite a bit that's involved in preparing for the trial. In fact, there's a mock
trial that we're putting on and there's many different initiatives that go into
place in preparing for this. But it is all outside spending.
TOM GUNDERSON: And if we put in 3.5 million for Q1 and Q2, you're pretty
comfortable that that encompasses all the costs?
RON SANTILLI: Yes. Then, after that point when we believe this matter is
completed, our expenses for G&A should fall back into the more traditional 8 to 10%of revenue.
TOM GUNDERSON: Okay. Thanks for that. Then just a couple of questions. I gotdistracted right when you said this, Kevin, but I think you said you're starting anew sales force for the medi-spa market. Is that right?
KEVIN CONNORS: Right. We really want to focus on the Solera product offering and
so we rolled that out in the second half, that new sales force in the second half
of '05.
TOM GUNDERSON: And what's the size of that sales force and is it going to grow in
'06 or too soon to tell?
KEVIN CONNORS: Well, the last call we talked about having a target of a total
sales organization of about 55 by the midpoint of '06 and we feel very comfortable
that we'll be at that level or even potentially higher.
TOM GUNDERSON: Okay. And then does the medi-spa or international sales get any
different kinds of terms or would we expect, as those sales go up, that DSOs might
increase?
KEVIN CONNORS: No, we're really not looking to do that. We're not looking to
change any of our policies with regard to credit terms. And so no, we're not
looking to extend our DSO levels, although at 25 days we really think we're at an
exceptionally low DSO level. But when we go after this market we're certainly not
looking to get more aggressive on the credit side of it.
RON SANTILLI: And that market primarily is finance type -- they finance their
purchases and we have many relationships with leasing companies in order to
facilitate that level of financing. But it's independent of us, providing those
credits.
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TOM GUNDERSON: And then last question and I'll get back in line. On the -- the AAD
is coming up in a few weeks and it's in your hometown. Are you planning any special
activities and should we be looking for anything new and different at that meeting?
KEVIN CONNORS: Well, obviously we just announced an extension of the Titan family
within the week and so we're really excited about that. And-the customers that have
used that -- those new versions are extremely positive on the new capability. We
always have events planned for that meeting; it is a big meeting with attendance in
excess of 15,000 and somewhere between 25 and 30% of it being international. So
we'll have representation not just from our North American sales organization but
we'll also have a lot of our international people present.
TOM GUNDERSON: But normal sales and marketing costs for the AAD meeting?
KEVIN CONNORS: Yes.
TOM GUNDERSON: Okay.
RON SANTILLI: Traditional spending.
TOM GUNDERSON: Yes. All right...
KEVIN CONNORS: And keep in mind that most of our business is outside of
dermatology and plastic surgery.
TOM GUNDERSON: Right. Well, I said last one but you brought it up, Kevin. You want
to break that out for the quarter or the year?
KEVIN CONNORS: Yes, Ron, do you have that available?
RON SANTILLI: Yes. For the quarter, derms and plastics comprised about 26% of the
U.S. transactions, OBGYN and family practice combined for about 43%, and then other
MD and non-physician combined for about 31%.
TOM GUNDERSON: And do you have a way of breaking the medi-spa out of the 31?
KEVIN CONNORS : We don't capture it by that...
TOM GUNDERSON: Okay.
KEVIN CONNORS: ...by that category, Tom.
TOM GUNDERSON: Okay.
KEVIN CONNORS: It really is kind of hard to draw that distinct line.
TOM GUNDERSON: Okay, thanks.
OPERATOR: Thank you. Our next question will come from Phil Nalbone of RBC.
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PHIL NALBONE, ANALYST, RBC: Hi, Kevin and Ron. On average over the last three
quarters Cutera's revenue growth was 47% or thereabouts and yet you're targeting
growth in the first quarter and for the full year '06 of 25%, which is probably
pretty consistent with the rate of market growth right now. So what's going on? Are
you just being ultra conservative or are you expecting some sort of competitive
change in the landscape or a slowdown in the market? Why only 25% top line growth?
KEVIN CONNORS: It's obviously a subject that we spend a lot of time in the
management team about formulating the plans for the year. We're not seeing anythingin terms of a change in the market from what we've seen in the past, so I think we
remain confident that the market drivers remain intact and we believe that theopportunities in front of us for '06 remain very exciting.
As you know, this is the market that has a very short sales cycle so in terms ofvisibility, it's really a 90-day sales process. And obviously we're assembling
plans to grow faster than the market's growing, but it's difficult for us to have
accurate forecasting out beyond 12 months and we'd rather err on the side of being
able to achieve what we can commit to.
PHIL NALBONE: As you look ahead using that 90-day window, is there anything that
would lead you to believe that 25% top line growth in the first quarter is an
inevitability or that you're being very conservative relative to the kind of growth
we've seen in recent quarters?
KEVIN CONNORS: Well, we've been public since Ql of 2004 and we take ourforecasting commitments very seriously here, Phil. So no, we're not seeing anything
that leads us to believe that we can't achieve these levels.
PHIL NALBONE: Okay. The Titan system has obviously been a very big source of
growth and a key differentiating factor for Cutera over the past year. And
obviously that application is going to attract some competition, probably a lot of
it. So what is your sense right now as to competitors who are lining up to take on
that application? When are we likely to see that competition and how are you
thinking about how that's likely to impact the pace of adoption for Cutera? And in
particular, if you can give us some sense of how much of Cutera's installed base
has been penetrated so far with the skin tightening application and how much do we
have to go before we see saturation of your existing customer base?
KEVIN CONNORS: Why don't we start off with that question first? Ron, that's a
relatively low number, but do you have a better sense in terms of percentage of our
installed base that has Titan in one form or another?
RON SANTILLI: I don't, Phil, have any specific numbers. As you know, with a multi-
application, multi-technology, it's tougher always to find out what people have.
But what I can say is the products that we've been selling for this past year in
'05, I would say of the product revenues, over half of those include a component of
Titan in them. So we're certainly seeing it as a popular procedure being added to
the purchase cycle. And then of course it's a major component of our upgrade
revenue. So it is everywhere, although I don't have the specific numbers to answer
KEVIN CONNORS: And another point, Phil, is that, and we didn't mention in the
script, but one thing that we've been focused on this past year and remains an
important objective for 2006 is the Titan solution incorporated as a component of
our [3D] technology. With our 3D procedure, our customers are giving their patients
the Titan procedure in conjunction with our other technology. So that's photo
rejuvenation such that they can remove pigmented lesions and improve-- diffuse
redness, and with the Genesis procedure, they're able to reduce pore size and
improve skin texture. So the 3D solution has been a very popular procedure that's
been developed with our key clinical investigators, and we remain very excited
about the prospects for that going forward.
But a general comment about the competitive landscape, I think that anytime
there's a new application, this is an industry where many companies claim to have
that same solution in one form or another in their bag. And our development work
with Titan has gone on for a number of years and it really has taken a long time to
develop that and we think we really have achieved strong traction in the
marketplace. And our main competitor is a company that has a solution that's a
different technology, uses radio frequency energy, and we think that our technology
really is distinguished in the marketplace for its safety and performance profile.
PHIL NALBONE: Okay, one more question and then I'll go back into the queue. with a
47 person North American sales headcount at the end of the year, are my records
accurate? Did you add two during the December quarter?
KEVIN CONNORS: I believe at our last call, was it 40 that we talked about?
RON SANTILLI: I thought it was 40 as well.
KEVIN CONNORS: Yes. So for the month -- or the quarter ending in September I
believe we commented on 40 with a plan to be at 55 by mid 2006.
PHIL NALBONE: Okay, so you're up seven people. And to Tom's question earlier, can
you give us a clearer picture of how these people are being split between the
traditional sales force and those focusing on the medi-spa business?
KEVIN CONNORS: Right. I think more than anything else, Phil, we are excited about
the medi-spa market. But one of the objectives in bifurcating the sales force the
way we have is to get our entire portfolio of products well represented in the
marketplace. Since we started the company our average selling price has increased
in excess of 50%, so we are commanding a premium in the marketplace for our
technology.
But we recognize that there's another segment of the market that we haven't been
penetrating very well and we now have this new sales organization that's focused on
representing the Solera Opus product line and we believe that we had to do
something structurally to do that. We have designed this such that they -- that
this new sales rep is working in conjunction with the existing sales organization,
so it really has been a very positive program that's been very well received by the
existing sales force.
PHIL NALBONE: Okay, thank you.
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OPERATOR: Thank you. Our next question will come from [Mark Taylor] of Ross
Capital.
MARK TAYLOR, ANALYST, ROSS CAPITAL: Hi. Good morning, Kevin. Great quarter. And
Ron as well. Thanks for taking my question. I have a few. I'd like to zero in, if I
might just ask a question on your total revenue for domestic and international in
Q4, if you might tell us how much of that was like device sales versus upgrades? I
think in the U.S. you indicated you did about 18.3 and international I think 21.1.
How much of that was laser and light and how much was upgrade?
RON SANTILLI: Right. Within the geographic categories we don't disclose the
breakdown of the product sales. We either disclose it by geography or by products.
MARK TAYLOR: Okay. All right. Well, then we'll just -- you do -- yes, we do have
the upgrade number so...
RON SANTILLI : Yes, we...
MARK TAYLOR: ...ration that out.
RON SANTILLI: ... was part of the release this time as well.
MARK TAYLOR: On a percentage basis, okay. Then back to the sales productivityhighlights and clearly we see that in this very robust business you have. Accordingto my numbers you had ended the second quarter with 40 sales people in the U.S. andI think ended the third with 40, so you added seven in the fourth, as youmentioned. Do you care to comment on what maybe the average productivity is in theper dollar for each rep or how soon a new rep can get to a certain number, what youwould call your average production level?
KEVIN CONNORS: Right. Just in rough terms, Mark, for a sales person that's been
with us for three or four quarters, our productivity improved pretty substantially
in North America percentage-wise, around -- what was that -- ?
RON SANTILLI: It was around 30%.
KEVIN CONNORS: Yes, 30% improvement for our, what we call the veteran sales
people. Obviously, if we do hire people that come from within the industry they're
able to hit the ground running. But we've done a number of things to plan for this
aggressive sales expansion and one of the key components is to have the support
infrastructure to really ensure that these people are able to get traction. We've
made significant investments in sales training and that program, we think, is the
best in the industry.
We've also expanded our sales management team in advance of the expansion, so we'd
rather have more bandwidth on the management side than be challenged on the light
side. But we're pleased to see that the new hires are certainly contributing beyond
our expectations and our seasoned people have achieved record sales productivity in
the company's history.
MARK TAYLOR: Well, it looks that way because if we just do a quick back-of-the-
envelope of your competitors and their quarterly performance, it looks like you
entered the year in the number three spot and you're leaving the year in the number
one spot. So if this continues, you're now the number one laser company in the U.S.
Do your numbers agree with this and if so, as the market continues is there more
share gain ahead or is it just grabbing your piece of the pie as it continues to
grow at a hefty clip?
KEVIN CONNORS: We think there's plenty of share out there for uq and we've -- we
believe that aggressive investments and sales expansion have made great sense for
us in the past and we're continuing on that path as we go into 2006. So we are
ahead of the trajectory of having 55 reps by midpoint and we think the sales force
is well positioned to continue that expansion.
MARK TAYLOR: Just two last questions. On international, is the U.S. market just so
robust that international, while growing, can't compare? And if that's the case, is
there something that we could look for that would make -- that would change the
international picture such that it takes off as well?
KEVIN CONNORS: Your point's a good one, Mark. We're very pleased with our domestic
-- our North American sales growth and what's nice about the North American marketis it's just so large. And it isn't straightforward to scale the sales force, butit is a challenge that we believe we can develop the skills to do that. We see themarket outside the United States as larger, even slightly larger than the U.S.market, and we have competitors that have been established in the market a lotlonger than we have. But two of our bigger competitors have as much or more oftheir business outside the United States and so we're very focused on continue toexecute our aggressive investments outside the United States.
MARK TAYLOR: Just last question. On the Titan, does that handpiece revenue flow
straight to the bottom line or are there any costs associated with that, likecommission and such?
RON SANTILLI: There is a cost of sale associated to it. I'd characterize it closer
to our service kind of revenue margin as opposed to non-service or products.
MARK TAYLOR: Okay, good. Thank you.
OPERATOR: Thank you. Our next question will come from [Anthony Vendetti] of Maxim
Group.
ANTHONY VENDETTI, ANALYST, MAXIM GROUP: Thanks. Good afternoon. I just wonder if
we could focus a little bit, Ron, on the first quarter again because that seems to
be where I'm getting most of my questions as well.
RON SANTILLI: Okay.
ANTHONY VENDETTI: And I know the 3.5 million is -- well, hopefully a one-time, but
it sounds like it's going to be first and second quarter as you ramp up for this
trial. And prior to this you had been spending I guess 1.25 or 1.2 to 1.3 per
quarter and then it tailed off as you waited for this trial date to be set. So the
ramp-up to 3.5 is a significant ramp. Is there anything else, I guess, other than
that that's accounting for maybe slightly greater than expected -- so it's that,
the tax rate, are those the only two things, just to be clear on that?
RON SANTILLI: Those are the two major things that come into play here.
ANTHONY VENDETTI: Okay. And in terms of breakout of just revenues in general, just
end of the year kind of thing, not for the quarter, what did ProWave -- do you have
any numbers for that with percent of revenues or units sold of that?
RON SANTILLI: We don't break down our revenues into that level of detail. As you
know, we do the products, the upgrades and the service and Titan refills, but we
don't break down that level.
KEVIN CONNORS: Anthony, it's Kevin. I guess we could comment on our Xeo business,
so much of it did come with the ProWave 770 as part of the Xeo solution.
RON SANTILLI: It's a good point. With the multi-application, multi-technology
product, what were seeing with the Xeo is that [inaudible] includes a Titan
component and [inaudible] includes a ProWave component.
ANTHONY VENDETTI: Okay, so that's helping propel the Xeo sales?
RON SANTILLI: Yes.
ANTHONY VENDETTI: Okay. And would you say that that is replacing to a large extentthe CoolGlide CV or is it in addition to?
RON SANTILLI: Well, it's in addition to. In this case, on the Xeo platform you'vealready got the [NVA] component that's capable of doing laser hair removal, thevascular as well as the rejuvenation. So they have two technologies. With the Xeo -- with the ProWave they have two technologies to do hair removal, so it's inaddition to.
ANTHONY VENDETTI: Okay. Now, on the sales force it seems like 55 seems to be the
magic number since one of your competitors mentioned that number as well. And
that's the U.S. Now, I know you guys opened up in Zurich, I think, your
international sales operation, I guess, headquarters for international sales
operation. How many direct OUS sales people do you have right now and where do you
want that to go to?
RON SANTILLI: Okay. First of all, coming back to the 55, that's North -- that's a
North American number so it would include Canada as well as the U.S.
ANTHONY VENDETTI: Okay.
RON SANTILLI: And outside of North America, then, our direct sales force is still
under 20.
ANTHONY VENDETTI: Under 20, okay.
RON SANTILLI: And we're looking -- again, we needed to invest in the
infrastructure to support these people before we could add them, unlike the U.S.
and Canadian markets where we've got the infrastructure and it's just really
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strategically placing people around.
ANTHONY VENDETTI: Okay. And it sounds like you've invested in the infrastructure.
Obviously you're probably still investing in it. But I guess what's the goal there,
what else do you need to do to ramp that up to get to the level that you're talking
about because obviously the revenue opportunities, as you said, internationally are
fairly large?
RON SANTILLI: I don't have any specifics on that other than again, we have
continued to invest in the infrastructure, we've continued to hire people and we
will continue to do so as we see that as a good market opportunity. But as Kevin
had mentioned earlier, we just -- we didn't have the presence because we haven't
been there as long as some of our competitors. But we do believe and, as you just
heard and saw, we did experience nice growth in the international market last year.
It was just nothing like what we saw here in the U.S.
ANTHONY VENDETTI: Okay. And what was the -- I probably missed it, the breakout for
the fourth quarter, international made up what percent of revenues?
RON SANTILLI: In the fourth quarter, international went up -- I'm sorry, let me
[inaudible - microphone inaccessible] so I give you the right number.
ANTHONY VENDETTI: Okay, while you're searching for that, Kevin, just in terms of
the back and forth a little bit with Palomar, you counter sued for inequitable
conduct and now they are suing also for the ProWave in terms of that product,
saying that that also infringes on their [IPL] patent. Is that -- can you just
clarify that a little bit?
KEVIN CONNORS: It is the second case that [inaudible]. It's not linked to the case
that is being heard in May. We're not aware of anyone that is paying a royalty for
flashlamp-based technology. It certainly hasn't been disclosed to us if that is the
case. We view it as a response to the ProWave technology being launched in the
marketplace.
RON SANTILLI: And, Anthony, coming back to your question on the international
revenue, fourth quarter revenue in international increased 9% and for the full year
2004 compared to 2005 it grew 19%.
ANTHONY VENDETTI: What was the percent of revenues, though? Do you have that or
no? The percent of -- just a breakout of...
RON SANTILLI: Oh, percent -- ?
ANTHONY VENDETTI: ...North American versus international.
RON SANTILLI: Percent of the total? You know I don't have that but it's --
actually it's part of the press release. If you look back, it's included on the
release and you could do the math to get there.
OPERATOR: Thank you. Our next question will come from [Dalton Chandler] of Needham
& Co.
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DALTON CHANDLER, ANALYST, NEEDHAM & CO.: Yes, hi, good evening.
KEVIN CONNORS: Hi, Dalton.
RON SANTILLI: Hey, Dalton.
DALTON CHANDLER: I wanted to ask just a bit more about the medi-spa strategy, if
you're [incentivizing] the sales force differently and if you have any targets for
the number of sales reps in that group?
KEVIN CONNORS: Dalton, it's Kevin. We have approximately 40 of the senior sales
positions established and we're looking to continue to expand that in 2006. And so
rough numbers we're targeting 55 by the midpoint.
DALTON CHANDLER: I was talking specifically about the medi-spa strategy.
KEVIN CONNORS: I pointed out earlier it's really the Solera Opus representation...
DALTON CHANDLER: Right.
KEVIN CONNORS: ...and we see the medi-spa as a very significant component of that
focus, but it really is that product line getting focus within the sales force.
DALTON CHANDLER: Okay, maybe I misunderstood, but I thought you were saying that
you were going to hire a different group of sales people to focus on that market.
KEVIN CONNORS: That's correct.
DALTON CHANDLER: So, are those people incentivized any differently and how many of
them are you targeting, how many would you like to have?
KEVIN CONNORS: Well, approximately we have 40 reps that have the senior
territories and then we're planning to be at 55, so approximately 15 or so would be
in that category.
DALTON CHANDLER: Okay.
KEVIN CONNORS: And there is a different incentive plan, but for competitive
reasons we 'd rather not disclose that.
DALTON CHANDLER: Okay, thanks. And then your marketing partner, [PSS World], are
they any help there or did they not really call on that market?
KEVIN CONNORS: That relationship has really blossomed in 2005, a very, very strong
contribution for our U.S. business. And yes, we see them everywhere so I think they
can be very helpful with that point as well.
DALTON CHANDLER: Okay. And lastly, on the Titan refill business you said you did
1.8 million for the year, but it looks like you did almost half of that in the
fourth quarter. So what are you expecting there for '06 and how do you think that
could ramp up?
RON SANTILLI: Well, that certainly indicates a good usage of those handpiece and
the need for refills because, as you know, we introduced Titan at the end of '04,
so our '04 business for Titan refills was almost nonexistent, I think it was about
$72,000. So we've been exponentially building that up. And we do expect to see a
significant growth rate next year on that refill business, although I don't have
any specific numbers to give you on that. We do think every -- quarter over quarterit will continue to grow.
DALTON CHANDLER: Okay. All right, thanks very much.
OPERATOR: Thank you. We do appreciate all of your questions, but due to time
constraints we will have to end the Q&A session at this point. I'd like to turn the
call back over to Mr. Connors for any closing remarks.
KEVIN CONNORS: Thank you for participating on our call today. Please note that we
will be speaking at the Roth Capital Conference on February 21st. This presentation
will be webcast and available on our website. Also, during March 4th through 6thwe'll be exhibiting at the American Academy of Dermatology's annual meeting in San
Francisco. We're looking forward to updating you on our progress next quarter. Good
afternoon and thanks for your attention.
OPERATOR: Ladies and gentlemen, that does conclude our presentation for the day.We do appreciate your participation. At this time you may disconnect.
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Q1 2006 Cutera , Inc Earnings Conference Call - Final
OPERATOR: Good afternoon and welcome to the Cutera Incorporated Fourth Quarter
2006 Earnings Conference Call. At this time, all participants have been placed in a
listen-only mode, and the floor will be opened for your questions, following the
presentation.
It is now my pleasure to turn the floor over to your host, Mr. John Mills with
Integrated Corporate Relations. Please go ahead, sir.
JOHN MILLS, INVESTOR RELATIONS COUNSEL, INTEGRATED CORPORATE RELATIONS: Thank you.
By now, everyone should have access to the first-quarter 2006 earnings release,
which went out today at approximately 4 PM, Eastern Time. The release is available
on the "Investor Relations" portion of Cutera 's website, at cutera.com, and with
our Form 8-K filed with the SEC and available on its website, at sec.gov.
Before we begin, Cutera would like to remind everyone that these prepared remarks
contain forward-looking statements, including statements concerning future
financial performance, the outcome of Cutera's patent litigation with Palomar
Medical Technologies, the long-term international growth opportunity and strategy,anticipated increase in service revenue and expansion of Cutera's customer base,
the expansion of our sales force to all of our target markets, and that management
may make additional forward-looking statements in response to your questions.
Factors that could cause Cutera 's actual results to differ materially from these
forward-looking statements include its ability to effectively continue to increase
its sales performance worldwide, unforeseen events and circumstances relating to
its operations, government regulatory actions, general economic conditions, and
adverse ruling or resolution in the litigation with Palomar, and those other
factors described in the section entitled "Factors That May Affect Future Results"
in its most recent 10-Q and 10-K filed with the SEC. These forward-looking
statements do not guarantee future performance, and, therefore, you should not rely
on them in making an investment decision without considering the risks associated
with such statements.
Cutera also cautions you to not place undue reliance on forward-looking
statements, especially those relating to guidance on future financial performance,
which speak only as of the date they were made . Cutera undertakes no obligation to
update publicly any forward-looking statements to reflect new information, events
or circumstances after the date they were made, or to reflect the occurrence of
unanticipated events.
As you will note from a review of our earnings release, we have provided pro forma
non-GAAP reporting that excludes the impact of adopting FAS 123(R) with effect from
Q1 2006. Cutera management believes that these non-GAAP measures provide the
investment community with a better understanding of how our Q1 '06 results relate
to our historical performance. Please refer to the company's earnings release for a
more detailed definition, cautionary statements relating to the pro forma
reporting, and a reconciliation of the GAAP financials to the pro forma financials.
With that, I'll turn the call over to Company ' s President and Chief Executive
Officer, Mr . Kevin Connors.
KEVIN CONNORS, PRESIDENT AND CEO, CUTERA INCORPORATED: Thank you, John. Good
afternoon, everyone, and thanks for joining us today to discuss Cutera 's results
for the first quarter ended March 31st 2006. In today's call, I'll provide an
overview of the first quarter. Ron Santilli, our CFO, will provide additional
detail on operating and financial results and comment on guidance. We'll then
provide some closing comments and open up the call to your questions.
I'm very pleased with our first quarter results, which met or exceeded both our
top and bottom line guidance. Our revenue in the first quarter increased 37%, to
$20.8 million. We achieved revenue growth in all of our geographic regions, and are
particularly, pleased with our 44% growth in the United States. GAAP diluted
earnings per share were $0.08 per share. On a pro forma basis, our earnings per
share climbed to $0.12 in the first quarter 2006.
Our 37% revenue increase was due to a number of factors, including; one, continued
strength in our product portfolio, particularly, with our multi-application Xeo
product -- platform products. Two, we made further progress with our 2006 sales
force expansion. In North America, we added eight territories, resulting in 55
territories at the end of the quarter. Three, we continue to see strong growth in
our Titan application, as demonstrated by our continued growth in Titan handpiece
replacements.
Four, finally, our service revenue increased 49% from Q1 2005, as a result of our
expanding customer base. After Ron has commented on our financial performance and
guidance, I will give more detail on a number of growth drivers of our business,
and I will update about our pending patent litigation with Palomar. As we had
mentioned before, our patent litigation trial is scheduled to begin on May 30th. We
remain confident in the positive outcome for this lawsuit. Obviously, litigation is
uncertain, and we advice investors to refer to our quarterly and annual reports
filed with the SEC for a more detailed understanding and the risks associated with
this patent litigation.
Now, I'd like to turn the call over to Ron to discuss our strong financials in
more detail. Ron?
RONALD SANTILLI, VP OF FINANCE AND ADMINISTRATION, PRINCIPAL ACCOUNTING OFFICER
AND CFO, CUTERA INCORPORATED: Thanks, Kevin. And thanks to all of you for joining
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us today for the first-quarter 2006 results. First quarter 2006 revenue was $20.8
million, a 37% increase compared to the same period last year. GAAP net income for
the first quarter 2006 was $1.1 million, or $0.08 per diluted share. Pro forma
earnings were 1.7 million, or $0.12 per diluted share, which represents an increase
from the $0.11 for Q1 of 2005.
During this first_quarter of 2006, US revenue increased 44% to $14.9 million, and
international revenue increased by 23% to $5.8 million. We experienced growth in
both of our Asian and European regions. In particular, due to our sales force
expansion effort, we experienced strong revenue growth in Japan. We have continued
to invest in our direct international offices and are pleased with the traction of
our products, internationally, and the results being achieved from these
investments. We believe the international market offers us an excellent long-term
growth opportunity, and with the investments made to-date, we are well established
to take advantage of this growing market.
During the first quarter of 2006, our product revenue grew 39%, to $17.6 million.
This was driven primarily by sales of our premium multi-application Xeo platform
and our Solera platform products. We continue to see an increasing number of
multiunit transactions from the higher volume practices. Additionally, our national
account agreement with PSS, an organization with over 700 sales representatives
serving physician offices in all of the 50 United States, continues to provide anextensive market penetration for our product.
Upgrade revenue declined in the first quarter 2006 to $1.1 million. With our
existing customer practices growing, they are choosing to purchase an additional
system, typically a Solera product, instead of upgrading their existing systems.This approach allows a practice to increase their revenue, as they can provide
services to multiple customers at the same time. Service revenue increased 49% to1.1 million in the first quarter. We expect this revenue growth to remain strong,
as our customer base and product offering increase. Finally, our annuity revenue
stream of Titan refills grew significantly from 142,000 in the first quarter of
2005 to $944,000 in the first quarter of 2006.
Just like our service revenues, as the installed base of our Titan product
increases and our customers continue to satisfy the fast-growing demand for Titan
procedures, we expect revenue from this product line to continue increasing. On a
sequential basis, revenue from Titan refills increased by 29%. I will now address
our expense performance. Please note that our operating expense ratios and guidance
figures discussed are based on GAAP financials, which include the impact of
adopting FAS 123(R). For your benefit, we have included, in our earnings release,
pro forma financials that provide a consistent and comparable reporting to the
Company's historical performance.
Our gross margin remains strong at 72% in the first quarter, due to the following;
continued strong demand for our premium multi-application Xeo product, higher gross
margin associated with our Titan-related products, and increased level of US
revenue, which tends to be higher margin. Our pro forma gross margin was 73%, which
is comparable to our historical reporting. We're expecting our gross margins to
stay in the range of 71 to 73% for the remainder of 2006.
Consistent with our strategy of expanding our sales force and distribution
network, our sales and marketing expenses for the first quarter of 2006 were $8.5
million, or 41% of revenue, compared to 5.8 million, or 38% of revenue, for the
first quarter of 2005. The growth in our spending was primarily due to our sales
force expansion effort and the effect of implementing FAS 123(R).
For the remainder of 2006, similar to 2005, we expect to continue increasing our
spending in sales and marketing in absolute dollar terms. However, when measured as
a percent of-revenue, we expect this to decline due to the.projected increase in
revenue. We estimate our spending to be in the range of 32% to 38% for the
remaining three quarters of 2006. Research and development expenses were 1.3
million or 6% of revenue in the first quarter of 2006. Even though we will continue
to increase our investment in this area, we believe our spending will remain in the
range of 6% to 7% of revenue for the remainder of 2006.
General and administrative expenses for the first quarter were $4.4 million or 21%
of revenue. We spent approximately $1.5 million of legal expenses or $0.07 per
diluted share during the quarter for our patent litigation as we prepared for the
trial beginning May 30th. We expect our total general and administrative expenses
to be approximately 5.5 million in the second quarter of 2006. Included in thisforecast is approximately $3 million or $0.14 per diluted share for this
litigation. After the trial is finished, we expect our G&A to be in the range to 9%
to 11% of revenue, which includes the additional share based compensation expenses
associated with FAS 123(R).
Operating income for the first quarter of 2006 was $0.7 million or 3% of revenue.
On a pro forma basis, our operating income was 1.6 million or 8% of revenue. The
decrease in operating margins from 12% in Ql '05 was mainly due to a significant
increase in legal expenses, impact of expensing stock options for FAS 123(R) and
increased investments in our distribution channel.
We expect our operating margin to improve in the second half of the year after the
reduction of legal expenses as we reap the benefits of projected increasing revenue
resulting from the sales force expansion. Our expected income tax rate for the
first quarter 2006 was 34%. We expect our effective tax rate to be approximately
34% for the remainder of 2006. Turning to the balance as of March 31st 2006, Cutera
had $95.5 million or approximately $7.75 for outstanding share of net cash and
marketable investments and no debt. Our accounts receivables net at the end of the
first quarter remained low at $6.6 million. Our DSOs remained strong at 29 days in
the first quarter of 2006.
Moving to guidance, for the second quarter of 2006, we expect revenue to be
approximately $23 million with earnings per share of approximately $0.08. For the
full year 2006, we are increasing our revenue guidance to approximately $98 million
and estimate our earnings per share at approximately $0.73. This is based on an
effective income tax rate of 30%, and these EPS numbers include the impact of FAS
123(R).
Non-GAAP EPS for Q2 and the full year are estimated to be approximately $0.12 and
$0.95 respectively. These non-GAAP numbers are comparable with our historical
reporting. However, they include litigation expenses in the first half of 2006 of
approximately $4.5 million or $0.20 per diluted share.
Our updated revenue guidance is on track to achieve annual revenue growth of
approximately 30% for the full year 2006 compared to full year 2005. We plan on
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continuing to invest in our sales and marketing channels based on the growth
opportunities we see in the market. As we have discussed in the past, we expect
these investments to have a temporary negative impact on our Q2 106 earnings and
our operating margins will benefit beginning in the third quarter of 2006.
Now that I have concluded my overview of Cutera's financial performance , I'll turn
the call back to Kevin.
KEVIN CONNORS: Thanks, Ron. As you can tell from the results that Ron reviewed,
many aspects of our business enabled us to achieve strong results during the first
quarter. Now, I'd like to expand on some of the reasons for our strong results and
highlight key initiatives we believe will lead to record revenue for 2006. We are
continuing to experience growth both in the core/non-core segments of our market,
our plan to continue with our sales force expansion to accomplish the goal of
increasing our reach in all these markets.
Another important aspect to our long-term growth is in research and development.
We intend to continue investing in product innovation; which will always be a major
part of our business. And keeping with our commitment to delivering innovative
solutions for our customers annually and unveil two new Titan offerings that enable
enhanced visibility and faster treatments for our customers. The Titan V handpieceprovides practitioners with enhanced visibility and 50% more pulses than the
original Titan handpiece, and that the Titan XL handpiece enables fastertreatments, as well as enhanced visibility while delivering the procedure.
Turning to our sales force, we significantly ramped up hiring of additional drugsales people in Q1 2006, and intend to continue investing in our distributionchannels to increase our revenue in both United States and international markets.In summary, we have developed a strong portfolio of products, and assembled one ofthe largest direct sales organizations in the laser and light-based aestheticmarket in North America.
We are continuing to invest in our international channels. We have built a strong
business to continue the growth in revenue and profits. Our financial position
remains very strong with $95.5 million of cash and marketable investments and no
debt. We believe these investments, together with our business strategy and the
fast pace growth of the market, position Cutera for continued growth, and revenue,
market share and profitability for years to come.
Now I'd like to open up the call for your questions. Operator?
OPERATOR: [OPERATOR INSTRUCTIONS]
And we go first to Tom Gunderson from Piper Jaffray.
TOM GUNDERSON, ANALYST, PIPER JAFFRAY: Hi. Good afternoon. Can you hear me okay?
KEVIN CONNORS: Yes, Tom.
TOM GUNDERSON: Great. There seems to be three things on the income statement that
I wanted to touch on. Number one is sales came in a little bit higher than what
we'd expected and your guiding up for the rest of the year. And it seems from the
tone and some of description, Kevin, that everything steady as she goes, and the US
remains strong and OUS continue to expand, is that a fair assessment?
KEVIN CONNORS: Yes, Tom. In our last call, we've talked about a target of
achieving 55 territories in North America by the end of the second quarter. And
obviously, we were able to successfully accomplish that ahead of plan. Obviously,
that also had am impact on the expense line in sales and marketing, but we believe
the market dynamics continue to be strong and these aggressive investments in the
past have been very fruitful.
TOM GUNDERSON: Well, you jumped to my second part on the income statement and that
was the S&M line. So you did add eight sales people in North America, is that
right?
KEVIN CONNORS: Yes
RONALD SANTILLI: That's correct.
TOM GUNDERSON: And you added six or seven, I think, last quarter?
KEVIN CONNORS: We finished with 47 at the end of last year, and I'm not sureexactly we added in the fourth quarter.
RONALD SANTILLI: I think that's about right. I think we were flat in Q3 from Q2. I
think it's a good number.
TOM GUNDERSON: Qi and Q2 have in your projections now, you know, several more
sales people all for the entire quarter in Q2, and you talked about Kevin, which is
going to continue to expand. Can you give us an estimate of how many sales people
you expect to have at the end of -- either at the end of June or at end of December
or both?
KEVIN CONNORS: Tom, we'll talk about that on the next call in more detail. Rightnow, we're pleased that we are -- we have been able to hire ahead of schedule.
We're very focused on giving the new sales people the tools they need to besuccessful, then, we'll give additional guidance about our plans for continued
expansion for the balance of the year on our next call.
TOM GUNDERSON: Okay. And then, the legal costs were higher than what I had
expected and I thought I had high costs already but that's California for you, I
guess. Did -- is there anything else to be said about the Palomar suit at the
beginning of may, I mean, is this just everybody shows up with the court house on
May 30th and two weeks later we have a decision?
KEVIN CONNORS: Well, obviously we've been working with that intention in mind.
Unfortunately, we also had the same view, you had, Tom, set aside enough money to
cover this in the first half. But to the best of our ability we got guidance from
our legal team in terms of what our expectations would be, and we have a better
visibility now as to what this quarter looks like. So we had to make some
modifications to the G&A line.
TOM GUNDERSON: Okay.
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KEVIN CONNORS: And again, that translates into the $0.20 per share of the expense
associated with this.
TOM GUNDERSON: And if you were in the final analysis, beyond appeals, beyond
everything, if you prevail, do some or all of those expenses paid back or is that
up to the judge?
KEVIN CONNORS: Ultimately, it's up to the judge. We're certainly [not accounting]
on that, but that type of thing has happened in the past.
TOM GUNDERSON: Okay. Thanks.
OPERATOR: Our next question comes from Phil Nalbone from RBC Capital Markets.
PHIL NALBONE, ANALYST, RBC CAPITAL MARKETS: Couple of questions. Kevin, you showed
37% topline growth in Ql, your upward revised guidance for Q2 sales would suggest
31% growth. So to get to about 98 million for the full year, the growth rate during
the second half of the year would have to fall pretty significantly down to, kind
of, the mid 20% -- 26% to there about.
So is your forecast for the year really based just on, kind of, a conservativeview for the second half of the year or should something specific happen to causethe Company's growth rate or the market growth rate to decelerate?
KEVIN CONNORS: No. We certainly don't see anything on the horizon now that
concerns this in terms of softening in the marketplace, fortunate to have a number
of our competitors reporting, we're seeing all strengthen in the overall market. So
there is nothing out there that leads us to believe that there is a slowdown around
the corner. And just looking at how we did in the second half of 2005, both in Q3
and Q4. We experienced 49% growth in each of those quarters.
PHIL NALBONE: So are you suggesting tough comparisons or should we think more in
terms of the continuation of the, kind of, trends that we've seen recently,
particularly with the lights of Palomar and sign assure reporting better than 40%
growth in their March quarters?
KEVIN CONNORS: Well, I think the point I am trying to make is that a lot of our
growth does tend to happen at the second half of the year. We're comfortable with
the revised increased guidance on revenue at this point.
PHIL NALBONE: Okay. And I understand your reluctance to these specific regarding
the additions to the direct sales force for the remainder of the year. But could
you give us some sense of what that numbers likely to look like by the end of the
calendar year?
KEVIN CONNORS: Really can't Phil, this is probably in terms of sheer number of
sales headcount additions to the Company. This is -- the past two quarters that
have certainly done record levels, and so we want to be sure that all these new
hearts have the support and the tools be successful. And we will give more specific
MARK TAYLOR, ANALYST, ROTH CAPITAL PARTNERS: Hi, Ron and Kevin.
RONALD SANTILLI: Hi Mark.
MARK TAYLOR: A couple of questions if I may. First on the 14.9 million in US
revenue, do you care to comment on how much of that was traditional and how much
was non-traditional?
RONALD SANTILLI: We don't break out just the revenue side, but on the orders taken
for Q1 of '06, the core business was actually down a bit about 12% with plastics
and derms of which then we had a 46% with family practice and OB/GYN and non-
physicians and other MDs took the remaining piece of that, which was probably about
42%.
MARK TAYLOR: So, 42% you would call medi-spa possibly?
KEVIN CONNORS: We don't really capture it that way Mark, I think that the key
takeaway is that plastics and derms account for 12% of the business, which is about
half the level that they are typically at, so it kinds of bounce around from
quarter-to-quarter, but the first quarter had abruptly low percentage of our
business [going] into the core specialties, but we believe that our relationshipwith the PSS has allowed us to expand beyond the core specialties faster than the
competition.
MARK TAYLOR: I guess, I'm trying to get maybe a picture of the health of your,
what I call your ethical channel versus medi-spa, and the reason for that is and
correct me if I am wrong, but I am thinking that on the physician side, you know,
you are selling a device a laser or a light device. And you really capture that
patient or that physician long-term and then that physician upgrades, and it's a
good solid long-term healthy piece of business. And the medi-spa could be subject
to contract, where you are selling a chain let's say, but perhaps that's a little
more competitive. So I am just trying -- I am hoping that the ethical channel is
continuing to be strong in your mix. Medi-spa is great as well, but maybe you could
add some color there.
KEVIN CONNORS: Well, just for clarification Mark, we only sell our products where
doctors are directly involved, and the definition of [medi-spa] is a bit all over
the map, in the case of dermatologist and plastic surgeons, buying our equipment
often times they are interested in providing these services in a more spa like
setting. So I think the lines are not quite as well defined as one might say. We
are not selling to major chains, but we do have a relationship with a number of
organizations out there, but relative to our revenue, it's relatively small portion
of our business going through organizations that have franchise business model.
And Ron, unless you have a different view on this, but I am not aware of any
change in terms of the future purchasing habits of any segment of our market,
whether it's the core physician group or the non-core. Ron you want to comment on
that?
RONALD SANTILLI: No. We haven't seen any real big shift there, as you mentioned
Kevin from quarter-to-quarter it may move around a bit, but we're still seeing
quick questions. On the -- did you give the percent breakout, Ron on the North
American international?
RONALD SANTILLI: It was a growth in the US --. During the quarter?
ANTHONY VENDETTI: Just a percent, well again percent of revenues not the growth.
RONALD SANTILLI: Yes. I have the growth of -- I'm sorry.
KEVIN CONNORS: We had [44%] growth in the United States, but I don't thing we did
break it out international versus domestic?
RONALD SANTILLI : Let me grab that for you Anthony, I can get it for you in just a
second.
ANTHONY VENDETTI: Okay, I will go on to my next question.
RONALD SANTILLI: Yes. You could.
ANTHONY VENDETTI: You were talking about laser hair removal as being, Kevin, less
of the business going forward and has been progressively less especially with the
other applications you now have and ProWave and so forth. Do you have the percent
or a general range of what laser hair removal made up of your first quarter '06
sales, what percent that accounted for?
KEVIN CONNORS: We haven't done that analysis Anthony and I would really don't want
venture or guess either, but as you follow the company's history, I think you getthe sense that we are very committed to finding new [aesthetic] application
categories each year and we've been able to successfully grow our business thatway. The laser hair removal market remains a robust market. We just believe thatthe strategy of identifying new applications is one that allows us to grow our
business faster.
ANTHONY VENDETTI: Okay. And I just wanted to verify. So you have 55 sales reps was
that by the end of first quarter or is that as of now?
KEVIN CONNORS: End of first quarter.
ANTHONY VENDETTI: End of first quarter. Okay. Great. And lastly, as Ron is trying
to get that question for me. In terms of the legal expenses obviously they
increased and the estimate for second quarter '06 is now 3 million, is that right
for legal?
RONALD SANTILLI: That's correct.
ANTHONY VENDETTI: Okay. And, I mean, I guess you mentioned at least G&A would go
down to 9% to 11% expected after that. But I was, Kevin I was wondering if you
could talk through what if you did -- if you were to lose, would there be --what
would the costs or what would the estimated costs be? What was the appeal process
look like? How long do you think this could drag on? Do you have an idea?
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KEVIN CONNORS: Well, obviously, it's up to the court to determine what the number
is, it's been our view that we were aware of this [patent] when we started the
company and received opinion from one of the most prominent IP firms in the valley,
that we don't wrench this particularly patent. So we believe that [inaudible] would
be very difficult to establish with that in mind. And Palomar has licensed the
patent in question to at least two company's, and the royalty rate is anywhere from
5% to 7.5% for the laser hair removal products.
We have shipped some around -- maybe $200 million with the product, all products
since conception. So you can try to get a sense of what that cash royalty amount,
the damages would be. Obviously we are focused on multi-application products so
we'd argue that we should be subject to a lesser rate for the-multi-application
products. There would be an appeal, the process, the timing of that has some
uncertainty associated with it, but it could be anywhere from, six months tosignificantly longer than that for that field process to run its course.
ANTHONY VENDETTI: Okay. But most of the cost, the legal cost that you have
incurred would not have to be repeated during the appeal process, because you've
already gone through that, is that correct?
KEVIN CONNORS: That's right.
ANTHONY VENDETTI: Okay. And then lastly, Ron, were you able to get that number?
RONALD SANTILLI: Sure. Actually, and its in some of the supplemental information
that we provide, maybe you [are] not able to see the release, but US was 72% and
the international was 28% of the total during this most recent quarter.
ANTHONY VENDETTI: Okay. Great. All right. Thanks guys.
OPERATOR: Our next question comes from Dalton Chandler from Needham & Company.
DALTON CHANDLER, ANALYST, NEEDHAM & COMPANY: Yes, hi. Just a follow-up on the
legal appeal question. The 9% to 11% you are talking about going to in the second
half of the year. Does that anticipate anything for the appeal process or, does
that assume you zero out the patent related cost?
RONALD SANTILLI: Hi Dalton, this is Ron. It actually assumes a very low burn rate
in the second half of the year, because we would expect the appeal process to be a
fairly inexpensive process after the trial would be done.
DALTON CHANDLER: Okay. And then just another, sort of nit picky question on the
gross margin, obviously still very high, but it was down a little bit year-over-
year and sequentially and higher revenue, just wondering if you could comment on
what happened there and what you expect going forward?
KEVIN CONNORS: Really, it's within the range that we've given. We've given
guidance when we compared the non-GAAP numbers between 73% to 75% we were a little
bit on the low end. But it depends on the product mix, warranties provided and what
not. So it's kind of, it's still within the range that we were expecting.
DALTON CHANDLER: Okay. So it wasn't, like any -- sort of product discounting
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related to the AAD show or --?
Page 13
KEVIN CONNORS: No. There was no special promotion that would have caused that to
occur.
DALTON CHANDLER: Okay. Thanks, very much.
OPERATOR: Our next question comes from Jose Haresco from Merriman.
JOSE HARESCO, ANALYST, MERRIMAN: Thank you very much for taking the question. Just
a couple of housekeeping items. What is the cost of the CoolGlide loaded with the
ProWave 770 versus the [VI] laser?
KEVIN CONNORS: We don't have such a product Jose.
JOSE HARESCO: I mean if you had to replace all laser handsets with a ProWave how
much -- was there a significant reduction in cost?
KEVIN CONNORS: Again, I don't understand the question.
JOSE HARESCO: Okay. You said that the multi-application, Xeo platforms are now
starting to ship with the ProWave on board?
KEVIN CONNORS: That's correct.
JOSE HARESCO: What does that go for?
KEVIN CONNORS: There is a broad range of prices for the Xeo, basically the ideawas that our customers can select any of our applications, and have that populated
in one machine. So the pricing for Xeo was anywhere from the low 100, I suppose
Ron-- to $200,000 depending on what they decide to populate.
JOSE HARESCO: Does the top end of the range come down a bit, if you have ProWave
on there, as one of the apps?
KEVIN CONNORS: Again Jose, we offer that today, the customer can buy a fully
loaded [DL] with ProWave, and that's represented by the $200,000 price tag that we
talked about.
JOSE HARESCO: Okay. Is the ProWave selling at all overseas?
KEVIN CONNORS: Yes, it is.
JOSE HARESCO: Okay.
KEVIN CONNORS: We have [regulatory clearances] for it in all the major markets.
JOSE HARESCO: Okay. Could you comment -- you mentioned that there was an
enormously low percentage of sales in the traditional market. Do you have any sense
KEVIN CONNORS: While again, Jose I commented that that's does tend to balance
around from quarter-to-quarter and at this point we are not getting too excited
about the data from a single quarter of the that analysis. It's been hovering
anywhere from 20% to 25% for quite some time and it just gets down in the first
quarter for some reason, turn out to be the PSS's fiscal year-end. And so one
theory could we that the strong interest in PSS's year-end could have driven more
non-core physicians, but that's purely speculation.
JOSE HARESCO: Okay. Do you have a sense as to with how different segments within
the market might be migrating to different types of products? Is it still the
general consensus that derms and plastic tend to go towards more the high-end
lines, and the newer segments of the market tend to gravitate towards the lower
medium price point?
KEVIN CONNORS: Sure. Its -- that's something we analyze every quarter Jose. And Ithink many assume that the non-core specialties are more price-sensitive and often
pursue products that are lower price point. Our experience has been that the non-
cores have identical buying habits to the derms and plastics. We aren't active in
the spa market and I think in the spa market there is significantly more price
sensitivity. We are active in what we consider the medi-spa, which is physician
assisted spa environments and we are not seeing from our experience any difference
in the product selection.
JOSE HARESCO: Okay. Two other questions related to the lawsuit. The first one is,
first one is if for some reason, the worst case scenario happens out and there is
an any junction against laser based hair removal products, does your council have
any sense or given you any sense for whether or not that sets a precedence for the
second lawsuit, that Palomar has against you?
KEVIN CONNORS: Does it set precedent? Well, the second lawsuit is relative to
flash lamp technology in hair removal. So --
JOSE HARESCO: This patent is under -- some of the same claims are being discussed
within the original complaint. So is there any sense from your council as to
whether we should be worried about that or not or, is it too early to tell?
KEVIN CONNORS: It's too early to tell. That second lawsuit -- it hasn't really
progressed much. So we really don't have anything to update there. It's really in
it's infancy and the technologies are radically different. One is the laser-based
technology for hair removal and the other one is lamp-based, incoherent light.
JOSE HARESCO: Are we passed the point -- I guess is there still a chance here that
we could reach some sort of settlement [with the] two companies or is it -- are we
-- are you hoping at this point that it just goes to trial?
KEVIN CONNORS: Well, were ready to get this resolved. And, we believe that our
technology does not infringe, but this is has been something that we've been
working through since February 2002. So it has been a long process. So it's hard to
answer that, Jose. We are just preparing for trial. And we've got an excellent team
to represent us in this matter.
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JOSE HARESCO: Well, thanks, guys.
KEVIN CONNORS: Operator?
OPERATOR: And we have time for one last question from Mike Bosman from Peninsula.
MIKE BOSMAN, ANALYST, PENINSULA: Hi, guys. First of all, I'd-like to just
[preface] the question with congratulations. You guys are really growing this
business nicely here. I was wondering, Kevin, if you could just comment on the
general competitiveness within the market. Your space is closing in on a billion
dollars. Are you seeing any new competitors come in or is it the usual suspects in
the marketplace?
KEVIN CONNORS: To a large extent, Mike, it is the usual suspects. But being at the
market, it is growing at a very robust rate, there are number of companies that are
popping up. A lot of them are development stage companies. But the space is getting
a lot of attention because of the excitement. And anytime one is in a strong market
with great growth drivers identified, it will get attention of folks out there
looking to take advantage of that.
With all that said, we are certainly not seeing anything in our business where
there is any sign of saturation or price erosion. We're continuing to experience
strong growth and do it in a market where both Cutera and most of our competition's
not reporting any of those things.
MIKE BOSMAN: That's great to hear. I mean can you just comment about the sale
cycle length of the time and the ASPs? Are they starting to get higher or stay the
same?
KEVIN CONNORS: Well, I will turn the ASP question over to Ron. But one caveat with
ASP is that we launched a new product platform last year, the Solera platform. We
are pleased that we were able to grow our ASPs in excess of 50%, probably closer to
75% by now, since we launched our first product in 2000.
But we intentionally launched the new product platform to participate in a more
price sensitive segment of the market. And so, we knew that that would result in
some impact on average selling prices. But we are not seeing, as I said earlier,
any issues of pricing, and the individual product lines are holding up quite
nicely. And maybe, Ron, you could talk about our blended ASP.
RONALD SANTILLI: Yes. Mike, just in general, the blended ASPs are doing very nice.
We have not been seeing a lot of discounting. And as a result, we have been very
pleased with what we have been able to achieve there.
MIKE BOSMAN: Right. Well, I like to thank you guys for doing a good job.
KEVIN CONNORS: Thank you very much, Mike. Okay. Thank you for participating in our
call today. We are very excited about our future and look forward to updating you
on our progress next quarter. Good afternoon. And thanks for your interest in
Cutera.
OPERATOR: That concludes today's conference. Everyone have a great day.
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---- INDEX REFERENCES ----
COMPANY: MAXIM GROUP INC (THE); CUTERA INC
NEWS SUBJECT: (Company Profiles (1C063); Corporate Financial Data (1X059);
Corporate Performance (1X012); Business Management (1BU42); Economic Statistics
(1EC52); Sales & Marketing (1MA51); Sales (1SA20); Market Data (1MA11); Business
Lawsuits & Settlements (1BU19); Business Litigation (1BU04); Economics & Trade
Q2 2006 Cute ra Inc Earnings Conference Call - Final
OPERATOR: Good afternoon, and welcome to the Cutera Incorporated Second
Quarter 2006 Earnings Conference Call. At this time, all participants have been
placed in a listen-only mode, and the floor will be open for your questions
following the presentations. This call is being recorded.
It is now my pleasure to turn the floor over to your host, Mr. John Mills ofIntegrated Corporate Relations. Please go ahead, sir.
JOHN MILLS, IR REPRESENTATIVE, INTEGRATED CORPORATE RELATIONS: Thank you. By now,
everyone should have access to the second quarter 2006 earnings release, which went
out today at approximately 4:00 PM Eastern time. The release is available on the
investor relations portion of Cutera's website at Cutera.com, and with our Form 8-
K, filed with the SEC, and available on our website, or at the SEC website at
SEC.gov.
Before we begin, Cutera would like
contain forward-looking statements,
financial performance and financial
growth opportunities and strategies
operations and estimates related to
future royalty expenses.
to remind everyone that these prepared remarks
including statements concerning future
guidance, long-term domestic and international
future spending on various aspects of our
the patent litigation settlement payment and
Also, management may make additional forward-looking statements in response to
your questions. Factors that could cause Cutera's actual results to differ
materially from these forward-looking statements include its ability to effectively
continue to increase its sales performance worldwide, unforeseen events and
circumstances relating to its operations, government regulatory actions, general
economic conditions and those other factors described in the section entitled
Factors that May Affect Future Results in its most recent 10-Q and 10-K filed with
the SEC.
These forward-looking statements do not guarantee future performance, and
therefore you should not rely on them in making an investment decision without
considering the risk associated with such statements. Cutera also cautions you to
not place undue reliance on forward-looking statements, especially those relating
to guidance on future financial performance, which speaks only as of the date they
2007 Thomson/West. No Claim to Orig. US Gov. Works.
J1
8/7/06 FINDISCLOSURE 21: 00:00 Page 2
were made. Cutera undertakes no obligation to update publicly any forward-looking
statements to reflect new information, events or circumstances after the date they
were made or to reflect the occurrence of unanticipated events.
With that, I'll turn the call over to the company's President and Chief Executive
Officer, Mr. Kevin Connors.
KEVIN CONNORS, PRESIDENT AND CEO, CUTERA: Thank you, John. Good afternoon,
everyone, and thanks for joining us today to discuss Cutera's results for the
second quarter ended June 30th, 2006. On today's call, I'll provide an overview of
our second quarter results, and then Ron Santilli, our CFO, will provide additional
details on our operating financial results and comment on guidance. Finally, I will
provide some closing comments and open the call to your questions.
I'm very pleased with the second quarter results, which exceeded both our top and
bottom-line guidance. A number of factors are helping our organization achieve
these expectations, including, one, a strong, unique portfolio of upgradeable
products and applications that enable our customers to perform all of the popular
aesthetic applications on the broadest range of patients and skin types.
Two, our investment in research and development continues to provide our customerswith state-of-the-art technology that yields high returns on your equipment
purchases. Three, another factor fueling our growth is our sales force expansionthat continues to yield measurable results. These investments have made our salesforce over the last few quarters -- have enabled us to expand to 55 territories inNorth America. These investments are expected to continue contributing to strongimprovements and our operating margins during the remainder of the year.
Four, we have continued to experience growth across all of the major physiciancategories we market to, with particularly strong growth in the general and familypractitioner specialties. During the second quarter of 2006, we booked
approximately 22% of system orders from traditional dermatologist and plastic
surgery specialties, 63% from OBGYNs, family practice and other physicians andapproximately 15% from non-physicians.
We have always approached our business with the long-term goal of establishingCutera as a leading provider of laser and other light-based systems to the
aesthetic market. To further this, we have continued to make significant
investments in R&D, which has allowed us to design innovative products that command
a premium in the market. Sales force expansion, coupled with aggressive investments
in marketing, have been important in our business to position us well for continued
strong future growth. Because of these investments, we're expecting continued sales
growth and operating leverage for the second half of 2006 and beyond.
Now I'd like to turn the call over to Ron to discuss our strong financials in more
detail. Ron?
RON SANTILLI, CFO AND VP, FINANCE AND ADMINISTRATION, CUTERA : Thanks, Kevin, and
thanks to all of you for joining us today for our second quarter of 2006 results.
Before I begin, please note that all of our financial performance and guidance
comments are expressed in GAAP numbers, which include the impact of patent
litigation settlement charges and stock-based compensation charges.
In addition, to supplement the GAAP numbers, we have provided non-GAAP net income
and non-GAAP diluted income per share information that excludes the impact of the
litigation settlement and all stock-based compensation expenses, both net of their
related income tax effects. We believe that these non-GAAP numbers provide you with
insights to conduct a more meaningful and consistent comparison of our ongoing
operating results and trends compared with historical results. A table reconciling
the GAAP numbers to non-GAAP numbers is included in our release.
Second quarter 2006 revenue was $24.4 million, a 39% increase compared to the same
period last year. Net loss for the second quarter of 2006 was $9 million, or $0.73
per diluted share. Non-GAAP income for the second quarter was $2.8 million, or
$0.20 per diluted share. The non-GAAP numbers enable you to view our financial
performance without the effects of the patent litigation settlement and deferred
stock-based compensation charges net of taxes.
Revenue for the first six'months ended June 30th, 2006, was $45.2 million, a 38%
increase from $32.7 million reported in the same period last year. Net loss for the
first six months of 2006 was $7.9 million, or $0.64 per diluted share. Non-GAAP
earnings for the first six months of 2006 were $4.7 million, or $0.33 per diluted
share, compared to net income of $4.2 million or [$0.31] per diluted share in the
first six months of 2005.
During the second quarter, revenue in the U.S. decreased by 44% to $16.4 million.
This growth reflects the strong demand for our product offerings and productivity
improvements from our sales expansion investments made over the last few quarters.
On the international front, second quarter 2006 revenue increased by 29% to $8million. International revenue in the second quarter as a percent of our total
revenue was 33%. We continue to invest in our international business, and are
pleased with the results we have achieved.
We believe the international market offers us an excellent long-term growth
opportunity. During the second quarter of 2006, our product revenue grew 39% to
$20.3 million. This was driven primarily by sales of our premium multi-application
Xeo platform and our Solera platform products. We continued to see an increasing
number of multi-use transactions from higher-volume practices. Upgrade revenue
declined 6% in the second quarter of 2006 to $1.6 million. This was primarily due
to an increasing number of existing customers choosing to purchase an additional
system, typically a Solera product, instead of upgrading their existing systems.
Service revenue increased 63% to 1.4 million in the second quarter of 2006, as
compared to the second quarter of 2005. We expect this revenue growth to remain
strong as our installed base increases. Finally, our annuity revenue stream from
Titan refuels grew 174% from 405,000 in the second quarter of 2005 to 1.1 million
in the second quarter of 2006. Just like our service revenue, as the installed base
of our Titan products has increased, and our customers have continued to satisfy
the fast-growing demand for Titan procedures, revenue from this product line has
continued to increase.
I will now address our operating performance. Our gross margin in the second
quarter of 2006 was 68%, compared to 72% in the second quarter of 2005. This
decrease was primarily attributable to the royalty expense, which represented 3.9%
of the most recent quarter's revenue. Adjusting for that royalty's expense, our
margins would have been 72%. Our margins have remained strong due to continuing
demand for our premium, multi-applications Xeo product and higher gross margin
associated with our Titan-related products. Including the continuing royalty
expense, we are expecting our gross margin to be in the range of 68 to 70% for the
remainder of 2006.
The blended royalty rate is expected to be in the range of 3.5 to 4% total revenue
for the remainder of 2006. Consistent with our strategy of expanding our sales
force and distribution network, sales and marketing expenses for the second quarter
of 2006 were $8.3 million, or 34% of revenue, compared to 5.8 million, or 33% of
revenue for the second quarter 2005. This growth in the spending is due to our
sales force expansion efforts at the end of 2005 and in the first quarter 2006, and
the effects of implementing FAS-123R.
For the remainder of 2006, similar to 2005, we expect to increase our spending inabsolute dollar terms in sales and marketing. However, we expect the expenses to
decline when measured as a percent of revenue. We estimate our sales and marketing
spending as a percent of revenues to be in a range of 30 to 34% for the second half
of 2006. Research and development expenses were 1.6 million, or 6% of revenue, in
the second quarter of 2006. Even though we will continue to increase our investment
in this area, we believe our spending will remain in the range of 6 to 7% of
revenue for the remainder of 2006.
General and administrative expenses for the second quarter were $4.3 million, or17% of revenue. We spent approximately $1.7 million on non-recurring legal expenses
associated with our patent litigation. After accounting for the income tax benefitof these expenses, this represented an $0.08 per diluted share impact in our secondquarter. We expect our normal G&A expenses to decline from a more traditional 9 to11% of revenue for the remainder of the year, now that our legal matter has beenresolved.
Our effective income tax rate for the second quarter of 2006 was 40%, which was
higher than we had originally expected, due to the patent litigation settlement
expense. Excluding the impact of the $18.4 million litigation settlement expense
incurred during this quarter, the effective income tax rate for the second quarter
would have been 33%.
We expect our effective income tax rate to be approximately 33% for the remainder
of 2006. Now, I would like to walk you through the final accounting for the Palomar
litigation settlement. On June 5th, we disclosed that we paid $22 million to
Palomar as a good faith estimate for royalties due on past sales, interest,
penalties and reimbursement of legal fees. Once we closed the transaction, we
embarked on the detailed work necessary to finalize our numbers, which required
that we review each applicable sales transaction since our first product shipments
in early 2000.
Please note that we sell primarily multi-application products, which are subject
to different royalty rates, or no royalties, per our agreement. We have now
completed this analysis and have determined that the actual amount due to Palomar
was 19.6 million. These numbers are subject to an audit which will be performed
this quarter.
Of the $19.6 million, we expensed 18.4 million and capitalized 1.2 million as
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intangible assets, representing the ongoing patent license that we received as part
of the settlement agreement. The $1.2 million intangible asset will be amortized
cost of goods over the next nine years, which is the remaining life of the
applicable patents.
The quarterly charge for this amortization going forward is approximately $33,000.
The $2.4 million difference between our $22 million estimated payment and the $19.6
million reconciled number will be used as a credit against future royalties. Coming
to EPS, the cost of [technical difficulty] we now referred to the non-GAAP
reconciliation of our net income and EPS provided in our earnings release.
On a GAAP basis, we had a loss per share in the second quarter of 2006 of $0.73.
However, to arrive at the non-GAAP earnings per share of $0.20, we need to make
three adjustments. Firstly, the litigation settlement expense of 18.4 million.
After adjusting for the income tax benefit of 7.1 million, the net impact was 11.3
million. This represented $0.80 per diluted share. Secondly, our deferred stock-
based compensation expense, per FAS-123R, was 911,000. After adjusting for the
income tax benefit of $301,000, the net impact was 610,000. This represented $0.04
per diluted share.
The last adjusted required is related to the weighted average share count that we
use as the denominator for computing the EPS. Our GAAP diluted share count was only
12.2 million shares, as compared to our non-GAAP diluted share count of 14.2
million shares. The 2 million share difference is related to the accounting
treatment for dilutive securities, which are excluded when a company is in a loss
position. The effect of dilutive securities is included in the non-GAAP sharecalculations, because we were profitable on a non-GAAP basis. However, the effect
of dilutive securities are excluded from the GAAP share calculation because we were
in a loss position.
The net difference of using the fully diluted share count, versus the non-diluted
share count was $0.09. Turning to the balance sheet, our financial position after
the settlement payment continues to remain very strong. As of June 30th, we had $82
million, or approximately $6.50 per outstanding share, of net cash and marketable
investments, and no debt.
Our accounts receivable, net at the end of the first quarter remained low at $5.7
million. Our DSOs improved to 21 days in the second quarter of 2006, due primarily
to our strong credit policies and effective cash collections. Cash used in
operating activities in the second quarter was 11.9 million, which included the $22
million estimated settlement payment to Palomar.
Moving to guidance. For the third quarter of 2006, we expect revenue to grow to
approximately $25 million, with earnings per share of approximately $0.21. For the
full year of 2006, we are increasing our revenue guidance to approximately $100
million and estimate breakeven earnings per share. These EPS numbers include the
impact of stock-based compensation charges and our recent litigation settlement.
Non-GAAP EPS numbers for the third quarter and full year are estimated to be
approximately $0.27 and $1, respectively. These non-GAAP numbers are comparable
with our historical reporting. Please refer to our detailed reconciliation of GAAP
to non-GAAP guidance numbers attached to the earnings release.
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Now that I have concluded my overview of Cutera 's financial performance, I'll turn
the call back to Kevin.
KEVIN CONNORS: Thanks, Ron. As you can tell from our results, many aspects of our
business performed very well in the second quarter. As we look into the second half
2006, with our patent litigation result, we're very pleased to redirect our
management efforts to expanding our market share in a robust, growing market. We
expect the investments we made in our sales and marketing team during the end of
2005 and beginning of 2006, will continue to show increasing measurable
improvements in our operating margins.
The near and long-term opportunities we are seeing in our market are proving that
our recent strategic expansion was a prudent choice for our company. In summary,
we're very excited about our future. We have developed and have continued to add to
a very strong portfolio of products, assembled one of the largest direct sales
organizations in North America, and have continued to invest in our international
channels. We believe these investments, together with our business initiatives andthe fast pace of growth of the aesthetic market position Cutera for continued
growth in profitability in years to come, with improved operating margins and
raised guidance for revenue and earnings, we feel very confident about theopportunities we're pursuing in our market.
Now I'd like to open the call for your questions. Operator?
OPERATOR: Yes, sir, thank you.
[OPERATOR INSTRUCTIONS].
And we'll take our first question from Phil Nalbone, RBC. Please go ahead.
PHIL NALBONE, ANALYST, RBC CAPITAL MARKETS: Good afternoon, Kevin and Ron. I
wondered if we could start with the discussion of the sales force headcounts. If I
heard correctly, you still have 55 territories, or 55 direct reps. Is that
unchanged from the end of Q1?
KEVIN CONNORS: Yes, Phil, it is.
PHIL NALBONE: Can you talk a little bit about what your expectations would be for
adding incrementally from this point?
KEVIN CONNORS: We plan to continue to expand the sales force. This past expansion
was a massive one, and we had to build a significant amount of infrastructure
within the sales force and the marketing support to facilitate that expansion. We
do intend to continue expanding, but right now we're not commenting on targeted
headcount by the end of the year.
PHIL NALBONE: Okay. I believe you added eight new people during the first quarter.
That was a very big step-up. Can you give us some color on how productive those
people are? Are they adding meaningfully to the revenue stream, or should that be a
KEVIN CONNORS: By and large, we expect that in the second half, Phil. It typically
takes six to nine months to get the productivity we look for in our salespeople.
Our investments in sales training and sales management I think have moved that
forward from past periods, but we really are looking at the second half as the
point where we start to get the returns on those investments.
PHIL NALBONE: Okay, Kevin. Can you talk any about sales force expansion activities
in Europe and Asia? I think you were at 20 people at the end of Q1?
RON SANTILLI: And we remain about 21 at the end of Q2 as well, Phil.
PHIL NALBONE: Okay, great. And, moving on, can you give us some sense of what
percentage of your revenue base right now is not subject to any sort of royalty,
and would you be comfortable at this point talking about sort of the proactive
initiatives that you have in place to increase that to give more leverage to your
income statement over time?
RON SANTILLI: Let me address the first part of that, Phil. Approximately -- and itdepends on the time that you look at -- what kind of number you run into when
you're trying to look at a percent of the revenue base that is totally hair
removal. But we estimate somewhere between 10 to 15% of our total revenue base is
hair removal only revenue.
Then there's another piece that is not subject to the royalties, and that'sprobably another chunk that's in the -- I'm going to give a pretty high range here,between 15 and 30%, depending on the quarter, depending on the activity. And thenthe rest of the revenue base is subject to different rates, because it's multi-application and it's subject to different rates for the royalty agreement.
KEVIN CONNORS: And, Phil, the second part of the question, we're obviously
committed to launching new applications in this marketplace and products that don't
feature laser light-based hair removal technology are not subject to a royalty,
according to the agreement. We're working on a number of new applications that are
in that category.
PHIL NALBONE: Kevin, I'm so glad you mentioned new applications and new products.
You have a history of not talking about any of those, but in a general sense,
anyway, can you talk about expectations for '07? Are we likely to see new products
and new applications? Are we likely to see several? We're all going to start
thinking about the academy meeting early next year before long. Is there any color
you can give us?
KEVIN CONNORS: Well, obviously, we have expanded our R&D efforts in hopes of
expediting this, the product development activities. And we tend to take the
academy meeting in the first quarter as an opportunity to discuss the new
applications that we're working on. And it is our intent to have new product launch
sometime during the year, with some more color of what we're working on at the
academy meeting.
PHIL NALBONE: So do I take that as a single product, or single new application?
KEVIN CONNORS: Well, were working on multiple projects right now, and we believe
that we should be able to launch at least one of those in 2006 or 2007.
PHIL NALBONE: Okay, Kevin. Thank you, very much. I'll go back into the queue.
OPERATOR: And we'll take our next question from Tom Gunderson, Piper Jaffray.
Please go ahead.
TOM GUNDERSON, ANALYST, PIPER JAFFRAY: Hi, good afternoon. Just a clarification on
the 911,000 stock-based compensation expense, can you break that out into the
operating categories for us?
RON SANTILLI: I do not have that information available at this moment. Very little
of it -- just over 100,000 of it is in cost of goods sold. The rest is in the
operating expense.
TOM GUNDERSON: Okay, well, you guessed what I wanted it for, so that's good
enough, thanks. And then I want to focus a little bit of discussion time on sales.
Just to follow up on what Phil said, Kevin, you started at 55, you ended at 55.
There were no adds or deletes during the quarter?
KEVIN CONNORS: Well, we're constantly hiring salespeople, so there is some level
of turnover that we deal with as part of the operation, but the 55 territories, and
those are direct salespeople, so that doesn't include sales management. And I think
we're likely to continue to expand the sales force. But at this point, we're really
focused on executing well with this last major expansion.
TOM GUNDERSON: Okay, and then can we talk a little bit about competition? Firstoff, there's a sense out there that I'm picking up from investors, and I was
wondering if you could give it from the industry's side, that competition is
getting hotter, that there's more companies and more salesmen chasing the same
market. And, I'm wondering, you've faced a lot of competition over the last three
or four years and had good sales growth. Are you sensing any new trends in
competition out there, or is it always -- is it at a constant level?
KEVIN CONNORS: I think the market has been growing at such an exciting rate that
it has attracted a number of new companies and so I guess that's the bad news
associated with being a part of a robust market. We expect to experience 44% growth
in North America last quarter, and we think we're capturing the U.S. market faster
than anyone else. But in terms of any trends that we're seeing, in terms of selling
prices or disruptive competitive products, I can't say that we can see anything
that looks like a radical departure from our past history.
TOM GUNDERSON: Okay, and then a last question on the sales thing here is, prior to
the settlement, there was at least some pushback from some customers that they were
afraid that maybe you would be enjoined, and that maybe their purchase of a product
wouldn't have the ongoing support that they had hoped, and that was also
promulgated by at least some competitive salespeople. Have you seen any change in
that? Has there been a bounce back since the settlement, in that maybe some
decisions that were on the fence went your way?
KEVIN CONNORS: Well, I think that was in the background for quite some time, Tom.
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The litigation was filed in February 2002, and there have been a number of
challenging sales situations, where the customer was confused about what this meant
to a customer that would purchase Cutera.
I think there has been a sigh of relief within the sales force that this is no
longer a factor, and that we recognize that this has been here all along, and I
think with the trial coming close, the volume of this certainly increased. So I
think it's likely that we did have some negative impact, because this has been
there all along and there are probably some customers that would opt not to
purchase from us because of the uncertainty associated with litigation. That's been
completely lifted now, and I think it should have a positive impact on business.
TOM GUNDERSON: Okay, and then a product question on Titan. You gave us year over
year, but it's often an awfully tiny number, so I looked at it sequentially and
it's almost 18% in the disposable sequentially. Is that mostly from existing people
buying more? Are you selling more new product? How would you add more color to
what's going on with Titan disposables?
KEVIN CONNORS: I think a lot of that just ties in to the installed base of Titan
machines out there. We did introduce two new versions of Titan in February, and so
those are more experience of hand pieces, and so we had some customers that opted
to purchase the higher-performance model, but I think more than anything else, Tom,
it's a function of how many customers we have out there.
TOM GUNDERSON: Okay, thank you.
OPERATOR: And we'll take our next question from Dalton Chandler, Needham &
Company. Please go ahead.
DALTON CHANDLER, ANALYST, NEEDHAM & CO.: Hi, guys, congratulations on a nice
quarter.
KEVIN CONNORS: Thanks, Dalton.
DALTON CHANDLER: Actually, most of my questions have been asked, but I did want to
just confirm on your guidance for the non-GAAP dollar earnings for the year, am I
doing this correctly, that implies $0.41 for the fourth quarter.
RON SANTILLI: I think it would imply about $0.39 for the fourth quarter, to get to
the dollar.
DALTON CHANDLER: Right, so I had 12 in the first quarter 20 this quarter, you're
guiding for 27 in the third quarter.
RON SANTILLI: It's actually $0.13 in the first quarter, 20 in the second, and then
27 to 39, and there may be a rounding in there that gets you to the penny.
DALTON CHANDLER: Okay. All right, thanks very much.
OPERATOR: And we'll take our next question from Jose Haresco, Merriman. Please go
OPERATOR: And well take our next question from Mike Bosman, Peninsula Capital.
Please go ahead.
MIKE BOSMAN, ANALYST, PENINSULA CAPITAL: Hi, good afternoon. Great quarter, guys.
RON SANTILLI: Thanks, Mike.
MIKE BOSMAN: Question for you. Currently, the Titan refills are running about 4.5%
of total revenues. Can you just give us an idea of how large you think at some
point this could be? I mean, is this something that could get up to double-digit
revenues for you guys at some point?
KEVIN CONNORS: Mike, it certainly could. We are in uncharted territory to some
extent, and we haven't given guidance in terms of what we think that number could
be, but we've been experiencing very robust growth in the procedure annuity fees.
MIKE BOSMAN: And then, Ron, just circling back to the EPS guidance, I also got
$0.41 implied in the fourth quarter, so I'll have to check my rounding as well.
RON SANTILLI: Easily a one penny rounding of some type within that.
MIKE BOSMAN: Okay. And then for the first quarter, you grew revenue year-over-year
at 37 and 39%. You're guiding the year revenue growth at 31.5%. This implies fourthquarter of about 30 million, or just under, and that's 24% year-over-year growth.
Is this just being a little bit -- not to really box you into the guidance, but isthis kind of a conservative number for your Q4 revenue, or is there some sort ofseasonality that maybe you might start to experience?
RON SANTILLI: Well, Mike, I think you've got those numbers all correct. I guess in
the fourth quarter, we're looking at $30 million of revenue, and we're comfortable
with that number at this time, so we're not looking to increase that, and that will
also be a record for us in terms of revenue growth. So, these are the revenue
figures that we're comfortable with at this time.
MIKE BOSMAN: Well, they're pretty impressive. And then just lastly, kind of to
piggyback on Tom's question about the competitiveness -- my question is more geared
toward the consumer. Are you hearing from your OBGYN customers, or GP customers,
since that's the majority of your business, any pushback from the consumers? Is it
getting.soft at all? I mean, obviously, the revenue growth is amazing, but is there
any sort of consumer softness out there that you're hearing from?
KEVIN CONNORS: Yes, we're somewhat removed from the direct patient perspective,
but if you look at the growth rates, you look at the balance sheet and our accounts
receivable, DSO being at record low levels, our average selling prices remain
strong. So, every indicator that we have seems to indicate it's more of the same.
MIKE BOSMAN: That's what it looks like. Well, great quarter, guys. Thank you.
KEVIN CONNORS: Thank you.
RON SANTILLI: Thanks, Mike.
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OPERATOR: We have time for one more question, and we'll take that question from
Matt Arens, Kopp Investment Advisers. Please go ahead.
MATT ARENS, ANALYST, KOPP INVESTMENT ADVISERS: Great. Thanks for taking my
question. Can you comment on -- in terms of the new product introductions, is
getting additional consumable streams an important parameter for new prcLduct
introductions? Or are you looking at that more universally in that if there's a
consumable stream associated with it, all the better, but that's not a requirement
for new products going forward?
KEVIN CONNORS: Yes, Matt, it's more the latter. We certainly like the
predictability associated with the annuity revenue stream, and if we can provide a
solution where our customers see the value associated with that offering, with the
understanding of what the other competitive alternatives are, then we certainly
will do that in the future. But we won't limit product launches with that
constraint.
MATT ARENS: So, is it fair to say that there may be a consumable stream associatedwith the products that you're speaking about introducing possibly next year, but
don't necessarily count on that being the case?
KEVIN CONNORS: That's right. That's right.
MATT ARENS: The other question that I have, in terms of the competitive landscape,one variable that I don't have a real good sense for, maybe others do, but asyou're going into accounts and competing for business, could you give me a ballparkfeel of what percentage of the time you're going in replacing older equipment? Andmaybe a feel for what percentage in -- and I'm thinking about the U.S. market here,kind of the traditional applications, so kind of ex Titan.
And what percentage of the time you're going into an account that doesn't have
existing equipment, because I think that that could have implications for how thecompetitive landscape may play out over the next several quarters and years?
KEVIN CONNORS: I think you look at where business is coming from, the lion's share
is coming out of the OBGYNs and family practice categories and 35,000 OBGYNs in the
United States, and about another 65,000 [GPFPs]. Almost without exception, when
we're selling into that, the physician category, it's the first time they're buying
equipment.
And dermatology and plastic surgery, which represented 22% of our revenue in the
second quarter, most cases, they own existing laser and light-based technology.
Sometimes they're looking to obsolete the existing products that they have, but
other times their practice has become so busy they need to buy additional equipment
to keep up with the consumer demand.
MATT ARENS: Okay, and one last question, if I can sneak it in, we have a model for
an aesthetic procedure during a slower economy, which is going back several years
to Botox, and what happened with the growth of Botox during a slowing economy. What
parallels can we draw between the aesthetic procedures that you provide, and what
we saw in a softening economy with Botox? Are there parallels there, or is that not
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the way that you model things out?
Page 14
KEVIN CONNORS: Well, I think there are certainly lessons to be learned from that
experience. I think the demand from consumers for these elective procedures
continues to be robust, even in a soft economy. And we've been out here since 2000,
and we didn't see much pullback during the choppy times in early 2000. But
oftentimes physicians are looking to purchase equipment that we provide, because
they're seeing a shift in the procedure demand from their patients.
Some of the higher-priced procedures are getting some pressure, and alternatives
that can be offered to their patients for treatments that cost anywhere from a
couple hundred dollars to a couple thousand dollars, allows them to keep their
practice healthy.
MATT ARENS: Great. Okay, well, thank you for taking my questions.
OPERATOR: And, Mr. Connors, I would now like to turn the conference back over to
you for any additional or closing remarks.
KEVIN CONNORS: Thank you, Operator. Thank you for participating in our call today.
We're very excited about our future, and look forward to updating you on our
progress next quarter. As a reminder, we will be attending a number of conferences
in the coming months, so we look forward to seeing you there. Good afternoon, and
thank you for your interest in Cutera.
OPERATOR: And that does conclude today's presentation. We thank you for youparticipation, and you may disconnect at this time.
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O 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the
John MillsCutera, Inc. - Investor Relations of Integrated Corporate
Kevin ConnorsCutera, Inc. - President and CEO _
Ron SantilliCutera, Inc. - CFO
CONFERENCE CALL PARTICIPANTS
Tom GundersonPiper./affray - Analyst
Phil NalboneRBC - Analyst
Anthony VendettiMaxim Group -Analyst
Dalton ChandlerNeedham & Company - Analyst
Jose Haresco
Merriman - Analyst
Mike Bosman
Peninsula Capital - Analyst
Alex ArrowLazard Capital Markets -Analyst
PRESENTATION
Operator
Good day, everyone, and welcome to the Cutera, Incorporated, Third quarter 2006 Earnings Conference Call. Today's call is
being recording.
[OPERATORS INSTRUCTIONS]
It is now my pleasure to turn the floor over to your host, Mr. John Mills, of Integrated Corporate Relations. Please go ahead, sir.
John Mills - Cutera, Inc. - Investor Relations oflntegrated Corporate
Thank you. By now, everyone should have access to the third quarter 2006 earnings release, which went out today at approximately
4:00 p.m. eastern time. The release is available on the Investor Relations portion of Cutera's website at cutera.com, and with our
Form 8-K, filed with the SEC and available on its website at sec.gov.
Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements,
including statements concerning future financial performance and guidance, including anticipated increase in revenue and
expansion of Cutera's customer base, long-term domestic and international growth opportunities and strategies, and future
spending on various aspects of our operations.
www.streetevents.com Contact Us
0 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the
Also, management may make additional forward-looking statements in response to your questions. Factors that could causeCutera's actual results to differ materially from these forward-looking statements include its ability to effectively continue toincrease its sales performance worldwide, unforeseen events and circumstances relating to its operations, government regulatory
actions, general economic conditions and those other factors described in the section entitled "Factors that may affect futureresults," and its most recent 10-Q and 10-K filed with the SEC.
These forward-looking statements do not guarantee future performance, and therefore, you should not rely on them in making
an investment decision without considering the risk associated with such statements. Cutera also cautions you to not place
undue reliance on forward-looking statements, especially those relating to guidance on future financial performance, which
speaks only as of the date they were made. Cutera undertakes no obligation to update publicly any forward-looking statements
to reflect new information, events or circumstances after the date they were made, or to reflect the occurrence of unanticipated
events.
With that, I'll turn the call over to the company's President and Chief Executive Officer, Mr. Kevin Connors.
Kevin Connors - Cutera, Inc. - President and CEO
Thank you, John. Good afternoon, everyone, and thanks for joining us today to discuss Cutera's results for the third quarter
ended September 30, 2006. Today's call will provide some -- provide an overview for our third quarter results. And Ron Santilli,
our CFO, will provide additional details on our operating and financial results, and comment on guidance. Finally, I will provide
some closing comments and open the call to your questions.
We set a new record for quarterly revenue in the third quarter, and achieved significant operating improvements, resulting in
improved profitability and operating cash flow. A number of factors, contributed to the strong third quarter results and our
long-term growth. For example, in the third quarter, revenue in the United States increased by 20%, to $17.4 million.This reflects
the continued demand for our product offerings and from sales force expansion investments made during the past year. We
continue to see very positive market conditions. And we'll now focus our efforts on improving productivity of our expanded
sales team.
Secondly, our international revenue increased by 70% when comparing Q3 2006 to Q3 2005. We experienced growth in all of
our major overseas markets and are particularly pleased with the contributions from Canada, Japan and Switzerland. We believe
the international markets offer us excellent long-term growth opportunity. And our investments, to date, in expanding our
international distribution network is paying off. We are well positioned to continue reaping the rewards from this emerging
market.
A third factor fueling our growth is our robust multi-application and upgradeable product offerings . We are continuing to
increase our investments in research and development , and have many important projects in the pipeline. In October, we
announced two new offerings, LimeLight and Navigation . LimeLight is the first programmable wavelength device that allows
doctors the flexibility to customize treatments for skin rejuvenation , pigmented legions and facial vascular legions.
Our programmable spectrum technology has been very well received with our ProWave 770 hair removal offering. And we have
heard very positive feedback with the LimeLight offering. LimeLight offers our customers customized treatments for their
patients, which results in better clinical results, with fewer patient visits. Our new Navigation technology provides our customers
with quick access to recommended operating parameters and storage of patient data on the Xeo platform. We are committed
to making our product intuitive for our customers. And Navigation helps guide our customers through each treatment.
Our Xeo platform allows fora broad spectrum of operating parameters. And our Navigation technology helps guide our customers
to the optimal treatment parameters for each patient treatment. This added feature is expected to improve treatment repeatability,
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reduce setup and administrative times during patient visits. We're continuing to experience growth across all the major physician
markets, with particularly saw growth in the non-core specialties.
During the third quarter of 2006, we booked approximately 24% of our system orders from the traditional dermatologists and
plastic surgeon specialties, 33% from family practice, 8% from OB/GYN, 23% from other physicians and approximately 12%
from non-physicians. We've always approached our business with the long-term goal of positioning Cutera as a leading provider
of laser and light-based systems to the aesthetic market. As a result of our strong product offerings, healthy balance sheet and
sizable recurring cash flow from operations, we are well positioned to continue growing our business for many years to come.
Now, I'd like to turn the call over to Ron to discuss our financials in more detail. Ron?
Ron Santilli - Cutera, Inc. - CFO
Thanks, Kevin. And thanks to all of you for joining us today for our third quarter 2006 results. Before I begin, please note that
all of our historical financial performance and guidance comments are expressed in GAAP numbers, which include the impact
of the patent litigation, settlement charges and stock-based compensation charges.
In addition, to supplement the GAAP numbers, we have provided non-GAAP net income and non-GAAP diluted income per
share information, that excludes the impact of the patent litigation settlement and all stock-based compensation expenses,
both net of their related tax effects. We believe that these non-GAAP numbers provide you with insight to conduct a more
meaningful and consistent comparison of our on-going operating results and trends, compared with historical results. A table
reconciling the GAAP financial information to the non-GAAP information is included in our earnings release.
Third quarter 2006 revenue was 25.1 million, a 32% increase compared to the same period last year. Net income for the third
quarter of 2006 was $3 million, or $0.21 per diluted share. Non-GAAP net income for the third quarter was $4.2 million, or $0.30
per diluted share. Revenue for the first nine months ended September 30 was $70.2 million, a 36% increase from the $51.7
million recorded in the same period last year.
Net loss for the first nine months of 2006 was $5 million, or $0.40 per diluted share. Non-GAAP earnings for the first nine months
of 2006 were $8.9 million, or $0.62 per diluted share. During the third quarter of 2006, our product revenue grew 29% to $20.9
million. This was driven primarily by sales of our premium multi-application Xeo platform and our Solera platform products. We
are continuing to see the increasing number of multi-unit transactions from higher-volume practices.
Upgrade revenue increased 21% in the third quarter to 1.6 million from 1.3 million in Q3 of'05. Service revenue increased 52%
to 1.6 million in the third quarter of 2006 as compared to the third quarter of 2005. We expect this revenue growth to remain
strong as our install base increases, and customers continue to utilize our services to maintain their products after the initial
warranty expires. Finally, our annuity revenue stream from Titan resales grew 112%, from 481,000 in the third quarter of 2005
to $1 million in the third quarter of 2006.
Just like our service revenue, as the install base of our Titan product increases, and as our customers continue to satisfy the
fast-growing demand for Titan procedures, we expect revenue from this product line to continue growing at a faster rate than
our other product categories. I will now address our operating performance. Our gross margin in the third quarter of 2006 was
68% compared to 75% in the third quarter of 2005. This decrease was primarily attributable to the patent license royalty expense,
which was approximately 4% of this quarter's revenue, and $170,000 of stock-base compensation expense resulting from
implementing the FAS 123R in 2006.
Our margins remain strong due to continuing demand forour premium multi-application Xeo products and higher gross margin
associated with our Titan related products. Including the continuing royalty expense, we are expecting our gross margin to
remain in the range of 68%to 70%for the fourth quarter of 2006. The blended royalty rate is expected to remain at approximately
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4% of total revenue fort he fourth quarter. Sales and marketing expenses forthe third quarter of 2006 were $8.2 million, or 33%of revenue, compared to $6.2 million, or [33%] of revenue in the third quarter of 2005.
The growth in absolute dollars is due to our sales force expansion efforts and an increase in stock-based compensation expenses,
resulting from the implementation of FAS 123R in 2006. For the next few quarters, we will be focusing on enhancing the
productivity of our sales force. We expect sales and marketing expenses as the percentage of revenue to decline to a 29% to
31 % range in the fourth quarter of 2006. Research and development expenses were 1.7 million, or 7% or revenue, in the third
quarter.
Even though we will continue to increase our investment in this area, we believe our spending will remain in the range of 6%
to 7% of revenue for the fourth quarter 2006. General administrative expenses for the third quarter were $3 million, or 12% of
revenue, which includes the effects of implementing FAS 123R. We expect our G&A expenses to improve to a range of 10% to
12% of revenue in the fourth quarter. In accordance with the litigation settlement agreement with Palomar, there was an audit
in the third quarter of 2006 of the settlement amount owed through March 31, 2006.
As a result of the audit, and after discussions with Palomar, we changed our estimate of the amount owed through March 31,
2006, and recorded an incremental expense of 544,000, or $0.03 per diluted share net of tax in the third quarter. The audit is
expected to be completed by December 31, 2006. And the blended royalty rate is expected to remain at approximately 4% of
total revenue for the fourth quarter.
Operating margin for the third quarter was 15%. We expect our operating margin to improve in the fourth quarter to be in the
range of 20% to 25% due to higher expected revenue and increased leverage of our operating expenses. Our effective income
tax rate for the third quarter of 2006 is 35%. We expect the effective income tax rate to be approximately 33% for the fourth
quarter of 2006.
Coming to EPS, its possible to now refer to the non-GAAP reconciliation of our net income and EPS provided in our earnings
release. On a GAAP basis, earnings per diluted share were $0.21 for the third quarter of 2006. Non-GAAP earnings per share for
the third quarter were $0.30, which was calculated after adjusting for the following two items. First, non-cash stock-based
compensation expense per FAS 123R of $1.2 million, adjusting for the income tax benefit of this expense, this represents $0.06
per diluted share.
Secondly, the incremental non-recurring litigation settlement expense of $544,000, adjusted for the income tax benefit of this
expense, this represented $0.03 per diluted share. Year to date, through September 30, 2006, GAAP loss per share was $0.40.
On a non-GAAP basis, after accounting for the net impact of the non-cash stock-based compensation and the non-recurring
litigation expenses, earnings per diluted share for the first nine months of 2006 were $0.62.
Turning to the balance sheet, our financial position continues to remain very strong. As of September 30, 2006, we had over
$90 million of cash and marketable securities. This represents over $7 per outstanding share. During the third quarter, cash
generated from operations was 7.7 million. And accounts receivable net at the end of the third quarter was 9.1 million, and the
DSOs were 33 days.
Moving to guidance. In the fourth quarter of 2006, we expect revenue of approximately $30 million, with GAAP earnings per
share and non-GAAP earnings per share of approximately $0.35 and $0.41, respectively. For the full year of 2006, revenue
guidance is approximately $100 million, representing a 33% increase when compared to 2005. EPS guidance for the full year
of 2006 is breakeven. These EPS numbers include the impact of stock-based compensation charges and our litigation settlement
expense.
Non-GAAP EPS for the full year of 2006, after adjusting for the non-recurring litigation settlement and non-cash stock-based
compensation expenses, is approximately $1.03. Please refer to our detailed reconciliation of GAAP and non-GAAP numbers
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Yes. For the fourth quarter, we're expecting 33%. And for'07, we're expecting kind of in the range of 33% to 35% as well.
Tom Gunderson - PiperJaffray - Analyst
Okay. And then, Kevin, the emphasis on new products and introducing them at a more rapid pace, you've gotten us comfortable
with -- once a year, you'd have another break-through product. Are you saying that that's going to be more than once a year
now? Is that the intention?
Kevin Connors - Cutera, Inc. - President and CEO
Well, we certainly are making those investments to expedite product introductions. So, we're doing our best to improve that
rate. But I think we have had a nice track record of break-through products about every year.
Tom Gunderson -Piper Jaffray-Analyst
And then, on the existing products, I'm wondering about penetration. What do you think of the -- whether it's hair removal or
skin tightening or skin tone -- what do you think is the least penetrated of the products you have out on the market?
Kevin Connors - Cutera, Inc. - President and CEO
Least penetrated. Well, being that we're selling to -- a lion's share of our business is outside of dermatology and plastic surgery
-- plastic surgery specialties. It's about 70% of our business, and the number of physicians we're calling on in North American,
is in excess of 130,000 physicians. And it's been estimated that, globally, it represents about 0.5 million physicians that we're
calling on, so very low single-digit penetration.
Tom Gunderson - Piper./affray-Analyst
Okay. And then, last question, you want to leverage the sales force and get more productivity in Q4. Were there any additions
or deletions in Q3, U.S. or International?
Kevin Connors - Cutera, Inc. - President and CEO
Ron, do you have that?
Ron Santilli - Cutera, Inc. - CFO
The headcount remained fairly constant. We still have 55 territories in North America. And the international headcount remains
constant at around 21, 22 direct people.
Tom Gunderson - Piper Jaffray-Analyst
And were any of those 50 --1 know the headcount's the same. But were any of them replaced during the quarter?
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Good afternoon, guys. I think Tom Gunderson tried valiantly. I'm going to try again and see where we get with this. Kevin, on
the new products front, what should are expectation be for the coming year? Traditionally--the new, new thing has been rolled
out at the AAD Conference, which will be in early February of '07. should we be expecting just one new product or more than
one?
Kevin Connors - Cutera, Inc. - President and CEO
Well, we just launched two new products in the third quarter. And we plan to have a new offering -- at least one new offering
at the AAD in the first quarter.
Phil Nalbone - RBC-Analyst
Okay. And would you characterize this as kind of a line extension, or is it likely to be a new application?
Kevin Connors - Cutera, Inc. - President and CEO
A new application.
Phil Nalbone - RBC - Analyst
Okay. Do you care to elaborate?
Kevin Connors - Cutera, Inc. - President and CEO
No. For competitive reasons, we've not done that, Phil. And I think you can appreciate the sensitivity that we have when we're
talking about new applications.
Phil Nalbone - RBC - Analyst
Absolutely understood. I just thought I'd try. More than $90 million in cash, that's a lot of cash. What are your expectations for
the use of cash? And at what point do you use that for share repurchases?
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It certainly is a topic that we've had with our board, some price threshold. I think that's something that we would certainly
entertain. We are also stepping up our efforts for new development activities. So we're looking to explore both of those
opportunities.
Phil Nalbone -RBC- Analyst
Okay. And as you contemplate new business opportunities, are you looking beyond light and laser-based technologies at this
point?
Kevin Connors - Cutera, Inc. - President and CEO
Absolutely.
Phil Nalbone - RBC - Analyst
Okay. You've made a number of illusions, throughout the call, to the productivity of the sales force. Can you give us a little more
color on that? Were you in any way, disappointed with the level of productivity that you're seeing from some of the newest
people. A lot of those people came on board roughly six months ago. Can you just kind of characterize your impression of the
overall productivity, and where there might be room for additional leverage?
Kevin Connors - Cutera, Inc. - President and CEO
Right. On one hand, we are seeing that the sales and marketing expenses really come down to low levels, in the low 30s now.
So it's clear evidence that we are leveraging that. However, we did make a major expansion about six months ago, as you pointed
out, Phil. And we're looking to improve upon the sales productivity of that most recent class. So the people that have been with
the company for at least one year have had a very solid sales productivity levels.
Phil Nalbone - RBC - Analyst
Okay. And I apologize. But let me ask just a housekeeping matter. Would you mind, Kevin, going through the mix of revenues
by physician or customer category again in the quarter?
Kevin Connors - Cut era, Inc. - President and CEO
Sure.
Phil Nalbone - RBC - Analyst
And point out where there might have been any sort of meaningful divergence from recent patterns.
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Well, it does bump around a bit from quarter to quarter. But I think, if we look at a longer timeframe, it does stay fairly consistent.
So in Q3, we had 33% of our business sold to family practice GPs, 8% into OB/GYNs, Derms at 12%, Plastic Surgeons at 12, other
physician categories is 23%, and then non-physicians, med spas, is 12%.
Phil Nalbone - RBC - Analyst
Okay. All right, I think I will go back into the queue. Thank you, very much.
Kevin Connors - Cutera, Inc. - President and CEO
Thank you, Phil.
Ron Santilli -Cutera, Inc. - CFO
Thank you, Phil.
Operator
We'll take our next question from Anthony Vendetti with Maxim Group.
Anthony Vendetti - Maxim Group -Analyst
Thanks.
Good afternoon, Kevin.
Good afternoon, Ron.
Kevin Connors - Cutera, Inc. - President and CEO
Good afternoon.
Ron Santilli - Cutera, Inc. - CFO
Hi, Anthony.
Anthony Vendetti - Maxim Group - Analyst
First, for Ron, if you could explain the add-back. Since the audit's not going to be completed until 12/30/06, what's the $0.03,
540,000 add-back?
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So it gives our customers the ability to have optimal treatment preferences for each procedure. And that's something that is
unique to Cutera.
Anthony Vendetti - Maxim Group - Analyst
Okay. And lastly, Kevin, you were talking about the international markets, in particular, that you were pleased with. One was
Canada, another Switzerland. You mentioned another one. Can you talk about what, this quarter specifically, was done differently
or what happened this quarter, you think, to show growth in those markets?
Kevin Connors - Cutera, Inc. - President and CEO
Yes. The other region I eluded to was Japan. We acquired a distributorship in Switzerland just over a year ago. And we liked that
model. In fact, we're open to replicating that with potential acquisitions in the future. But they have excellent contacts in the
market there. And we've been able to get a significant share of the -- relative market, but the market has been very healthy for
us in Switzerland.
The same is true for Canada. We've really made it a priority to focus on the Canadian market, and actually aligned our sales
management to capture that market specifically. And that's paid off for us. And then, Japan is the largest single market outside
of the United States. And we've built a very strong direct-sales organization there that we're continuing to expand.
Anthony Vendetti - Maxim Group -Analyst
How many direct sales people do you have in Japan?
Kevin Connors - Cutera, Inc. - President and CEO
Six.
Anthony Vendetti - Maxim Group - Analyst
Six. Okay, great. All right, thanks.
Operator
We'll go next to Dalton Chandler with Needham & Company.
Dalton Chandler - Needham & Company-Analyst
Good afternoon.
Kevin Connors - Cutera, Inc. - President and CEO
Good afternoon, Dalton.
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K12
FINAL TRANSCRIPT
Nov. 06. / 5:00PM, CLITR - Q3 2006 Cutera, Inc. Earnings Conference Cal I
Ron Santilli - Cutera, Inc. - CFO
Hi, Dalton.
Dalton Chandler - Needham & Company-Analyst
I apologize. I'm still just a little confused over this $544,000 payment. You're saying that is a pure adjustment. It's not related to
the cost of the audit itself. Is that right?
Ron Santilli - Cutera, Inc. - CFO
That's correct. We're adjusting our original estimate that we had last quarter of $18.4 million due to these upgrades that were
performed in '03 and '04.
Dalton Chandler - Needham & Company-Analyst
Right. So in -- I assume there will an on-going annual audit related expense. Is that right?
Ron Santilli - Cutera, Inc. - CFO
Yes. But that would be nothing like $500,000 for the annual cost of the audit.
Dalton Chandler - Needham & Company -Analyst
Okay. And then, I was just wondering, the non-physician market, I think you said, was -- did you say it was 12% this quarter?
Ron Santilli - Cutera, Inc. - CFO
I believe that was the right amount.
Kevin Connors - Cutera, Inc. - President and CEO
Yes. Yes.
Dalton Chandler - Needham & Company-Analyst
Yes. Could you just comment on the characteristics of that market? Who exactly you're selling those products to and what
they're interested in?
Kevin Connors - Cutera, Inc. - President and CEO
Right. It is a little confusing because we refer to the med-spa market as a non-physician market. But we only sell our products
where physicians are involved. So we are selling to doctors that are setting practices in a more retail environment. And that's
been relatively consistent at that 12% level.
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Okay. And are they interested in the broad spectrum of products or is it pretty much on one procedure?
Kevin Connors - Cutera, Inc. - President and CEO
Absolutely.
Dalton Chandler - Needham & Company-Analyst
Okay.
Kevin Connors - Cutera, Inc. - President and CEO
The whole spectrum of applications that we offer.
Dalton Chandler - Needham & Company - Analyst
Okay. All right, thanks very much.
Operator
[OPERATOR INSTRUCTIONS]
We'll go next to Jose Haresco with Merriman.
Jose Haresco - Merriman -Analyst
Hi, Kevin. Hi, Ron.
Ron Santilli - Cutera, Inc. - CFO
Hi, Jose.
Kevin Connors - Cutera, Inc. - President and CEO
Hi, Jose.
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A quick -- just a couple of housekeeping things. Ron, is it possible for you to break out that 1.2 million in that stock option
expense among the different line items?
Ron Santilli - Cutera, Inc. -CFO
Let's see. It's -- the 1.2 million that we had this quarter was approximately 170,000 in cost of goods sold, 406,000 in sales and
marketing, 189,000 in research and development, and 468,000 in G&A.
Jose Haresco - Merriman - Analyst
How much of those values can we carry forward as we look into'07, as we start to model GAAP versus non-GAAP in'07?
Ron Santilli - Cutera, Inc. - CFO
I would use -- I think those numbers would be very close to use for modeling.
Jose Haresco - Merriman - Analyst
For both fourth quarter and for all of'07 on a quarterly basis?
Ron Santilli - Cutera, Inc. - CFO
Yes, that's correct.
Jose Haresco -Merriman -Analyst
Okay. Thank you. Could you give us a little bit more insight into the LimeLight that just got introduced in the market place? Is
it fully launching your sales force? Is it still being introduced at some level? Can you give us some guidance as to where in the
ramp that is?
Kevin Connors - Cutera, Inc. - President and CEO
Yes. We fully launched it, Jose. And, again, the benefit of this device is the programmable spectrum that allows our customers
to have more customized facial rejuvenation treatments, as well [inaudible] brown spots or pigmented lesions.
Jose Haresco - Merriman -Analyst
All right, thank you.
Operator
We'll take our next question from Mike Bosman with Peninsula Capital,
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Hi, good afternoon. Ron, I was wondering if you could maybe just explain the accounts receivable increase sequentially. I know
international revenues grew faster. But it looks like that was actually down sequentially. Can you just give me a little color on
why it increased so much?
Ron Santilli - Cutera, Inc. - CFO
Sure. First of all, if you calculate into the $9.1 million, it's about a 33 day DSO, which is still, I think, the best that I've seen, according
to my calculations. But they were higher than we been sequentially. And that's primarily related to the summer months. In July
and August, it seemed we had fewer people who wanted to take delivery of their product in those months, I guess, evidently,
to vacationing. And we had a larger share being shipped in the third month, September, which is being paid in October or was
to be paid in October.
Mike Bosman - Peninsula Capital -Analyst
And is that consistent with year-over-year patterns for you guys?
Ron Santilli - Cutera, Inc. - CFO
Yes. I think you would find Q3 tends to be a little bit more back-ended on the shipment side because of the July and August
summer months.
Mike Bosman - Peninsula Capital -Analyst
So you obviously see your Q4 inventories probably coming down even with increased revenues?
Ron Santilli - Cutera, Inc. - CFO
[Could] very well.
Mike Bosman - Peninsula Capital -Analyst
All right, thanks, guys.
Operator
We'll take our next question from Alex Arrow with Lazard Capital Markets.
Alex Arrow - Lazard Capital Markets - Analyst
Thanks. I apologize if this has already been asked. But the progress that you've been making towards reducing the fraction of
total revenue that is susceptible to royalty payments to Palomar, can you comment? I know that's a moving target. In past
quarters, you've commented how that's going to be progressing. Can you tell us anything quantitative about how far that's
come so far and how far you expect it to go in '07, perhaps?
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Like I said, we haven't quantified any targets for 2007 in terms of what is subject to the royalty amount. And were continuing
to offer all of our products independent of whether it's subject to royalties, to the market place. The new applications that does
not incorporated laser or light-based hair removal [aren't] subject this royalty expense. So the new applications that we're
developing in that category, are going to have a beneficial impact on the gross margin line.
Alex Arrow - Lazard Capital Markets -Analyst
Yes. I recognize. And I guess my question is, how much progress towards the new applications being a larger portion of the
revenue has been made so far? I think it was a 3.5% blended rate. And you were aiming to get that down into the twos. And
can you say anything about how far along that's coming perhaps? The LimeLight is one of the steps in that direction, if that's
not a hair removal device.
Kevin Connors - Cutera, Inc. - President and CEO
That's right. It's new applications, Alex. And with the AAD coming in the first quarter, we look forward to launching new
applications that aren't subject to the royalty amount. So, really it ties up new product launches.
Alex Arrow - Lazard Capital Markets -Analyst
But, I mean, as of the end of this quarter, can you comment on -- where you below the 3.5%? Is there, like, a run-rate as of
September 30?
Ron Santilli - Cutera, Inc. - CFO
You know, Alex, our last few quarters, we've been running about 4% of total revenue. And that's what we're projecting on a
go-forward basis until, of course, the product launches that Kevin was just talking about.
Alex Arrow. I see. Okay. Okay, can you comment on whether you've got a buyback in your future?
Kevin Connors - Cutera, Inc. - President and CEO
As I mentioned earlier, we have discussed it with the board. And we're continuing to monitor it. But we are generating a
tremendous amount of cash. And that's something that seems to make a lot of sense for us.
Alex Arrow - Lazard Capital Markets - Analyst
Can you comment on whether it seems to make a lot of sense next quarter or next year?
Kevin Connors - Cutera, Inc. - President and CEO
Well, it really depends on the reprice of the stock, Alex.
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And that concludes the question and answer session. Mr. Connors, I'd like to turn the conference back to you for concluding
remarks.
Kevin Connors - Cutera, Inc. - President and CEO
Well, thank you for participating in our call today. We look forward to updating you with our progress next quarter. And as a
reminder, well be attending a number of conferences, including RBC, Lazard, Piper Jaffray and Needham conferences in the
coming months. I hope to see you there. Good afternoon, and thanks in your interest in Cutera.
Operator
This concludes today's Cutera conference call. Thank you for participating. And you may disconnect your phone lines at this
time.
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Good day, everyone, and welcome to today's Cutera, Incorporated Fourth Quarter 2006 Earnings Results Conference Call. As a
reminder, today's call is being recorded.
[OPERATOR INSTRUCTIONS]
I would now like to turn the call over to Mr. John Mills. Please go ahead, sir.
John Mills - Integrated Corporate Relations - IR
Thank you. By now, everyone should have access to the fourth quarter 2006 earnings release, which went out today at
approximately 4 PM Eastern Time. The release is available on the investor relations portion of Cutera's website at cutera.com
and with our Form 8-K filed with the SEC and available on its website at sec.gov.
Before we begin, Cutera would like to remind everyone that these prepared remarks contain forward-looking statements,
including statements concerning future financial performance and guidance, including anticipated increase in revenue, expansion
of Cutera's customer base and an increase in market share, long-term domestic and international growth opportunities and
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strategies, future spending on various aspects of our operations and comments relating to the development of new products
and applications and their anticipated introduction dates.
Also, management may make additional forward-looking statements in response to your questions. Factors that could cause
Cutera's actual results to differ materially from these forward-looking statements include its ability to continue increasing sales
performance worldwide, unforeseen events and circumstances relating to its operations, government regulatory actions, general
economic conditions and those other factors described in the section entitled "Factors That May Affect Future Results" in its
most recent 10-Q and 10-K filed with the SEC.
These forward-looking statements do not guarantee future performance and therefore you should not rely on them in making
an investment decision without considering the risks associated with such statements. Cutera also cautions you to not place
undue reliance on forward-looking statements, especially those relating to guidance on future financial performance, which
speak only as of the date they were made. Cutera undertakes no obligation to update publicly any forward-looking statements
to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated
events.
With that, I'll turn the call over to the company's President and Chief Executive Officer, Mr. Kevin Connors.
Kevin Connors - Cutera, Inc. - President, CEO
Thank you, John. Good afternoon, everyone. Thanks for joining us today to discuss Cutera's results for the fourth quarter and
year ended December 31st, 2006. On today's call I'll provide an overview of our results, then Ron Santilli, our CFO, will provide
additional details on our operating and financial results and comment on 2007 guidance. Finally, I will provide some closing
comments and open the call to your questions.
We are releasing our financial results earlier than usual, to enable us to discuss our 2006 results at the American Academy of
Dermatology conference that begins this Saturday, February 3rd. We plan to return to our typical quarterly reporting in the
future. Now to review our results. I'm pleased to report that we set a new record for quarterly and annual revenue for the
respective periods ended December 31, 2006.
During the fourth quarter 2006 we also achieved significant increases in our gross margin, operating margin and cash flow from
operations. A number of factors [continue to] the strong fourth quarter and full year results, including the following. One, our
U.S. revenue grew by 18% when comparing Q4 2006 to Q4 2005 and grew by 29% when comparing the full year of 2006 to
2005. This growth reflects the continued strength of our multiple product offerings and investments made in our sales force
expansion.
We remain optimistic on the overall growth of the U.S. market for the aesthetic systems and are planning on continuing our
expansion of our sales force in 2007 to take advantage of this opportunity. Two, our fourth quarter 2006 international revenue
grew by 57% when compared to fourth quarter 2005. It grew by 44% when comparing the full year of 2006 to 2005. We
experienced growth in all of our major overseas markets.
We're particularly pleased with the revenue contributions from Japan, Switzerland and Canada. We believe the international
markets offer us excellent long term growth opportunities. In 2007, we plan to continue our focus and investment in this
expanding market and are well positioned to reap the rewards from it.
The third factor fueling our growth is the introduction of new product offerings. During 2006 we introduced three new products,
Titan V and Titan XL delivery devices that enable enhanced visibility and faster treatments for our customers performing Titan
procedures, LimeLight, the first programmable wavelength skin rejuvenation device that allows our customers to offer customized
treatments for their patients, which result in better clinical results with fewer patient visits.
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And our navigation technology on the Xeo Platform provides our customers with quick access to recommended operating
parameters and stored patient data. This added feature improves treatment repeatability and a speed with which procedures
can be performed due to the reduced setup and administrative time during patient visits. We are continuing to experience
growth across all major physician markets with particularly strong growth in the more non-core specialties.
During 2006 we booked approximately 22% of our system orders for the traditional dermatologists and plastic surgeon specialties,
32% from family practitioners, 12% from OB/GYNs, 19% from other physicians and approximately 15% from non-physicians.
During 2006 we resolved our patent litigation, expanded our sales organization, achieved 33% revenue growth, and ended the
year with a very strong balance sheet. We believe we are strategically positioned for continued strong growth in 2007.
Now, I'd like to turn the call over to Ron to discuss our strong financials in more detail. Ron?
Ron Santilli - Cutera, Inc. - CFO
Thanks, Kevin, and thanks to all of you forjoining us today on our fourth quarter earnings release conference call. Before I begin,
please note that all of our historical financial performance and guidance comments are expressed in GAAP numbers, which
include the impact of patent litigation settlement charges and stock-based compensation expenses.
In addition, to supplement the GAAP numbers we have provided non-GAAP net income and non-GAAP diluted income per
share information that excludes the impact of the patent litigation settlement and all stock-based compensation expenses,
both net of their related income tax effects. We believe that these non-GAAP numbers provide you with insight to conduct a
more meaningful and consistent comparison of our ongoing operating results and trends compared with historical results. A
table reconciling the GAAP financial information to the non-GAAP information is included in our earnings release.
Fourth quarter 2006-- fourth quarter 2006 revenue was $30.5 million, a 27% increase compared to the fourth quarter 2005. Net
income for the fourth quarter of 2006 was $7.1 million, or $0.50 per diluted share. Non-GAAP net income for the fourth quarter
of 2006 was $7.9 million, or $0.55 per diluted share. Our net income for the fourth quarter of 2006 was better than we projected
earlier due primarily to higher gross margin, improved leverage of our sales and marketing expenses and a lower effective
income tax rate.
Revenue for the 12 months ended December 31, 2006 was $100.7 million, a 33% increase from $75.6 million in 2005. Net income
for the full year 2006 was $2.1 million, or $0.15 per diluted share. Non-GAAP net income for the full year 2006 was $16.8 million,
or $1.18 per diluted share.
Product revenue in the fourth quarter of 2006 increased by 30% compared to the fourth quarter of 2005, and grew by 34% for
the full year 2006 compared with 2005.This strong revenue growth was driven primarily by sales of our premium multi-application
Xeo Platform and continued strong sales of our Solera Platform.
Upgrade revenue in the fourth quarter of 2006 declined by 17% compared to the fourth quarter of 2005, and for the full year
2006 declined by 9% compared to 2005. These declines were due in part to an increasing number of customers choosing to
purchase a new Solera product in the lieu of upgrading their fully utilized Xeo systems.
Service revenue in the fourth quarter of 2006 increased by 45% when compared to the fourth quarter of 2005, and for the full
year of 2006 increased by 52% compared to 2005. We expect this revenue growth to remain strong as our installed base continues
to increase and customers utilize our services to maintain their products after the initial warranty periods expire.
Titan refill revenue in the fourth quarter of 2006 increased by 40% when compared to the fourth quarter of 2005, and for the
full year of 2006 increased by 133% compared with 2005. Just like our service revenue, as the installed base of our Titan product
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L4
FINAL TRANSCRIPT
Jan. 31. 2007/ 5:OOPM, CUTR - Q4 2006 Cutera, Inc Earnings Conference Cal I
increases and as our customers continue to satisfy the fast-growing demand for Titan procedures, we expect an increase in the
number of Titan refills.
However, note that the new Titan V handpiece released in 2006 provides 15,000 shots compared to 10,000 shots in the original
Titan S. As a result, even though Titan refill sales continue to be in very high demand, we experienced flat refill revenue in the
past three quarters. We are continuing to monitor this emerging source of revenue and believe that once this initial ship of
sales to the Titan V is complete, our Titan refill revenue will return to quarterly sequential growth.
I will now address our operating performance. Our gross margin in the fourth quarter of 2006 was 73% compared to 74% in the
fourth quarter of 2005. This decrease was primarily attributable to $1.3 million of royalty expenses associated with our patent
litigation settlement in 2006, which was partially offset by an increase in gross margin resulting from lower service and warranty
costs. These costs were lower as a result of improved product reliability and manufacturing economies of scale due to the higher
volume.
Our full year 2006 gross margin was 70%. We expect our full year 2007 gross margin to be in the range of 69 to 71 %. In line with
our historical trend, we anticipate the greatest leverage in our gross margin to occur in the fourth quarter of the year. Sales and
marketing expenses for the fourth quarter of 2006 were $7.9 million, or 26% of revenue, compared to $7.2 million, or 30% of
revenue, for the fourth quarter of 2005.
The growth in absolute dollars is primarily related to our sales force expansion efforts and an increase in stock-based compensation
expenses, resulting from the implementation of FAS123R in 2006. In 2007 we are expecting to expand our market presence,
which should result in sales and marketing expenses of about 30 to 35% of revenue. Research and development expenses were
$1.9 million, or 6% of revenue, in the fourth quarter of 2006. We intend to continue to increase our investment in this area and
believe our spending will remain in the range of 6 to 8% of revenue in 2007.
General and administrative expenses for the fourth quarter of 2006 were $3.6 million, or 12% of revenue, compared with $2.3
million in the fourth quarter of 2005. This increase in expense was primarily attributable to higher stock-based compensation
expenses resulting from the implementation of FAS123R and due to a $505,000 nonrecurring charge forthe estimated exposure
relating to uncollected sales taxes in jurisdictions that we previously believed we did not have a taxable presence.
G&A expenses for the full year of 2006 were 15% of revenue, which included legal expenses related to the patent litigation
matterthat was settled in the second quarter 2006. We expect our G&A expenses to decrease in 2007 given that patent litigation
spending and the previously mentioned sales-tax exposure are not expected to recur. We expect G&A expense to be in the
range of approximately 10 to 12% of revenue.
We are pleased with our 29% operating margin forthe fourth quarter of 2006. Historically, our fourth-quarter operating margins
have been strong due to the financial leverage of our operating model resulting from the seasonally high revenue. For full year
2007 we expect our operating margin to be approximately 20% of revenue.
Our effective income tax rate for the fourth quarter of 2006 was 27%. This rate was significantly below our earlier expectations
due to the recording of a full year of R&D tax credits in the fourth quarter 2006, as a result of the legislation extending this credit
in December 2006. We expect our effective income tax rate for 2007 to be approximately 33%. Turning to EPS, if possible, please
now refer to the non-GAAP reconciliation of our net income and EPS provided in our earnings release.
On a GAAP basis, net income per diluted share for the fourth quarter 2006 was $0.50. For the same period, non-GAAP net income
per diluted share was $0.55. This $0.05 differential represented the after-tax impact of the $1.3 million non-cash stock-based
compensation expenses recorded in accordance with FAS123R.
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Full year 2006 GAAP net income per diluted share was $0.15. On a non-GAAP basis, after adding back the net after-tax impact
of the non-cash stock-based compensation expense and the nonrecurring litigation settlement expense, net income per diluted
share for the full year 2006 was $1.18.
Turning to the balance sheet, our financial position continues to remain very strong. As of December 31, 2006, we have over
$108 million of cash and marketable-securities.This represents approximately $8.35 per outstanding share. For the fourth quarter
of 2006 cash generated by operations was $14.6 million, a new record for Cutera. Accounts receivable net at the end of the
fourth quarter 2006 was $9.6 million and DSOs were 29 days.
Our DSOs continued to remain amongst the best in the industry and below ourtarget of 35 to 45 days due to linear shipments
within the quarter, a thorough customer approval and credit check process and strong collection efforts. Inventory turns also
improved during the quarter to approximately six times per year. This ratio is at a seasonally high balance due to the strong
fourth quarter revenue, and is at its best since we went public in 2004.
Moving to guidance, in the first quarter of 2007 we expect revenue of approximately $26 million with GAAP and non-GAAP net
income per diluted share of approximately $0.21 and $0.28 respectively. For the full year of 2007 we expect revenue of
approximately $126 million with GAAP and non-GAAP net income per diluted share of approximately $1.30 and $1.57 respectively.
Non-GAAP net income per diluted share excludes the after-tax impact of non-cash stock-based compensation expenses reported
in accordance with FAS123R. Please refer to our detailed reconciliation of GAAP to non-GAAP financial information attached
to the earnings release.
Now that I've concluded my overview of Cutera's financial performance, I'll turn the call back to Kevin.
Kevin Connors - Curera, Inc. - President, CEO
Thank you, Ron. As you can tell from our results, we're continuing to expand our global business. Our gross margin was particularly
strong in the fourth quarter and we're now realizing the improved leverage of our operations. These have all contributed to
higher profitability and cash flows from operations. During the past year we expanded our sales force in North America and
now have one of the largest domestic sales teams in the light-based aesthetic market. We're continuing to see increased
productivity from this expansion and will continue to monitor this performance as we plan to further expand our sales organization
in 2007.
In addition, our continued focus and investment in the international market is now beginning to gain traction as shown by the
44% revenue growth in 2006 compared to 2005. In 2007, we expect to build on this impressive growth by continuing to invest
in our international distribution network of direct sales and service employees, as well as third-party distributors.
We're excited by the introduction today of our new laser technology, YSGG, which has unique optical characteristics for minimally
invasive aesthetic procedures. Our YSGG technology will allow us to participate in an emerging segment of the anti-aging
market. The size of this market segment is approximately $150 million a year and estimated to be growing in excess of 30% a
year. New product development has been the backbone of Cutera's success, and as such will continue -- we expect to continue
increasing our investment in R&D in 2007.
In conclusion, we're very excited about the opportunities that lay ahead for our company. The light-based aesthetic market is
growing at a robust rate, and we are continuing to capture global market share in this healthy market. We have developed a
strong portfolio of products, [have] one of the largest direct sales organizations in North America and are continuing to focus
on our international accounts. We believe these investments, together with our business strategy and significant financial
resources, position Cutera for continued growth and profitability for the foreseeable future.
Now I'd like to open up the call for your questions. Operator?
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We believe it's going to take a number of treatments, and we're thinking of one to three. But, again, we're still working through
that right now with our clinical evaluation. But we're excited about what we see early on.
Tom Gunderson - PiperJaffray - Analyst
Okay. Then two other quick questions and I'll get back in line. Back in 2002,1 didn't think I'd be saying this to you, but your return
on assets is being held back by your increasing stash of cash. Are you looking -- what are you looking to do with that cash
forward, and would it include buying back shares?
Kevin Connors - Cutera, Inc. - President, CEO
In the last call, Tom, we talked about that and this is something that the Board has been open to. And stock has improved slightly
from the last call, but we still think that when we're generating -- Ron for the year it's --
Ron Santilli - Cutera, Inc. - CFO
Over $30 million.
Kevin Connors - Cutera, Inc. - President, CEO
Over $30 million for the year. So we certainly have nice cash reserves going into 2007, and haven't identified anything that's
appealing from an acquisition perspective at this point. But we are looking at ways to expand our business faster by acquisition.
But I think, a share buyback is certainly something that we think is a good use of our cash.
Tom Gunderson - PiperJaffray - Analyst
And then, the last question. It's pretty much anathema to compete againstyour customers in any kind of business but particularly
in yours. Have you seen anything from the standpoint of a backlash against people that might be going to other formats for
their light-based aesthetics? In particular, I'm thinking have you seen any benefit -- I'm picking up some of this anecdotally, but
have you seen any broad-based benefit to partnering with your doctors as opposed to trying to do maybe some home-based
products?
Kevin Connors - Cutera, Inc. - President, CEO
Well, we've always described our focus as selling into the professional physician market and we'll continue to do that. We don't
really view our core competencies as developing products for consumers. But all along we've also acknowledged that consumer
awareness is something that we think is something that needs to be addressed in this industry. And if there's a way that
consumers can become aware that these procedures are available, and it's our belief, and to my knowledge the belief of
companies that are working on home-based solutions, that the professional treatment will be much more significant than
anything that's in the home.
Tom Gunderson - Piper-laffray - Analyst
Okay. Thanks.
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Well take our next question from Phil Nalbone with RBC.
Phil Nalbone - RBC- Analyst
Good afternoon, guys, and congratulations on some very impressive earnings numbers. Ron, back to the cash situation, based
on your projections for'07 what would you anticipate would be the incremental operating cash flow for the year?
Ron Santilli - Cutera, Inc. - CFO
Certainly we should be able to generate something more than $30 million, which is similar to what we did this year, when
adjusted for the legal settlement payment. But we probably will return to a taxable -- to remitting tax toward the end of the
year, so I think that will have some impact. But overall, greater than $30 million I think is a fair way to look at this.
Phil Nalbone - RBC - Analyst
Okay. Kevin , can you walk us through the sales force headcounts , both in the United States and overseas ? What happened
sequentially , and what do you expect will be the headcount over the next few quarters?
Kevin Connors - Cutera, Inc. - President, CEO
Right. In North America, Phil, the number of territories has been fairly constant the last couple of quarters at about 57. And I
think on the last call we talked about some of the expansion we embarked upon at the beginning of this year, at the end of --
or the December month of '04 where we wanted to have a more junior sales force focus on a certain segment of the market.
We didn't get the productivity we're looking for with that.
However, the portion of our sales force -- the senior portion of the sales force showed modest improvement in sales productivity.
So we have since made modifications to the [alignment] of the sales organization, and we anticipate having improved productivity
from the sales force as a whole. But we will continue to add on the space of 57 as we progress through the year. We're not giving
any firm numbers at this point because we're continuing to work with sales management to lay out that plan.
On international, Ron?
Ron Santilli - Cutera, Inc. - CFO
About 22. We're remaining constant at about 22 people.
Kevin Connors - Cutera, Inc. - President, CEO
And we have sales force expansion plans in Japan for'07 as well.
Phil Nalbone - RBC-Analyst
And would that be by partnering, or by adding direct employees?
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Okay. And back to the gross margin, how much of the gross margin improvement can be attributed to better mix as you, I think,
work really hard to stress the Solera Platform, and to stress any product configuration that's going to get you out from under
the Palomar royalty burden? Can you talk a little bit about that strategy and how it's working, and how you intend to follow
through with that with the YSGG?
Kevin Connors - Cutera, Inc. - President, CEO
Yes, Phil. First of all, in terms of how we handle our customers and prospects in the field, we really don't even go down that
path of trying to guide them towards a solution that's dependent on the royalty amount. We really try to understand the needs
of that customer to find the right Cutera solution for that customer. Obviously working on new technology that doesn't touch
on laser light-based hair removal will not be subject to the royalty agreement, so long as it does not incorporate the hair removal
solution.
And then, was there a question there for Ron there?
Phil Nalbone - RBC - Analyst
Well, let me stay with that for a moment in terms of strategy. It strikes me that the ongoing decline in your upgrade revenues
would suggest that something meaningful is happening to steer the customer base toward a standalone unit as opposed to
upgrading. So, I guess I'm trying to understand why that's happening.
Ron Santilli - Cutera, Inc. - CFO
I think that's the price point on the Solera product, which was one of the intentions that we had with that. The Xeo products
that are in many of our customers' offices are fully utilized. And so, instead of spending additional money to upgrade the unit
with a price point that we have with the Solera line, they can choose that and have an additional device in their office.
Phil Nalbone - RBC - Analyst
Okay, great. And I guess the other part of that question, Kevin, was how the YSGG rollout would be shaped and whether there
would be an effort to sort of push the Solera configuration of that, the standalone configuration?
Kevin Connors - Cutera, Inc. - President, CEO
Well, Phil, the detail, it won't be offered in the Solera Platform at this point. We will offer it as a standalone supported by the
Xeo Platform. But again, we are more focused on trying to find the right solution for our customers, and we think there's an
exciting market here that we can finally address with the YSGG technology.
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Okay. Kevin , a final question and I'll go back in the queue . For those of us who are laymen, could you just try to be really clear
about what YSGG is doing to the skin that your existing arsenal of projects for pigmented lesions and wrinkles and so forth does
not do? What' s the fundamental distinction here?
Kevin Connors - Cutera, Inc. - President, CEO
Well, what we're trying to do is gently treat the superficial epidermis and create a thermal effect in the underlying dermis. And
it's been demonstrated in dermatology for 15, 20 years now that by heating the dermis, it results in the generation of new
collagen, which improves the mechanical properties of the skin, as well as the appearance of the skin. So we're trying to do that,
while minimizing the thermal injury to the treatment area.
And with this particular wavelength, it's unique because it has a absorption characteristics that allow it to operate in a zone
that hasn't been explored in dermatology to date. So either it's a fairly deep significant effect in the dermis, which results in
about a month of healing, or it's extremely superficial and it's almost a planing type device. So, we're operating in a zone in
between those two that really hasn't been explored before.
Phil Nalbone -RBC-Analyst
Okay, so you're aiming this directly at the fraxel laser market, I assume?
Kevin Connors - Cutera, Inc. - President, CEO
That's right. And I think it's also worthwhile to get an education on what that really means because originally it was a technology
marketed for creating discrete holes, separated --very fine holes separated by a large amount of tissue. But there are a number
of offerings on the market that really don't incorporate that type of solution to the skin.
So it's not uncommon for this market to have a lot of me too offerings in the market, but I think a lot of the organizations that
have products that are going after this type of procedure aren't really fraxel-like, but there is an ability to have improved wrinkle
as well as sun damaged skin.
Phil Nalbone - RBC - Analyst
Okay. Thank you, very much.
Operator
We'll go next to Alex Arrow with Lazard Capital Markets.
Alex Arrow - Lazard Capital Markets - Analyst
Thank you. Hello. Kevin, if I could ask about the impact of the new YSGG product on the percent royalty that the company is
likely to be paying to Palomar. I understand this is probably part of your strategy of launching non-hair removal products over
time, to decrease the total portion of the revenue that would fall into that royalty payment. Can you make any comments on
how much this might push down that number from 3.5%?
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You know, Alex, it' s hard to tell at this point because we don't know what our customers are likely to do. If we have a strong mix
of customers that want to incorporate the YSGG with a fully loaded Xeo product , meaning that it would be all of our hair removal
solutions , and vascular solutions , and photo rejuvenation solutions, we'll get 1 percentage . If the interest is more towards people
looking to add this as a standalone device , it's a completely different answer . So we' ll have better -- a better sense of that as we
get some experience at marketing this.
Alex Arrow - Lazard Capital Markets -Analyst
Okay. On your customer base, you've given us some guidance in the past about how it breaks down between the traditional
plastic surgeons and dermatologists versus the newer types of customers, the general practitioners, OB/GYNs and in particular
the medi-spas. Can you update us now on how that is going? Is it becoming more diversified? In particular, how much of your
business is to medi-spas?
Kevin Connors - Cutera, Inc. - President, CEO
Ron has that data.
Ron Santilli - Cutera, Inc. - CFO
Yes. We mentioned a little bit earlier for all of 2006 the orders received in the U.S. were about 22% for the traditional derms and
plastics, 12% into the OB/GYN market, 32% family practice/general practice practitioners, 19% other MDs and about 15% for
non-physicians.
Kevin Connors - Cutera, Inc. - President, CEO
That' s more the medi-spas.
Ron Santilli - Cutera, Inc. -CFO
Yes.
Alex Arrow - Lazard Capital Markets - Analyst
Okay. And any comment you can make about the medi-spa component of that? I mean this is part of the -- part of the [bare
case] is whether that component is going to continue the way it's been. Can you give us any of your qualitative comments
about the medi-spa component?
Kevin Connors - Cutera, Inc. - President, CEO
Well, in terms of the sheer numbers right now, as you're probably aware, Alex, it's relatively small relative to the 500,000 physicians
that we're calling on worldwide. So we're interested in it because it is an emerging -- anticipated to be an emerging part of our
business. But we have competitors that are more focused on the non-physician opportunity in the market than the physician
or professional market. So we'll continue to be involved where doctors are buying equipment.
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Okay, but as far as regulations that would limit the growth of medi-spas, there's nothing like that you can tell us that you're
hearing from the field since you've probably got more -- your reps hear more about that than we do by interviewing docs.
Kevin Connors - Cutera, Inc. - President, CEO
It's constantly changing and we stay very close to the regulations in each state. But, again, we obviously need to be completely
compliant with all the federal and state laws when it comes to this. But I think it's important to note that we're not interested
in getting involved in the non-physician market.
Alex Arrow - Lazard Capital Markets -Analyst
Okay, but there is a physician portion of the medi-spa market that you are interested in growing your business?
Kevin Connors - Cutera, Inc. - President, CEO
That's right, where physicians are involved.
Alex Arrow - Lazard Capital Markets - Analyst
Okay. You just said that the legislation is constantly changing. Can you tell us what you mean by that? Is it constantly changing
in a particular direction? Is it becoming such that physicians can have multiple medi-spas, whereas previously a lot of states
only allowed one medi-spa to one physician? That kind of thing would be helpful for us to forecast.
Kevin Connors - Cutera, Inc. - President, CEO
Well, all I'm saying is that we have a regulatory group that stays very busywith these things, Alex. But we're continuing to expand
our business across the country, so we remain bullish that even the changing landscape doesn't have an impact on the overall
business opportunities across both the United States and abroad.
Alex Arrow - Lazard Capital Markets -Analyst
Okay. Thank you, Kevin.
Operator
Dalton Chandler with Needham & Company has our next question.
Dalton Chandler - Needham & Co. -Analyst
Hi. I was wondering if you could give us the list price you're expecting for the new YSGG?
Kevin Connors - Cutera, Inc. - President, CEO
Dalton, we don't have FDA clearance on it yet, so we can't quote pricing.
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We put in our 510k application with the FDA in December.
Dalton Chandler - Needham & Co. - Analyst
Okay. Could you just say relative to other projects where we should expect this to come out?
Kevin Connors - Cutera, Inc. - President, CEO
Well, again, we can't market it. The FDA gets funny about any implied marketing of a product. Were not going to be at the
upcoming meeting quoting pricing for the product.
Dalton Chandler - Needham & Co. - Analyst
Okay. And did I understand that you do not -- there's no disposable associated with this product?
Kevin Connors - Cutera, Inc. - President, CEO
There is no disposable.
Dalton Chandler - Needham & Co. - Analyst
Okay. And you compared it to some of the fractional technologies, which generally have no downtime. But at the other end of
the spectrum, short of an actual face left, you've got C02, which has considerable downtime. So are you looking for an aesthetic
effect that falls somewhere between those two extremes of light technology?
Kevin Connors - Cutera, Inc. - President, CEO
Well, it's our understanding from the various other products in the fractional category that there is some downtime associated
with it. We're not looking for something between that and the C02 by any stretch. We're looking for similar effects with some
clinical benefits that we're hoping to demonstrate.
Dalton Chandler - Needham & Co. - Analyst
Okay, but your expectation is you would have a superior benefit to some of the fractional --
Kevin Connors - Cutera, Inc. - President, CEO
Right.
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There are all sorts of considerations that we think are important. Patient prep can be quite extensive with some of the products
out there and it can take several hours to do a procedure. And we think that our technology will allow our customers to provide
this treatment in a 25 minute timeframe or so, with no post-op, no wound care or trauma. So, it's a different approach to what
we think the real market interest is.
Dalton Chandler - Needham & Co. - Analyst
Okay, but would you anticipate a topical anesthetic as part of the procedure?
Kevin Connors - Cutera, Inc. - President, CEO
Topical, yes.
Dalton Chandler - Needham & Co. -Analyst
Okay. And let me just shift gears for a minute and get back to your comments about the Titan refills being flat and you think
that that's due to the 15,000 shots in the Titan V versus 10,000 in the original. Can you talk about the pricing differential? Is the
Titan V 50% more expensive than the original Titan?
Ron Santilli - Cutera, Inc. - CFO
It's moderately higher priced than the Titan S.
Dalton Chandler - Needham & Co. - Analyst
Okay, but it's not 50% higher?
Ron Santilli - Cutera, Inc. - CFO
It's not quite 50%.
Dalton Chandler - Needham & Co. -Analyst
Okay. All right, that's all I have for now. Thanks, very much.
Operator
We'll go to Matt Arens with Kopp Investment Advisors for our next question.
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Great. Say, I just wanted to ask with your substantial cash balance now, could you speak to the environment for acquiring
technologies and/or products?
Kevin Connors - Cutera, Inc. - President, CEO
Well, I think there's tremendous interest in the minimally invasive/noninvasive aesthetic market. And lots of startup companies
are focusing on various opportunities in this space, which I think is good for the overall market as new applications are brought
to the consumer. I think that expands the potential market for it.
It has gotten a bit hot from the private equity investor side. VCs are making pretty substantial investments into the space. And
we have had some discussions and probing whether there's some interest in partnering with some of these early-stage companies
and so far we haven't come up with anything that looks like it would work for both sides. But we're continuing to take a look
at a lot of things`
Matt Arens - Kopp Investment Advisors -Analyst
Okay. Thank you.
Operator
And we'll go next to Chris Sasaoni with Eagle Asset Management.
Chris Sasaoni - EagleAsset Management -Analyst
Good afternoon. Could you help us to understand on the YSGG whether - how close something like the fraxel technology is
to this particular type of laser?
Kevin Connors - Cutera, Inc. - President, CEO
It's a different approach altogether. Again, as I said, what's described as the fractional approach has a broad range of technologies
in the market that are considering themselves in that category. But the original offering in the space had a design that bored
small holes into the dermis, and relied on a healing effect to generate improved cosmetic appearance. We're not generating
that type of effect. This is more of a superficial effect that uses a wavelength that penetrates at a predetermined depth into the
skin to create a dermal effect that will generate new collagen.
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So, but there is some degree of oblation that's occurring during the administration of that wavelength of light?
Kevin Connors - Cutera, Inc. - President, CEO
In all these technologies whether it's the fractional [work or] they are vaporizing some tissue, and we're vaporizing a controlled
amount. But the approach that we are pursuing results in what we call natural dressing. In other words, the area that's been
ablated does not get wiped, and its re-hydrated with moisturizer after the procedure. So, it's a different technology for the same
market.
Operator
[OPERATOR INSTRUCTIONS]
We'll go next to a question from Sean McMahon with Kennedy Capital Management.
Sean McMahon - Kennedy Capital Management - Analyst
Great Quarter. All my questions have been answered. Thank you.
Operator
We'll move on to Anthony Petrone with Maxim Group.
Anthony Petrone - Maxim Group -Analyst
Hi, guys. Great quarter. Just to start on the sales force side, was there any turnover during the quarter or did -- domestically or
overseas?
Kevin Connors - Cutera, Inc. - President, CEO
Nothing appreciable.
Ron Santilli -Cutera, Inc. - CFO
Just normal turnover levels; nothing unusual.
Anthony Petrone - Maxim Group -Analyst
All right. And going to the Palomar royalty, if you could quantify that during the quarter in terms of absolute dollars and on a
percentage basis, that would be helpful, and possibly compare it to last quarter.
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It was about 51.3 million, or 4.3% of revenue. And that's up maybe -- I think it was -- last quarter it was about 4.1 %, so it's in the
same range.
Anthony Petrone - Maxim Group -Analyst
Okay. Turning to YSGG, is there any risk that the FDA comes back and requests a PMA, just due to the longer wavelength? I
mean, I don't think this is a Class III device or anything, but do you think,just from the wavelength standpoint, is that a possibility?
Kevin Connors - Cutera, Inc. - President, CEO
Well, any submission to the FDA always has risks associated with it. We don't think that we're taking huge risks with this, but
until we get a definitive ruling from the FDA, we will not market the product.
Operator
And that concludes our question and answer session. Gentlemen, I'll turn the conference back over to you for any closing
remarks.
Kevin Connors - Cutera, Inc. - President, CEO
Thank you for participating in our call today. We look forward to updating you on our progress next quarter. As a reminder,
we'll be exhibiting at the American Academy of Dermatology meeting in Washington, D.C. from February 3rd to 6th, and will
be attending the Roth/Credit Suisse conference in the coming months, and hope to see you there. Good afternoon, and thanks
for your interest in Cutera.
Operator
And this concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.
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sales team was the unsuccessful implementation of our junior sales program, higherthan normal sales turnover and disappointing results for PSS and other national
accounts.
At the end of 2005 we embarked upon an aggressive sales force expansion plan where
we hired junior salespeople as a part of a new distribution model focusing
primarily on our lower price Solera platform products. The goal was to have a
targeted effort directed at a more price sensitive market segment.
This was a deviation from our previously successful sales force expansion practice
of hiring senior salespeople and placing them into strategic territories across the
country.
By the end of March 2006 we had hired 16 junior salespeople. We believe that we
hired many dedicated and enthusiastic people but the model did not prove successful
for us and instead resulted in low productivity and consumed a considerable amount
of sales management attention. By the end of March 2007, only two junior
salespeople remain in those roles.
Another factor leading to lower than expected productivity was unusually high
sales turnover. During Q1 2007 11 salespeople transitioned out from the company.
Also during that quarter we hired 10 new senior salespeople and reassigned eight of
our strongest junior salespeople to senior sales positions.
Lastly, we believe that our U.S. business was also affected in the first quarter
2007 because of disappointing revenue from PSS and other national accounts. This
shortfall also contributed to lower performance in our US revenue.
We've adopted several initiatives to improve our North American sales performance.
One, we are continuing to restructure our sales force with senior experienced
salespeople and have discontinued the junior sales program.
Two, we have dedicated additional sales personnel to our PSS partnership to
facilitate increased selling efforts. And three, we plan to expand our North
American team and expect to have 64 senior experienced salespeople by the end of
2007.
We realize it will take time to improve our sales performance. As of March 31,
2007, 18 of our salespeople have been in their current positions for less than six
months. Our experience is that it takes approximately nine months for a new
salesperson to achieve target productivity levels.
As a result of these factors, we are projecting sequentially flat revenue for Q2
2007 but believe our model will support increased growth in the second half of the
ear.
During the quarter our average selling prices, particularly on our multi-
application Xeo systems, remain firm and in some instances increased.
All the indicators suggest that our market remains strong and continues to attract
a broad customer base. We're continuing to see high demand for our products outside
Our effective income tax rate for the first quarter of 2007 was 34% of revenue --
was 34%. We expect our effective income tax rate to be approximately 33% for the
remainder of 2007.
Turning to EPS, please now refer to the non-GAAP reconciliation of our net income
and EPS provided in our earnings release. On a GAAP basis, net income per diluted
share for the first quarter 2007 was $0.12.
For the same period, non-GAAP net income per diluted share was $0.18. This $0.06
difference represented the after-tax impact of the $1.3 million of non-cash stock-
based compensation expenses recorded in accordance with FAS 123R.
Turning to the balance sheet, our financial position continues to remain very
strong. As of March 31, 2007 we had over $111 million of cash and marketable
securities. This represents over $8 per outstanding share.
For the first quarter of 2007 cash generated by operations was $1.1 million.
Accounts receivable net at the end of the first quarter of 2007 was $8.6 million
and the DSOs were 33 days.
Our DSOs continue to remain among the best in the industry and below our target of
35 to 45 days due to a thorough customer approval and credit check process andstrong collection efforts within the quarter.
Inventories increased slightly from December 31, 2006 as a result of higher
finished goods inventory at March 31, 2007 due to the lower than expected firstquarter revenue. In addition, there was a planned wrap-up of raw materials for our
Pearl product, which is expected to ship in the third quarter of 2007.
Moving to guidance, in the second quarter of 2007 we are projecting sequentially
flat revenue of approximately $23 million, with GAAP and non-GAAP net income per
diluted share of approximately $0.08 and $0.14 respectively.
Although strategic initiatives are already in place, it will take some time before
we see the expected improvements in U.S. sales force productivity. We expect to see
improved productivity later this year and believe that we will see higher growth
rates in the second half of 2007.
For full year 2007 we expect revenue of approximately $110 million, with GAAP and
non-GAAP net income per diluted share of approximately $0.81 and $1.07
respectively.
Revenue levels for Q3 and Q4 of 2007 are expected to be approximately $28 million
and $36 million respectively.
Non-GAAP net income per diluted share excludes the after-tax impact of non-cash
stock-based compensation expenses recorded in accordance with FAS 123R. Please
refer to our detailed reconciliation of GAAP to non-GAAP financial information
have reported in our space and the numbers don't support continued growth in the
20% range. So we're not observing anything in terms of a market change.
Obviously, new applications in this space tend to get a lot of attention. That's
why we think it's important for us to successfully launch the Pearl, which we think
will have an impact.
But new products have always been one of the key catalysts for our growth and
we'll continue to develop new applications in order to see the growth rates that
we're satisfied with.
PHIL NALBONE: Thank you.
OPERATOR: And our next question comes from Anthony Vendetti with Maxim Group.
ANTHONY VENDETTI, ANALYST, MAXIM GROUP: Maybe, Kevin, you can expand a little bit
on the new products. You said shipping the Pearl by third quarter. I guess, a, is
it possible that that will ship a little bit sooner, maybe by the end of thisquarter, and could that provide some upside to the guidance for this quarter?
And then can you talk a little bit about the applications that you're working on
now in terms of in what particular areas just generally?
KEVIN CONNORS: Sure, Anthony. Well, last quarter we did get FDA clearance for
Pearl and at that point we were able to accept orders for that and we have been
able to build a backlog for that. So we think the early interest in Pearl is very
positive.
And we feel comfortable that we should be able to achieve the target revenue
levels in the third and fourth quarter. There is a possibility there could be some
revenue in the second quarter, but we're not expecting a significant amount, if
there is any at all.
In terms of new applications, we haven't in the past talked about what we have
going on in the R&D group until we're close to launching the product.
But these are new aesthetic applications that we're currently not participating in
and looking at a number of exciting technologies that we think will make a huge
impact in our business.
ANTHONY VENDETTI: And can you talk about then maybe just -- it sounds like they're
new platforms altogether, but can you talk about just maybe the timing? Are these
scheduled more for AAD 2008 or is it possible one of these products gets out before
the end of this year?
KEVIN CONNORS: Well, as you know, Pearl is what we're focused on for this year, so
in the second half we'll experience that launch. And we don't anticipate another
new product launch during the calendar year and typically the AAD is where we do
display our new technology.
ANTHONY VENDETTI: Okay. And just a little more color on the sales force turnover.
JOSE HARESCO: Is it still something that has to do with the transition from the
first generation to the second generation Titan or is there something more endemic
in the market such that there are less procedures being done over a given period
such as are we moving away from skin tightening and moving over to other forms of
photo-facial or something that doesn't have a -- something that doesn't have a
razor/razorblade attached to it?
KEVIN CONNORS: Right. Well, we -- as Ron mentioned in his comments, we're
monitoring it very closely and we do see it as an opportunity to better understand
why that revenue ramp-up has dropped off. As Ron mentioned, our customers are
continuing to buy Titan as part of the Xeo solution. We just need to understand why
the utilization isn't where we thought it would be.
JOSE HARESCO: Okay. And last question and I'll get back in the queue. When you
guys think of the Pearl, who is your perfect customer for that? Who's the first
person your reps are calling? Is it the installed base, is it the new account out
there who's likely to buy a fully loaded Xeo Titan and a Pearl? How do you
prioritize those groups?
KEVIN CONNORS: Well, it's all of the above, Jose. Obviously, our installed base is
a prime candidate for an upgrade, but were also finding a lot of interest in themarket for procedures that offer a more pronounced outcome and so we're able to
have a more aggressive solution for treating wrinkles and fine lines.
JOSE HARESCO: Okay. Thanks.
OPERATOR: Our next question comes from Alex Arrow with Lazard Capital Markets.
ALEX ARROW, ANALYST, LAZARD CAPITAL MARKETS: Hi. Thanks. Good afternoon. Kevin,
the 14 junior salespeople that left over the course of the last year, can you say
how many of those had sort of nontraditional backgrounds that you've been known to
have success recruiting from versus people that came from the laser industry?
KEVIN CONNORS: I think without exception these did not -- these individuals were
not from the laser industry.
ALEX ARROW: And is that -- are you going to depart from that strategy now that
you've had this sales force set of challenges that you're going to be taking more
traditional type salespeople and do you think that was one of the reasons the
problem happened?
KEVIN CONNORS: Well, I think there's a couple of things. One is that we really
didn't give them in hindsight all the support that we give our senior people.
We do funnel leads to our senior people, we have the PSS relationship and so there
are a number of things that have contributed to the success of our senior sales
model.
And so we're going to return to that model, the only exception being we now have
dedicated resources -- salespeople to the PSS relationship. And PSS is quite
excited about that modification to the relationship.
ALEX ARROW: Okay, but I mean it's occurred to me that maybe this was a uniquely
Cutera strategy versus other laser manufacturers to hire people that didn't come
from the laser industry as sales reps.
That could be viewed as an isolated reason for the -- for the revenue shortfall
and that going forward, if you're not going to be doing that anymore, then that's
reason to expect a better revenue result. Is that a fair amount of reasoning?
KEVIN CONNORS: I think so, Alex. And again, in hindsight, we should have done this
on a smaller level than we did. We hired 16 people in this unproven model and so it
was a painful event for us.
But we think the model that has been successful in the past is one where we
continue to add more senior salespeople that have sold capital equipment preferably
and that's what we're resuming to.
ALEX ARROW: Okay. So given that, then, why is the guidance now -- the new guidance
that you gave this afternoon suggests a continued loss of share as opposed to the
recovery that it sounds like you're predicting qualitatively?
With more experienced salespeople, why is the guidance suggesting that you're
going to keep losing share?
KEVIN CONNORS: Well, obviously we're trying to get back on the growth trajectory
that we've had in the past and we have a plan that I think will get us there. But
there's risk associated with the plan as well.
We have a new product launch with Pearl that we're very hopeful that will gosuccessfully, as we plan, and then continued expansion of the sales organization is
also something that requires crisp execution. And we have to have additional sales
management roles created in order to do that.
So it's more of an execution concern than anything else, but we do believe the
market is continuing to grow in that 20% range and we need to get on the other side
of that 20%.
ALEX ARROW: Okay. And if you could help me understand the territory number. You
said there's 56 territories going to 64 by the end of 2007. Of the 56 you have now,
are 14 of those the ones the ones that had sales force turnover, so are you
actually going to be hiring a net of 22 salespeople or is this 56 without -- after
the 14 have left?
KEVIN CONNORS: I'm not quite sure. As I said on the call, we had 10 people leave
in the quarter -- or we had 11 people leave and we hired 10 and we've been at that
56 number for quite some time, Alex, over the year. So we're pretty close to that
number now. And so we're going from the 56 number to the 64.
RON SANTILLI: And that's the number of territories out there in the country.
ALEX ARROW: Okay, so the people that left, they were territory carrying reps; they
Can you give us an idea if indeed you're still looking at acquisitions or
strategic deals or partnerships and if so what the size of them might be?
KEVIN CONNORS: We are actively exploring those on a regular basis and obviously we
have not done anything like that yet. But it's something that we're continuing to
explore.
UNIDENTIFIED PARTICIPANT: Okay. Barring a major shift or large strategic
transaction, it looks like you've got potentially here greater than a third of your
market cap in cash.
And just trying to ask the question that was asked earlier slightly differently
here, you're looking at generating $10 million in operating cash flow, roughly,
this year. The deals that are out there so far in the space aren't huge.
So what kind of cash balance do you guys need to operate the company, assuming you
still generate cash? You've got a lot of cash you're sitting on, so just trying to
back into the buyback size here.
KEVIN CONNORS: Right. Well, as you know, we've been generating cash for many yearsnow and so we haven't been in a negative cash position for probably since 2000.
But, so in that sense we really don't need to maintain much of a cash position in
order to support the operation.
UNIDENTIFIED PARTICIPANT: So should we -- when we assume a buyback, then, I guess
the size buyback that you guys might be looking at might be one that's quite
substantial?
KEVIN CONNORS: We're not in a position to comment on that just yet.
UNIDENTIFIED PARTICIPANT: Okay. All right, fair enough. Thanks a lot, guys.
KEVIN CONNORS: Thanks.
OPERATOR: And we'll take our next question from Chris Sassouni with Eagle Asset
Management. Please go ahead.
CHRIS SASSOUNI, ANALYST, EAGLE ASSET MANAGEMENT: Good afternoon. I'm puzzled by
something. It appears to me that in one quarter everything that went wrong seems to
be attributable to sales management.
And so I'm sort of scratching my head in that there hasn't been any mention about
either changes in the sales management position, although you made some mention of
perhaps adding to sales managers.
So I'm wondering how so many things could go wrong because you're talking about
managing the existing sales force, managing the new reps, hiring new reps and also
having challenges with your, I guess your only and largest strategic distribution
partner, at least in the U.S.
So could you help us understand from a sales force management perspective what, in
your opinion, went wrong and were there -- and are there personnel changes coming?
KEVIN CONNORS: I think we try to really categorize it in three different areas.
One is during the quarter we had aberrantly high turnover, we had a junior sales
strategy that did not contribute and we were expecting contributions by the end of
last year, and then the national account business relative to a year ago was off.
And we've got initiatives in place to address each of those three areas.
CHRIS SASSOUNI: So what you're telling me is - - you've basically recited for me
what you had already said before were the problems.
I guess what I'm asking you is, are the people that are in charge of sales
management, in your opinion, the right people to carry this thing forward?
KEVIN CONNORS: Well --
CHRIS SASSOUNI: Because there were obviously some challenges that happened all in
one shot. It just seems amazing to me that all this could happen in a span of 90
days.
KEVIN CONNORS: Right. Well, as I mentioned, we felt -- it was a very positive
ending to 2006 with a very strong fourth quarter and I think in hindsight it did
mask some of the problems that we were dealing with.
But we've got a lot of confidence in the team and I think the biggest mistake thatwe made as a management team was really to explore the junior rep program in the
grand scale that we did.
CHRIS SASSOUNI: Okay. Well, maybe then let's take it -- so let's assume that yourassessment of the market growth rate, at least in the U.S., is at least 20% and
maybe it's a hair higher than that.
So given that you've got the Pearl coming onboard, given that you'll have seasoned
salespeople in all of the territories and that your sales force, you'll have the
largest productive sales force that you've ever had in your history because we're
going to presume that the 14 or so reps that were junior reps were non-productive
so now if you come into the end of the year and you have all 64 positions hired and
more or less seasoned and productive to where they should be, theoretically you
will have the largest and most productive sales force that you've ever had. Is that
correct?
KEVIN CONNORS: That's correct.
CHRIS SASSOUNI: Okay. So then I guess -- I guess we can presume that going into
'08 that there should be an acceleration of revenues beyond the market growth rate
simply by virtue of the size of your sales force and their productivity and the
fact that you will still be relatively early in the launch of the Pearl. Is that
fair?
KEVIN CONNORS: Well, clearly we monitor our performance relative to what's
happening in the marketplace. We want to grow faster than the market's growing. So
it's clear that we (in) 2008 we want to be north of that 20% growth rate that we
RON SANTILLI: I don't think we did. It was related to Q1 106, the part in the
earlier script. But its still approximately 4% of revenue.
DALTON CHANDLER: Okay. Thanks.
OPERATOR: We'll move on to Jose Haresco with Merriman.
JOSE HARESCO: Just a quick follow-up question on the PSS World medical issue.
Could you just give us a refresh on how PSS World Medical works with your sales
force and how it's going to be different now going forward?
KEVIN CONNORS: Well, we've had a relationship with PSS now for about four years,
something like that.
RON SANTILLI: Yes.
KEVIN CONNORS: And the way the relationship works is that any business that PSS
brings to us, they're compensated for those deals. And in the past we've had the --our senior salesperson work side by side with the PSS rep and our salesperson iscompensated for any deals that are done through PSS as well.
So the main difference now is that we will have in some parts of the country adedicated PSS person that works with the PSS reps in that person's territory. Andour senior person will no longer be part of those transactions.
JOSE HARESCO: Okay, so that rep would essentially be the person responsible for
closing that sale?
KEVIN CONNORS: That's right. And the exciting part of this program is that we've
seen a pretty significant amount of our business come through PSS, but it really is
spotty. And by having this dedicated sales strategy, we believe we can extract more
from the PSS relationship.
JOSE HARESCO: And do you think that it's been spotty because some of the sales
folks on your side have been not being able to follow through fast enough or the
leads aren't -- where's the disconnect between moving it from one salesperson to
essentially a PSS dedicated one --
KEVIN CONNORS: Right.
JOSE HARESCO: -- [and now you're just -- it's all] they're doing at this point?
KEVIN CONNORS: Well, we have certain reps that really seem to embrace the
relationship and do quite well with it and other reps that for a long list of
reasons hadn't had the same level of excitement. So it really is on our side that I
think the relationship either works or it doesn't work.
JOSE HARESCO: Okay. Thank you.
OPERATOR: And at this time that would conclude our question and answer session.
I'd like to turn the conference back to our speakers for additional or closing
comments.
KEVIN CONNORS: Thank you for participating in our call today. We look forward to
updating you on our progress next quarter.
.We plan on making many investor visits in May and June and we'll be presenting at
the Needham & Co. biotechnology and medical technology conference in New York,
which will be held on June 13th and 14th.
We look forward to seeing you then. Good afternoon and thanks for your interest in
Cutera.
OPERATOR: Thank you, everyone, for your participation on today's conference call.
You may disconnect at this time.
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---- INDEX REFERENCES ----
COMPANY: MAXIM GROUP INC (THE); FINANCIAL; MAXIM GROUP; POINT OF SALE SYSTEM
SERVICES INC; PSS WORLD MEDICAL INC ; SEC SOCIETE EUROPEENNE DE COMMUNICATION;
SOCIOOC9,ETOOC9,E FINANCIAL SA; KENNEDY CAPITAL MANAGEMENT; FEEDER ASSOCIATE
SYSTEMS; EPS BIO TECHNOLOGY CORP; SITE (NETHERLANDS)
NEWS SUBJECT: (Company Profiles (1C063); Corporate Financial Data (1X059);
left our $0.36 estimate in the dust. Our pro forma estimate of $0.42 wasalso no match for CUTR's $0.55. A lower tax rate was responsible for $0.04of the upside, but most of the surprise came from a higher gross margin andimproved overall operating leverage. Sales of $30.48mm (+27%) fell a tadshort of our high-end forecast but come in a tad above consensus.
• The Cash Hoard Grows, And The Company Will Start Buying TheStock If Investors Don't: CUTR generated $14.6 million in cash flowfrom operations during the quarter, ending the year with $108 million incash and equivalents -- that's $8.35 per share in cash -- and no debt.Management has no immediate plans for acquisitions, so CUTR will likelyuse this cash for share repurchases unless the stock moves significantlyhigher and stays there. We expect at least $35mm in cash flow fromoperations in '07.
• Raising 2007 Earnings Estimates By A Lot: We have raised our GAAPnumber by $0.18 to $1.31. Our pro forma number (excluding the impact ofSFAS 123R) goes up $0.27 to $1.57. Our sales projection comes up by$1.7mm to $129mm (+28.2%). We plan to wait to introduce 2008projections until after we have attended the AAD meeting and have had achance to do work on the new product.
• Powerful New Skin Rejuvenation Product For AAD: CUTR willpreview its YSGG laser technology at the American Academy ofDermatology conference this weekend. YSGG, which we expect to beginshipping by mid-year, will give CUTR an entre into the high-end facialrejuvenation market -- a new segment of the aesthetic arena that representsapproximately $150 million in annual sales with growth above 30%.
• Valuation : We are reiterating our Outperform, Speculative Risk rating. Ourprice target comes up by $3 to $39, reflecting a multiple of 30x our revised2007 GAAP EPS estimate of $1.31.
For Required Disclosures, please see page 5.
Ni
RBC Capital Markets Cutera, Inc.
Cutera Inc. turned in another strong quarterly performance and gave upbeat guidance for the new year. The company also revealedthe product it plans to show at the American Academy of Dermatology meeting later this week -- and we think the new product,aimed at the burgeoning market for more powerful treatment of aging skin, will generate excitement in the marketplace. And thecompany is now flush with $108 million, or $8.35 per share, in cash. We forecast that Cutera is on track to generate an additional$35 million in cash flow from operations this year. If Cutera's stock price doesn't perk up from current levels -- and stay up -- weexpect the board to authorize a share-repurchase program.
The outlook for the aesthetic laser and light market remains strong , Cutera continues to deliver superior performance, and we thinkthe new product and operating leverage opportunities will lead to strong returns for investors . We are reiterating our Outperform,Speculative Risk rating . We are raising our price target by $3 to $39, which represents a multiple of 30 times our revised 2007fully-diluted GAAP EPS estimate of $1.31.
Note that ordinarily at this juncture we would be initiating 2008 financial forecasts and basing our revised price target on a multipleof the'08 numbers . We will hold off on initiating '08 forecasts , however, until after we attend the AAD meeting, where we hope toget a better understanding of what Cutera' s pending new product launch is likely to mean to the revenue line and margins . For now,it should be comforting to investors that a significantly higher stock price for Cutera is justified by the CURRENT YEAR numbers.
A Pleasant Upside Surprise To Q4 Earnings
For the quarter ended December 31, Cutera generated sales of $30.48 million, representing growth of 27%. This fell modestlybelow our high-end forecast of $30.97 million, but modestly above the Street's consensus number of $30.23 million.
EPS on a GAAP basis -- inclusive of stock-based compensation under Section 123(R) -- was $0.50, dramatically above our $0.36estimate. On a pro-forma basis, EPS grew by 34% to $0.55, way above our $0.42 estimate and the Street's $0.41.
The major point of variance in the quarter was the gross margin, which at 72.6%, was some 280 basis points ahead of our forecast.This marks a sequential improvement of 420 basis points from the September-quarter level, although the level of gross profit is stillwell below the 74.5% in the year-ago fourth quarter before Cutera assumed the royalty burden to Palomar Medical under a patentlitigation settlement reached in June of 2006. The gross margin in the most recent fourth quarter included approximately $1.3million in royalty payments to PMTI, representing 4.3% of Cutera's total sales in the quarter.
Another key variance in the quarter was the tax rate, which at 27%, was well below the 33% level we had been anticipating. Thelower tax rate, which contributed $0.04 per share to the upside surprise in earnings, reflects the reimplementation of the federalR&D tax credit during the fourth quarter.
For the full year, Cutera generated sales growth ofjust over 33%, to $100.7 million. This was supposed to have been a year of flatearnings performance for the company, given at least four factors: (1) a higher effective tax rate this year (the actual was 34.7%,compared to 26.5% in'05), (2) all of the attorneys' fees associated with the PMTI patent dispute, (3) the royalty payments to PMTIthat kicked-in once that litigation was settled, and (4) the imposition of stock-based compensation expense under SFAS 123(R).Despite these burdens, Cutera managed to eke out an 18% gain, to $1.18, on a pro forma basis (excluding stock-compensationexpense). All of this suggests that Cutera has significantly improved its underlying operating leverage.
First National Bank of Brisbane?
Cutera has become quite a powerful generator of cash, and the balance is really piling up. During the December quarter, thecompany generated $14.6 million in cash from operations, about a 93% year-over-year increase. At December 31, Cutera's balanceof cash and short-term investments stood at $108 million -- representing cash per share of $8.35. The company has no long-termdebt. Not bad for an eight-year-old company headquartered in Brisbane, California.
On Wednesday's conference call, management was once again very clear about what it intends to do with the money: if the stockdoesn't move higher and stay there, management plans to ask the board to authorize a significant share-repurchase program. We donot believe management is contemplating any other uses of its cash balance at this time. We simply do not believe management hasidentified any really attractive acquisition targets that would make sense any time soon. We expect Cutera to generate another $35+million in cash from operations in 2007.
The company continues to be a stickler about collecting its debts. At December 31, receivables were $9.6 million, representingDays Sales Outstanding (DSOs) of 29. The inventory level was a skinny $5.2 million -- about flat from the year-ago level, despitethe big acceleration in sales -- as this company continues to make strides in manufacturing efficiencies, with inventory turns atabout the 6x/year level during the most recent fourth quarter.
Boosting 2007 Forecasts
February 1, 2007 Page 2
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RBC Capital Markets Cutera, Inc.
Management said Wednesday they expect 2007 sales of approximately $126 million, which would represent growth of 25%. Quitesimply, we think management is once again effectively "low-balling" on its revenue guidance. Cutera's top-line guidance mantrasince going public in early 2004 has been "25 percent." Management has been consistent in sticking to this stated objective, butthey have always managed to significantly exceed that target. Therefore, we treat management's stated objective for 2007 revenuegrowth as a conservative base-case.
We are raising our 2007 sales forecast modestly, by $1.7mm, to $129mm (+28.2%).
As for the bottom line, management said they expect Cutera to generate GAAP fully-diluted EPS of $1.30 this year. They expectthe non-GAAP, or pro forma, EPS number (excluding the impact of stock-based compensation expenses) to be $1.57.
For 2007, we have raised our GAAP EPS by $0.18 to $1.31. Our pro forma number (excluding 123R) goes up $0.27 to $1.57.
YSGG Technology: Taking Aim At The Higher End Of The Skin Rejuvenation Market
The product Cutera intends to highlight at the American Academy of Dermatology annual meeting, which begins this weekend inWashington, D.C., is called the YSGG technology. It is a new laser system that aims to provide a higher degree of facialresurfacing or skin rejuvenation than is possible with Cutera's current line of light- or laser-based systems.
YSGG is designed to play in what we would characterize as the very high-end of the market for facial skin rejuvenation. Cuteraestimates this niche of the market to represent approximately $150 million in annual sales with growth north of 30%. This is anemerging category generally known as the "Fraxel laser" or "fractional laser" segment, and based on our previous research into thissegment, we think Cutera's estimates of the market size and growth rate are right on the money.
The basic idea behind this category is to use a laser that is capable of generating more significant clinical outcomes -- addressingmore of the wrinkles, fine lines, and pigmented lesions associated with aging skin. The trade-off for patients is that there will besome modest down-time or recovery time associated with such procedures, compared to the more conventional skin rejuvenationregimens that have been available for some time.
Cutera said Wednesday that its YSGG technology is designed to provide "more pronounced improvement with moderatedowntime" in treating fine lines, wrinkles, and skin texture. YSGG stands for yttrium, scandium, gallium, and garnet. Before yougo running to your Periodic Table of the Elements and guide minerals, the key is that these metals and mineral have been combinedto create a unique wavelength that operates at the steep part of the water absorption curve. The laser generates a 2790 nanometerwavelength and marks the first application of this wavelength in cosmetic dermatology. It is designed to remove a portion of theepidermis with a controlled amount of thermal effect and to promote collagen remodeling without the discomfort andwound-healing trauma associated with older, ablative procedures.
Cutera submitted a 510(k) application to the FDA in late December. We expect a full roll-out by mid-2007. Why debut a productnow that won't be ready for shipment for several months? We think it makes perfect sense for Cutera to show its customer basewhat's in the pipeline. It could help push more potential customers toward selecting Cutera platforms, and it could certainly causepractitioners interested in entering the high-end of the facial rejuvenation market to hold off on purchases of competing products.The company has employed this tactic in the past quite successfully.
Valuation
We are raising our 12-month price target by $3 to $39, reflecting a multiple of 30x our revised 2007 GAAP EPS estimate of $1.31.This is in line with CUTR's normalized growth rate. The target multiple represents about a 200 basis point premium to the aestheticlaser group -- but we think a premium is justified given CUTR's differentiated product mix, pending new products, and superiorexecution. We are reiterating our Outperform, Speculative Risk, rating.
Price Target ImpedimentOur earnings projections reflect our expectations that the demand for aesthetic procedures will continue to grow, which willtranslate into increased demand for Cutera's class leading products. If growth in aesthetic procedures ends up being lower than weprojected or if a new competitive product appears in the marketplace that challenges Cutera's class leading products, both scenarioscould serve as an impediment to our EPS forecasts and price target.
Company DescriptionCutera, Inc. based in Brisbane, CA designs, develops, manufactures, and markets the CoolGlide family of laser and other light-basedproducts for the aesthetic treatments.
February 1, 2007 Page 3
N3
Cutera, Inc. (CUTR)Income StatementFiscal Year Ends December 3C($ in thousands
An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to theanalyst's sector.RatingsTop Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations.Outperform (0): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Qualifiers (any of the following criteria may be present):
Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; nosignificant cash flow/financing concerns over coming 12-24 months; fairly liquid.Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability;may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.
Distribution of Ratings, Firmwide
For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of threerating categories--Buy, Hold/Neutral, or Sell--regardless of a firm's own rating categories. Although RBC Capital Markets' stockratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell,respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).
Distribution of Ratings, Firmwide
RBC Capital MarketsInvestment BankingServ.IPast 12 Mos.
Rating Count Percent Count Percent
BUY [TP/O] 425 43.90 169 39.76
HOLD [SP] 441 45.56 116 26.30
SELL [U] 102 10.54 21 20.59
Rating and Price Target History for: Cutera, Inc. as of 01 -31-2007 (in USD)
Legend:TP: Top Pick; 0: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated;NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security wasremoved from a recommended list.
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February 1, 2007 Page 5
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RBC Capital Markets Cutera, Inc.
References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by a member company of RBC Capital Markets or one of its affiliates. RBC Dain Rauscher Inc.Recommended Lists include a former list called the Western Region Focus List (1), a former list called Model Utility Portfolio (2),and the Prime Opportunity List (3) (formerly called the Private Client Selects), Private Client Prime Portfolio (4), a former listcalled Private Client Portfolio (5), the Prime Income List (6), the Guided Portfolio: Large Cap (7), and the Guided Portfolio:Dividend Growth (8). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation'RL Off means the date a security was removed from a Recommended List.
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Important Disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.
RBC Capital Markets Corp. makes a market in the securities of Cutera, Inc. and may act as principal with regard to sales orpurchases of this security.
A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Cutera, Inc. during the past 12 months. During this time, a member company of RBC CapitalMarkets or one of its affiliates provided non-securities services to Cutera, Inc.
RBC Capital Markets is currently providing Cutera, Inc. with investment banking services.
RBC Capital Markets has provided Cutera, Inc. with investment banking services in the past 12 months.
RBC Capital Markets has provided Cutera, Inc. with non-securities services in the past 12 months.
The author is employed by RBC Capital Markets Corp., a securities broker-dealer with principal offices located in New York,USA.
Additional DisclosuresRBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital MarketsCorporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBCCapital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, itsaffiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgementas of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal,accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to theindividual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it isrecommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sellor a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital mayoccur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable toinvestment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and
February 1, 2007 Page 6
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RBC Capital Markets Cutera, Inc.
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Cutera, Inc. Common Stock Published Prices (from Yahoo.com)
from January 31, 2007 to May 8, 2007
Date Price Date Price
31-Jan-07 $ 28.62 26-Mar-07 $ 35.76
1-Feb-07 $ 33.38 27-Mar-07 $ 36.04
2-Feb-07 $ 34.45 28-Mar-07 $ 35.80
5-Feb-07 $ 33.94 29-Mar-07 $ 35.84
6-Feb-07 $ 34.03 30-Mar-07 $ 36.19
7-Feb-07 $ 34.15 2-Apr-07 $ 37.22
8-Feb-07 $ 34.90 3-Apr-07 $ 37.99
9-Feb-07 $ 34.54 4-Apr-07 $ 38.39
12-Feb-07 $ 34.54 5-Apr-07 $ 26.67
13-Feb-07 $ 34.38 9-Apr-07 $ 25.09
14-Feb-07 $ 36.05 10-Apr-07 $ 24.85
15-Feb-07 $ 35.72 11-Apr-07 $ 25.08
16-Feb-07 $ 36.31 12-Apr-07 $ 24.96
20-Feb-07 $ 37.47 13-Apr-07 $ 24.83
21-Feb-07 $ 37.28 16-Apr-07 $ 27.20
22-Feb-07 $ 37.48 17-Apr-07 $ 27.34
23-Feb-07 $ 37.38 18-Apr-07 $ 28.01
26-Feb-07 $ 37.22 19-Apr-07 $ 27.94
27-Feb-07 $ 34.96 20-Apr-07 $ 28.46
28-Feb-07 $ 34.95 23-Apr-07 $ 29.77
1-Mar-07 $ 33.40 24-Apr-07 $ 29.37
2-Mar-07 $ 33.87 25-Apr-07 $ 29.52
5-Mar-07 $ 33.21 26-Apr-07 $ 29.57
6-Mar-07 $ 33.49 27-Apr-07 $ 30.06
7-Mar-07 $ 33.39 30-Apr-07 $ 29.28
8-Mar-07 $ 33.24 1-May-07 $ 29.47
9-Mar-07 $ 33.17 2-May-07 $ 29.74
12-Mar-07 $ 33.15 3-May-07 $ 29.43
13-Mar-07 $ 32.49 4-May-07 $ 28.76
14-Mar-07 $ 32.19 7-May-07 $ 29.24
15-Mar-07 $ 32.79 8-May-07 $ 23.40
16-Mar-07 $ 32.88
19-Mar-07 $ 33.80
20-Mar-07 $ 34.04
21-Mar-07 $ 34.28
22-Mar-07 $ 35.00
23-Mar-07 $ 35.55
01
EXHIBIT P
Stock Sales of Cutera, Inc. Common Stock by Defendants Connors and Santilli
from January 1, 2005 through May 8, 2007
DEFENDANT CONNORS
Date Shares Sold Date Shares Sold
6-Jan-05 5,000 25-Jul-05 5,000
13-Jan-05 5,000 28-Jul-05 5,000
20-Jan-05 5,000 3-Aug-05 15,000
27-Jan-05 5,000 4-Aug-05 5,000
3-Feb-05 5,000 11-Aug-05 5,000
10-Feb-05 5,000 18-Aug-05 5,000
17-Feb-05 5,000 25-Aug-05 40,000
24-Feb-05 5,000 1-Sep-05 5,000
3-Mar-05 5,000 8-Sep-05 5,000
10-Mar-05 5,000 15-Sep-05 5,000
17-Mar-05 5,000 22-Sep-05 5,000
24-Mar-05 5,000
31-Mar-05 5,000 Q3 2005 Total 100,000
Q1 2005 Total 65,000 7-Nov-05 67,500
7-Nov-05 40,000
7-Apr-05 5,000 8-Nov-05 70,232
14-Apr-05 5,000 18-Nov-05 18,000
21-Apr-05 5,000 22-Nov-05 40,334
22-Apr-05 5,000
28-Apr-05 5,000 Q4 2005 Total 236,066
5-May-05 5,000
12-May-05 5,000 FYE 2005 Total 464,066
19-May-05 5,000
26-May-05 18,000
26-May-05 5,000 22-Feb-07 100,000
Q2 2005 Total 63,000 Q1 2007 Total 100,000
As of March 1, 2007 , Defendant Connors held 160,000 shares and an option to
buy at least 564,166 shares , a total of 706,166 shares. (See Ex. P at P3, P70.)
P1
DEFENDANT SANTILLI
Date Shares Sold Date Shares Sold
26-Jan-05 1,500
28-Jan-05 11,000
28-Jan-05 12,500
31-Jan-05 5,000
Q1 2005 Total 30,000
3-May-05 7,262
4-May-05 2,738
Q2 2005 Total 10,000
28-Jul-05 10,000
29-Jul-05 10,000
1-Aug-05 10,000
Q3 2005 Total 30,000
31-Oct-05 5,000
1-Nov-05 10,000
4-Nov-05 15,000
8-Nov-05 10,000
16-Nov-05 7,500
22-Nov-05 7,500
Q4 2005 Total 55,000
FYE 2005 Total 125,000
23-Aug-06 6,220
24-Aug-06 3,780
Q3 2006 Total 10,000
13-Nov-06 10,000
Q4 2006 Total 10,000
FYE 2006 Total 20,000
8-Feb-07 10,000
20-Feb-07 10,000
26-Feb-08 10,000
Q1 2007 Total 30,000
As of February 28, 2007, Defendant Santilli held 10, 140 shares and an option to buy
at least 35,000 shares , a total of 45,140 shares. (See Ex. P at P5, P69.)
P2
SEC Form 3
FORM 3 UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington , D.C. 20549
INITIAL STATEMENT OF BENEFICIAL OWNERSHIP OFSECURITIES
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of thePublic Utility Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of
1940
OMB APPROVAL
OMB Number: 3235-0104
Expires:January 31,
2008
Estimated average burden
hours per0.5
response
1. Name and Address of Reporting Persons2. Date of Event 3. Issuer Name and Ticker or Trading SymbolRequiring Statement CUTERA INC f CUTRLCONNORS KEVIN P (Month /Day/Year)03/31/2004
4. Relationship of Reporting Person (s) to 5. If Amendment , Date of Original( Last) (First ) ( Middle ) Issuer Filed ( Month/Day/Year)
C/O CUTERA INC. (Check all applicable),
3240 BAYSHORE BLVD X Director X 10% Owner 6 . Individual or Joint/Group Filing.(Check Applicable Line)
Officer (give Other (specifyX title below) below) x Form filed by One Reporting
(Street) Person
BRISBANE CA 94005President and CEO Form filed by More than One
Reporting Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Beneficially Owned
1. Title of Security ( Instr . 4) 2. Amount of Securities 3. Ownership 4. Nature of Indirect BeneficialBeneficially Owned ( Instr . Form: Direct Ownership ( Instr. 5)
1. Title of Derivative Security ( Instr. 4) 2. Date Exercisable and 3. Title and Amount of 4. 5 . 6. Nature ofExpiration Date Securities Underlying Derivative Co nversion Ownership Indirect(Month/Day/Year) Security ( Instr . 4) or Exercise Form: Beneficial
Pri ce of Direct ( D) OwnershipAmount De rivative or Indirect ( Instr. 5)
or Security ( I) (Instr. 5)Number
Date Expiration ofExercisable Date Title Shares
Employee Stock Option (Right to 09/01/2000 760,00009/13/2009 Common Stock 0 01 D
Buy)(1) ) .
Employee Stock Option (Right to 06/01/2001Buy)
08/04/2010 Common Stock 50,440 0.5 D
Employee Stock Option (Right to 061/011/200206/08/2011 Common Stock 40 000 2.5 D
Buy),
Employee Stock Option (Right to 06/01/20037 10/18/2012 Common Stock 40 000 4.25 DBuy)
,
Employee Stock Option (Right to 06/01/2004f , ) 08/13/2013 Common Stock 40 000 4.25 D
Buy),
Series A Convertible Preferred Stock t3) { s) Common Stock 38,000 (4) D
Explanation of Responses:
1. Options v- t ^- - ` - '^ the f-")--' - --'- - iule: 14 uj - - rcisable, and 1;48 per inonth thereafter.
P3
ors-;naI option grant for 800,000 shares was partially exercised for 40,000 shares of Common Stock on December 31, 2002.
4. n-1
7. N:
ls! Kevin P. Connors 03/30/2004
** Signature of Reporting DatePerson
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, see Instruction 5 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently validOMB Number.
P4
SEC Form 3
FORM 3 UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington , D.C. 20549
INITIAL STATEMENT OF BENEFICIAL OWNERSHIP OFSECURITIES
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of thePublic Utility Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of
1940
OMB APPROVAL
OMB Number: 3235-0104
Expires:January 31,
2008
Estimated average burden
hours per0.5
response
1. Name and Address of Reporting Person2. Date of Event 3. Issuer Name and Ticker or Trading SymbolRequiring Statement CUTERA INC f CUTR
[SANTILL, RONALD J (Month/Day/Year)
03/31/20044. Relationship of Reporting Person (s) to 5. If Amendment , Date of Original
3240 BAYSHORE BLVD. Director 10% Owner 6 . Individual or Joint/Group Filing
Officer (give Other (specifyX
(Check Applicable Line)
title below) below) Form filed by One ReportingX
(Street) CFO & VP of Finance and Admin.Person
BRISBANE CA 94005Form filed by More than OneReporting Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Beneficially Owned
1. Title of Security ( Instr . 4) 2. Amount of Securities 3. Ownership 4. Nature of Indirect BeneficialBeneficially Owned ( Instr . Form : Direct Ownership ( Instr. 5)4) (D) or Indirect
1. Title of Derivative Security ( Instr . 4) 2. Date Exercisable and 3 . Title and Amount of 4. 5 . 6. Nature ofExpiration Date Securities Underlying Derivative Co nversion Ownership Indirect(Month/Day/Year) Security ( Instr . 4) or Exercise Form : Beneficial
Pri ce of Direct (D) OwnershipAmount De rivative or Indirect (Instr. 5)
or Security ( I) (Instr. 5)Number
Date Expiration ofExercisable Date Title Shares
Employee Stock Option (Right to 09//14/2002 09/24/2011 Common Stock 140 000 5.5 DBuy)
,
Employee Stock Option (Right to 06/01/2003 08//07/2012 Common Stock 23 125 4.25 DBuy)
,
Employee Stock Option (Right to 06/01/20041 ) 08/13/2013 Common Stock 50,000 4.25 D
Buy)
Explanation of Responses:
1. Optiz c schcdute: 1/4 upon the da ind 1/48 pcr mo
Is! Ronald J. Santilli 03/30/2004
** Signature of Reporting DatePerson
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, see Instruction 5 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently validOMB Number.
P5
SEC Form 4
FORM 4
Chock this box if no longer subject
0
to Section 18. Form 4 or Form 5obligations may continue. SaoInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number: 3235.0287
January 31,2008
Estimated overage btrdsn
hours per0.5response
1 Name and Address of Reporting Person 2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer,
CUTERA INC [ CUTR ] (Check all applicable)DCONNORS KEVIN P
X X ,Owner
X Officer (give two Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year) below) below)
01/06/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment . Date of Original Filed (MondtlDaylYear) 6. Individual or JointlGroup Filing (Check
Applicable Line)(Street)
BRISBANE CA 94005 X Form filed by One Reporting Person
. Form filed by More than One Reporting........ ..Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3) 2 Transaction 2A . Deemed 3. 4 Securities Acquired (A) 5. Amount of & 7. NatureData Execution Data, Transaction or Disposed Of ( D) (Intr. 3, Securities Ownership of Indirect(Mont iDaylVoar) If any Code (Intr. 4 and 6) Beneficially Form : Beneficial
(MonthlDaylyaar) 8) Owned Direct ( D) OwnershipFollowing or Indirect (Intr. 4)Reported (1) (Intr. 4)
(A) TCoda V Amount or Price (a) (Instr. 3
(D) and 4)
Common Stock 01/06/2005 01/06/2005 s0) 5,000 D $12.3875 345,732 D
1. Title of 2. 3. Transaction 3A. Doomed 4. 5. 6. Daft Exercisable and 7. Intl, and 8. Price of 0. Number 10. 11 . NatureDerivative Conversion Data Execution Data, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthIDaylVsar) If any Code (Inoue. of (Monthlay(Var) Securities Security derivative Fort: Beneficial(Intr. 3) Prlaa of (MonthiDaylVasr ) 8) Derivative Underlying (Intr. 6) Securities Direct ( 0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Instr, 3, 4 (s) (Intr. 4)and 5)
Amountor
NumberData Expiration of
Cods V (A) (D) ExsroisabIe Data
Tilts
Shares
Explanation of Responses:
I The sale reported on this Form 4 was effected pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on August 10, 2004.
/s/ Kevin P. Connors 01/06/2005
" Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
" If the form Is filed by more than one reporting person , see Instruction 4 (bXv).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U .S.C. 1001 and 15 U.S.C. 7tnf(a).
Note: File three copies of this Form , one of which must be manually signed. If space Is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P6
SEC Form 4
FORM 4
Check this box N no longer subject
0
to Section 16. Form 4 or Form 5obligations may cootnus. SaoInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington . D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) or the Investment Company Act of 1940
OMB APPROVAL
OM13 Number: 3235-0267
Expires : January 31,2006
Estimated average burden
hours per 0.5w
1. Name and Address of Reporting Person 2• Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERAINC [ CUTR ] (Check all applicable)CONNORS KEVIN P X Director X 10% Owner
X Officer (give title Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/DayNear) below) below)
01/13/2005 President and CEOC/O CUT1wRA, TNC.
3240 f3AYSHORE BLVD,4. if Amendment. Date of Original Filed (Month/Day/Year) 6. Individual or Joint/Group Filing (Check
(Street)Applicable Line)
BRISBANE CA 94005 X Form Pled by One Reporting Person
. Form filed by More than One ReportingPerson
(City) (State) (zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3) 2. Transaction 2A. Deemed 4. Securities Acquired (A) 5. Amount of 6. T. NatureData Execution Data, Transaction or Disposed Of (D) (Intr. Securities Ownership of Indirect(MonthlDaylyear) N any Code (Intr. 3,4 and 5) Beneficially Form; Beneficial
(Month/aylYear) 6) Owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)Reported (I) (Intr. 4)
(A) TransactionCoda V Amount or Price (s) pnstr. 3
(0) and 4)
Common Stock 01/13/2005 01/13/2005 sf I 5,000 D $12.94 340,732 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g., puts , calls, warrants, options , convertible securities)
1. Title of 2. 3. Transaction 3A. Deemed 4. 5. 6. Data Exercisable and 7. Title and 6. Price of B. Number 10. 11. NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Data Amount of Derivative of Ownership of IndirectSecurity or Exercise (Mon hlDayryear) If any Code ( Intr. of (MonthiDayrysar) Securities Security derivative Form: Beneficial(Intr. 3) Price of, (MonthlDayffear) 5) Derivative Underlying (Intr. 6) Sacuriaes Direct (0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (a) Transaction(Intr. S. 4 (a) (Intr. 4)and 6)
Amountor
NumberExpiration of
Code V (A) (D) Exercisable Date Title Shares
Explanation of Responses:
1. The sale reported on this Fortin 4 was effected pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on August 10, 204.
%s/ Kevin P. Connors 01/13/2005
- Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
" If the form Is filed by more than one reporting person, see Instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 181J.S.C. 1001 and 15 U.S.C. 78ff(a),
Note: File three copies of this Form, one of which must be manually signed . If space Is insufficient , see Instruction 0 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P7
SEC Form 4
FORM 4
Check Oft box if no longer subject
0
ID Section 10 . Fonn 4 or Form 5obligations may continue. SeaInsbuctlon 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington , D.G. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(e) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the investment Company Act of 1940
0MB APPROVAL
0MB Number. 3235-0287
n: January 31,2006
Estimated svsrags burden
horns per0.5response
1. Name and Address of Reporting Person 2. issuer Nunn and Ticker or Trading Symbol 5. Relationship of Reporting Person (s) to Issuer
CUTERA INC [Cum ] (Check el( applicable)CONNORS KEViN P X Director X 10% Owner
x Officer (give title Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonthlDay/Year) below) below)
C/O CUTERA, INC.01/20/2005 President and CEO
3240 BAYSHORE BLVD,4. If Amendment , Date of Original Filed (Month/DayrYear) B. Individual or Joint/Group Filing (Chedc
(Street) Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
._...... ...... _ ....... ........... ........_.._.... .............. ..... __...._.....__..._ _.. ._..... ...... Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative (securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security ( Instr. 3 ) 1 Transaction 2A. Deemed 3. 4. Securities Acquired (A) 5. Amount of 6. 7. NatureData Execution Date, Transaction or Disposed Of (D) (Intr. Securities Ownership of Indirect(MonthiDayrYear) If any Cods (Instr. 3.4 and 6) Beneficially Form: Beneficial
(MonthlDaylYsar ) 8) Owned Direct (D) OwnershipFollowing or Indirect (Inatr. 4)Reported (I) (Intr. 4)
( )n
Cods V Amount or Price (s)(lnstr. 3
(D) and 4)
Common Stock 01/20/2005 01/20/2005 sit) 5,000 D $12.46 335,732 D
1. Title of R 3, Transaction 3A. Deemed 4. 6. 8. Date Exercisable and T. Title and e. Price of 9. Number 10. 11. NatureDerivative Conversion Date Execution Date, Transaction Number Expiration Data Amount of Derivative of Ownership of IndirectSecurity or Exercise ( MonthlDay/vesr) If any Code (Intr. of ( MonellDsyfysar) Securities security derivative Fonn : Beneficial(Intr. 3) Price of ( Monttt/Dsytvssr) 6) Derivative Underlying (Intr. 5) Securities Direct (D) Ownership
(A) or (intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3.4 (s) (Instr. 4)and 6)
Amountor
NumberDaft Expiration of
Code V (A) (D) Exercisable Dots TRIO Shares
Explanation of Responses:
I The sale reported on this Forcer 4 was effected pursuant to a Rule iObl - 1 Eater Plan adopted by the reporting person on August 10, 2004.
/s/ Kevin P. Connors 010/2005- Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form is filed by more than one reporting person , saw Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violation See 18 U.S.C. 1001 and 15 U.S.C. 7811(a).
Note : File three copies of this Form, one of which must be manually signed . If space is Insufficient. see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P8
SEC Form 4
FORM 4
0
Chock this box If no longer subjectW Section 15 . Faint 4 or Fonn 6obligations may contit+w. SovInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20649
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number: 3235-0287
des: January 31,2008
Estimated average burden
hove par 0.5response
1. Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer
CUTERA INC [ CUTR ] (Check applica ble)
CONNORS KEVIN P X Directo r X 10% Owner
X officer (give title Other (specify
(Last) ( First) ( Middle) 3. Date of Earliest Transaction (Month/Day/Year ) below) below)
01/27/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment . Date of Original Filed (Month/DayNear) 6. Individual or JoMVGroup Filing (Check
Applicable Line)(Street)
BRISBANE CA 94005 X Form filed by One Reporting Person
.......... __...... Form filed by More than One Reporting_ _Person
(City) (State) (ZIP)
Table I - Non•Dsrtvattve Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3 ) Z Transaction 2A. Deemed 3. 4. Securities Acquired (A) 5. Amount of 6. T. NatureDab Execution Date, Transaction or Disposed Of (D) (Instr. Securities Ownership of Indirect(MonttMay/Ysar) N any Code (Intr. 3,4 and 5) Beneficially Form; Beneficial
(Month/DaylYear) 8) owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)Reported (I) (lnstr. 4)
(A ) nTransacdCoda V Amount or Price (a) paste 3
(0) and 4)
Common Stock 01/27/2005 01/27/2005 s t 1 5,000 D $13.725 330,732 D
1. Title of 2. 3 . Transaction 7A. Deemed 4. 6. s. Data Exercisable and 7. Tice and 8. Price of e. Number 10. 11. NatureDerivative Conversion Date Execution Data, Transaction Number Expiration Data Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthfDeylriar) R any Code (mate, of (MonthtDay/Yeer) Securities Security derivative Form: Beneficial(Intr. 3) Price of (MonthlDaylVear) 8) Derivative Underlying (Intr. 5) Securities Direct ( D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(lnstr. 3,4 (a) (Intr. 4)and 5)
-
Amount
I
orNumber
Date Expiration ofCoda V (A) (D) Exercisable Data Tkls Shares
Explanation of Responses:
I. The sale reported on this Form 4 was effected pursuant to a Rule 10b5-1 Sales Plan adopted by the reporting person on August 10, 2004,
/s/ Kevin P. Connors 01/28/2005
" Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
' If the form is flied by more than one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is Insufficient. see Instruction 8 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P9
SEC Form 4
FORM 4
Chadk this box it no longer tubed to0Section 16 . Form 4 or Fonn 5obligations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0257
Exams, January31,2000
Estimated average burden
hours per0.5
Iesponso
Name and Address of Reporting Person12. Issuer Name and Ticker or Trading Symbol S. Relationship of Reporting Person(s) to Issuer
.TERA INC [ CUTR ]M (Check all applicable)
SANTL,LI RONALD I Director 10% Owner
X Officer ( give title Other (specifybelow) below)
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonthlDaylYear)
01/26/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD ,4. R Amendment, Date of Original Filed (Month(DAyl(ear) S. Individual or Joint/Group Filing (Check Applicable
Lime)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (State) (zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3) 2. Transaction 2A. Deemed 3. 4. SecuriMss Acquired (A) 0. Amount at 6. T. NatureData Execution Date , Transaction or Disposed Of (D) (rusts. Securities Ownership of Indirect(MontlMayiYsar) If any Cods (Instr. 3, 4 and 0) Bsnsacissy Fora : Beneficial
(MonWDaylvsar) 6) Owned Direct (0) or OwnershipFollowing Indirect ( 1) (intr. 4)
(A) Reported (Imtr.4)Coda V Amount Of Price Transaction(s)
(D) (Intr. 7 and 4)
Common Stock 01/26/2005 01/26/2005 M 1,500 A $4.25 1,500 D
Common Stock 01/26/2005 01/26/2005 sty' 1,500 D $14 0 D
1. TnN of Z 3. Transaction 3A. Doomed 4. 6. Number 6. Date Exercisable and 7. This and s. Price of s. Number 10. 11. NatureDerivative Conversion Date Execution Date, Transaction of Expiration Data Amount of Derivative of Ownership of Indirectsecurity or CxMalss (MontNDaylvear ) If any Code (Intr. Derivative (MandMDsyiYear) Socurigss security derivative Form; Beneficial(Intr. 3 ) Price of (MonthIDayNest) 6) securities Underlying (Intr. 5) Securities Direct (D) Ownership
Derivative Acquired Derivative Security Benrneplty at Indirect (Intr. 4)security (A) or (Intr. 3 and 4) Owned (I) (intr. 4)
I Options vest according to the following schedule 114 upon the date exercisable , and 1/48 per month thereafter.
2, The sale reported on this Form 4 was effected pursuant to a Rule Iobs - 1 Sales Plan adopted by the reporting person on August 31. 2004.
/s/ Ronald J. Santilli 01/28/2005
- Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form. one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Inflations on contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P10
SEC Form 4FORM 4
Check thu box it no longer subject is0Suction 16. Form 4 or Form 6obligations may continua. SeeIna uction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONVtptshinglon, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(6) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMBAPPROVAL
I OMB Number 3235.0267
Expires : January 31, 2008
Ensued average burden
hours per 0.5response
Name and Address of Reporting Persoti12 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
.CUTERA INC [ CUTR ] (Check all applicable)
SANTILLI RONALD J Director 10% Owner
Officer (give title Other (specify
(Lan) (Fret) (Middle) 3. Date of Earliest Transaction (Month(Day/Yeer)
X
bekw) below)
01/28/2005 CFO & VP of Finance and Admin.C/O CUTERA. INC.
40 BAYSHORE BLVD3 .2_ ____--• 4. If Amendment . Date of Original Filed (MonthlDay/Yeer ) S. Ind ividual or JoiritlGroup Filing (Check Applicable.. --. _
Lints)(street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. This of Security (Intr. 3) 2. Transaction 7A. own" 3. 4. Securities Acquired (A) 6. Amount of 6. 1. NatureDag Execution Date . Transaction or Disposed Of (0) (Intr. $iOurftlss Ownership of Indirect(Mordllpsylve.r ) N any Code ptutr. 3, 4 and 5) Beneficially r. 11.1 Beneficial
(MontttDsylysar) 5) Owned (D) or OwnershipFollowing Indirect (9 Ortatir. 4)
(A) Reported Omar. 4)Coda V Amount or Price Tn1nMONett(s)
(D) (hued 3 and 4)
Common Stock 01/28/2005 01/28/2005 M 11,000 A $4.25 11,000 D
Common Stock 01/28/2005 01/28/2005 s'2j 11.000 D $14 0 D
Common Stock 01/28/2005 01/28/2005 M 12,500 A $4.25 12,500 D
Common Stock 01/28/2005 01/28/2005 s121 12,500 D 314 0 0
1. This or 2. 3. Transaction 3A. Deemed 4. 6. Number 6. Date Exsrelsable and 7. Title and Amount 8. Price of 6. NumWr 10. 11. NatureDMriwtiw Conversion Data Execution Date , Transaction of Expiration Date of Securities Derivative of Ownership of IndirectSecurity or Exercib (MonthlDaylvrsr) N any Code (Intr. Derivative (MonthlDeylVear) Underlying Security derivative Form: Beneficial(Intr. 3) Price of (MontldOeyWeeV) 5) Securities Derivative Security (Mete. 5) Securities Direct (D) Ownership
Derivative Acquired (intr. 3 and 4) BsnsfltNay or Indirect (Intr. 4)Security (A) or Owned (1) (Intr. 4)
)aaa
dof (D
ftpor%
pnstr. 3, 4 Transaction,red 6) (a) (intr. 4)
Amountor
NumberData Expiration Of
Cede V N) (D) Exercisable Data This shares
EmployeeStockOption $4.25 01/28/2005 M 11,000
06/01/2004
41P 08/13/2013 CommonStock 11,000 so 37,500 D
(Right toBuy)
EmployeeStockOption 84.25 01/28/2005 M 12.500
06/01/2003t t 08/07/2012 Common
12 500 80 10,625 0(Right to
Stock ,
Buy)
Explanation of Responses:
1. Options vest according to the following schedule. 1,'4 upon the date exercisable. and 1249 per month thereafter.
2 The sate reported on this Form 4 was effected pursuant to a Rule I Ob5_I Sales Plan adopted by the reporting person on August 31. 2004.
/s! Ronald J. Santilli Q2/01/2005
"" Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
" If the form is filed by more than one reporting person , see Instruction 4 (bXv).
"' Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 16 U.S.C. 1001 and 15 U.S.C. 78fr(e).
Note ; File three copies of this Form, one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of information contained in this form as not required to respond unless the form displays a currently valid OMB Number.
P11
SEC Form 4
FORM 4
Cheek this boa it no longer subject to
0
Section 18. Form 4 or Fonn 6obligations may continua. SeaInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20649
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
0MB APPROVAL
OMB Number. 3235.0287
Expires:January 31,
2008
Estimated average burden
hours per 0.5response
2 - issuer Name and Ticker or Trading Symbol S . Relationship of Reporting Person( s) to Issuer1. Name and Address or Reporting Person
UTERA INC [ CUTR I (Cherie all applicable)
SAN JLLI RONAI., I ,< Director 10% owner, _,_......__ . _. _ ._ Ofcer (give title Other (specify
X below) below)
(Last) (First) (Middle ) 3. Date of Earliest Transaction (MontFVDay/Year)
01/31/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
0 BAYSHORE BLVD.3244. If Amendment, Date of Original Filed (MonthlDey/Vear) S. Individual or Joint/Group Filing (Check Applicable
Line)(Street)
X Form filed by One Repotting PersonBRISBANE CA 94005
Form filed by More than One Reporting. .. Person
(City) (state) (zip)
Table I - Non-Derivative Securities Acquired. Disposed of, or Beneficially Owned
1. Tide of Security (Intr. 3) L Transaction 2A. Deemed 3. 4. Securities Acquired (A) S. Amount of g. 7. NatureData Execution Dab, Transaction or Disposed Of ( D) pnsir. Securities Ownership of Indirect(MonthlDaylfsar) II any Coda (Insp. 3 , 4 and 8) Beneficially Form : Beneficial
(MontMDaylysar) 8) Owned Direct (0) or OwnershipFollowing Indirect (1 ) (Intr. 4)
(A) Reported (Instr.4)Coda V Amount or Price Transaction(s)
(D) 8nstr. 3 and 4)
Common Stock 01/31/2005 01/31/2005 M 5,000 A $4.25 5,000 D
Common Stock 01/31/2005 01/31/2005 s(2) 5,000 D $14 0 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options, convertible securities)
1. Title of 2. 3 . Transaction 5A. Dsamad 4. 5. Number S. Date Exercisable and T. Tide and 6. Price of 8. Number 10, 11 . NatureDerivative Conversion Date Execution Date, Transaction of Expiration Data Amount of Derivative of Ownership of IndirectSecurity at Exercise (MonthlDsy/Year ) S any Coda pnstr . Derivative ( MonthiDsyrfear ) Securities Security derivative Form: Beneficial(Intr. 3) Pries of ( MondtlPaylysar) 5) Securities Underlying (Intr. 8) Securities Direct (0 ) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (mete. 4)security (A) or (Inatr. 3 and 4) Owned (1) (Instr. 4)
I Options veal according to the following schedule 1/4 upon the date exercisable , and 1!48 per month thereafter.
2. The sale reported on this Form 4 was effected pursuant to a Rule 10b5.1 Sales Plan adopted by the reporting person on August 31. 2004.
/S/ Ronk). Santilli 02/01/2005
" Signature of Reporting Person Date
Reminder : Report on a separate lime for each class of securities beneficially owned directly or indirectly.
" If the form is filed by more than one reporting person , we Instruction 4 (bxv).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S .C. 1001 and 15 U.S.C. 78ff(a).
Note : File three copies of this Form , one of which must be manually signed. If space is insufficient . we Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P12
SEC Form 4
FORM 4
Check this box If no lager subject
0
to Section 18. Fonn 4 or Farm 5obligation. may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtiityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number: 3236-W$7
January 81,Expirm: 2008
Estimated average burden
hwra perO'sresponse
1. Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer
CUTERA INC [ CUTR ] applicable)(Check^CONNORS KEVIN P ^ X 10% OwnerOtT i titl Oth ifX cer (g ve e er (spec y
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day!Year) mow) below)
02/03/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.------... ,.,_....., .,_........... _.._...._._._._._-•----^. 4. If Amendment , Date of Original Filed (Month/Day/Year) 6. Individual or Joint/Group Filing (Check
(street)Applicable Une)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Dertvetive Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) 2. Transaction 2A. Deemed 9. 4. Securities Acquired (A) 5, Amount of 8. 7. NatureDeb Execution Date, Transaction or Disposed of (D) pnstr, 3, Securities Ownership of Indirect(MonthlDay(Vesr) If any Code (Intr. 4 and 5) Beneficially Form: Beneficial
(MonthlDayryaar) 8) awned Direct (D) OwnershipFollowing or Indirect (Intr. 4)Reported (1) (Intr. 4)
(A) TransactionTransactionCody V Amount Or Price (a) ( Insp. 3
(0) and 4)
Common Stock 02/03/2005 02/03/2005 s t' 5,000 D $13.9875 325,732 D
1. Tide of 2, 3. Transaction 3A . Deemed 4. 5. 5. Dab Exercisable and 7. Title and 8. Price of 8. Number 10. 11 . NatureDerivative Conversion Date Execution Data, Transaction Number Expiration Date Amount of Derivative, of Ownership of IndirectSecurity or Exercise (Monthlpay!Vear ) If any Code (Intr. of (MoneWay/year) Securaies Security derivative Form : Beneficial(Intr. 3) Price of (Mondupay/Vear) 8) Derivative Underlying (lnatr, 5) Securities Direct ( D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3,4 (a) (Intr. 4)and 5)
Amountar
NumberDate Expiration of
Cods V (A) (D) Exercisable Daft TNN Shares
Explanation of Responses:
1. The sale reported on this Form 4 was effected pursuant to a Rule lCb5-I Sales Plan adopted by the reporting person on August 10, 21)04.
/s/ Kevin P. Connors OU/Q3/2005
- Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is flied by more than one reporting person, see Instruction 4 (b)(v).
'e Intentional misstatements or omissions of facts constitute Federal Criminal Violations Sae 18 U.S.C. 1001 and 15 U.S.C. 7811(a).
Note: Fife three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays is currently valid OMB Number.
P 13
SEC Form 4
FORM 4
Check this box it no longer subject0W Section 18. Form 4 or Form 5obligations may con5011i0. SeeInstnicticn 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
QMB APPROVAL
OMB Number. 3235.0287
des: January 31,2006
Estimated average burden
hours per0.5
respOrlM
Name and Address of Reporting Person12 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person( s) to Issuer
.CUTERA INC [ CUTR ] (Cho* all applica ble)
CONNORS KEVIN P X D X 10% Ownerirector- - -- - - Officer (give title Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year)
Xbelow) below)
02/10/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .-.... ..._ 4. If Amendment. Date of Original Filed (MonthMayNear) 6. Individual or Joint/Group Filing (Check
Applicable Line)(Street)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More then One Reporting........ -.._._Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed at, or Beneficially Owned
1, Title of Security ( Instr. 3) 2. Transaction 2*. Deemed 8, 4, Securities Acquired (A) B. Amount of I. T. NatureData Execution Date, Transaction or Disposed Of (D) pnslr, 3, Securities Ownership of Indltrat(MomrdDaylvear) If any Code (Intr. 4 and 6) Beneficially Form : Beneficial
(MonthlDay/Year) 8) Owned Direct (D) OwnershipFollowing or Indirect (Inatr. 4)
Report d (I) (lnstr. 4)(A) eTransaction
V Amount or Price (s) (Intr. 3(D) and 4)
Common Stock 02/10/2005 02/10/2005 S (1 ! 5,000 D $17.6284 320,732 D
1. Title of 2 3. Transaction 3A, Deemed 4, 51 S. Date Exercisable and 7. Title and 8, Price of 8. Number 10, 11 , NatureDerivative Convers on Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthlDaylYear) if any Code (Intr. of (MonthlDayAVear) Securities Security derivative Form; Beneficial(Intr. 3) Price of (ManthlDay/Year) 8) Derivative Underlying (Intr. 5) Securities Direct (D) Ownership
(A) or (intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3,41 (a) (Intr. 4)and 5)
Amountor
NumberDate Expiration
ICod. V (A) (D) Exercisable Data Tilts Shares
Explanation of Responses:
I The sale reported on this Form 4 was effected pursuant to a Rule 103-1 Sales Plan adopted by the reporting person on August to, 2f I4.
/s/ Kevin P. Connors 02/11/2005
•• Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C, 1001 and 15 U.S.C, 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If apace is insufficient, see Instruction 6 for procedure.
Persona who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P14
SEC Form 4
FORM 4
Check Ihis box it no longer subject
0
to Section 16. Form 4 or Form 5abliqaqons mey ecni ue. Sawinstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington . D.G. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 , Section 17(a) of the Public UtilityHolding Company Ad of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0287
Expires :Janwry 71,
2008
Estimated average burden
hours per0.5response
1. Name and Address of Reporting Person2. Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issuer
CUTERA INC [ CUTR ] (Check all applicable)
CONNO S KEVIN P J( Director X 10% Owner
X Officer (give title Other (specify
(Last) (First) (Midrib) 3. Data of Earliest Transaction (Month/Day/Year) mow) below)
02/17/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD,4. If Amendment , Date of Original Filed (Month0ay/Year) 8. Individual or Joint/Group Filing (Check
(Street)Applicable Line)
13RJSBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
( City) (State) (zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3 ) 2. Transaction 7A . Deemed 3. 4. Securities Acquired (A) 5. Amount of 1 7. NatureDots Execution Date, Transaction or Disposed Of ( D) (Intr. 3, Securidp Ownership of Indirect(MongWay/Year) If any Coda (Intr. 4 and 5) Beneficially Farm: Beneficial
(Mon hlDayNear) 8) Owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)
ed(1) (Intr. 4)
(A) wTransCode V Amount or Price (a) (Intr. 7
(D) and 4)
Common Stock 02/17/2005 02/17/2005 s(' I 5,000 D $17.6694 315,732 D
1. Tills of R 3. Transaction 9A. Deemed 4. 6. 6. Data Exercisable and 7, Title and I. Price of 9. Number 10. 11. NatureDerivative Conversion Date Execution Data, Transaction Number Expiration Deb Amount of Derivative of Ownership of IndirectSecurity or Exercise (Mon hlDaylfsu) it any Code (Intr. of (Mont IDayNsar) Securities Security derivative Form: Beneficial(nstr. 3) Price of (MontMay(Year) 8) Derivative Underlying (Intr. 5) Securities Direct ( 0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3. 4 (a) (Instr. 4)and 5)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Data
Title
Shares
Explanation of Responses:
I The sale reported in this Form 4 was effected pursuxm to a Rule 1(ib5-I Sales Plan adopted by the reporting person on August 10, 2004.
/s/ Kevin P. Connors 02/18/2005
" Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly,
If the form Is filed by more than one reporting person , see Instruction 4 (b)(v).
" Intentional misstatements or omissions affects constitute Federal Criminal Violations See 18 U, S.C. 1001 and 15 U.S.C. 78t1(a).
Note : File three copies of this Form, one of which must be manually signed. If space is Insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P15
SEC Form 4
FORM 4
Chick this box if no longer subject
0
to Section 18 . Form 4 or Form 5obligations may cantinas. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0287
Ems. January 31,2000
Estimated average burden
hours per0.5
napaue
2. Issuer Name and Ticker or Trading Symbol S . Relationship of Reporting Person (s) to Issuer1. Name and Address of Reports Peron
CUTERA [NC [ CUTR) (Check all applicable)
CONNORS KEVIN P X Director X 10% Ownerive two Other (specifyOfficer (X g
(Last) (First) (Middle ) 3. Date of Earliest Transaction (Month/DaylYesr) below) below)
02/24/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment . Date of Original Filed (Month/Day/Year) 5. Individual or Joint/Group Filing (Check
Applicable Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form Bled by More than One Reporting. .........
Person
(City) (State) (Lip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Inatr. 3) R Transaction 2A. Deemed & 4. Securities Acquired (A) 8. Amount of 8 7. NatureData Execution Dap, Transaction or Disposed Of (D) (int r. 3, Securities Ownership of Indirect(MamhlDay/Yaar) If any Coda gnat,. 4 and 8) Beneficially Form: Beneficial
(MonthlD*ylyear) 8) Owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)
id(1) (Intr. 4)
(A) T aCocci V Amount or Price (s) (Intr. 3
(D) and 4)
Common Stock 02/24/2005 02/24/2005 s t' > 5,000 D $16.6934 310,732 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options, convertible securities)
1. Title of 2. 3. Transaction 3A . Deemed 4. 5. 6. Data Exercisable and 7. This and 5. Price of 9. Number 10. 11. NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (Month/Dayryear) If any Code pnatr. of (MoneWaytyear) Securities Security derivative Form: Beneficial(intr. 3) Price of ( MOnthiDsyrYoar) 8) Derivative Underlying (Intr. 5) Securities Direct (D) ownership
(A) or (Intr. 3 and 4) FollowingDisposed ReportedOf(D) Transaction(Intr. 3, 4 (a) (Intr. 4)and 5)
Amountor
NumberData Expiration Of
Code V (A) (D) Exercisable Data ml. Shahs
Explanation of Responses:
I The sale reported on this Form 4 was effected pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on August to, 2004,
/s/ Kevin P. Connors 02/24/2005"" Signature of Reporting Person Date
Reminder: Report on a separate tine for each class of securities beneficially owned directly or Indirectly.
" If the form is flied by more than one reporting person, see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 70(a).
Note : File three copies of this Form, one of which must be manually signed . If space is insufficient , see Instruction 8 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P16
SEC Form 4
FORM 4
Check this box it no longer subject
0
to Section 1e . Form 4 or Farm 5obligations may Continue, SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C.20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
0MB APPROVAL
OMB Number. 3235-0287
es: January 31,2008
Estimated average burden
hours per 0.5response
2. issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person ( s) to Issuer1. Name and Address of Reporting Person
CUTERA_IN [ CUTR ] (Check all applicable)
CONNORS KEVLN P X Director X 10% OwnerOfficer (give title Other (specify
( Last) ( First) (Middle ) 3. Date of Earliest Transaction (Month/DaylYear)
Xbelow) below)
03/03/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .... .. 4. If Amendment , Data of Original Filed (Month/Day/Year) 6. Individual or JointlGroup Filing (Check
Applicable Line)(Street)
BRISBANE CA 94005 X Form tiled by One Reporting Person
Form filed by More than One Reporting........ ....._... ................. ..----....... .............
Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired . Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3) Z Transaction 2A. Deemed 3. 4. Securities Acquired (A) a. Amount of 8. 7. NatureData Execution Data, Transaction or Disposed Of (D) (Intr. 3, Securities Ownership of Indirect(MonthlDay/year) If any Code pnstr. 4 and 5) Beneficially Form : 51101911411111
( MonthiDsy/Ycar) 8) Owned Direct ( D) OwnershipFollowing or Indirect (Intr. 4)Reported (1) (Inatr. 4)
(A) TransactionCods V Amount or Priam (s) (Intr. 3
(D) and 4)
Common Stock 03/03/2005 03/03/2005 s1 ' 5,000 13 $17.8986 305,732 D
1. Title of 2. 3. Transaction 3A. Deemed 4. 5. 6. Data Exercisable and T. Title and 8. Price of 8. Number 10. It. NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (Month/Dayrfaar) If any Code (Intr . of (MonthlDayffoar) Securities Security derivative Form ; Beneficial(Intr. 3) Price of (MonthIDaylyesr) 8) Derivative Underlying (Intr. 5) Securities Direct (0) Ownership
I The sale reported on this Form 4 was effected pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on August 10. 2004.
/s/ Kevin P. Connors 03/03/2005
•' Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed . If space is Insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this term are not required to respond unless the form displays a currently valid OMB Number.
P 17
SEC Form 4
FORM 4
Check No box It no longer subject
0
1o Section 18 . Fonn 4 or Form 5oblations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0287
January 31,Expires: 2008
Estimated average burden
hours par0.5response
Name and Address of Reporting Parson12 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issuer
.CUTEMINC [ CUTR ]
(Check all applicable)
CONNORS KEVIN P X Director X 10% OwnerOther (s ecifOffi ( i til p yX cer g ve e
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year) below) below)
03/10/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (MonBWaylvear) 8. Individual or Joint/Group Filing (Check
Applicable Line)(Street)
BRISBANE CA 94005 X Form flied by One Reporting Person
Form flied by More than One Reporting. .........Person
(City) (State) (Tip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3 ) 2. Transaction 2A. Deemed 3, 4, Securities Acquired (A) 8. Amount of 8. T. NatureDate Execution Data, Transaction or Disposed Of (0) (Instr. 3, Secumin Ownership of Indirect(MonthlDaylYear) N any Code (Intr. 4 and 5) Beneficially Form: Beneficial
(MontMpaylvesr) e) owned Direct ( D) OwnershipFollowing or Indirect (Intr. 4)Reported (Imtr. 4)( l)(A) Transaction
Code V Amount or Price (a) (Intr. 3( 0) and 4)
Common Stock 03/10/2005 03/10/2005 S t I 1 5,000 D $17.7462 300,732 D
1. Title of 2 . 3. Transaction 3A. Deemed 4 8. 8. Date Exercisable and T. Title and 8. Price of 9. Number 10. 11. NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (Menthlpayrvesr) If any Code (Instr. of ( MonthiDsyIVear) Securities Security derivative Form: Beneficial(intr. 3) Price of (MonaWayNear) 8) Derivative Underlying (Intr. 8) Securities Direct (0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3,4 (a) (Intr. 4)and 5)
Amountor
NumberDate Expiration of
Code V (A) (D) Exercisable Dab Title Shares
Explanation of Responses:
I The sale reported on this Form 4 was effected pursuant to a Rule Irih5-1 Sales Plan adopted by the reporting person on August ID, 2004.
/s/ Kevin P. Connors /03 10/2005
" Signature' of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form Is filed by more than one reporting person, see Instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space Is insufficient, see Instruction 8 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P18
SEC Form 4
FORM 4
0
Check this box if no longer subjectto Section 18 . Form 4 or Form 5obligation may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number: 3235.0287
Expires:January 31,
2008
Estimated average burden
hors per 0.5response
1. Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERA INC [ CUTR) ( Check s11 applicable)
CONNORS KEVIN P X Director X 10% Owner
Officer (give we Other (specify
X(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year) below) below)
03/17/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHO.E BLVD...... _._. 4. If Amendment , Date of Original Filed (MontlNDayNear) B. Individual or JointiGroup Filing (Check
(Sbeet) Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Instr. 3 ) 2. Transaction 7A. Deemed 3. 4. Securities Acquired (A) 5. Amount of 8. 7. NatureData Execution Date, Transaction or Disposed Of (0) (Intr. 3, Securities Ownership of Indirect(MonthlDayrfear) N any Code (Intr. 4 and 5) Beneficially Form : Ben ficial
(MonthlDaylvear) 8) Owned Direct ( D) OwnershipFollowing or Indirect 4)
p t(I) (Intr. 4)
(A) emaedonRCods V Amount or Price (a) (Intr. 3
(D) and 4)
Common Stock 03/17/2005 03/17/2005 SO) 5,000 D s18.5626 295,732 D
1. Title of 2 3. Transaction 3A, Deemed 4. 5. 8. Date Exercisable and 7. Title and 8. Prise of 8. Number 10. It. NatureDerivative Conversion Data Execution Dots, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (Monthioay/vear) If any Code (Intr. of (Month'Day/Year) Securities Security derivative Form: Beneficial(intr. 3) Price of (Month1Dsy/Yesr) 8) Derivative Underlying ( Intr. 5) Securities Direct ( D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction( Intr. 3,4 (s) (intr. 4)and 5)
Amountor
NumberDate Expiration of
Code V (A) (D) Exercisable Data Tale Shares
Explanation of Responses:
I 'I he sale repaned on this Form 4 was effected pursuant to a Rule 1Ob5-1 Sales Plan Adopted by the reporuny person on August 10, 2004,
/s/ Kevin P. Connors 03/17/2005
" Signature of Reporting Person DateReminder: Report on a separate fine for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person. see Instruction 4 (b)(v).
"' Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 16 U.S.C. 1001 and 15 U.S.C. 70ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P19
SEC Form 4
FORM 4
Check Ws box M no longer subject
0
to Section 1e. Form 4 or Form 5adgations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington . D.C.20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 , Section 17 (a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
0MB Number: 3235-0287
des: January 31,2008
Estimated average burden
hours per 0.5response
2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer1. Name and Address of Reporting Person
CUTERA INC [ CUTR ] (Chad al l applicable)CONNORS KEVIN P X X 10% Owner
i M O ifOffiX cer (g ve t a ther (spec y
(Last) (First ) ( Middle) 3. Date of Earliest Transaction (Month/Day/Year) Wow) below)
03/24/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .... 4. If Amendment , Date of Original Filed (Month/Day/Year) 6. Individual or JohtUGroup Filing (Check
Applicable Line)(Street)
13RIS13ANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non -Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Instr. 3 ) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) 5. Amount of 8. 1. NatureData Execution Date, Transaction or Disposed Of (D) (Intr. 3, Securities Ownership of Indirect(MonttUD4y1Year) It any Cods (Intr. 4 and 5) Beneficially Farm: BenMlcial
(MonthlDayNear) 0) Owned Direct ( D) OwnershipFollowing or Indirect (Itlstr. 4)
(1) (intr. 4)(A) Tnmaedon
Cede V Amount or Price (a) (Intr. 3(D) and 4)
Common Stock 03/24/2005 03/24/2005 SO) 5,000 D $18.3966 290,732 D
1. Tree of 2, 3. Transaction 3A. Deemed 4. 5. 5. Date Exercisable and 7. Title and I Prins of i. Number 10. 11. NatureDerivative Conversion Date Execution Dab, Transaction Number Expiration Data Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthlDaylYeer) N any Code (Intr. of (MonthiDaylYesr) Securities Security derivative Form: Beneficial(instr . 3) Price of ( ManthIDay/YSar) 0) Derivatvo Underlying (Intr. 5) Securities Direct ( D) ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3 , 4 (s) (Intr. 4)and 5)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Data This Shares
Explanation of Responses:I The sale reported on this Form 4 was effected pursuant to a Rule 10b5-1 Sales Plan adopted by the reporting person on August 10, 2004.
/s/ Kevin P. Connors 03/24/2005
'" Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form Is filed by more than one reporting person , see Instruction 4 (b)(v).
•" Intentional misstatements or omisslons of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C- 78f(a).
Note: File three copies of this Form , one of which must be manually signed . If space Is insufficient . see Instruction 6 for procedure.
Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 20
SEC Form 4
FORM 4
Check this box if no longer subjecta to SedWn 18. Form 4 or Form 5
abAgatorts may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0287
Expires : January 31,2006
Estimated swap burden
hours per 016response
Name and Address of Reporting Person12 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issuer
.
C TPRAINC [ CUTR ] (Check all applicable)
CONNORS KEVi P ]( Director X 10% Owner
-- - - - - f i i titl th iff cer (g ve er (spec yX O e O
(Last) (First ) ( Middle) 3. Date of Earliest Transaction (Month/Day/Year) below) below)
03/31/2005 President and CEOC/O CUTERA, [NC.
3240 BAYSHORE BLVD.4. If Amendment , Date of Original Filed (Month/DayNear) 6. Individual or JointlGroup Filing (Check
Applicable Line)(Street )
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One Reporting....... . ......... .. .__.... ... ......,...Person
(City) (State) (Zip)
Table I - Non -Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3) 2. Transaction IA. Deemed 3. 4. Securities Acquired (A) 8. Amount of 5. T. NatureDate Execution Date, Transaction or Disposed Of (D) (Intr. 3, Securities Ownership of Indirect(MonthlDaylvear ) If any Code (intr. 4 and 6) Beneficially Form ; Beneficial
(MontlVDay/Ysar) 8) Owned Direct(D) OwnershipFollowing or Indirect (Intr. 4)
Repot d (1) 11-tr. 4)(A) T onaa
Code V Amount or Price (s) (Intr. 3(D) and 4)
Common Stock 03/31/2005 03/31/2005 s1' 5,000 D $19.0766 285,732 D
1. Title of 2. a Transaction 3A. Deemed 4. 5. S. Date Exercisable and 7. Title and S. Price of 9. Number 10. 11 . NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthiDayffsar) If any Code (Instr. of (MonthlDaylyear ) Securities Security derivative Form ; Beneficial(Intr . 3) Price of ( MonthmayNear) 5) Derivative Underlying (intr. 5) Securftlea Direct (D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3,4 (a) (Instr. 4)and 5)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Data
TM
Shams
Explanation of Responses:
I. The sale reported on this Forn, 4 was effected pursuant to a Rule l0b5-I Sales Plan adopted by the reporting person on August 10, 2004.
/s/ Kevin P. Connors 03/31/20Q5
- Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form Is filed by more than one reporting person, see Instruction 4 (b)(v).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 76ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is Insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P21
SEC Form 4
FORM 4
Check On box If no larger subjectEl to Section 16. Fam 4 or Form 5
obligations mrycahoots. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 11(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0287
January 31,Expires: 20DO
Estimated average burden
hours per0,5
response
1. Name and Address of Reporting Person2. issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUIERA INC[ CUTR
all ble)(ChXCONNORS KEVIN P- -
X 10% OwnerDirector
X Officer (give into Other; pecify
(Last) ( First) (Middle ) 3. Date of Earliest Transaction (Month/Day/Year)sbelow)
04/07/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amendment . Date of Original Filed (Monthp7ay/Year) 6 . Individual or Joint/Group Filing (Check
(Street )Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) 2. Transaction 2A. Deemed 9. 4. Securities Acquired (A) 5. Amount of G. 7. NatureDate Execution Date, Transaction or Disposed Of (0) pnsir. 3, Securities Ownership of Indirect(MonlhlDay/Year) Reny Cods (Intr. 4 and 5) Beneficially Form Beneficial
(MoneuDayivear) 8) Owned Direct (D) OwnershipFollowing or Indirect pnstr. 4)Reported ( 1) (Intr. 4)
(A) actionCode V Amount or Price (s) (insp. 3
(D) and 4)
Common Stock 04/07/2005 04/07/2005 s t' 5,000 D $19.2304 280,732 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options, convertible securities)
1. Title of Z 3. Transaction 3A. Deemed 4. 6. 6. Date Exercisable and 7. Title and A. Price of 9. Number 10. 11. NatureDerivative Conversion Date Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthlDawvear) If any Code (Intr. of (MonthiDaylYear) Securities Security derivative Form: Beneficial(Intr. 3) Price of ( MonthlDaylYear) 8) Derivative Underlying ( Intr. 5) Securities Direct (D) Ownership
(A) or (Intr . 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3,4 (a) (Intr. 4)and 5)
Amountor
NumberDab Expiration of
Code V (A) (D) Exercisable Date Tale Shares
Explanation of Responses:
I The axis reported on th-s I'mm 4 was effected pursuant to a Rule 1 (ib5-I Sales Plan adopted by the reporting person on August 10, 2004,
/s/ Kevin P. Connors 04/07/2005
'" Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly,
" If the form Is filed by more than one reporting person . see Instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 16 U.S.C. 781t(e).
Note : File three copies of this Form, one of which must be manually signed . If apace is Insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 22
SEC Form 4
FORM 4
Check this box it no longer sub)ect
0
to Section 16. Form 4 or Form 5obligations may cont nue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 15(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number : 3235-0287
January 31.Expires: 2008
Estimated average burden
hours per 0.6response
1. Name and Address of Reporting Person2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person (s) to Issuer
A_YNC [ CUTR ICUTE„R (Check all applicable)
CONNORS KEVIN P.
- X Director X 10% OwnerX Officer (give title Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/vea0 below) below)
04/14/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.-_----- ........ .......... ................_..........._,__----- ----_---.. 4. If Amendment . Date of Original Filed (Month/DayNear) 6. Individual or JoinUGroup Filing (Check
(Street) Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form flied by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) 2. Transaction 2A. Deemed 3. 4. Securltles Acquired (A) S. Amount of 6. 7. NatureDate Execution Dab, Transaction or Disposed Of ( D) (Instr. Securities Ownership of Indirect(MonthiDayiYear) If any Code (Intr . 3,4 and 5) Beneficially Form; Beneficial
(MonauDay/year) s) Owned Direct ( 0) OwnershipFollowing or Indirect (Intr. 4)
( 1) (Inatr. 4)(A) Transactionion
Code V Amount or Price (e) (matt. 3( D) and 4)
Common Stock 04/14/2005 04/14/2005 g t 11 5,000 D 318.008 275,732 D
1. Title of 2. 3. Transaction 3A. Deemed 4. It. 5. Data Exercisable and T. Title and 8. Price of 9. Number 10. 11 . NatureDerivative Conversion Dow Execution Data , Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise ( MonthlOay/Ysar) it any Code (ln$tr. of (MonthlDaylyear ) Securities security derivative Form: Beneficial(Intr. 3) Price of ( MonthlDay /Ysar) 8) Derivative Underlying (Intr. 5) Securities Direct (0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3. 4 (a) (Intr. 4)and 6)
mount
Ror
rNumbeDate Expirati or
Cods V (A) (D) Exercisable Date hams
Explanation of Responses:
I The sale reported an this Form 4 was effected pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on August 10, 2004.
/jvin P. Connors 04/14/2005
"' Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form Is filed by more than one reporting person. see Instruction 4 (b)(v).
•' Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 755(a).
Note; File three copies of this Form, one of which must be manually signed. If space Is insufficient, see Instruction 6 for procedure.
Pennons who respond to the collection of Information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 23
SEC Form 4
FORM 4
Check this box If no longer subject
0
to Section 18. Form 4 or Form 5obligations may contfr,u . SeaInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(s) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235.0287
Expims: January 31,2008
Estimated average burden
hours per asresponse
2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person (s) to Issuer1. Name and Address of Reporting Person
CUTERC [ CUTR ] (Check al applicable)
CONNORS KEVIN P X Director X 10% OwnerOfficer (give title Other (specify
(Last) ( First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year)
Xbelow) below)
04/21/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD ._.... .. ... .- 4. If Amendment . Date of Original Filed (MonthlDay/Year) 6. Individual or Joint/Group Filing (Check
Applicable Line)( Street )
BRISBANE CA 94005X Form filed by One Reporting Person
Form filed by More than One Reporting.... .. ....... ...Person
(City) (State) (Zip)
Table I - Non-Derhrative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Intr. 3) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) 5. Amount of 8. T . NatureDate Execution Date, Transaction or Disposed Of ( D) (Intr. 3, Securities Ownership of Indirect(MonthiDaylvear) If any Code (Intr. 4 and 5) Beneficially Form; Beneficial
(MonthlDayNear) 8) Owned Direct ( 0) OwnershipFollowing or Indirect (intr. 4)Reported ( I) (Inttr. 4)
(A) TransactionCoda V Amount or Price (s) (tnstr. 3
(D) and 4)
Common Stock 04/21/2005 04/21/2005 St t I 5,000 D $17.2824 270,732 D
1. Title of x 3. Transaction 3A. Deemed 4. 5. L Data Exercisable and 7. Title and S. Price of 0. Number 10, It . NatureDerivative Conversion Date Execution Data, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (Month/Day /Year) if any Code (Intr. of (MonthlDaylvear) Securities Security derivative Form: Beneficial(Intr. 3) Price of (MonthIDsylVear ) 8) Derivative Underlying (Intr. 5) Securities Direct (D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3,4 (a) (Instr. 4)and 5)
Amountor
NumberDate Expiration of
Code V (A) (D) Exercisable Date Title Shares
Explanation of Responses:
1. The stile reported on this Form 4 was effected pursuant to a Rule 10b5 - 1 Sales Plan adopted by the reporting person on August 10, 2004,
/s/ Kevin P. Connors 04/21/2005
- Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
If the form Is filed by more than one reporting person, see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 24
SEC Form 4FORM 4
Check this box if no longer subject to
0
Ssc$on is . Form 4 or Form 5obligations may continue. SeeInstruction 1(b),
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
0MB Number 3235-0767
Expires_ January 31,2006
Estimated average burden
hours per 0.5response
1. Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
CUTER/ INC [ CUTR J(Check all applicable)
MN RS KEVIN P X Director X 10% OwnerOfficer ( give this Other ( speedyXb b l
(Last) (First) (Middle) 3. Data of Earliest Transaction (Month/Day/Year) elow) e ow)
04/22/2005 President and CEOC/O CUTERA. INC.
3240 BAYSHORE BLVD ,4. If Amendment, Date of Original Filed (MonthlDay/Ysar) 8. Individual or Joint/Group Filing (Check Applicable
(Street) Lam)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Dorivathre Securities Acquired . Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) L Transaction 4A. Deemed 7. 4. Securiies Acquired (A) S. Amount of A. 7, Natureonto Exooutbn Data, Transaction or Disposed Of (D) (Init. 8, Securities Ownership of Indirect(MonthIDayryear ) C any Code (Intr. 4 and 6) Beneficially Form: Beneficial
(N-thlDaylyear) s) Owned Direct (D) OwnershipFollowing or Indirect (Intr. 4)
(A) Reported (1) (Intr. 4)Coda V Amount or Price Transaction(s)
(D) (tnstr, 3 and 4)
Common Stock 04/22/2005 04/22/2005 M 5,000 A $0.1 275,732 D
Common Stock 04/22/2005 04/22/2005 s11 5,000 D $17.799 270,732 D
Table ii - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g., puts, calla, warrants, options , convertible securities)
1. Title of 2 . 3. Transaction 3A. Deemed 4. 6. Number 6. Date Exercisable and 7. Title and 6. Price of s. Number 10 . 11. NatureDerivative Conversion Date Execution Date, Trsnaaotion of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthlDayivsar ) If any Code (Intr. Derivative (MondJDayrynr) Securities Security deAvatM Form; Beneficial(Intr. 3 ) Price of (Monddpsyryear) 8) securities Underlying (Intr. 5) Securities Direct (0) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect () natr. 4)Security (A) or (Intr. 3 and 4) Owned (1) (Intr. 4)
EmployeeStockOption 80.1 04/22/2005 04/22/2005 M 5,000
09/01/20000911312009
Common5 000 80 755 000 D
(Right to(1) Stock . ,
Buy)
Explanation of Responses:
1 The sale reported on this Form 4 was effected porsuant to a Rule I ObS-I Sales Plan adopted by the reporting person on August 10, 20.04
'Options vest according to the following schedule. 1:4 upon the date exercisable, and I/48 per month thereafter
/s/ Kevin_P. Connors 04/25/2005
•• Signature of Reporting Person DateReminder Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person , we Instruction 4 (b)(v).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 15 U.S.C. 1001 and 15 U.S:C. 7off(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient . see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 25
SEC Form 4
FORM 4
Check this box If no longer subject to
0
Section te. Fernt 4 or Form 5obligations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 , Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0257
Expires :January $1,
2005
Estimated average burden
hours per 0.5response
2 . Issuer Name and Ticker or Trading Symbol S. Relationship of Reporting Person(s) to Issuer1. Name and Address of Reporting Person
CUTR 1(Check all applicable)
KEVINj PCC NNORS X Director X 10% Owner.,Officer ( give title other ( specify
(Last) (First) ( Middle) 3. Date of Earliest Transaction (Month/Day/Year)
Xbelow ) below)
04/28/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment, Date of Original Filed (MonthfDay/Year) 6. Individual or JoinVGroup Filing (Check ApplicableLam)
(Street)X Form filed by One Reporting Person
BRISBANE CA 94005Form filed by More than One Reporting
-^_
Person
(City) (State) (Zip)
Table I • Non -Derlvetive Securities Acquired , Disposed of, or Beneficially Owned
Tine of Security (Intr. 3 )1 2. Transaction ZA, Deemed 3. 4. Securlaes Acquired (A) or S. Amount of G. 7. Nature.
Data Execution Date, Transaction Disposed Of (0) (Intr . 3.4 Ssouft" Ownership of Indirect
(MontIDsyryesr) If any Code (Intr. and 5) Beneficially Form; Beneficial(MontllDeyrvnr) $) Owned Direct ( D) Ownership
Following or indirect (I 4)(A) Reported (I) (hat,. 4)
Code V Amount or Price Transaction(s)(D) (Intr . 3 and 4)
Common Stock 04/28/2005 04/28/2005 M 5,000 A $0.1 275,732 D
Common Stock 04/28/2005 04/28/2005 s I 5,000 D $17.1174 270,732 D
1. Title of 2. 3. Transaction 3A. Desmad 4. 5. Number s. Date Exercisable and T. Title and 0. Price of 5 . Number 10. 11, Nature
Derived" Conversion Data Execution Date, Transaction of Expiration Date Amount of Derivative of ownership of indirect
Security or Exercise ( MonthIDey(Yeer) If any Gods (Intr. Derivative (MondYDeyrfear) Securities Security derivative Form ; Beneficial
(Intr. 3) Pries of (MonthlDayffear) 5) Securities Underlying (Intr. 5) Securities Direct (0) OwnershipDerivative Acquired Derivative Security Beneficially or Indirect (Insp. 4)
security (A) or (Intr. 3 and 4 ) Owned (1) (Instr, 4)Disposed Followingof (D) Reported(Intr. 3 . 4 Transactionand S) (e ) ( Instr. 4)
Amountor
Number
DataExpiration of
Code V (A) (0) Exercisable Date Title Shares
EmployeeStockOption $0.1 04/25/2005
:
04/28/2005 M 5,00009/01/2000
5 2 1 09/13 /2009CommonStock 5.000 $0 750,000 D
(Right to
I I I I I I 1 1Buy) -
Explanation of Responses:
I The sale reported an this Form 4 was effected pursuant to a Rule loh5-I Sales Plan adopted by the reporting person on August 10, 2004.
2. Options vest according to the following schedule. 1;4 upon the date exercisable, and 1/45 per month therea0er.
/s/ Kcvin P, Connors 04/29/2005
'" Signature of Reporting Person Date
Reminder: Report on a separate line for each close of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person , we Inetniction 4 (b)(v).
n Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. R space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 26
SEC Form 4
FORM 4
Chock this box if no longer subject to
0
Section 16. Form 4 or Form 5obligations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16( a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0207
Exams. January 31.2008
Estimated average burden
hours per0.5
response
1. Name and Address of Reporting Person 2 - Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
CUTERA INC (CuTR ] (Check all applicable )SANTILLI RONALD J 10% Owner
.-...------ -- - .. Officer ( ive title Other ( s ecif- - r _ T_ _ X g p y
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonthlDay/Year)below) below)
05/03/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD,4. If Amendment, Date of Original Filed (Month/Day/Year) 6. Individual or Joint/Group Filing (Check Applicable
(Street)Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Tattle I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Tide of Security ( Instr , 3) 2, Transaction 2A. Deemed 3. 4. SecurItMS Acquired (A) 5. Amount of 8. 7, NatureDote Execution Do%. Transaction or Disposed Of (0) (Intr. 8scutitMs Ownership of Indhwt(MondNDaylvear) If any Cods (Intr. 3,4 and 5) Beneficially Form : Beneficial
(MonedDayrynr ) 8) Owned Direct (0) or OwnershipFollowing Indirect ( 1) peaty. 4)
(A) Reported liner. 4)Cods V Amount or Prue Transaction(s)
(0) linear. 3 and 4)
Common Stock 05/03/2005 05/03/2005 M 7,262 A $5.5 9,938 D
Common Stock 05/03/2005 05/03/2005 s (^' 7,262 D $18 2,676 D
1. Title of 2. 3 . Trxnasation 7A. Deemed 4. S. Number 6. Dabs Exercisable and 7. Tide and S. Price of 9. Number 10, 11, NatureDerivative Conversion Data Execution Date, Transaction of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Extra se ( MonthlDsylYssr) If any Code (Intr. Derivative ( MonthlDaylysar) Securities Security derivative Ferm: Beneficial(Intr. 3 ) Price of (MonWDay/Yaar) 5) Securities underlying (Intr. 5) Securities Direct (D) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect Pratt. 4)security (A) or (Intr. 3 and 4) Owned (1) (Inver. 4)
I Options vest according to the following schedule, 1 /4 upon the date exercisable , and 1/48 per month thereafter.
2. The sale reported on this Form 4 was etTcctcd pursuant to a Rule lobs - I Sales Plan adopted by the reporting person on February 28, 2005.
L LRouald J. Santilli 05/04/2005
" Signature of Reporting Person DateReminder Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more then one reporting person, see Instruction 4 (b)(v).
- Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 781T(a).Note: File three copies of this Form, one of which must be manually signed. N space is insufficient, see Instruction 6 for procedure.Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P 27
SEC Form 4FORM 4
Check this box if no longer subject to
0
Section 16 . Form 4 or Form 6obligations may continue. Seainstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Excharga Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act xf 1940
OMB APPROVAL
OMB Number. 3235-0267
Expires: January 31,800s
Estimated avenge burden
hours per 0.5response
Name and Address of Reporting Person12 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issuer
.CUTERA INC [ CUTR I (Check all applicable)
$ANTILLI RONALD I Director 10% Owner... .-----. X Officer (give title Other ( specify
(Last ) ( Fir9t) (Middle ) 3. Date of Earliest Transaction (MoritPVDayiYeer ) bed)below)
05/04/2005 CFO & VP of Finance and Admin.CIO CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (Mont lDey/Year) 6. Individual or Joint/Group Filing (Check Applicable
Lam)(Street)X Form filed by One Reporting Person
BRISBANE CA 94005Form filed by More than One ReportingPerson
(City) (state) (zip)
Table I - Non-Derivative Securities Acquired . Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) R Transaction 2A. Deemed 3. 4. Securities Acquired (A) S. Amount of 6. 7. NatureDate Execution Data, Transaction or Disposed Of (D) (Inst. Securities Ownership of Indirect(MenhWaylyear) If any Code (Insk. 3 , 4 and 6) Betrfeidly Form : Beneficial
(MonthiDaylyear ) 6) Owned Direct (0) or Ownership
'
Following Indirect (I) (Inch, 4)
Z
(A) Reported (Instr, 4)
TV
Amount or Price Transaction(a)(D) pnatr. 3 and 4)
Common Stock 05/04/2005 05/04/2005 M 2,738 A $5,5 5,414 D
Common Stock 05/04/2005 05/04/2005 2,738 D $18 2,676 D
1. Title of 2 . 3. Transaction 3A. Dasmed 4, S. Number 6. Date Exercisable and 7. Tile and 6. Price of 9. Number 10. 11. NatureDerivative Conversoni Date Execution Data, Transaction of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exerc se (MonthlDaylYear) If any Code (Intr. Derivative (MonWDaylVar) Securities Security derivative Form: Beneficial(Intr. 3) Price of (MonthlDayfvear ) 6) Securities Underlying (Intr. 5) securities Direct (0) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (Inch, 4)Security (A) or (Intr . 3 and 4 ) Owned (I) (Intr. 4)
I Options vest according to the following schedule 1/4 upon the date exercisable, and I/48 per month thereafter.
2. The sale reported on this Form 4 was effected pursuant to a Rule 105-1 Sales Plan adopted by the reporting person on Febnwrv 28, 2005
/s/ Ronald J . Santilli 05106/2005" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person , see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 781f(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 28
SEC Form 4
FORM 4
Instruction
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Check this box it no longer subject to
0
Section 16. Form 4 at. See
Instruction 1ay
continueForm5
Washington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 , Section 17 ( a) of the Public UtilityHolding Company Act of 1935 or Section 30( h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 8286.0287
Expires:January 31.
2005Estimated average burdenhours per 0.5response
1. Name and Address of Reporting Perstxi2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person ( s) to Issuer
CUTER.A INC [ CUTR ] (check all applica ble)CONNORS KEVIN P X 10% Ownerirector
Officer ( give title Other ( specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year)
Xbelow) below)
05/05/2005 President and CEOC/O CUTERA. INC.
3240 BAYSHORE BLVD.4 If Amendment Date of Original Filed (Month/Day/Vear) 6 Individual or Joint/Group Filing (Check Applicable
(Street)
. , .
Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Irish, 3) S. Transaadon TA. Deemed 3. 4. Securities Acquired (A) or S . Amount of 6. 7. NatureDahl Execution Dats, Transaction Pispossd of (D) (Ins1r. 3,41 Securities Ownership of Indirset(MonthlDay/Year) If any Cods (Intr. and 6) Beneficially Form : Benuftolal
(MOnWDeylvasr ) 6) Owned Direct (0) OwnershipFollowing of Indirect (ttglr, 4)
(A) Reported W (Instr, 4)Cods V Amount or Price Transaction(s)
(D) (Insp. 3 and 4)
Common Stock 05/05/2005 05/05/2005 M 5,000 A $0. i 275,732 0
Common Stock 05/05/2005 05/05/2005 S11 5,000 D 517.4362 270,732 D
1. Title of 2. 8 . Transaction 7A, DNmed 4. 6, Number 5, Data Exercisable and T. TRIe and 8. Price of s. Number 10. 11. NatureDertvatlve Conversion Data Execution Onto, Trsnssativn of Explrstfon Data Amount of Derivative of Ownership of IndirectSecurity or Exercise (MondYDayffear) If any Code ( Intr. Derivative (MonthlD.ylvssr) Securities Security derivative Form: Beneficial(Intr. 3) Price of (Monthlosyryoar ) 8) Securities Underlying (Intr. 5) Securities Dimas (0) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (Intr. 4)Security (A) or (Inser. 3 and 4) Owned (q (mete. 4)
I The We reported on this Form 4 was effected pursuant to a Rule 16b5-1 Sales Plan adopted by the reporting person on August 10, 2004
2 Options vest according to the following schedule. t/4 upon the date exercisable. and 1/48 per month thereafter.
/s/ Kevin P. Connors 05/06/2005
"` Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person , see Instruction 4 (bXv).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note : File three copies of this Form, one of which must be manually sgrted . If space is insufficient , sea Instruction a for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 29
SEC Form 4
FORM 4
Check this box it no longer subject to
0
Section 10 . Fonn 4 or Form 5obtgaiions may conti ue. SeeInttruetion 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the investment Company Act of 1940
OMB APPROVAL
OMB Number, 3235-0287
Expires:January 31,
2008
Est imated average burden
hours per 0.5response
2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer1. Name and Address of Reporting Person
cU!EkA INC C CUTR(Check all applicable)
COINOR-S KEVIN P X Director X 10% Owner-_.__--..-._.._-..._ _..^ Officer (g ive title Other (specify
(Last) (First ) (Middle ) 3. Data of Earliest Transaction (MonWDaylVear)
X
bed) below)
05/12/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amendment . Date of Original Filed (MonthlDay/Yeer) 6. Individual or Joint/Group Filing (Check Applicable
Line)(Street)
X Form flied by One Reporting PersonBRISBANE CA 94005BR15
Form tiled by More than One ReportingPerson
(City) (State) (Zip)
Table I • Non-Derivative Securities Acquired. Disposed of, or Benefic ially Owned
Title of Security (Intr. 3)1 2. Transaction 7A. Deemed 3. 4. securities Acquired (A) S. Amount of 8. T. Nature.
Dad Execution Date, Transaction or Disposed Of (D) (Instr. 3 , Securities Ownership of Indirect(MondMDayl car) It any CwN (imtr. 4 and 5) Beneficially Farm: Beneficial
(MonihlDryfYear) 8) Owned Direct ( D) or OwnershipFollowing Indirect (1) linear. 4)
(A) Reported (lnstr.4)CeM V Amount or Price Transection(s)
(0) (Inst. 3 and 4)
Common Stock 05/12/2005 05/12/2005 M 5,000 A $0.1 275,732 D
Common Stock 05/12/2005 05/12/2005 s 1' 1 5,000 D $15.17 270,732 D
Table 11- Derivative Securities Acquired, Disposed of, or Beneficially Owned
Tills of1 2. 3 . Transaction 7A. Deemed 4. 5. Number 8. Date Exercisable and 7. Tills and 8. Price or 9. Number to. 11. Nature.Dsdvadve Conversion Date Execution Data, Tran saction of Expiration Date Amount of Derivative of Ownership of Indirect
Security or Exercise (MonthlDay/ysar) If any Code ( Intr. Derivative (MonthlDeyryear) Securities security derivative Form : Beneficial
(Intr. 3) Price of (MonthlDayrf ssr) 8) Securities Underlying (Instr. 5) Securities Direct ( D) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (Intr. 4)
I The sale reported on this Form 4 was effected pursuant to a Rule I(.b)5-I Sales Plan adopted by the reporting person on August 10. 2004
2. Options vest according to the following schedule. 14 upon the date exercisable. and 1.48 per month thereafter
/s/ Kevin P. Connors 05/13/2005
'" Signature of Reporting Person Date
Reminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, we Instruction 4 (bXv).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. if space is insu(ncient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 30
SEC Form 4
FORM 4
Check this box it no longer subject to
U section 18. Form 4 or Form 5obligations may continue. Seeinstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashngton , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number : $235-0287
Expires: January 31,2006
Estimated average burden
hours per 0.5response
Name and Address of Reporting Person'12 . issuer Name and Ticker or Trading Symbol S . Relationship of Reporting Person( s) to Issuer
.TERA INC [ CUTR ]
(Check all applicable)
CQNNORS KEVIN X Director X 10% Owner
-._. Officer (give title Other (speoNy
(Last ) ( First ) (Middle ) 3. Date of Earliest Transaction (MonthiDay/Year)
Xbelow) below)
05/19/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .Date of Original Filed (MonthlDay/Yeer)If Amendment4 6. Individual or Joint/Group Filing (Check Applicable,.
Line)(Street)
BRISBANE CA 94005X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) S. Tranasctlon 7A. Deemed 3. 4. Securtles Acquired (A) or 5. Amount ofe. 1. NatureDataExecution Date, Transaction Disposed Of (D) (InsV. 7, 4 securities Ownership of Indirect
(ManthlDaylYear) N any Cods (Imtr, and 5) Beneficially Form ; BensBclal(MenthlDeylveer) 6) wined Direct (D) Ownership
Following or Indirect (bass. 4)(A) Reported P) (Intr. 4)
Cade V Amount or Price Transaction(s)(0) (Intr. 3 and 4)
Common Stock 05/19/2005 05/19/2005 M 5,000 A $0.1 275,732 D
Common Stock 05/19/2005 05/19/2005 s' 11 5,000 D $15.4644 270,732 D
1. Tide of 7. S, Transaction 3A. Deemed 4. S. Number 6, Dab Exercisable and 7. Tide and It. Price of 9. Number 10. 11, NatureDerivative, Conversion Date Execution Data. Transaction of Expiration Data Amount of Derivative of Ownership of indirectsecurity or Exercise (MonthlDayr fear) N any Code (Intr. Der native (MondhDayryear) 8eeurlti s Security derivative Form: Beneficial(Intr. 3) Price of (MonthlDayrfear ) 6) Securities Underlying (Intr. 5 ) Securities Direct (D) Ownership
Derivative Acquired Derivative Security Benellaglly or Indirect (latter. 4)Security (A) o r p tr. 3 and 4) Owned (I) (Intr. 4)
Disposed FollowingReported
pnatr. 3, 4 Transactionand 6) (a) (Inak. 4)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Data Tins Shares
EmployeeStockOption 30.1 05/19/2005 M 5.000 ^!^ 2) 00/13/2009 Common
Stock 5,000 so 735,000 D(Right toBuy)
Explanation of Responses:
I The sale reported on this Form 4 was effected pursuant to a Rule i PPbS-I Sales Plan adopted by the reporting person on August 10, 2004
= Options vest according to the following scheduler. I:'4 upon the date exercisable , and 1/45 per month thereafter.
/s/ Kevin P. Comm 05120/2005
" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78f1(a).
Note : File three copies of this Form, one of which must be manually signed. If space is insufficient, we Instruction 6 for procedure.
Persona who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P31
SEC Form 4
FORM 4
Check this box if no longer subject to
0
Section 16 . Form 4 or Form 5obligations may continue. See
Instruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17 ( a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0287
Exams: January 31,2006
Estimated average burden
hours per 0.5response
2- Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer1. Noma and Address of Reporting Peron
I ERA [NC [ CUTR J(Check all applicable)
CONNQRS KEVIN P X Director X 10% OwnerOfficer (give We Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonthfDay/Yoar)
Xbelow) below)
05/26/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .-- 4. If Amendment, Date of Original Filed (Month/Day/Year) S. Individual or JoinVOroup Filing (Check Applicable
Lam)(Street)X Form filed by One Reporting Person
BRISBANE CA 94005Form filed by Moro than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security ( Inatf . 3) 2. Transaction 2A. De med 3. 4, Securities Acquired (A) or 5. Amount of S. 7, NatureData Execution Dahl, Transaction Disposed Of (D) (Intr. 3, 4 Securities Ownership of Indirect(MonlhIDeylVesr) If any Code (Intr. and S) Beneficially Form: BenefaWl
(Mont lpsyn'ur) 8) Owned Direct (0) OwnershipFollowing or Indirect (Irate. 4)
(A) Reported (I) (main. 4)Coda V Amount or Price Transacdon(s)
(D) (Irate, d and 4)
Common Stock 05/25/2005 05/25/2005 0 V 18,000 D s0 252,732 D
Common Stock 05/26/2005 05/26/2005 M 5,000 A $0.1 257,732 D
Common Stock 05/26/2005 05/26/2005 S t " 5,000 D 514.2888 252,732 D
1, Tlsa of 2. 3 . Transaction 3A. Deemed 4, 6. Number 6. Data Exercisable and 7. Title and 5. Pries of S. Number 10. it. Nature
Derivative ConWnion Data Execution Dap, Transaction of Expiration Date Amount of Derivative of Ownership of Indirect
So tartly or Exercise ( MonthlDaylvsar ) if any Code pnstr. Derivative (Mont lDaylYsar) Securities Security derivative Form : Beneficial(Intr. 3) Price of (Monddoayfyser) a) Securities Underlying (Intr. 6 ) Securities Direct (D) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (mate. 4)Security (A) or pnstr. 3 and 4 ) Owned m (mete. 4)
I The sale reported on this Form 4 was effected pursuant to a Rule 10b5- 1 Sales Plan adopted by the reporting person on August 10. 2004.
2. Options vest according to the following schedule: 14 upon the dare exercisable . and 1/49 per month thereafter.
/s/ Kevin P. Connors 05/27/2005
"' Signature of Reporting Person Date
Reminder Report on a separate fine for each class of securities beneficially owned directly or indirectly.
• i f the form is filed by more than one reporting person , see Instruction 4 (biv).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient . see Instruction 6 for procedure.
Persons who respond to the collection of Infornlatlon contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 32
SEC Form 4
FORM 4
Check this box If no longer subject
0
to Section 18 . Form 4 or Form 5obligations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0287
Expires: January 31,2008
Estimated average burden
hours per 0.5response
1. Name and Address of Reporting Person' 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person (s) to Issuer
CUTERA INC [ CUTR ] (Check all applicable)CONNORS KEVIN P Director X
10% Owner
X Officer (give tale Other ( specify
(Last) (First) ( Middle) 3. Date of Earliest Transaction (MondVDaY!Year) below) below)
07/25/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.4. It Amendment , Date of Original Filed (Month/DayNear) 8. Individual or Joint/Group Fling (Check
(Street ) Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
.................. Form filed by More then One ReportingParson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Instr. 3 ) R Transaction 2A. Dammed 3. 4. Seouriehs Acquired (A) 5. Amount of & 7. NatureDate Execution Date, Transaction or Disposed Of (D) (Intr. Securities Ownership of Indirect(MonthiDay/Vear) if any Code (Intr. 3.4 and 5) Beneficially Form: Beneficial
(Mont lDeyfYesr) 8) Owned Direct (D) OwnershipFollowing or Indirect (Intr. 4)eported
R(1) (Intr. 4)
(A) menTransCoda V Amount or Price (a) (Inap, 3
(D) and 4)
Common Stock 07/25/2005 07/25/2005 s' I 1 5,000 D $18.48 247,732 D
1. Title of 2. 3. Transaction 3A. Deemed 4. 5. 0. Date Exercisable and T. Title and 8. Priam of V. Number 10. 11 . NatureDerivative Conversion Do* Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MontlWsylYear) if any Cede ( Intr. of (Mont /Day/Yaar) Securities Security derivative Form : Beneficial(Intr. 3) Price of (Month/Day/Year) 8) Derivative Underlying (instr. 5) Securities Direct (D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof(D) Transaction(Intr. 3.4 (s) (Intr. 4)and 5)
Amountor
NumberDate Expiration of
Cods V (A) (0) Exercisable Date Title Shares
Explanation of Responses:
1. The sale reported on this Form 4 was etfeeted pursuant to a Rule 10b5-I Sales Plan adopted by the reporting person on May 25. 2005
/s/j(eyin P. Connors 07/26/2005
'• Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form Is filed by more than one reporting person , see Instruction 4 (b)(v).
- Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 7811(a).
Note : File three copies of this Form, one of which must be manually signed . If space Is Insufficient , See Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 33
SEC Form 4
FORM 4
Check this box if no longer subjed
0
to Section 19. Form 4 or Form 5obliga tions may centirme. SeeInstruction 1(b)-
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWaahingtot , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1834, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0267
gip: January 31,20os
Estimated average burden
hours per0.5response
1. Name and Address of Reporting Person2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer
CUTERA INC [ CUTR ] (C r^^)CONNORS KEVIN P X Directo X 10% OwnerX Officer (give title Other ( specify
(Lost) (First) (Middle ) 3. Date of Earliest Transaction (Month/Day/Year) below) below)
07/28/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amendment , Date of Original Filed (MontlWayNear) 6. Individual or Join1/Group Filing (Check
(Street) Applicable Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Instr . 3) 7. Transaction 2A, Deemed 3. 4. Securities Acquired 6. Amount of 6 T. NatureDate Execution Date, Transaction (A) or Disposed Or (D) Securities Ownership of Indirect(MonthlDy?Yesr) N any Code (Intr. (instr. 3,4 and 6) Beneficially Form : Beneficial
(MomtWsylYear) 0) Owned Direct ( D) OwnershipFollowing or Indirect ( Intr. 4)Reported (I) (Instr, 4)
(A) e onTCoda V Amount or Pries (s) pnstr. 3
( D) and 4)
Common Stock 07/28/2005 07/28/2005 S t 5,000 D $18.5 1 242,732 D
1. TWO of 2 3. Transaction 3A. Deemed 4. 5. 6. Date Exercisable and 7. Title and 8. Price of 9. Number 10. 11. NatureDerivative Conversion Data Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonthlDaylvear) If any Code (Intr. of (Mont /DayiYear) Securities Security derivative Form : Beneficial(Intr. 3) Price of (MonthiDaylyear) 8) Derivative Underlying (Intr. 5) Securities Direct ID) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3. 4 (s) (Intr. 4)and 5)
Amountor
NumberDab Expiration of
Code V (A) (0) Exercisable Data This Shares
Explanation of Responses:
1. The sale reported on this Form 4 was effected pursuant to a Rule 10b5-1 Sales Plan adopted by the reporting person on May 25. 2005
/a/ Ke P. Connors 07/28/2005
" Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
" If the form is Ned by more than one reporting person, see Instruction 4 (b)(v).
- Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 76ff(a).
Note: File three copies of this Form, one of which must be manually signed . If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P 34
SEC Form 4FORM 4
Check this box it no longer aub)sct to
0
Section 10 . Fonn 4 or Fonn 5obligations may continue. SeeInstniction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Saprdies Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
=umber 7235.0287
Expires January 31, 2000Eatimaled average burden
hours per o.6response
1. Name and Address of Reporting Person 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERA INC [ CUTR ] (Check all applicable)SANTILLI RONALD J Director 10% Owner
Officer ( ive title Other ( s ecifgX p y
( Last) (First) ( Midrib) 3. Date of Earliest Transaction (MonthlDsylYew ) bed) below)
07/28/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amendment, Date of Original Filed (MonUVDay/Year) S. Individual or Joint/Group Filing (Check Applicable
(street )Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-De ivative Securities Acquired, Disposed of, or Beneficially =ad
1. Title of Security (Imrtr. 3) 2. Transaction 2A. Deemed 7. 4. Securities Acquired (A) or 5. Amount of S. 7. NatweDale Execution Date, Transaction Disposed Of (D) linear, s, 4 Securities Ownership of Indirsot(MonthlDaylysar) S any Coda (InsV. and 8) Beneficially Form: Beneficial
(MontMlsyIY.sr) 8) Owned Direct (0) OwnershipFollowMq or Indirect (Insp. 4)
(A) Reperud (1) (Intr. 4)Cods Y Amount or Price Trsnsso8on(s)
(D) (Iostr. 3 and 4)
Common Stock 07/28/2005 07/28/2005 10,000 A $5.5 12,676 D
Common Stock 07/28/2005 07/28/2005 s t z 1 10,000 D $20.0196 2,676 I)
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants opgans , convertible securlt es)
1. Title of 2 . 3. Transaction 3A. Deemed 4. 5. Number a. Onto Exercisable and 7. Title and Amount S. Price of a. Number 10. 11. NatureDerivative Conversion Data Execution Data, Transaction of Expiration Date of Securities Derivative of Ownership of Indirectsecurity or Exercise (MontlDeyIYaar) N any Coda (Intr. Derivative (Month/Myl fear) Underlying security derivative Form: Bensnoial(Intr. 3) Price at (MordlWay/Yaer) a) Securities Derivative Security (Intr. 5) securities Direct (D) Ownership
Derivative Acquired (Intr . 3 and 4) Beneficially or Indirect (mate. 4)Security (A) or Owned (I) (Insp. 4)
I. Options vest according to the following schedule 1.4 upon the date exercisable, and 1.48 per month thereafter
2. The sale reported on this Furor 4 was effected pursuant to a Rule 1005-1 Sales Plan adopted by the repnning person on May 29. 2005
/s/ Ronald J. Santilli 08/01/2005
Signature of Reporting Person DateReminder : Report on a aeperete line for each class of securities beneficially owned directly or indirectly.
" If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
- Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S .C. 1001 and 15 U.S.C. 78ff(a).Note: File three copies of this Form, one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Inforrnaton contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 35
SEC Form 4
FORM 4
Chock this box if no longer subject to
0
Section 18 . Farm 4 or Farm 5
btiti on 1continue, Sea
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D.C. 20649
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(5) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
01111119 Numbs 3235.0287
Expinc January 31, 2008
Estm.Md average burden
hours per 0.5respanss
1. Name and Address of Reporting Peratxi 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERA INC [ CUTR ] (Chads all applicable)SANTILLI RONALD J Director 10% Owner
07/29/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amendment , Date of Original Filed (MoridVDay/Year) 6. Individual or Join(/Group Filing (Check Applicable
(Street) Line)
BRISBANE CA 94005 X Form filed by one Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivsdve Securiges Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3 ) 4. Transaction 2A, Deemed 3. 4. Securities Acquired (A) or 8, Amount of I. T. NatureDaft Execution bats, Transaction Disposed Of (0) pnstr. 3.4 Securities Ownership of Indirect(MonthlDayNwr) If any Cods (Ines'. and 5) Beneficially Form: Beneficial
(MonttIDayffear ) 5) Owned Direct ( D) OwnershipFollowing or Indirect (Inca. 4)
(A) Reported (1) (Intr. 4)Cods V Amount or Price Trsnsea on(e)
(D) (Intr. 3 and 4)
Common Stock 07/29/2005 07/29/2005 M 10,000 A $5.5 12,676 D
Common Stock 07/29/2005 07/29/2005 SO) 10,000 D $20.975 2,676LL
1. Title of 2. S. Transaction 9A, permed 4, 5. Number d. Date Exercisable end 7. Title and Amount s. Price at 8. Number 10. 11 . NatureDerivative Conversion Data Execution Dap, Transaction of Expiration Daft of Securities Derivative of Ownership of IndirectSecurity orExsn:ia (MontWsylyear)
I. Options test according to the following schedule. 1.4 upon the date exercisable, and 1/48 per month thereafter.2The sale reported on this Form 4 was effected pursuant to a Rule I 0b3-I Sales Plan adopted by the reporting person on May 29. 2005.
/s Ronald J. Santilli 08/02/2005" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly," If the form is filed by more than one reporting person, we Instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ft(a).Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction B for procedure.Persons who respond to the collection of Information contained In this form acs not required to respond unless the form displays a currently valid OMB Number.
P 36
SEC Form 4FORM 4
Check ads box if no longer sub)ect In
0
Section IS . Form 4 or Form SObligations may continue. SanInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(e) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
J^j OMB APPROVAL
OMB Number. 3235-0287
Expires : January31, 2008
Estimated average burden
hours per 0.5reopen"
Name and Address of Reporting Person12 . Issuer Name end Ticker or Trading Symbol 5 . Relationship of Reporting Parson(s) to Issuer
.CUTERA INC [ CUTR ] applicable)(Check
°SANTILLI RONALD J 10% owneronorOfficer (give title other (specifyX
(Last) (First) (Middle) 3. Data of Earliest Transaction (MonthiDay/Year) below) below)
08/01/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD.4. N Amendment, Date of Original Filed (MoMfvpey/Vear) e. Individual or Joinl/Group Filing (Check Applicable
Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Tltte of Security (Insf. 3) 2. Transaction 2A. Daamad 3. 4. SeourllNs Acquired (A) or S. Amount of a. 7. NatureBe,. Execution Daft, Transaction Disposed Or (D) pnstr. 3,4 S ecuddes
Ownershipof Indirect
(MonpdDayrveer) If any Cods (Intr. and 5) BeneficilNy Form: Direst Bansnclal(MonthlDSylYaar) s) Owned (D) or Ownershipip
Following dlnetIn ( I)(A) Reported (Insir.4)
Cads V Amount or Price Tranwetlan(s)(0) Pnstr. 3 and 4)
Common Stock 08/01/2005 08/01/2005 M 10.000 A $5.5 12,676 D
Common Stock 08/01/2005 08/01/2005 s0 10,000 D $22.03 2.676 D
Tabi 11- Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g.. Pub, calls, warrants , options, convertible securities)
1. Title of 2. 3. Transaction 3A. Deemed 4. S. Number a. Data Examinable and 7. TNN and Amount a. Price of D. Number 10. 11. NatureDerivative Convention Dais Execution Data, Transaction of Expiration Data of securities Derivative of Ownership of IndirectSecurity or Exan:isa (MondhDaylYar) N any Cods (1tuNr. Derivative (Mont iOay/Year) Underlying security derivative Form ; 9awrlclal(Intr. 3) Price of (MonthiDay/ywr) s) Securities Derivative Security (Intr. 5) Securities Direct (0) Ownership
Derivative Acquired (Irotr. 3 and 4) Beneficially or Indirect pnatr. 4)Security (A) or Owned (1) (Intr. 4)
1, Options vest according to the following schedule. 1.4 upon the date exercisable, and 1,'48 per month thereafter.
2, The sale reported on this Form 4 was effected pursuant to a Rule I Ohs-1 Salts plan adopted by the reporting person on May 29, 2005.
/s/ Ronald J. S ti li 08/0312005
" Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form Is filed by more than one reporting person , we Instruction 4 (b)(v).
- Intentional miaatetements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If specs is insufficient, see Instruction 8 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 37
SEC Form 4
FORM 4
Chock tits box If no longer subjectto Section 18. Fonn 4 or Form 5obligations may continue. SooInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 9235-0287
Expires: January 91,2008
Estimated own" burden
hota par 0.5response
Name and Address of Reporting Person'12• issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person (s) to Issuer
bl.CUTERA INC [ CUTR ]
e)(Check all applica
CONNORS KEVIN X Director X 10% OwnerOfficer (give tits Other (specifyX
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonthlDaydVear) below) below)
08/03/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (Month/Day/Vear) S. individual or Joint(Group Filing (Check
Applicable Line)(Street)
X Form flied by One Reporting PersonBRISBANE CA 94005
Form filed by More than One Reporting.... . . .....
Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficia l ly Owned
1. Title of Security (Intr. 3) R , Transaction 2A . Deemed 7. 4. Securities Acquired (A) 5. Amount of 6. T. Nature
Date Execution Data, Transaction or Disposed Of ( D) (Intr. 3, Securities Ownership of Indirect
(MondUDsylVesr) C any Code gnatr. 4 and 6) Beneficially Form: Beneficial(Month1DaylYMr) 8) Owned Direct ( D) ownership
Following or Indirect (Intr. 4)Reported (I) (tour. 4)
(A) TCods V Amount or Price (a) (Irgpc 3
(D) and 4)
Common Stock 08/03/2005 08/03/2005 S 708 D s22.2 242,024 D
Common Stock 08/03/2005 08/03/2005 S 6,177 D $22.2 235,847 D
Common Stock 08/03/2005 08/03/2005 S 2,800 D $22,3011 233,047 D
Common Stock 08/03/2005 08/03/2005 S 2,243 D $22.2 230,804 D
Common Stock 08/03/2005 08/03/2005 S 100 U s22.35 230,704 D
Common Stock 08/03/2005 08/03/2005 S 72 D $22.36 230,632 D
Common Stock 08/03/2005 08/03/2005 S 1,400 D s22.3314 229,232 D
Common Stock 08/03/2005 08/03/2005 S 1,500 D $22.3707 227,732 D
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more then one reporting person , see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78tf(a).
Note; File three copies of this Form, one of which must be manually signed . If space is insuff dent, see Instruction 8 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 38
SEC Form 4
FORM 4
Check this box if no larger subjrat
0
to sec6an16 . Form 4or Fonn5obligations may oonanue. Seeinstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE
COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number: 3235-0287
January 31,Expires: 2006
Estimated avenige burden
hour' par 0.5response
2. issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person ( s) to Issuer1. Name and Address of Reporting Person
CUTERA INC [ CUTR)(Check all applicable)
CONK RS KEVIN P X Director X 10% OwnerOfficer ( give title Other (specifyX
(Last) (First) ( Middle) 3. Date of Earliest Transaction (Month/DaylVear) below) below)
08/04/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (Month/Day/Year) 6. Individual or JoinVGroup Filing (Check
Applicable Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (( nstr. 3) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) 5. Amount of e. 7, NatureDate Execution Data, Transaction or Disposed Of (D) (Intr. Securities Ownership of Indirect(Mon hiDayrvear) R any Code (Intr. 3, 4 and 5) Beneficially Form : Beneficial
(MonthlDaylyesr) 8) Owned Direct ( 0) OwnershipFollowing or Indirect (Intr. 4)
d (I) gnat-. 4)
(A) onranseoCods V Amount or Prig (s) (Intr. 3
(D) and 4)
Common Stock 08/04/2005 08/04/2005 S( l) 5,000 D s21.99 222,732 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transactionpnstr. 3 . 4 (a) (Intr. 4)and 5)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Data
Title
Shares
Explanation of Responses:
I The :ale reported on this Form J was effected pursuant to a Rule t ribs- I Soles Plan adopted by the reporting person on May 25 20(15
/s/ Kevin P. Connors 08/05/2005
" Signature of Reporting Person Date
Reminder : Report on a separate line for each class of securities beneficially owned directly or Indirectly.
If the form is flied by more then one reporting person , see Instruction 4 (b)(v).
intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed . If space is Insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 39
SEC Form 4
FORM 4
Check this box it no longer Subject
0
to Section 16. Form 4 or Form 5obligations may continue. SeeInabuC6an 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington . D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(e) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3285.0287
Eames: January 31,
Estimated average burden
hours W 015response
2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person ( s) to Issuer1. Name and Address of RaporMny Peraori
CUTERA 1K [ CUTR ] (Check all applicable)CO RS KEV X Director X 10% Owner
Officer (give we Other (specifyX
(Last) (First) (Middle ) 3. Date of Earliest Transaction (Month!DayPfear) below) below)
08/11/2005 President and CEOC/O CUTERA, INC,
3240 BAYSHORE BLVD ................ 4. If Amendment . Date of Original Filed (Month/Day/Veer) 6. Individual or Joint(Group Filing (Check
Applicable Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form Tiled by More than One Reporting
Person
(City) (State) (Zip)
Table I • Non -Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security ( Instr. 3 ) 2. Transaction 2A. Deemed & 4. Securities Acquired (A) 6. Amount of S. T. NatureDate Execution Date, Transaction or Disposed Of (D) (intr. Securities Ownership of Indirect(MonthlDayNear) If any Code (Instr. 3, 4 and 5) Beneficially Form : Beneficial
(MoedWay/vear) 8) Owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)
ftPorl d(I) (Inatr. 4)
(A) enT aVCede
T
Amount or Price (s) (intr. 3
I( D) 00,14)
Common Stock 08/11/2005 08/11/2005 s"' 5,000 D $21.87
I The sale reported on this Form 4 was effected pursuant to a Rule I0b5- I Saks Plan adopted by the reporting person on May 25.2005
/s/ Kevin P. Connors 08/11/2005
"• Signature of Reporting Person Date
Reminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form Is filed by more than one reporting person, see Instruction 4 (bXv).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 7Bff(a).
Note: File three copies of this Form, one of which must be manually signed . If space Is Insufficient , see Instruction B for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 40
SEC Form 4
FORM 4
Check this box If no longer subieet
0
to Saclion 16. Form 4 or Form 5obligations may continua. Seainstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington . D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 1 e(a) of the Securities Exchange Act of 1934 , Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3236-0287
Expires:January 31,
2008
Estimated average burden
hours per 0.5response
2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person ( s) to Issuer1. Name and Address of Repenting Person
^L+^ERAINC f
L
CUTR 1
1
(Check all applicable)
CONNORS KEVIN P X Director X 10% Owner
Officer (give title Other (specifyX
(Last) (First) (Middle ) 3. Date of Earliest Transaction (MonttVDay/Year) below) bed)
08/18/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD ._..... . 4. If Amendment , Data of Original Filed ( Month/Day ear) 6. Individual or Joint/Group Filing (Check
Applicable Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (State) (zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security ( Instr. 3) 1 Transaction 2A. Doomed 3. 4, Securities Acquired (A) e, Amount of Q. T. Nature
Daft Execution Date, Transaction or Disposed Of (D) (Intr. Securities Ownership of Indirect(MonthlDayrvear) If any Code (Insrr, 3 , 4 and 5) Beneficially Form: Benefloial
(MonttuDsy/yesr) a) Owned Direct (D) OwnershipFollowing or Indirect (Intr. 4)Reported
(q(Instr. 4)
(A) TransactionCode V Amount or Price (a) (ItgK, 3
(D) and 4)
Common Stock 08/18/2005 08/18/2005 s' 5,000 D $21.08 212,732 D
Daft Expiration ofCode V (A) (D) Exercisable Data This Shams
Explanation of Responses:
1. The sate reported on this Form 4 was effected pu,suant to a Rule IOb5-1 Sales Plan adopted by the reporting person on May 25 2005
/s/ Kevin P. Connors 08/18/2005
•" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form is filed by more than one reporting person . see instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U .S.C. 78ff(a).
Note : File three copies of this Form, one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persona who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P41
SEC Form 4
FORM 4
Check this box if no longer sub(ed to
0
Section 16. Faun 4 or Farm 5obligations may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16( a) of the Sec rities Exchange Act of 1934, Section 17(5) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the kwcetment Company Act of 1940
OMB APPROVAL
0MB Number. 323546287
Expires_ January 31,2005
Eslimsgd average burden
hours per 0.5reopen"
Name and Address of Reporting Peraori12 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
.CUTERA INC [ CUTR ]
(Check all applicable)
CQNNORS KEVIN P X Director X 10% OwnerOfficer ( ive title Other ( specifygX
(Last) ( First ) ( Middle) 3. Date of Earliest Transaction (Month/Day/Vear) bed) below)
08/25/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.Date of Original Filed (Month/Day/Vear )4 If Amendment 5. Individual or Joint/Group Filing (Check Applicable. .
Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (state) (zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) L Transeedon 2A. Deemed 3. it, Securities Acquired (A) or S. Amount of S. 7 . NatureDate Execution Dag, Transaction Disposed Of (0) Qnsb, $,4 Securities Ownership of Indirect(MonMMDaylYesr ) Nany Coda (Intr. and 5) eenefblally Form; Beneficial
(MontivDaylYesr) s) Owned Direct ( D) OwnershipFollowing or Indirect (mats. 4)
(A) RaperMd (I) (Intr. 4)Coda V Amount or Price Trenssstlon($)
(D) (meta, 3 and 4)
Common Stock 08/25/2005 08/25/2005 M 5,000 A $0.1 217,732 D
Common Stock 08/25/2005 08/25/2005 s" t 5,000 D $22.7 212,732 D
Common Stock 08/25/2005 08125/2005 S 15,000 D $23 197,732 D
Common Stock 08/26/2005 08/26/2005 S 400 D 523.5 197,332 D
Common Stock 08/26/2005 08/26/2005 S 750 D $23.46 196,582 D
Common Stock 08/26/2005 08/26/2005 S 2,200 D $23,3009 194,382 D
Common Stock 08/26/2005 08/26/2005 S 200 D $23.24 194,182 D
Common Stock 08/26/2005 08/26/2005 S 8,535 D 323 185,647 D
Common Stock 08/26/2005 08/26/2005 S 50 D $23.3 185,597 D
Common Stock 08/26/2005 08/26/2005 S 15 D $23 185,582 D
Common Stock 08/26/2005 08/26/2005 S 7,850 D 523.1952 177,732 D
1. Title of 3. i , Transaction 3A. Destined 4. 5. s. Date Exercisable and 7. Title and s . Price of s. Number 10, 11 . NatureDerivative Conversion Dow Execution Data, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity pnstr. 3) or ExsnNas (MondJDaylvaar) M any Code Onatr. of (Mon6YDSy/Year) Securi ties Security derivative Form: Beneficial
Pr ce of (MondNDaylvear) s) Derivative Underlying (Intr. 6) Securahs Direct (D) OwnershipDerivative securities Derivative Beneficially or Indirect (Intr. 4)Security Acquired Security (Intr. Owned (q (Irate. 4)
(A) or 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3,4 (a) (lasts. 4)and 5)
Amountor
NumberData Expiration at
Coda V (A) (D) Exercisable Data Title Shares
Explanation of Responses:
1. The sale reported on ibis Form 4 was en'eutcd pursuant to 4 Rule l%3-1 Sales Plan adopted by the reporting person on May 25, 2005.
/s/ Kevin P. Connors 08/29/2005
" Signature of Reporting Person Data
Reminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person , see Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See IS U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is Insufficient. see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 42
SEC Form 4
FORM 4
Check this box if no bnpsr sullied to
0
Section 16 . Form 4 or Form 5obligations may continue. SaeInstruction 1(5).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0287
Exams, January 31.2008
Estimated average burden
hours per0-6response
1. Name and Address of Reporting Person2 . Issuer Name and Tfter or Trading Symbol S. Relationship of Reporting Person( s) to Issuer
CMRA INC [ CUTR J (Check all applicable)
CONNQRS KEVfN P X 10% Owner
Officer (give title specifyOt
(Last) (First) (Middle ) 3. Date of Earliest Transaction (MonthrgayNear)
^jX below)
09/01/2005 President and CEOC/o CUTERA, INC.
3240 BAYSHORE BLVD.Dote of Original Filed (MonthlDayNear)If Amendment4 S. Individual or JointGroup Filing (Check Applicable
(Street)
,.Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
1. Title of Security (Intr . 3) 0. Transaction 2A. Deemed 3. 4. Securities Acquired (A) it. Amount of s. Y. NatureData Execution Data, Transaction or Disposed Of I D) (Intr. 3, SecurHNs Ownership of Indirect(Mont iDaylyssr) If any Code (Intr. 4 end S) Beneficially Form; Beneficial
(MonthlOaylysar) s) Owned Direct (D) or OwnershipFollowing Indirect (1) (Intr. 4)
(A) Reported pnstr.41Cads V Amount or
PriceTransaeti Ms)
(D) (mate , 3 and 4)
Common Stock 09/01/2005 09/01/2005 M 5,000 A $0.1 182,732 D
Common Stock 09/01/2005 09/01/2005 s(1 5,000 b 324.52 177,732 D
1. Title of 2. 3 . Transaction 3A. Ossified 4, 5. Number 8. Dal* Exstaisable and T. Title and 8. Price of 8. Number 10. 11. NatureDerivative Conversion Data Execution Data. Transaction of Expiration Date Amount of Dsrivsdve of Ownership of Indirectsecurity or Exercise ( MonthlDaylv.sr ) it any Cod,(Insa', Derivative (MonWDaynreor) Securities Security derivative Form; Beneficial(Intr. 3 ) Price of ( MonthlDaynfear) 8) Securities Underlying (Intr. 5 ) Securities Direct (D) Ownership
Derlvsew Acquired Derivative Security Beneficially or Indirect (Intr. 4)Security (A) or (Inst, . 3 and 4) Owned (1) (Inatr, 4)
Disposed Followingof (D) Reported(Intr. 3.4 Transactionand S) (s) linear. 4)
Amountor
NumberDaa Expiration of
CaN V (A) (D) Exrrolsable Date Title Shares
EmployeeStockOption $0.1 09/01/2t1o5 M 5,000
09/01/2000t s ^ 091 1 3 /2009 Common
51000 so 720,000 D(Right to
Stock
Buy)
Explanation of Responses;
I The tale rationed on tint Form 4 was ctTected pursuant to a Rule I ObS-I Sales Plan adopted by the reporting person on May :5. 2005
2. Options vest according to the following schedule : I!4 date exercisable , and 1/48 per month thereafter.
/s/ Kevin P. Connors 09/06/2005
•• Signature of Reporting Person DataReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File Was copies of this Form. one of which must be manually signed. R space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 43
SEC Form 4
FORM 4
obligationsns lmay continue. SeeInstruction
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Check this box if no longer subjsd to
0
Section 16 . Fonn 4 or Fonn 5
Washington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16( s) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0287
Expires_ January 31,2008
Estimated swrspU burden
hours par0.6respunt'
1. Name and Address of ReportIN Person2. Issuer Name and Ticker or Trading Symbol S. Relationship of Reporting Person( s) to Issuer
CUTERA_INC [ CUTR ]
l
k al(Chec)CONNORS KEVIN P
ll
irector X 10% OwnerXspecifyOfficer (gore title Ott;X
(Last) (First) (Middle ) S. Date of Earliest Trerlsaction (MonWDay/Year) below)
09/08/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.^. Date of Original Filed (MonthlOay/Year)If Amendment4 Individual or Joint/Group Filing (Check Applicable6T
(Street)
,. .
Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (zip)
Table I - Non'Der(vattve Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) 2. Transaction 7A. Doomed 3. 4. Securitlss Acquired (A) 8. Amount of 8. T. NatureDate Execution Dote, Transsativn or Disposed Of (0) (mutt. Securities Ownership of Indirect(MonthlDaylVear) N any Cede (meta. 3, 4 and 5) Beneficially Form : Beneficial
(MonpMWyfv.sr) s) Owned Direct (D) or OwnershipFollowing Indirect ( I) (Inst.. 4)
(A) Reported (Inat,.4)Code Y Amount or Prigs Transaction(s)
(D) poste 3 and 4)
Common Stock 09/08/2005 09/08/2005 M 5,000 A $0.1 182,732 D
Common Stock 09/08/2005 09/08/2005 s 1 I 1 5,000 D 525.3 177,732 D
1. Tian of 2 . 3. Transaction 3A. Deemed 4. 8. Number 6. Data Exercisable and T. Tide and I. Price of 0. Number 10, 11, NatureDerivative Conversion Date Execution Date, Transaction of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise (MontiWDayNear ) If any Cods (Incur. Derivative (MondhDeylvsar) Securities Security derhm" Form: Beneficial(Instr . 3) Price of (Mont IPsylyar) 4) securities Underlying (Intr. 5) Securities Direct ( D) Ownership
Derivative Acquired Derive" Security Beneficially or Indirect (Intr. 4)security (A) or (Intr. 3 and 4) Owned (1) (Instr. 4)
I The sale reported on this Form 4 was effected pursuant to a Rule 1065 -1 Sales Plan adopted by the reporting person on May 25, 2005
2 Options vest according to the following schedule . 1/4 date exercisable . and 1:48 per month thereafter.
/s/ Kevin P. Connors 09/09/2005
" Signature of Reporting Person DateReminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
It the form is filed by more than one reporting person , see Instruction 4 (bXv).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 13 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed . If space Is insufficient , see Instruction a for procedure.
Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 44
SEC ForTn 4
FORM 4
Chock this box if no bnger subject toSection 18. Form 4 or Form 8obligations may continua. SeaInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0787
Expires:January 31.
2094
Estimated average burden
hours per 0.5response
2. Issuer Name and Ticker or Trading Symbol 6. Relationship of Reporting Person( s) to Issuer1. Name and Address of Reporting Person
CUTERA INC [ CUTR ](Check all applicable)
_CONNORS1VIN P X Director X 10% Owner-.__...... 1..,__ Officer ( give title Other ( specify
(Last) (First ) ( Middle) 3. Date of Earliest Transaction (MontllDaYNear) X below) below)
09/15/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. F Amendment , Date of Original Filed (MonWDay/Yeer) 6. Individual or Joint/Group Filing (Check Applicable
Lam)(Street)X Form filed by One Reporting Person
BRISBANE CA 94005Form filed by More than One Reporting
......... .Person
(City) (state) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Seneltclelly Owned
1. Title of Security (Intr. 3) L Transaction 4A. Deemed 3. 4. Setcurleea Acquired IA) 5. Amount of S. Y. NatureData Execution Data, Transaction or Disposed Of (D) (Intr . 3, SeOurtHss Ownership of Indirect(MonehDaylysar) If any Code pnatr. 4 and 5) Beneficially Form: Beneficial
(MengdDayl ear) 8) Owned Direct ( D) or OwnershipFollowing Indirect (q (Intr. 4)
(A) Reported (1111141" 4)Cede V Amount or Price Tnmaaatfon(s)
(D) (intr. 3 and 4)
Common Stock 09/15/2005 09/15/2005 5,000 A $0.1 182,732 D
Common Stock 09/15/2005 09/15/2005 SI2I 5,000 D $25.39 177,732 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options , convertible securities)
1. Tile of Y . 3. Transaction 3A. Deemed 4. S. Number e. Date lxarcisitru and 7. Tide and 8. Price of 8. Number 10. 11. NatureDerivative Conversion Date Execution Date, Transacthm of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exorcise ( MonpYDayn'sar) N any Code (Intr. Derivative ( MonthiDay/Year) securities Security derivative Form; asnafloisl(Instr. 3) Price of (MonthiDay!Year ) 8) securities Underlying (Intr. 5) Securities Direct (D) Ownership
Derivative Acquired Derivative Security BenefitMlly or Indirect (Instr. 4)Security (A) or (Intr. 3 and 4) Owned (I) (Intr. 4)
Disposed Following
Of (D) Reported(Intr. 3.4 Transactionand 8) (a) (Inatr. 4)
Amountor
NumberDots Expiration of
Coda V (A) (D) Exercisable Data Title Shares
EmployeeStockOption $0.1 09/15/2005 M 5.000
09/01/200009/13/2000 Common
Stook5,000 00 710.000 D
(Right toBuy)
Explanation of Responses:
I Options vest according to the rallnwing schedule 14 dare exercisable, and 1:48 per month thereafter.
2. The .sale reported on this Form 4 was effected pursuant to a Role 1ob/-1 Sales Plan adopted by the reporting person on May 25, 2005.
/s/ Kevin P. Connors 09/19/2005
"" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
" If the form is filed by more than one reporting person, see Instruction 4 (bxv).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 45
SEC Form 4
FORM 4
Check this box it no longer subject to
0
Section 18. Form 4 or Form 5oblipidens may continue. SeeInsWction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington . D.C. 20548
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 11734, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0287
Expires:January 31,
2005
Estimated average burden
hours per 0.5response
1 Name and Address of Reporting Person2- Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
.CUTERA INC [ CUTR ] (Chocit all applicable)
C Q S KEVIN P DiredarX X 10% Owner
Officer (give title Olhsr ( specify
(Last) (First) ( Middle ) 3. Date of Earliest Transaction (MonthlDaylVear)
Xbelow ) below)
09/22/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .--- Date of Original Filed (MonthlDayfYear)4 If Amendment Individual or Joint/Group Filing (Check ApplicableS
(Street)
. , .
Lam)
BRISBANE CA 94005 X Form filed by One Reporting Person
.. ..... Form filed by More than One Reporting..Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title at Security ( Instr. 3) P, Trsns4otian IA. Deemed 4. 4, S.curt8es Acquired (A) 5. Amount of 6. 7. NatureDate Execution Date, Transaction or Disposed of (D) IInstu 3 , Securities Ownership of Indirect(MonlWDeyrYsar) N say Code ( Inste. 4 and 6) Beneficially Form ; Beneficial
(MonthIDayiYear) 6) Owned Direct ( D) or OwnershipFollowing Indirect (1) (Intr. 4)
(A) Reported (Inste.4)Code Y Amount or Price Transaction(s)
(D) (Intr. S and 4)
Common Stock 09/22/2005 09/22/2005 M 5,000 A $0.1 182,732 D
Common Stock 09/22/2005 09/22/2005 s(2) 5,000 D s23.33 177,732 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g., puts, calls, warrants, options , convertible securities)
1. Tole of 2. 3 . Transaction 3A. Deemed 4. S. Number 8, Date Exercisable and 7. Tile and S. Price of I. Number 10. 11. NatureDerivative Conversion Date Execution Dots, Transaction of Expiration Dots Amount of Derivative of Ownership of IndirectSecurity or Exercise (MonMWsylYear) if any Code lints. Derivative (MonthlDayryear ) Securities Security derivative Form : Beneficial(Intr. 3 ) Price of (MontlMaylYear) 8) Securities Underlying (Intr. 5) Securities Direct (D) Ownership
Derivative Acquired Derivative Sscurlty Beneficially or Indirect (intr. 4)Security (A) or (Intr. 3 and 4 ) Owned (1) (Irate. 4)
I Options vest according to the following schedule, 114 date exercisable , and 1148 per month thereafter.
2, The sale reported on this Form 4 was affected pursuant to a Rule IObS-1 Sales Plan adopted by the reporting person on May 25, 2005.
/s/ Kevin P. Connors 09/23/2005
"' Signature of Reporting Person DateReminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
It the form is filed by more than one reporting person , see Instruction 4 (b)(v).
'" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 46
SEC Form 4
FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION OMB APPROVALWashington , D.C. 20649
OMB Number 3236-0287
Exams. January 31,
0
Chock this baxIno longer sub(epto STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP 2008Section 16 . Form 4 or Form 6 Estimated average burdenobligations may continue. SimInstruction 1(b). Filed pursuant to Section 19(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility response 0.5
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
1. Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( a) to Issuer
SANTILLI RONALD Q1 RA INC [ CUTR ] (Chock all applicable)Dhactor 10% Owner
_...-----.r_.._....._....__..._^_ T ..._...-........_ X OOflicceer (give Idle Other )specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (MonUVDay/Year)
C/O CUT)~RA, INC.10/3112005 CFO & VP of Finance and Admin.
3240 BAYSHORE BLVD.4. If Amendment, Date of Original Filed (MonttlDay/Vear) B. Individual or JoInt/Group Filing (Check Applicable
(Street) Lam)
BRISBANE CA 94005 X Form fled by One Reporting Person
Form fled by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Seneiclally Owned
1. Title of Security (Ins*r. 3 ) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) S. Amount of S. 7. NatureData Execution Date, Transaction or Disposed Of ( D) gnat. 3, Securities Ownership of Indirect(MonthlDaylvaar ) it any Code (Instr. 4 and 5 ) Beneficially Form; Beneficial
(MonthIDayNaar) 8) Owned Direct (D) or OwnershipFollowing Indirect (1 ) (mate. 4)
(A) Reported finger. 4)Code V Amount or Prkv Transactlon(a)
(D) (mete. 3 and 4)
Common Stock 10/31/2005 10/31/2005 M 5,000 A $4.25 14,211 D
Common Stock 10/31/2005 10/31/2005 02) 5,000 0 326.75 9,211 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options , convertible securities)
1. Tigs of 2. 3 . Transaction 3A. Doomed 4. 5. Number 6. Date Exercisable and 7. Tile and 8. Price of a. Number 10. 11. NatureDerivative Conversion Doh F-xsoution Data. Transaction of Expiration Data Amount of Derivative of Ownership of IndireeotSecurity or Exercise ( MonthlpaytYear ) If any Code ( Intr. Dsrlwthv (MondWayWear) Sacuripas Security derived a Form! Beneficial(Intr. 3 ) Price of ( MonthlDeyrfear) 8) securities Underlying (Intr. 5) Securities Direct ( D) OwnershipDerivetiva AcquiredDerivative
Security Beneficially or indirect (Intr. 4)Security (A) or (mate . 3 and 4) Owned (I) (Intr. 4)Disposed Following01(0) Reported(Intr. 3,4 Transactionand e) (a ) (Intr. 4)
Amountor
NumberData Expiration of
Code V (A) (0) Exercisable Date TWO Shares
EmployeeStock 06/01/2003option $425 10/31/2005 M 5,000 t I / 09/07/2012 Common(Right to Stock 5,000 so 1,771 D
Buy)
Explanation of Responses:
1 Options vest according to the following schedule' 14 upon the date exercisable. and 1/40 per month thereafter,
2. The sale reported on this Form 4 was efrerted pursuant to a Rule IObS- I Sales Plan adopted by the reporting person on August 27, 2005.
/s/ Ronald J. Santilli 111.02/2005
" Signature of Reporting Person DateReminder. Report on a separate line for each class of securities beneficially owned directly or indirectly." If the form is filed by more then one reporting person , see Instruction 4 (b)(v)." Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S .C. 1001 and 15 U.S.C. 76fl(a).Note: File three copies of this Form , one of which must be manually signed . If space is insufficient , see Instruction 6 for procedure.Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 47
SEC Form 4
FORM 4
Check this box if no longer subject to
0
Section 18. Form 4 or Form 5
Inchesmay continua. Sea
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
0MB APPROVAL
OMB Number. 3235.0287
Exams. January 31.2005
Eatim.Md averses burden
hours per 0.5response
1. Name and Address of Reporting Person 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person ( s) to Issuer
CUTERA INC [ CUTR ](Check all applicable)
SANT .LI.RONALD.J Director 10% OwnerX Officer (give title Other ( specify
( Last ) ( First) (Middle ) 3. Data of Earliest Transaction (MonthlDay/Vear)below) below)
11/01/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD .4. M Amendment , Date of Original Filed (ManttVDayNeer) 6. Individual or Joint/Group Filing (Check Applicable
Line)(Street)
BRISBANE CA 94005X Form Tiled by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. TNIe of Security (In.b. 3 ) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) or 6. Amount of 5. T. NatureData Execution Dow, Transaction Disposed Of (D) (Instr. 3, 4 Securities ownership of Indbect(MonthlDayryear) If any Code pnsh. and 0) BenanclSy Form: Beneficial
(MenthlDaylYear) 6) Owned Direct (0) OwnershipFol or Indirect prrtr. 4)
(A) Reported (1) (rest,. 4)Cads V Amount or Price Transaction(s)
(D) (Iner. 3 and 4)
Common Stock 11/01/2005 11/01/2005 M 575 A $4.25 9.786 D
Common Stock 11/01/2005 11/01/2005 s12I 575 D 827.5 9,211 D
Common Stock 11/02/2005 11/02/2005 M 1,678 A $4.25 10,889 D
Common Stock 11/02/2005 11/02/2005 s 1' j 1,678 D 533,0235 9,211 D
Common Stock 11/02/2005 11/02/2005 M 2,747 A $4.25 11,958 D
Common Stock 11/02/2005 11/02/2005 0 2 ) 2,747 D $33,0235 9,211 D
Common Stock 11/02/2005 11/02/2005 M 5,000 A $4,25 14,211 D
Common Stock 11/02/2005 11/02/2005 $421 5,000 D x33.02 9,2110' D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(sap , puts, calls, warrants, options, convertible securities)
1. Titq of 2. 3. Transaction 3A. Doomed 4. 5. Number 6. Data Exercisable and 7. Title and 8. Price of 9. Number 10. 11. NatureDerivative Conversion Date Execution Date , Transaction of Expiration Dap Amount of Derivative of ownership of IndirectSecurity or Exercise (Mont IDsy/Year) It any Cede (Intr. Derivative (MonBNDaylvsar) Securities Security derivative Form: Beneficial(7nstr . 3) Price of (MonthlPay/Y eer) 8) Secud#@@ Underlying (Insp. 5) Securlt es Direct (O) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (Intr. 4)security (A) or (Intr. 3 and 4) Owned (1) pnstr. 4)
:Explanation of ResponsesI Options vest according to the following schedule 1:4 upon the date exercisable , and I/48 per month thereafter.
2. The sale reported on this Form 4 was effected pursuant to a Rule lobs-I Sales Plan adopted by the reporting person on August 27. 2005.
3 Includes 1,$35 shares acquired under the Cutera stock purchase plan on November 1, 2005
/s/ Ronald J. Santilli 11/03/2005
" Signature of Reporting Person Date
Reminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
if the form 1s filed by more than one reporting person, we instruction 4 (b)(v)-
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 16 U.S.C. 1001 and 15 U.S.C. 76f(s).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid 0M8 Number.
P 49
SEC Form 4FORM 4
Check this box if no longer subject to
0
Seedon 16 . Form 4 or Form 5obligations may eonFnus. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONVNnhinpton, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(e) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMS Number 3235-0287
Expires: January 31, 2006Estimated average burden
hours per 0 6response
1. Name and Address of Reporting Person" 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s ) to Issuer
CUTERA INC [ CUTR ] (Check apploSANTILLI RONALD J
r10% Owner
.. _.,.. _. _ . _w ...... ................... ... ......... .......... . X Officer (give title Other ( specify
(Last) (Fire ) (Middle) 3. Date of Earliest Transaction (Month/Day/Year)below) below)
11/04/2005 CFO & VP of Finance and Admin,C/O CUTERA, INC.
3240 BAYSHORE BLVD,4. If Amendment, Date of Original Filed (Month/Day/Year) 6. Individual or Joint/Group Filing (Check Applicable
(Street)Line)
BRISBANE CA 94005 X Form filed by One Reporting PersonForm filed by More than One ReportingPerson
(City) (State) (Zip)
Table I • Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Inatr. 3) 2. Transaction 2A. Deemed 3. 4. $Scu lMss Acquired (A) or 5. Amount of L 7. NatureDais Execution Date, Transaction Disposed Of (0) (Intr. 7.4 securities Ownership of Indirect(MenthfDsy/ If any Cods Poser. and 5) 9anAkMlly Form: BmNkMl
(MondWaylyeer) 8) Owned Direct (0) OwnershipFollowing or ct (Intr. 4)
(A) Rsporsd m(I) 4)Cods V Amount or Price Transaction(s)
(D) (Intr. 3 and 4)
Common Stock 11/04/2005 11/04/2005 M 15,000 A $5.5 24,211 D
Common Stock 11/04/2005 11/04/2005 S 15,000 q $34.1968 9,211 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g.. puts. calls. warrants. options , convertible securities)
1. Title of 2 . 3. Transaction JA. Deen,d 4. 6. Number 6. Date Exercisable and 7. Title and Amount i, Prlos of 9. Number 10. it. NatureDerivative Conversion Date Execution Dab, Transaction of Expiration Date of securities Derivative of Ownership of Indirectsecurity or Exercise (MonthlDaylysar) If any Cods (bee. Da lvsthnr ( Mont iDay/yesr) Underlying security dsrivatkn Form : Beneficial(Intr. 3 ) Price of (Manegpsy/Year) 5) Securities Derivative Security (Intr. 5 ) securities Direst (0) Ownership
Derivative Acquired (Intr. 3 and 4) ^Mlly or Indirect (incr. 4)security (A) or (1) (Instr. 4)
Date Expiration ofCods V (A) (D) Exercisable Date Tmv Shams
EmployeeStockOption $5.5 11/04/2005 M 15,000
09/14/2002t t , 09/24/2011 Common
Stock 15,000 so 85,000 D(Right toBuy)
Explanation of Responses:
I Options vest according to the following schedule 1.4 upon the date exercisable , and 1/4s per month thereafter
/s/ Ronald J. Santilli 11/07/2005
" Signature of Reporting Person DateReminder Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Parsons who respond to the collection of Information contained In this form am not required to respond unless the form displays a currently valid OMB Number.
P 50
SEC Form 4
FORM 4 UNITED STATES SECURITIES AND EXCHANGE OMB APPROVAL
COMMISSION OMB Number 3235-0287Washington, D.C. 20549
Expires:January 31.
zoos
Chocit this box "nolcngerst ed STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIPEstimated averageburdim
to Section 10. Form 4 or Forth 50
hours per 0.5obligations may continue. See roWn"Instruction 1(b). Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
1. Name and Address of Reporting Person2. Issuer Name and Ticker or Trading Symbol
CUTERA INC [ CUTR ]5 . Relationship of Reporting Person ( s) to Issuer
(Check all applicable)
CONNORS K_INP X Director X 1D% Owner
X Olllcer (give tfge other (specify
(Last) (First) (Middle ) 3. Date of Earliest Transaction (Month/DaylVear) below) below)
11/07/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD..-----.-...... .. ,..........----_ 4. If Amendment , Date of Original Filed (Month/Day/ear) S. Individual or Joint/Group Filing (Check
Applicable Line)(Sbeet)
X Form flied by One Reporting PersonBRISBANE CA 94005
Form tiled by More than One Reporting.- - ......... _
Person
(City) (State) (ZiP)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Inatr . 3) Z TransactionDel.(MondMayivear)
2A. DeemedExecution Date,If any(MonttuDaylyear )
3.TransactionCode (Intr.a)
4. Securities Acquired (A)or Disposed of (D) (Intr. 3,4 and 5)
5. Amount ofSecuritiesBeneficiallyOwnedFollowing
5,ownershipForm :Direct ( D)or indirect
7. Natureof indirectBeneficialownership(instr. 4)
Cods V Amount(A)or(0)
Price
ReportedTransaction(a) (Inip, 3and 4)
(I) (Intr. 4)
Common Stock 11/07/2005 11/07/2005 S 2,500 D $34.8186 185,232 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D $34.82 182,732 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $34.8212 180,232 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D s34.8649 178,982 D
Common Stock 11/07/2005 11/07/2005 S 7,500 D $34,8966 171,482 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $34.9019 168,982 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $34.9138 167,732 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D s34.95 166,482 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D 834.9598 165,232 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D s34.9676 163,982 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D $34.9745 161,482 D
Common Stock 11/07/2005 11/07/2005 S 3,750 D $34.9765 157,732 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $34.9839 156,482 D
Common Stock 11/07/2005 11/07/2005 s 3,750 D $35 152,732 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D $35.0021 151,482 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $35.0038 148,982 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.0065 147,732 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.0143 146,482 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.0266 145,232 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D 535.0332 142,732 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D $35.0626 141,482 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D $35.0718 140,232 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D 835.0818 138,982 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.0906 137,732 D
P51
Common Stock 11/07/2005 11/07/2005 S 2,500 D $35.1 135,232 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D $35.1121 132,732 D
Common Stock 11/07/2005 11/07/2005 s 5,000 D $35.115 127,732 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $35.1193 125,232 D
Common Stock 11/07/2005 11/072005 s 2,500 D s35.1297 122,732 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D $35.1604 120,232 D
Table If - Derivative Securities Acquired, Disposed of. or Beneficially Owned(e.g., puts. calls, warrants , options, convertible securiijes)
1. TIde of 2. & Transaction 3A. Deemed 4. 5. a. Oats Exercisable and 7. Me and a. Price of & Number 10. 11. NatureDerivative Conversion Dab Execution Date, Transaction Number Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise ( MonthiDaylyaar) I any Code pneit of (MonWDay/ysar) Securities Security derivative Form: Beneficial(Instr. 3) Prise of (MonthiUaylveer) B) DerivatIve Underlying (Intr. 6) Securities Direct (D) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reported0(D) Transaction(Intr. 3,4 (a) (Instr. 4)and 5)
Amountor
NumberData Expiration of
Code V (A) (D) Exercisable Dan Title Sham
Explanation of Responses:
/s/ Kevin P. Connors 1108/2005
"• Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form Is filed by more than one reporting person , see Instruction 4 (b)(v).
•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a).
Note: File three copies of this Form , one of which must be manually signed. If space is Insufficient , see Instruction 6 for procedure,
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 52
SEC Form 4
FORM 4
Check this box if no longer audjett0to Section 16 . Fonn 4 or Form 6obligations may continue. SO&Instruction 1(b).
UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(e) of the Public Utility
Holding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 8295-0287
Expires:JarNWy 81,
2008
Estimated average burden
hours per 0.5response
2 . issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer1. Name and Address of Reporting Person
CUTERA INC [ CUTR ] (Check all applicable)
CONNORS KEVIN P X Director x 10% OwnerOfficer (give title Other (specify
x(Last) (First) ( Middle) 3. Data of Earliest Transaction (MonthlDayNear) below) below)
11/07/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (Month/Day/Year) S. Individual or Joint/Group Filing (Check
Applicable Line)(Street)
X Form tiled by One Reporting PersonBRISBANE CA 94005
Form tiled by More than One Reporting_..... .._...... ........ ......,.......... ..._..... --..__.... Person
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
Title of Security (Intr . 3)1 2. Transaction 2A. Daemad S. 4. Securities Acquired (A) ti. Amount of 8. T . Nature.
Dab Execution Data, Transaction or Disposed Of (D) pnstr. 3, Securities Ownership of Indirect
(MonthlDaylyear) It any Code (Intr. 4 and 8) Beneficially Form : Beneficial(Mon thlDayNear) 8) Owned Direct ( 0) Ownership
Following or indirect (Intr. 4)Reported (1) (Instr. 4)
(A) TransactionTransactionCods V Amount or Price (a) (Intr. 3
(0) and 4)
Common Stock 11/07/2005 11/07/2005 s 2,500 D $35.1634 117,732 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.1791 116,482 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $35.2 113,982 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D s35.2453 112,732 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.2661 111,482 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D 635.3055 108,982 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D s35.3289 106,482 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D 535.3292 105,232 D
Common Stock 11/07/2005 11/07/2005 S 5,000 D 135.3303 100,232 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D $35.35 98,982 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D s35.4238 96,482 D
Common Stock 11/07/2005 11/07/2005 S 1,250 D s35.427 95,232 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D s35.4294 93,982 D
Common Stock 11/07/2005 11/07/2005 s 5,000 D $35.46 88,982 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D 635.476 86,482 D
Common Stock 11/07/2005 11/07/2005 S 2,500 D $35.5 83,982 D
Common Stock 11/07/2005 11/07/2005 s 2,500 D s35.5117 81,482 D
Common Stock 11/07/2005 11/07/2005 s 1,250 D 635.5136 80,232 D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options, convertible securities)
1. Tnh or 2. 9. Transaction JA. Doomed 4. 5. 6. Date Ex rciaable and T. Tilde and I. Price of 8. Number 10. 11. Nature
Derivative Conversion Date Execution Data, Transaction Number Expiration Date Amount of Derivative of Ownership of Indirect
Security or Exercise (MonthIbaylYsar) It any Code ( Intr. of (MoneUDaylYear) Securities Security derivative Form : Beneficial(Intr. 3) Price of (Mont iDaylYear) 8) Derivative Underlying ( Intr. 5) Securities Direct (0) Ownership
(A) or (Intr. 3 and 4) FollowingDisposed Reportedof (D) Transaction(Intr. 3,41 (a) (Intr. 4)and 6)
P 53
J Amountor
NumberDate Expiration of
Cod. J V (A) (D) Emmisable Dab
TM
Shares
Explanation of Responses:
/s/ Kevin P. Comm 11/08/2005'" Signature of Reporting Person Date
Reminder. Report on a separate line for each lass of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person. see instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ft(a).
Note: Foe three copies of this Form, one of which must be manually signed. It space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained in this form are not required to respond unless the form displays a currently valid OMB Number.
P 54
SEC Form 4
FORM 4 UNITED STATES SECURITIES AND EXCHANGE OMB APPROVALCOMMISSION OMB Number: 32355.0287Washington. D.C. 20549 January 31.Expires :
2M
Check seaban0noIcngura"e' STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP F""'"edi"°ra°"burden0
b Section 16. Farm 4 or Form 5 hours perobligations may continue. See response
o.5mstucbon 1(b)-
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public lJttltyHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
1. Name and Address of Reporting Person
CONNORS KEVIN P
Z. Issuer Name and Ticker or Trading Symbol
TER , INC [ CUTR ]S . Relationship of Reporting Person (a) to Issuer(Check all applicable)X Director X 10% Owner
(Ohre title Other ( specify
(Last) (First) (Middle)
C/O CUTERA, INC.
3240 BAYSHORE BLVD.
3- Date of Earliest Transaction (Month/Day/Year)11/08/2005
Xbelow)
President and CEO
(Street)
BRISBANE CA 94005........
(City) (State) (Zip)
4. If Amendment , Date of Original Filed (MondMay/ear) 6. Individual or JolntVGroup Filing (CheckApplicable Line)
X Form filed by One Reporting Person
Farm filed by More than One ReportingPerson
Table I - Non-Derivative Securities Acquired, Disposed of. or Beneficially Owned
1. Title of Security (Intr. 3 ) 7. TransactionOslo(MonthlDaylYssr )
2A. DeemedExecution Date.N any(MonthiDay/ysar)
7.TransactionCode (IAA.s)
4. Securities Acquired (A)or Disposed Of (0) (Intr. 3,4 and $)
s. Amount ofSecuritiesBeneficiallyOwnedFollowing
!.OwnershipForm ;Direct ( 0)or Indirect
T. Natureof IndirectSenenolalOwnership(Intr. 4)
Code V Amount(A)or
(D)
Pri ceTRmsedon(s) (Intr. 3and 4)
(I)(Intr. 4)
Common Stock 11/08/2005 11/08/2005 s 2,500 D $34.7311 77,732 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D $34.954 75,232 D
Common Stock 11/08/2005 11/08/2005 S 2,500 D $34.6 72,732 D
Common Stock 11/08/2005 11/08/2005 s 2,732 D 335.5447 70,000 D
Common Stock 11/08/2005 11/08/2005 S 2,500 D $34.5806 67,500 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D $34.5 65,000 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D $34.47 62,500 0
Common Stock 11/08/2005 11/08/2005 s 2,500 D $34.4714 60,000 D
Common Stock 11/08/2005 11/08/2005 S 2,500 D 134.8022 57,500 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D 534,755 55,000 D
Common Stock 11/08/2005 11/08/2005 s 5,000 D 134.6598 50,000 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D $35.013 47,500 D
Common Stock 11/08/2005 11/08/2005 S 2,500 D $35.1 45,000 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D s35.0408 42,500 D
Common Stock 11/08/2005 11/08/2005S
2,500 D 135.1474 40,000 D
Common Stock 11/08/2005 11/08/2005 s 5,000 D s35.1308 35,000 D
Common Stock 11/08/2005 11/08/2005 s 6,054 0 535.1782 28,946 D
Common Stock 11/08/2005 11/08/2005 s 800 D $35.11 28,146 D
Common Stock 11/08/2005 11/08/2005 s 646 D $35.1 27,500 D
Common Stock 11/08/2005 11/08/2005 S 2,500 D 135.07 25,000 D
Common Stock 11/08/2005 11/08/2005 s 5,000 0 135.0746 20,000 D
Common Stock 11/08/2005 11/08/2005 s 2,500 D 135.2391 17,500 D
Common Stock 11/08/2005 11/0812005 s 2,500 D s35.2301 15,000 D
Common Stock 11/08/2005 11/08/2005 S 5,000 D $35.7331 10,000 D
1 Twe of 7 3. Transaction 3A. Deemed 4. e. s. Dab Exercisable and 7. Title and 8. Prior of 9. Number 10. 11. Nature.
Derivative.
Conversion Dab Execution Data, Transaction Number expiration Dab Amount of Derivative of Ownership of Indirect
Security or Exorcise (MmMiDaYlYsar) If any Cods pnstr. of (Monthioayftar) Securities Security derivative Form: Beneflcfsl
(Imt,. 3) Price of (MonthlDaylYear) 9) Derivative Underlying (Instr. 5) Segue Iss Direct (D) Ownership
Derwa lv Securities Derivative Benelolally or Indirect (Imnr. 4)
Swurity Acquired Security Owned (1) (Initr. 4)(A) or (Intr. 3 and 4) FollowingDisposed Reported
(mpnstr. 3.4 1)1 4)and 5)
Amountor
NumberDate Expiration of
Cods V (A) (D) Exercisable DOW
Title
Shares
Explanation of Responses:
/s/ Kevin P. Connors 11/09/2005
'" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or Indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 18 U.S.C. 78ff(a).
Note: File three copies of this Form, one of which must be manually signed . If space is Insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 56
SEC Form 4
FORM 4
Chick this box if no longer subject to0Section 18. Form 4 or Form 5obligations may continue. SooInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashkpton , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 113(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
CMB Number 3235.0287
Expires : January 31, 2006Estimated average burden
hum per 0.6response
1. Name and Address of Reporting Person 2. tseuer Name and Ticker or Trading Symbol 5. Relationship of Reporting person( s) to Issuer
CUTERA INC [ CUTR ] (Check all applicable)SANTILLIL .QNAL_la d Director 10% Owner
Offi i titl oX cer (g ve e ther (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (MpnthlDpY/Yser) below) below)
11/08/2005 CFO & VP of Finance and Admin.C/O CUTERA, INC.
3240 BAYSHORE BLVD.4. If Amerxknant, Date of Original Filed (MonaVDay/Year) 8. Individual or Joint/Group Filing (Check Applicable
(Street) Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More then One ReportingPerson
(City) (State) (Zip)
Table I - Hon-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. TWO of Security (Intr. 3) 7. TrrnsectIon 2A. Deemed 3. 4. Securities Acquired (A) or 6. Amount of 6. T. NatureDais Execution Del,, Transaction Disposed Of (0) (Intr. 3.4 securities Ownership of Indirect(MoethDaylymor) N any Code (Insp. and 6) Ilenslklaiy Form; Beneficial
(MonthlDayNear) 5) Owned Direct (0) OwnershipFollorwIng or
t n
(A) Reported (1) (Intr. 4)Cods V Amount or Price Trsneacilon(e)
(D) (m eta. 3 and 4)
Common Stock 11/08/2005 11/08/2005 M 10.000 A 85.5 19,211 0
Common Stock 11/08/2005 11/08/2005 s 10,000 D $34.8076 9,211 D
Table II - Derivative Securities Acquired. Disposed of, or Benifcialy Owned(e.g., puts, calls, warrants, options , convertible securities)
1. This or 2. 3. Trsnsecton 3A. Doomed 4. 5. Number it. Data Exercisable and T. TNN and Amount 6. Price of a. Number 10. 11. NatureDerivative Conversion Date Execution Pate, Transaction of Expiration Oats of securities Derivative of Ownership of Indirectsecurity or Exercise (MonthDaylYear) If any Code pnatr. Derivative (MonthDey/Year) Underlying Security derivative Form : Beneficial(Intr. 3) Price of ( ) 8) securities Derivedve Security Qnstr. 5) Securities Direct (D) Ownership
Derivative Acquired (loner. 3 and 4) Beneficially or Indirect pnstr, 4)security (A) or
er(I) (InuI. 4)
Disposed p mof(0) Reported(Insh. 3,4 Transactionand 5) (a) (Intr. 4)
Amountor
NumberDate Expiration of
Code V (A) (D) ExeeflesbN Dap Title Shares
EmployeeStockOption $5.5 11/0812005 M 10,000
09/14/2002
(11 09/24/2011 Common00010 10 75 000 0
(Right to Stick > ,
Buy)
Explanation of Responses:
I. Options vest according to the following schedule 114 upon the date exercisable, and 1.48 per month thereafter.
/s Ronald J.Santilli )1/09/2005" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.' If the form is filed by more than one reporting person, we instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 7Bfl(a).Note: File three copies of this Form, one of which must be manually signed . If space is insufficient. see Instruction 6 for procedure.Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 57
SEC Form 4
FORM 4
Instruction
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Check this box If no longer subject toSection 16 . Form 4 or Form 5
1continue. See
Washington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16( s) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0287
Exams. January $1,2008
Estimated average burden
hours per 0.5response
1. Name and Address of Repo" Person 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERA INC CUTR (Check all applicable)SANTILLI RQNALD J Director 10% Owner
X Vi r (give title Other specify
(Last) (First) (Middle ) 3. Date of Earliest Transaction (MorlWDay/Year)
cabelow )
11/16/2005 CFO & VP of Finance and AdminC/O CUTERA, INC. .
3240 BAYSHORE BLVD.4. If Amendment Date of Original Filed (Month(Day/Year) 6 Individual or Joint/Grou Filin k A li(Ch bl
(Street)
, . p g ec pp ca e
hue)
BRISBANE CA 94005 X Form filed by One Reporting Person
......... . . ...... . Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired , Disposed of, or Beneficially Owned
1. Tide of Security (intr. 3) 2. Transaction 2A, Deemed e, 4. securities Acquired (A) 5. Amount of 6. T. NitunDate Execution Data, Transaction at Disposed Of (D) (Instr. 3, securities Ownership of Indirect(Monlh/DayNear) N any Code (Inak, 4 and 5) Beneficially Form: Beneficial
(MondJDayliear) 5) Owned Direct (D) OwnershipFollowing or Indirect (Intr. 4)
(A) Reported (I) (Instr. 4)cods V Amount or Price Transaction(s)
(D) (IMtr. 3 and 4)
Common Stock 11/16/2005 11/16/2005 M 7,500 A $5.5 16,711 D
Common Stock 11/16/2005 11/16/2005 s 7,500 D 537.386 9,211 D
1. Title of 2. 3. Transaction 3A. Deemed 4. 0. Number 6. Date Exercisable and T. TWO and s. Price of S. Number 10. 11, NatureDerivative Conversion Date Execution Data, Transaction of Expiration Date Amount of osrlvetlvs of Ownership of indirectsecurity or Bxsrcise (Monthlpay/Year) litany Code (Ins4', Derivative (MontWDsy/Year) Securities Security derivative Form; Beneficial(Insp. 3) Price of ( MonthlDaylYear ) s) Securities Underlying (Intr. 5) securities Direct (D) OwnsnhipDerivative Acquired Derivative security Beneficially or Indirect linear. 4)Security (A) at I t 3 d 4( n r. an ) Owned p ) (Intr. 4)
I Options vest according to the following schedule I,-I upon the dare exercisable, and 1/48 per month thereafter
/ / Ronald 11/17/2005
" Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly." If the form is filed by more than one reporting person, we instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 16 U. S. C. 1001 and 15 U.S.C. 78f1(6).Note; File three copies of this Form, one of which must be manually signed . M space is insufficient , see Instruction 6 for procedure.Persona who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 58
SEC Form 4
FORM 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION OMB APPROVAL
Washington , D.C. 20549 r. 3235-0287
Jenusry 3 1, 2008
ttEdSTATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP erageburden
eChsdc6YsboxitnolonymsutNsdSection 1 ! Form 4 or Form 5 0.5
a oWipssons m continue , SN1 ba Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 . Section 17(a) of the Public Utility)..(anInsbuc
Holding Company Act of 1835 or Section 30( h) of the Investment Company Act Of 1940
Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer2.1. Name and Address, of Reporting Peron
CUTERA_NIC [ CUTR ] (Check all applicable)
ONN S KEVIN X Director x 10% Owner
Officer (give title other (specify
(Last ) (Fist) (Middle) 3. Date of Earliest Transaction (MonthlDayA'ear) below) below)
11/18/2005 President and CEOC/O CUTERA, INC.
3240 BAYSHORE BLVD.4. It Amertdrnem, Date of Original Filed (MonUtlDay/Year) B. Individual or Joint/Group Fil ing (Chad[ Applicable
Line)
( X Form filed by One Reporting PersonBRISBANE CABRISBANE 94005
filed by More than One Reporting-- - - -- Person
(City) (State) (Zip)
Table I - Non-Oarivatlve Securities Acquired. Disposed of, or Beneficially Owned
1. Title of Security (intr. 3) 2. Transaction ZA. Deemed 3. 4. securities Aoquwd (A) 5. Amount of 6. 7. Nature
Dols Execution Data, Transaction or Disposed Of (D) pnstr. Securities Ownership of Indirect(MondWsy/Ygr) If any Coda pnstr, 3.4 and 6) Beneficially Form: Direct Beneficial
a) Reported onew.4)Cody V Amount or Pries Trsnsactlon(s)
(D) (Iraq. 3 and 4)
Common Stock 11/18/2005 11/18/2005 M 18,000 A $4.25 28,000 D
Common Stock 11/18/2005 11/18/2005
S
18,000 D $38.1 10,000 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options , convertible securities)
THIS of 2, 3 . Transaction1 $A . Doomed 4. 5. Number 6. Date Exercisable and 7. Title and Amount 8. Price of s. Number 10 . 11. Nature,
Derivative Conversion Data Execution Data, Transaction of Expiration Data of securities Derivative of Ownership of Indirect
Security or Exorcise (MoMhlDay(VMr) it any Cork (Intr. Derivative (MonthlDsylyear) Underlying Security detvatiw Form; Beneficial
(intr. 3) price of IMontMDxyiTur) 8) Securities Derivative Security (Intr. 5) Securities Direct (D) OwnershipAcquired (Intr. 3 and 4) B nefIcIaliy or Indirect (Intr. 4)x
I Options vest according to the following sc hedule: 14 upon the date exercisable, and I!48 per month thereafter.
%s/ Kevin P. Connors 11/21/2005
- Signature of Reporting Person Date
Reminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more than one reporting person , see Instruction 4 (b)(v).
•' Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 75ff(a).
Note: File three copies of this Form, one of which must be manually signed. It space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond union the form displays a currently valid OMB Number.
P 59
SEC Form 4
FORM 4
Check this box 11 no longer subject to
0Section 16 . Form 4 or Form 5obligation may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
0MB Number. 3235-0207
Expires! January 31. 2008
Estimated average burden
hours per 0.6response11
1 Name and Address of Reporting Person 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CUTERA INC [ CUTR ] (Check all applicable)CONNORS KEVIN P X Director X 10% Owner
X Officar (give title specify
(Law) (F^t) (Middle) 3. Data of Earliest Transaction (MonthlDayNenr) below) below)
C/O CUTERA, INC.11/22/2005 President and CEO
3240 BAYSHORE BLVD.4 If Amendment Data of Original Filed (MonttVDaylvear) S Individual or JointlGrou licableFilin (Check A
(S). , . p g pp
Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More them One ReportingPerson
(City) (state) (zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1, Title of Security (Intr. 3) 2, Trinaacllon ?A. Deemed 3. 4. Securities Acquired (A) or 5. Amount at 6. 7. NatureDale Execution Date, Transaction Disposed Of (D) (Irate. 3, 4 Securities Ownership of Indirect(MoMfADayNear) If any Cods pest. end 5) Benancla ty Farm: Beneficial
(MonchDay/feer) 5) Owned Di rect ( D) OwnershipFollowing or Indirect (Insk, 4)
(A) Ripened (I) prate. 4)Coda V Amount or Price on(s)Trensaap
(D) (Intr. 3 and 4)
Common Stock 11/22/2005 11/22/2005 M 16,167 A $4.25 26,167 D
Common Stook 11/22/2005 11/22/2005 S 16,167 D 638,2247 10,000 D
Common Stock 11/22/2005 11/22/2005 M 24,167 A $4.25 34,167 D
Common Stock 11/22/2005 11/22/2005 S 24,167 D 538.2247 10,000 D
Table II - Devlvstlve Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants , options , convertible securities)
1. TItle of 2. 3 , Transaction 3A. Deemed 4. 5. Number S. Date Exercisable and 7. Title and Amount It. Pace of 6, Number 10. 11. NatureDerivative Conversion Date Execution Daft , Transaction of Expiration DNS of Securities Derivative of Ownership of IndirectSecurity or Exsnols (MantlIDsylVeer)
(Intr. 3) Price of (MonthDaylvsar) 6) Ssourtdes Derivative Security prate. 6) securities Direct (0) OwnershipAcquired (Intr. 3 and 4) BenNIcleIIy or Indirect pnate. 4)
Security (A Owned (1) (Ina. 4)Dispond
F p
of (D) Reported(Intr. 3 , 4 Transactionand 6) (a ) ( In-V. 4)
Amountor
Number
Data
Expiration ofCads V (A)
(0)
Exercisable Dow Tidy shams
EmployeeStockOption 64,25 11/22/2005 M 16,167
06/01/200310/15/2012 Camman
16 167 $0 5 933 D(Right to Stock , ,
Buy)
EmployeeStockOption $4.25 11/22/2005 M 24,167
06/01/20041 05/13/2013 Common
16724 i0 15 833 D(Right to
tStack , .
Buy)
Explanation of Responses:
I Options vest according to the following schedules t!4 upon the date exercisable , and 1/411 per month thereafter
/o/ Kevin P. Connors 11/23/2005" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
' If the form is filed by more than one reporting person , see Instruction 4 (b)(v).
- Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(e).Note: File three copies of this Form, one of which must be manually signed. If space is insufficient. see Instruction S for procedure.
Persons who respond to the collection of Information contained In this form we not required to respond unless the form displays a currently valid OMB Number.
P 60
SEC Form 4
FORM 4
0
Check this box if no longer subject tosection 10. Form 4 or Form sobligations may continue. SeeInstruction t(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16 (a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235-0257
Exams. January 31.2004
Estimated average burden
hours par 0.5response
1 Name and Address of Reporting Person 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
CU-Ej .A INC [ CUTR 1 (Check all applicable)SANTILI. I RONALD J
- .Director 10% Owner
X Officer (give title Other ( specify
(Last) (First ) ( Middle) 3. Date of Earliest Transaction (Month/Day/Veer) bed) below)
11/22/2005 CFO & VP of Finance and Admin,C/O CUTERA, INC.
3240 BAYSHORE BLVD.4. N Amendment Date of Original Filed (Month/Day/Year) 6 Individual or JoinUGroup Filing (Check Applicable
(Street)
, .Line)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Dertvat(ve Securities Acquired. Disposed of, or Beneficially Owned
1. Title of Security ( Instr, 3 ) 2. Transaction 4A . Deemed 3. 4. Securities Acquired (A) 5. Amount of 6. 7 . NatureDate Execution Data, Transaction or Disposed Of (0) (Intr. Securities Ownership of Indirect(MonthlDaylYasr ) If any Cade (barer. 3.4 and 5) Bamnolally Form: Snatlaial
(MonWDsylyear) 5) Owned Direct (0) or OwnershipFollowing Indirect ( 1) (Intr. 4)
(A) Reported (Inih.4)Cods V Amount or
PriceTransaction(s)
(D) (Intr. 3 and 4)
Common Stock 11/22/2005 11/22/2005 M 224 A $5.5 9,435 D
Common Stock 11/22/2005 11/22/2005 S 224 D $39 9,211 D
Common Stock 11/22/2005 11/22/2005 M 7,276 A $5.5 16,487 D
Common Stock 11/21/2005 11/22/2005 S 7,276 D $39 9,211 D
1. Tine of 2 , 3. Transaction 3A. Deemed 4. S. Number 6. Date Exercisable and 7. Title and 6. Price of s. Number 10. 11, NatureDerivatlw Conversion Data Execution Data, Transaction of Expiration Date Amount of Derivative of Ownership of IndirectSecurity or Exercise ( MonthiDaylYsar ) if any Code ( Intr. Derivative ( MonthlDayIYsar) Securities Security derivative Form ; Beneficial(Intr. 3) Price of (Month IDaylYear) s) Securities Underlying (Inabr. 5) Securities Direct (D) Ownership
Derivative Acquired Derived" Security Beneficially or Indirect (Insp. 4)Security (A) or Qnatr. 3 and 4) Owned (I) (Inatr. 4)
I. Options ^crt accordinu to the f'nllowing .r hedule 14 upon the date esercisahir , and I.49 per month thereaRrr
/S/ Ronald J. Santilli 11/23/2005
" Signature of Reporting Person DataReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more then one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a),Note: File three copies of this Form, one of which must be manually signed. If space Is insufficient, see Instruction 6 for procedure.Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P61
SEC Forth 4
FORM 4
0
Check this box 8 no longer subject toSection 16. Form 4 at Form $otMpaaona may continue. SeeInstntctIon 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(e) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number 3235.0287
Exams: January 31,2006
Estimated average burdenhours per 0.5response
1. Name and Address of Reporting Person" 2 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person ( s) to Issuer
CLJTERA INC [ CvTR ] (Check aD applicable)SAN_TIL..,I_ RONALD J
iector 10% OwnerX Officer (give title Other (specify
(Last) (First) (Middle ) 3. Date of Earliest Transaction (MonaVDoy/Ysar) below) below)
08/23/2006 CFO & VP of Finance and Admin.C/O CUTERA. INC.
3240 BAYSHORE BLVD .4. If Amendment , Date of Original Filed (Month/Day/Year) S. Individual or Joint/Group Filing (Check Applicable
(Street)Lit*)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form riled by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed or, or Beneficially Owned
1. Title of Security (Intr. 3) 7. Transaction 4A. Deemed 3. 4. securities Acquired (A) or 5. Amount of 6. 7. NatureData Execution Date, Transaction Disposed Of (D) pnstr. 3.4 securities Ownership of Indirect(MoneWaylynr) N any Code (tnsfr. and 5) Beneficially Form : Beneficial
(MondMDay/year) 8) Owned Direct (D) OwnershipFollowing or Indirect (Intr. 4)
(A) Reported 0) (Intr. 4)Cods V Amount ar Price Transaction(s)
(D) (In+k. 3 and 4)
Common Stock 08/23/2006 08/23/2006 M 6,220 A $4.25 16,086 D
Common Stock 08/23/2006 08/23/2006 s 6,220 D $25,1818 9,866' 21 D
1. Tide of L 3. Transact on 3A, Deemed 4. S. Number S. Data Exercisable and T. Tie and 5. Price of 8. Number 10, 11, NatureDerivative Conversion Date ExCeudon Date, Transaction or ExpiratIon Date Amount of Derivative of Ownership of Indirectsecurity or Exercise (MonthSDey/Year) if any Cods (Insp. Derivative (MondJDayN tier) 8souritlea Security derivative Form : Bsmlliclalpnatr. 3 ) Price of (Month/Day/fear) 8) securities Underlying (Intr. 5) Securities Direct (D) Ownership
Derivative Acquired Derivative Security Beneficially or Indirect (Intr. 4)security (A) o r (Insh. 3 and 4) Owned (1) pnstr. 4)
I Options vest according to the following schedule 1/4 upon the date exercisable, and 1/48 per month thereafter.
2. Includes 655 shares acquired under the Curers stock purchase plan on May 1. 2006,
/s/ Ronald J. Santilli 08/24/2006
"" Signature of Reporting Person DateReminder; Report on a separate line for each class of securities beneficially owned directly or indirectly,
• If the form is filed by more than one reporting person, we Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 781f(a).Note: File three copies of this Form, one of which must be manually signed. If apace is insufficient. see Instruction 6 for procedure.Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currsndy valid OMB Number.
P 62
SEC Form 4
FORM 4
Check this box If no longer subject to
0
Section 18 . Fnrm 4 or Form 5obligalions may continue. SaeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington , D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of 810 Public Utility
Holding Company Act of 1935 or Section 30(h) of the investment Company Act of 1940
OMB APPROVAL
OMB Number 3235-0287
Expires, January 31,2008
Estimnsd average burden
hour per 0.5response
Name and Address of Reporting Person12 . Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person(s) to Issuer
.JTERA INC [ CUTR ]
(Check all applicable)
RONALD J$ANTILL1 Director 10% Owner-x Officer (give title Other (specify
below) below)
(Last) (Final) (Middle) 3. Date of Earliest Transaction (MonthfDay!Year)CFO & VP of Finance and Admin08/24/2006 .
C/O CUTERA, INC.
RE BLVD ,3240 BAYSHO4. If Amendment, Date of Original Filed (Month/Dsy/Year) B. Individual or Joint/Group Filing (Chock Applicable
Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One Reporting..... ......_ ........... .. -- ..... Person
(City) (State) (zip)
Table I - Non-Derivative Securities Acquired . Disposed of, or Beneficially Owned
1. Title of Security ( Instr . 3) 2. Transaction 7A. Deemed 3 . 4, Securities Acquired (A) 5. Amount of 8. 7. NatureDap Execution Dan, Transaction or Disposed 01(D) (Instr, 3, Securities Ownership of Indirect(MonlhlDaylYesr) If any Code (Intr. 4 and 5) Beneficially Form: 9ensflcial
(MonthlDayrfear) 5) Owned Direct (0) OwnershipFollowing or Indirect (Intr. 4)
(A) Reported (1) (Intr. 4)Code V Amount or Price Tnnsactlon(a)
(0) (hut,. 3 and 4)
Common Stock 08/24/2006 08/24/2006 M 3,780 A $4.25 13,646 D
Common Stock 08/24/2006 08/24/2006 S 3,780 D $25,127 9,866 D
I Options vest according to the following schedule I:4 upon the date exercisable , and 1148 per month thereafter.
/s/ Ronald J. Santilli 08/25/2006
" Signature of Reporting Person Date
Reminder: Report on a separate line for each class of securities beneficially awned directly or indirectly.
If the form is filed by more than one reporting person, we Instruction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 76R(a).
Note: File three copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this farm are not required to respond unless the form displays a currently valid OMB Number.
P 63
SEC Form 4
FORM 4
Check this box if no longer subject to
0
Section 16. Form 4 or Form 5
Instructionbligatio ma)
continue. See
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3235.0207
Exams. January 31,2006
Estimated average burden
hours per0.5response
1. Name and Address of Reporting Person' 2 . issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person(s) to Issuer
fN C CUTR ]C TE(check a applicable )
SANTILU--QNALD1- D
rector 10% Ownerofficar this Dow specify
X(Last) (First) (Middle ) 3. Date of Earliest Transaction (MonBYDay/Vear)
below ) ;)
11/13/2006 CFO & VP of Finance and Adrnin,C/O CUTERA, INC.
3240 BAYSHORE BLVD .4. It Amendment , Date of Original Filed (Monthloay/Year) 6. Individual or Joint/Group Filing (Check Applicable
Line)( Street)
BRISBANE CA 94005X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) 2. Transaction 7A. Deemed 3. 4. Secur ities Acquired IA) 5. Amount of 6. T. NatureData Execution Date, Trsnseotlcn or Disposed Of (0) (Inea. securities Ownership of Indirect(MonthMayrfear) If any Coda linear. 3, 4 and 5) BnMftclally Form: Beneficial
(MoneMDay/yaer) a) Owned Direct (0) or OwnershipFefowbp Indirect (1) (Intr. 4)
(A) Reported (lnstr.4)Cade V Amount or
priceTnnpotion(s)
(0) (matr. 3 4)
Common Stock 11/13/2006 11/13/2006 M 5,000 A $5.5 14,866 D
Common Stock 11/13/2006 11/13/2006 S 5,000 D $28.3 10,140 D
Common Stock 11/14/2006 11/14/2006 M 5,000 A $5.5 15.140 D
Common Stock 11/14/2006 11/14/2006 S 5,000 D $28.4 10,140 12 t D
Table II - Derivative Securities Acquired , Disposed of, or Beneficially Owned(e.g., puts, calls, warrants, options , convertible securities)
1. Tah of 2. 3. Transaction 3A. Deemed 4. G. Number s, Data Exarcisable and 7. T18a and s. Price of 9. Number 10. 11, NatureDerivative Conversion Date Execution Date, Transaction of Expiration Date Amount of Derivative of Ownership of Indirectsecurity or Faciratw (MenthlosyIYssr ) if any Cods (Inch. Derivative (MontlWDay/Yeer) Securities Security derivative Form: Beneficial(Intr. 3) Price of (MonthtDaylVear ) s) Securities Underlying (Inai. 5) Sscurldss Dinet (0) Ownership
Derivative Acquired Derivative security Beneficially or Indirect (lnstr. 4)Security (A) or linear . 3 and 4) Owned p) (Intr. 4)
EmployeeStock 09/14/2002 CommonOption $5.5 11/13/2006 M 5,000 1 1 09/24/2011
Stock 5,000 50 55,000 D(Right toBuy)
EmployeeStockOption $5.5 11/14/2006 M 5,000
09114/2002I t I 09/24/2011 Common
5 000 s0 50.000 17(Right to Stock ,
Buy)I _j
Explanation of Responses;
I Options vest according to the following schedule 1/4 upon the date exercisable, and 1148 per month thereafter.
Includes 274 shares acquired under the Cutera stock purchase plan on November 1, 2006
/gLRonald J. Santilli 11/15/2006
" Signature of Reporting Person DateReminder : Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is tiled by more then one reporting person, We Instruction 4 (b)(v).
"" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U .S.C. 78ff(a).
Note: File three copies of this Form , one of which must be manually signed. If space is insufficient , see Instruction 6 for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P 64
SEC Form 4
FORM 4
Chick this box S no longer subject Is
0
Section 16. Form 4 or Farm 5o68pslons may continue. SeeInstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D.C. 20649
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934. Section 17(a) of the Public UtilityHolding Company Act of 1835 or Section 30(h) of the Investment Company Act of 1940
0M9 APPROVAL
DMB Number 825.0287
Expires : January 31, 2000
Eshmrrd Instpa burden
hours per 0.5response
2 . Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person( s) to Issuer1. Name and Address of Reporting Person
CUTERA INC II CUTR ] (Check all applicable)
ANTILLI RONALQJ.. Director 10% OwnerX Officer (g ive title Other (speedy
(Last ) ( First) (Middle ) 3. Date of Earliest Transaction (MontlvDaylYear)below ) below)
02/08/2007 CFO & VP of Finance and Admin.C/O CUTERA, MC,
3240 BAYSHORE BLVD .---..__...._..... _ W ._...,..,,.,,._.._. ._ 4, If Amendment , Date of Original Filed (MonWDayNear) 6. Indiv idual or Joint/Group, Filing (Check Applicable
Line)(Sir")X Form filed by One Reporting Person
BRISBANE CA 94005Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I • Non-Derlvatlve Securities Acquired. Disposed of, or Beneficially Owned
1. THIS of Security (Intr. 3) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) 8. Amount of s. T. NatureDate Execution Date, Transaction or Disposed Of (D) (intr. Securities Ownership of Indirect(MondMDaylywr) If any Cods (Incr. 3,4 nd 8) BenetlNNly Form : Direct Beneficial
(A) Reported linear. 4)Cods V Amount or Price Tramsawlen(s)
(0) line. 3 and 4)
Common Stock 02/08/2007 02/08/2007 M 10,000 A $5.5 20,140 D
Common Stock 02/08/2007 02/08/2007 s t z' 10,000 D $35 10,140 D
Table II - Derivative Securities Acquired, Disposed of, or Beneficially Owned(e.g.. putk calls, warrants, options , convertible securities)
1. Title of 2. 8 , Transaction 3A. Deemed 4. 5. Number 5. Date Exercisable and 7. Title and Amount S. Price of 9. Number 10. 11. NatureDsnvathti Conversion Deis Execution Date, Transaction of Expiration Pats of securities Derivative of Ownership of Indirectsecurity or Exercise (MondhDaylvsar) S any Cods (Inch. Derivative (MontliDsy(ysar ) Undarrying Security dorivatIve Foam: Beneficialpnstr. S) Pries of (MonthlDayNear) 8) Securities Derivative Security (Insp. 5) Securities Direct (D) Ownership
Derivative Acquired (Intr. 3 and 4) Benef icially or Indirect (Insp. 4)Security (A) or Owned ( 1) (Insty. 4)
Disposed Followingof(D) Reportedgees r. 3.4 Transactionand 8) (a ) (Inst. 4)
Amountor
NumberDate Expiration of
Cods V (A) (D) Sneecleable Date Tide Shores
EmployeeStockOption $1.5 02/08/2007 M 10,000
00/14/2002
1 09/24/2011Common
10 000 30 40,000 D(Right to
( ) stork ,
Buy)
Explanation of Responses:
1. Options test according to the following schedule 1:4 upon the date exercisable, and 1/48 per month thereafter.
2 The sale reported to this Form 4 was effected pursuant to a Rule I Ob5-1 Sales Plan adopted by the reporting person on February 22, 2006.
/s/ Ronald J. Santilli 02/08/2007
Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.
• If the form is filed by more then one reporting person, we instru ction 4 (b)(v).
Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 1S U.S .C. 1001 and 15 U.S.C. 701f(a).
Note : File three copies of this Form , one of which must be manually signed . If space is insufficient , see Instruction S for procedure.
Persons who respond to the collection of Information contained In this form are not required to respond unless the form displays a currently valid OM® Number,
P 65
SEC Form 4
FORM 4
Check this box if no longer subject to
0 obligationsSection 16 . Form 4 or Form 5
tma continue. SeeNuhuckon
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17 ( e) of the Public UtilityHolding Company Act 0(1935 or Section 30(h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number. 3236.0267
Expiss: January 31, 2006
Estimated average burden
hour per0.5response
1. Name and Address of Reporting Peraon 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
CUTERA INC [ CUTR ] (Checkep
applicable)SANTILLI RONALD J 10% Owner
off i titl o h if-- - icer (g ve e t er (spec y
(Last) (First) (Middle) 3. Date of Earliest Transaction (MontiDaynear) bed) below)
02/20/2007 CFO & VP of Finance and AdminC/O CUTERA, rNC.
.
3240 BAYSHORE BLVD.4. If Amendment , Date of Original Filed (MontWDay/Year) S. Individual or Joint/Group Filing (Check Applicable
(Street) Line)
BRJSBANE CA 94005 X Form filed by one Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I • Non-Derivative SecuAtles Acquired , Disposed of, or Beneficially Owned
1. Title of Security (Intr. 3) y. Transaction 2A, Deemed 3. 4. S ecuriass Acquired (A) or 5. Amount of e. T. NatureDab Exesuaon Date, Transaction Disposed Of (D) (Intr. 3.4 Securities Ownership of Indirict(MonthNsy/year) if any Coda (Intr, and 6) BNnnaM9y Forer. Beneficial
(MondtlDsy/Yar) 6) Owned Dlreot (0) OwnershipFollowing or Indire nmtr. 4)
(A) Reported p) (lnstr.4)Coda V Amount or Price Transaedon(s)(D) (Instr, 3 and 4)
Common Stock 02/20/2007 02/20/2007 M 10,000 A $5.5 20,140 D
Common Stock 02/20/2007 02/20/2007 s 10,000 D 537.0579 10,140 0
1. Title of 2, 3. Transaction 3A. Deemed 4. 6. Number s. Date Esarolsable and 7. Thee and Amount 6. Price of s. Number 10 , It. NatureDerivative Conversion Data Execution Date, Transaction of Expiration Date of Securities DsrIvative of Ownership of Indirectsecurity or Exercise (Mon*A)ay/Vesr) If any Code (Intr. Derivative (MoniWayfYsar) Underiying Security derivative Form: Beneficialtint'. 3 ) Price of (MenthbayIYaar) s) Securities Derivsttw security (Ine. 5) Securities Direct (D) Ownership
Derivative Acquired (Intr. 3 and 4 ) Beneficially or Indirect pnatr. 4)security (A) Owned (q (loser. 4)
Disposednpof (D) d
(Instir. 314 Transactionand 5) (a) (Inetr, 4)
amountor
NumberExpiration of
Cods V (A) (0) Exercisable te Tills Shares
EmployeeStockOption 35.5 02/20/2007 M 10.000
09/14/2002t 1 , 09/24/2011 Common
00010 30 30 000 D(Right to Stack , ,
Buy)
Explanation of Responses:
I Options vest according to the following schedule 1%4 upon the date exercisable, and 1/48 per month thereafter.
/s/ Ronald J. Sami lli 02/21 /2007
" Signature of Reporting Person DateReminder. Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person , see Instru ction 4 (b)(v).
m Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U .S.C. 78ff(a).Note: File three copies of this Form , one of which must be manually signed, If space is insufficient, we Instruction S for procedure.Persons who respond to the collection of Infonnadon contained In this form are not required to respond unless the form displays a currently valid OMB Number,
P 66
SEC Form 4
FORM 4
Check this box N no longer subject tofl Seddon 16. Fomt 4 or Farm 5
obligations may continue. Seainstruction 1(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public Utility
Holdkw Company Act of 1935 or Section 30(h) of the Investment Company Act of 1940
0MB APPROVAL
OMB NuniY4r. 3235-0207
Expires; January 31, 2006
Estimated average burden
hours per 0.5response
2 . Issuer Name and Ticker or Trading Symbol S. Relationship of Reporting Person(s) to Issuer1. Name and Address of Reporting Persai
CUTEI^A^ [ CUTR ] (Check all fable)CONNORS KEVIN P X Director 10% Owner
Officer (give title Other (specifyX
(Last) (First) ( Middle ) 3. Data of Earliest Transaction (MonthloaylVear ) below) below)
02/22/2007 President and CEOC/O CUTERA, INC.
SHORE BLVD.3240 BAY4. If Amendment , Date of Original Filed (MonthlDeyNear ) B. Individual or JoinUGroup Filing (Check Applicable
Line)(Street)
X Form filed by One Reporting PersonBRISBANE CA 94005
Form filed by More than One ReportingPerson
(City) (Stets) (Zip)
Table I - Non-Derivative Securftlee Acquired , Disposed of, or BsneftciSIly Owned
1. Title of 2 . 3. Transaction 3A. Deemed 4. S. Number 6, Date EcerobsbM and 7. Ties and Amount 0. Price of I. Number 10. 11. NatureDaMtlve Conversion Onto Execution Date, Transaction of Expiration Date, of Securities Derivative of Ownership of IndirectSecurity or Exercise (MondMDsyfYssr) If any Code (Intr. DmlvutW. (Mont )aylYear) Underlying Security derivative Form: Beneficial(Intr. 3) Price of (MonthD+yNear) 6) securities Derivative Security pnstr, 5) SecuriIs Direct (D) Ownership
Dergqve Acquired (Intr. 7 and 4) Beneficially or Indirect (Intr. 4)Security (A) or Owned (I) (Intr. 4)
Disposed Followingof (D) Reported(Intr. 3,4 Transactionand 5) (s) (Intr. 4)
Amountor
NumberDols Expiration ofCode V
(A) (D) Exeruisrble Data TI11s Shares
EmployeeStockOption $0.1 132/22/2007 M 51.667
09/01/2000(1 1 09/13/2009
CommonStack 81 ,667 $0 623,333 q
(Right toBuy)
EmployeeStockOption $4.25 02/22/2001 M 5,533
06/01/2003i 1) 10/ 10/2012 Common
Stock 5,833 $0 0 D
(Right toBuy)
P 67
^mplogeeStock 06MIi2004 CommonOption $1.25 0=212007 M 112500 1 t 08113!2013
Stock 12,500 to
(Right toBuy)
Explanation a Rsspcnses:
1. Options vest according to the following schedule 1/4 upon the date exercisable. and 1149 per month thereafter
/s/ Kevin P. Connors 02/26/2007
" Signetve of Reporting Person Date
Reminder Report on a separate line for each class of securities beneffcisgy owned directly or indirectly.
• If the form is filed by more than one reporting person, see Instruction 4 (b)(v).
" Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 19 U.S.C. 1001 and 15 U.S.C. 79H(a).
Note: File throe copies of this Form, one of which must be manually signed. 11 space is insufficient. see Instruction 6 for procedure.
Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a cumantly valid OMB Number.
P 68
SEC Form 4
FORM 4
Check this box if no longer subject to
0
Section 16 . Form 4 or Form 5
Insauo6onmay continue. Sea
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington. D. C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 1S( a) of the Securities Exchange Act of 1934 , Section 17(a) of the Public; UtilityHolding Company Act of 1935 or Section 30( h) of the Investment Company Act of 1940
OMB APPROVAL _J
OM8 Number. 3235-0287
Expires : January 31, 2008Esltwtsd average burden
hours per0.5response!
1. Name and Address of Reporting Person' 2. Issuer Name and Ticker or Trading Symbol 5. Relationship of Reporting Person( s) to Issuer
CUTERA MC [ CUTR ] (Check all applicable)SANT(LLI RONALD J Director 10% Owner
Officer (give title Other (specify
(Last) (First) (Middle) 3. Date of Earliest Transaction (Month/Day/Year)
X
bed) below)
02/26/2007 CFO & VP of Finance and AdminC/O CUTERA, INC.
.
3240 BAYSHORE BLVD.4. If Amendment , Date of Original Filed (MonthlDay/Year) S. Individual or Joint/Group Filing (Check Applicable
(Street) Une)
BRISBANE CA 94005 X Form filed by One Reporting Person
Form filed by More than One ReportingPerson
(City) (State) (Zip)
Table I - Non-Derivative Securities Acquired, Disposed of, or Ber afleidly Owned
1. Title of Security (Insp. 3) 2. Trenesevon 2A. Dssmsd 3. 4. Seccuriass Acquired (A) or 5. Amount of 6. T. NatureDeb Execution Dols, Transaction pess
dor (D) (Ineh. 3.4e 8"9"" Ownership of Indirect
(MonphDsyNear) If any Cods pnser. snd 6) Senanclsqy Form: Beneficial(MondYDaylyur) 6) Owned Direct ( D) Ownership
Following or Indirect (Instr. 4)(A) Reported (I) (11natr. 4)
Cede V Amount at Price Transecdon(s)(0) pnstr. 3 and 4)
Common Stock 02/26/2007 02/26/2007 M 10,000 A 85.5 20,140 0
Common Stock 02/26/2007 02/26/2007 S 10,000 D $37.2206 10,140 D
Table II - Derivathre Securities Acquired , Disposed of, or Beneficially Owned(e.g., tuts, calla, warrants . options , convertible securities)
1. This of 2. 3. Transactlon 3A. Deemed 4. 6. Number s. Data Exercisable and 7. Title and Amount 6. Price or 9. Number 10. 11. NatureDerivative Convention onto Execution Date, Transaction of Expiration Dols of securl8ss Derivative of Ownership of IndirectSecurity or Exam" (MonthWsyIYssr) If any Cods (Init. Derivative (MonghDayfYsar) Underlying security derivative Form; Beneficial(Intr. 3) Prim Of (Month/DsylNsar) s) Securities Derivative Security (Intr. 5) Securitis Direct ( 0) OwnershipDerivative Acquired (their. and 4) Beneficially or Indiwet pnsh. 4)Security (A) a (1) (Insp. 4)Owned
Disposed FollowingReported
h 3.4pns Transaction6) (a) h
(Instr. )na 4)
Amountor
NumberDais
expiration ofCods
V
(A) (D) Exsreissbls Data
Title
Shares
EmployeeStockOption $5.5 02/26/2007 M 10,000
09/14/2002(1$ 09/24/2011 CSk°n 10 000 $0 00020 D
tooc , ,
Buy)
cxpianaaon or Responses:
I Options vest according to the following schedule I.4 upon the date exercisable, and Ir411 per month thereafter.
s/-Ronald J.Santilli 02/28/2007
" Signature of Reporting Person DateReminder Report on a separate line for each class of securities beneficially owned directly or indirectly.
If the form is filed by more than one reporting person, see Instruction 4 (b)(v)." intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U.S.C. 1001 and 15 U.S.C. 781((x).Note : File Was copies of this Form, one of which must be manually signed. If space is insufficient, see Instruction 6 for procedure.Persons who respond to the collection of infonnadon contained In this form are not required to respond unless the form displays a currently valid OMB Number.
P 69
SEC Form 4
FORM 4
0
Check this box N no longer subject toSoction 16 . Fan 4 or Form 0obligations may continua. SeaInstruction I(b).
UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
STATEMENT OF CHANGES IN BENEFICIAL OWNERSHIP
Filed pursuant to Section 18(a) of the Securities Exchange Act of 1934, Section 17(a) of the Public UtilityHolding Company Act of 1936 or Section 30( h) of the Investment Company Act of 1940
OMB APPROVAL
OMB Number : 3234-0707
Expires: January 31, 2008
Estimated average burden
hours per response 0.6
1. Name and Address of Reporting Person' 2. Issuer Name and Ticker or Trading Symbol 5 . Relationship of Reporting Person (s) to Issuer
CUTERA [ CUTR 1 (Check as applicable)NN IZ KEV IN P X Director 10% Owner
x Officer (give tfib omen (specify(Last) (First) ( Middle) 3. Date of Earliest Transaction (MonlhlDaylvear) below) below)
C/O CUTERA, INC. 02/28/2007 President and CEO
3240 BAYSHORE BLVD.4. If Amendment , Data of Original Filed (MonWDay/Vear) 8. Individual or JointGroup Filing (Check Applicable
(Street) l")
BRISBANE CA 94005 X Form filed by One Reporting Person
w..__...W..., Form filed by More than One ReportingPerson
(City) (state) (Zip)
Table I - Non•D.rivathro Securities Acquired, Disposed of, or Beneficially Owned
1. Title of Security ( Intr. 3 ) 2. Transaction 2A. Deemed 3. 4. Securities Acquired (A) S. Amount of e, T. Naturebats Execution Date, Transaction or Disposed 01 (0) (Intr. 3, Secur tIes Ownership or IndMa~Y(MomhIDsyNean If any Code ( Inst,. 4 and 5) BIn. lcllly Form : Direct Beneficial
1. TMs or 3, 3 . Transaction 3A, Deemed 4. A. Number of 6. Date Exercisable and 7. Title and Amount e, Price of o. Number 10. It. NatureDerivative Conversion Dote Execution Date , Transaction Derivative Expiration Deb of Securities Derivative of Ownership of IndirectSecurity or Exercise (MonthlDaylyeer) If any Code pnstr. Securities ( Month/DsylYur) Underlying Security derivative Fenn: Beneficial(Instr. 3) Price of (MenthlDayiVsar ) 6) AcquIred (A) Derivative Security (Intr. 5) Securities Direct (D) Ownership
Derivativesecurity
or Disposedof (D) (Instr
(Instr, 3 and 4) Beneficially or Indirect (Instr, 4).
3, 4 and 5)OwnedFollowing
(1) (Instr. 4)
ReportedAmount Transaction
or (e) (Inmc 4)Dete Expiration Number
Code V (A) (0) Exercisable Dpe Title of chines
EmployeeStockOption $01 02/28/2007 M 150,000
09/01/2000
i I 1 09/13/2009 Common1 50 000 f0 473 3)) D
(Right togk , ,
Buy)
Explanation of Responses:
1. Options vest according to the following schedule. 1'4 upon the date exercisable, and Ir48 per month thereafter.
/s/ Kevin P. Conmors 03/01/2007
Signature of Reporting Person DateReminder: Report on a separate line for each class of securities beneficially owned directly or indirectly.• if the form is filed by more than one reporting person , we Instruction 4 (b)(v).•• Intentional misstatements or omissions of facts constitute Federal Criminal Violations See 18 U . S.C. 1001 and 15 U . S.C. 78if(e).Note : File three copies of this Form , one of which must be manually signed . If space is Insufficient . we Instruction 8 for procedure.Persons who respond to the collection of information contained In this form are not required to respond unless the form displays a currently valid OMB Number.