<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarter ended March 29, 1997.
Commission file number 0-14742
CANDELA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2477008
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
530 Boston Post Road, Wayland, Massachusetts 01778
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (508) 358-7400
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at May 8, 1997
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Common Stock, $.01 par value 5,408,337
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<PAGE>
CANDELA CORPORATION
Index
<TABLE>
<CAPTION>
Page(s)
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<S> <C> <C>
Part I. Financial Information:
Item 1. Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8-13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit 11 Computation of Earnings Per Share 17
Exhibit 27.1 Financial Data Schedule 18
</TABLE>
2
<PAGE>
CANDELA CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 29, June 29,
1997 1996
Assets (unaudited)
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<S> <C> <C>
Current assets:
Cash and equivalents $ 1,989 $ 3,041
Accounts receivable 7,517 6,444
Notes receivable 1,074 1,956
Inventory 6,265 5,627
Other current assets 696 352
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Total current assets 17,541 17,420
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Property and equipment, net 2,464 1,183
Other assets 1,569 731
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Total Assets $ 21,574 $ 19,334
=========================================================================================================
Liabilities and Stockholders' Equity
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Current liabilities:
Current portion of long-term debt $ 408 $ 708
Deferred income 1,979 1,943
Accounts payable 4,401 3,162
Accrued payroll and related expenses 764 748
Accrued warranty costs 1,104 897
Income taxes payable 426 350
Other accrued liabilities 776 1,004
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Total current liabilities 9,858 8,812
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Long-term debt 383 557
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Stockholders' equity:
Common stock 54 53
Additional paid-in capital 17,163 17,069
Retained deficit (5,575) (7,123)
Accumulated translation adjustment (309) (34)
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Total stockholders' equity 11,333 9,965
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Total Liabilities and Stockholders' Equity $ 21,574 $ 19,334
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CANDELA CORPORATION
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended: For the nine months ended:
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 8,790 $ 7,486 $ 25,835 $ 21,356
Cost of sales 4,112 4,174 12,747 12,026
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Gross profit 4,678 3,312 13,088 9,330
Operating expenses:
Research and development 609 390 1,737 1,137
Selling, general and administrative 3,667 2,642 9,203 7,192
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Total operating expenses 4,276 3,032 10,940 8,329
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Income from operations 402 280 2,148 1,001
Other income (expense):
Interest income 37 17 68 66
Interest expense (35) (8) (67) (28)
Other (271) 12 (237) (132)
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Total other income (expense) (269) 21 (236) (94)
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Income before income taxes 133 301 1,912 907
(Benefit) provision for income taxes (170) 70 364 320
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 303 $ 231 $ 1,548 $ 587
===================================================================================================================================
Net income per share $ 0.05 $ 0.04 $ 0.27 $ 0.11
===================================================================================================================================
Weighted average number of common and
common equivalent shares outstanding 5,743 5,638 5,694 5,520
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CANDELA CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended:
March 29, March 30,
1997 1996
(unaudited)
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,548 $ 587
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 374 364
Change in assets and liabilities:
Accounts receivable (1,073) (2,327)
Notes receivable 883 662
Inventory (638) 3
Other current assets (343) (96)
Other assets (852) 17
Accounts payable 1,239 1,010
Accrued payroll and related expenses 15 57
Deferred income 36 310
Accrued warranty costs 207 67
Income taxes payable 76 (513)
Other accrued liabilities (228) 11
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Total adjustments (304) (435)
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Net cash provided by operating activities 1,244 152
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Cash flows from investing activities:
Proceeds from sale of equipment 45 0
Payment for additions to property and equipment (1,610) (426)
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Net cash used for investing activities (1,565) (426)
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Cash flows from financing activities:
Payment of long-term debt (552) 111
Proceeds from the issuance of common stock 95 148
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Net cash provided by (used) for financing activities (457) 259
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Accumulated translation adjustment (274) (549)
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Net decrease in cash and equivalents (1,052) (564)
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Cash and equivalents at beginning of period 3,041 2,565
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Cash and equivalents at end of period $ 1,989 $ 2,001
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
CANDELA CORPORATION
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements and notes do not include all of the
disclosures made in the Company's Annual Report on Form 10-K for fiscal
1996, which should be read in conjunction with these statements. The
financial information included herein, with the exception of the
consolidated balance sheet at June 29, 1996, has not been audited.
However, in the opinion of Management, the statements include all
adjustments necessary for a fair presentation of the quarterly results.
All adjustments made to these financial statements were considered to be
of a normal and recurring nature. The results for the three and nine
month periods ended March 29, 1997, are not necessarily indicative of the
results to be expected for the full year. All prior period historical
consolidated financial data presented herein have been restated to
include the financial position, results of operations, and cash flows of
Spa Management, Inc. (renamed Candela Skin Care Center of Boston, Inc.)
acquired through a pooling of interests on June 27, 1996.
2. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
-------------- -------------
(unaudited) (1)
<S> <C> <C>
Raw materials $ 2,946 $ 3,534
Work in process 1,086 531
Finished goods 2,232 1,562
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$ 6,265 $ 5,627
======== =======
</TABLE>
3. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
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(unaudited) (1)
<S> <C> <C>
Leasehold improvements $1,314 $ 361
Office furniture 1,157 724
Laser systems 483 543
Computers and other equipment 3,576 3,296
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Total $6,530 $4,924
Less accumulated depreciation
and amortization 4,066 3,741
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$2,464 $1,183
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</TABLE>
(1) Derived from audited financial statements
6
<PAGE>
CANDELA CORPORATION
Notes to Consolidated Financial Statements
(Continued)
4. Net Income Per Common and Common Equivalent Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and, if dilutive, common stock
equivalents outstanding. Common stock equivalents include shares issuable
upon the exercise of stock options or warrants, net of shares assumed to
have been purchased with the proceeds.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128 - Earnings per
Share. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and requires a dual presentation of basic and
dilutive EPS. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, and earlier adoption is not
permitted. Neither basic nor diluted EPS computed in accordance with FAS
128 would be materially different from the Company's primary EPS
presented in the financial statements.
7
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW:
- ---------
Candela Corporation develops, manufactures, and distributes innovative
clinical solutions that enable physicians, surgeons and personal care
practitioners to treat selected cosmetic and medical problems using lasers,
cryosurgery and other proven technologies. In addition, the Company is applying
its capabilities and experience with skin care and related problems to develop a
network of Company-owned skin care centers and spas.
The Company continued to post positive operating results from its laser
operation (the manufacture, sale and servicing of lasers) and continued the
investment and expansion of its skin care centers through its wholly-owned
subsidiary (Candela Skin Care Centers, Inc.). Based on the increasing
significance of revenue and costs associated with the establishment and
operation of the skin care centers in relation to the Company in total, the
following discussion and analysis provides expanded discussion on the laser
operations and for the skin care centers in greater detail.
RESULTS OF OPERATIONS
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Total revenue for the three and nine months ended March 29, 1997, are
reflected in the following table:
<TABLE>
<CAPTION>
($ in 000's) 3 months 9 months
-------- --------
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Laser operations $ 8,226 $ 7,002 17% $ 24,138 $ 19,746 22%
Skin care centers 564 484 16% 1,697 1,610 5%
--------- ------- -------- --------
Total $ 8,790 $ 7,486 17% $ 25,835 $ 21,356 21%
</TABLE>
The increase in revenues for laser operations for the three and nine
months reflect the significant shipments of the Company's new leg vein device,
the Sclerolaser, introduced in March 1996; increased shipments of the ALEXlasr,
used for removal of tattoos and pigmented lesions; and initial shipments of the
Erbium YAG laser, used for skin resurfacing. Revenues for the skin care centers
reflect increases from the opening of a new center in Scottsdale, AZ, and slight
increases in the Boston, MA, center.
Gross profits were 53% and 51% for the three and nine months ended March
29, 1997, compared to gross profits of 44% for the same periods a year earlier.
The gross profit for the three month period was impacted positively by the sale
of certain lasers which had been written down due to the uncertainty of their
net realizable value. This improvement in gross profits was offset by greater
costs associated with the laser centers, primarily as the result of increased
labor costs associated with opening a new facility.
Research and development spending is associated with laser operations and
increased to $609,000 and $390,000 and $1,737,000 from $1,137,000 for the three
and nine months, respectively, ended March 29, 1997. These amounts reflect
increases of 56% and 53% over the same three and nine month periods a year
earlier. The increases in research and development reflect the Company's efforts
to develop products or product improvements designed to enhance or augment the
laser product lines and consist of increased costs associated with an expansion
of both internal staffing and use of external consulting.
8
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Selling, general and administrative expenses increased 39% and 28% for
the three and nine month periods ending March 29, 1997, compared to the same
periods one year earlier, reflecting increases from both the laser operations
and skin care centers. The increase in laser operations expenses of $271,000
and $1,118,000 for the three and nine month periods ended March 29, 1997, are
the result of increased spending for marketing new laser products introduced
during the year and expansion of staffing in the sales and administrative areas.
Skin care center expenses during the three and nine month periods increased
$753,000 and $893,000 over the same periods a year earlier due to the expansion
of a corporate and operational infrastructure for the organization and increased
levels of spending associated with the new skin care centers.
Profits from operations of 4.6% and 8.3% for the three and nine month
periods ended March 29, 1997, compared to 3.7% and 4.7% for the same periods one
year earlier, reflect an increase in profit from laser operations offset by
increased expenses associated with the skin care centers.
Net interest income and expense for the three month and nine month
periods ended March 29, 1997, is essentially unchanged, reflecting decreases of
$7,000 and $37,000 compared to the same periods a year earlier. For the three
month period ended March 29, 1997, total other expenses were $271,000 compared
to total other income of $12,000 in the same period one year earlier. For the
nine month period ended March 29, 1997, total other expenses were $236,000
compared to total other expenses of $94,000 for the same period one year
earlier. This change is primarily the result of foreign currency transactions
and start-up expenses related to the skin care centers.
The provision for income taxes includes an adjustment in the quarter
ended March 29, 1997, to reflect the expected annualized tax rate based on
revised projected earnings for the Company in both domestic and foreign
operations. The provision for income taxes for the nine months ended March 29,
1997, reflects the utilization of a portion of the Company's domestic net
operating loss carryforwards and tax provided in Japan at a 60% tax rate
yielding an overall effective tax rate of 19%.
9
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and equivalents at March 29, 1997, decreased by $1,052,000 to
$1,989,000 from $3,041,000 at June 29, 1996. Major factors impacting this change
include payment for additions to property and equipment for the skin care
centers, payment of long-term debt, and cash provided from operations of
$1,244,000.
The Company opened a LaserSpa/(TM)/ in Scottsdale, AZ, in February 1997
and in Boston, MA in April 1997. It is currently anticipated that a laser skin
care treatment center will open in Cairo, Egypt, in May, with Candela Skin Care
Centers, Inc. maintaining 51% ownership in a joint-venture with local Egyptian
investors. Equipment leasing will provide a portion of the funds used by the
Company for the initial investment costs and on-going operating expenses of
these facilities.
In support of the continued growth of these and other laser treatment
centers, the Company is in the process of finalizing a Line of Credit with a
major bank and pursuing financing from other private sector sources. The Company
is also pursuing additional borrowing by the Japanese subsidiary to be used for
payment of purchases made from the parent corporation. There can be no assurance
that such line of credit, financing, or borrowing will be available on terms
acceptable to the Company, or at all.
10
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Cautionary Statements
In addition to the other information in this Quarterly Report on Form
10-Q, the following cautionary statements should be considered carefully in
evaluating the Company and its business. Statements contained in this Form 10-Q
that are not historical facts (including, without limitation, statements
concerning anticipated operational and capital expense levels and such expense
levels relative to the Company's total revenues) and other information provided
by the Company and its employees from time to time may contain certain "forward-
looking" information, as that term is defined by (i) the Private Securities
Litigation Reform Act of 1995 (the "Act") and, (ii) in releases made by the
Securities and Exchange Commission (the "SEC"). The factors identified in the
cautionary statements below, among other factors, could cause actual results to
differ materially from those suggested in such forward-looking statements. The
cautionary statements below are being made pursuant to the provisions of the Act
and with the intention of obtaining the benefits of the "safe harbor" provisions
of the Act.
Variability of Quarterly Operating Results. The Company's quarterly
operating results may vary significantly from quarter to quarter, depending upon
factors such as the timing of product sales, the timing of expenditures in
anticipation of future product orders, the introduction and market acceptance of
new products, effectiveness in managing manufacturing processes, changes in cost
and availability of labor and product components, order cancellations, the
budgetary cycles of its customers, the timing of regulatory approvals, and the
timing of skin care center openings. The Company's ability to accurately
forecast future revenues and income for any period is necessarily limited, and
any forward-looking information provided from time to time by the Company
represents only management's then-best current estimate of future results or
trends, and actual results may differ materially from those contained in the
Company's estimates.
Potential Volatility of Stock Price. There has been significant
volatility in the market price of securities of companies in the medical device
industry. Factors such as announcements of new products by the Company or its
competitors, quarterly fluctuations in the financial results of the Company or
its competitors, shortfalls in the Company's actual financial results compared
to results previously forecast by stock market analysts, conditions in the
medical device industry and the financial markets and the economy generally
could cause the market price of the Company's securities to fluctuate
substantially and may adversely affect the price of the Company's securities.
11
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Risks Associated with International Operations. A significant portion of
the Company's revenues are attributable to international operations and revenues
from international operations are likely to continue to represent a significant
portion of the Company's revenues in future periods. The Company's international
business and financial performance may be adversely affected by a number of
factors, including without limitation to fluctuations in exchange rates, tariffs
and other trade barriers, adverse tax regulation, and adverse political and
economic conditions. Adverse effects on the Company's international operations
may have materially adverse effects on the Company's overall financial condition
and operating results.
New Business Strategic Development. While the Company continues to
expand and diversify its core cosmetic and surgical laser equipment business,
the Company has embarked on a new business strategy of opening combined spa and
laser cosmetic skin care centers. Currently, the Company operates combined
spa/skin care facilities in Boston, Massachusetts and Scottsdale, Arizona. The
Company's skin care treatment center previously located in Framingham,
Massachusetts has been combined with the spa in Boston to create a combination
spa/skin care facility. Additionally, the Company has entered into a joint-
venture with Egyptian investors to open a new laser cosmetic center in Cairo,
Egypt. The surgical skin care treatments performed in each location are
administered by board-certified physicians under contract with the Company's
wholly-owned subsidiary, Candela Skin Care Centers, Inc. While the target
audience for the Company's core laser equipment tends to be medical practice
groups and other health care providers, its target audience for its spa and skin
care centers are individuals who are typically reached through entirely
different marketing efforts. The cost structures, new client accretion methods
and other demands associated with the Company's new facilities are largely
untested, and the Company could incur significant losses in connection with its
spa and skin care centers.
Governmental Regulation. Medical devices are subject to United States
Food and Drug Administration ("FDA") approval before they can be utilized for
clinical studies or sold commercially. In addition, the Company's activities in
connection with its CSCC business may subject the Company to additional
regulation under state and federal laws. The process for obtaining the necessary
approvals and compliance with applicable regulations can be costly and time
consuming. Many foreign countries in which the Company markets or may market its
products have similar regulatory bodies and restrictions. There is no assurance
that the Company will be able to obtain any such government approvals or
successfully comply with any such regulations in a timely and cost-effective
manner, if at all, and failure to do so may have an adverse effect on the
Company's financial condition and results of operations.
12
<PAGE>
CANDELA CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Continued)
Risks Associated with Product Liability. The administration of medical
and cosmetic treatments using laser products is subject to various risks of
physical injury to the patient which may result in product liability or other
claims against the Company. The costs and resources involved in defending or
settling any such claims, or the payment of any award in connection therewith,
may adversely affect the Company's financial condition and operating results.
The Company maintains product liability insurance, but there is no assurance
that its current policy will provide sufficient coverage for any claim or claims
that may arise, or that the Company will be able to maintain such insurance
coverage on favorable economic terms, or at all.
Rapid Technological Change; Competition. The medical laser industry is
subject to rapid and substantial technological development and product
innovations. The Company, to be successful, must be responsive to new
developments in laser technology and applications of existing technology, and
the Company's financial condition and operating results may be adversely
affected by the failure of new or existing products to compete favorably in
response to such technological developments. In addition, the Company competes
against numerous other companies offering products similar to the Company's
and/or alternative products and technologies, some of which have greater
financial, marketing and technical resources than the Company. There can be no
assurance the Company will be able to compete successfully.
Reliance on Attracting and Retaining Key Employees. The Company's
success will depend in large part on its ability to attract and retain highly-
qualified scientific, technical, sales and marketing, management and other
personnel. Competition for such personnel is intense and any decline in the
Company's ability to attract and retain such personnel may have adverse effects
on its financial condition and operating results.
13
<PAGE>
CANDELA CORPORATION
Part II Other Information
Item 1 Legal Proceedings
There have been no material developments in the legal proceedings
previously reported by the Company.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Computation of Earnings Per Share.
Exhibit 27.1, Financial Data Schedule, page 16.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 29, 1997.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM SEC FORM 10Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-28-1997 JUN-30-1996 JUN-28-1997 JUN-30-1996
<PERIOD-END> MAR-29-1997 MAR-30-1996 MAR-29-1997 MAR-30-1996
<CASH> 1,989 2,172 1,989 2,172
<SECURITIES> 0 0 0 0
<RECEIVABLES> 7,690 7,665 7,690 7,665
<ALLOWANCES> 173 289 173 289
<INVENTORY> 6,265 5,330 6,265 5,330
<CURRENT-ASSETS> 17,540 16,700 17,540 16,700
<PP&E> 6,531 4,448 6,531 4,448
<DEPRECIATION> 4,066 3,559 4,066 3,559
<TOTAL-ASSETS> 21,574 18,227 21,574 18,227
<CURRENT-LIABILITIES> 9,858 8,665 9,858 8,665
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 54 55 54 55
<OTHER-SE> 11,278 9,099 11,278 9,099
<TOTAL-LIABILITY-AND-EQUITY> 18,227 18,227 21,574 18,227
<SALES> 8,790 7,487 25,835 21,356
<TOTAL-REVENUES> 8,827 7,504 25,903 21,422
<CGS> 4,112 4,174 12,747 12,026
<TOTAL-COSTS> 4,112 4,174 12,747 12,026
<OTHER-EXPENSES> 4,547 3,021 11,177 8,461
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 35 8 67 28
<INCOME-PRETAX> 133 301 1,912 907
<INCOME-TAX> (170) 70 364 320
<INCOME-CONTINUING> 303 231 1,548 587
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 303 231 1,548 587
<EPS-PRIMARY> 0.05 0.04 0.27 0.11
<EPS-DILUTED> 0.05 0.04 0.27 0.10
</TABLE>
