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____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarter ended March 28, 1998
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
_______________________
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 6, 1998
--------------- --------------------------
Common Stock, $.01 par value 5,470,831
____________________________________________________________________________
____________________________________________________________________________
<PAGE>
CANDELA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Cautionary Statements 12-14
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit 27.1 Financial Data Schedule 17
</TABLE>
2
<PAGE>
CANDELA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 28, June 28,
1998 1997
ASSETS (unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,140 $ 2,674
Accounts receivable, net 6,392 8,848
Notes receivable 1,094 1,284
Inventory 8,152 6,776
Other current assets 541 522
- -------------------------------------------------------------------------------------------------
Total current assets 17,319 20,104
- -------------------------------------------------------------------------------------------------
Property and equipment, net 3,207 3,523
Other assets 610 1,210
- -------------------------------------------------------------------------------------------------
Total Assets $21,136 $24,837
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
Current liabilities:
Lines of credit and short-term notes $ 2,206 $ 1,488
Current portion of long-term debt 360 339
Deferred income 1,765 2,071
Accounts payable 5,491 5,879
Accrued payroll and related expenses 778 833
Accrued warranty costs 1,362 1,338
Income taxes payable 163 516
Other accrued liabilities 1,214 608
Reserve for restructuring costs 2,125 0
- -------------------------------------------------------------------------------------------------
Total current liabilities 15,464 13,072
- -------------------------------------------------------------------------------------------------
Long-term debt 1,063 1,519
- -------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 55 54
Additional paid-in capital 17,386 17,223
Accumulated deficit (12,372) (6,885)
Cumulative translation adjustment (460) (146)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 4,609 10,246
- -------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $21,136 $24,837
=================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended: For the nine months ended:
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
(unaudited) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $8,617 $8,790 $24,962 $25,835
Cost of sales 4,774 4,112 14,100 12,747
- --------------------------------------------------------------------------------------------------------------
Gross profit 3,843 4,678 10,862 13,088
Operating expenses:
Research and development 659 609 1,979 1,737
Selling, general and administrative 3,331 3,667 11,421 9,203
Restructuring charge 0 0 2,609 0
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 3,990 4,276 16,009 10,940
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (147) 402 (5,147) 2,148
Other income (expense):
Interest income 12 37 29 68
Interest expense (47) (35) (181) (67)
Other (12) (271) (109) (237)
- --------------------------------------------------------------------------------------------------------------
Total other income (expense) (47) (269) (261) (236)
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (194) 133 (5,408) 1,912
(Benefit) provision for income taxes 0 (170) 78 364
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(194) $303 $(5,486) $ 1,548
=============================================================================================================
Basic earnings (loss) per share $(0.04) $0.06 $(1.00) $ 0.29
Diluted earnings (loss) per share $(0.04) $0.05 $(1.00) $ 0.27
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended:
March 28, March 29,
1998 1997
(unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $(5,486) $ 1,548
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 586 374
Provision for restructuring charges 2,609 0
Change in assets and liabilities:
Accounts receivable 2,133 (1,073)
Notes receivable 79 883
Inventory (1,550) (638)
Other current assets (40) (343)
Other assets 583 (852)
Accounts payable (88) 1,239
Accrued payroll and related expenses (60) 15
Deferred income (260) 36
Accrued warranty costs 36 207
Income taxes payable (388) 76
Accrued restructuring charges (484) 0
Other accrued liabilities 640 (228)
- -------------------------------------------------------------------------------------------------
Total adjustments 3,796 (304)
- -------------------------------------------------------------------------------------------------
Net cash (used for) provided by operating activities (1,690) 1,244
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 15 45
Payment for additions to property and equipment (185) (1,610)
- -------------------------------------------------------------------------------------------------
Net cash used for investing activities (170) (1,565)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of capital lease obligations (284) (268)
Proceeds from equipment financing 84 218
Borrowings from line of credit, net 950 0
Payment of long-term debt (468) (502)
Proceeds from the issuance of common stock 164 95
- --------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 446 (457)
- --------------------------------------------------------------------------------------------------
Effect of foreign currency on cash (120) (274)
- --------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (1,534) (1,052)
- --------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period 2,674 3,041
- --------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 1,140 $ 1,989
==================================================================================================
</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 1997,
which should be read in conjunction with these statements. The financial
information included herein, with the exception of the consolidated balance
sheet at June 28, 1997, has not been audited. However, in the opinion of
management, the statements include all necessary adjustments for a fair
presentation of the quarterly results and are prepared and presented in a
manner consistent with the Company's annual report on Form 10-K. The results
for the three and nine month periods ended March 28, 1998, are not
necessarily indicative of the results to be expected for the full year.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 28, 1998 June 28, 1997
-------------- -------------
<S> <C> <C>
Raw materials $3,131 $2,429
Work in process 1,398 1,023
Finished goods 3,623 3,324
------ ------
$8,152 $6,776
====== ======
</TABLE>
3. DEBT
At March 28, 1998, the Company had utilized $1,950,000 of the line of credit
at an interest rate of 9.5%. As of March 28, 1998, the Company was not in
compliance with the financial covenant limiting the maximum leverage to
3.00:1.00; the Company's ratio was 3.41:1.00. This covenant requirement was
waived by the bank. All other covenants contained in the line of credit were
met as of March 28, 1998.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding and, if dilutive,
diluted earnings per share is computed by including 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.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
--------------------------- --------------------------
March 28 March 29 March 28 March 29
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMERATOR
---------
Net income(loss) $ (194) $ 303 $(5,486) $1,548
====== ====== ======= ======
DENOMINATOR
-----------
BASIC EARNINGS PER SHARE
------------------------
Weighted average shares
outstanding 5,471 5,406 5,471 5,406
------ ------ ------- ------
Earnings(loss) per share $(0.04) $ 0.06 $ (1.00) $ 0.29
====== ====== ======= ======
DILUTED EARNINGS PER SHARE
--------------------------
Weighted average shares
outstanding 5,471 5,406 5,471 5,406
Dilutive options 0 385 0 385
------ ------ ------- ------
Adjusted weighted average
shares outstanding 5,471 5,791 5,471 5,791
------ ------ ------- ------
Earnings(loss) per share $(0.04) $ 0.05 $ (1.00) $ 0.27
====== ====== ======= ======
</TABLE>
5. RESTRUCTURING COSTS AND OTHER CHARGES
During the quarter ended December 27, 1997, the Company recorded
restructuring charges of $2,609,000 resulting from management's decision to
close the LaserSpa(TM) located in Scottsdale, Arizona. During the quarter
ended March 28, 1998, a total of $484,000 was charged against this reserve,
representing costs associated with the shutdown of the Scottsdale facility.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 Reporting Comprehensive Income ("SFAS
130") which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set
of general purpose financial statements. Management has not yet evaluated
the effects of this change on its reporting of income. The Company will
adopt SFAS 130 for its fiscal year ending June 26, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." Based on the management approach to segment reporting, SFAS
No. 131 establishes requirements to report selected segment information
quarterly and to report entity-wide disclosures about products and services,
major customers and the countries in which the entity holds material assets
and reports material revenue. The Company has adopted SFAS No. 131 for its
fiscal year ending June 26, 1999, and management is currently evaluating its
effects on the Company's reporting of segment information.
7. YEAR 2000 ISSUES
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems will recognize the year 2000 as 1900,
or not at all. This inability to recognize or properly treat the Year 2000
may cause systems to process critical financial and operational information
incorrectly. The Company utilizes software from third parties and related
technologies throughout its business that will be affected by the date change
in the year 2000. An internal review is currently under way to determine the
full scope and related costs to insure that the Company's systems continue to
meet its needs. All expenditures will be expensed as incurred and they are
not expected to have a significant impact on the Corporation's ongoing
results of operations.
8
<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 operates a
Company-owned LaserSpa(TM) (a combination skin care center and spa).
While the core laser operations of the Company (consisting of the
manufacture, sale and servicing of lasers) posted positive operating results on
a stand-alone basis during the quarter ended March 28, 1998, the Company
incurred an overall loss for the quarter attributable to losses from its wholly-
owned subsidiary, Candela Skin Care Centers, Inc. ("CSCC"). On-going CSCC
losses have continued to utilize significant cash reserves of the Company. As a
result of the continued losses from CSCC, the Company had decided to close the
Scottsdale LaserSpa(TM) earlier in the year. A charge of $2,609,000 was made
against second quarter income to cover the cost of closing the Scottsdale
facility. The Company continues to operate one LaserSpa(TM) located in Boston,
Massachusetts.
Due to the demand on the Company's resources to fund the skin care centers in
relation to the Company's core laser business, the Company has made the decision
to sell both the Boston and Scottsdale LaserSpas(TM). A preliminary agreement
was reached in March to sell both facilities to Advanced Medical Alliance, a San
Diego, CA-based aesthetic/cosmetic services group. Discussions to complete the
proposed $3 million transaction are continuing with the potential buyer on a
non-exclusive basis. The sale of these facilities will enable the Company to
focus resources on its core business of developing, marketing and distributing
medical lasers.
RESULTS OF OPERATIONS
- ---------------------
Total revenue for the three and nine months ended March 28, 1998 was
$8,617,000 and $24,962,000 respectively. Revenues decreased by 2% and 3%
respectively, for the three and nine month periods ended March 28, 1998 in
comparison to the same periods a year earlier. This decrease reflects a lower
level of shipments to South Korean distributors and elsewhere in the Far East.
Additionally, increased price pressures have resulted in lower selling prices
per unit in comparison to last year, and continued devaluation of the Japanese
Yen has negatively impacted revenues reported by the Company's wholly-owned
Japanese subsidiary. Skin care center revenue for the nine months ended March
28, 1998 reflect five more months of operations at the Scottsdale facility in
comparison to the same period a year earlier. The increase in skin care center
revenue for the three month period compared to the same period one year ago is
attributable to the capability to provide cosmetic laser procedures at the
Boston Spa which was introduced in April, 1997.
Revenue for the period ended March 28, 1998:
($ in 000's)
<TABLE>
<CAPTION>
3 months 9 months
-------- --------
1998 1997 Change 1998 1997 Change
------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Laser operations $7,941 $8,226 -3% $22,927 $24,138 -5%
Skin care centers 676 564 20% 2,035 1,697 20%
------ ------ ------- -------
Total $8,617 $8,790 -2% $24,962 $25,835 -3%
</TABLE>
9
<PAGE>
CANDELA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Gross profits were 45% and 44% for the three and nine months ended March 28,
1998, compared to gross profits of 53% and 51% for the same periods a year
earlier. Gross profit for the three month and nine month periods were
negatively impacted by increased price pressures and the decline of higher
margin shipments to the Far East.
Research and development spending is associated with laser operations and
increased to $659,000 from $609,000 and $1,979,000 from $1,737,000 for the three
and nine months, respectively, ended March 28, 1998. These amounts reflect
increases of 8% and 14% 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 and product improvements designed to enhance and augment the
existing product lines.
Selling, general and administrative expenses decreased 9%, from $3,667,000 to
$3,331,000, for the three month period ending March 28, 1998 compared to the
same period one year earlier. This reflects a savings of approximately $300,000
resulting from the Company's decision to close the Scottsdale Laserspa(TM) in
January. For the nine month period ended March 28,1998, selling, general and
administrative expenses increased 24% to $11,421,000 from $9,203,000 for the
same period a year earlier. This reflects increased operating expenses for the
LaserSpas(TM) of $530,000, non-recurring charges for legal and consulting fees
of $350,000, and an additional provision for potentially uncollectible notes and
accounts receivable of a domestic distributor for $550,000.
During the quarter ended December 27, 1997, a restructuring charge was made
against income in the amount of $2,609,000. This charge represents the
anticipated costs associated with closing the Scottsdale, Arizona, LaserSpa(TM),
including costs of maintaining the facility, write-off of leasehold
improvements, and a reserve against a loss upon liquidation of the equipment at
the site. During the quarter ended March 28, 1998, expenses charged against the
reserve totaled $484,000.
Loss from operations was $147,000 and $5,147,000, respectively, for the three
and nine month periods ended March 28, 1998. For the same periods one year
earlier, profit from operations was $402,000 and $2,148,000, respectively.
Other income and expense reflected $47,000 and $261,000 in expenses,
respectively, for the three-month and nine-month periods ending March 28, 1998,
compared to expenses of $269,000 and $236,000 for the same period a year
earlier.
The provision for income taxes results from a combination of activities of
both the domestic and foreign subsidiaries of the Company. Provision for income
taxes for the nine months ended March 28, 1998, reflects the utilization of a
portion of the Company's domestic net operating loss carryforwards and minimum
tax provisions calculated in Japan at a rate in excess of the U.S. statutory tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has continued to utilize cash resources in the operation of the
LaserSpas(TM) and in the production of a new laser introduced in the current
quarter. For the nine months ending March 28, 1998, cash used for operating and
investing activities totaled $1,860,000 which was partially offset by additional
borrowing against a bank line of credit in the amount of $950,000, and proceeds
from issuance of capital stock, upon exercise of stock options, in the amount of
$164,000. After considering payments against lease obligations and long-term
debt, net cash provided by financing activities totaled $446,000.
10
<PAGE>
CANDELA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash and equivalents at March 28, 1998 decreased by $1,534,000 to $1,140,000
from $2,674,000 at June 28, 1997. Major factors impacting this change include
payments for additions to property and equipment, payment of capital lease
obligations and long-term debt, and the use of cash for operating activities of
$1,690,000.
After reassessing the future funding requirements of the Scottsdale, Arizona
LaserSpa(TM), in December 1997 the Company decided to close this facility. The
Company is currently evaluating the sale of both the Scottsdale, AZ and Boston,
MA facilities and is currently in discussions to that end. A preliminary
agreement for the sale of both facilities has been reached with final
negotiations continuing. Equipment leasing has provided a portion of the funds
used by the Company for the initial capital investment costs for these
locations. Upon finalizing the sale of the assets the leases covering the
equipment will be paid in full using the sales proceeds to the extent that
leased equipment is sold or liquidated from the Scottsdale and Boston
facilities.
In support of the Company's laser production operations and the development
of CSCC's LaserSpa(TM) operations, the Company maintains a renewable $3,500,000
line of credit with a major bank which expires on November 30, 1998. The line of
credit bears interest at 1% over the bank's prime lending rate and is
collateralized by total domestic and international accounts receivable and
inventory, all tangible and intangible assets, and a pledge of the stock of
CSCC. At March 28, 1998, the Company had utilized $1,950,000 of the line of
credit at an interest rate of 9.5%.
The Company's Japanese subsidiary has borrowed funds to be used for payment
of equipment purchases made from the parent corporation. At March 28, 1998,
this liability is $384,000, converted at the quarter-end exchange rate. The
Company's remaining short-term and long-term debt is comprised of capital lease
obligations which were $360,000 and $935,000 respectively, at March 28, 1998,
compared to $339,000 and $1,156,000, respectively, at June 28, 1997.
The Company continues to pursue methods of expanding its current line of
credit and is seeking financing from alternative sources and private sector
sources of funds. There can be no assurance that such funding will be available
on terms acceptable to the Company, or at all, and if external sources of
financing do not become available, the Company's operations could be adversely
impacted.
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems will recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly. The Company utilizes software from third parties and related
technologies throughout its business that will be affected by the date change in
the year 2000. An internal review is currently under way to determine the full
scope and related costs to insure that the Company's systems continue to meet
its needs. All expenditures will be expensed as incurred and they are not
expected to have a significant impact on the Corporation's ongoing results of
operations.
11
<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
cost of operating the LaserSpa(TM) owned by the Company's wholly-owned
subsidiary, Candela Skin Care Centers, Inc. (CSCC). 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.
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, fluctuations in exchange
rates, tariffs and other trade barriers, adverse tax regulation, and adverse
political and economic conditions. Adverse effect on the Company's
international operations may have materially adverse effects on the Company's
overall financial condition and operating results.
12
<PAGE>
CANDELA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Condition and Results of Operations
(CONTINUED)
BUSINESS STRATEGIC DEVELOPMENT. While continuing to expand and diversify its
core cosmetic and surgical laser equipment business, the Company embarked on a
new business strategy of opening combined spa and laser cosmetic skin care
centers. Currently the Company operates a combined spa/skin care facility in
Boston, Massachusetts, created by combining the Company's skin care treatment
center previously located in Framingham, Massachusetts with the spa in Boston.
A combined spa/skin care facility located in Scottsdale, Arizona, was closed in
December 1997. While the Company continues to operate the Boston facility, it
has made the decision to sell the assets of both the Scottsdale and the Boston
facilities. In March 1998 the Company reached a preliminary agreement with
Advanced Medical Alliance, a San Diego, CA-based aesthetic/cosmetic services
group. Negotiations to complete this sale are continuing on a non-exclusive
basis. There can be no assurances that these negotiations will be concluded
successfully. Surgical skin care treatments performed in the LaserSpa(TM) are
administered by board-certified physicians under contract with CSCC. While the
target audience for the Company's core laser equipment tends to be medical
practice groups and other health care providers, the target audience for its
spa and skin care center is 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 continue to incur losses
in connection with its spa and skin care centers.
GOVERNMENTAL REGULATION. Medical devices are subject to 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 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.
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 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.
13
<PAGE>
CANDELA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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. In addition, the
Company's CSCC operations face a host of competitors including hair salons,
health spas, massage therapists, aestheticians, health and fitness clubs,
personal trainers, dermatologists, plastic surgeons, cosmetic laser centers and
cosmetic retailers. The Company also believes its CSCC operations face
competition from laser manufacturing companies that have, or may develop, plans
to open facilities based on concepts similar to the Candela LaserSpa(TM)
concept. Such competition could have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
even if the Company is able to successfully compete, there can be no assurance
that it would be able to do so in a profitable manner.
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, managerial, 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.
14
<PAGE>
CANDELA CORPORATION
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
On January 20, 1998, the Company held its Annual Shareholder meeting. At
the meeting, the Shareholders acted upon the following proposals: (I.)
election of directors; and (II.) ratification of the firm of Coopers &
Lybrand L.L.P. as independent auditors for the fiscal year ending June
28, 1997. All of the above matters were approved by the Shareholders.
Votes "For" represent affirmative votes and do not include abstentions or
broker non-votes. In cases where a signed proxy was submitted without
direction, the shares represented by the proxy were voted "For" each
proposal in the manner disclosed in the Proxy Statement and Proxy.
Voting Results were as follows:
<TABLE>
<CAPTION>
Broker
Matter For Against Withheld Abstain Non-Votes
------ --- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
I. Election of Directors:
----------------------
Gerard E. Puorro 4,078,983 N/A 54,867 N/A -0-
Theodore G. Johnson 4,091,717 N/A 42,133 N/A -0-
Kenneth D. Roberts 4,092,527 N/A 41,323 N/A -0-
Douglas W. Scott 4,081,927 N/A 51,923 N/A -0-
Richard J. Cleveland, MD 4,080,083 N/A 53,767 N/A -0-
Robert E. Dornbush 4,092,027 N/A 41,823 N/A -0-
II. Ratification of Independent Auditors:
-------------------------------------
4,106,752 16,015 N/A 11,083 -0-
</TABLE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
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 28, 1998.
15
<PAGE>
SIGNATURES
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.
CANDELA CORPORATION
Registrant
Date: May 8, 1998 /s/ Gerard E. Puorro
----------- --------------------
Gerard E. Puorro
(President, Chief Executive Officer)
Date: May 8, 1998 /s/ F. Paul Broyer
----------- -------------------
F. Paul Broyer
(Vice President, Treasurer and
Chief Financial Officer)
16
<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-27-1998 JUN-28-1997 JUN-27-1998 JUN-28-1997
<PERIOD-END> MAR-28-1998 MAR-29-1997 MAR-28-1998 MAR-29-1997
<CASH> 1,140 1,989 1,140 1,989
<SECURITIES> 0 0 0 0
<RECEIVABLES> 7,357 7,690 7,357 7,690
<ALLOWANCES> 965 173 965 173
<INVENTORY> 8,152 6,265 8,152 6,265
<CURRENT-ASSETS> 17,319 17,541 17,319 17,541
<PP&E> 7,765 6,530 7,765 6,530
<DEPRECIATION> 4,558 4,066 4,588 4,066
<TOTAL-ASSETS> 21,136 21,574 21,136 21,574
<CURRENT-LIABILITIES> 15,464 9,858 15,464 9,858
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 55 54 55 54
<OTHER-SE> 4,554 11,279 4,554 11,279
<TOTAL-LIABILITY-AND-EQUITY> 21,136 21,574 21,136 21,574
<SALES> 8,617 8,790 24,962 25,835
<TOTAL-REVENUES> 8,629 8,827 24,991 25,903
<CGS> 4,774 4,112 14,100 12,747
<TOTAL-COSTS> 4,774 4,112 14,100 12,747
<OTHER-EXPENSES> 4,002 4,547 16,118 11,117
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 47 35 181 67
<INCOME-PRETAX> (194) 133 (5,408) 1,912
<INCOME-TAX> 0 (170) 78 364
<INCOME-CONTINUING> (194) 303 (5,486) 1,548
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (194) 303 (5,486) 1,548
<EPS-PRIMARY> (0.04) 0.06 (1.00) 0.29
<EPS-DILUTED> (0.04) 0.05 (1.00) 0.27
</TABLE>
