<PAGE>
As filed with the Securities and Exchange Commission on June 21, 1999.
Registration No. 333-78339
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
CANDELA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
Delaware 3845 04-2477008
<S> <C> <C>
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
</TABLE>
530 Boston Post Road
Wayland, Massachusetts 01778
(508) 358-7400
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices and principal place of business)
----------------
Gerard E. Puorro
Chief Executive Officer and President
Candela Corporation
530 Boston Post Road
Wayland, Massachusetts 01778
(508) 358-7400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
Copies to:
Gordon H. Hayes, Jr. William C. Rogers
TESTA, HURWITZ & THIBEAULT, LLP CHOATE, HALL & STEWART
125 High Street Exchange Place
High Street Tower 53 State Street
Boston, Massachusetts 02110 Boston, Massachusetts 02109
(617) 248-7000 (617) 248-5000
(617) 248-7100 (Fax) (617) 248-4000 (Fax)
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 21, 1999
PROSPECTUS
2,580,000 Shares
Candela Corporation Logo
Common Stock
------------
Of the 2,580,000 shares of common stock offered, we are offering 1,499,854
shares and certain shareholders are offering 1,080,146 shares. We will not
receive any of the proceeds from the shares sold by the selling shareholders.
Our common stock is traded on The Nasdaq National Market under the symbol
"CLZR." On June 18, 1999, the last reported sale price for the common stock on
The Nasdaq National Market was $14.50 per share.
------------
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 6.
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Public Price........................................................ $ $
Underwriting Discount............................................... $ $
Proceeds, before expenses, to Candela............................... $ $
Proceeds to Selling Shareholders.................................... $ $
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The underwriters may also purchase up to an additional 387,000 shares from us
and certain selling shareholders at the public offering price, less the
underwriting discounts, within 30 days from the date of this prospectus, to
cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
------------
Needham & Company, Inc. Tucker Anthony Cleary Gull
The date of this Prospectus is , 1999
<PAGE>
Candela's lasers deliver superior performance and price for aesthetic
procedures
Faster Smaller Affordable
Faster, easier Compact, highly reliable Reduced costs bring
treatments that are safe devices are well suited aesthetic procedures to
and efficacious, satisfy for the physician's a broader range of
patients and benefit office. practitioners and
physicians. consumers.
[photo of male [photo of female
practitioner] practitioner]
<PAGE>
Led by GentleLASE(R), Candela is expanding the range of aesthetic laser
procedures through its comprehensive and growing product line.
Dynamic Cooling Device (DCD)
Candela's proprietary DCD technology improves speed, safety and
efficacy for hair removal (GentleLASE) and vascular procedures (ScleroPLUS).
GentleLASE ScleroPLUS ALEXlazr and YAGlazr
GentleLASE is rapidly The versatility of The ALEXlazr and YAGlazr
capturing a leading ScleroPLUS provides provide permanent
position in the emerging optimized treatments for removal of pigmented
laser solution for the a broad range of lesions, such as age
large hair removal vascular conditions, spots, and multi-colored
market. such as stretch marks, tatoos.
varicose veins, facial
veins and birthmarks.
[Photo of GentleLASE] [Photo of ScleroPLUS] [Photo of ALEXlazr]
[Photo of DCD handpiece]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Capitalization........................................................... 13
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Selected Consolidated Financial Data..................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 25
Management............................................................... 40
Principal and Selling Shareholders....................................... 49
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Where You Can Find More Information...................................... 56
Index to Consolidated Financial Statements............................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
document may only be accurate on the date of this document.
All references to "we," "us," "our," "Candela" or "the Company" in this
prospectus mean Candela Corporation and all entities owned or controlled by
Candela Corporation. Candela, the Candela Corporation logo, GentleLASE and
Sclerolaser are registered trademarks of Candela. This prospectus also include
trademarks, service marks and trade names of other companies.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements.
Candela
We develop, manufacture, market and service lasers for a broad variety of
aesthetic and cosmetic procedures, including:
. hair removal;
. non-invasive treatment of varicose veins and other benign vascular
lesions;
. removal of benign pigmented lesions such as age spots and tattoos;
. treatment of scars and stretch marks; and
. skin resurfacing.
Since our founding nearly 30 years ago, we have continuously developed and
enhanced applications of laser technology. In the mid-1980's we began
developing laser technology for medical applications and since that time we
have shipped approximately 3,000 lasers to over 40 countries. Today, all of our
products are for aesthetic and cosmetic applications and we offer one of the
broadest product lines in the aesthetic and cosmetic laser industry.
The aesthetic and cosmetic laser industry has only recently developed
technology that successfully addresses hair removal, which is the largest
cosmetic application to date. In addition, the aesthetic and cosmetic laser
industry appears to be entering an era of broader based growth. The most
important factors contributing to this growth are:
. the challenging medical reimbursement environment resulting in
practitioners seeking more procedures on a direct-pay basis;
. the rising discretionary income of aging baby boomers; and
. the development of technology that allows for new, safe and efficacious
procedures for conditions that have large patient populations.
Our customer base for aesthetic and cosmetic lasers has been primarily
dermatologists and plastic and cosmetic surgeons. In the U.S. alone there are
approximately
. 10,000 dermatologists;
. 7,000 plastic and cosmetic surgeons;
. 70,000 general and family practitioners;
. 35,000 obstetricians and gynecologists; and
. other specialists who are outside our traditional customer base.
Recently, we signed an exclusive distribution agreement with Physicians
Sales and Service (PSS) which gives PSS the right to distribute our hair
removal and vascular lesion lasers to their customer base of family and general
practice physicians, obstetricians, gynecologists and general and vascular
surgeons.
Aesthetic and cosmetic laser vendors who are able to develop lasers that are
more affordable, faster, smaller and easier to use will be well positioned to
take advantage of the industry's growth. Our strategy is to:
.reduce product costs;
.expand sales beyond our traditional base;
.increase penetration of our traditional customer base;
.expand our domestic and international marketing and distribution channels;
and
.continue to invest in research and development.
Our principal offices are located at 530 Boston Post Road, Wayland,
Massachusetts, 01778, and our telephone number is (508) 358-7400. Our website
can be found at www.clzr.com. Information contained on our website does not
constitute part of this prospectus.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Candela.................... 1,499,854 shares
Common stock offered by selling shareholders....... 1,080,146 shares
Common stock to be outstanding after the offering.. 7,053,963 shares
Use of proceeds.................................... General corporate
purposes, including
working capital and
potential acquisitions.
Risk factors....................................... An investment in the
common stock involves
risks. See "Risk Factors"
beginning on page 6 to
read about the risks you
should consider before
buying shares of the
common stock.
Nasdaq National Market symbol...................... CLZR
</TABLE>
We calculated the number of shares of our common stock to be outstanding
immediately after the offering based on 5,554,109 shares outstanding at June
15, 1999. This number does not take into account options and warrants
outstanding at June 15, 1999 to purchase 1,638,351 shares of stock.
4
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following Summary Consolidated Financial Data should be read in
conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. "As Adjusted" balance sheet
data at March 27, 1999, is adjusted to reflect the sale by Candela of 1,499,854
shares of common stock offered by us in this prospectus at an assumed public
offering price of $15.00 per share and the receipt of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
Consolidated Statement of Nine Months Ended Fiscal Year Ended
Operations Data: ------------------- --------------------------------------------
March 27, March 28, June 27, June 28, June 29, July 1, July 2,
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Lasers and other
products.............. $31,254 $16,735 $25,917 $25,601 $20,403 $18,017 $20,187
Product related
service............... 6,373 6,193 8,405 7,661 7,861 8,450 9,425
Skin care centers...... 2,254 2,034 2,703 2,243 2,149 1,777 208
------- ------- ------- ------- ------- ------- -------
Total revenue........ 39,881 24,962 37,025 35,505 30,413 28,244 29,820
Gross profit............. 20,888 10,862 16,318 16,855 13,580 12,376 13,765
Income (loss) from
operations.............. 6,376 (5,147) (3,961) 687 1,889 (1,603) 714
Net income (loss)........ 4,210 (5,486) (4,452) 238 1,245 (1,536) 655
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per
share................... .77 (1.01) (.81) .04 .23 (.29) .13
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share............... $ .72 $ (1.01) $ (.81) $ .04 $ .22 $ (.29) $ .13
======= ======= ======= ======= ======= ======= =======
Shares used in computing
historical diluted net
income per share:
Weighted average shares
outstanding........... 5,486 5,446 5,479 5,398 5,321 5,288 5,206
======= ======= ======= ======= ======= ======= =======
Adjusted weighted
average shares
outstanding........... 5,841 5,446 5,479 5,673 5,652 5,288 5,208
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
March 27, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital............................................. $10,977 $28,100
Total assets................................................ 30,450 47,573
Long-term debt, excluding current maturities................ 2,971 299
Total liabilities........................................... 19,540 16,866
Stockholders' equity........................................ 10,910 31,733
</TABLE>
----------------
Unless otherwise indicated, the information in this prospectus assumes the
underwriters do not exercise their over-allotment option.
5
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
risks, including those described below. You should consider carefully these
risk factors together with all of the other information included in this
prospectus before you decide to purchase shares of our common stock.
Our Dependence on GentleLASE Increases Our Susceptibility to Competitive
Changes in the Marketplace
We introduced our GentleLASE in March 1998. GentleLASE's sales have grown
rapidly and account for more than half of our total revenue in the most recent
fiscal quarter, ended March 27, 1999. Heavy dependence on GentleLASE sales
increases our susceptibility to changes in the marketplace, such as
competitors' reducing prices or adding new features to their products, or
customers ordering fewer of our products. Such changes in the marketplace could
hurt our financial results.
Loss of Our Exclusive Rights to the DCD Technology Could Hurt Our Financial
Results
Due to the terms of an amended license agreement entered into in October
1998, Candela could lose its exclusive rights to our Dynamic Cooling Device
(DCD), or the patent under which the DCD was developed could be invalidated as
a result of pending litigation. We developed our DCD, which is used to
selectively cool the subject's outermost layer of skin during cosmetic laser
treatments, under an exclusive license to patent rights owned by the Regents of
the University of California. The DCD is an integral component of our biggest-
selling device, the GentleLASE, and is also currently sold as an attachment to
our other principal laser device, the ScleroPLUS. We believe the efficacy of
the DCD has been a key element in the recent growth in sales of our laser
devices. In October 1998, we entered into an amendment of the license agreement
which provided us with an exclusive right under the Regents' patent to make,
use and sell the dynamic cooling technology in all fields of use. However, this
amendment also imposes on us an obligation to negotiate in good faith and make
commercially reasonable efforts to conclude sublicensing agreements with third
parties, subject to certain stipulated minimum terms and conditions. If we fail
to negotiate in good faith or enter into sublicenses with third parties within
certain time periods, the Regents may then grant license rights to such third
parties directly, provided that Candela will receive 50% of all revenues
received under such licenses.
To date, Candela has corresponded with seven prospective sublicensees of the
DCD technology who were identified by the Regents as potentially interested in
obtaining a sublicense for that technology. Of these seven entities, two
expressed an interest in pursuing sublicensing discussions. Candela provided
term sheets for a sublicense to each of them. One of these entities, Laser
Aesthetics, Inc. and its parent corporation, New Star Lasers, Inc., responded
by commencing litigation seeking, among other things, to invalidate the
Regents' patent under which the DCD was developed. The other entity has not
responded to the term sheet. Candela has sent additional correspondence to the
other entities who were identified by the Regents reminding them that Candela
remains willing to open negotiations with them for the sublicensing of DCD
technology, but has not received any further response.
While no such sublicenses or further licenses have been granted by us or the
Regents to date, principal competitors of ours, or new entrants into the
medical laser industry, may successfully conclude licensing arrangements
providing them with access to the dynamic cooling technology. While our
agreement with the Regents provides that we would receive 50% from all such
licenses, the loss of exclusivity to this technology could hurt our financial
results. In addition, while we believe the litigation commenced by New Star
Lasers, Inc. challenging the validity of the Regents' patent rights is without
merit, we can't be certain that the Regents' patent rights will not be reduced
or invalidated, which could also hurt our business and financial results.
Our Dependence upon Revenues From International Sales Exposes Us to Special
Risks
We sell a significant portion of our products and services outside the U.S.
and Canada. International sales, consisting of sales from our subsidiaries in
Germany, Spain and Japan, and sales shipped directly to
6
<PAGE>
international locations from the U.S., accounted for 54% and 53% of our revenue
for the nine months ended March 27, 1999 and the fiscal year ended June 27,
1998, respectively, and we expect that they will continue to be significant. As
a result, a major part of our revenues and operating results is subject to
risks associated with international sales, including:
. significant fluctuations in the exchange rates between the U.S. dollar
and foreign currencies which could cause us to lower our prices and our
profitability, or could cause prospective customers to push out orders
because of the increased relative cost of our products in the aftermath
of a currency devaluation, or currency fluctuation -- for example, in our
fiscal year ended June 27, 1998, we experienced an 8% decline in product
sales to Japanese customers as a result of the erosion of the Japanese
Yen compared to the U.S. dollar during this period.
. failure to obtain necessary import or foreign regulatory approvals for
our products;
. policy changes or changes in applicable U.S. or foreign laws which result
in burdensome government controls, tariffs, restrictions, embargoes or
import or export license requirements;
. difficulties of staffing and managing our foreign operations;
. political and economic instability in our target international markets;
. potential additional U.S. and foreign taxes which increase the amount of
taxes we have to pay;
. longer payment cycles common in foreign markets;
. difficulties collecting our accounts receivable because of different
legal rules;
. debt defaults on the part of governments of nations in which we sell our
products;
. currency devaluation;
. lack of liquidity; and
. recessions.
Economic Problems in Japan and the Asia-Pacific Marketplace May Hurt Our Sales
Recently, Japan and the Asia-Pacific economies have experienced serious
problems. For the Asia-Pacific market these include debt defaults and, along
with Japan, currency devaluation, lack of liquidity and recessions. Since
approximately a third of our sales in recent periods were derived from this
region, negative changes in this area's economic growth rate would impact our
ability to sell our products in those markets. While we don't know the actual
magnitude of our revenues at risk, if capital spending in these markets remains
flat or decreases further, our sales and results of operations could be hurt.
We Are Dependent Upon a Sole Supplier For a Key Component
We use Alexandrite rods to manufacture the GentleLASE and the ALEXlazer,
which account for a significant portion of our total revenues. We depend
exclusively on Litton Airtron Synoptics Group to supply these rods, for which
no alternative supplier meeting our quality standards exists. We cannot be
certain that Litton will be able to meet our future requirements at current
prices or at all. To date we have been able to obtain adequate supplies of
Alexandrite rods in a timely manner, but any extended interruption in our
supplies could hurt our results.
Our Quarterly Operating Results May Fluctuate Significantly
Our quarterly revenue and operating results are difficult to predict and may
swing sharply from quarter to quarter. If our quarterly revenue or operating
results fall below the expectations of investors or public market analysts, the
price of our common stock could fall substantially. Our quarterly revenue is
difficult to forecast for many reasons, some of which are outside of our
control, including the following:
Market Supply and Demand
. potential increases in the level and intensity of price competition
between us and our competitors;
7
<PAGE>
. potential decrease in demand for our products; and
. possible delays in market acceptance of our new products.
Customer Behavior
. changes in or extensions of our customers' budgeting and purchasing
cycles; and
. changes in the timing of product sales in anticipation of new product
introductions or enhancements by us or our competitors.
Company Operations
. absence of significant product backlogs;
. our effectiveness in our manufacturing process;
. unsatisfactory performance of our distribution channels, service
providers or customer support organizations; and
. timing of any acquisitions and related costs.
The Cost of Closing Our Skin Care Centers May Be Higher Than Anticipated
We have renewed our commitment to expand and diversify our core cosmetic and
surgical laser equipment business. As part of this refocus, we decided to
reduce our focus on our efforts to own and operate centers which would offer
cosmetic laser treatments utilizing our equipment, along with providing other
cosmetic services traditionally offered by high-end spas. Although we are
actively seeking buyers for the two skin care centers we opened which are
located in Scottsdale, Arizona and Boston, Massachusetts, we can't be certain
that a sale or sublease of either facility will be completed on favorable terms
or at all. We have established a reserve to cover the anticipated costs of
terminating the Scottsdale facility, but we can't be sure that such reserve
will be adequate. To date, we have not established a reserve in connection with
the Boston facility, which we are continuing to operate as a spa without
providing cosmetic laser services.
Our Growth Depends Upon Our Ability to Expand Our Sales Force and Distribution
Channels
We sell our products primarily through our direct sales force and we support
our customers with our internal technical and customer support staff. To
achieve significant revenue growth in the future we must recruit and train
sufficient technical, customer and direct sales personnel. We have in the past
and may in the future experience difficulty in recruiting qualified sales,
technical and support personnel. We also rely on our network of distributors
and our relationship with PSS for sales of our products. Our inability to
rapidly and effectively expand our direct sales force and our technical and
support staff or our failure to maintain effective distribution relationships
with PSS and other distributors could hurt our business.
The Laser Industry is Subject to Rapid Changes in Technology and Intense
Competition
The aesthetic and cosmetic laser equipment industry is subject to rapid and
substantial technological development and product innovations. To be
successful, we must be responsive to new developments in laser technology and
new applications of existing technology. Our financial condition and operating
results could be hurt if our products fail to compete favorably in response to
such technological developments, or we are not agile in responding to
competitors' new product introductions or product price reductions. In
addition, we compete against numerous companies offering products similar to
ours, some of which have greater financial, marketing and technical resources
than we do. We can't be sure that we will be able to compete successfully with
these companies and our failure to do so could hurt our business, financial
condition and results of operations.
Our New Products May Be Subjected to a More Burdensome Regulatory Review
Process Than Our Earlier Products and Could Fail to Receive Necessary
Government Clearances or Approvals
The types of medical devices that we seek to market in the U.S. generally
must receive either "510(k) clearance" or "PMA approval" in advance from the
U.S. Food and Drug Administration (FDA) pursuant to
8
<PAGE>
the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process
usually takes from four to twelve months, but it can last longer. The process
of obtaining PMA approval is much more costly and uncertain and generally takes
from one to three years or even longer. To date, the FDA has deemed our
products eligible for the 510(k) clearance process. We believe that most of our
products in development will receive similar treatment. However, we cannot be
sure that the FDA will not impose the more burdensome PMA approval process upon
one or more of our future products, nor can we be sure that 510(k) clearance or
PMA approval will ever be obtained for any product we propose to market.
Many foreign countries in which we market or may market our products have
regulatory bodies and restrictions similar to those of the FDA. Particularly,
for example, we are awaiting Ministry of Health approval in Japan for the sale
of ScleroPLUS. We can't be certain that we will be able to obtain (or continue
to obtain) any such government approvals or successfully comply with any such
foreign regulations in a timely and cost-effective manner, if at all, and our
failure to do so could hurt our business, results of operations and financial
condition.
We Have Modified Some of Our Products Without FDA Clearance; The FDA Could
Retroactively Decide the Modifications Were Improper and Require Us to Cease
Marketing and/or Recall the Modified Products
Any modification to one of our 510(k) cleared devices that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires every manufacturer to make this determination in the first instance,
but the FDA can review any such decision. We have modified some of our marketed
devices, but we believe that new 510(k) clearances are not required. We cannot
be certain that the FDA would agree with any of our decisions not to seek
510(k) clearance. If the FDA requires us to seek 510(k) clearance for any
modification, we also may be required to cease marketing and/or recall the
modified device until we obtain a new 510(k) clearance.
Achieving Complete Compliance With FDA Regulations Is Difficult and, if We Fail
to Comply, We Could Be Subject to FDA Enforcement Action
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. The FDA's regulatory scheme is
complex, especially the Quality System Regulation, which requires manufacturers
to follow elaborate design, testing, control, documentation and other quality
assurance procedures. This complexity makes complete compliance difficult to
achieve. Also, the determination as to whether a QSR violation has occurred is
often subjective. If the FDA finds that we have failed to comply with the QSR
or other applicable requirements, the agency can institute a wide variety of
enforcement actions, including a public warning letter or other stronger
remedies, such as:
. fines, injunctions and civil penalties against us;
. recall or seizure of our products;
. operating restrictions, partial suspension or total shutdown of our
production;
. refusing our requests for 510(k) clearance or PMA approval of new
products;
. withdrawing product approvals already granted; and
. criminal prosecution.
Our Industry Is Subject to Unanticipated Changes in Domestic and Foreign
Governmental Regulation
A host of regulatory requirements apply to the manufacture and commercial
distribution of our devices after the FDA and foreign governments have cleared
them for marketing. Unanticipated changes in existing regulatory requirements
or adoption of new requirements could hurt our business, results of operations
and financial condition.
9
<PAGE>
We May Incur Unexpected Costs to Comply with Other Government Regulations
We also must comply with numerous laws relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and hazardous substance disposal. We may incur significant costs
to comply with such laws and regulations in the future and we cannot be sure
that such laws or regulations will not hurt our business, results of operations
and financial condition.
Third Parties May Claim That We Infringe Their Proprietary Technology
Our industry has been characterized by frequent litigation regarding patent
and other intellectual property rights. Patent applications are maintained in
secrecy in the U.S. until such patents are issued and are maintained in secrecy
for a period of time outside the U.S. Accordingly, we can conduct only limited
searches to determine whether our technology infringes any patents or patent
applications of others. Any claims of patent infringement would be time-
consuming, and could:
. result in costly litigation;
. divert our technical and management personnel;
. cause product shipment delays;
. require us to develop non-infringing technology; or
. require us to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the laser industry
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and often require the
payment of ongoing royalties, which could hurt our gross margins. In addition,
we can't be sure that the necessary licenses would be available to us on
satisfactory terms, or that we could redesign our products or processes to
avoid infringement, if necessary. Accordingly, an adverse determination in a
judicial or administrative proceeding, or the failure to obtain necessary
licenses, could prevent us from manufacturing and selling some of our products,
which could hurt our business, results of operations and financial condition.
On the other hand, we may have to start costly and time consuming litigation in
order to enforce our patents, to protect trade secrets and know-how owned by us
or to determine the enforceability, scope and validity of the proprietary
rights of others.
We Could be Subject to Product Liability Claims
There are various risks of physical injury to the patient when using our
lasers for aesthetic and cosmetic treatments. Injuries often result in product
liability or other claims being brought against the practitioner utilizing the
device and us. The costs and management time we would have to spend in
defending or settling any such claims, or the payment of any award in
connection with such claims, could hurt our business, results of operations and
financial condition. Although we maintain product liability insurance, we can't
be certain that our policy will provide sufficient coverage for any claim or
claims that may arise, or that we will be able to maintain such insurance
coverage on favorable economic terms.
We May Be Unable To Attract and Retain Management and Other Personnel
The loss of any of our senior management or other key research, development,
sales and marketing personnel, particularly if lost to competitors, could hurt
our future operating results. Our future success will depend in large part upon
our ability to attract, retain and motivate highly skilled employees. We cannot
be certain that we will attract, retain and motivate sufficient numbers of such
personnel.
Year 2000 Issues May Increase Our Costs or Disrupt Our Operations
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This "Year 2000" problem could result
in miscalculations, data corruption, system failures or disruption of
operations.
10
<PAGE>
We have assessed our operations, from information and financial systems to
each aspect of our manufacturing processes, in order to reduce the risk of
operational disruption and potential litigation due to the Year 2000 issue. We
have completed approximately 80% of the implementation and testing of the
necessary upgrades to our financial and information systems and expect to
finish our upgrades prior to the end of October 1999. Our Year 2000 assessment
identified no need for upgrades to our products and non-information systems.
While responses to an informal survey of our suppliers and significant
customers indicate that many of our suppliers and customers are Year 2000
compliant, we have not yet received sufficient information from all parties
about their Year 2000 preparedness to assess the effectiveness of their
efforts. Moreover, in most cases, we are not in a position to verify the
accuracy or completeness of the information we receive from third parties.
If third parties with whom we interact have Year 2000 problems that are not
remedied, we could experience problems including the following:
. in the case of vendors, disruption of important services upon which we
depend, such as telecommunications and electrical power;
. in the case of customers, temporary reduction in their purchasing
activities as they implement upgraded systems;
. in the case of third-party data providers, receipt of inaccurate or out-
of-date information that would impair our ability to perform critical
data functions; and
. in the case of banks and other lenders, disruption of capital flows
potentially resulting in liquidity stress.
While we believe that Year 2000 disruptions will not materially hurt our
business, we cannot be certain that all of our systems, or those of our
suppliers and customers, will function properly after December 31, 1999. This
could result in delays in operations which would harm our financial condition
and operating results. In addition, in some international markets in which we
do business, the level of awareness and remediation efforts relating to the
Year 2000 issue may be less advanced than in the U.S. We are in the process of
formulating a contingency plan to address the failure of our most important
organizational systems, which we expect to be substantially complete by October
1999. We anticipate that our contingency plan will focus on identifying
additional suppliers that can be utilized in the event of a Year 2000
disruption.
Future Acquisitions and Joint Ventures May Involve Financial and Management
Risk
We may acquire businesses, products and technologies that complement or
expand our business. We may also consider joint ventures and other
collaborative projects. We may not be able to
. identify appropriate acquisition or joint venture candidates,
. successfully negotiate, finance or integrate any businesses, products or
technologies that we acquire, or
. successfully manage any joint ventures or collaborations. Furthermore,
the integration of any acquisition or joint venture may divert management
time and resources. If we fail to manage these acquisitions or joint
ventures effectively we may incur debts or other liabilities or costs
which could harm our operating results or financial condition. While we
from time to time evaluate potential acquisitions of businesses, products
and technologies, and also consider joint ventures and other
collaborative projects, and anticipate continuing to make these
evaluations, we have no present understandings, commitments or agreements
with respect to any acquisitions or joint ventures.
Our Anti-Takeover Measures May Affect the Value of our Stock
We, as a Delaware corporation, are subject to Section 203 of the General
Corporation Law of the State of Delaware. In general, Section 203 restricts the
ability of a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder. As a result of the application of Section 203 and certain other
corporate documents, potential acquirors may be discouraged from attempting to
acquire us, thereby possibly depriving our stockholders of acquisition
opportunities to sell or otherwise dispose of our stock at above-market prices
typical of such acquisitions.
11
<PAGE>
We have also adopted a shareholder rights plan which gives holders of common
stock the right to purchase additional shares of our common stock if a
potential acquiror purchases or announces a tender offer to purchase 25% or
more of our outstanding common stock. The existence of this plan may make it
more difficult for a third party to acquire control of Candela.
The effect of the above-mentioned provisions of the General Corporation Laws
of the State of Delaware and Candela's shareholder rights plan may deter
individuals or groups from accumulating blocks of Candela common stock in
excess of the triggering thresholds contained in the Delaware statute or the
shareholder rights plan. The existence of such limits may depress the value of
Candela's stock price below that which would otherwise prevail in the
marketplace where, in the absence of such limits, stockholders wishing to
accumulate large positions would be free to bid up the price of the stock.
This Prospectus Contains Forward-Looking Statements and Other Risks
This prospectus contains forward-looking statements including, without
limitation, statements concerning the future of the industry, product
development, business strategy (including the possibility of future
acquisitions), continued acceptance and growth of our products and dependence
on significant customers and suppliers. This prospectus contains forward-
looking statements that we have made based on our current expectations,
estimates and projections about our industry, operations and prospects, not
historical facts. We have made these forward-looking statements pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. These
statements can be identified by the use of forward-looking terminology such as
"may," "will," "believe," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, and may
contain projections of results of operations or of financial condition or state
other forward-looking information. When considering forward-looking statements,
you should keep in mind the risk factors and other cautionary statements in
this prospectus. The risk factors noted below and other factors noted
throughout this prospectus could cause our actual results to differ
significantly from those contained in any forward-looking statement. We may not
update or publicly release the results of these forward-looking statements to
reflect events or circumstances after the date hereof.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to Candela from the sale of the 1,499,854 shares of common
stock offered hereby are estimated to be approximately $20,822,920 million,
assuming a public offering price of $15.00 per share and after deducting
estimated underwriting discounts and expenses payable by us in connection with
the offering.
We expect to use the net proceeds of the offering for the retirement of
$3,700,000 in aggregate principal amount of outstanding subordinated term
notes, and for general corporate purposes, including working capital. The
subordinated term notes being retired have a maturity date of October 2006, and
bear interest at the rate of 9.75%. $2,700,000 of the proceeds from the
subordinated term note issuance in October 1998 was used to retire the full
amount then outstanding on Candela's bank line of credit. A portion of the net
proceeds of this offering may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. Although we from time to time evaluate potential
acquisitions of such businesses, products or technologies, and anticipate
continuing to make these evaluations, we have no present understandings,
commitments or agreements with respect to any acquisitions. Pending such uses,
the proceeds will be invested in short-term interest-bearing securities and
debt instruments in compliance with our investment policy. We will not receive
any proceeds from the sale of shares by the selling shareholders.
CAPITALIZATION
The following table sets forth at March 27, 1999, the capitalization of
Candela on an actual basis, and as adjusted to give effect to our sale of
1,499,854 shares of common stock, assuming a public offering price of $15.00
per share and after deducting the estimated underwriting discount and offering
expenses. You should read this table in conjunction with our Consolidated
Financial Statements and related notes thereto, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
March 27, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt:
Capital lease obligations............................... 299 299
Subordinated term notes................................. 2,672 0
------- -------
Total long-term debt.................................. 2,971 299
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized actual and as adjusted; 5,511,310 shares
issued and outstanding actual and 7,011,164 shares
issued and outstanding as adjusted..................... 55 70
Additional paid-in capital.............................. 18,577 39,385
Accumulated deficit..................................... (7,127) (7,127)
Cummulative translation adjustment...................... (595) (595)
------- -------
Total stockholders' equity............................ $10,910 $31,733
------- -------
Total capitalization................................ $13,881 $32,032
======= =======
</TABLE>
We calculated the number of shares of our common stock to be outstanding
immediately after the offering based on 5,554,109 shares outstanding at June
15, 1999. This total number of shares excludes up to 1,398,730 shares of common
stock issuable upon the exercise of previously issued stock options or options
which may be awarded in the future, and excludes 650,946 shares of common stock
issuable upon the exercise of outstanding warrants. At June 15, 1999 options to
purchase 987,405 shares and warrants to purchase 650,946 shares are
outstanding.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the NASDAQ National Market under the symbol
"CLZR." The following table sets forth the high and low closing sale prices of
the common stock as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal 1997
First Quarter................................................. $ 8.625 $4.625
Second Quarter................................................ 7.375 4.625
Third Quarter................................................. 9.063 5.750
Fourth Quarter................................................ 7.750 5.000
Fiscal 1998
First Quarter................................................. $ 6.375 $4.188
Second Quarter................................................ 7.438 4.000
Third Quarter................................................. 5.875 2.875
Fourth Quarter................................................ 4.313 2.812
Fiscal 1999
First Quarter................................................. $ 6.375 $2.688
Second Quarter................................................ 6.031 3.000
Third Quarter................................................. 10.000 5.625
Fourth Quarter (through June 18, 1999)........................ 22.000 8.125
</TABLE>
On June 18, 1999, the last reported sale of the common stock on the NASDAQ
National Market was $14.50 per share. As of June 15, 1999, there were
approximately 355 holders of record of our common stock.
DIVIDEND POLICY
We do not intend to declare or pay cash dividends in the foreseeable future.
Our management anticipates that all of our earnings and other cash resources,
if any, will be retained by us for investment in our business. We are prevented
by our line of credit agreement from paying cash dividends without the consent
of our commercial lender.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with the Company's Consolidated Financial Statements and related
notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data for the years ended June 27, 1998, June 28, 1997 and June 29,
1996, and the balance sheet data as of June 27, 1998 and June 28, 1997, are
derived from, and are qualified by reference to, the audited financial
statements included elsewhere in this prospectus. The results for the nine
months ended March 27, 1999 may not be indicative of future results. "As
Adjusted" balance sheet data at March 27, 1999, is adjusted to reflect the sale
by Candela of 1,499,854 shares of common stock offered by us in this prospectus
at an assumed public offering price of $15.00 per share and the receipt of the
estimated net proceeds therefrom.
<TABLE>
<CAPTION>
Nine Months Year Ended
--------------------- ----------------------------------------------
March 27, March 28, June 27, June 28, June 29, July 1, July 2,
1999 1998 1998 1997 1996 1995 1994
--------- ----------- -------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Lasers and other
products.............. $31,254 $16,735 $25,917 $25,601 $20,403 $18,017 $20,187
Product related
service............... 6,373 6,193 8,405 7,661 7,861 8,450 9,425
Skin care centers...... 2,254 2,034 2,703 2,243 2,149 1,777 208
------- ------- ------- ------- ------- ------- -------
Total revenue......... 39,881 24,962 37,025 35,505 30,413 28,244 29,820
Cost of revenue:
Laser and other
products.............. 13,213 7,447 11,272 11,195 9,159 7,952 8,240
Product related
service............... 4,213 4,758 6,954 5,563 6,560 6,976 7,721
Skin care centers...... 1,567 1,895 2,481 1,892 1,114 940 94
------- ------- ------- ------- ------- ------- -------
Total cost of
revenue.............. 18,993 14,100 20,707 18,650 16,833 15,868 16,055
Gross profit:
Lasers and other
products.............. 18,041 9,288 14,645 14,406 11,244 10,066 11,947
Product related
service............... 2,160 1,435 1,450 2,098 1,301 1,473 1,704
Skin care centers...... 687 139 223 351 1,035 837 114
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 20,888 10,862 16,318 16,855 13,580 12,376 13,765
Operating expenses:
Selling, general, and
administrative........ 12,131 11,421 15,271 13,680 9,873 10,246 9,241
Research and
development........... 2,381 1,979 2,399 2,488 1,818 3,733 3,810
Restructuring
charge(1)............. 0 2,609 2,609 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 14,512 16,009 20,279 16,168 11,691 13,979 13,051
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............ 6,376 (5,147) (3,961) 687 1,889 (1,603) 714
Other income (expense)
Interest income........ 60 29 42 84 93 70 97
Interest expense....... (377) (181) (235) (107) (49) (47) (47)
Other.................. 91 (109) (123) (26) (207) 544 291
------- ------- ------- ------- ------- ------- -------
Total other income
(expense)............ (226) (261) (316) (49) (163) 567 341
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 6,150 (5,408) (4,277) 638 1,726 (1,036) 1,055
Provision for income
taxes.................. 1,940 78 175 400 481 500 400
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 4,210 $(5,486) $(4,452) $ 238 $ 1,245 $(1,536) $ 655
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss)
per share.............. $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23 $ (0.29) $ 0.13
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share.............. $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22 $ (0.29) $ 0.13
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321 5,288 5,206
======= ======= ======= ======= ======= ======= =======
Adjusted weighted
average shares
outstanding............ 5,841 5,446 5,479 5,673 5,652 5,288 5,208
======= ======= ======= ======= ======= ======= =======
<CAPTION>
March 27, 1999
---------------------
June 27, June 28, June 29, July 1, July 2,
Actual As Adjusted 1998 1997 1996 1995 1994
--------- ----------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 8,059 $25,182 $ 1,615 $ 2,674 $ 3,041 $ 2,565 $ 3,790
Working capital......... 10,977 28,100 2,639 7,032 8,608 8,033 9,109
Total assets............ 30,450 47,573 22,604 24,837 19,334 16,832 20,447
Long-term debt.......... 2,971 299 887 1,519 557 476 223
Total stockholders'
equity................. 10,910 31,733 5,395 10,246 9,965 9,086 10,567
Total liabilities and
stockholders' equity... 30,450 47,573 22,604 24,837 19,334 16,832 20,447
</TABLE>
- --------
(1) During the quarter ended December 27, 1997, a restructuring charge was
recorded and a reserve established in the amount of $2.6 million resulting
from the closure of the skin care center located in Scottsdale, Arizona.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in
revenue, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus.
Overview
We research, develop, manufacture, market and service lasers used to perform
aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. Candela markets its products directly and through a network of
distributors to end users. Our traditional customer base includes plastic and
cosmetic surgeons and dermatologists. More recently we have expanded our sales
to a broader group of practitioners consisting of general practitioners and
certain specialists including obstetricians, gynecologists and general and
vascular surgeons. Over half of our revenue in recent periods have come from
international sales.
We derive our revenue from:
.the sale of lasers and other products;
.the provision of product related services; and
.the operations of our remaining skin care center.
Domestic and international product sales are generated principally through
our direct sales force based in the U.S. and three international offices.
Historically, a relatively small portion of our sales have come through our
network of independent distributors. In December 1998 we entered into an
exclusive distributorship arrangement with Physicians Sales and Service (PSS)
whose 700 representatives target general practice physicians and certain
specialists in the U.S. Sales through distributors for the quarter ended March
27, 1999 increased as a result of this arrangement.
Since we began marketing the GentleLASE in 1998, sales of this product have
accounted for an increasing percentage of our total revenue. In the quarter
ended March 27, 1999, sales of GentleLASE accounted for more than half of our
total revenue. We typically assemble products in our Wayland, Massachusetts
facility in the quarter in which they are shipped, and backlog has not been
significant. We experience some seasonal reduction of our product sales in the
quarter ending in September due to the summer holiday schedule of physicians
and their patients.
All product shipments include a 12-month parts and service warranty. The
anticipated cost associated with the warranty coverage is accrued at the time
of shipment and amortized over the warranty period as a cost of sales charged
to service revenue. Costs associated with product installation are also
recognized as costs of product related service revenue. Both such anticipated
and actual costs have no associated revenue and therefore reduce the gross
profit from product related service revenue.
Product related service revenue consists of revenue from maintenance and
repair services and the sale of spare parts and consumables. We derive revenue
from extended warranty contracts, which are typically for a 12 to 24-month
period. In addition, we provide on-site service worldwide on a time-and-
materials basis directly or through our distributors.
In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment, along with
providing other cosmetic services traditionally offered by high-end spas.
16
<PAGE>
We pursued this strategy by purchasing an existing spa in Boston in 1996. In
March 1997 we opened a new skin care center in Scottsdale, Arizona with no
pre-existing client base. We subsequently decided to reduce our focus on our
skin care center efforts and to renew our commitment to our core aesthetic and
cosmetic laser business. In the quarter ending December 27, 1997, we closed
our Scottsdale facility because it had failed to generate any material revenue
from its inception, and recorded a restructuring charge and established a
reserve in the amount of $2.6 million which represented the anticipated cost
associated with this closure. In January 1999, we ceased to offer aesthetic
laser procedures at our Boston skin care center because the rate of
performance was insufficient to justify the associated costs, but continue to
provide personal care and health and beauty services from this location. We
are actively seeking buyers to assume the leases and purchase the assets of
both the Scottsdale and Boston facilities.
International revenue, consisting of sales from our subsidiaries in
Germany, Spain and Japan, and sales shipped directly to international
locations from the U.S., during the first nine month period ended March 27,
1999, and for the fiscal year ended June 27, 1998, represented 54% and 53%,
respectively. Sales of our products are denominated in U.S. dollars with the
exception of product sales in Japan, and currently Japan is the only country
in which our sales are subject to currency risk. All major shipments to Japan
are protected from currency fluctuations by hedging the value of the Japanese
Yen with forward contracts secured at the time of invoicing. Because all our
international sales generated from our U.S. operations, other than our sales
to Japan, are denominated in U.S. dollars, we do not expect the conversion of
the eleven member countries of the European Union to a single "euro" currency
to have a significant impact on our marketing and sales activities.
Our fiscal year consists of the 52 or 53 week period ending on the Saturday
closest to June 30 of each year.
Results of Operations
The following tables set forth selected financial data for the periods
indicated expressed as percentages.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
------------------- ---------------------------
March 27, March 28, June 27, June 28, June 29,
1999 1998 1998 1997 1996
Revenue Mix: --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Percentage of Total Revenue)
Lasers and other products... 78.4% 67.0% 70.0% 72.1% 67.1%
Product related service .... 16.0 24.8 22.7 21.6 25.8
Skin care centers........... 5.6 8.2 7.3 6.3 7.1
----- ----- ----- ----- -----
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0%
<CAPTION>
Nine Months Ended Year Ended
------------------- ---------------------------
March 27, March 28, June 27, June 28, June 29,
1999 1998 1998 1997 1996
Operating Ratios: --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross profit
(Percentage of Each Revenue
Item)
Laser and other products.... 57.7% 55.5% 56.5% 56.3% 55.1%
Product related service .... 33.9 23.2 17.3 27.4 16.6
Skin care centers........... 30.4 6.8 8.3 15.6 48.2
----- ----- ----- ----- -----
Consolidated Gross
Profit................... 52.4 43.5 44.1 47.5 44.7
Operating expense
(Percentage of Total Revenue)
Selling, general and
administrative............. 30.4 45.8 41.2 38.5 32.5
Research and development.... 6.0 7.9 6.5 7.1 6.0
Restructuring charge........ 0.0 10.4 7.1 0.0 0.0
----- ----- ----- ----- -----
Total..................... 36.4 64.1 54.8 45.6 38.5
----- ----- ----- ----- -----
Income (loss) from
operations................... 16.0 (20.6) (10.7) 1.9 6.2
Other income (expense)........ (0.6) (1.1) (0.9) (0.1) (0.5)
----- ----- ----- ----- -----
Net income (loss) before
income taxes................. 15.4 (21.7) (11.6) 1.8 5.7
Provision for income taxes.. 4.8 0.3 0.4 1.1 1.6
----- ----- ----- ----- -----
Net income (loss)............. 10.6% (22.0%) (12.0%) 0.7% 4.1%
===== ===== ===== ===== =====
</TABLE>
17
<PAGE>
First Nine Months of Fiscal 1999 Compared to First Nine Months of Fiscal 1998
Revenue. Total revenue for the first nine months in fiscal 1999 increased
60% over the same period one year earlier. Laser and product revenue increased
87% for the nine months of 1999 compared to the same period in 1998. This was
due mainly to a significant increase in the volume of both domestic and
international shipments of the GentleLASE which we began shipping in March
1998. International product revenue, consisting of sales from our subsidiaries
in Germany, Spain and Japan, and sales shipped directly to international
locations from the U.S., was 59% of total revenue for the first nine months of
1999 compared to 65% for the same period in 1998. Product-related service
revenue increased 3% for the first nine months of 1999 compared to the same
period in 1998. This increase was attributable to shipments of consumables used
with the GentleLASE and Sclero products. Skin care centers revenue in the first
nine months of 1999 increased 11% compared to the same period of 1998 due
mainly to the introduction of laser and other medical procedures performed at
our Boston facility. These procedures were initially introduced in April 1998
and were subsequently discontinued in January 1999.
Gross Profit. In the first nine months of fiscal 1999 our gross profit
increased to $20.9 million or 52% from $10.9 million or 44% over the same
period one year earlier as the result of increased sales of higher margin
GentleLASE and higher absorption of fixed portions of manufacturing overhead.
In the first nine months of 1999, gross profit on products increased to $18.0
million or 58% compared to $9.3 million or 56% in 1998. Gross profit for
service revenue in the first nine months of fiscal 1999 increased to $2.2
million or 34% compared to $1.4 million or 23% for the same period in fiscal
1998. Gross profit for the nine months ended March 27, 1999 improved by 2.1%
compared to the same period one year earlier as a result of a reduction of the
accrued warranty expense associated with the GentleLASE. This reduction was
based on our actual experience with first year warranty cost relating to
GentleLASE shipments. Skin care center gross profit for the nine months ended
March 27, 1999 was positively impacted by the closure of the Scottsdale
facility in the second quarter of fiscal 1998.
Selling, General and Administrative Expense. For the nine month period ended
March 27, 1999, selling, general and administrative expense increased 6%, from
$11.4 million to $12.1 million in comparison to the same nine month period a
year earlier. This reflects increased staffing levels in the sales and
marketing departments incurred to support revenue growth, partially offset by
savings realized from operating one skin care center rather than two during the
first six months of the fiscal year. Also impacting selling, general and
administrative expense for the first nine months of fiscal 1999 was the accrual
of approximately $600,000 for the payment of management bonuses which are tied
to pre-tax profits derived from product and service revenue. In the first nine
months of fiscal 1998, pre-tax profit targets had not yet been achieved, and no
accrual was taken until the fourth quarter. We currently expect to accrue an
additional $600,000 in management bonuses for the fourth quarter of fiscal
1999. In relation to revenue, selling, general and administrative expenses for
the nine month period ended March 27, 1999, was 30% of revenue in fiscal 1999
compared to 46% for the same period a year earlier.
Research and Development Expense. Research and development spending for the
nine month period in 1999 increased 20% to $2.4 million, from $2.0 million for
the same period a year earlier. The increase in research and development
expense reflects efforts to develop products and product improvements designed
to enhance, augment, and expand existing product lines.
Restructuring Charge. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million resulting from the closure of the skin care center located in
Scottsdale, Arizona. During the nine months ended March 27, 1999, a total of
$356,000 was charged against this reserve, representing costs associated with
the closure of the Scottsdale facility leaving a reserve balance of $1.6
million. Candela continues to pursue a sublease of the Scottsdale facility, but
if this effort is not successful, we could incur additional costs in excess of
our existing reserve. Management believes that the reserve established to date
will be sufficiently adequate so that no additional material charges will need
to be recognized for at least the next 18 months.
18
<PAGE>
Operating Income. Income from operations for the nine month period ended
March 27, 1999 increased by $11.5 million, from a loss of $5.1 million to a
profit of $6.4 million, in comparison to the same nine month period a year ago.
The improved performance was a result of both increased revenue from product
sales and reduced expenses in connection with operations of the skin care
centers.
Other Income/Expense. For the nine month period ended March 27, 1999, total
other expense was $226,000 in comparison to $261,000 for the same period a year
earlier. The improvement resulted from exchange gains realized at our foreign
subsidiaries, compared to exchange losses in the same period a year earlier
that were partially offset by increased interest costs.
Income Taxes. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries. Provision for income
taxes for the nine months ended March 27, 1999 reflects the utilization of a
portion of the domestic net operating loss carryforwards and minimum tax
provisions calculated in Japan at a rate in excess of the U.S. statutory tax
rate. We had a net operating loss carryforward of approximately $2.2 million
and tax credit carryforwards of approximately $1.6 million at June 28, 1998,
the beginning of the current fiscal year. Based on current year operating
results we anticipate utilizing all of the net operating loss carryforward and
the tax credit carryforwards. Due to the availability of net operating loss
carryforwards, income tax expense has been reduced by approximately $1.3
million thus far in the current fiscal year. The effective tax rate for the
year is expected to be approximately 36.5% assuming that the remaining tax
benefit of $662,000 is utilized in the fourth quarter.
Fiscal Year Ended June 27, 1998 Compared to Fiscal Year Ended June 28, 1997
Revenue. Total revenue for fiscal 1998 increased 4% over fiscal 1997 to
$37.0 million from $35.5 million. International revenue as a percentage of
total revenue represented 53% of revenue in fiscal 1998, compared to 52% in
fiscal 1997. Product revenue increased slightly to $25.9 million for fiscal
1998 compared to $25.6 million for fiscal 1997. Increased shipments of
GentleLASE were partially offset by an 8% sales decline in our Japanese
subsidiary as a result of the erosion of the Japanese Yen compared to the U.S.
dollar during this period. Product related service revenue increased 10% in
fiscal 1998 over fiscal 1997 to $8.4 million from $7.7 million. This increase
was primarily the result of increased service in our Spanish subsidiary. Skin
care centers revenue for fiscal 1998 increased 20% over fiscal 1997 to $2.7
million from $2.2 million primarily as a result of operating two skin care
centers in fiscal 1998 compared to fiscal 1997 when only the Boston skin care
center was operating.
Gross Profit. Gross profit decreased to $16.3 million or 44% of total
revenue in fiscal 1998 from $16.9 million or 47% of total revenue in fiscal
1997. This decline was primarily due to the negative effect of currency
devaluation on Japanese sales and a decrease in gross margins from the skin
care centers resulting from increased medical procedure costs. Gross profit
from product revenue for fiscal 1998 was $14.6 million, basically unchanged
from $14.4 million for fiscal 1997. Gross profit from product related service
revenue decreased from $1.5 million or 17% in fiscal 1998 compared to $2.1
million or 27% in fiscal 1997. This decline in product related service gross
profit is attributable to warranty expenses associated with the initial
shipments of the GentleLASE which were estimated to be higher than our
historical experience. Skin care centers gross profit declined to $223,000, or
8.2% of total revenue, from $376,000, or 17% of total revenue, due to the
higher operating costs and minimal revenue associated with the Scottsdale
facility.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 12% to $15.3 million in fiscal 1998 from $13.7
million in fiscal 1997, as a result of charges incurred in the second quarter
for legal and consulting fees and taking a full reserve for potentially
uncollectible accounts and notes receivable from a domestic distributor.
Selling, general and administrative expense was 41% of total revenue in fiscal
1998 compared to 39% in fiscal 1997.
Research and Development Expense. Research and development spending for
fiscal 1998 decreased 4% to $2.4 million in fiscal 1998 from $2.5 million in
fiscal 1997.
19
<PAGE>
Restructuring Charge. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million resulting from the closure of our skin care center located in
Scottsdale, Arizona. Charges against the reserve for fiscal 1998 totalled
$614,000, leaving a reserve balance of $2.0 million.
Operating Income (Loss) We experienced an operating loss in fiscal 1998 of
$4.0 million compared to an operating profit of $687,000 in fiscal 1997. This
decline was a result of the restructuring charge, higher selling, general and
administrative expenses and declining margins from product related service
revenue and the skin care centers.
Other Income and Expense. For fiscal 1998, other income and expense
reflected $316,000 in expense in comparison to $49,000 in expense for fiscal
1997. Interest income decreased in fiscal 1998 as a result of a decrease in
average cash balances, while interest expense increased in fiscal 1998 as a
result of the increased level of debt and lease financing. Other expenses in
fiscal 1998 included an increase in expense from foreign currency transactions.
Income Taxes. The provision for income taxes in fiscal 1998 was established
due to taxable income from our subsidiaries in Spain and Japan.
Fiscal Year Ended June 27, 1997 Compared to Fiscal Year Ended June 29, 1996
Revenue. Total revenue for fiscal 1997 increased 17% over fiscal 1996 to
$35.5 million from $30.4 million. International revenue as a percentage of
total revenue represented 52% of revenue in 1997 and in fiscal 1996. Product
revenue increased 25% to $25.6 million for fiscal 1997 compared to $20.4
million for fiscal 1996 reflecting significant shipments of Sclerolaser,
AlexLAZR, and Er/YAG laser. Product related service revenue decreased 3% from
1996 to $7.7 million from $7.9 million, resulting mainly from a reduced level
of grant revenue in fiscal 1997. Skin care centers revenue increased by 4% in
fiscal 1997 to $2.2 million compared to $2.1 million in fiscal 1996 resulting
from the opening of our Scottsdale skin care center and a slight increase from
our Boston skin care center.
Gross Profit. Gross profit increased to $16.9 million or 47% of total
revenue in fiscal 1997 from $13.6 million or 45% of total revenue in fiscal
1996, reflecting volume increases in product sales and increases in service
revenues offset in part by greater costs associated with the skin care centers.
Gross profit for product revenue for fiscal 1997 increased to $14.4 million, or
56%, from $11.2 million, or 55%, for fiscal 1996. Gross profit for product
related service revenue for fiscal 1997 increased to $2.0 million, or 27%, from
$1.3 million, or 17% for fiscal 1996. Skin care centers' gross profit decreased
to $376,000, or 17%, from $1.0 million, or 48%, due to the costs associated
with opening the Scottsdale skin care center.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 39% to $13.7 million in fiscal 1997 from $9.9
million in fiscal 1996, as a result of increased spending associated with the
opening of the skin care centers and increased marketing expenses. Selling,
general and administrative expense was 39% of total revenue in fiscal 1997
compared to 32% in fiscal 1996.
Research and Development Expense. Research and development expense for
fiscal 1997 increased 37% to $2.5 million from $1.8 million in fiscal 1996
relating to increased product development efforts.
Operating Income. Income from operations for fiscal 1997 decreased to
$687,000 from $1.9 million for fiscal 1996. Although we achieved higher revenue
from product sales and higher gross profit from product related service
revenue, these increases were more than offset by losses from skin care centers
and higher selling, general and administrative expense and higher research and
development expense.
Other Income and Expense. For fiscal 1997, other income and expense
reflected $49,000 in expense compared to $163,000 in expense for fiscal 1996.
Interest income in fiscal 1997 decreased slightly and was
20
<PAGE>
more than offset by an increase in interest expense in fiscal 1996. Other
expense in fiscal 1997 of $26,000 and other expense in fiscal 1996 of $207,000
resulted primarily from foreign currency transactions.
Income Taxes. The provision for income taxes in fiscal 1997 was established
due to taxable income in our subsidiary in Japan. The provision for income tax
in fiscal 1997 results in an effective tax rate of 63%. This tax rate reflects
the higher applicable tax rates in Japan and our inability to use net operating
loss carry-forwards in the U.S. to offset income in Japan.
Pronouncements
In June 1997, the Financial Accounting Standards Board ("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 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. We will adopt SFAS
No. 131 for its fiscal year ending July 3, 1999. We believe that we operate in
two segments, laser and other products and related services, and skin care
centers.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, collectively referred to as "derivatives", and for hedging
activities. SFAS 133 requires companies to recognize all derivatives as either
assets or liabilities, with the instruments measured at fair value. The
accounting for changes in fair value, gains or losses, depends on the intended
use of the derivative and its resulting designation. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Candela
plans to implement SFAS 133 for its fiscal year 2000. Had we implemented the
policy at March 27, 1999 it would have increased assets and liabilities equal
to the notional amount of forward currency contracts held by us in the amount
of $1.9 million and there would have been no material impact on the statements
of operations.
21
<PAGE>
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly statement of
operations data for the eleven quarters ended March 27, 1999, as well as such
expressed as a percentage of our total revenue for the periods indicated. We
believe this unaudited information has been prepared substantially on the same
basis as the annual audited financial statements and all necessary adjustments,
consisting of only normal recurring adjustments, except for the restructuring
charge in the second quarter of fiscal 1998, have been included in the amounts
stated below to present fairly our unaudited financial statements. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
Consolidated Statement of Operations Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------
Mar 27 Dec 26 Sep 26 Jun 27 Mar 28 Dec 27 Sep 27 Jun 28 Mar 29 Dec 28 Sep 28
1999 1998 1998 1998 1998 1997 1997 1997 1997 1996 1996
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Lasers and other
products.............. $12,847 $10,385 $8,022 $9,182 $5,789 $5,682 $5,264 $6,994 $6,341 $6,948 $5,319
Product related
service............... 2,275 2,098 2,000 2,212 2,153 2,105 1,935 2,131 1,884 1,860 1,785
Skin care centers...... 722 816 716 670 675 735 623 546 565 598 535
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue......... 15,844 13,299 10,738 12,064 8,617 8,522 7,822 9,671 8,790 9,406 7,639
Cost of Revenue
Lasers and other
products.............. 4,908 4,505 3,801 3,826 2,555 2,576 2,315 3,265 2,920 2,809 2,201
Product related
service............... 1,394 1,473 1,344 2,196 1,723 1,511 1,524 1,938 725 1,544 1,379
Skin care centers...... 518 521 529 585 496 737 663 700 467 397 305
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenue.............. 6,820 6,499 5,674 6,607 4,774 4,824 4,502 5,903 4,112 4,750 3,885
Gross profit
Lasers and other
products.............. 7,939 5,880 4,221 5,356 3,234 3,106 2,949 3,729 3,421 4,139 3,118
Product related
service............... 881 625 656 16 430 594 411 193 1,159 316 406
Skin care centers...... 204 295 187 85 179 (2) (40) (154) 98 201 230
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. 9,024 6,800 5,064 5,457 3,843 3,698 3,320 3,768 4,678 4,656 3,754
Operating expense
Selling, general and
administrative........ 4,586 4,213 3,333 3,851 3,331 4,695 3,394 4,477 3,667 3,031 2,505
Research and
development........... 933 760 688 420 659 742 578 751 609 555 573
Restructuring charge... -- -- -- -- -- 2,609 -- -- -- -- --
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. 5,519 4,973 4,021 4,271 3,990 8,046 3,972 5,228 4,276 3,586 3,078
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Income (loss) from
operations............. 3,505 1,827 1,043 1,186 (147) (4,348) (652) (1,460) 402 1,070 676
Other income (expense).. (128) (64) (33) (55) (47) (93) (121) 187 (269) (19) 52
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before
income taxes........... 3,377 1,763 1,010 1,131 (194) (4,441) (773) (1,273) 133 1,051 728
Provision for income
taxes.................. 1,470 370 100 97 -- -- 78 37 (170) 315 218
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... 1,907 1,393 910 1,034 (194) (4,441) (851) (1,310) 303 736 510
Basic earnings (loss)
per share.............. $ 0.35 $ 0.25 $ 0.17 $ 0.19 $(0.04) $(0.82) ($0.16) $(0.24) $ 0.06 $ 0.14 $ 0.09
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted earnings (loss)
per share.............. $ 0.31 $ 0.24 $ 0.16 $ 0.19 $(0.04) $(0.82) $(0.16) $(0.24) $ 0.05 $ 0.13 $ 0.09
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average shares
outstanding............ 5,498 5,482 5,479 5,398 5,448 5,443 5,426 5,409 5,406 5,394 5,655
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Adjusted weighted
average shares
outstanding............ 6,168 5,739 5,566 5,673 5,448 5,443 5,426 5,409 5,791 5,658 5,655
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total Revenue
Quarter Ended
------------------------------------------------------------------------------------------
Mar 27 Dec 26 Sep 26 Jun 27 Mar 28 Dec 27 Sep 27 Jun 28 Mar 29 Dec 28 Sep 28
1999 1998 1998 1998 1998 1997 1997 1997 1997 1996 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue Mix
Lasers and other
products.............. 81.1% 78.1% 74.7% 76.1% 67.2% 66.7% 67.3% 72.3% 72.1% 73.9% 69.6%
Product related
service............... 14.4 15.8 18.6 18.3 25.0 24.7 24.7 22.0 21.4 19.8 23.4
Skin care centers...... 4.5 6.1 6.7 5.6 7.8 8.6 8.0 5.7 6.5 6.3 7.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit
Lasers and other
products.............. 61.8 56.6 52.6 58.3 55.9 54.7 56.0 53.3 54.0 59.6 58.6
Product related
service............... 38.8 29.8 32.8 0.8 19.9 28.2 21.2 9.0 61.5 17.0 22.7
Skin care centers...... 28.2 36.2 26.1 12.6 26.7 (0.3) (6.4) (28.2) 17.3 33.6 43.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 57.0% 51.1% 47.2% 45.2% 44.6% 43.4% 42.4% 39.0% 53.2% 49.5% 49.1%
Operating expense
Selling, general and
administrative........ 28.9 31.7 31.1 31.9 38.7 55.1 43.4 46.3 41.7 32.2 32.8
Research and
development........... 6.0 5.7 6.4 3.5 7.6 8.7 7.5 7.8 6.9 5.9 7.5
Restructuring charge... 0.0 0.0 0.0 0.0 0.0 30.6 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 34.9 37.4 37.5 35.4 46.3 94.4 50.9 54.1 48.6 38.1 40.3
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 22.1 13.7 9.7 9.8 (1.7) (51.0) (8.5) (15.1) 4.6 11.4 8.8
Other income (expense).. (0.8) (0.4) (0.3) (0.4) (0.6) (1.1) (1.4) 1.9 (3.1) (0.2) 0.7
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before
income taxes........... 21.3 13.3 9.4 9.4 (2.3) (52.1) (9.9) (13.2) 1.5 11.2 9.5
Provision for income
taxes.................. 9.3 2.8 0.9 0.8 0.0 0.0 1.0 0.3 (1.9) 3.4 2.8
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 12.0% 10.5% 8.5% 8.6% (2.3%) (52.1%) (10.9%) (13.5%) 3.4% 7.8% 6.7%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Liquidity and Capital Resources
Cash provided by operating activities amounted to $6.5 million for the nine
months ended March 27, 1999, compared to cash used for operating activities of
$1.7 million for the same period a year earlier, reflecting increased operating
profit. Cash provided by investing activities totalled $181,000 for the nine
months ended March 27, 1999, compared to cash used for investing activities of
$170,000 for the same period a year earlier. Cash used for financing activities
amounted to $77,000 in comparison to cash provided from financing activities of
$446,000 for the same period a year earlier. We issued $3.7 million eight-year,
9.75% subordinated term notes with warrants in October 1998 and used the
proceeds of this financing in part to pay $2.7 million on our line of credit
and make payments on short term notes of our Japanese subsidiary for $627,000.
We borrowed $950,000 on our line of credit during the same period a year ago.
Cash and cash equivalents at March 27, 1999, increased by $6.4 million to
$8.1 million from $1.6 million at June 27, 1998, due primarily to higher cash
receipts resulting from increased shipments of GentleLASE.
On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million. The notes become due
in October, 2006, and require quarterly interest payments. In addition, we
issued warrants to purchase 370,000 shares of common stock to the note holders
which have an exercise price of $4.00 per share. The relative fair value
ascribed to the warrants is $1.1 million and has been recorded as a component
of Additional Paid-In Capital. The relative fair value of the debt was recorded
as $2.6 million. Interest expense of $1.1 million will be accreted to debt over
the eight-year life of the debt to bring the value of that debt to its $3.7
million face value.
We also maintain a $3.5 million line of credit with Fleet Bank which expires
December 1, 1999. The line of credit bears interest at Fleet Bank's prime
lending rate and is collateralized by total domestic accounts receivable,
inventories, and a pledge of subsidiary stock. We currently have no borrowings
outstanding on this line of credit.
23
<PAGE>
Our Japanese subsidiary has borrowed funds to be used for payment of
equipment purchases made from us. At March 27, 1999, this liability was
$139,000. Our remaining short-term and long-term debt is comprised of capital
lease obligations in the amount of $350,000 and $299,000, respectively, at
March 27, 1999, compared to $362,000 and $828,000, respectively, at June 27,
1998.
We believe that cash balances will be sufficient to meet anticipated cash
requirements through the fourth quarter of fiscal 2000. We also believe that
the net cash proceeds from this offering, together with cash balances, will be
sufficient to meet currently planned working capital and capital expenditure
requirements through at least 2001. However, we cannot be sure that we will not
require additional capital beyond the amounts currently forecasted by us, nor
that any such required additional capital will be available on reasonable
terms, if at all, at such time as required.
Year 2000 Readiness Disclosure Statement
We have assessed our operations, from information and financial systems to
each aspect of our manufacturing processes, in order to reduce the risk of
operational disruption and potential litigation due to the Year 2000 issue. We
have completed approximately 80% of the implementation and testing of the
necessary upgrades to our financial and information systems and expect to
finish our upgrades prior to the end of October 1999. Our Year 2000 assessment
identified no need for upgrades to our products and non-information systems.
While responses to an informal survey of our suppliers and significant
customers indicate that many of our suppliers and customers are Year 2000
compliant, we have not yet received sufficient information from all parties
about their Year 2000 preparedness to assess the effectiveness of their
efforts. Moreover, in most cases, we are not in a position to verify the
accuracy or completeness of the information we receive from third parties.
If third parties with whom we interact have Year 2000 problems that are not
remedied, we could experience problems including the following:
. in the case of vendors, disruption of important services upon which we
depend, such as telecommunications and electrical power;
. in the case of customers, temporary reduction in their purchasing
activities as they implement upgraded systems;
. in the case of third-party data providers, receipt of inaccurate or out-
of-date information that would impair our ability to perform critical
data functions; and
. in the case of banks and other lenders, disruption of capital flows
potentially resulting in liquidity stress.
While we believe that Year 2000 disruptions will not materially hurt our
business, we cannot be certain that all of our systems, or those of our
suppliers and customers, will function properly after December 31, 1999. This
could result in delays in operations which would harm our financial condition
and operating results. In addition, in some international markets in which we
do business, the level of awareness and remediation efforts relating to the
Year 2000 issue may be less advanced than in the U.S. We are in the process of
formulating a contingency plan to address the failure of our most important
organizational systems, which we expect to be substantially complete by October
1999. We anticipate that our contingency plan will focus on identifying
additional suppliers that can be utilized in the event of a Year 2000
disruption.
24
<PAGE>
BUSINESS
We develop, manufacture, market and service lasers for a broad variety of
aesthetic and cosmetic procedures, including:
. hair removal;
. non-invasive treatment of varicose veins and other benign vascular
lesions;
. removal of benign pigmented lesions such as age spots and tattoos;
. treatment of scars and stretch marks; and
. skin resurfacing.
Since our founding nearly 30 years ago, we have continuously developed and
enhanced applications of laser technology. In the mid-1980's we began
developing laser technology for medical applications and since that time have
shipped approximately 3,000 lasers to 40 countries. Since the early 1990's we
have focused our organizational resources on developing laser technology for
use solely in the aesthetic and cosmetic laser industry. Our introduction of
new dermatology/plastic surgery laser systems during the mid-1990's allowed us
to expand rapidly in this area. Today, all of our products are for aesthetic
and cosmetic applications and we offer one of the broadest product lines in the
aesthetic and cosmetic laser industry. Our current products, all of which are
marketed both in the U.S. and internationally, include the following:
. GentleLASE, for performing hair removal and treating leg veins;
. ScleroPLUS, for treating vascular lesions;
. ALEXlazr and YAGlazr, for treating pigmented lesions and tattoos; and
. SkinPLUS 2J system, for resurfacing and treating fine facial veins.
The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The most important factors contributing to this growth
are changing practitioner economics, positive demographic trends with America's
baby boomer population and its higher discretionary income, and the
introduction of more effective and affordable products offering a broader range
of treatments. The challenging managed care medical reimbursement environment
has resulted in many practitioners seeking to offer more procedures on a direct
pay basis. In addition the aesthetic and cosmetic laser industry has only
recently developed technology that successfully addresses hair removal which is
the largest cosmetic application to date.
Aesthetic and cosmetic laser vendors who are able to develop lasers that are
more affordable, fast, small and easy to use will be well positioned to take
advantage of the industry's growth. We believe that we have the technological
expertise, product offerings and necessary infrastructure to execute our
business strategy and to capitalize on this market opportunity, as evidenced by
the successful introduction of our newest laser, the GentleLASE.
Industry Overview
Medical lasers use the unique characteristics of laser light to achieve
precise and efficacious therapeutic effects, often in a non-invasive manner.
The precise color, concentration and controllability of different types of
laser light provide for the delivery of a wide range of specialized treatments.
First introduced in the 1960's, the use of lasers for medical applications grew
rapidly in the 1990's as technical advances made medical lasers more effective
and reliable. Medical lasers today are used for numerous types of procedures
falling into four broad categories: ophthalmic surgery, aesthetic and cosmetic
procedures, general surgery and dental procedures. Candela competes solely
within the growing market for lasers performing aesthetic and cosmetic
procedures, including:
. removal of unwanted facial hair;
. removal of hair from legs, back and other body areas;
25
<PAGE>
. treatment of varicose, spider and other veins;
. treatment of birthmarks;
. removal of wrinkles, scars, and stretch marks; and
. removal of pigmented lesions and tattoos.
Lasers produce intense bursts of highly-focused light to treat skin tissues.
A laser's wavelength (color), energy level, spot size and pulse width (exposure
time) are optimized for the specific treatment. Hair removal and the treatment
of various leg vein malformations require the deepest laser penetration for
successful treatment while scars, stretch marks and red birth marks (port wine
stains and hemangiomas) require less laser penetration. Pigmented lesions such
as sunspots, liverspots and tattoos are typically surface conditions which
require the least amount of penetration. Different conditions may require the
use of different types of lasers, and an active aesthetic and cosmetic practice
addressing a broad range of laser procedures requires multiple lasers.
In the pioneering years of the cosmetic and aesthetic laser industry from
the late 1980's to the mid 1990's, the market for laser procedures was focused
on vascular conditions such as port wine stains and hemangiomas and the
development of treatments for pigmented lesions, such as tattoos. Equipment
available in this period tended to be expensive, slow and bulky. In addition,
laser applications addressed the needs of relatively small patient populations,
served by a narrow group of specialists.
In the last half of the 1990's, the development of computer driven beam
delivery systems called scanners increased the interest of a growing number of
physicians in providing procedures to new, larger market segments such as
wrinkle removal. During this period, the complexity and cost of equipment from
many vendors still inhibited sales. However, clinical experience was
broadening, leading to better development efforts for new applications which
are now resulting in the next generation of aesthetic and cosmetic lasers.
The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The major factors converging to drive this growth are:
. the economics of practitioners in a tough medical reimbursement
environment;
. the rising discretionary income of aging baby boomers; and
. the development of technology that allows for new, effective procedures
for conditions that have large patient populations.
Aesthetic and cosmetic laser vendors who are able to deliver lasers that are
cost effective, reliable and easy to use will be well positioned to take
advantage of such broader based industry growth.
Managed care and reimbursement restrictions in the U.S. and similar
constraints, such as socialized medicine, outside the U.S. are motivating
practitioners to emphasize aesthetic and cosmetic procedures that are delivered
on a private, fee-for-services basis. While cosmetic procedures were once the
domain of plastic surgeons and dermatologists, reimbursement reductions coupled
with the reliable revenue stream from private-pay procedures have piqued the
interest of other specialties, including general practice physicians.
Key technical developments required for the broader cosmetic laser markets
relate to ease-of-use, speed, lower costs, safety and effective elimination of
undesirable side effects. These factors are critical for broader segments of
practitioners that wish to build aesthetic and cosmetic laser practices. These
factors are also important for minimizing disruption of a patient's normal
routine and for building demand for procedures addressing very large patient
populations.
26
<PAGE>
Business Strategy
Candela believes that a convergence of price and performance is occurring in
the aesthetic and cosmetic laser industry driving the expansion of the market.
We believe we have the necessary infrastructure in place to capitalize on this
expansion. Candela's objective is to establish itself as the leading provider
of aesthetic and cosmetic lasers by using its proprietary technology and
expertise in light and tissue interaction, as well as by developing market-
oriented products that utilize related technologies. Our business strategy is
focused on the following goals:
. reduce product costs;
. increase penetration of our traditional customer base;
. expand sales beyond our traditional customer base;
. expand our domestic marketing and distribution channels;
. expand our international marketing and distribution channels;
. continue investing in research and development; and
. broaden additional applications for our Dynamic Cooling Device.
Reduce Product Costs. We apply bottom-up engineering, focusing on each
component to improve the performance of each device while reducing its size,
complexity and cost. We believe our approach leads to lasers with fewer parts
and greater manufacturing efficiency resulting in lower production costs which
enables us to offer more reliable products at more affordable prices.
Increase Penetration of Our Traditional Customer Base. Our traditional
customer base consists of dermatologists and plastic and cosmetic surgeons. We
believe that the affordability of our products will enable us to penetrate
further into the dermatologist and plastic and cosmetic surgeon markets. We
have conducted surveys that indicate that only approximately one-third of the
17,000 dermatologists and plastic and cosmetic surgeons in the U.S. presently
have lasers. We believe that affordability has been a major obstacle preventing
the remaining practitioners from purchasing a laser. As competition for
patients among practitioners increases, those practitioners with aesthetic and
cosmetic lasers will be able to differentiate themselves.
27
<PAGE>
Expand Sales Beyond Our Traditional Customer Base. We seek collaborative
relationships that expand upon our traditional customer base, such as our
recent relationship with PSS. We believe that specialist practitioners outside
our traditional customer base are a market with a large growth potential. In
addition, we have recently begun an innovative leasing program to target the
estimated 6,000 electrologists in the U.S. as potential customers of the
GentleLASE for hair removal.
Expand Our Domestic Marketing and Distribution Channels. The U.S. presently
represents approximately 50% of our sales and is the largest single geographic
market for our products. Over the past year we have doubled the size of our
U.S. direct sales force to better address the needs of our traditional core
markets. To further expand our presence in the U.S., in December 1998, we
entered into a three year distribution arrangement with PSS that gives PSS the
exclusive right to distribute the GentleLASE and ScleroPLUS to specific office-
based specialists. The agreement with PSS specifies that our products will be
the exclusive aesthetic and cosmetic lasers sold by PSS.
Expand Our International Marketing and Distribution Channels. Outside of the
U.S. we continue to strengthen our long-standing positions in Europe and Japan
and are seeking to expand our market in Asia and Latin America. We currently
have direct sales offices in Madrid, Frankfurt and Tokyo and are anticipating
opening additional sales offices in Hong Kong and Osaka within the next 12
months. Over the past year we increased the number and improved the quality of
our international independent distributor channel. We currently utilize 32
independent distributors in 46 countries.
Continue Investing in R&D. We believe that investment in research and
development is necessary to remain a leader in the aesthetic and cosmetic laser
market. Our research and development approach is to develop high-quality,
reliable and affordable products that continue to address existing markets and
allow us to enter into and expand new markets. Our research and development
staff works closely with our marketing and operations groups to ensure our
goals are met. Our strategy has been to drive technology that is market
applicable and addresses voids in the marketplace. To that end, Candela will
continue to apply technologies to reduce the size and complexity of its
technology and products, increase the speed and ease with which therapeutic
applications can be delivered, improve its ability to build and deliver lasers
at affordable prices and address expanding therapeutic applications and
markets. Candela has numerous research and development arrangements with
leading hospitals and medical laboratories in the U.S.
Broaden Additional Applications for Our Dynamic Cooling Device. In recent
months the aesthetic and cosmetic laser market has recognized the importance of
effective cooling delivery systems for laser treatment, especially in such
large market segments as hair removal and treatment of leg veins. Currently,
DCD is an integral component of our GentleLASE and is sold as an attachment to
our ScleroPLUS. We intend to broaden the incorporation of DCD into all of our
lasers and believe by doing so we can address major new market opportunities.
The Market for Aesthetic and Cosmetic Lasers
Our traditional customer base for aesthetic and cosmetic lasers consists of
dermatologists and plastic and cosmetic surgeons. In addition, other
practitioner groups are emerging as potential customers, including general
practitioners, obstetricians, gynecologists, general and vascular surgeons. In
the U.S., according to the American Medical Association and various societies,
there are approximately 10,000 dermatologists, and 7,000 plastic and cosmetic
surgeons. Practitioners in other specialties that are beginning to buy
aesthetic and cosmetic lasers include 70,000 general and family practitioners,
35,000 obstetricians and gynecologists, 28,000 general and vascular surgeons.
In addition, the aesthetic and cosmetic laser market includes non-medical
practitioners, notably electrologists, of which there are an estimated 6,000 in
the U.S.
The end markets for cosmetic laser procedures encompass broad and growing
patient groups, including aging baby boomers as well as younger age groups.
According to the U.S. Census Bureau, at the end of 1998 the number of baby
boomers in the 35 to 54 age range was approximately 80 million, representing
more than
28
<PAGE>
29% of the total U.S. population. This large population group generally has a
high level of disposable income and has exhibited a strong demand for aesthetic
and cosmetic procedures. We believe that as the cost of treatments decreases
and the popularity of laser cosmetic procedures such as hair removal increases,
the target market for these procedures is expanding beyond the baby boomers to
include a broad range of women and men aged 17 to 65. Demographic factors
similar to the U.S. underlie the growth of the aesthetic and cosmetic laser
market outside of the U.S.
Hair Removal. We believe that the great majority of the 108 million women
over the age of 16 in the U.S. employ one or more techniques for temporary hair
removal from various parts of the body. Also, a growing number of men are
removing hair by means other than their daily shaving routine. A number of
techniques are used to pull hair from the follicle including waxing,
depilatories and tweezing. In the waxing process, a lotion, generally beeswax-
based, is spread on the area to be treated and is then rapidly peeled off,
pulling out the entrapped hairs. Depilatories employ rotating spring coils or
slotted rubber rolls to trap and pull out the hairs. Tweezing involves removing
individual hairs with a pair of tweezers. Pulling hair from the follicle
produces temporary results, but is often painful and may cause skin irritation.
Depilatory creams, which contain chemicals to dissolve hair, frequently leave a
temporary unpleasant odor and may also cause skin irritation. Shaving is the
most widely used method of hair removal, especially for legs and underarms, but
produces the shortest-term results. Hair bleaches do not remove hair, but
instead lighten the color of hair so that it is less visible. A principle
drawback of all of these methods is that they require frequent treatment.
Before the advent of laser hair removal, electrolysis was the only method
available for the long-term removal of body hair. Electrolysis is a process in
which an electrologist inserts a needle directly into a hair follicle and
activates an electric current in the needle, which disables the hair follicle.
The tiny blood vessels in each hair follicle are heated and coagulated,
presumably cutting off the blood supply to the hair matrix, or are destroyed by
chemical action depending upon modality used. The success rate for electrolysis
is variable depending upon the skill of the electrologist and always requires a
series of treatments. Electrolysis is time-consuming, expensive and sometimes
painful. There is also some risk of skin blemishes and a rising concern
relating to needle infection. Because electrolysis requires that each hair
follicle be treated separately and can only treat visible hair follicles, the
treatment of an area as small as an upper lip may require numerous visits at an
aggregate cost of up to $1,000. The American Electrology Association estimates
that approximately one million people per year undergo electrology procedures.
Although we believe the large majority of all electrolysis treatments are for
facial hair, the neck, breasts and bikini line are also treated. Because hair
follicles are disabled one at a time, electrolysis is rarely used to remove
hair from large areas such as the back, chest, abdomen and legs. We believe
lasers enable the practitioner to address a potentially larger market than
electrolysis by treating a larger area of the body more quickly and with better
results.
We believe the market for laser-based hair removal is in its early stages
and that this market will grow as the customer compares laser treatments to
other hair removal methods that are currently available. The benefits include:
. significant longer term cosmetic improvement;
. treatment of larger areas in each treatment session;
. less discomfort during and immediately after procedures;
. reduced procedure time and number of treatments;
. reduced risk of scarring and infection;
. non-invasive procedures; and
. no risk of cross-contamination.
Vascular Lesions: Benign vascular lesions are generally enlarged and
proliferating blood vessels that appear on the surface of the skin as
splotches, dots, bulges and spider shapes in a variety of colors ranging from
red to purple. Different types of benign vascular lesions include the
following:
29
<PAGE>
. varicose veins, which are large veins greater than 1mm in diameter and
often bulge above the skin surface;
. leg telangiectasias, which are smaller spider veins, up to 1mm in
diameter in size, appearing as single strands;
. facial and truncal telangiectasias, which are spider veins and other
dilated veins that appear on the face and other parts of the body;
. port wine stains, which are vascular birthmarks characterized by a red or
purple discoloration of the skin;
. hemangiomas, which are protuberances that consist of dilated vessels,
which often appear on newborns within one month of birth; and
. stretch marks and scars.
Varicose leg veins typically result when damaged valves cause blood to
stagnate rather than be pumped back to the heart, causing the vein walls to
stretch and bulge. Varicose veins affect a significant portion of the U.S.
adult population and increase in prevalence with age. Among U.S. women aged 40
to 50, an estimated 41% have varicose leg veins, increasing to an estimated 72%
between 60 and 70 years of age. An estimated 24% of men aged 30 to 40 have
varicose veins, increasing to 43% among 70 year olds. To date, treatment for
varicose veins has been predominantly performed on women. Other benign vascular
lesions such as port wine stains, hemangiomas, and facial and truncal
telangiectasias or spider veins have a combined prevalence rate of up to 10% of
the U.S. population. It is estimated that in 1997 there were approximately
661,000 procedures performed in the U.S. to remove vascular lesions.
Pigmented Lesions/Tattoos: Benign pigmented lesions can be both epidermal
and dermal, natural or man-made (tattoos) and can constitute a significant
cosmetic problem to those who have them. Pigmented lesions occur in an
estimated 83 million people in the U.S.
Skin Resurfacing: A significant percentage of the population suffers from
wrinkles or older looking skin as a result of the normal aging process, which
is often exacerbated by the effects of sun damage and smoking. This is the
primary group of candidates for skin resurfacing procedures. While there are a
variety of techniques used for smoothing skin including botox and collagen
injections, chemical peels and dermabrasion, laser technology has become an
accepted alternative for efficacious treatment of moderate and deep wrinkles.
Developed in the mid 1990's, laser skin resurfacing experienced explosive
growth fueled by improved technology and patient acceptance of the procedure.
Recent advances enabling lasers to treat other body parts and different skin
types effectively have further expanded the market. These advances in laser
technology continue to improve efficiency and reduce patient recovery time.
Estimates based on aging population demographics indicate continuous growth in
the number of procedures on an annual basis.
Candela's Products
We develop, manufacture, market and service lasers used to perform
procedures addressing patients' aesthetic and cosmetic concerns. We offer a
comprehensive range of products based on proprietary technologies. Our products
focus on the major aesthetic and cosmetic laser applications including:
. hair removal;
. non-invasive treatment of varicose veins and other benign vascular
lesions;
. removal of benign pigmented lesions such as age spots and tattoos;
. treatment of scars and stretch marks; and
. skin resurfacing.
Intense light technology forms the basis for most of our products. Our
patented technology uses thermal energy generated by an intense pulsed laser
light source to selectively eliminate unwanted skin blemishes without damaging
the surrounding healthy tissue, and to remove facial or other unwanted hair
throughout the body. Candela's objective is to establish itself as the leading
provider of aesthetic and cosmetic lasers by continually striving to develop
smaller, faster and less expensive devices.
30
<PAGE>
Candela has been a pioneer in the laser industry. From the start, our
mission has been to lead the way in the development of innovative laser
products. Significant innovations include:
. a laser system to treat vascular lesions with minimal skin injury;
. a vascular lesion treatment laser approved for use on children;
. an Er/YAG resurfacing laser with a microprocessor-driven scanner; and
. a hair removal laser with integrated DCD.
Each of our laser products and its current list price are shown in the
following table.
<TABLE>
<CAPTION>
Current U.S.
Product Application List Price
<S> <C> <C>
GentleLASE Hair removal and treatment of leg veins greater $ 69,500
than 1mm; integrated with the Dynamic Cooling
Device
- ---------------------------------------------------------------------------------------
ScleroPLUS Treatment of benign vascular lesions, scars, $139,500*
stretch marks, rosacea, leg veins, warts and
hemangioma in adults, children and infants; used
in conjunction with the Dynamic Cooling Device
- ---------------------------------------------------------------------------------------
SP TL-1b Treatment of vascular lesions of the skin; $129,500**
available with the Dynamic Cooling Device
- ---------------------------------------------------------------------------------------
ALEXlazr Treatment of multi-colored tattoos and a broad $ 84,500
range of pigmented lesions such as age spots,
freckles and Nevus of Ota
- ---------------------------------------------------------------------------------------
YAGlazr Treatment of red tattoo pigments and brown $ 78,500
pigmented lesions
- ---------------------------------------------------------------------------------------
SkinPLUS Erbium YAG Treatment of facial vascular lesions and skin $ 69,900
KPT/532 Laser rejuvenation
- ---------------------------------------------------------------------------------------
Dynamic Cooling Device Selectively cools the top layer of skin during $ 19,500
laser treatment
</TABLE>
- --------------------------------------------------------------------------------
* List price does not include DCD. Currently all ScleroPLUS devices are sold
only with DCD.
** List price does not include DCD.
GentleLASE. The GentleLASE, integrated with DCD, is a high-energy, long-
pulse solid-state laser that generates laser light in the near infrared
wavelength range. It is used for both hair removal and the treatment of large
(1mm or larger) leg veins. The technology incorporated in the GentleLASE uses
high energy directed through an Alexandrite rod, which achieves selective
heating while keeping the temperature of the skin below its damage threshold.
The longer Alexandrite laser wavelength enables GentleLASE to penetrate skin
surfaces deeper than traditional Ruby lasers, and the large spot size (15mm)
allows the practitioner to treat a larger area more quickly.
The DCD is integrated into the design of GentleLASE and delivers a short
burst of cryogen coolant onto targeted areas of the skin undergoing treatment.
DCD selectively cools the top layer only of the skin, while leaving the
targeted underlying hair follicle, vein or other structure at normal
temperature. As a result, higher levels of laser energy can be delivered during
treatment, while minimizing thermal injury, pain and the inconvenience
associated with anesthetics. The design of the hand-held DCD enables the
practitioner to clearly see the area being treated, and the combined efficiency
of GentleLASE and DCD reduces the risks of overtreatment, which can result in
white spots on the skin, or undertreatment which can result in brown spots.
GentleLASE was initially cleared for marketing by the FDA in December 1997
for treating facial veins and vascular lesions and we commenced sales in March
1998. Candela began selling GentleLASE for hair
31
<PAGE>
removal in the U.S. in July 1998, when it received FDA marketing clearance for
hair removal. In August 1998, we were issued a CE Mark on GentleLASE clearing
it for sale in 15 European countries.
Hair removal typically requires three to five treatments to achieve
efficacious results due to the growth cycle of hair follicles. A typical
treatment can range from approximately $200 for an upper lip and chin procedure
to as much as $1,000 per treatment for the back or chest.
ScleroPLUS. The ScleroPLUS is a versatile laser combining multiple
wavelengths and long pulse duration for the treatment of a broad range of
benign vascular lesions and is typically sold with a DCD attachment. ScleroPLUS
provides treatment of facial spider veins, port wine stains, leg
telangiectasia, hemangiomas, poikiloderma, rosacea, scars, warts, stretch
marks, vulvodynia and other vascular abnormalities in adults, children and
infants. The practitioner selects the wavelength and energy density that are
most appropriate for each patient, delivering a longer or shorter pulse
duration to treat veins and lesions of different sizes, shapes, locations and
depth. Most treatments of vascular lesions cost between $300 and $800 depending
on the length of and type of procedure. The combination of ScleroPLUS and
GentleLASE offers the capability to treat a majority of leg veins in patients
seeking treatment. A predecessor product to ScleroPLUS, the SP TL-1b, is
currently marketed in Japan, pending Ministry of Health approval of ScleroPLUS.
The ScleroPLUS was initially cleared for marketing by the FDA in the U.S. in
1995.
ALEXlazr and YAGlazr. We offer two types of lasers to address removal of a
broad range of pigmented lesions and most tattoos.
The ALEXlazr is a short-pulsed solid-state laser, which emits near-infrared
light for the non-invasive removal of tattoo pigments and pigmented lesions
such as freckles and Nevus of Ota, a bluish colored, non-vascular, pigmented
lesion, generally found among the Asian population. The ALEXlazr was cleared by
the FDA for marketing for these uses in the U.S. in 1994. The ALEXlazr has a
fiber optic delivery system that produces an even beam distribution without hot
spots. Its wavelength maximizes beam penetration, providing positive results
with deeper pigments and is effective in the removal of most tattoo pigments
except red.
The YAGlazr is a short-pulsed Nd/YAG laser, which is able to emit both near
infrared and green light, for the non-invasive removal of red tattoos and the
treatment of brown benign pigmented lesions, such as age spots and sunspots.
The YAGlazr was cleared for marketing by the FDA for these uses in the U.S. in
1994. The YAGlazr has variable pulse repetition frequency to optimize treatment
time, and dual wavelengths that broaden treatment options, allowing for removal
of tattoos which have red pigments as well as tattoos in darker skin types.
SkinPLUS system with optional SkinScan. The SkinPLUS system provides skin
resurfacing of the face, hands, neck and eye areas with an Er/YAG laser, an
erbium laser which emits a mid-infrared light, and the treatment of fine facial
veins with an optional KTP/532, Nd/YAG laser. The characteristic shallow
penetration of the Er/YAG energy into the skin allows precise removal of tissue
without heating adjacent tissue and also permits the treatment of delicate skin
on neck and hands, as well as darker pigmented skin. Healing time following a
SkinPLUS treatment is relatively rapid so that patients can return to their
daily routines quickly. The SkinPLUS system was approved for marketing by the
FDA in the U.S. in 1996.
The SkinScan Computerized Pattern Scanner is an optional add-on device for
the SkinPLUS system that enables the user to have a high degree of flexibility
and precision when performing skin resurfacing procedures. The SkinScan was
cleared for marketing by the FDA in the U.S. in 1996.
Dynamic Cooling Device. Currently, DCD is integrated into GentleLASE, as
described above, and is offered as an attachment to the ScleroPLUS. In
addition, owners of earlier models of the Sclero product line can purchase DCD
separately as an accessory.
Skintonic. The Skintonic is a massage device for body and face manufactured
by CFK Concepts of Valence, France. The system utilizes a variety of massage
heads and varying vacuum pressure to deeply
32
<PAGE>
massage and stimulate local blood circulation, which helps patients look and
feel better. Current regulatory claims restrict promotion for cellulite
reduction. However, we are working to obtain additional marketing claims for
promotion in the second half of 1999.
Marketing, Sales and Distribution
We pursue a global marketing, sales and distribution strategy which is
centrally managed out of our Wayland, Massachusetts headquarters. Separate
regional managers for the Americas, Europe and the Middle East, and Asia ensure
that the differing needs of each region are identified and satisfied.
International sales are an important contributor to our revenue. In the first
nine months of our current fiscal year, the U.S. comprised 43% of our revenue,
Japan 24%, Europe and the Middle East 24%, and the rest of the world 9%.
We have stepped up our marketing efforts to increase both brand and specific
product awareness. Expenditures on marketing our products and services in the
first nine months of fiscal 1999 were approximately $3 million, an increase of
approximately 66% over the same period in fiscal 1998. Most of this increase
was used to support the growth of our sales force and new promotional
activities. Our traditional marketing has concentrated on practitioners through
trade shows, trade journals and workshops. Recently, we have increased our
marketing directly to consumers including practice enhancement programs for
practitioners, regional consumer print advertising and other media aimed at the
consumer. In addition, we have allocated resources to support our new
distribution relationship with PSS. We intend to increase resources dedicated
to marketing to further expand support of PSS and ancillary markets as well as
developing greater brand awareness by both the practitioner and the consumer.
We sell our products through our direct sales force and a network of
independent distributors. The particular mix of direct sales and distributors
varies by region. Generally, our distributors enter into a two to three year
exclusive agreement during which they typically agree not to sell our
competitors' products. Our sales strategy is to choose the most productive and
practicable distribution channel within each of our geographic markets.
We sell products in the U.S. primarily through our direct sales force to our
traditional customer base of dermatologists and plastic and cosmetic surgeons.
In addition, several independent distributors enhance our coverage of this
traditional customer base. In order to expand outside our traditional customer
base in the U.S., we entered into a three year distribution arrangement with
PSS in December 1998 that gives PSS the exclusive right to distribute the
GentleLASE and ScleroPLUS to specific office-based specialists. PSS is a
division of PSS World Medical, Inc., and is the largest distributor of medical
supplies, equipment and pharmaceuticals to office-based physicians in the U.S.
Through its nationwide sales force of 700 representatives, PSS will offer the
GentleLASE and ScleroPLUS to approximately 100,000 family practice and general
practice physicians, ob/gyn specialists and general and vascular surgeons. The
agreement with PSS specifies that our products will be the only aesthetic and
cosmetic lasers sold by PSS.
Outside the U.S., we sell our products in Western Europe, Japan, Latin
America, the Middle East and the Pacific Rim through direct sales offices and
distribution relationships. We have 24 employees in our direct sales offices in
Madrid, Frankfurt and Tokyo. We plan to open additional direct sales offices in
Hong Kong and Osaka. We have established distribution relationships throughout
Europe, Japan, Africa, Latin America and the Middle East. Outside the U.S. we
currently utilize 22 distributors in 46 countries.
33
<PAGE>
The following chart shows data relating to Candela's international
activities during each of the last three fiscal years by geographic region.
Revenue generated from regions other than the U.S. and Canada includes sales
from Candela's German, Spanish and Japanese subsidiaries, as well as sales
shipped directly to international locations from the U.S. Candela does not
record or report, either internally or externally, operating profit or assets
in the same manner it aggregates revenues.
<TABLE>
<CAPTION>
Nine
Months Ended Year Ended
------------ -----------------
March 27, June 27, June 28,
1999 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Revenue:
United States and Canada...................... $18,195 $17,248 $ 16,998
United States shipments to other regions of
the world.................................... 234 278 301
Japan and Far East............................ 12,956 11,267 13,792
Europe........................................ 8,496 8,232 4,415
</TABLE>
Service and Support
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
practitioner disruption. Our principal service center and parts depot is
located at our Wayland, Massachusetts, headquarters. Parts depots are also
located at our sales offices in Japan, Spain and Germany. Independent
distributors maintain parts depots and service representatives adequate to
cover their installed systems and have primary responsibility to service such
systems. In addition, we have service representatives in each of our markets
worldwide.
Product maintenance and repair following the warranty period provides an
additional recurring source of revenue. Customers may elect to purchase an
extended warranty or to purchase service on a time and materials basis. Our
extended warranties vary by the type of system and the level of service desired
by the customer and are typically for a 12 to 24 month period after the initial
warranty period expires. Initial warranties on all laser products cover parts
and service for twelve months.
Candela emphasizes education and support of its customers. Our recommended
preventive maintenance, coupled with continuing technical education for service
representatives, help to ensure product reliability. After a sale, the system
is installed and supported by a Candela qualified service engineer. After
installation of a system at the customer's location, a nurse clinician provides
the practitioner with training and technical support.
Manufacturing
We design, manufacture, assemble and test our branded products other than
the SkinPLUS system at our Wayland, Massachusetts facility. Ensuring adequate
and flexible production capacity, continuous cost reduction and superior
product quality are top priorities of our manufacturing organization. We
achieve our goals by:
. working closely with the research and development organization, including
significant early involvement in product design;
. continually improving our just-in-time manufacturing and inventory
processes; and
. effectively managing a limited number of the most qualified suppliers.
In March 1999, our facility was awarded the ISO 9001 certification and EN
46001 registration. ISO 9001 certification provides guidelines for the quality
of company systems associated with the design, manufacturing, installation and
servicing of company products. EN 46001 standards are European quality
requirements specifically relating to the design of medical devices.
Our products are manufactured with standard components and subassemblies
supplied by subcontractors to our specifications. We purchase certain
components and subassemblies from a limited number of suppliers, or in the case
of the Alexandrite rods used in our GentleLASE and ALEXlazr products, a sole
supplier.
34
<PAGE>
If our suppliers are unable to meet our requirements on a timely basis, our
production could be interrupted until we obtain an alternative source of
supply. To date, we have not experienced significant delays in obtaining dyes,
optical and electro-optical components, electronic components and raw materials
for our products.
Research and Development
We believe that our advanced research and engineering activities are crucial
to maintaining and enhancing our business and we are currently conducting
research on a number of applications. We believe that our in-house research and
development staff has demonstrated its ability to develop innovative new
products that meet evolving market needs. Our core competencies include:
. applied laser physics and technology;
. new imaging methods;
. tissue optics;
. photochemistry; and
. laser-tissue interaction.
As we discover new technologies or applications with commercial potential,
we assemble a team to develop the new product or application in cooperation
with leading physicians and medical and research institutions. In most
instances, we must receive FDA clearance before marketing new products or
applications.
Our research and development team works with our operations group to design
our products for ease of manufacturing and assembly and with our marketing
group to respond to market opportunities. We believe that this interaction
between functional groups facilitates the introduction of new products with the
right balance of features, performance, quality and cost. To date our research
and development effort has relied primarily on internal development building on
our core technologies, rather than through acquisition.
In addition, Candela conducts joint research with physicians affiliated with
various medical and research institutions. One example of technology developed
through joint research is our DCD which was developed in conjunction with the
Beckman Laser Institute at the University of California, Irvine. We anticipate
continuing joint research and licensing arrangements with medical research
institutions.
As of June 15, 1999, our research and development staff consisted of 27
people, six of whom have advanced degrees including three Ph.Ds. The core
members of our research and development team have been with us for an average
of ten years. The significant continuity of the research and development staff
has been a major factor in enabling Candela to expand. We believe our research
and development staff is one of the most experienced teams in the industry.
Customers
We currently sell our products primarily to physicians. A majority of our
sales in the U.S. are financed through leasing companies. Although our sales
are not dependent on any single customer or distributor, our sales to PSS have
increased and we expect sales to PSS to begin to represent a significant
portion of sales. Our customers are located in more than 40 countries. We have
recently begun an innovative program to target the estimated 6,000
electrologists in the U.S. as potential customers for GentleLASE for hair
removal, positioning GentleLASE as an adjunct to traditional electrolysis
methods.
Competition
Competition in the aesthetic and cosmetic laser industry is intense and
technological developments are expected to continue at a rapid pace. Although
there are over 20 manufacturers of aesthetic and cosmetic lasers, we believe
that only Candela and a few others offer a broad range of products able to
address multiple applications. Unlike Candela, few, if any, of our competitors
focus exclusively on the cosmetic and aesthetic
35
<PAGE>
laser market. We believe that our principal competitors are currently Coherent
and ESC Medical Systems. We compete on the basis of proprietary technology,
product features, performance, service, price and reputation. Some of our
competitors have greater financial, marketing and technical resources than we
do. In addition, some competitors have developed, and others may attempt to
develop, products with applications similar to ours.
We believe that many factors will affect our competitive position in the
future, including our ability to:
. develop and manufacture new products that meet the needs of our markets;
. respond to competitive developments and technological changes;
. manufacture our products at lower cost;
. retain a highly qualified research and engineering staff; and
. provide sales and service to a worldwide customer base.
Proprietary Rights
We own several U.S. and foreign patents and have four U.S. and one foreign
patent applications pending to protect our rights in certain technical aspects
of our hair removal, benign vascular lesion, pigmented lesion and other laser
systems.
In addition to our portfolio of patents issued and pending, we license
patented technology from third parties. We use DCD under an exclusive license
agreement to patent rights owned by the Regents of the University of
California. In October 1998, we entered into an amendment of the license
agreement which now gives us an exclusive right under the Regents' patent to
make, use and sell the dynamic cooling technology in all fields of use.
However, this amendment also imposes an obligation to negotiate sublicensing
agreements with third parties, subject to certain minimum terms and
conditions. If we do not enter into sublicenses with such third parties within
certain time periods, the Regents may then grant license rights to them
directly, provided that Candela will receive 50% of all revenues received
under such licenses. To date, no such sublicenses or further licenses have
been granted by us or the Regents.
We rely primarily on a combination of patent, copyright and trademark laws
to establish and protect our proprietary rights. We also rely on trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect our technology rights. In addition, we seek to protect our proprietary
rights by using confidentiality agreements with employees, consultants,
advisors and others. We can't be certain that these agreements will adequately
protect our proprietary rights in the event of any unauthorized use or
disclosure, that our employees, consultants, advisors or others will maintain
the confidentiality of such proprietary information, or that our competitors
will not otherwise learn about or independently develop such proprietary
information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may attempt to copy aspects of our products, to violate our
patents or to obtain and use our proprietary information. In addition, the
laws of some foreign countries do not protect our intellectual property to the
same extent as do the laws of the U.S. The loss of any material trademark,
trade name, trade secret or copyright could hurt our business, results of
operations and financial condition.
We believe that our products do not infringe the rights of third parties.
However, we can't be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result in
costly litigation or require us to obtain a license to third party
intellectual property. In addition, we can't be certain that such licenses
will be available on reasonable terms or at all, which could hurt our
business, results of operations and financial condition.
Government Regulation
FDA's Premarket Clearance and Approval Requirements. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either "510(k) clearance" or "PMA approval" in advance from the U.S. Food and
Drug Administration pursuant to the Federal Food, Drug, and Cosmetic Act.
36
<PAGE>
The FDA's 510(k) clearance process usually takes from four to twelve months,
but it can last longer. The process of obtaining PMA approval is much more
costly, lengthy and uncertain and generally takes from one to three years or
even longer. We can't be sure that 510(k) clearance or PMA approval will ever
be obtained for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or
PMA approval process based upon statutory criteria. These criteria include the
level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to
devices that are already legally marketed. Devices deemed to pose relatively
less risk are placed in either class I or II, which requires the manufacturer
to submit a premarket notification requesting 510(k) clearance, unless an
exemption applies. The premarket notification must demonstrate that the
proposed device is "substantially equivalent" in intended use and in safety and
effectiveness to a legally marketed "predicate device" that is either in class
I, class II, or is a "preamendment" class III device (i.e., one that was in
commercial distribution before May 28, 1976) for which the FDA has not yet
decided to require PMA approval.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance,
but the FDA can review any such decision. If the FDA disagrees with a
manufacturer's decision not to seek a new 510(k) clearance, the agency may
retroactively require the manufacturer to submit a premarket notification
requiring 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until 510(k) clearance is obtained.
We have modified some of our 510(k) cleared devices but have determined that,
in our view, new 510(k) clearances are not required. We can't be certain that
the FDA would agree with any of our decisions not to seek 510(k) clearance. If
the FDA requires us to seek 510(k) clearance for any modification, we also may
be required to cease marketing and/or recall the modified device until we
obtain a new 510(k) clearance.
Devices deemed by the FDA to pose the greatest risk such as life-sustaining,
life-supporting or implantable devices, or deemed not substantially equivalent
to a legally marketed predicate device, are placed in class III. Such devices
are required to undergo the PMA approval process in which the manufacturer must
prove the safety and effectiveness of the device to the FDA's satisfaction. A
PMA application must provide extensive preclinical and clinical trial data and
also information about the device and its components regarding, among other
things, manufacturing, labeling and promotion. After approval of a PMA, a new
PMA or PMA supplement is required in the event of a modification to the device,
its labeling or its manufacturing process.
A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
application approved in advance by the FDA for a limited number of patients,
unless the product is deemed a nonsignificant risk device eligible for more
abbreviated IDE requirements. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical
trials may begin if the IDE application is approved by the FDA and the
appropriate institutional review boards at the clinical trial sites.
To date, the FDA has deemed our products to be class II devices eligible for
the 510(k) clearance process. We believe that most of our products in
development will receive similar treatment. However, we can't be certain that
FDA will not deem one or more of our future products to be a class III device
and impose the more burdensome PMA approval process.
Pervasive and Continuing FDA Regulation. A host of regulatory requirements
apply to marketed devices such as our laser products, including labeling
regulations, the Quality System Regulation (which requires manufacturers to
follow elaborate design, testing, control, documentation and other quality
assurance procedures), the Medical Device Reporting regulation (which requires
that manufacturers report to the FDA certain types of adverse events involving
their products), and the FDA's general prohibition against promoting products
for unapproved or "off label" uses. Class II devices such as ours also can have
special controls such
37
<PAGE>
as performance standards, postmarket surveillance, patient registries, and FDA
guidelines that do not apply to class I devices. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.
We are subject to inspection and market surveillance by the FDA for
compliance with regulatory requirements. If the FDA finds that we have failed
to comply with applicable requirements, the agency can institute a wide variety
of enforcement actions. The FDA sometimes issues a public warning letter, but
also may pursue more drastic remedies, such as refusing our requests for 510(k)
clearance or PMA approval of new products, withdrawing product approvals
already granted to us, requiring us to recall products or asking a court to
require us to pay civil penalties or criminal fines, adhere to operating
restrictions or close down our operations. Ultimately, criminal prosecution is
available to FDA as punishment for egregious offenses. Any FDA enforcement
action against us could hurt our business, financial condition and results of
operation.
Other U.S. Regulation. We also must comply with numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and hazardous
substance disposal. We can't be sure that we will not be required to incur
significant costs to comply with such laws and regulations in the future or
that such laws or regulations will not hurt our business, financial condition
and results of operations.
Foreign Regulation. International sales are subject to foreign government
regulation, the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may
differ. Companies are now required to obtain the CE Mark prior to sale of
certain medical devices within the EU. During this process, the sponsor must
demonstrate compliance with ISO manufacturing and quality requirements. In
addition, Candela is currently awaiting Ministry of Health approval in Brazil
to market the GentleLASE, ScleroPLUS and ALEXlazr and in Japan to market the
ScleroPLUS.
Candela and its products may also be subject to other federal, state, local
or foreign regulations relating to health and safety, environmental matters,
quality assurance and the like. Candela's compliance with laws that regulate
the discharge of materials into the environment or otherwise relate to the
protection of the environment does not have a material effect on its ongoing
operations. Candela has not made any material expenditures for environmental
control facilities.
Product Liability and Warranties
Our products are generally warranted for a period of one year. We set aside
a reserve based on anticipated warranty claims. We believe such reserves to be
adequate, but in the event of a major product problem or recall, such reserve
may be inadequate to cover all costs, and such an event could have a material
adverse effect on our business, financial condition and results of operations.
Our business involves the inherent risk of product liability claims. We
maintain appropriate product liability insurance with respect to its products
with a coverage limit of $13 million in the aggregate. We cannot be certain
that with respect to our current or future products, such insurance coverage
will continue to be available on terms acceptable to us or that such coverage
will be adequate for liabilities that may actually be incurred.
The Skin Care Centers
In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment along with other
cosmetic services traditionally offered by high-end spas. We pursued this
strategy by purchasing an operating spa in Boston in 1996. In March 1997 we
opened a new facility in Scottsdale, Arizona with no pre-existing customer
base. We subsequently decided to reduce our focus on our skin care center
efforts.
38
<PAGE>
Employees
As of June 15, 1999, we employed 275 people in the following areas of our
organization:
. 27 in research, development and engineering;
. 51 in manufacturing and quality assurance;
. 23 in service positions;
. 30 in sales and marketing;
. 16 in finance and administrative positions;
. 106 in our clinic and health spa subsidiary, including both full and
part-time employees; and
. 22 in our international sales and service subsidiaries.
Properties
We lease a facility totaling approximately 35,000 square feet for our
operations in Wayland, Massachusetts, which is located approximately 20 miles
west of Boston. The lease on this facility was amended in April 1998 extending
the expiration date to March 2003. We believe that our current facilities are
suitable for our near-term needs.
The Company's subsidiary, Candela Skin Care Centers, Inc., currently leases
the following facilities:
(1) Candela Skin Care Center of Scottsdale, Inc., 7,555 square feet
located at 6939 E. Main Street, Scottsdale, AZ. The lease on this facility
is for a period of ten years, expiring on June 30, 2006, with a provision
for two five-year extensions; and
(2) Candela Skin Care Center of Boston, Inc., 20,728 square feet located
at 28 Arlington Street, Boston, MA. The lease on this facility is for a
period of 15 years, and commenced on June 1, 1994.
Legal Proceedings
On March 5, 1999, New Star Lasers, Inc. and its subsidiary Laser Aesthetics,
Inc. filed a complaint in the U.S. District Court for the Eastern District of
California against The Regents of the University of California (the "Regents"),
the Beckman Laser Institute and Medical Clinic ("Beckman") and Candela. In the
complaint, New Star Lasers is seeking a declaration that its technology does
not infringe the Regents' patent pertaining to dynamic cooling technology to
which we are a licensee, or in the alternative that the patent is invalid and
not infringed by the plaintiff's technology. The complaint also includes
various tort claims against us and contract-related claims against the Regents
and Beckman. The complaint asserts that we interfered with the licensing of the
dynamic cooling technology to the plaintiffs. The complaint seeks unspecified
general, special, punitive and exemplary damages plus costs and attorneys' fees
against Candela as well as the "disgorgement" of any benefit received by
Candela as a result of the alleged receipt of any of New Star Lasers' trade
secrets from Beckman and the Regents. We intend to defend this matter
vigorously and have filed a motion to dismiss the case on jurisdictional
grounds. That motion is pending. We believe that an adverse outcome of New Star
Lasers' tort claims against Candela will not have a material adverse effect on
our operations and financial condition. However, if New Star Lasers were to
obtain a declaration that the Regents' patent under which the DCD was developed
is not valid or enforceable, we would have to discontinue the sale of its DCD
or obtain a license to permit continuing sales, and either outcome could
adversely impact our operations and financial condition. The Regents have
requested that we indemnify them in connection with this litigation pursuant to
the license agreement between the Regents and Candela. We have rejected this
request.
From time to time, we are a party to various legal proceedings incidental to
our business. We believe that none of the other presently pending legal
proceedings will have a material adverse effect upon our financial position,
results of operation, or liquidity.
39
<PAGE>
MANAGEMENT
The current directors and executive officers of Candela are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerard E. Puorro.......... 52 President, Chief Executive Officer and Director
F. Paul Broyer............ 50 Senior Vice President, Finance and
Administration, Chief Financial Officer and
Treasurer
James C. Hsia, Ph.D....... 52 Senior Vice President, Research
William D. Spies.......... 48 Senior Vice President, Marketing Sales and
Service
Jay D. Caplan............. 36 Vice President, Operations
Timothy P. Costello....... 39 Vice President, Marketing
William B. Kelley......... 43 Vice President, North American and Latin
American Sales
William McGrail........... 37 Vice President, Development Engineering
Toshio Mori............... 46 Vice President, President of Candela K.K.
Robert Wilber............. 40 Vice President, Worldwide Service
Kenneth D. Roberts........ 66 Chairman of the Board of Directors
Theodore G. Johnson....... 66 Director
Douglas W. Scott.......... 52 Director
Richard J. Cleveland, 67 Director
M.D......................
Robert E. Dornbush........ 51 Director
Nancy Nager, R.N., B.S.N, 48 Director
M.S.N....................
</TABLE>
Each member of Candela's board of directors is elected at the annual meeting
of stockholders and holds office until the next annual meeting and until his or
her successor is elected and qualified. A director is chosen to fill a vacancy
on the board and will hold office until the next annual meeting and until his
or her successor is elected and qualified.
Mr. Gerard E. Puorro was appointed a Director of Candela in September 1991.
Mr. Puorro has been President and Chief Executive Officer of Candela since
April 1993. From April 1989 until April 1993, Mr. Puorro was Senior Vice
President and Chief Financial Officer of Candela. Mr. Puorro was elected
Treasurer in April 1991 and Chief Operating Officer in December 1992. Prior to
joining Candela and since 1982, he was Vice President and Controller at
Massachusetts Computer Corporation, a manufacturer of micro-supercomputers.
Mr. F. Paul Broyer was appointed Senior Vice President, Finance and
Administration, Chief Financial Officer and Treasurer in July 1998. Mr. Broyer
joined Candela in October 1996 as Vice President and Chief Financial Officer.
Prior to joining Candela, Mr. Broyer held the position of Vice President
Finance at Integrated Genetics from 1994 to 1996. From 1987 until 1994 Mr.
Broyer was Corporate Controller for Laserdata, Inc. and held earlier positions
with Avatar Technologies and Data General Corporation.
James C. Hsia, Ph.D. has been Senior Vice President, Research of Candela
since July 1991. He has been with Candela since October 1985, and was
previously Vice President, Research and Development. Prior to joining Candela,
and since 1982, he was Vice President, Research and Development at Laser
Science, Inc.
Mr. William D. Spies joined Candela in July 1998, as Senior Vice President,
Marketing, Sales and Service. Prior to joining Candela, and since 1996, Mr.
Spies held the position of Director, Business Development with the Cordis
medical device unit of Johnson & Johnson. From 1988 to 1996 Mr. Spies held the
positions of
40
<PAGE>
Executive Vice President/General Manager and Vice President Sales and Marketing
with Seiko Optical Products. Previously Mr. Spies held a position with Corning,
Inc.
Mr. Jay D. Caplan was appointed Vice President, Operations in February 1997,
after serving as Vice President, Manufacturing since December 1995. He has been
with Candela since September 1988 and was previously Senior Director, Corporate
Planning/Business Development. From 1988 to 1993, Mr. Caplan held the positions
of Product Director, International Controller, Manager, Financial Planning and
Analysis and Planning Associate. Prior to joining Candela, Mr. Caplan held
positions at Xerox Corporation and the United States Air Force.
Mr. Timothy P. Costello joined Candela in December 1998 as Vice President,
Worldwide Marketing. Prior to joining Candela, and since 1996, Mr. Costello
held the position of Vice President, Marketing with ESC Medical Systems, Inc.
From 1989 until 1996, Mr. Costello held a number of product and marketing
manager positions at Mentor Corporation.
Mr. William B. Kelley was named Vice President of North American and Latin
American Sales in July 1998. Mr. Kelley was previously Vice President, North
American Sales and Service from April 1993 through June 1998. From January 1993
until April 1993 he was Vice President, Domestic Sales. He has been with
Candela since 1987 and previously held the positions of National Sales Manager
and Eastern Regional Sales Manger. Prior to joining Candela, Mr. Kelley held a
number of sales and sales management positions in the medical industry.
Mr. William McGrail was named Vice President, Development Engineering in
July 1998. Previously, Mr. McGrail served in the position of Director of
Engineering since August 1994. From 1987 to 1992, he held the positions of
Senior Software Engineer and Software Design Engineer. Prior to joining
Candela, Mr. McGrail was employed by Raytheon Corporation.
Mr. Toshio Mori was named Vice President, President of Candela K.K. in July
1998, after serving as President and Representative Director of Candela K.K.
since September 1996. Previously Mr. Mori held the positions of Director of
Candela K.K. from September 1992 to September 1996, and General Manager from
September 1989 to September 1992. From 1976 to 1989, he was employed by Sansui
Electric Co. Ltd. in Tokyo.
Mr. Robert Wilber was appointed Vice President, Worldwide Service in August
1997, after serving as Director of Worldwide Service since October 1993. He has
been with Candela since September 1989 and was previously a Finance Group
Director. From 1989 to 1992 Mr. Wilber held the positions of International
Accounting Manager, Customer Service Manager and Director of Financial Planning
and Analysis. Prior to joining Candela, Mr. Wilber held positions at Sony
Corporation of America, Massachusetts Computer Corporation and National
Semiconductor/Data Terminal Systems.
Mr. Kenneth D. Roberts has been a Director of Candela since August 1989 and
Chairman of the Board of Directors since November 1991. From November 1992 to
June 1995, Mr. Roberts was employed on a part-time basis as Vice President and
Chief Financial Officer of Foster-Miller, Inc., an engineering services
company. Since December 1988, he has been an independent management and
financial consultant. From July 1986 to December 1988, Mr. Roberts was Vice
President, Treasurer and Chief Financial Officer of Massachusetts Computer
Corporation, a manufacturer of micro-supercomputers. Prior to that time and for
many years, he was Senior Vice President and Treasurer of Dynatech Corporation,
a provider of diversified high technology products and services.
Mr. Theodore G. Johnson has been a Director of Candela since February 1988.
From 1983 until 1991, he managed his own venture capital and consulting
business, Prelude Management, Inc. Since that time, he has been an active
venture investor and director of a number of companies. Prior to that and for
25 years, he was a Vice President at Digital Equipment Company. Mr. Johnson is
currently a Director of Kronos, Inc., Gensym, Inc. and a number of private
companies including Enrollment Collaborative, Inc., a computer-based college
application service.
41
<PAGE>
Mr. Douglas W. Scott has been a Director of Candela since September 1991.
Since 1985, Mr. Scott has been a partner with Phildius, Kenyon & Scott, a
health care consulting and investment firm. Mr. Scott is currently President,
Chief Operating Officer and Director of Avitar, Inc., a publicly held health
care company. Mr. Scott also served as Chief Executive Officer of Avitar from
December 1989 through April 1991.
Richard A. Cleveland, M.D. was appointed a Director of Candela in April
1994. He has been Professor of Surgery at Tufts University School of Medicine
since 1972. In 1986, he was appointed the Andrews Professor of Surgery at the
same institution. From 1975 to 1993, Dr. Cleveland was Chairman of the
Department of Surgery and Surgeon-in-Chief at the New England Medical Center
and a member of the staff of several hospitals in the Boston area. He is
presently Secretary-Treasurer of the American Board of Thoracic Surgery and has
held numerous positions in a variety of other professional associations.
Mr. Robert E. Dornbush was appointed a Director of Candela in January 1995.
He has been a principal in Dorn Associates, Ltd., a health care consulting
firm, since 1992. In that capacity, he served as a materials management
consultant for Kaiser Permanente from 1994 through 1995. Prior to that time,
Mr. Dornbush was President of UNIT Consulting Group. From 1978 through 1991,
Mr. Dornbush held the positions of President and Chief Executive Officer at
Itel Distribution Systems, Inc. and The Dornbush Group, Inc. Mr. Dornbush also
is currently a partner in five real estate entities: Pratezk Partners, Double M
Investments, Dom Associates, Westside Development and Lewis, Wolcott and
Dornbush Real Estate, Inc. Mr. Dornbush has informed Candela that he will
retire from Candela's Board of Directors upon the effectiveness of this
prospectus.
Nancy Nager, R.N., B.S.N., M.S.N. was appointed a Director of Candela in
February 1999. From 1990 until the present, Ms. Nager has been the Principal
and CEO of Specialized Health Management, Inc., a privately held behavioral
heath care corporation. Ms. Nager also founded and directs Specialized
HomeCare, Inc., Specialized Billing Services, Inc. and Seniorlink, an
information, referral and resource corporation. Prior to that, Ms. Nager was
the Chief Operating Officer of Charles River Hospital, a private psychiatric
facility in Wellesley, where she previously held a number of positions in
nursing and administration from 1976 through 1990. Ms. Nager also provided
corporate consulting to the hospital's parent company Community Care Systems,
Inc. from 1990 through 1992.
AUDIT COMMITTEE
Currently, our Audit Committee consists of Robert E. Dornbush and Kenneth D.
Roberts. The Audit Committee meets with management and our independent
accountants to determine the adequacy of our internal controls and financial
reporting, recommends to the full Board of Directors the appointment of
independent accountants and reviews our long-term financial plans and makes
recommendations to the full Board of Directors for approval and to authorize
action.
COMPENSATION COMMITTEE
Currently our Compensation Committee consists of Richard J. Cleveland, M.D.
and Douglas W. Scott. The Compensation Committee reviews and makes decisions
regarding our compensation policies, and the amounts and forms of compensation
to be provided to executive officers, which generally include annual salaries
and bonuses, equity awards and other incentive compensation arrangements. As
part of the foregoing, the Compensation Committee administers our various
employee equity compensation plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or the Compensation Committee of any other company that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee. None of our employees or current or former officers are
members of our Compensation Committee.
42
<PAGE>
DIRECTOR COMPENSATION
Directors who are not employees of Candela receive a fee of $750 per meeting
of the Board of Directors or committee meeting thereof if held separately.
Directors are also reimbursed for out-of-pocket expenses incurred in connection
with the performance of their duties as a director.
On May 10, 1990, the Board of Directors adopted the 1990 Non-Employee
Director Stock Option Plan, which the shareholders approved on November 13,
1990. This plan, which was superseded by the 1993 Non-Employee Director Stock
Option Plan, provided for the issuance of options to purchase up to 60,000
shares of our common stock. Under this plan, each director who is neither an
employee nor officer of Candela received a one-time grant of an option to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value on the date of grant. The options generally vest in equal amounts
over a period of four years, expire after seven years and are nontransferable.
Including cancellations, options for the purchase of 66,500 shares were granted
at exercise prices ranging from $3.25 to $14.50 per share.
On June 2, 1993, the Board of Directors adopted the 1993 Non-Employee
Director Stock Option Plan, which the shareholders approved on November 18,
1993. This plan provides for the issuance of options to purchase up to 80,000
shares of common stock. Under this plan, each director who is neither an
employee nor an officer of Candela receives a one-time grant of an option to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value on the date of grant. The options generally vest in equal amounts
over a period of two years, expire after ten years and are nontransferable. We
have granted options for the purchase of 60,000 shares at exercise prices
ranging from $1.625 to $8.00 per share.
On December 24, 1996, Richard J. Cleveland, M.D., a director of Candela, was
granted non-statutory options to purchase 20,000 shares of the common stock of
Candela Skin Care Centers, Inc., at an exercise price of $1.00. On August 21,
1997, we converted these options, along with all options granted under the CSCC
Plan at the rate of 0.21053 Candela options for each CSCC option. Dr. Cleveland
realized options to purchase 4,211 shares of the Candela's common stock at an
exercise price of $4.75 per share as a result of this conversion.
On August 14, 1997, Non-Qualified Options to purchase 10,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $4.688 per share, such price being the market price of the common
stock on the date of the grant. These Non-Qualified Options were granted
pursuant to our 1989 Stock Plan and vest in equal amounts over two years,
provided that each such optionee continues to serve as a director of the
Company.
On August 21, 1997, Candela granted Richard J. Cleveland options to purchase
4,000 shares at $7.00 per share. These options are fully vested and have a term
of ten years.
On September 30, 1998, Non-Qualified Options to purchase 5,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $3.63 per share, such price being the market price of the common stock
on the date of the grant. These Non-Qualified Options were granted pursuant to
our 1989 Stock Plan and vest in equal 50% amounts on each of the first and
second anniversaries of the date of the grant, provided that each such optionee
continues to serve as a director of Candela on such anniversary date.
On January 12, 1999, Non-Qualified Options to purchase 5,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $7.00 per share, such price being the market price of the common stock
on the date of the grant. These Non-Qualified Options were granted pursuant to
our 1998 Stock Plan and are fully vested.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid or accrued by us for services rendered to Candela, in all
capacities, for the year ended June 27, 1998 by our Chief Executive Officer
(the "CEO") and our four other most highly paid executive officers, in each
case whose total salary and bonus exceeded $100,000 during the year ended June
27, 1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation(1) Compensation
---------------------------------- ---------------
Name And Principal Fiscal Other Annual Awards(2) All Other
Position Year Salary($) Bonus($) Compensation($) Options/SARS(#) Compensation($)
------------------ ------ --------- -------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro....... 1998 237,500 114,885(3) 10,527(4) 4,972(5)
Chief Executive Offi-
cer, 1997 209,792 15,000(3) 100,000(4) 3,046(5)
President and Director 1996 207,615 15,000(3) 50,000(4) 2,376(5)
James C. Hsia, Ph.D.... 1998 155,000 105,188 33,000(6) 2,942(7)
Senior Vice President, 1997 141,686 -- 20,000(6) 2,935(7)
Research 1996 131,019 -- 40,000(6) 2,470(7)
William B. Kelley...... 1998 163,942 65,188 -- 2,443(8)
Vice President, North 1997 156,988 -- 25,000 2,401(8)
American Sales and 1996 135,520 -- -- 1,934(8)
Service
Jay D. Caplan.......... 1998 130,000 54,674 5,000 2,100(10)
Vice President, 1997 120,000 -- 20,000(9) 1,920(10)
Operations 1996 102,500 -- 12,525(9) --
Robert Wilber.......... 1998 108,844 46,772 15,000 8,009(11)
Vice President, 1997 93,301 5,000 -- 12,433(11)
Worldwide Service
1996 86,554 -- 3,250 8,956(11)
</TABLE>
- --------
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or
10% of the total salary and bonus reported for the named executive
officer.
(2) We did not grant any restricted stock awards or stock appreciation rights
("SARs") or make any long-term incentive plan pay-outs during the fiscal
years 1998, 1997 or 1996.
(3) Fiscal years 1998, 1997 and 1996, each includes $15,000 for debt
forgiveness. Fiscal 1998 also includes incentive bonus of $99,885.
(4) Options granted in fiscal 1996 for the purchase of 50,000 shares in
Candela Skin Care Centers, Inc., a subsidiary, were converted to 10,527
during fiscal 1998. All rights and interests in options granted in fiscal
1997 to purchase 100,000 shares at $7.50 per share were forfeited during
fiscal 1998.
(5) For fiscal 1998, includes $2,375 in matching contributions by us pursuant
to our 401(k) Plan, $766 in life insurance premiums paid by us for the
benefit of Mr. Puorro, and $1,831 for an automobile we provided. For
fiscal 1997, includes $2,320 in matching contributions by us pursuant to
our 401(k) Plan and $726 in life insurance premiums paid by us for the
benefit of Mr. Puorro. For fiscal 1996, includes $1,717 in matching
contributions by us pursuant to our 401(k) Plan and $659 in life insurance
premiums paid by us for the benefit of Mr. Puorro.
44
<PAGE>
(6) During fiscal 1998 options granted in fiscal 1991 to purchase 8,000 shares
of stock at $8.75 and options granted in fiscal 1992 to purchase 25,000
shares of stock were repriced at $3.25 per share. All rights and interests
in options granted in fiscal 1996 to purchase 15,000 shares at $9.875 per
share and options granted in fiscal 1997 to purchase 20,000 shares at
$7.50 were forfeited during fiscal 1998.
(7) For fiscal 1998, includes $2,144 in matching contributions by us pursuant
to our 401(k) Plan and $798 in life insurance premiums paid by us for the
benefit of Dr. Hsia. For fiscal 1997, includes $2,175 in matching
contributions by us pursuant to our 401(k) Plan and $760 in life insurance
premiums paid by us for the benefit of Dr. Hsia. For fiscal 1996, includes
$1,773 in matching contributions by us pursuant to our 401(k) Plan and
$697 in life insurance premiums paid by us for the benefit of Dr. Hsia.
(8) For fiscal 1998, includes $2,325 in matching contributions by us pursuant
to our 401(k) Plan and $118 in life insurance premiums paid by us for the
benefit of Mr. Kelley. For fiscal 1997, includes $2,291 in matching
contributions by us pursuant to our 401(k) Plan and $110 in life insurance
premiums paid by us for the benefit of Mr. Kelley. For fiscal 1996,
includes $1,837 in matching contributions by us pursuant to our 401(k)
Plan and $97 in life insurance premiums paid by us for the benefit of Mr.
Kelley.
(9) All rights and interests in options granted in fiscal 1996 to purchase
10,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.
(10) For fiscal 1998, includes $1,950 in matching contributions by us pursuant
to our 401(k) Plan and $150 in life insurance premiums paid by us for the
benefit of Mr. Caplan. For fiscal 1997, includes $1,771 in matching
contributions by us pursuant to our 401(k) Plan and $149 in life insurance
premiums paid by us for the benefit of Mr. Caplan.
(11) For fiscal 1998, includes $1,533 in matching contributions by us pursuant
to our 401(k) Plan and $6,476 in commissions paid on service contracts
sold to customers. For fiscal 1997, includes $1,639 in matching
contributions by us pursuant to our 401(k) Plan and $10,794 in commissions
paid on service contracts sold to customers. For fiscal 1996, includes
$1,406 in matching contributions by us pursuant to our 401(k) Plan and
$7,550 in commissions paid on service contracts sold to customers.
45
<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth grants of stock options pursuant to our 1989
Stock Plan during the fiscal year ended June 27, 1998 to the Named Executive
Officers listed in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Options(1)
----------------------------------------- --------------
Percent of
Total
Options/
Granted
to Exercise
Option Employees of Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Share) Date 5% 10%
- ---- -------- ---------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro...... 10,527(2) 5.43% 4.75 8/21/07 31,447 79,692
James C. Hsia, Ph.D... 33,000(3) 17.03% 3.25 4/24/08 67,449 170,929
William B. Kelley..... -- -- -- -- -- --
Jay D. Caplan......... 5,000 2.58% 4.688 8/14/07 14,741 37,357
Robert Wilber......... 15,000 7.74% 4.688 8/14/07 44,224 112,072
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on our common stock, as the case may be, over the term of the options.
These numbers are calculated based on rules promulgated by the SEC and do
not reflect our estimate of future stock price growth. Actual gains, if
any, on stock option exercises and common stock holdings are dependent on
the timing of such exercise and the future performance of our common stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individuals.
(2) These options were granted in fiscal 1996 for the purchase of 50,000 shares
in Candela Skin Care Centers, Inc., a subsidiary of Candela, and converted
to 10,527 options in Candela on August 21, 1997. These options have a term
of ten years from the date of conversion, become exercisable one year from
the date of conversion, and qualify as incentive stock options under
Section 422 of the Internal Revenue Code.
(3) Options for 8,000 shares, granted in fiscal 1991 at $8.75 per share were
repriced on April 27, 1998, have a term of 10 years from the date of
repricing, and are 100% vested at the date of repricing. Options for 25,000
shares, granted in fiscal 1992 at $8.125 per share were repriced on April
27, 1998, have a term of 10 years from the date of repricing, and are 100%
vested at the date of repricing.
46
<PAGE>
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth information with respect to options to
purchase our common stock granted under the 1987 Stock Option Plan and 1989
Stock Plan including (1) the number of shares purchased upon exercise of
options in the most recent fiscal year, (2) the net value realized upon such
exercise, (3) the number of unexercised options outstanding at June 27, 1998,
and (4) the value of such unexercised options at June 27, 1998:
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
JUNE 27, 1998 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised
Shares Options at June 27, in-the-Money Options
Acquired Value 1998 (#) at June 27, 1998 ($)(2)
on Realized -------------------------- -------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro........ -- -- 155,000(3) 35,527(3) 4,725 1,575
James C. Hsia, Ph.D..... -- -- 76,796(4) -- (4) -- --
William B. Kelley....... -- -- 60,464 23,750 850 315
Jay Caplan.............. -- -- 4,525(5) 5,000(5) -- --
Robert Wilber........... -- -- 8,750 17,500 2,033 2,033
</TABLE>
- --------
(1) Named Executive Officers will receive cash only if and when they sell the
securities issued upon exercise of the options and the amount of cash
received by such individuals is dependent on the value of such securities
at the time of such sale, if any.
(2) Value is based on the difference between option grant price and the fair
market value at 1998 fiscal year end ($2.813 per share as quoted on the
NASDAQ Stock Market at the close of trading on June 26, 1998) multiplied by
the number of shares underlying the option.
(3) All rights and interests in options granted in fiscal 1997 to purchase
100,000 shares at $7.50 per share were forfeited during fiscal 1998.
(4) All rights and interests in options granted in fiscal 1996 to purchase
15,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.
(5) All rights and interests in options granted in fiscal 1996 to purchase
10,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.
CERTAIN TRANSACTIONS
In October 1998 we entered into a Note and Warrant Purchase Agreement with
Massachusetts Capital Resource Company, William D. Witter and Michael D. Witter
pursuant to which we issued an aggregate of $3.7 million in subordinated term
notes and granted warrants to purchase an aggregate of 370,000 shares of our
common stock at $4.00 per share. Of the total, William D. Witter, an affiliate,
received a subordinated term note in the amount of $500,000 and a warrant to
purchase 50,000 shares of our common stock. Candela plans to use a portion of
the proceeds of this offering to retire all of the outstanding subordinated
term notes.
47
<PAGE>
TEN YEAR OPTION REPRICINGS
The following table sets forth information concerning the repricing of stock
options held by certain executive officers of Candela since June 27, 1988, the
date of our initial public offering, including (1) the date of repricing; (2)
the number of shares subject to repricing; (3) the market price at the time of
repricing; (4) the exercise price prior to repricing; (5) the new exercise
price; and (6) the original option term remaining at the date of repricing.
<TABLE>
<CAPTION>
No. of Length of
Securities Market Price Original term
Underlying of Stock at Exercise Price Remaining at
Options/SAR's Time of at Time of Date of
Date of Repriced or Repricing or Repricing New Exercise Repricing of
Name Repricing Amended (#) Amendment ($) Amendment ($) Price Amendment
- ---- --------- ------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro........ 7/21/95 5,000 3.1875 5.625 3.1875 3.7 years
7/21/95 25,000 3.1875 8.750 3.1875 5.9 years
James C. Hsia, Ph.D..... 4/27/98 8,000 3.25 8.75 3.25 3.0 years
4/27/98 25,000 3.25 8.125 3.25 3.75 years
William B. Kelley....... 8/10/89 1,200 7.375 9.625 7.375 9 years
7/21/95 7,000 3.1875 8.50 3.1875 6 years
7/21/95 6,000 3.1875 8.125 3.1875 6 years
7/21/95 1,514 3.1875 5.50 3.1875 8.4 years
Robert Wilber........... 7/21/95 750 3.1875 6.82 3.1875 4.25 years
7/21/95 1,500 3.1875 8.50 3.1875 6.1 years
7/21/95 1,000 3.1875 8.125 3.1875 6.5 years
Jay Caplan.............. 7/21/95 525 3.1875 5.75 3.1875 3.9 years
7/21/95 2,000 3.1875 8.50 3.1875 6 years
</TABLE>
Employment Agreements
Candela has entered into severance agreements with each of Messrs. Puorro,
Hsia, Broyer, Kelley and Caplan. Under our agreements with Messrs. Hsia,
Broyer, Kelley and Caplan, Candela has agreed to continue payment of their
respective base annual salaries over twelve months in the event that their
services for Candela are terminated for any reason except resignation. Under
our agreement with Mr. Puorro, in the event that his employment is terminated
for any reason, at either his election or Candela's election other than for
just cause, he will be entitled to receive severance payments equal to his base
annual salary for twelve months and then 50% of his base annual salary for an
additional twelve months. Mr. Puorro is subject to nonsolicitation and
noncompetition provisions for the period during which he receives severance
payments.
48
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 15, 1999, and as adjusted
to reflect the sale by us and selling shareholders of the shares offered hereby
with respect to: (1) each of our directors; (2) each of the Named Executive
Officers; (3) each stockholder known by us to be the beneficial owner of more
than 5% of our common stock; (4) each selling stockholder; and (5) all
executive officers and directors as a group. Except as otherwise noted, the
persons or entities named in the table have sole voting and investment power
with respect to all the shares of common stock beneficially owned by them.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Owned After Number of Shares
Name and Address of to Offering Number of Offering Offered in the
Principal and Selling ---------------------- Shares ---------------------- Over-Allotment
Shareholders Number Percent Offered Number Percent Option
- --------------------- ----------- ---------- --------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro(1)..... 194,452 3.5% -- 194,452 2.8% --
530 Boston Post Road
Wayland, MA 01778
Theodore G. Johnson(2).. 80,849 1.5% -- 80,849 1.1% --
530 Boston Post Road
Wayland, MA 01778
Kenneth D. Roberts(3)... 82,000 1.5% -- 82,000 1.2% --
530 Boston Post Road
Wayland, MA 01778
Douglas W. Scott(4)..... 41,250 * -- 41,250 * --
530 Boston Post Road
Wayland, MA 01778
Richard J. Cleveland,
M.D.(5)................ 46,009 * -- 46,009 * --
530 Boston Post Road
Wayland, MA 01778
Robert E. Dornbush(6)... 317,835 5.7% 150,000 167,835 2.4% --
104 Cypress Avenue
Kentfield, CA 94904
Nancy Nager, R.N.,
B.S.N., M.S.N. ........ -- -- -- -- -- --
530 Boston Post Road
Wayland, MA 01778
James C. Hsia, PhD.(7).. 104,672 1.9% -- 104,672 1.5% 15,000
530 Boston Post Road
Wayland, MA 01778
William B. Kelley(8).... 28,625 * -- 28,625 * 10,000
530 Boston Post Road
Wayland, MA 01778
F. Paul Broyer(9)....... [ ] * -- [ ] * 12,500
530 Boston Post Road
Wayland, MA 01778
Jay D. Caplan(10)....... [ ] * -- [ ] * 5,000
530 Boston Post Road
Wayland, MA 01778
William McGrail(11)..... [ ] * -- [ ] * 1,750
530 Boston Post Road
Wayland, MA 01778
Robert Wilber(12)....... [ ] * -- [ ] * 5,000
530 Boston Post Road
Wayland, MA 01778
Eddie C.K. Foo(13)...... 870,146 15.7% 870,146 -- -- --
506 Chai Chee Lane
Singapore 469026
Singatronics
Limited(14)............ 870,146 15.7% 870,146 -- -- --
506 Chai Chee Lane
Singapore 469026
Singatronics Asset
Holdings Private
Limited(15)............ 870,146 15.7% 870,146 -- -- --
506 Chai Chee Lane
Singapore 469026
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Owned After Number of Shares
Name and Address of to Offering Number of Offering Offered in the
Principal and Selling ----------------------- Shares --------------------- Over-Allotment
Shareholders Number Percent Offered Number Percent Option
- --------------------- ------------ ---------- ------- --------- --------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
William D.
Witter(16)........... 1,333,227 24.1% -- 1,333,227 18.9% --
153 East 53rd Street
51st Floor
New York, New York
10022
William D. Witter,
Inc.(17)............. 1,333,227 24.1% -- 1,333,227 18.9% --
153 East 53rd Street
New York, NY 10022
Massachusetts Capital
Resource
Company(18).......... 300,000 60,000 240,000 3.3% --
420 Boylston Street
Boston, MA 02116
All Directors and
Executive Officers as
a Group (13
Persons)(19)......... 940,994 16.9% 150,000 790,994 11.2% 49,250
</TABLE>
- --------
* Represents less than 1% of our outstanding common stock.
(1) Includes 185,527 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(2) Includes 40,500 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(3) Includes 50,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(4) Includes 35,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(5) Includes 38,236 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(6) Includes 50,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999 and warrants to purchase
2,000 shares of Common Stock. Mr. Dornbush has informed us that he will
retire from our Board of Directors upon effectiveness of this prospectus.
(7) Includes 73,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(8) Includes 28,625 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(9) Includes 15,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(10) Includes 7,025 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(11) Includes 3,000 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(12) Includes 13,750 shares issuable pursuant to stock options exercisable
within the 60 day period following June 15, 1999.
(13) Includes 831,004 shares of common stock and warrants to purchase 39,142
shares of common stock owned by Singatronics Asset Holdings Private
Limited. Mr. Foo is the Chairman, Chief Executive Officer and owner of a
majority of the outstanding shares of capital stock of Singatronics
Limited, the parent company of Singatronics Asset Holdings Private
Limited, and has the sole power to dispose or to direct the disposition of
all of the shares of common stock which are beneficially owned
respectively by Singatronics Asset Holdings Private Limited, Singatronics
Limited and Eddie C.K. Foo.
(14) Includes 831,004 shares of common stock and warrants to purchase 39,142
shares of common stock owned by Singatronics Asset Holdings Private
Limited. Singatronics Limited is the parent company of Singatronics Asset
Holdings Private Limited, and has the sole power to dispose or direct the
disposition of all of the shares of common stock which are beneficially
owned respectively by Singatronics Asset Holdings Private Limited,
Singatronics Limited and Eddie C.K. Foo.
(15) Includes warrants to purchase 39,142 shares of common stock. Information
based on Amendment No. 3 to Schedule 13D, dated June 9, 1992 filed with
the Securities and Exchange Commission. All of such shares and warrants
are also beneficially owned by Singatronics Limited, the parent company of
Singatronics Asset Holdings Private Limited, and Eddie C.K. Foo,
individually, the Chairman, Chief Executive Officer and owner of a
majority of the outstanding shares of capital stock of Singatronics
Limited.
50
<PAGE>
(16) Includes 1,333,227 shares of common stock owned by William D. Witter, Inc.
Mr. Witter is the President and primary owner of William D. Witter, Inc.
and has the sole power to dispose or to direct the disposition of all of
the shares of common stock which are beneficially owned respectively by
William D. Witter, Inc. and William D. Witter.
(17) Information based on Amendment No. 8 to Schedule 13G, dated January 27,
1998 filed with the Securities and Exchange Commission. All of such shares
are also beneficially owned by William D. Witter, individually, the
President and primary owner of William D. Witter, Inc.
(18) Includes presently exercisable warrants to purchase 300,000 shares of
common stock.
(19) Includes 524,663 shares subject to stock options exercisable within the 60
day period following June 15, 1999. Also includes warrants to purchase
2,000 shares of common stock.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
We are authorized by our Certificate of Incorporation, as amended, to issue
30,000,000 shares of common stock, par value $.01 per share. Effective at the
closing of this offering, approximately 7,040,000 shares of common stock will
be issued and outstanding. All of the shares of common stock that will be
outstanding immediately following this offering including the shares of common
stock sold in this offering, will be validly issued, fully paid and
nonassessable.
Common Stock
The holders of common stock are entitled to one vote for each share on all
matters to be voted on by our stockholders, including elections of directors,
and the holders of such shares will possess all voting power. The holders of
common stock will be entitled to such dividends as may be declared from time to
time by the Board from funds legally available therefor. In the event of our
dissolution, liquidation or winding up holders of our shares of common stock
will be entitled to receive, pro rata, all assets available for distribution to
such holders after payment of all liabilities. The holders of our common stock
have no preemptive rights to purchase newly issued securities.
Options
As of June 15, 1999, Candela had outstanding options to purchase up to an
aggregate of 987,405 shares of common stock at exercise prices ranging from
$1.50 to $14.50, of which 583,701 were then exercisable.
Warrants
In March 1992 we entered into a Warrant Agreement as part of a class action
settlement, pursuant to which we authorized warrants to purchase an aggregate
of 300,000 shares of our common stock, exercisable for $6.875 per share, of
which we issued warrants for 282,182 shares. The warrants were registered with
the SEC pursuant to a Registration Statement on Form S-3 filed April 8, 1992.
As of June 15, 1999 1,236 of these warrants had been exercised. These warrants
will expire if not exercised on or before November 6, 2000.
In October 1998 Candela entered into a Note and Warrant Purchase Agreement
with Massachusetts Capital Resource Company, William D. Witter and Michael D.
Witter pursuant to which we granted them warrants to purchase an aggregate of
370,000 shares of our common stock at $4.00 per share. As of June 15, 1999 none
of these warrants have been exercised. These warrants will expire if not
exercised on or before October 31, 2006.
Registration Rights
Pursuant to a Stock Purchase Agreement dated November 17, 1988 and a Note
and Warrant Purchase Agreement dated October 15, 1998, certain of our
stockholders have the right to request that their shares be included in our
registration statements filed under the Securities Act of 1933. The managing
underwriter of any offering has the right to limit the number of shares that
stockholders may include in any registration statement. Such stockholders also
have the right, subject to various restrictions, to require us to file a
registration statement under the Securities Act of 1933 in which they may
include their shares. In addition to other limitations on this right,
stockholders may require us to effect no more than two registrations following
this offering.
Certain Provisions in Our Certificate and Bylaws
Our Bylaws provide that special meetings of the stockholders may be called
for any purpose, unless otherwise prescribed by statute or by the Certificate
of Incorporation, by the Chairman of the Board, or the
52
<PAGE>
President, and shall be called by the President or the Secretary at the written
request of a majority of the Board of Directors or of the stockholders owning a
majority of the outstanding shares of capital stock. Written notice of a
special meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten and no more than sixty days prior to the meeting.
Our Bylaws also provide that the stockholders may remove a director by a
majority vote. New directors may be elected by majority of the remaining
directors then in office, by a sole remaining director or, if there are no
directors in office, by the stockholders at a special meeting of stockholders
called in accordance with the Bylaws.
Our Certificate of Incorporation offers our directors certain protections to
the extent permitted by Delaware law. Our directors are not liable to us or our
stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Certificate obligates us to
indemnify our directors to the fullest extent permitted by the General
Corporation Law of Delaware. We believe that these provisions will assist us in
attracting and retaining qualified individuals to serve as directors.
Rights Plan
Our stockholder rights plan was adopted on September 4, 1992 and amended in
March 1996 and again in November 1998. Under the plan, we declared a dividend
of one common stock purchase right for each share of our common stock
outstanding on September 22, 1992. The rights are not currently exercisable,
but would become exercisable if certain triggering events occur, such as the
initiation of certain tender offers for our common stock. If such an event
occurred, qualifying stockholders would be initially entitled to purchase one
share of our common stock at an exercise price of $48 per share, subject to
adjustment. In the event that the rights were exercised after further
triggering events, each right would entitle holders to purchase, at the
exercise price then in effect, shares of our common stock (or other property,
under certain circumstances) having a value of twice the exercise price. Such
rights would not extend to any stockholder whose action triggered the rights.
We can, in certain circumstances, redeem the rights at $.005 each. The rights
expire on September 22, 2002, unless redeemed earlier by us.
The Rights Plan discourages hostile takeovers by effectively allowing our
stockholders to purchase additional shares of our common stock at a discount
following the hostile acquisition of a large block of our outstanding common
stock and by increasing the value of consideration to be received by
stockholders in specified transactions following such an acquisition.
Delaware Business Combination Statute
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for
a three-year period following the date that such stockholder becomes an
interested stockholder unless:
. prior to such date, the Board of Directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding certain shares); or
. on or subsequent to such date, the business combination is approved by
the Board of Directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
53
<PAGE>
Except as otherwise specified in Section 203, an interested stockholder is
defined to include (1) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to
the date of determination and (2) the affiliates and associates of any such
person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. We have not elected to
be exempt from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage persons interested in acquiring us to negotiate in
advance with our Board, since the stockholder approval requirement would be
avoided if a majority of the Directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in our management. It is possible that such provisions could
make it more difficult to accomplish transactions which our stockholders may
otherwise deem to be in their best interests.
Listing
The common stock is traded on the Nasdaq National Market under the trading
symbol "CLZR."
Transfer Agent and Registrar
The transfer agent for our common stock is BankBoston, N.A.
54
<PAGE>
UNDERWRITING
The underwriters named below, represented by Needham & Company, Inc. and
Tucker Anthony Cleary Gull (the Representatives), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement, to
purchase from us and the selling shareholders the number of shares of common
stock indicated below opposite their respective names at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. The Underwriting Agreement provides that the obligations of the
underwriters to pay for and accept delivery of such shares are subject to
certain conditions precedent, and that the underwriters are committed to
purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Needham & Company, Inc.
Tucker Anthony Cleary Gull
---------
Total........................................................ 2,580,000
=========
</TABLE>
The Representatives have advised us that the underwriters initially propose
to offer the shares of common stock to the public on the terms set forth on the
cover page of this prospectus. The underwriters may allow to selected dealers
(who may include the underwriters) a concession of not more than $ per share,
and the underwriters may allow, and such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After this offering, the
offering price and other selling terms may be changed by the Representatives.
We estimate that the total offering expenses, other than underwriting discounts
and commissions, will be $ .
Candela and certain selling shareholders have granted an option to the
underwriters, exercisable during the 30-day period after the date of this
prospectus, to purchase up to 387,000 additional shares of common stock at the
same price per share as the initial 2,580,000 shares to be purchased by the
underwriters. To the extent that the underwriters exercise this option, each of
the underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table, and we and the selling stockholders will be obligated to sell such
shares to the underwriters. The underwriters may purchase such shares only to
cover over-allotments made in connection with this offering. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 2,580,000 shares are being offered.
Our directors and officers, beneficially holding in the aggregate 556,447
shares of common stock after this offering, have agreed that, for a period of
120 days after the date of this prospectus, they will not, without the prior
written consent of Needham & Company, Inc., directly or indirectly sell, offer
to sell or otherwise dispose of any such shares of common stock or any right to
acquire such shares. In addition, we have agreed that, for a period of days
after the date of this prospectus, we will not, without the prior written
consent of Needham & Company, Inc., issue, offer, sell, grant options to
purchase or otherwise dispose of any of our equity securities or any other
securities convertible into or exchangeable for the common stock or other
equity security, other than the grant of options to purchase common stock or
the issuance of shares of common stock under our stock option and stock
purchase plans, and the issuance of shares of common stock pursuant to the
exercise of outstanding options and warrants.
The Underwriting Agreement provides that we indemnify the several
underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, or will contribute to payments the underwriters may be
required to make arising from these types of liabilities.
In connection with this offering, certain underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in our common stock on the Nasdaq National Market in accordance
with Rule M under the Securities Exchange Act of 1934 during the two business
day period before commencement
55
<PAGE>
of offers or sales of the common stock offered hereby. The passive market
making transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded.
The following table summarizes the compensation to be paid to the
underwriters by us and the selling shareholders and the expenses payable by us
and the selling shareholders.
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commis-
sions paid by us.................. $ $ $
Expenses payable by us............. $ $ $
Underwriting Discounts and Commis-
sions paid by selling sharehold-
ers............................... $ $ $
</TABLE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Choate, Hall & Stewart, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Candela Corporation as of June 27,
1998 and June 28, 1997 and for each of the three years in the period ended June
27, 1998, included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents by writing to the SEC and paying a fee for
the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available to the public at the SEC's website at www.sec.gov. In addition, you
can read and copy our SEC filings at the office of the National Association of
Securities Dealers, Inc. at 1735 K Street, Washington, DC 20006.
This prospectus is only part of a Registration Statement on Form S-1 that we
have filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the Registration Statement. We have also filed
exhibits and schedules with the Registration Statement that are excluded from
this prospectus, and you should refer to the applicable exhibit or schedule for
a complete description of any statement referring to any contract or other
document. You may:
. inspect a copy of the Registration Statement, including the exhibits and
schedules, without charge at the public reference room; or
. obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.
56
<PAGE>
CANDELA CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at March 27, 1999 (unaudited), June 27, 1998
and June 28, 1997....................................................... F-3
Consolidated Statements of Operations for the nine months ended March 27,
1999 (unaudited) and
March 28, 1998 (unaudited) and for the Years Ended June 27, 1998, June
28, 1997 and
June 29, 1996 .......................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
27, 1998, June 28, 1997 and June 29, 1996 and for the nine months ended
March 27, 1999 (unaudited) ............................................. F-5
Consolidated Statements of Cash Flows for the nine months ended March 27,
1999 (unaudited) and March 28, 1998 (unaudited) and for the Years Ended
June 27, 1998, June 28, 1997 and
June 29, 1996 .......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Candela Corporation:
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Candela
Corporation and its Subsidiaries at June 27, 1998 and June 28, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 27, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 29, 1998, except for the information
in the third paragraph of Note 6,
for which the date is August 7, 1998
F-2
<PAGE>
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 27, June 27, June 28,
1999 1998 1997
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 1)............ $ 8,059 $ 1,615 $ 2,674
Accounts receivable (net of allowance of $854
(unaudited), $1,038 and $197 in 1999, 1998
and 1997, respectively) (Notes 1 & 6)........ 9,922 8,419 8,848
Notes receivable.............................. 1,582 1,486 1,284
Inventories (Notes 1 & 3)..................... 6,809 7,241 6,776
Other current assets.......................... 1,174 200 522
------- -------- -------
Total current assets........................ 27,546 18,961 20,104
Property and equipment, net (Note 4)............ 2,533 3,120 3,523
Other assets.................................... 371 523 1,210
------- -------- -------
Total assets................................ $30,450 $ 22,604 $24,837
======= ======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 4,574 $ 4,292 $ 5,879
Accrued payroll and related expenses.......... 1,889 1,319 833
Accrued warranty costs........................ 2,356 2,012 1,338
Income taxes payable.......................... 2,254 335 516
Restructuring reserve (Note 12)............... 1,640 1,995 0
Other accrued liabilities..................... 1,680 957 608
Lines of credit and short-term notes (Note
6)........................................... 0 3,052 1,000
Current portion of long-term debt (Note 6).... 489 597 827
Deferred income (Note 5)...................... 1,687 1,763 2,071
------- -------- -------
Total current liabilities................... 16,569 16,322 13,072
Long-term debt (Note 6)......................... 2,971 887 1,519
Commitments and contingencies (Note 6).......... -- -- --
Stockholders' equity (Note 8):
Common stock, $.01 par value: 30,000,000
shares authorized; 5,511,310 (unaudited),
5,479,020 and 5,419,913 shares issued and
outstanding in 1999, 1998 and 1997,
respectively................................. 55 55 54
Additional paid-in capital.................... 18,577 17,407 17,223
Accumulated deficit........................... (7,127) (11,337) (6,885)
Cumulative translation adjustment............. (595) (730) (146)
------- -------- -------
Total stockholders' equity.................. 10,910 5,395 10,246
------- -------- -------
Total liabilities and stockholders' equity.. $30,450 $ 22,604 $24,837
======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the nine months
ended For the years ended
----------------------- -------------------------
June June June
March 27, March 28, 27, 28, 29,
1999 1998 1998 1997 1996
----------- ----------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Lasers and other
products................ $31,254 $16,735 $25,917 $25,601 $20,403
Product related service.. 6,373 6,193 8,405 7,660 7,861
Skin care centers........ 2,254 2,034 2,703 2,244 2,149
------- ------- ------- ------- -------
Total revenue.......... 39,881 24,962 37,025 35,505 30,413
Cost of sales:
Lasers and other
products................ 13,213 7,447 11,272 11,195 9,159
Product related service.. 4,213 4,758 6,954 5,563 6,560
Skin care centers........ 1,567 1,895 2,481 1,892 1,114
------- ------- ------- ------- -------
Total cost of sales.... 18,993 14,100 20,707 18,650 16,833
------- ------- ------- ------- -------
Gross profit............... 20,888 10,862 16,318 16,855 13,580
Operating expenses:
Research and
development............. 2,381 1,979 2,399 2,488 1,818
Selling, general and
administrative.......... 12,131 11,421 15,271 13,680 9,873
Restructuring charge..... 0 2,609 2,609 0 0
------- ------- ------- ------- -------
Total operating
expenses.............. 14,512 16,009 20,279 16,168 11,691
------- ------- ------- ------- -------
Income (loss) from opera-
tions..................... 6,376 (5,147) (3,961) 687 1,889
Other income (expense)
Interest income.......... 60 29 42 84 93
Interest expense......... (377) (181) (235) (107) (49)
Other expense............ 91 (109) (123) (26) (207)
------- ------- ------- ------- -------
Total other expense...... (226) (261) (316) (49) (163)
------- ------- ------- ------- -------
Income (loss) before income
taxes..................... 6,150 (5,408) (4,277) 638 1,726
Provision for income tax-
es........................ 1,940 78 175 400 481
------- ------- ------- ------- -------
Net income (loss).......... $ 4,210 $(5,486) $(4,452) $ 238 $ 1,245
======= ======= ======= ======= =======
Basic earnings (loss) per
share..................... $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23
Diluted earnings (loss) per
share..................... $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22
======= ======= ======= ======= =======
Weighted average shares
outstanding............... 5,486 5,446 5,479 5,398 5,321
Adjusted weighted average
shares outstanding........ 5,841 5,446 5,479 5,673 5,652
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Treasury
Common Stock Additional Stock Cumulative
-------------- Paid-in Accumulated -------------- Translation
Shares Amount Capital (Deficit) Shares Amount Adjustment Total
------ ------ ---------- ----------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995... 5,496 $54 $18,349 $ (8,294) (197) $(1,574) $ 551 $ 9,086
Sale of common stock un-
der stock plans........ 86 1 244 245
Dividend paid by Le
Pli.................... (26) (26)
Net income.............. 1,245 1,245
Retirement of Treasury
Stock.................. (197) (2) (1,572) 197 1,574 0
Conversion of Spa
Management, Inc. to a
C-Corporation.......... 48 (48) 0
Currency translation
adjustment............. (585) (585)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 29,
1996................... 5,385 53 17,069 (7,123) 0 0 (34) 9,965
Sale of common stock un-
der stock plans........ 35 1 154 155
Net income.............. 238 238
Currency translation
adjustment............. (112) (112)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 28,
1997................... 5,420 54 17,223 (6,885) 0 0 (146) 10,246
Sale of common stock un-
der stock plans........ 59 1 184 185
Net loss................ (4,452) (4,452)
Currency translation
adjustment............. (584) (584)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 27,
1998................... 5,479 55 17,407 (11,337) 0 0 (730) 5,395
Sale of common stock
under stock plans
(unaudited)............ 32 90 90
Issuance of warrants
(unaudited)............ 1,080 1,080
Net income (unaudited).. 4,210 4,210
Currency translation
adjustment
(unaudited)............ 135 135
----- --- ------- -------- ---- ------- ----- -------
Balance at March 27,
1999 (unaudited)....... 5,511 $55 $18,577 $ (7,127) 0 $ 0 $(595) $10,910
===== === ======= ======== ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended For the years ended
----------------------- -------------------------
June June June
March 27, March 28, 27, 28, 29,
1999 1998 1998 1997 1996
----------- ----------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $4,210 $(5,486) $(4,452) $ 238 $ 1,245
Adjustments to reconcile
net income (loss) to net
cash provided by (used
for) operating activities:
Depreciation and
amortization............. 589 586 815 666 475
Provision for bad debts... 72 790 844 36 36
Provision for
restructuring charges.... -- 2,609 2,609 -- --
Accretion of interest on
debt discount............ 52 -- -- -- --
Gain on disposal of
equipment................ -- -- -- -- (8)
Increase (decrease) in cash
from working capital:
Accounts receivable....... (944) 1,343 (950) (2,628) (1,945)
Notes receivable.......... (175) 79 (434) 620 (545)
Inventories............... 540 (1,550) (810) (1,216) (590)
Other current assets...... (979) (40) 314 (188) 74
Other assets.............. (32) 583 664 (529) (171)
Accounts payable.......... (179) (88) (1,046) 2,945 1,552
Accrued payroll and
related expenses......... 511 (60) 491 88 130
Deferred income........... (129) (260) (241) 145 315
Accrued warranty costs.... 340 36 683 445 278
Income taxes payable...... 1,944 (388) (154) 181 (222)
Restructuring reserve..... (356) (484) (501) 0 0
Other accrued
liabilities.............. 996 640 303 (395) 90
------ ------- ------- ------- -------
Net cash provided by
(used for) operating
activities............. 6,460 (1,690) (1,865) 408 714
Cash flows from investing
activities:
Proceeds from sale of
assets................... 293 15 24 50 10
Purchases of property and
equipment................ (112) (185) (401) (1,867) (377)
------ ------- ------- ------- -------
Net cash provided by (used
for) investing activities.. 181 (170) (377) (1,817) (367)
Cash flows from financing
activities:
Net borrowings from
(repayments of) lines of
credit................... (2,700) 950 1,700 1,000 --
Proceeds from issuance of
debt and stock warrants.. 3,700 -- 480 655 479
Principal payments on
long-term debt........... (627) (468) (441) (422) (225)
Payments of capital lease
obligations.............. (540) (200) (390) (258) (125)
Proceeds from issuance of
common stock............. 90 164 184 155 294
Payment of dividends...... -- -- -- -- (26)
------ ------- ------- ------- -------
Net cash provided by (used
for) financing activities.. (77) 446 1,533 1,130 397
Effect of exchange rate
changes on cash and cash
equivalents................ (120) (120) (350) (88) (268)
------ ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.. 6,444 (1,534) (1,059) (367) 476
Cash and cash equivalents at
beginning of period........ 1,615 2,674 2,674 3,041 2,565
------ ------- ------- ------- -------
Cash and cash equivalents at
end of period.............. $8,059 $ 1,140 $ 1,615 $ 2,674 $ 3,041
====== ======= ======= ======= =======
Cash paid during the period
for:
Interest.................. $ 265 $ 181 $ 235 $ 107 $ 50
Income taxes.............. $ 21 $ 259 $ 356 $ 492 $ 807
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Candela
Corporation and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. In August 1995, the Company incorporated a
wholly-owned subsidiary, Candela Skin Care Centers, Inc. (CSCC). In June 1996,
the Company acquired all of the outstanding capital stock of Spa Management,
Inc. which was accounted for using the pooling of interests method of
accounting. (See Note 2)
The Company's fiscal year ends on the Saturday nearest June 30.
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. It is the belief of the Company's management that all
necessary adjustments have been made for a proper presentation of results.
Actual results could differ from those estimates and impact future results of
operations and cash flows.
Cash and Cash Equivalents
The Company classifies investments purchased with a maturity at the date of
acquisition of three months or less as cash equivalents. These are valued at
cash plus accrued interest which approximates market value. At March 27, 1999,
June 27, 1998 and June 28, 1997, substantially all cash equivalents were
invested in overnight Repurchase Agreements or U.S. Treasury Bills with a major
bank.
Financial Instruments
The Company operates internationally, with sales offices, customers, and
vendors in several countries outside of the United States. The Company may
reduce its exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of foreign currency forward contracts, a
type of derivative financial instrument. Foreign currency exposures are
accounted for on an accrual basis. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives.
At March 27, 1999, the Company held foreign currency forward contracts with
notional value totaling approximately $1,914,000 (228,556,000 Japanese Yen)
(unaudited) compared to forward contracts with a value of $1,352,000
(172,951,000 Japanese Yen) (unaudited) held at March 28, 1998. These contracts
have maturity dates prior to July 22, 1999. The carrying and net fair value of
these contracts at March 27, 1999, was $0 (unaudited) and $14,000 (unaudited),
respectively, compared to $0 (unaudited) and $25,000 (unaudited) respectively,
at March 28, 1998.
At June 27, 1998 the Company held foreign currency forward contracts with
notional value totaling approximately $1,386,000 (183,687,568 Japanese Yen)
compared to $500,000 (58,625,000 Japanese Yen) at June 28, 1997. These
contracts have maturities prior to October 19, 1998. The carrying and net fair
value of these contracts at June 27, 1998 was $0 and $127,000, respectively,
compared to $0 and $12,000, respectively, at June 28, 1997.
Accounts Receivable and Notes Receivable
The Company's trade accounts receivables and notes receivables are primarily
from sales to end users and distributors servicing the dermatology and urology
markets, and reflect a broad domestic and international customer base. The
Company does not require collateral and has not historically experienced
significant credit losses related to receivables from individual customers or
groups of customers in any particular industry or geographic area.
F-7
<PAGE>
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market, using a standard costing system.
Property and Equipment
Purchased property and equipment is recorded at cost. Property and equipment
purchased under capital lease arrangements is recorded at the lesser of cost or
the present value of the minimum lease payments required during the lease
period. Laser systems used for testing are capitalized at cost. Significant
improvements are capitalized; maintenance and repairs are charged to expense as
incurred. Upon sale or retirement of property and equipment, the costs and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in income from operations. Depreciation and amortization
are provided using the straight-line method over estimated useful lives as
follows:
<TABLE>
<CAPTION>
Number of Years
---------------
<S> <C>
Leasehold improvements and assets under capital lease........ 2 to 5
Office furniture and other equipment......................... 3 to 5
Laser systems................................................ 3
</TABLE>
Revenue Recognition
Product sales--Revenue from product sales, except sales to certain
distributors, are recognized at the time of shipment. Shipments made to
distributors, for which payment to the Company is dependent on resale of the
system, are not recognized as revenue unless the distributor demonstrates that
the system is sold.
Grants--Revenue from U.S. government contracts granted under the Small
Business Innovation Research program. Government contracts limit reimbursement
to 100% of allowable direct costs and a negotiated rate for indirect costs. The
revenue is recognized as reimbursable costs are incurred.
Service--Revenue from the sale of service contracts is deferred and
recognized on a straight-line basis over the contract period. Revenue from
service administered through CSCC is recognized as the services are provided.
Amounts received from the sale of gift certificates by CSCC are deferred and
recognized as revenue when the services are provided.
Advertising Costs
The Company expenses all advertising costs at the time they are incurred.
Research and Development
Research and development costs are expensed as incurred. Advertising costs
incurred in the nine months ended March 27, 1999 and March 28, 1998, and the
years ended June 27, 1998, June 28, 1997 and June 29, 1996 were $1,218,000 and
$810,000, and $977,000, $1,121,000 and $668,000, respectively.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Assets and
liabilities are translated into U.S. dollars at current exchange rates, while
income and expense items are translated at average rates of exchange prevailing
during the year. Exchange gains and losses arising from translation of the
Japanese and Spanish subsidiary balance sheets are accumulated as a separate
component of stockholders' equity. Net exchange (gains) losses resulting from
foreign currency transactions amounted to $(58,000) (unaudited), $138,000,
$60,000 and $420,000 for the nine months ended March 27, 1999, and for the
fiscal years 1998, 1997 and 1996, respectively, and are included in other
expense.
Product Warranty Costs
The length of the Company's warranty on end user sales of medical devices is
generally one year on parts and labor. Distributor sales generally include a
parts warranty only. Estimated future costs for initial product warranties are
provided for at the time of sale.
F-8
<PAGE>
Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings (loss) per share amounts have been restated to conform with SFAS
128 requirements.
<TABLE>
<CAPTION>
For the nine months ended For the years ended
----------------------------- ---------------------------
March 27, March 28,
1999 1998 June 27, June 28, June 29,
(unaudited) (unaudited) 1998 1997 1996
------------ ------------- -------- -------- --------
(numbers in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
NUMERATOR
Net income(loss)........ $4,210 $ (5,486) $(4,452) $ 238 $1,245
============ ============= ======= ====== ======
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321
------------ ------------- ------- ------ ------
Earnings (loss) per
share.................. $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23
============ ============= ======= ====== ======
DILUTED EARNINGS PER
SHARE
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321
Effect of dilutive
warrants............... 103 0 0 0 0
Effect of dilutive
options................ 252 0 0 275 331
------------ ------------- ------- ------ ------
Adjusted weighted
average shares
outstanding............ 5,841 5,446 5,479 5,673 5,652
------------ ------------- ------- ------ ------
Earnings (loss) per
share.................. $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22
============ ============= ======= ====== ======
Dilutive options under
FAS 128................ 349 9
============= =======
</TABLE>
Accounting for Stock-Based Compensation
The company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has
disclosed herein pro forma net income and pro forma earnings per share in the
footnotes using the fair value based method for fiscal 1998, 1997, and 1996.
New Accounting Pronouncements
In June 1997, the FASB 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
July 3, 1999.
Pronouncements
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 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 will adopt SFAS No. 131 for its fiscal year ending July 3,
1999. Management believes that the Company operates in two segments, laser and
other products and related services, and skin care centers.
F-9
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives"), and for hedging
activities. SFAS 133 requires companies to recognize all derivatives as either
assets or liabilities, with the instruments measured at fair value. The
accounting for changes in fair value, gains or losses, depends on the intended
use of the derivative and its resulting designation. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company plans to implement SFAS 133 for its fiscal year 2000. Had the Company
implemented the pronouncement at March 27, 1999, it would have increased assets
and liabilities equal to the notional amount of forward currency contracts held
by the Company in the amount of $1,914,000 (unaudited), and there would have
been no material impact on the statements of operations.
Unaudited Interim Financial Information
The consolidated financial statements of the Company as of March 27, 1999
and for the nine months ended March 27, 1999 and March 28, 1998 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been
made, which in the opinion of management, are necessary for a fair
presentation. Results of operations for the nine months ended March 27, 1999
are not necessarily indicative of the results that may be expected for the year
ending July 3, 1999 or for any other future period.
2. Pooling of Interests
On June 27, 1996, the Company acquired all of the outstanding shares of
capital stock of Spa Management, Inc. The acquisition was effected through an
exchange of 60,317 shares of the Company's common stock for all of the
outstanding shares of capital stock of Spa Management, Inc. This transaction
has been accounted for using the pooling of interests method of accounting. Spa
Management, Inc., d/b/a Le Pli at the Heritage (Le Pli) was formed in May 1994,
and is a Boston-based health spa with approximately 60 employees at the time of
acquisition and specializes in personal care and health and beauty services. Le
Pli (currently operating as Candela Skin Care Center of Boston, Inc.) operates
as a wholly-owned subsidiary of CSCC.
The following information presents certain income statement data of Candela
Corporation and Spa Management, Inc. for the periods prior to the acquisition.
The acquisition was substantially coincident with the fiscal year end close.
<TABLE>
<CAPTION>
Candela Spa
Corporation Management, Inc. Total
----------- ---------------- -------
(in thousands)
<S> <C> <C> <C>
Revenue for:
Year ending June 29, 1996............ $28,264 $2,149 $30,413
Net income (loss) for:
Year ending June 29, 1996............ $ 1,210 $ 35 $ 1,245
</TABLE>
The accompanying consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of Le Pli. All prior
period historical consolidated financial statements presented herein have been
restated to include the financial position, results of operations, and cash
flows of Le Pli.
F-10
<PAGE>
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Raw materials.................................. $2,348 $3,110 $2,429
Work in process................................ 1,833 1,062 1,023
Finished goods................................. 2,628 3,069 3,324
------ ------ ------
$6,809 $7,241 $6,776
====== ====== ======
</TABLE>
4. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Leasehold improvements....................... $2,067 $2,033 $2,014
Office furniture............................. 888 819 1,064
Laser systems................................ 483 483 483
Computers and other equipment................ 4,169 4,544 4,271
------ ------ ------
7,607 7,879 7,832
Less accumulated depreciation and
amortization................................ 5,074 4,759 4,309
------ ------ ------
Property and equipment, net.................. $2,533 $3,120 $3,523
====== ====== ======
</TABLE>
Depreciation expense was approximately $405,000 (unaudited), $684,000,
$616,000, and $552,000 for the nine months ended March 27, 1999, fiscal 1998,
1997 and 1996, respectively.
Assets under capital lease obligations of $1,156,000 (unaudited), $1,648,000
and $1,747,000 are included in property and equipment at March 27, 1999, June
27, 1998 and June 28, 1997, respectively. Accumulated depreciation on these
assets was $788,000 (unaudited), $818,000 and $769,000 at March 27, 1999, June
27, 1998 and June 28, 1997, respectively.
5. Deferred Income
Deferred income consists of the following (in thousands):
<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Service contract revenue......................... $ 712 $1,026 $1,243
Gift certificate revenue......................... 508 343 362
Other............................................ 467 394 466
------ ------ ------
$1,687 $1,763 $2,071
====== ====== ======
</TABLE>
6. Debt and Lease Obligations
Debt (unaudited)
On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million. The notes become due
in October, 2006, and require quarterly interest payments. In addition, we
issued warrants to purchase 370,000 shares of common stock to the note holders
which have an exercise price of $4.00 per share. The relative fair value
ascribed to the warrants is $1.1 million (measured as of the date of issuance)
was estimated using a Black-Scholes model assuming a 4.5% risk free rate of
return, an eight-year life of the warrant, a 72% volatility factor for an
eight-year period and no dividend rate. The relative fair value of the warrants
has been recorded as a component of Additional Paid-In Capital.
F-11
<PAGE>
The relative fair value of the debt was recorded as $2.6 million. Interest
expense of $1.1 million will be accreted to debt over the eight-year life of
the debt to bring the value of that debt to its $3.7 million face value.
On October 22, 1998, $2,700,000 of the note proceeds was used to retire the
full amount then outstanding on the Company's line of credit. In December,
1998, this line of credit was renewed to expire on December 1, 1999, bearing
interest at the bank's prime lending rate and collateralized by domestic
accounts receivable, inventories, and a pledge of subsidiary stock. At March
27, 1999, there were no borrowings outstanding on this line of credit and no
amounts were drawn from the line during the period.
Line of Credit
In February 1997, the Company obtained a renewable $3,500,000 revolving
credit agreement with a bank with interest at 1% over the bank's prime lending
rate (9.5%) at June 27, 1998). This line of credit is collateralized by all
tangible and intangible assets plus international accounts receivable covered
by credit insurance, and the pledge of stock of CSCC. The agreement contains
restrictive covenants establishing maximum leverage, certain minimum ratios and
minimum levels of net income. At June 27, 1998 the Company was in violation of
one of the minimum ratio covenants. On August 7, 1998, the lender waived its
rights under the agreement for the violation for the period ended June 30,
1998. As of June 27, 1998, the Company had utilized $2,700,000 of the line of
credit compared to $1,000,000 as of June 28, 1997. This line of credit expires
on December 1, 1998.
The Company's experience has been to renew its bank financing arrangement
annually, and management believes the Company will be able to renew the above
line of credit on acceptable terms, however there is no assurance that they
will be successful. In addition, the Company continues to evaluate alternative
sources of financing, including both debt and equity arrangements, to ensure
the Company has sufficient liquidity to fund operations throughout the next
year. Should these alternatives not be possible, there could be material
adverse implications for the Company's financial position and operations.
Short-term Debt
In June 1998, the Company obtained a term bank loan denominated in
50,000,000 Japanese Yen($355,467), secured by a customer note receivable,
bearing interest at 1.825% per annum with payment of interest in advance. The
amount due at June 27, 1998, was $352,000, converted at the year-end exchange
rate. The principal became due and was paid in August 1998.
Long-term Debt
The Company's long-term debt consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
March 27, June 27, June 28,
1999 (unaudited) 1998 1997
---------------- -------- --------
<S> <C> <C> <C>
Unsecured term bank loan denominated in
60,000,000 Japanese Yen; interest at 1.95%
per annum; quarterly payments of principal
and interest through March 1998........... $ 0 $ 0 $ 196
Unsecured term bank loan denominated in
75,000,000 Japanese yen; interest at
1.745% per annum; quarterly payments of
principal and interest through September
1999...................................... 139 294 655
Obligations under capital leases with
options to purchase equipment; interest
from 5.8% to 12.31% per annum; payments of
principal and interest through March
2001...................................... 649 1,190 1,495
Subordinated notes, eight-year term, 9.75%
interest rate, quarterly interest payments
due through December 31, 2006
(unaudited)............................... 2,672 0 0
------ ------ ------
3,460 1,484 2,346
Less current portion....................... 489 597 827
------ ------ ------
Total long-term debt..................... $2,971 $ 887 $1,519
====== ====== ======
</TABLE>
F-12
<PAGE>
Lease Commitments
The Company leases several facilities and automobiles under noncancellable
lease arrangements. The facility leases may be adjusted for increases in
maintenance and insurance costs above specified levels. In addition, certain
facility leases contain escalation provisions based on certain specified
criteria, and one lease calls for the payment of additional rent based on a
percentage of gross revenues above a base gross sales level for that particular
location. These operating leases expire in various years through 2009. These
leases may be renewed for periods ranging from one to five years.
Future minimum lease payments under noncancellable operating leases with
initial terms of one year or more consisted of the following at June 27, 1998:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999.......................................................... $ 788
2000.......................................................... 647
2001.......................................................... 645
2002.......................................................... 489
2003.......................................................... 407
Thereafter.................................................... 894
------
Total minimum lease payments................................ $3,870
======
</TABLE>
Total rent expense was approximately $632,000 (unaudited), $848,000,
$772,000 and $607,000 for the nine months ended March 27, 1999, and for the
fiscal years 1998, 1997 and 1996, respectively.
The Company had additions to capital lease obligations of approximately $0
(unaudited), $84,000, $1,240,000, and $400,000 in the nine months ended March
27, 1999, and for the fiscal years 1998, 1997, and 1996 respectively, for the
acquisition of certain equipment. These obligations are collateralized by the
related equipment.
Cash paid for interest, including interest on capital lease obligations,
totaled approximately $265,000 (unaudited), $235,000, $107,000 and $50,000 for
the nine months ended March 27, 1999, and for the fiscal years 1998, 1997, and
1996 respectively.
As of June 27, 1998, the Company's approximate minimum payment requirements
under debt and capital lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
1999................................................................. $3,742
2000................................................................. 516
2001................................................................. 333
2002................................................................. 125
------
Total minimum payments............................................... 4,716
Less interest........................................................ 180
------
Present value of minimum payments.................................... 4,536
Less current portion................................................. 3,649
------
Long-term obligations................................................ $ 887
======
</TABLE>
F-13
<PAGE>
7. Stockholders' Equity
Stock Plans
1985, 1987 and 1989 Candela Corporation Stock Option Plans
The 1985, 1987 and 1989 Stock Option Plans (the "Plans") provide for the
granting of incentive stock options to employees for the purchase of common
stock at an exercise price not less than the fair market value of the stock on
the date of grant. The 1987 and 1989 Stock Option Plans also provide for the
granting of non-qualified stock options. The options generally become
exercisable ratably over two or four years from the date of grant and expire
ten years from the date of the grant. The maximum number of shares for which
options may be granted under the 1989 Plan is 1,000,000 shares. The Board of
Directors has terminated the granting of options under the 1985 and 1987 plans.
On July 21, 1995, the Board of Directors approved the repricing of certain
previously outstanding stock options. Options outstanding at prices ranging
from $5.50 to $14.00 were amended to $3.1875, the fair market value of the
stock on that date. In November 1995, the shareholders approved an increase in
the number of shares under the 1989 Plan of 250,000 shares, changing the
maximum number of shares that may be granted to 1,000,000. On April 28, 1998,
the Board of Directors approved the repricing of certain outstanding stock
options priced at $8.75 and $8.125. The exercise price of these options was
amended to $3.25, the fair market value of the stock on that date.
1996 Candela Skin Care Center Inc. Stock Option Plan
During fiscal year 1996, CSCC adopted the 1996 Incentive and Non-Statutory
Stock Option Plan under which options may be granted enabling the purchase, at
a price not less than the fair market value, of the common stock on the date of
grant for incentive stock options and at a price of not less than the par value
of the common stock for non-qualified stock options. Options granted under this
plan become exercisable at different rates over one to four years from the date
of grant and expire ten years from the date of grant. As of June 27, 1998,
there were no options to purchase shares of the subsidiary's common stock
outstanding compared to 188,000 at June 28, 1997. All such options were issued
with an exercise price equal to the fair market value of the subsidiary's
common stock on the date of grant. During fiscal year 1998, the Board of
Directors of Candela Corporation approved the conversion of all outstanding
CSCC stock options to Candela Corporation stock options. CSCC options were
converted at the rate of 0.21053 Candela Corporation options for each CSCC
option. At the time of the conversion there were options for 193,000 shares
outstanding which converted to options for 40,634 Candela Corporation shares at
$4.75 per share, the fair market value of Candela Corporation stock on the date
of the conversion.
1990 and 1993 Candela Corporation Non-Employee Director Stock Option Plans
The 1990 and 1993 Non-Employee Director Stock Option Plans provide for the
issuance of options for the purchase of up to 60,000 and 80,000 shares of
common stock, respectively. Under these plans, each director who is neither an
employee nor an officer receives a one-time grant of an option to purchase
10,000 shares of common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. Under the 1990 and 1993 Plans
options become exercisable in equal amounts over a period of four and two
years, respectively. Shares under these Plans expire four and ten years,
respectively, after the date of grant and are nontransferable.
F-14
<PAGE>
The following is a summary of stock option activity under these Plans:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Option Price Per Share
--------- --------------- ----------------
<S> <C> <C> <C>
Balance at July 1, 1995........ 752,271 $4.8100
Granted........................ 211,693 $3.1875-$ 9.875 $4.2092
Exercised...................... (72,896) $ 6.50-$ 9.625 $3.2015
Canceled....................... (232,965) $ 2.00-$15.50 $6.6946
--------
Balance at June 29, 1996....... 658,103 $4.1300
Granted........................ 296,500 $ 4.88-$8.63 $6.9343
Exercised...................... (22,591) $ 2.00-$7.25 $3.0484
Canceled....................... (70,755) $ 2.00-$9.875 $6.8645
--------
Balance at June 28, 1997....... 861,257 $4.8800
Granted........................ 243,867 $ 3.25-$4.75 $4.1028
Exercised...................... (43,891) $ 2.75-$3.375 $3.1202
Canceled....................... (269,973) $ 2.75-$9.875 $7.0516
--------
Balance at June 27, 1998....... 791,260
========
Options available for grant at
June 27, 1998................. 163,970
========
</TABLE>
The following table summarizes information about stock options under the
Option Plans outstanding at June 27, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- -------------------------------
Weighted Average
--------------------------- Weighted Weighted
Number Remaining Average Number Average
Outstanding at Contractual Exercise as of Exercise
Range of Exercise Prices June 27, 1998 Life (years) Price June 27, 1998 Price
------------------------ -------------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$1.50-$ 3.1875.......... 237,796 5.01 $ 2.8315 200,296 $2.8561
$3.25-$ 3.3750.......... 244,330 5.94 $ 3.3249 180,830 $3.3418
$3.4375-$ 5.7500........ 242,434 8.37 $ 4.9382 68,511 $4.8587
$6.1875-$14.5000........ 66,700 6.19 $ 7.2007 47,950 $ 7.083
------- -------
$1.50-$14.5000.......... 791,260 6.50 $ 3.9976 497,587 $3.7157
======= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its option plans. Accordingly, no compensation expense has been recognized for
options granted to employees and directors of the Company. Had compensation
expense for the Company's stock option plans and employee stock purchase plan
been determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and net income per share would have been reduced by
$45,000, or $.01 per share in 1998, $416,000 or $.08 per share in 1997, and
$250,000 or $.04 per share in 1996. The weighted average fair value of the
options granted under the stock option plans and the shares issued under the
employee stock purchase plan for 1998 and 1997, calculated using the Black
Scholes pricing model, was $2.49, $4.93 and $2.77 per share, respectively. The
following assumptions were used in the Black Scholes pricing model for options
granted in 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
risk-free interest rate................ 5.95% 5.93% 5.93%
estimated volatility................... 83% 85% 85%
an expected life for stock options..... six years six years six years
an expected life for stock purchase
plan.................................. six months six months six months
expected dividends..................... none none none
</TABLE>
F-15
<PAGE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of the pro-forma effect on net income in future years because SFAS
No. 123 does not take into consideration pro-forma expenses related to options
granted prior to 1996.
1990 Candela Corporation Employee Stock Purchase Plan
The 1990 Employee Stock Purchase Plan provides for the sale of up to 500,000
shares of common stock to eligible employees. The shares are issuable at the
lesser of 85% of the average market price on the first or last day of
semiannual periods. Substantially all full-time employees are eligible to
participate in the plan.
The following is a summary of shares issued under this plan:
<TABLE>
<CAPTION>
Range of
Shares Price per share
------ ---------------
<S> <C> <C>
1996............................................... 12,594 $1.75--$4.50
1997............................................... 11,483 $ 5.00
1998............................................... 15,216 $2.50--$3.75
</TABLE>
Reserved Shares
The Company has reserved 1,425,186 shares of common stock for issuance under
its stock plans.
Candela Corporation Common Stock Warrants
In connection with a litigation settlement in January 1991, the Company
authorized warrants to purchase 300,000 shares of common stock in March 1992.
The exercise price for the warrants is $6.875 per share, the fair market value
of the Company's common stock on the date of the settlement. These warrants
will expire in November 2000. There were 282,182 warrants issued in December,
1992. During 1997, 199 warrants were exercised. No warrants were exercised
during fiscal 1998, 1996 or 1995. There were 281,983 warrants outstanding at
June 27, 1998.
Candela Corporation Stockholder Rights Plan
On September 4, 1992, the Company adopted a Stockholder Rights Plan under
which it declared a dividend of one common stock purchase Right for each share
of the Company's common stock outstanding on September 22, 1992. The Rights are
not currently exercisable, but would become exercisable if certain triggering
events occur, such as the initiation of certain tender offers for the Company's
common stock. If such an event occurs, each Right would initially entitle
shareholders to purchase one share of the Company's common stock at an exercise
price of $48 per share, subject to adjustment. In the event that the Rights are
exercised after further triggering events, each Right would entitle holders to
purchase, for the exercise price then in effect, shares of the Company's common
stock (or other property, under certain circumstances) having a value of twice
the exercise price.
Such Rights do not extend to any shareholders whose action triggered the
Rights. The Company can in certain circumstances redeem the Rights at $.005 per
Right. The Rights expire on September 22, 2002, unless redeemed earlier by the
Company.
Authorized Shares
The total authorized shares is 30,000,000 as authorized at the 1995 annual
meeting.
Dividends
Dividend distributions made by Le Pli prior to the acquisition, were
principally for reimbursement of income tax liabilities of its former
stockholders due to Le Pli's S-Corporation tax status. The Company currently
intends to retain future earnings for use in its business and, therefore, does
not expect to pay dividends in the foreseeable future.
F-16
<PAGE>
8. Income Taxes
The components of income before income taxes and the related provision for
income taxes consists of the following for fiscal 1998, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- ------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic........................................... $(4,686) $ (46) $ 698
Foreign............................................ 409 684 1,028
------- ----- ------
$(4,277) $ 638 $1,726
======= ===== ======
Provision for income taxes:
Current provision:
Federal.......................................... $ -- $ -- $ 75
State............................................ 26 19 10
Foreign.......................................... 149 381 396
------- ----- ------
Total provision for income taxes............... $ 175 $ 400 $ 481
======= ===== ======
</TABLE>
The components of the Company's deferred tax assets consist of the
following at June 27, 1998 and June 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Federal and state net operating loss carryforwards......... $ 607 $ 660
Federal and state tax credit carryforwards................. 1,816 1,630
Inventory valuation reserves............................... 787 736
Warranty reserve........................................... 771 498
Deferred revenue........................................... 352 174
Intercompany profit........................................ 265 335
Bad debt reserve........................................... 393 59
Restructuring reserve...................................... 798 --
Pre-opening expense........................................ 349 --
Other...................................................... 89 21
------- -------
Gross deferred tax asset................................... 6,227 4,113
Valuation allowance........................................ (6,227) (4,113)
------- -------
Net deferred tax assets.................................... $ 0 $ 0
======= =======
</TABLE>
A reconciliation from the federal statutory tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate............................................ 34% 34% 34%
State taxes............................................... -- 3 1
Differences between foreign and U.S. tax rates............ -- 21 5
Utilization of deferred tax assets........................ -- -- (15)
Unbenefitted losses....................................... (35) (2) --
Other..................................................... (3) 7 3
--- --- ---
Effective tax rate........................................ (4)% 63% 28%
=== === ===
</TABLE>
Income taxes paid were $356,000, $492,000 and $807,000 in fiscal 1998, 1997
and 1996, respectively.
At June 27, 1998, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $1,786,000 which
expire from 2008 to 2012. In addition, the Company has approximately
$1,595,000 of credit carryforwards for federal income tax purposes expiring at
various dates through 2012.
F-17
<PAGE>
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 27, 1999, reflects the utilization 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.
The Company had a net operating loss carryforward of approximately
$2,174,000 (unaudited) and tax credit carryforwards of approximately $1,595,000
(unaudited) at June 28, 1998, the beginning of the current fiscal year. Based
on current year operating results, the Company anticipates utilizing all of the
net operating loss carryforward and tax credit carryforwards.
The Company had provided valuation allowances for 100% of the deferred tax
assets resulting from the net operating loss and tax credit carryforwards.
Income tax expense for the nine month period ended March 27, 1999 has been
reduced by $1,284,000 (unaudited) through a reduction in the valuation
allowance. The Company expects the effective tax rate for the year to be
approximately 36.5% (unaudited) which assumes the utilization of the remaining
$662,000 (unaudited) of the deferred tax asset through a reduction in the
valuation allowance during the last quarter of the current fiscal year.
F-18
<PAGE>
9. Segment, Geographic and Major Customer Information
The Company operates principally in two industry segments; the design,
manufacture sale and service of medical devices and related equipment, and the
performance of services in the skin care/health spa industry.
Geographic data
Geographic information for fiscal 1998, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenue:
United States................................... $ 24,943 $25,185 $20,886
Intercompany.................................... 8,342 6,303 6,043
-------- ------- -------
33,285 31,488 26,929
Europe.......................................... 3,333 818 296
Japan........................................... 8,749 9,502 9,231
-------- ------- -------
45,367 41,808 36,456
Elimination..................................... (8,342) (6,303) (6,043)
-------- ------- -------
$ 37,025 $35,505 $30,413
======== ======= =======
Operating income (loss):
United States................................... $ (4,315) $ (12) $ 833
Europe.......................................... 364 86 (67)
Japan........................................... 174 616 1,006
Elimination..................................... (184) (3) 117
-------- ------- -------
$ (3,961) $ 687 $ 1,889
======== ======= =======
Geographic identification of assets
United States................................... $ 28,911 $27,139 $17,135
Europe.......................................... 2,575 852 532
Japan........................................... 4,372 5,901 5,401
Elimination..................................... (13,254) (9,055) (3,734)
-------- ------- -------
$ 22,604 $24,837 $19,334
======== ======= =======
Line of Business Data
Revenue
Product sales and service....................... $ 34,322 $33,262 $28,264
Skin care/health spa services................... 2,703 2,243 2,149
-------- ------- -------
Total Revenue.................................. $ 37,025 $35,505 $30,413
======== ======= =======
Operating income (loss)
Product sales and service....................... $ 1,550 $ 4,073 $ 2,583
Skin care/health spa services................... (5,511) (3,386) (694)
-------- ------- -------
Total operating income (loss).................. $ (3,961) $ 687 $ 1,889
======== ======= =======
Depreciation and Amortization
Product sales and service....................... $ 308 $ 281 $ 369
Skin care/health spa services................... 507 385 106
-------- ------- -------
Total Depreciation and Amortization............ $ 815 $ 666 $ 475
======== ======= =======
Capital Expenditures
Product sales and service....................... $ 241 $ 243 $ 238
Skin care/health spa services................... 160 1,624 139
-------- ------- -------
Total Amortization............................. $ 401 $ 1,867 $ 377
======== ======= =======
</TABLE>
F-19
<PAGE>
United States revenue includes export sales to unaffiliated companies
located principally in Western Europe, the Middle East, and in the Asia-Pacific
region, which approximated $7,695,000, $8,188,000 and $6,245,000 for fiscal
1998, 1997 and 1996, respectively. One distributor customer accounted for 12%
and 6% of total gross receivables at June 27, 1998 and June 28, 1997,
respectively.
10.Comprehensive Income (unaudited)
Effective the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." This
statement establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no
impact on the Company's net income or stockholders' equity. The Company's
comprehensive earnings were as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
----------------------------- -----------------------------
March 27, 1999 March 28, 1998 March 27, 1999 March 28, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income.............. $1,907 $ (194) $4,210 $(5,486)
Foreign currency
translation adjustment,
net.................... (142) 23 166 (331)
------ ------ ------ -------
Comprehensive income
(loss)................. $1,765 $ (171) $4,376 $(5,817)
====== ====== ====== =======
</TABLE>
11.Employee Benefit Plans
The Company offers a savings plan which allows eligible U.S. employees to
make tax-deferred contributions, a portion of which are matched by the Company.
Company contributions vest ratably with three years of employment and amounted
to $58,000, $84,000 and $57,000 in fiscal 1998, 1997 and 1996, respectively.
12.Restructuring Costs and Other Charges
During the second quarter ended December 27, 1997, the Company recorded a
restructuring charge 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, reserve for
leasehold improvements and fixed assets (carrying value before reserve of
$1,123,000), and a reserve against loss upon liquidation of the equipment at
the site. Charges against the reserve for the nine months ended March 27, 1999
and the year ended June 27, 1998 total $356,000 (unaudited) and $614,000,
respectively, leaving a reserve balance of $1,639,000 (unaudited) and
$1,640,000 at March 27, 1999 and June 27, 1998, respectively.
<TABLE>
<CAPTION>
Leasehold
Improvements
Payroll and and Fixed Facility Capitalized
Severance Assets Costs Start up Costs Total
------------ ------------ -------- -------------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 27,
1997 $ 419 $1,123 $ 887 $180 $2,609
Cash Charges (134) (161) (295)
Non-Cash Charges (139) (180) (319)
----- ------ ----- ---- ------
Balance at June 27, 1998 285 984 726 -- 1,995
Cash Charges (56) (162) (218)
Non-Cash Charges (137) -- (137)
----- ------ ----- ---- ------
Balance at March 27,
1999 (unaudited) $ 229 $ 847 $ 564 $ -- $1,640
===== ====== ===== ==== ======
</TABLE>
As of March 31, 1999, the payroll and severance costs will be paid through
December 2003 and the facility lease expires in 2006.
13.Legal Proceedings (unaudited)
On March 5, 1999, New Star Lasers, Inc., and its subsidiary Laser
Aesthetics, Inc., filed a complaint in the U.S. District Court for the Eastern
District of California against The Regents of the University of California
F-20
<PAGE>
(the "Regents"), the Beckman Laser Institute and Medical Clinic ("Beckman") and
Candela. In the complaint New Star Lasers is seeking a declaration that its
technology does not infringe the U.S. Patent No. 5,814,040 issued to the
Regents and pertaining to dynamic cooling technology to which we are a
licensee, or in the alternative that the patent is invalid. The complaint also
includes various tort claims against us and contract-related claims against the
Regents and Beckman. The complaint asserts that we interfered with the
licensing of the dynamic cooling technology to the plaintiffs. We intend to
defend this matter vigorously. The Regents has orally requested that Candela
indemnify it in connection with this litigation pursuant to the license
agreement between the Regents and Candela. Candela has rejected this request.
From time to time, Candela is a party to various legal proceedings
incidental to its business. Candela believes that none of the other presently
pending legal proceedings will have a material adverse effect upon its
financial position, results of operations, or liquidity.
14.Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
Quarter
--------------------------------
1998 First Second Third Fourth
---- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Revenues.............................. $7,822 $ 8,522 $8,617 $12,064
Gross Profit.............................. 3,320 3,698 3,843 5,457
Restructuring charge...................... -- 2,609 -- --
Net Income (Loss)......................... (851) (4,441) (194) 1,034
Earnings (Loss) per common share
Basic................................... $(0.16) $ (0.82) $(0.04) $ 0.19
Diluted................................ $(0.16) $ (0.82) $(0.04) $ 0.19
<CAPTION>
Quarter
--------------------------------
1997 First Second Third Fourth
---- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Revenues.............................. $7,639 $ 9,406 $8,790 $ 9,671
Gross Profit.............................. 3,754 4,656 4,678 3,768
Net Income (Loss)......................... 510 736 303 (1,310)
Earnings (Loss) per common share
Basic................................... $ 0.09 $ 0.14 $ 0.06 $ (0.24)
Diluted................................ $ 0.09 $ 0.13 $ 0.05 $ (0.24)
</TABLE>
F-21
<PAGE>
Patient satisfactionthrough safety
and efficacy
GentleLASE
[Graphic [Graphic
depicting depicting
DCD GentleLASE
cryogen treatment
mist on of hair
[Photo of adult female] epidermis] follicle]
Candela's proprietary Dynamic
Cooling Device protects the
[Photo of adult male and small child] epidermis with a jet of cryogen
milliseconds before the laser pulse.
The skin remains undamaged while the
laser energy penetrates structures
beneath the skin, such as, in this
case, hair follicles.
ScleroPLUS
[Graphic ScleroPLUS also
depicting utilizes Dynamic
ScleroPLUS Cooling (see
handpiece above) and
treating incorporates
vascular multiple
lesion] wavelengths and
[Photo of adult female and young girl] energy delivery
parameters to
vary depth of
penetration for a
variety of
vascular lesions
while minimizing
recovery time and
adverse effects.
<PAGE>
[CANDELA CORPORATION LOGO]
<PAGE>
PART II
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 14,566.81
NASD Filing Fee................................................. $ 7,000.00
Nasdaq National Market Additional Listing Fee................... $ 17,500.00
Accountants' Fees and Expenses.................................. $125,000.00
Legal Fees and Expenses......................................... $250,000.00
Blue Sky Fees and Expenses...................................... $ 5,000.00
Transfer Agent's Fees and Expenses.............................. $ 10,000.00
Printing and Engraving Expenses................................. $100,000.00
Miscellaneous................................................... $ 20,933.19
-----------
Total Expenses................................................ $550,000.00
===========
</TABLE>
Item 14. Indemnification of Directors and Officers
Our Certificate of Incorporation offers our directors certain protections to
the extent permitted by Delaware law. Our directors are not liable to us or our
stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Certificate obligates us to
indemnify our directors to the fullest extent permitted by the General
Corporation Law of Delaware. We believe that these provisions will assist us in
attracting and retaining qualified individuals to serve as directors.
Section 6(b) of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain of our officers,
directors and controlling persons may be entitled to be indemnified by the
Underwriters named therein.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has sold the securities set
forth below which were not registered under the Securities Act.
On October 15, 1998 we entered into a Note and Warrant Purchase Agreement,
pursuant to which we issued common stock purchase warrants for the purchase of
370,000 shares of our common stock at $4.00 per share and notes in the
aggregate principal amount of $3,700,000. Beginning on January 31, 2002, and
quarterly thereafter, Candela will be obligated to redeem $185,000 in principal
amount due on the Notes, or such lesser amount as may then be outstanding,
together with all interest due, until the Notes have been repaid in full.
Candela used the proceeds from the sale of the Notes and Warrants for general
corporate purposes, including repayment of indebtedness, payment of outstanding
payables and working capital.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
1.1 --Form of Underwriting Agreement.
5.1 --Opinion of Testa, Hurwitz & Thibeault, LLP, Counsel to the
Registrant, as to the legality of the shares being registered.
3.1 <FN9> --Certificate of Incorporation, as amended.
3.2 <FN9> --By-laws of the Company, as amended and restated.
3.3 <FN1> --Agreement of Merger between Candela Corporation, Inc., a
Massachusetts corporation, and Candela Laser Corporation, a
Delaware corporation.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
4.1 <FN6> --Form of Rights Agreement dated as of September 4, 1992
between the Company and The First National Bank of Boston, as
Rights Agent, which includes as Exhibit A thereto the Form of
Rights Certificate.
10.1 <FN1> --1985 Incentive Stock Option Plan.
10.2 <FN2> --1987 Stock Option Plan.
10.2.1 <FN2> --1989 Stock Plan.
10.2.2 <FN3> --1990 Employee Stock Purchase Plan.
10.2.3 <FN3> --1990 Non-Employee Stock Purchase Plan.
10.2.4 <FN7> --1993 Non-Employee Director Stock Option Plan.
10.3 <FN7> --Lease for premises at 526 Boston Post Road, Wayland,
Massachusetts.
10.4 <FN7> --Lease for premises at 530 Boston Post Road, Wayland,
Massachusetts.
10.5 <FN7> --Patent License Agreement between the Company and Patlex
Corporation effective as of July 1, 1988.
10.6 <FN4> --License Agreement among the Company, Technomed International,
Inc. and Technomed International S.A. dated as of December 20,
1990.
10.7 <FN5> --License Agreement between the Company and Pillco Limited
Partnership effective as of October 1, 1991.
10.8 <FN8> --Distribution Agreement between the Company and Cryogenic
Technology Limited, dated October 15, 1993.
10.9 <FN10> --Asset Purchase agreement between the Company and Derma-Laser,
Limited and Derma-Laser, Inc. dated June 23, 1994.
10.10 --Letter Agreement between the Company and Fleet Bank dated
February 13, 1997
10.10.1 --Amendment to Letter Agreement between the Company and Fleet
Bank dated December 15, 1998.
21.1 <FN11> --Subsidiaries of the Company.
23.1 --Consent of PricewaterhouseCoopers LLP.
27.1 --Financial Data Schedule.
</TABLE>
- --------
<TABLE>
<C> <C> <S>
<FN1> --Previously filed as an exhibit to Registration Statement No. 33-
54448B and incorporated herein by reference.
<FN2> --Previously filed as an exhibit to the Company's Amended and
Restated Annual Report on Form 10-K for the fiscal year ended June
30, 1988, and incorporated herein by reference
<FN3> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1990, and
incorporated herein by reference
<FN4> --Previously filed as an exhibit to Form 10-Q for the quarter ended
December 29, 1990, and incorporated herein by reference
<FN5> --Previously filed as an exhibit to Form 10-Q for the quarter ended
September 28, 1991, and incorporated herein by reference
<FN6> --Previously filed as an exhibit to Form 8-K, dated September 8,
1992, and incorporated herein by reference
<FN7> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended July 3, 1993, and incorporated
herein by reference
<FN8> --Previously filed as an exhibit to Form 10-Q for the quarter ended
January 1, 1994, and incorporated herein by reference
<FN9> --Previously filed as an exhibit to Form 10-Q for the quarter ended
April 2, 1994, and incorporated herein by reference
<FN10> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended July 2, 1994, and incorporated
herein by reference
<FN11> --Previously filed as an exhibit to Form 10-Q for the quarter ended
March 31, 1999, and incorporated herein by reference
</TABLE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts.
II-2
<PAGE>
Except for the financial statement schedule listed above, all schedules have
been omitted because they are not required or because the required information
is presented in the Consolidated Financial Statements or Notes to those
statements.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on the 21st day of June, 1999.
Candela Corporation
/s/ Gerard E. Puorro
By: _________________________________
Gerard E. Puorro
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerard E. Puorro * Chief Executive Officer, June 21, 1999
______________________________________ President (Principal
Gerard E. Puorro Executive Officer) and
Director
/s/ F. Paul Broyer* Senior Vice President, June 21, 1999
______________________________________ Chief Financial Officer
F. Paul Broyer and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Kenneth D. Roberts* Chairman of the Board of June 21, 1999
______________________________________ Directors
Kenneth D. Roberts
/s/ Richard J. Cleveland, M.D.* Director June 21, 1999
______________________________________
Richard J. Cleveland, M.D.
/s/ Nancy Nager* Director June 21, 1999
______________________________________
Nancy Nager
/s/ Douglas W. Scott* Director June 21, 1999
______________________________________
Douglas W. Scott
* Director June 21, 1999
______________________________________
Robert E. Dornbush
*By: /s/ Gerard E. Puorro June 21, 1999
------------------------------
Attorney-in-fact
</TABLE>
II-4
<PAGE>
SCHEDULE II
CANDELA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the nine months ended March 27, 1999 and the years ended June 27, 1998,
June 28, 1997 and June 29, 1996
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions Deductions Balance at
Beginning Charged to from End of
Description of Period Income Reserves Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reserves deducted from assets to
which they apply (in thousands):
Allowance for doubtful accounts:
Nine months ended March 27, 1999
(unaudited).................... $1,038 $ 72 $256 $854
====== ====== ==== ======
Year ended June 27, 1998........ $ 197 $ 866 $ 25 $1,038
====== ====== ==== ======
Year ended June 28, 1997........ $ 305 $ 42 $150 $ 197
====== ====== ==== ======
Year ended June 29, 1996........ $ 361 $ 36 $ 92 $ 305
====== ====== ==== ======
Restructuring reserve:
Nine months ended March 27, 1999
(unaudited).................... $1,995 $ -- $355 $1,640
====== ====== ==== ======
Year ended June 27, 1998........ $ 0 $2,609 $614 $1,995
====== ====== ==== ======
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of Candela Corporation:
Our audits of the consolidated financial statements referred to in our
report dated July 29, 1998, except for the information in the first paragraph
of Note 6, for which the date is August 7, 1998 of Candela Corporation, also
included an audit of the financial statement schedules for the years ended June
27, 1998, June 28, 1997 and June 29, 1996 listed in Schedule II(b) herein. In
our opinion, the financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 29, 1998
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <C> <S>
1.1 --Form of Underwriting Agreement.
5.1 --Opinion of Testa, Hurwitz & Thibeault, LLP, Counsel to the
Registrant, as to the legality of the shares being registered.
3.1 <FN9> --Certificate of Incorporation, as amended.
3.2 <FN9> --By-laws of the Company, as amended and restated.
3.3 <FN1> --Agreement of Merger between Candela Corporation, Inc., a
Massachusetts corporation, and Candela Laser Corporation, a
Delaware corporation.
4.1 <FN6> --Form of Rights Agreement dated as of September 4, 1992
between the Company and The First National Bank of Boston, as
Rights Agent, which includes as Exhibit A thereto the Form of
Rights Certificate.
10.1 <FN1> --1985 Incentive Stock Option Plan.
10.2 <FN2> --1987 Stock Option Plan.
10.2.1 <FN2> --1989 Stock Plan.
10.2.2 <FN3> --1990 Employee Stock Purchase Plan.
10.2.3 <FN3> --1990 Non-Employee Stock Purchase Plan.
10.2.4 <FN7> --1993 Non-Employee Director Stock Option Plan.
10.3 <FN7> --Lease for premises at 526 Boston Post Road, Wayland,
Massachusetts.
10.4 <FN7> --Lease for premises at 530 Boston Post Road, Wayland,
Massachusetts.
10.5 <FN7> --Patent License Agreement between the Company and Patlex
Corporation effective as of July 1, 1988.
10.6 <FN4> --License Agreement among the Company, Technomed International,
Inc. and Technomed International S.A. dated as of December 20,
1990.
10.7 <FN5> --License Agreement between the Company and Pillco Limited
Partnership effective as of October 1, 1991.
10.8 <FN8> --Distribution Agreement between the Company and Cryogenic
Technology Limited, dated October 15, 1993.
10.9 <FN10> --Asset Purchase agreement between the Company and Derma-Laser,
Limited and Derma-Laser, Inc. dated June 23, 1994.
10.10 --Letter Agreement between the Company and Fleet Bank dated
February 13, 1997
10.10.1 --Amendment to Letter Agreement between the Company and Fleet
Bank dated December 15, 1998.
21.1 <FN11> --Subsidiaries of the Company.
23.1 --Consent of PricewaterhouseCoopers LLP.
27.1 --Financial Data Schedule.
</TABLE>
- --------
<TABLE>
<C> <C> <S>
<FN1> --Previously filed as an exhibit to Registration Statement No. 33-
54448B and incorporated herein by reference.
<FN2> --Previously filed as an exhibit to the Company's Amended and
Restated Annual Report on Form 10-K for the fiscal year ended June
30, 1988, and incorporated herein by reference
<FN3> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1990, and incorporated
herein by reference
<FN4> --Previously filed as an exhibit to Form 10-Q for the quarter ended
December 29, 1990, and incorporated herein by reference
<FN5> --Previously filed as an exhibit to Form 10-Q for the quarter ended
September 28, 1991, and incorporated herein by reference
<FN6> --Previously filed as an exhibit to Form 8-K, dated September 8,
1992, and incorporated herein by reference
<FN7> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended July 3, 1993, and incorporated
herein by reference
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
<FN8> --Previously filed as an exhibit to Form 10-Q for the quarter ended
January 1, 1994, and incorporated herein by reference
<FN9> --Previously filed as an exhibit to Form 10-Q for the quarter ended
April 2, 1994, and incorporated herein by reference
<FN10> --Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended July 2, 1994, and incorporated
herein by reference
<FN11> --Previously filed as an exhibit to Form 10-Q for the quarter ended
March 31, 1999, and incorporated herein by reference
</TABLE>
<PAGE>
EXHIBIT 1.1
2,580,000 Shares*
CANDELA CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1999
Needham & Company, Inc.
Tucker Anthony Cleary Gull
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Candela Corporation, a Delaware corporation (the "Company"), proposes to
-------
issue and sell 1,499,854 shares (the "Company Firm Shares") of the Company's
-------------------
Common Stock, $0.01 par value per share (the "Common Stock"), and the
------------
stockholders of the Company named in Schedule II hereto (collectively, the "Firm
----
Selling Stockholders") propose to sell an aggregate of 1,080,146 (the "Selling
- -------------------- -------
Stockholder Firm Shares") of Common Stock, in each case to you and to the
- -----------------------
several other Underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representatives (the
- -------------
"Representatives"). The Company and the stockholders of the Company named in
- ----------------
Schedule III hereto (the "Option Selling Stockholders," and collectively with
---------------------------
the Firm Selling Stockholders, the "Selling Stockholders") have also agreed to
--------------------
grant to you and the other Underwriters an option (the "Option") to purchase up
------
to an additional 327,000 shares (the "Company Option Shares") and 60,000 shares
--------------------
(the "Selling Stockholder Option Shares") of Common Stock, respectively, on the
---------------------------------
terms and for the purposes set forth in Section 1(b). The Company Option Shares
and the Selling Stockholder Option Shares are referred to collectively herein as
the "Option Shares," and the Firm Shares and the Option Shares are referred to
-------------
collectively herein as the "Shares."
------
The Company and each of the Selling Stockholders confirm as follows their
respective agreements with the Representatives and the several other
Underwriters.
- ---------------------------
* Plus an option to purchase up to an additional 387,000 shares to cover over-
allotments.
<PAGE>
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of the
Company and the Selling Stockholders herein contained and subject to all the
terms and conditions of this Agreement, (i) the Company agrees to issue and sell
the Firm Shares to the several Underwriters, (ii) each Firm Selling Stockholder,
severally and not jointly, agrees to sell to the several Underwriters the
respective number of Selling Stockholder Firm Shares set forth opposite that
Firm Selling Stockholder's name on Schedule II hereto and (iii) each of the
Underwriters, severally and not jointly, agrees to purchase from the Company and
the Firm Selling Stockholders the respective number of Firm Shares set forth
opposite that Underwriter's name in Schedule I hereto, at the purchase price of
$____ for each Firm Share. The number of Firm Shares to be purchased by each
Underwriter from the Company and each Firm Selling Stockholder shall be as
nearly as practicable in the same proportion to the total number of Firm Shares
being sold by the Company and each Firm Selling Stockholder as the number of
Firm Shares being purchased by each Underwriter bears to the total number of
Firm Shares to be sold hereunder.
(b) Subject to all the terms and conditions of this Agreement, the Company
and the Option Selling Stockholders grant the Option to the several Underwriters
to purchase, severally and not jointly, up to the maximum number of Option
Shares set forth in the first paragraph hereof, with respect to the Company, and
in Schedule III hereto, with respect to the Option Selling Stockholders, at the
same price per share as the Underwriters shall pay for the Firm Shares. The
Option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any time
(but not more than once) on or before the 30th day after the date of this
Agreement upon written or telegraphic notice (the "Option Shares Notice") by the
--------------------
Representatives to the Company and the Option Selling Stockholders no later than
12:00 noon, New York City time, at least three and no more than five business
days before the date specified for closing in the Option Shares Notice (the
"Option Closing Date"), setting forth the aggregate number of Option Shares to
- --------------------
be purchased and the time and date for such purchase. On the Option Closing
Date, the Company and the Option Selling Stockholders will sell to the
Underwriters the number of Option Shares set forth in the Option Shares Notice,
and each Underwriter will purchase such percentage of the Option Shares as is
equal to the percentage of Firm Shares that such Underwriter is purchasing, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by wire transfer payable in same-day funds to the order of the
Company for the Company Firm Shares to be sold by it, and by wire transfer
payable in same-day funds to the order of BankBoston, N.A., as custodian for the
Selling Stockholders (the "Custodian"), for the Selling Stockholder Firm Shares
---------
to be sold by them, at the office of Needham & Company, Inc., 445 Park Avenue,
New York, New York 10022, at 10:00 a.m., New York City time, on the third (or,
if the purchase price set forth in Section 1(a) hereof is determined after 4:30
p.m., Washington D.C. time, the fourth) business day following the commencement
of the offering contemplated by this Agreement, or at such time on such other
date, not later than seven business days after the date of this Agreement, as
may be agreed upon by the Company and the Representatives (such date is
hereinafter referred to as the "Closing Date").
------------
2
<PAGE>
To the extent the Option is exercised, delivery of the Option Shares against
payment by the Underwriters (in the manner specified above) will take place at
the offices specified above for the Closing Date at the time and date (which may
be the Closing Date) specified in the Option Shares Notice.
If the Representatives so request, certificates evidencing the Shares shall
be in definitive form and shall be registered in such names and in such
denominations as the Representatives shall request at least two business days
prior to the Closing Date or the Option Closing Date, as the case may be, by
written notice to the Company. For the purpose of expediting the checking and
packaging of certificates for the Shares, the Company agrees to make such
certificates available for inspection at least 24 hours prior to the Closing
Date or the Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or sale to
such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company represents,
warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-78339) on Form S-1
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
---
(collectively referred to as the "Rules and Regulations") of the Securities and
---------------------
Exchange Commission (the "Commission") promulgated thereunder, and has been
----------
filed with the Commission. The term "Preliminary Prospectus" as used herein
----------------------
means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the
Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective, will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule 424(b)
of the Rules and Regulations. The term "Registration Statement" means the
----------------------
registration statement as amended at the time it becomes or became effective
(the "Effective Date"), including financial statements and all exhibits and any
--------------
information deemed to be included by Rule 430A, and includes any registration
statement relating to the offering contemplated by this Agreement and filed
pursuant to Rule 462(b) of the Rules and Regulations. The term "Prospectus"
----------
means the prospectus as first filed with the Commission pursuant to Rule
3
<PAGE>
424(b) of the Rules and Regulations or, if no such filing is required, the form
of final prospectus included in the Registration Statement at the Effective
Date.
(b) No order preventing or suspending the use of any Preliminary Prospectus
has been issued by the Commission and no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereto has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission. On the Effective Date, the date the Prospectus is first filed
with the Commission pursuant to Rule 424(b) (if required), at all times
subsequent to and including the Closing Date and, if later, the Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did and will comply with all applicable provisions of the Act and
the Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement, the
Prospectus or any such amendment or supplement thereto did or will contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement or Prospectus or any amendment or
supplement thereto. The Company acknowledges that the statements set forth
under the heading "Underwriting" in the Prospectus constitute the only
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement.
(c) All documents that have been previously filed by the Company with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), when they became effective or were filed with the Commission,
- -------------
as the case may be, complied in all material respects with the requirements of
the Exchange Act and the rules and regulations under the Exchange Act (the
"Exchange Act Rules and Regulations").
- -----------------------------------
(d) The Company does not own, and at the Closing Date and, if later, the
Option Closing Date, will not own, directly or indirectly, any shares of stock
or any other equity or long-term debt securities of any corporation or have any
equity interest in any corporation, firm, partnership, joint venture,
association or other entity, other than the subsidiaries listed in the
Prospectus or in the Company's Annual Report on Form 10-K for the fiscal year
ended June 27, 1998 (the "Subsidiaries"). The Company and each of its
------------
Subsidiaries is, and at the Closing Date and, if later, the Option Closing Date,
will be, a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation. The Company and each of
its Subsidiaries has, and at the Closing Date and, if later, the Option Closing
Date,
4
<PAGE>
will have, full power and authority to conduct all the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company and each of its Subsidiaries is, and at the Closing Date and, if later,
the Option Closing Date, will be, duly licensed or qualified to do business and
in good standing as a foreign corporation in all jurisdictions in which the
nature of the activities conducted by it or the character of the assets owned or
leased by it makes such license or qualification necessary, except to the extent
that the failure to be so qualified or be in good standing would not materially
and adversely affect the Company and its Subsidiaries taken as a whole, or its
consolidated business, properties, financial condition or results of operations
(such effect is referred to herein as a "Material Adverse Effect"). All of the
-----------------------
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued and are fully paid and nonassessable, and owned by the
Company free and clear of all claims, liens, charges and encumbrances; there are
no securities outstanding that are convertible into or exercisable or
exchangeable for capital stock of any Subsidiary. The Company is not, and at the
Closing Date and, if later, the Option Closing Date, will not be, engaged in any
discussions or a party to any agreement or understanding, written or oral,
regarding the acquisition of an interest in any corporation, firm, partnership,
joint venture, association or other entity where such discussions, agreements or
understandings would require amendment to the Registration Statement pursuant to
applicable securities laws. Complete and correct copies of the certificate of
incorporation and the by-laws of the Company and each of its Subsidiaries and
all amendments thereto have been delivered to the Representatives, and no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date or, if later, the Option Closing Date.
(e) All of the outstanding shares of capital stock of the Company
(including the Selling Stockholder Firm Shares and the Selling Stockholder
Option Shares to be sold by the Selling Stockholders under this Agreement) have
been duly authorized, validly issued and are fully paid and nonassessable and
were issued in compliance with all applicable state and federal securities laws;
the Firm Shares, and the Option Shares issued by the Company (if any), have been
duly authorized and when issued and paid for as contemplated herein will be
validly issued, fully paid and nonassessable; and no preemptive or similar
rights exist with respect to any of the Shares or the issue and sale thereof.
The Underwriters will receive good and valid title to the Shares purchased from
the Company, free and clear of all liens, claims, security interests, pledges,
charges, encumbrances, preemptive rights, stockholders' agreements, voting
trusts or other defects in title. The description of the capital stock of the
Company in the Registration Statement and the Prospectus is, and at the Closing
Date and, if later, the Option Closing Date, will be, complete and accurate in
all material respects. Except as set forth in the Prospectus, the Company does
not have outstanding, and at the Closing Date and, if later, the Option Closing
Date, will not have outstanding, any options to purchase, or any rights or
warrants to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell, any shares of capital stock, or
any such warrants, convertible securities or obligations. No further approval
or authority of stockholders or the Board of Directors of the Company will be
required for the transfer and sale of the Selling Stockholder Firm Shares and
the Selling Stockholder Option Shares or the issuance and sale of the Firm
Shares and the Option Shares as contemplated herein.
(f) The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly the financial condition of the
Company and its consolidated
5
<PAGE>
Subsidiaries as of the respective dates thereof and the results of operations
and cash flows of the Company and its consolidated Subsidiaries for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. No other financial
statements or schedules of the Company are required by the Act, the Exchange
Act, the Exchange Act Rules and Regulations or the Rules and Regulations to be
included in the Registration Statement or the Prospectus. PricewaterhouseCoopers
LLP (the "Accountants"), who have reported on such financial statements and
schedules, are independent accountants with respect to the Company as required
by the Act and the Rules and Regulations. The summary consolidated financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein.
(g) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company (other than in
connection with the exercise of options to purchase the Company's Common Stock
granted pursuant to the Company's stock option plans from the shares reserved
therefor as described in the Registration Statement), or any Material Adverse
Effect arising for any reason whatsoever, (ii) the Company and its Subsidiaries
taken as a whole have not incurred nor will they incur, except in the ordinary
course of business as described in the Prospectus, any material liabilities or
obligations, direct or contingent, nor have the Company and its Subsidiaries
taken as a whole entered into nor will they enter into, except in the ordinary
course of business as described in the Prospectus, any material transactions
other than pursuant to this Agreement and the transactions referred to herein
and (iii) the Company has not and will not have paid or declared any dividends
or other distributions of any kind on any class of its capital stock.
(h) The Company is not, and will not become as a result of the transactions
contemplated hereby or the use of proceeds as described in the Prospectus, an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(i) Except as set forth in the Registration Statement and the Prospectus,
there are no actions, suits or proceedings pending or, to the knowledge of the
Company, threatened against or affecting the Company, its Subsidiaries or any of
their officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
would have a Material Adverse Effect.
(j) At the Closing Date, and, if later, the Option Closing Date, the
Company and each Subsidiary will not be, in default, under any contract or other
instrument to which it is a party or by which its property is bound or affected,
which default would have a Material Adverse Effect. To the best knowledge of
the Company, no other party under any contract or other instrument to which it
or any of its Subsidiaries is a party is in default in any respect thereunder,
which default would have a Material Adverse Effect. Neither the Company nor any
6
<PAGE>
of its Subsidiaries is, and at the Closing Date and, if later, the Option
Closing Date, will be, in violation of any provision of its certificate of
incorporation or by-laws or other organizational documents.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
----
in connection with the purchase and distribution by the Underwriters of the
Shares.
(l) The Company has full corporate power and authority to enter into this
Agreement. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as to (i)
rights to indemnity and contribution hereunder, which may be limited under
applicable law, (ii) bankruptcy and laws relating to the rights and remedies of
creditors generally and (iii) the availability of equitable remedies. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate of incorporation or by-laws of the Company or
any of its Subsidiaries, except where the creation of such lien, charge or
encumbrance, breach, violation, default or right of termination would not have a
Material Adverse Effect, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company, any of
its Subsidiaries or any of their properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries.
(m) Except for properties and assets disposed of in the ordinary course of
business which are not in the aggregate material in amount, the Company or one
of its Subsidiaries has good and marketable title to all properties and assets
described in the Prospectus as owned by them, free and clear of all liens,
charges, encumbrances or restrictions, except as described in the Prospectus or
as is not material to the business of the Company or its Subsidiaries. The
Company or one of its Subsidiaries has valid, subsisting and enforceable leases
for the properties described in the Prospectus as leased by them. The Company
or one of its Subsidiaries owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted, except where
the failure to so own or lease would not have a Material Adverse Effect.
(n) There is no document, contract, agreement, instrument, lease, license,
certificate, permit or other arrangement, whether written or oral, of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All such contracts to which
7
<PAGE>
the Company or any of its Subsidiaries is a party have been duly authorized,
executed and delivered by the Company or such Subsidiary, constitute valid and
binding agreements of the Company or such Subsidiary and are enforceable against
and by the Company or such Subsidiary in accordance with its terms, except as to
(i) rights to indemnity and contribution thereunder, which may be limited under
applicable law, (ii) bankruptcy and laws relating to the rights and remedies of
creditors generally and (iii) the availability of equitable remedies.
(o) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by Section 6
of this Agreement to be delivered to the Representatives was or will be, when
made, inaccurate, untrue or incorrect in any material respect.
(p) Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(q) No holder of securities of the Company has rights to the registration
of any securities of the Company because of the filing of the Registration
Statement, which rights have not been exercised in accordance with their terms
or waived by the holder thereof as of the date hereof.
(r) The Common Stock is listed and duly admitted to trading on the Nasdaq
National Market ("NNM"), and the Company has received notification that the
---
listing of Shares to be issued by it has been approved, subject to official
notice of issuance of such Shares. The Shares to be sold by the Selling
Stockholders hereunder are listed on the NNM.
(s) Except as disclosed in or specifically contemplated by the Prospectus,
(i) to the Company's knowledge, the Company and its Subsidiaries have
trademarks, trade names, patent rights, copyrights, licenses, approvals and
governmental authorizations necessary to conduct their businesses as now
conducted and as presently proposed to be conducted, (ii) to the Company's
knowledge, none of the patent rights owned or licensed by the Company is
invalid, (iii) to the Company's knowledge, the Company and its Subsidiaries are
not infringing and copyrights, trade secrets, trademarks, trade name rights,
patent rights, or other similar rights of others, where such infringement would
have a Material Adverse Effect, and (iv) to the Company's knowledge, no claim
has been made against the Company or any of its Subsidiaries, regarding
trademark, trade name, patent, copyright, license, trade secret or other
infringement which would have a Material Adverse Effect.
(t) The Company and each of its Subsidiaries have filed all federal, state,
local and foreign income tax returns which have been required to be filed and
has paid all taxes and assessments received by it to the extent that such taxes
or assessments have become due other than taxes being contested in good faith.
Neither the Company nor any of its Subsidiaries has any tax deficiency which has
been or, to the knowledge of the Company, might be asserted or threatened
against them which would have a Material Adverse Effect.
8
<PAGE>
(u) With respect to the pro forma, "as adjusted" financial information set
forth in the Registration Statement, subject to the limitations set forth in the
Registration Statement as to such pro forma, "as adjusted" financial
information, management of the Company believes (i) the assumptions underlying
such pro forma adjustments are reasonable, and (ii) that such adjustments have
been properly applied to the historical amounts in the compilation of such
statements.
(v) The Company or its Subsidiaries owns or possesses all authorizations,
approvals, orders, licenses, registrations, other certificates and permits of
and from all governmental regulatory officials and bodies, necessary to conduct
their respective businesses as contemplated in the Prospectus, except where the
failure to own or possess all such authorizations, approvals, orders, licenses,
registrations, other certificates and permits would not have a Material Adverse
Effect. There is no proceeding pending or threatened which may cause any such
authorization, approval, order, license, registration, certificate or permit to
be revoked, withdrawn, cancelled, suspended or not renewed; and the Company and
each of its Subsidiaries are conducting their business in compliance with all
laws, rules and regulations applicable thereto (including, without limitation,
all applicable federal, state and local environmental laws and regulations)
except where such noncompliance would not have a Material Adverse Effect.
(w) The Company and its Subsidiaries taken as a whole maintain insurance of
the types and in the amounts they deem adequate for their business, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company and its Subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(x) Neither the Company nor any of its Subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(y) The Company has not distributed and will not distribute any prospectus
or other offering material in connection with the offer and sale of the Shares,
other than the Preliminary Prospectus or the Prospectus or other offering
materials permitted by the Act and the Rules and Regulations to be distributed.
4. Representations, Warranties and Covenants of the Selling
Stockholders. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(a) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and the
Power-of-Attorney and Custody Agreement (hereinafter referred to as a
"Stockholders' Agreement") relating hereto, and for the sale and delivery of the
- ------------------------
Selling Stockholder Firm Shares or the Selling Stockholder Option Shares, as the
case may be, to be sold by such Selling Stockholder hereunder, have been
obtained; and such Selling Stockholder has full right, power and authority to
enter into this Agreement and the Stockholders' Agreement, to make the
representations, warranties and
9
<PAGE>
agreements hereunder and thereunder, and to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder hereunder.
(b) Certificates in negotiable form, or warrant agreements accompanied by
duly completed notices of exercise or requests for cashless exercise,
representing all of the Selling Stockholder Firm Shares or the Selling
Stockholder Option Shares, as the case may be, to be sold by such Selling
Stockholder have been placed in custody under the Stockholders' Agreement, in
the form heretofore furnished to you, duly executed and delivered by such
Selling Stockholder to the Custodian, and such Selling Stockholder has duly
executed and delivered a power-of-attorney, in the form heretofore furnished to
you and included in the Stockholders' Agreement (the "Power-of-Attorney"),
-----------------
appointing Gerard E. Puorro and F. Paul Broyer, and each of them, as such
Selling Stockholder's attorney-in-fact (the "Attorneys-in-Fact") with authority
-----------------
to execute and deliver this Agreement on behalf of such Selling Stockholder, to
determine (subject to the provisions of the Stockholders' Agreement) the
purchase price to be paid by the Underwriters to the Selling Stockholders as
provided in Section 1 hereof, to authorize the delivery of the Selling
Stockholder Firm Shares or the Selling Stockholder Option Shares, as the case
may be, to be sold by such Selling Stockholder hereunder and otherwise to act on
behalf of such Selling Stockholder in connection with the transactions
contemplated by this Agreement and the Stockholders' Agreement.
(c) Such Selling Stockholder specifically agrees that the Selling
Stockholder Firm Shares or the Selling Stockholder Option Shares, as the case
may be, represented by the certificates or warrant agreements held in custody
for such Selling Stockholder under the Stockholders' Agreement are for the
benefit of and coupled with and subject to the interests of the Underwriters,
the Custodian, the Attorneys-in-Fact, each other Selling Stockholder and the
Company, that the arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the Attorneys-in-
Fact by the Power-of-Attorney, are to that extent irrevocable, and that the
obligations of such Selling Stockholder hereunder shall not be terminated by
operation of law, whether by the death, disability, incapacity, liquidation or
dissolution of any Selling Stockholder or by the occurrence of any other event.
If any individual Selling Stockholder or any executor or trustee for a Selling
Stockholder should die or become incapacitated, or if any Selling Stockholder
that is an estate or trust should be terminated, or if any Selling Stockholder
that is a partnership or corporation should be dissolved, or if any other such
event should occur, before the delivery of the Selling Stockholder Firm Shares
or the Selling Stockholder Option Shares, as the case may be, hereunder,
certificates or warrant agreements representing the Selling Stockholder Firm
Shares or the Selling Stockholder Option Shares, as the case may be, shall be
delivered by or on behalf of the Selling Stockholders in accordance with the
terms and conditions of this Agreement and of the Stockholders' Agreement, and
actions taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney shall
be as valid as if such death, incapacity, termination, dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
(d) This Agreement and the Stockholders' Agreement have each been duly
authorized, executed and delivered by such Selling Stockholder and each such
document constitutes a valid and binding obligation of such Selling Stockholder,
enforceable in accordance with its terms.
10
<PAGE>
(e) No consent, approval, authorization or order of, or any filing (other
than a final amendment to Schedule 13D, a Form 4 or an IRS Currency Transaction
Report, as may be required) or declaration with, any court or governmental
agency or body is required in connection with the sale of the Selling
Stockholder Firm Shares or the Selling Stockholder Option Shares, as the case
may be, by such Selling Stockholder or the consummation by such Selling
Stockholder of the transactions on its part contemplated by this Agreement and
the Stockholders' Agreement, except such as have been obtained under the Act or
the Rules and Regulations and such as may be required under state securities or
Blue Sky laws or the by-laws and rules of the NASD in connection with the
purchase and distribution by the Underwriters of the Shares to be sold by such
Selling Stockholder.
(f) The sale of the Selling Stockholder Firm Shares or the Selling
Stockholder Option Shares, as the case may be, to be sold by such Selling
Stockholder hereunder and the performance by such Selling Stockholder of this
Agreement and the Stockholders' Agreement and the consummation of the
transactions contemplated hereby and thereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of such
Selling Stockholder pursuant to the terms or provisions of, or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under, any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of its properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to such
Selling Stockholder or, if such Selling Stockholder is a corporation,
partnership or other entity, the organizational documents of such Selling
Stockholder.
(g) Such Selling Stockholder has, or in the case of any warrant agreements
upon the valid exercise or cashless exercise thereof will have, and at the
Closing Date or the Option Closing Date, as applicable, will have, good and
marketable title to the Selling Stockholder Firm Shares or the Selling
Stockholder Option Shares, as the case may be, to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities or
claims whatsoever; and, upon delivery of such Selling Stockholder Firm Shares or
the Selling Stockholder Option Shares, as the case may be, and payment therefor
pursuant hereto, good and marketable title to such Selling Stockholder Firm
Shares or Selling Stockholder Option Shares, as the case may be, free and clear
of all liens, encumbrances, equities or claims whatsoever, will be delivered to
the Underwriters.
(h) On the Closing Date or the Option Closing Date, as applicable, all
stock transfer or other taxes (other than income taxes) that are required to be
paid in connection with the sale and transfer of the Shares to be sold by such
Selling Stockholder to the several Underwriters hereunder will have been fully
paid or provided for by such Selling Stockholder and all laws imposing such
taxes will have been fully complied with.
(i) Other than as permitted by the Act and the Rules and Regulations, such
Selling Stockholder has not distributed and will not distribute any Preliminary
Prospectus, the Prospectus or any other offering material in connection with the
offering and sale of the Shares.
11
<PAGE>
Such Selling Stockholder has not taken and will not at any time take, directly
or indirectly, any action designed, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(j) All information provided by such Selling Stockholder contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto complied or will comply in all material respects
with all applicable requirements of the Act and the Rules and Regulations and
does not and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(k) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, such Selling
Stockholder agrees to deliver to you prior to or at the Closing Date or the
Option Closing Date, as applicable, a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
5. Agreements of the Company and the Selling Stockholders. Each of the
Company and the Selling Stockholders (with respect to subsections (i) and (n)
only) respectively covenants and agrees with the several Underwriters as
follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have reasonably objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 5(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any Preliminary Prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules
12
<PAGE>
and Regulations, the Company will comply with the provisions of and make all
requisite filings with the Commission pursuant to said Rule 430A and notify the
Representatives promptly of all such filings.
(c) The Company will furnish to each Representative, without charge, one
signed copy of the Registration Statement and of any post-effective amendment
thereto, including financial statements and schedules, and all exhibits thereto
and will furnish to the Representatives, without charge, for transmittal to each
of the other Underwriters, a copy of the Registration Statement and any post-
effective amendment thereto, including financial statements and schedules but
without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the reasonable judgment of the Company or
counsel to the Underwriters should be set forth in the Prospectus in order to
make any statement therein, in the light of the circumstances under which it was
made, not misleading, or if it is necessary to supplement or amend the
Prospectus to comply with law, the Company will forthwith prepare and duly file
with the Commission an appropriate supplement or amendment thereto, and will
deliver to each of the Underwriters, without charge, such number of copies of
such supplement or amendment to the Prospectus as the Representatives may
reasonably request.
(f) Prior to any public offering of the Shares, the Company will cooperate
with the Representatives and counsel to the Underwriters in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably request; provided, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to general service of process in any
jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives and each other Underwriter who may
so request copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the holders
of any class of its capital stock, and will furnish to the Representatives and
each other Underwriter who may so request a copy of each annual or other report
it shall be required to file with the Commission.
(h) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended
13
<PAGE>
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay or reimburse,
if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement and in connection with the transactions contemplated hereby,
including but not limited to costs and expenses of or relating to (i) the
preparation, printing and filing of the Registration Statement and exhibits to
it, each Preliminary Prospectus, Prospectus and any amendment or supplement to
the Registration Statement or Prospectus, (ii) the preparation and delivery of
certificates representing the Shares, (iii) the printing of this Agreement, the
Agreement Among Underwriters, any Selected Dealer Agreements, any Underwriters'
Questionnaires, the Stockholders' Agreements, any Underwriters' Powers of
Attorney, and any invitation letters to prospective Underwriters, (iv)
furnishing (including costs of shipping and mailing) such copies of the
Registration Statement, the Prospectus and any Preliminary Prospectus, and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (v) the listing of the Shares on the NNM, (vi) any
filings required to be made by the Underwriters with the NASD, and the fees,
disbursements and other charges of counsel for the Underwriters in connection
therewith (except fees, disbursements and other charges of counsel for the
Underwriters relating to the form or adequacy of the underwriting arrangements),
(vii) the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions designated pursuant to
Section 5(f), including the fees, disbursements and other charges of counsel to
the Underwriters in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, (viii) fees,
disbursements and other charges of counsel to the Company (but not those of
counsel for the Underwriters, except as otherwise provided herein), (ix) the
transfer agent for the Shares, and (x) any fees and expenses of the Attorneys-
in-Fact and the Custodian. The Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees and expenses to be paid by the
Company and by the Selling Stockholders. The Selling Stockholders will pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement that are not otherwise specifically
provided for herein, including but not limited to any fees and expenses of
counsel for such Selling Stockholders, and all expenses and taxes incident to
the sale and delivery of the Shares to be sold by such Selling Stockholders to
the Underwriters hereunder.
(j) The Company will not at any time, directly or indirectly, take any
action designed or which might reasonably be expected to cause or result in, or
which will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
(k) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds".
(l) During the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, without the prior
written consent of
14
<PAGE>
Needham & Company, Inc., the Company will not offer, sell, contract to sell,
grant options to purchase or otherwise dispose of any of the Company's equity
securities of the Company or any other securities convertible into or
exchangeable with its Common Stock or other equity security (other than pursuant
to stock option plans disclosed in the Prospectus or the conversion of
convertible securities or the exercise of warrants outstanding on the date of
this Agreement).
(m) During the period of 90 days after the date of the Prospectus, the
Company will not, without the prior written consent of Needham & Company, Inc.,
grant options to purchase shares of Common Stock at a price less than the public
offering price, except in connection with the Company's stock option plans
disclosed in the Prospectus. During the period of 90 days after the date of the
Prospectus, the Company will not file with the Commission or cause to become
effective any registration statement relating to any securities of the Company
without the prior written consent of Needham & Company, Inc.
(n) The Selling Stockholders will, and the Company will cause each of its
executive officers and directors to, enter into lock-up agreements with the
Representatives to the effect that they will not, without the prior written
consent of Needham & Company, Inc., sell, contract to sell or otherwise dispose
of any shares of Common Stock or rights to acquire such shares according to the
terms set forth in Schedule IV hereto.
6. Conditions of the Obligations of the Underwriters. The obligations of
each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective shall
be received by the Representatives not later than 5:00 p.m., New York City time,
on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction of the staff of the Commission or such authorities and (iv)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Representatives and the Representatives do not object thereto
in good faith, and the Representatives shall have received certificates, dated
the Closing Date and, if later, the Option Closing Date and signed by the
President and Treasurer of the Company (who may, as to proceedings threatened,
rely upon their knowledge), to the effect of clauses (i), (ii) and (iii) of this
paragraph.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, properties,
management, financial condition or results of operations
15
<PAGE>
of the Company or any of its Subsidiaries, whether or not arising from
transactions in the ordinary course of business, in each case other than as
described in or contemplated by the Registration Statement and the Prospectus,
and (ii) the Company shall not have sustained any material loss or interference
with its business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not
described in the Registration Statement and the Prospectus, if in the judgment
of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company, any of its Subsidiaries, or
any of their officers or directors in their capacities as such, before or by any
Federal, state or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding would have a Material
Adverse Effect.
(e) Each of the representations and warranties of the Company and the
Selling Stockholders contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company or the Selling Stockholders and all
conditions contained herein to be fulfilled or complied with by the Company or
the Selling Stockholders at or prior to the Closing Date and, with respect to
the Option Shares, at or prior to the Option Closing Date, shall have been duly
performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for the
Underwriters from Testa Hurwitz & Thibeault, LLP, counsel to the Company and the
Selling Stockholders, with respect to the following matters:
(i) Each of the Company and Candela Skin Care Center, Inc., a wholly-
owned subsidiary of the Company ("CSCC") is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation; has full corporate power and authority to conduct all the
activities conducted by it, to own or lease all the assets owed or leased by
it and to conduct its business as described in the Registration Statement
and Prospectus; and is duly licensed or qualified to do business and is in
good standing as a foreign corporation in ________________________________.
(ii) To such counsel's knowledge, all of the outstanding shares of
capital stock of the Company (including the Selling Stockholder Option
Shares) have been duly authorized, validly issued and are fully paid and
nonassessable, were issued pursuant to exemptions from the registration and
qualification requirements of federal and applicable state securities laws,
and were not issued in violation of or subject to any preemptive or, to such
counsel's knowledge, similar rights;
16
<PAGE>
(iii) The Shares to be sold by the Company hereunder have been duly
authorized and, when issued and paid for as contemplated by this Agreement,
will be validly issued, fully paid and nonassessable; and no preemptive or
similar rights exist with respect to any of the Shares or the issue and sale
thereof.
(iv) To such counsel's knowledge, the Company does not own or control,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any
corporation, firm, partnership, joint venture, association or other entity,
other than __________________. All of the outstanding shares of capital
stock of CSCC have been duly authorized and validly issued and are fully
paid and nonassessable, and owned by the Company free and clear of all
claims, liens, charges and encumbrances; to such counsel's knowledge, there
are no securities outstanding that are convertible into or exercisable or
exchangeable for capital stock of CSCC.
(v) The authorized and outstanding capital stock of the Company is as
set forth in the Registration Statement and the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement or pursuant to reservations,
agreements, employee benefit plans or the exercise of convertible
securities, options or warrants referred to in the Prospectus). To such
counsel's knowledge, except as disclosed in or specifically contemplated by
the Prospectus, there are no outstanding options, warrants of other rights
calling for the issuance of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of the
Company. The description of the capital stock of the Company in the
Registration Statement and the Prospectus conforms in all material respects
to the terms thereof.
(vi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company CSCC is a party or to
which any of their respective properties is subject that are required to be
described in the Registration Statement or the Prospectus but are not so
described.
(vii) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required
for the consummation by the Company of the transactions on its part
contemplated under this Agreement, except such as have been obtained or made
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Shares.
(viii) The Company has full corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The execution and delivery of this Agreement, the compliance by
the Company with all of the terms hereof and the consummation of the
transactions contemplated hereby does not contravene any provision of
applicable law or the
17
<PAGE>
certificate of incorporation or By-Laws of the Company or CSCC, and to such
counsel's knowledge will not result in the creation or imposition of any
lien, charge or encumbrance upon any of the assets of the Company or CSCC
pursuant to the terms and provisions of, result in a breach or violation of
any of the terms or provisions of, or constitute a default under, or give
any party a right to terminate any of its obligations under, or result in
the acceleration of any obligation under, any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other
agreement or instrument known to such counsel to which the Company or CSCC
is a party or by which the Company, CSCC, or any of their respective
properties is bound or affected, or violate or conflict with (i) any
judgment, ruling, decree or order known to such counsel or (ii) any statute,
rule or regulation of any court or other governmental agency or body
applicable to the business or properties of the Company or CSCC.
(x) To such counsel's knowledge, there is no document or contract of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which
is not described as required, and each description of such contracts and
documents that is contained in the Registration Statement and Prospectus
fairly presents in all material respects the information required under the
Act and the Rules and Regulations.
(xi) The statements under the caption "Description of Capital Stock"
in the Prospectus, insofar as the statements constitute a summary of
documents referred to therein or matters of law, are accurate summaries and
fairly and correctly present, in all material respects, the information
called for with respect to such documents and matters (provided, however,
that such counsel may rely on representations of the Company with respect to
the factual matters contained in such statements, and provided further that
such counsel shall state that nothing has come to the attention of such
counsel which leads them to believe that such representations are not true
and correct in all material respects).
(xii) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940,
as amended.
(xiii) The Selling Stockholder Firm Shares and the Selling Stockholder
Option Shares are duly listed on the NNM and the Shares to be issued by the
Company have been duly authorized for listing on the NNM, subject to notice
of issuance.
(xiv) To such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived, to require the register with
the Commission shares of Common Stock or other securities, as part of the
offering contemplated hereby.
(xv) The Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness
18
<PAGE>
of the Registration Statement has been issued and no proceeding for that
purpose has been instituted or is pending, threatened or contemplated.
(xvi) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirement of the Act and the Rules
and Regulations (other than the financial statements, schedules and other
financial data contained in the Registration Statement or the Prospectus, as
to which such counsel need express no opinion).
(xvii) Such counsel has participated in the preparation of the
Registration Statement and Prospectus and has no reason to believe that, as
of the Effective Date the Registration Statement, or any amendment or
supplement thereto, (other than the financial statements, schedules and
other financial data contained therein, as to which such counsel need
express no opinion) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, or any
amendment or supplement thereto, as of its date and the Closing Date and, if
later, the Option Closing Date, contained or contains any untrue statement
of a material fact or omitted or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading (other than the financial statements,
schedules and other financial data contained therein, as to which such
counsel need express no opinion).
(xviii) This Agreement and the Stockholders' Agreement have each been
duly executed and delivered by or on behalf of each Selling Stockholder; the
Stockholders' Agreement constitutes a valid and binding agreement of such
Selling Stockholder in accordance with its terms, except as enforceability
may be limited by the application of bankruptcy, insolvency or other laws
affecting creditors' rights generally or by general principles of equity;
the Attorneys-in-Fact and the Custodian have been duly authorized by such
Selling Stockholder to deliver the Shares on behalf of such Selling
Stockholder in accordance with the terms of this Agreement; and the sale of
the Shares to be sold by such Selling Stockholder hereunder, the performance
by such Selling Stockholder of this Agreement and the Stockholders'
Agreement and the consummation of the transactions contemplated hereby and
thereby will not, to such counsel's knowledge, result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, or give any party a right to terminate any of its obligations under,
or result in the acceleration of any obligation under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract
or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any of its properties is bound
or affected, or violate or conflict with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency
or body applicable to such Selling Stockholder or, if such Selling
Stockholder is a corporation, partnership or other entity, the
organizational documents of such Selling Stockholder.
(xix) No consent, approval, authorization or order of, or any filing
(other than the filing by Signatronics Asset Holdings Private Limited of a
final amendment
19
<PAGE>
to Schedule 13D and Form 4) or declaration with, any court or governmental
agency or body is required for the consummation by the Selling Stockholders
of the transactions on their part contemplated by this Agreement, except
such as have been obtained or made under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky
laws or the by-laws and rules of the NASD in connection with the purchase
and distribution by the Underwriters of the Shares.
(xx) Each Selling Stockholder has full legal right, power and authority
to enter into this Agreement and the Stockholders' Agreement and to sell,
assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder and, upon payment for such Shares and assuming that
the Underwriters are purchasing such Shares in good faith and without notice
of any other adverse claim within the meaning of the Uniform Commercial
Code, the Underwriters will have acquired all rights of such Selling
Stockholder in such Shares free of any adverse claim, any lien in favor of
the Company and any restrictions on transfer imposed by the Company.
In rendering the opinions in subparagraphs (xviii) - (xx), such counsel may
rely upon opinions of other counsel retained by the Selling Stockholders
reasonably acceptable to the Representatives and as to matters of fact on
certificates of the Selling Stockholders, officers of the Company and
governmental officials and the representations and warranties of the Company and
the Selling Stockholders contained in this Agreement and the Stockholders'
Agreement, provided that the opinion of counsel to the Company and Selling
Stockholders shall state that they are doing so, that they have no reason to
believe that they and the Underwriters are not entitled to rely on such opinions
or certificates and that copies of such opinions or certificates are to be
attached to the opinion.
In rendering such opinion, such counsel may rely upon as to matters of local
law on opinions of counsel satisfactory in form and substance to the
Representatives and counsel for the Underwriters, provided that the opinion of
counsel to the Company and the Selling Stockholders shall state that they are
doing so, that they have no reason to believe that they and the Underwriters are
not entitled to rely on such opinions and that copies of such opinions are to be
attached to the opinion.
(g) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Choate, Hall & Stewart, counsel to the
Underwriters, with respect to the Registration Statement, the Prospectus and
this Agreement, which opinion shall be satisfactory in all respects to the
Representatives.
(h) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its Subsidiaries as required by the
Act and the Exchange Act and the Rules and Regulations and with respect to
certain financial and other statistical and numerical information contained in
the Registration Statement. At the Closing Date and, as to the Option Shares,
the Option Closing Date, the Accountants shall have furnished to the
Representatives a letter, dated the date of its
20
<PAGE>
delivery, which shall confirm, on the basis of a review in accordance with the
procedures set forth in the letter from the Accountants, that nothing has come
to their attention during the period from the date of the letter referred to in
the prior sentence to a date (specified in the letter) not more than five days
prior to the Closing Date and the Option Closing Date, as the case may be, which
would require any change in their letter dated the date hereof if it were
required to be dated and delivered at the Closing Date and the Option Closing
Date.
(i) Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the President and Treasurer of the Company, in form
and substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus as of the date of such
certificate, and (A) such documents are true and correct in all material
respects and do not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not untrue or
misleading and (B) in the case of the certificate delivered at the Closing
Date and the Option Closing Date, since the Effective Date no event has
occurred as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein not untrue or misleading.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the Company
herein on or prior to the date of such certificate has been duly, timely and
fully performed and each condition herein required to be satisfied or
fulfilled on or prior to the date of such certificate has been duly, timely
and fully satisfied or fulfilled.
(j) Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by the Selling Stockholders (or the Attorneys-in-Fact on their
behalf), in form and substance satisfactory to the Representatives, to the
effect that the representations and warranties of the Selling Stockholders
contained herein are true and correct in all material respects on and as of the
date of such certificate as if made on and as of the date of such certificate,
and each of the covenants and conditions required herein to be performed or
complied with by the Selling Stockholders on or prior to the date of such
certificate has been duly, timely and fully performed or complied with.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 5(o).
(l) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
21
<PAGE>
(m) Prior to the Closing Date, the Shares shall have been duly authorized
for listing on the NNM upon official notice of issuance.
(n) The Company and the Selling Stockholders shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. Indemnification.
(a) The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the omission or alleged omission to state in
such document a material fact required to be stated in it or necessary to make
the statements in it not misleading in the light of the circumstances in which
they were made, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company contained herein
or any failure of the Company to perform its obligations hereunder or under law
in connection with the transactions contemplated hereby; provided, however, that
(i) the Company will not be liable to the extent that such loss, claim,
liability, expense or damage arises from the sale of the Shares in the public
offering to any person by an Underwriter and is based on an untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to any Underwriter furnished in writing to
the Company by the Representatives, on behalf of any Underwriter, expressly for
inclusion in the Registration Statement, the Preliminary Prospectus or the
Prospectus; and (ii) the Company will not be liable to any Underwriter, the
directors, officers, employees or agents of such Underwriter or any person
controlling such Underwriter with respect to any loss, claim, liability,
expense, or damage arising out of or based on any untrue statement or omission
or alleged untrue statement or omission or alleged omission to state a material
fact in the Preliminary Prospectus which is corrected in the Prospectus if the
person asserting any such loss, claim, liability, charge or damage purchased
Shares from such Underwriter but was not sent or given a copy of the Prospectus
at or prior to the written confirmation of the sale of such Shares to such
person and if copies of the Prospectus were
22
<PAGE>
timely delivered to such Underwriter pursuant to Section 5 hereof. This
indemnity agreement will be in addition to any liability that the Company might
otherwise have.
(b) Each Selling Stockholder will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, liabilities, expenses and damages (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which the Selling Stockholders, or any of them, may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or the
omission or alleged omission to state in such document a material fact required
to be stated in it or necessary to make the statements in it not misleading in
the light of the circumstances in which they were made, or arise out of or are
based in whole or in part on any inaccuracy in the representations and
warranties of the Selling Stockholder contained herein or any failure of the
Selling Stockholder to perform its obligations hereunder or under law in
connection with the transactions contemplated hereby; provided, however, that
(i) the Selling Stockholder will not be liable to the extent that such loss,
claim, liability, expense or damage arises from the sale of the Shares in the
public offering to any person by an Underwriter and is based on an untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives, on behalf of any Underwriter,
expressly for inclusion in the Registration Statement, the Preliminary
Prospectus or the Prospectus; (ii) the Selling Stockholder will not be liable to
any Underwriter, the directors, officers, employees or agents of such
Underwriter or any person controlling such Underwriter with respect to any loss,
claim, liability, expense, or damage arising out of or based on any untrue
statement or omission or alleged untrue statement or omission or alleged
omission to state a material fact in the Preliminary Prospectus which is
corrected in the Prospectus if the person asserting any such loss, claim,
liability, charge or damage purchased Shares from such Underwriter but was not
sent or given a copy of the Prospectus at or prior to the written confirmation
of the sale of such Shares to such person and if copies of the Prospectus were
timely delivered to such Underwriter pursuant to Section 5 hereof; (iii) each
Selling Stockholder will be liable under this Section 7(b) with respect to any
untrue statement or omission or alleged untrue statement or omission to the
extent, and only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission has been made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus in reliance upon and
in conformity with written information furnished to the Company by such Selling
Stockholder specifically for use in the preparation thereof, and (iv) the
liability of each Selling Stockholder under this Section 7(b) shall not exceed
the product of the purchase price (less underwriting discount) for each Share
set forth in Section 1(a) hereof multiplied by the number of Shares sold by such
Selling Stockholder hereunder. This indemnity agreement will be in addition to
any liability that the Selling Stockholder might otherwise have.
23
<PAGE>
(c) Each Underwriter will indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and each Selling
Stockholder to the same extent as the foregoing indemnity from the Company and
each Selling Stockholder to each Underwriter, as set forth in Sections 7(a) and
7(b), but only insofar as losses, claims, liabilities, expenses or damages arise
out of or are based on any untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the Preliminary Prospectus or the Prospectus. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
(d) Any party that proposes to assert the right to be indemnified under
this Section 7 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 7 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(iii) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any
24
<PAGE>
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld).
(e) If the indemnification provided for in this Section 7 is applicable in
accordance with its terms but for any reason is held to be unavailable other
than for failure to give notice to hold harmless an indemnified party under
paragraphs (a), (b), (c) and (d) of this Section 7 in respect of any losses,
claims, liabilities, expenses and damages referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Company or the Selling
Stockholders from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Act, officers of the Company who
signed the Registration Statement and directors of the Company, who also may be
liable for contribution) by such indemnified party as a result of such losses,
claims, liabilities, expenses and damages in such proportion as shall be
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand.
The relative benefits received by the Company and the Selling Stockholders, on
the one hand, and the Underwriters, on the other hand, shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. If,
but only if, the allocation provided by the foregoing sentence is not permitted
by applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative benefits referred
to in the foregoing sentence but also the relative fault of the Company and the
Selling Stockholders, on the one and, and the Underwriters, on the other hand,
with respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any other
relevant equitable considerations with respect to such offering. Such relative
fault shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(e) were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 7(e) shall be deemed to
include, for purposes of this Section 7(e), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7(e), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts received by it, (ii) no person found guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation, and (iii) no Selling Stockholder shall be required
to contribute any amount in excess of the proceeds received by the Selling
Stockholder from the Underwriters in the offering. The Underwriters'
25
<PAGE>
obligations to contribute as provided in this Section 7(e) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 7(e), any person who controls a party to this Agreement
within the meaning of the Act will have the same rights to contribution as that
party, and each officer of the Company who signed the Registration Statement
will have the same rights to contribution as the Company, subject in each case
to the provisions hereof. Any party entitled to contribution, promptly after
receipt of notice of commencement of any action against any such party in
respect of which a claim for contribution may be made under this Section 7(e),
will notify any such party or parties from whom contribution may be sought, but
the omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 7(e). No party will be liable for contribution with respect to any
action or claim settled without its written consent (which consent will not be
unreasonably withheld).
(f) The indemnity and contribution agreements contained in this Section 7
and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of the
Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii)
any termination of this Agreement.
8. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon,
in whole or in part, any statement or omission or alleged statement or omission,
or any inaccuracy in the representations and warranties of the Company or the
Selling Stockholders contained herein or failure of the Company or the Selling
Stockholders to perform its or their respective obligations hereunder or under
law, all as described in Sections 7(a) and (b), notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 8 and the possibility that such payment might later be held
to be improper; provided, however, that, to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them.
9. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company and the Selling Stockholders from the Representatives,
without liability on the part of any Underwriter to the Company if, prior to
delivery and payment for the Firm Shares or Option Shares, as the case may be,
in the sole judgment of the Representatives, (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission or by The
Nasdaq National Market, (ii) trading in securities generally on the New York
Stock Exchange or The Nasdaq National Market shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
such exchange, or additional material governmental restrictions, not in force on
the date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange, by order of the Commission or any court or other
governmental authority, or by The Nasdaq National Market, (iii) a general
banking moratorium shall have been declared by either Federal or Commonwealth of
Massachusetts authorities or (iv) any material adverse change in the financial
or securities markets in the United States or in political, financial or
economic conditions in the United States or any outbreak or material
26
<PAGE>
escalation of hostilities or other calamity or crisis shall have occurred, the
effect of which is such as to make it, in the sole judgment of the
Representatives, impracticable or inadvisable to proceed with completion of the
public offering or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 9 or 10 hereof, neither
the Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 5(j), 7 and 8 hereof, but, if due to
any breach of this Agreement by the Company or the Selling Stockholders, the
purchase of the Shares by the Underwriters is not consummated or the Company is
unable to perform its obligations hereunder, the Company will reimburse the
several Underwriters for all out-of-pocket expenses (including the fees,
disbursements and other charges of counsel to the Underwriters) incurred by them
in connection with the offering of the Shares.
10. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 10 by more than one-ninth of such number of Firm Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase exceeds one-tenth of the aggregate number of
the Firm Shares and arrangements satisfactory to the Representatives and the
Company for the purchase of such Firm Shares are not made within 48 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders for the
purchase or sale of any Shares under this Agreement. In any such case either the
Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
11. Information Provided by Underwriters. The Company, the Selling
Stockholders and the Underwriters acknowledge and agree that the statements set
forth under the heading "Underwriting" in the Preliminary Prospectus and the
Prospectus constitute the only information relation to any Underwriter furnished
in writing to the Company by the Representatives on behalf of the Underwriters
expressly for inclusion in the Registration Statement, the Preliminary
Prospectus or the Prospectus.
12. Information Provided by Selling Stockholders. The Company, the
Selling Stockholders and the Underwriters acknowledge and agree that the only
information furnished
27
<PAGE>
by any Selling Stockholder to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the caption
"Principal and Selling Stockholders".
13. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be sent by
certified or registered mail, return receipt requested, or by nationally
recognized overnight courier, (a) if to the Company or the Selling Stockholders,
at the office of the Company, Candela Corporation, 530 Boston Post Road,
Wayland, MA 01778, Attention: Chief Executive Officer, with a copy to Gordon H.
Hayes, Jr., Esq., Testa Hurwitz & Thibeault, LLP, High Street Tower, 125 High
Street, Boston, MA 02110, or (b) if to the Underwriters, to the Representatives
at the offices of Needham & Company, Inc., 445 Park Avenue, New York, New York
10022, Attention: Corporate Finance Department, with a copy to William C.
Rogers, Esq., Choate, Hall & Stewart, Exchange Place, 53 State Street, Boston,
MA 02109. Any such notice shall be effective only upon receipt. Any notice under
such Section 9 or 10 may be made by telex or telephone, but if so made shall be
subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, the Selling Stockholders and the controlling persons,
directors and officers referred to in Section 7, and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" as used in this
Agreement shall not include a purchaser, as such purchaser, of Shares from any
of the several Underwriters.
Any action required or permitted to be made by the Representatives under
this Agreement may be taken by them jointly or by Needham & Company, Inc.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may have
to a trial by jury in respect of any claim based upon or arising out of this
Agreement or the transactions contemplated hereby.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
CANDELA CORPORATION
By:
--------------------------------------
Title:
SELLING STOCKHOLDERS
(named in Schedule II and in Schedule III
hereto)
By:
------------------------------------
Attorney-in-Fact
Confirmed as of the date first
above mentioned:
Needham & Company, Inc.
Tucker Anthony Cleary Gull
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: Needham & Company, Inc.
By:
-------------------------------------
Title:
29
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Firm
Shares
Underwriters to be Purchased
- ------------ ---------------
Needham & Company, Inc. ............................
Tucker Anthony. ....................................
[other underwriters]. ..............................
--------
Total ........................................
========
30
<PAGE>
SCHEDULE II
Total Number
of Firm Shares
to be Sold
----------
[Selling Stockholders]............................. ----------
TOTALS .......................................
==========
31
<PAGE>
SCHEDULE III
Total Number
of Option Shares
to be Sold
----------
[Selling Stockholders] ............................. ----------
TOTALS ..........................................
==========
32
<PAGE>
SCHEDULE IV
FORM OF LOCK-UP AGREEMENT
The undersigned, a holder of securities of Candela Corporation, a Delaware
corporation (the "Company"), is entering into this agreement (the "Lock-Up
------- -------
Agreement") to facilitate the public offering of shares of Common Stock (the
- ---------
"Common Stock") of the Company (the "Offering"). In connection with the
- ------------- --------
Offering, the Company will enter into an Underwriting Agreement with the several
Underwriters listed on Schedule I to the Underwriting Agreement (the
"Underwriters"), for whom you are acting as representatives (the
- -------------
"Representatives").
- ----------------
In consideration of your entering into the Underwriting Agreement and in
order to induce you to act as Representatives in connection with the Offering,
the undersigned hereby agrees that he or she will not, without the prior written
approval of Needham & Company, Inc., acting on its own behalf and/or on behalf
of other Representatives of the Underwriters, directly or indirectly, sell,
contract to sell, make any short sale, pledge, or otherwise dispose of, or enter
into any hedging transaction that is likely to result in a transfer of, any
shares of Common Stock, options to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock of the Company which
he or she may own, for a period commencing as of the date hereof and ending on
the date which is one hundred and twenty (120) days after the date of the final
Prospectus relating to the Offering. The foregoing sentence shall not apply to
(A) the transfer of shares of Common Stock by the undersigned as a gift of
gifts; (B) the transfer of shares of Common Stock by the undersigned to its
affiliates, as such term is defined in Rule 405 under the Securities Act; and
(C) the exercise of stock options granted pursuant to the Company's stock option
and employee stock or option purchase plans; provided, that, in the case of
clause (A) or (B) above, the recipient(s), donee(s) or transferee(s),
respectively, agrees in writing as a condition precedent to such issuance, gift
or transfer to be bound by the terms of this agreement and, in the case of
clause (C), any shares of Common Stock acquired pursuant to the exercise of any
such stock option shall be subject to the restrictions of this letter.
The undersigned acknowledges the sufficiency of the consideration for this
Lock-Up Agreement. The undersigned confirms that he or she understands that the
Underwriters and the Company will rely upon the representations set forth in
this Lock-Up Agreement in proceeding with the Offering. The undersigned further
confirms that the agreements of the undersigned are irrevocable and shall be
binding upon the undersigned's heirs, legal representatives, successors and
assigns. The undersigned agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
securities held by the undersigned except in compliance with this Lock-Up
Agreement.
This Lock-Up Agreement shall be binding on the undersigned and his or her
respective successors, heirs, personal representatives and assigns.
Very truly yours,
Date: , 1999
------------ --------------------
33
<PAGE>
EXHIBIT 5.1
-----------------------
TESTA, HURWITZ & THIBEAULT, LLP
-----------------------
ATTORNEYS AT LAW
125 HIGH STREET
BOSTON, MASSACHUSETTS 02110-2704
OFFICE (617) 248-7000 FAX (617) 248-7100
June 18, 1999
Candela Corporation
530 Boston Post Road
Wayland, MA 01778
RE: Registration Statement on Form S-1 (No. 333-78339)
Relating to 2,580,000 Shares of Common Stock
-------------------------------------------------
Dear Sir or Madam:
This opinion relates to an aggregate of 2,580,000 shares of Common Stock,
par value $.01 per share (the "Common Stock"), of Candela Corporation (the
"Company"), which are the subject matter of a Registration Statement on Form
S-1 (No. 333-78339) filed with the Securities and Exchange Commission on May 12,
1999 and amended on June 18, 1999 (the "Registration Statement").
The 2,580,000 shares of Common Stock covered by the Registration Statement
are being sold by the Company and include 387,000 shares subject to an
over-allotment option granted by the Company to the underwriters to be named in
the prospectus (the "Prospectus") included in the Registration Statement.
Based upon such investigation as we have deemed necessary, we are of the
opinion that when the shares of Common Stock to be sold by the Company and the
selling stockholders pursuant to the terms described in the Prospectus, such
shares of Common Stock will have been validly issued and will be fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/s/ Testa, Hurwitz & Thibeault, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
EXHIBIT 10.10
CANDELA CORPORATION
530 Boston Post Road
Wayland, MA 01778
February 13, 1997
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between Candela
Corporation, a Delaware corporation (the "Borrower") and Fleet National Bank
(the "Bank") with respect to Revolving Loans (hereinafter defined) to be made by
the Bank to the Borrower and with respect to letters of credit which may
hereafter be issued by the Bank for the account of the Borrower. In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
I. AMOUNTS AND TERMS
-----------------
1.1. Reference to Documents. Reference is made to (i) that certain
----------------------
$3,500,000 face principal amount promissory note (the "Revolving Note") of even
date herewith made by the Borrower and payable to the order of the Bank, (ii)
that certain Inventory and Accounts Receivable Security Agreement of even date
herewith from the Borrower to the Bank (the "Security Agreement"), and (iii)
those certain Pledge Agreements of even date herewith (the "Pledges") from the
Borrower to the Bank relating to stock of Candela Skin Care Centers, Inc. and
related entities (the "Candela Skin Care Entities").
1.2. The Borrowing; Revolving Note. Subject to the terms and conditions
-----------------------------
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within described revolving financing arrangements pursuant to
(S).2 or (S).7; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Within such limits, and subject to the terms and conditions hereof, the Borrower
may obtain Revolving, Loans, repay Revolving Loans and obtain Revolving Loans
again on one or more occasions. The Revolving Loans shall be evidenced by the
Revolving Note and interest thereon shall be payable at the times and at the
rate provided for in the Revolving
<PAGE>
-2-
Note. Overdue principal of the Revolving, Loans and, to the extent permitted by
law, overdue interest shall bear interest at a fluctuating rate per annum which
at all times shall be equal to the sum of (i) two (2%) percent per annum Plus
(ii) the per annum rate otherwise payable under the Revolving Note (but in no
event in excess of the maximum rate from time to time permitted by then
applicable law), compounded monthly and payable on demand. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Revolving Note or on the books of the Bank, at or following the
time of making each Revolving Loan and of receiving any payment of principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Revolving Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to
principal of the Revolving Loans. Failure of the Bank to make any such notation
shall not, however, affect any obligation of the Borrower or any right of the
Bank hereunder or under the Revolving Note. All payments of interest, principal
and any other sum payable hereunder and/or under the Revolving Note shall be
made to the Bank, in immediately available funds, at its office at 75 State
Street, Boston, MA 02109 or to such other address as the Bank may from time to
time direct. All payments received by the Bank after 2:00 p.m. on any day shall
be deemed received as of the next succeeding Business Day. All monies received
by the Bank shall be applied first to fees, charges, costs and expenses payable
to the Bank under this letter agreement, the Revolving Note and/or any of the
other Loan Documents, next to interest then accrued on account of any Revolving
Loans or letter of credit reimbursement obligations and only thereafter to
principal of the Revolving Loans and letter of credit reimbursement obligations.
All interest and fees payable hereunder and/or under the Revolving Note shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.
1.3. Repayment; Renewal. The Borrower shall repay in full all Revolving
------------------
Loans and all interest thereon upon the first to occur of. (i) the Expiration
Date or (ii) an acceleration under (S).2(a) following an Event of Default. The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan. In addition, if at any time the Borrowing Base
is in an amount which is less than the then outstanding Aggregate Bank
Liabilities, the Borrower will forthwith prepay so much of the Revolving Loans
as may be required (or arrange for the termination of such letters of credit as
may be required) so that the Aggregate Bank Liabilities will not exceed the
Borrowing Base. The Bank may, at its sole discretion, renew the financing
arrangements described in this letter agreement by extending the Expiration Date
in a writing signed by the Bank and accepted by the Borrower. Neither the
inclusion in this letter agreement or elsewhere of covenants relating to periods
of time after the Expiration Date, nor any other provision hereof, nor any
action (except a written extension pursuant to the immediately preceding
sentence), non-action or course of dealing on the part of the Bank will be
deemed an extension of, or agreement on the part of the Bank to extend, the
Expiration Date.
1.4. Advances and Payments. The proceeds of all Revolving Loans shall be
---------------------
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes.
<PAGE>
-3-
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Revolving Note and/or with
respect to any letter of credit; and will thereafter notify the Borrower of the
amount so charged. The failure of the Bank so to charge any account or to give
any such notice shall not affect the obligation of the Borrower to pay interest,
principal or other sums as provided herein or in the Revolving Note or with
respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time. All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
impositions or taxes and without deduction, setoff or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.
1.5. Letters of Credit. At the Borrower's request, the Bank may, from
-----------------
time to time, in its sole discretion issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Bank Liabilities will in no event exceed the
lesser of (i) $3,500,000 or (ii) the then effective Borrowing Base. Any such
letter of credit will be issued for such fee and upon such terms and conditions
as may be agreed to by the Bank and the Borrower at the time of issuance. The
Borrower hereby authorizes the Bank, without further request from the Borrower,
to cause the Borrower's liability to the Bank for reimbursement of funds drawn
under any such letter of credit to be repaid from the proceeds of a Revolving
Loan to be made hereunder. The Borrower hereby irrevocably requests that such
Revolving Loans be made.
1.6. Conditions to Advance. Prior to the making of the initial Revolving
---------------------
Loan or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreement, the Pledges, the Revolving Note and the documents and other items
listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all
of which, as well as all legal matters incident to the transactions contemplated
hereby, shall be satisfactory in form and substance to the Bank and its counsel.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):
(a) All statements, representations and warranties of the Borrower made in
this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be.
<PAGE>
-4-
(b) All covenants and agreements of the Borrower contained herein and/or in
any of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Revolving Loan or the date of issuance of
such letter of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance of
any letter of credit, and each acceptance by the Borrower of the proceeds of any
Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be, and
after giving effect thereto all of the conditions set forth in the foregoing
clauses (a)-(d) of this (S)1.6 will be satisfied. Each request for a Revolving
Loan or letter of credit issuance will be accompanied by a borrowing base
certificate on a form satisfactory to the Bank, executed by the chief financial
officer of the Borrower, unless such a certificate shall have been previously
furnished setting forth the Borrowing Base as at a date not more than 30 days
prior to the date of the requested borrowing or the requested letter of credit
issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1. Representations and Warranties. In order to induce the Bank to enter
------------------------------
into this letter agreement and to make Revolving Loans hereunder and/or issue
letters of credit hereunder, the Borrower warrants and represents to the Bank as
follows:
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. The Borrower has full corporate power
to own its property and conduct its business as now conducted, to grant the
security interests contemplated by the Security Agreement and the Pledges and to
enter into and perform this letter agreement and the other Loan Documents. The
Borrower is duly qualified to do business and is in good standing in
Massachusetts and is also duly qualified to do business in and is in good
standing in each other jurisdiction in which the Borrower maintains any
facility, sales office, warehouse or other location, and in each other
jurisdiction where the failure so to qualify could (singly or in the aggregate
with all other such failures) have a material adverse effect on the financial
condition, business or prospects of the Borrower, all such jurisdictions being
listed on item 2. 1 (a) of the attached Disclosure Schedule. At the date
hereof, the Borrower has no Subsidiaries, except as shown on said item 2.1(a) of
the attached Disclosure Schedule. The Borrower owns, directly or indirectly,
100% of the capital stock of each of such Subsidiaries, including without
limitation, the Candela Skin Care Entities. The Borrower is not a member of any
partnership or joint venture.
<PAGE>
-5-
(b) Item 2. 1 (b) of the attached Disclosure Schedule sets forth
information as to each Person who owns, of record and/or beneficially, 5% or
more of any class of equity securities of the Borrower.
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than
filings under the Uniform Commercial Code), registration, consent or
approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any waiver or
consent under any indenture or loan or credit agreement or any other
material agreement, lease or instrument to which the Borrower is a party or
by which the Borrower or any of its properties may be bound or affected or
require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank),
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or by-laws
as now in effect. Neither the Borrower nor any Subsidiary of the Borrower is in
material violation of any term of any mortgage, indenture or judgment, decree or
order, or any other instrument, contract or agreement to which it is a party of
by which any of its property is bound.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
<PAGE>
-6-
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower is
in compliance) with all requirements of law, federal, state and local, and all
requirements of all governmental bodies or agencies having jurisdiction over it,
the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits, certificates and authorizations needed
for the conduct of its business and the use of its properties and all promises
occupied by it, as now conducted, owned and used.
(i) The audited financial statements of the Borrower as at June 30, 1996
and the management-generated statements of the Borrower as at September 30,
1996, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the management-
generated statements do not have footnotes and thus do not present the
information which would normally be contained in footnotes to financial
statements. The Borrower has no liability, contingent or otherwise, not
disclosed in the aforesaid financial statements or in any notes thereto that
could materially affect the financial condition of the Borrower. Since December
31, 1995, there has been no material adverse development in the business,
condition or prospects of the Borrower, and the Borrower has not entered into
any transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 530 Boston Post Road, Wayland, MA 01778 (the
"Premises"). All of the books and records of the Borrower are located at said
address. Except as described on item 2.1(j) of the attached Disclosure
Schedule, no assets of the Borrower are located at any other address. Said item
2.1(j) of the attached Disclosure Schedule sets forth the names and addresses of
all record owners of the Premises.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises now being used to
conduct its business. The conduct of the Borrower's business as now operated
does not conflict with valid patents, licenses, copyrights, trademarks, trade
names or franchises of others in any manner that could materially adversely
affect the business, prospects, assets or condition, financial or otherwise, of
the Borrower.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
<PAGE>
-7-
(m) The Borrower is not a party to any contract or agreement which now has
or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
------------------------------------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
3.1. Legal Existence: Qualification. Compliance. The Borrower will
--------------------------------------------
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts. Further, the Borrower will qualify to do business and will
remain qualified and in good standing (and the Borrower will cause each
Subsidiary of the Borrower to qualify and remain qualified and in good standing)
in each other jurisdiction where the Borrower or such Subsidiary, as the case
may be, maintains any facility, sales office, warehouse or other location and in
each other jurisdiction in which the failure so to qualify could (singly or in
the aggregate with all other such failures) have a material adverse effect on
the financial condition, business or prospects of the Borrower or any such
Subsidiary. The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws. The Borrower will
comply with (and will cause each Subsidiary of the Borrower to comply with) all
applicable laws, rules and regulations (including, without limitation, ERISA and
those relating to environmental protection) other than (i) laws, rules or
regulations the validity or applicability of which the Borrower or such
Subsidiary shall be contesting in good faith by proceedings which serve as a
matter of law to stay the enforcement thereof and (ii) those laws, rules and
regulations the failure to comply with any of which could not (singly or in the
aggregate) have a material adverse effect on the financial condition, business
or prospects of the Borrower or any such Subsidiary. The Borrower will at all
times own all of the outstanding capital stock of each of the Candela Skin Care
Entities.
3.2. Maintenance of Property: Insurance. The Borrower will maintain and
----------------------------------
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof. The Borrower, will
maintain all such insurance as may be required under the Security Agreement and
will also maintain, with financially sound and reputable insurers, insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge
----------------------------
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including,
<PAGE>
-8-
without limitation, taxes, assessments, charges or levies relating to real and
personal property, franchises, income, unemployment, old age benefits,
withholding, or sales or use, prior to the date on which penalties would attach
thereto, and all lawful claims (whether for any of the foregoing or otherwise)
which, if unpaid, might give rise to a lien upon any property of the Borrower or
any such Subsidiary, except any of the foregoing which is being contested in
good faith and by appropriate proceedings which serve as a matter of law to stay
the enforcement thereof and for which the Borrower has established and is
maintaining adequate reserves. The Borrower will pay, and will cause each of its
Subsidiaries to pay, in a timely manner, all lease obligations, all trade debt,
purchase money obligations, equipment lease obligations and all of its other
material Indebtedness. The Borrower will perform and fulfill all material
covenants and agreements under any leases of real estate, agreements relating to
purchase money debt, equipment leases and other material contracts. The Borrower
will maintain in full force and effect, and comply with the terms and conditions
of, all permits, permissions and licenses necessary or desirable for its
business.
3.4. Accounts. The Borrower will maintain its principal depository and
--------
operating accounts with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
-------------------
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
----------------------
(i) Within 90 days after the end of each fiscal year of the Borrower,
a copy of the annual audit report for such fiscal year for the Borrower,
including therein consolidated and consolidating balance sheets of the
Borrower and Subsidiaries as at the end of such fiscal year and related
consolidated and consolidating statements of income, stockholders' equity
and cash flow for the fiscal year then ended. The annual consolidated
financial statements shall be certified by independent public accountants
selected by the Borrower and reasonably acceptable to the Bank, such
certification to be in such form as is generally recognized as
"unqualified".
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries and related consolidated and consolidating statements of
income and stockholders' equity and cash flow, unaudited but complete and
accurate and prepared in accordance with generally accepted accounting
principles consistently applied fairly presenting the financial condition
of the Borrower as at the dates thereof and for the periods covered thereby
(except that such quarterly statements need not contain footnotes) and
certified as accurate (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer of the Borrower, such
balance sheets to be as at the end of such fiscal quarter and such
statements of income and stockholders' equity and cash flow to be
<PAGE>
-9-
for such fiscal quarter and for the year to date, in each case together
with a comparison to budget.
(iii) At the time of delivery of each annual or quarterly statement
of the Borrower, a certificate executed by the chief financial officer of
the Borrower stating that he or she has reviewed this letter agreement and
the other Loan Documents and has no knowledge of any default by the
Borrower in the performance or observance of any of the provisions of this
letter agreement or of any of the other Loan Documents or, if he or she has
such knowledge, specifying each such default and the nature thereof. Each
financial statement given as at the end of any fiscal quarter of the
Borrower will also set forth the calculations necessary to evidence
compliance with (S)(S)3.73. 1 0, and each annual financial statement will
be accompanied by calculations necessary to determine compliance with
(S)3.11.
(iv) Monthly, within 15 days after the end of each month, (A) an aging
report in form satisfactory to the Bank covering all Receivables of the
Borrower outstanding as at the end of such month, and (B) a certificate of
the chief financial officer of the Borrower setting forth the Borrowing
Base as at the end of such month, all in form reasonably satisfactory to
the Bank. Notwithstanding the foregoing, the Borrower need not provide
such an aging report and Borrowing Base Certificate as at any month-end if,
at such month-end, there is no Revolving Loan outstanding and no letter of
credit issued hereunder is outstanding; provided that if the Borrower does
not deliver a Borrowing Base Certificate and aging report as at any month-
end in reliance on the foregoing provisions of this sentence, then at the
time of any subsequent borrowing of a Revolving Loan or issuance of a
Letter of Credit, as the case may be, the Borrower will provide such
Borrowing Base Certificate and aging report.
(v) Promptly after receipt, a copy of all audits or reports submitted
to the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
letter of comments directed by such accountants to the management of the
Borrower.
(vi) As soon as possible and in any event within five days of the
occurrence of any Event of Default or any event which, with the giving of
notice or passage of time or both, would constitute an Event of Default,
the statement of the Borrower setting forth details of each such Event of
Default or event and the action which the Borrower proposes to take with
respect thereto.
(vii) Promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party.
(viii) Promptly upon filing any registration statement or listing
application (or any supplement or amendment to any registration statement
or listing application) with
<PAGE>
-10-
the Securities and Exchange Commission ("SEC") or any successor agency or
with any stock exchange or with the National Association of Securities
Dealers quotations system, a copy of same.
(ix) For so long as the Borrower is a publicly-traded company, a copy
of each periodic or current report filed with the SEC or any successor
agency and each annual report, proxy statement and other communication sent
to shareholders or other securityholders generally, such copy to be
provided to the Bank promptly upon such filing with the SEC or such
communication with shareholders or securityholders, as the case may be.
(x) Promptly after the Borrower has knowledge thereof, written notice
of any development or circumstance which may reasonably be expected to have
a material adverse effect on the Borrower or its business, properties,
assets, Subsidiaries or condition, financial or otherwise.
(xi) Promptly upon request, such other information respecting the
financial condition, operations, Receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
3.7. Debt to Worth. The Borrower will maintain as at the end of each
-------------
fiscal quarter (commencing with its results as at December 31, 1996) on a
consolidated basis a Leverage Ratio of not more than 1.0 to 1. As used herein,
"Leverage Ratio" means, as at any date when same is to be determined, the ratio
of (x) the Adjusted Debt of the Borrower and/or its Subsidiaries then
outstanding to (y) the Borrower's then consolidated Tangible Net Worth.
3.8. Net Worth. The Borrower will maintain as at the end of each fiscal
---------
quarter (commencing with its results as at December 31, 1996) a consolidated
Tangible Net Worth of not less than the then-effective TNW Requirement. As used
herein, the "TNW Requirement" for December 31, 1996 is deemed to be the sum of
(i) $9,500,000 plus (ii) 80% of the consolidated Net Income of the Borrower and
----
Subsidiaries during the fiscal quarter ended December 31, 1996, plus (iii) 100%
----
of the net proceeds of any equity securities sold by the Borrower during the
six-month period July 1 - December 31, 1996. As at the last day of each fiscal
quarter thereafter (commencing with March 31, 1997) (each, a "Determination
Date"), the TNW Requirement will be deemed to become an amount equal to the sum
of: (i) that TNW Requirement which had been in effect at the last day of the
immediately preceding fiscal quarter, plus (ii) 100% of the net proceeds of any
----
equity securities sold by the Borrower during the fiscal quarter ending at such
Determination Date, plus (iii) 80% of the consolidated Net Income of the
----
Borrower and Subsidiaries during the fiscal quarter ending at such Determination
Date (but without giving effect to any Net Income which is less than zero for
any fiscal quarter).
3.9. Profitability. The Borrower will achieve consolidated quarterly Net
-------------
Income of at least $250,000 for each of its fiscal quarter ended December 31,
1996 and its fiscal quarter ending March 31, 1997. The Borrower will achieve
consolidated quarterly Net Income of at least $500,000 for its fiscal quarter
ending June 30, 1997 and for each fiscal quarter thereafter.
<PAGE>
-11-
Without limitation of the foregoing, the Borrower will achieve annual
consolidated Net Income of at least $1,000,000 for each fiscal year, commencing
with its fiscal year ending June 30, 1997.
3.10. Liquidity. The Borrower will maintain as at the end of each fiscal
---------
quarter of Borrower (commencing with its results as at December 31, 1996) a
ratio of Net Quick Assets to Current Liabilities, which ratio shall be not less
than 1.2 to 1.
3.11 Capital Expenditures. The Borrower will not incur Capital
--------------------
Expenditures in excess of $900,000 for any fiscal year, commencing with its
results for the fiscal year ended December 31, 1996.
3.12. Books and Records. The Borrower will maintain (and will cause each
-----------------
of its Subsidiaries to maintain) complete and accurate books, records and
accounts which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied. The Borrower will, at any reasonable time and from time
to time upon reasonable notice and during normal business hours (and at any time
and without any necessity for notice following the occurrence of an Event of
Default), permit the Bank, and any agents or representatives thereof, to examine
and make copies of and take abstracts from the records and books of account of,
and visit the properties of the Borrower and any of its Subsidiaries, and to
discuss its affairs, finances and accounts with its officers, directors and/or
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this (S)3.12. Each
financial statement of the Borrower hereafter delivered pursuant to this letter
agreement will be complete and accurate and will fairly present the financial
condition of the Borrower as at the date thereof and for the periods covered
thereby.
3.13. Landlord's Waiver. Prior to the Bank making the first Revolving
-----------------
Loan, the Borrower will obtain, and will thereafter maintain in effect at all
time, waivers from the owners of all premises in which any material amount of
Collateral is located, such waivers to be in form and substance satisfactory to
the Bank.
IV. NEGATIVE COVENANTS
------------------
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or suffer
------------
to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Revolving Note and any Indebtedness in
respect of letters of credit issued by the Bank;
<PAGE>
-12-
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness with
respect to fixed assets) incurred upon customary terms in the ordinary
course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
for use in the Borrower's business, provided that the total of Indebtedness
permitted under this clause (iv) plus presently-existing equipment
financing permitted under clause (v) of this (S)4.1 will not exceed
$900,000 in the aggregate outstanding at any one time;
(v) Indebtedness of [ ] (the Borrower's Japanese
Subsidiary) representing borrowings from Japanese financial institutions,
so long as the credit of the Borrower is not pledged to the payment
thereof;
(vi) other Indebtedness existing at the date hereof, but only to the
extent set forth on item 4.1 of the attached Disclosure Schedule; and
(vii) any guaranties or other contingent liabilities expressly
permitted pursuant to (S)4.3.
4.2. Liens . The Borrower will not create, incur, assume or suffer to
-----
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall not
at the time be delinquent or thereafter can be paid without interest or
penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
<PAGE>
-13-
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
(S)4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed; or
(vi) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
4.3. Guaranties. The Borrower will not, without the prior written consent
----------
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent
---------
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock.
4.5. Loans and Advances. The Borrower will not make (and will not permit
------------------
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
advances will not exceed, in the aggregate, $100,000 outstanding at any one
time.
4.6. Investments. The Borrower will not, without the Bank's prior written
-----------
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except (i) readily marketable direct obligations
of, or obligations guarantied by, the United States of America or any agency
thereof, (ii) other investment grade debt securities, (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this (S)4.6, (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent, (v) deposits in any other bank organized in the United
States having capital in excess of $100,000,000, and (vi) investments in any
Subsidiaries now existing or hereafter created by the Borrower pursuant to
(S)4.7 below; provided that in any event the Tangible Net Worth of the Borrower
alone (exclusive of its investment in Subsidiaries and any debt owed by any
Subsidiary to the Borrower) will not be less than 90% of the consolidated
Tangible Net Worth of the Borrower and Subsidiaries.
4.7. Subsidiaries: Acquisitions. Except as otherwise expressly permitted
--------------------------
by (S)4.8, the Borrower will not, without the prior written consent of the Bank,
form or acquire any Subsidiary
<PAGE>
-14-
or make any other acquisition of the stock of any other Person or of all or
substantially all of the assets of any other Person. The Borrower will not
become a partner in any partnership.
4.8. Merger. Except as otherwise expressly permitted by the following
------
provisions of this (S)4.8, the Borrower will not, without the prior written
consent of the Bank, merge or consolidate with any Person or sell, lease,
transfer or otherwise dispose of any material portion of its assets (whether in
one or more transactions), other than the sale of inventory in the ordinary
course. Notwithstanding the provisions of (S)4.7 and the foregoing provisions
of this (S)4.8, the Borrower may acquire any other Person (in a stock
transaction or an asset purchase transaction) and/or may merge with any such
Person; provided that all of the following conditions have been met: (i) no such
acquisition or merger may be consummated unless, at the time of such acquisition
or merger and after giving effect thereto, there is no Event of Default nor any
event or circumstance which, with the passage of time or the giving of notice or
both, could become an Event of Default; (2) the Borrower will be the surviving
entity in each such merger; (3) the Borrower will give the Bank at least 30
days' prior written notice of each such acquisition or merger and will provide
the Bank with pro forma financial statements, prepared in a manner reasonably
--- -----
satisfactory to the Bank, demonstrating to the Bank's satisfaction that such
acquisition or merger will not violate any of Sections 3.7-3.11 (compliance with
each of Sections 3.7, 3.8 and 3.10 being measured as at the date of such
acquisition or merger, even if not a fiscal quarter-end and compliance with each
of Sections 3.9 and 3.11 being determined as at the date of such acquisition or
merger, even if not a fiscal quarter-end or fiscal year-end, on the basis of the
results of the Borrower and its Subsidiaries and the target company, combined on
a pro forma basis, for the 12-month period (or 3-month period, as the case may
--- ------
be) then ended; (4) any entity so acquired by the Borrower or merged into the
Borrower must have had at least $1.00 in Net Income for the 12 months
immediately preceding such acquisition or merger; (5) the Borrower may not
assume or incur, pursuant to any or all of such acquisitions or mergers,
Indebtedness in excess of $500,000 per acquisition or merger transaction nor
Indebtedness in excess of $1,000,000 in the aggregate for all acquisitions and
merger transactions consummated after the date of this letter agreement; and (6)
cash acquisitions shall not exceed $500,000 per transaction unless the prior
written consent of the Bank has been obtained.
4.9. Affiliate Transactions. The Borrower will not, without prior written
----------------------
consent of the Bank, enter into any transaction, including, without limitation,
the purchase, sale or exchange of any property or the rendering of any service,
with any affiliate of the Borrower, except in the ordinary course of and
pursuant to the reasonable requirements of the Borrower's business and upon fair
and reasonable terms no less favorable to the Borrower than would be obtained in
a comparable arms'-length transaction with any Person not an affiliate; provided
that nothing in this (S)4.9 shall be deemed to prohibit the payment of salary or
other similar payments to any officer or director of the Borrower at a level
consistent with the salary and other payments being paid at the date of this
letter agreement and heretofore disclosed in writing to the Bank, nor to prevent
the hiring of additional officers at a salary level consistent with industry
practice, nor to prevent reasonable periodic increases in salary. For the
purposes of this letter agreement, "affiliate" means any Person which, directly
or indirectly, controls or is controlled by or is under common control with the
Borrower; any officer or director or former officer or director of the Borrower;
any Person owning of record or beneficially, directly or indirectly, 5% or more
of any
<PAGE>
-15-
class of capital stock of the Borrower or 5% or more of any class of capital
stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family of any of the foregoing. "Control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.
4.10. Change of Address. etc. The Borrower will not change its name or
----------------------
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
(S)2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral at any location other than
the Premises without, in each instance, giving the Bank at least 30 days' prior
written notice and providing all such financing statements, certificates and
other documentation as the Bank may request in order to maintain the perfection
and priority of the security interests granted or intended to be granted
pursuant to the Security Agreement. The Borrower will not change its fiscal
year or methods of financial reporting unless, in each instance, prior written
notice of such change is given to the Bank and prior to such change the Borrower
enters into amendments to this letter agreement in form and substance
satisfactory to the Bank in order to preserve unimpaired the rights of the Bank
and the obligations of the Borrower hereunder.
4.11. Hazardous Waste. Except as provided below, the Borrower will not
---------------
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the Borrower,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such
<PAGE>
-16-
Subsidiary (as the case may be) would follow, and disposes of such materials
(not consumed in the ordinary course) only through licensed providers of
hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Revolving Loan shall be used
---------------
directly or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly
-----------------
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt. In any event, the Borrower will not make any payment of any principal of
or interest on any Subordinated Debt at any time when there exists, or if there
would result therefrom, any Event of Default hereunder.
V. DEFAULT AND REMEDIES
--------------------
5.1. Events of Default. The occurrence of any one of the following events
-----------------
shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or interest
on the Revolving Note on or before the date when due; or the Borrower shall fail
to pay when due any amount owed to the Bank in respect of any letter of credit
now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of (S)(S)3.1, 3.3, 3.6, 3.7, 3.8, 3.9, 3.10 or
3.11 or Article IV; or
(d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or
(e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(f) Any default shall exist and remain unwaived or uncured with respect to
any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $50,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $50,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice
<PAGE>
-17-
or both would permit, the acceleration of the maturity of any such Indebtedness
by the holder of holders thereof, or
(g) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof; or
(h) Any attachment, execution or similar process shall be issued or levied
against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or
(i) Any final uninsured judgment in excess of $50,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or
(j) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(k) The Security Agreement or any other Loan Document shall for any reason
(other than due to payment in full of all amounts secured or evidenced thereby
or due to discharge in writing by the Bank) not remain in full force and effect;
or
(l) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank) not be fully
perfected liens and security interests; or
(m) At any time, 50% or more of the outstanding shares of any class of
equity securities of the Borrower shall be owned by any Person or by any "group"
(as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder), other than by one or more of the Persons listed on item
5.1(m) of the attached Disclosure Schedule; or
(n) Gerard E. Puorro shall for any reason not be an executive officer of
the Borrower actively involved in the management of the Borrower; or
<PAGE>
-18-
(o) There shall occur any other material adverse change in the condition
(financial or otherwise), operations, properties, assets, liabilities or
earnings of the Borrower.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
------------------------------
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Revolving Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving Note,
under the Security Agreement, under each of the Pledges and under each and any
other agreement with the Bank; and exercise all other rights and remedies which
the Bank may have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
-------
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further
security for the Obligations, the Borrower also grants to the Bank a security
interest with respect to all its deposits and all securities or other property
in the possession of the Bank or any affiliate of the Bank from time to time,
and, upon the occurrence of any Event of Default, the Bank may exercise all
rights and remedies of a secured party under the Uniform Commercial Code.
5.4. Letters of Credit. Without limitation of any other right or remedy
-----------------
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
<PAGE>
-19-
VI. MISCELLANEOUS
-------------
6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs
------------------
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan or any
letter of credit issued hereunder and any amendments or modifications of any of
the foregoing, as well as the costs and expenses (including, without limitation,
the reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents delivered or to be delivered hereunder
or in connection herewith, all whether or not legal action is instituted. In
addition, the Borrower shall be obligated to pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
delivery of this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents to be delivered in connection with any
Obligation. Any fees, expenses or other charges which the Bank is entitled to
receive from the Borrower under this Section shall bear interest from the date
of any demand therefor until the date when paid at a rate per annum equal to the
per annum rate otherwise payable under the Revolving Note (but in no event in
excess of the maximum rate permitted by then applicable law).
6.2. Capital Adequacy. If the Bank shall have determined that the
----------------
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the within-described revolving loan facility and/or letters of
credit issued for the account of the Borrower to a level below that which the
Bank could have achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, phase-in, change
or compliance and assuming that the Bank's capital was then fully utilized) but
for such adoption, phase-in, change or compliance by any amount deemed by the
Bank to be material: (i) the Bank shall promptly after its determination of such
occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay
forthwith to the Bank as an additional fee such amount as the Bank certifies to
be the amount that will compensate it for such reduction with respect to the
Revolving Loans, the within-described revolving loan facility and/or such
letters of credit.
A certificate of the Bank claiming compensation under this Section shall be
conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving rise to such compensation, the additional
amount or amounts to be paid to it hereunder and the method by which such
amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the
Bank to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any
<PAGE>
-20-
certificate in a timely manner shall in any way reduce any obligation of the
Borrower to the Bank under this Section.
6.3. Facility Fees. With respect to the within arrangements for Revolving
-------------
Loans, the Borrower will pay to the Bank, at the time of execution and delivery
of this letter agreement and on the first day of each calendar quarter
thereafter (commencing April 1, 1997), a non-refundable quarterly facility fee
of $4,375 per calendar quarter (appropriately pro-rated for any partial calendar
quarter). In addition, if the within-described revolving financing arrangements
are terminated by the Borrower for any reason or by the Bank as the result of
the Borrower's default, the Borrower shall forthwith upon such termination pay
to the Bank a sum equal to all of the fees which would have become due pursuant
to the immediately preceding sentence from the date of such termination through
the Expiration Date. The fees described in this Section are in addition to any
balances and fees required by the Bank or any of its affiliates in connection
with any other services now or hereafter made available to the Borrower.
6.4. Other Agreements. The provisions of this letter agreement are not in
----------------
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between
this letter agreement and any of the other Loan Documents or any such other
agreement will be deemed to create any additional grace period or otherwise
derogate from the express terms of each such default provision. No covenant,
agreement or obligation of the Borrower contained herein, nor any right or
remedy of the Bank contained herein, shall in any respect be limited by or be
deemed in limitation of any inconsistent or additional provisions contained in
any of the other Loan Documents or any such other agreement.
6.5. Governing Law. This letter agreement and the Revolving Note shall be
-------------
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. Addresses for Notices, etc. All notices, requests, demands and other
--------------------------
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
Candela Corporation
530 Boston Post Road
Wayland, MA 01778
Attention: F. Paul Broyer, Chief Financial Officer
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street
Boston, MA 02109
Attention: Olaperi Onipede, Vice President
<PAGE>
-21-
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.7. Binding Effect; Assignment; Termination. This letter agreement shall
---------------------------------------
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participation
in this letter agreement, the Revolving Loans, the Revolving Note and/or the
letters of credit issued hereunder. The Borrower may terminate this letter
agreement and the financing arrangements made herein by giving written notice of
such termination to the Bank together with payment of the sum described in the
second sentence of (S)6.3; provided that no such termination will release or
waive any of the Bank's rights or remedies or any of the Borrower's obligations
under this letter agreement or any of the other Loan Documents unless and until
the Borrower has paid in full the Revolving Loans and all interest thereon and
all fees and charges payable in connection therewith and all letters of credit
issued hereunder have been terminated.
6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the
-----------------------
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any such suit, action or proceeding brought in such a court and any
claim that any such suit, action or proceeding has been brought in an
inconvenient forum. The Borrower agrees that final judgment in any such suit,
action or proceeding brought in such a court shall be enforced in any court of
proper jurisdiction by a suit upon such judgment, provided that service of
process in such action, suit or proceeding shall have been effected upon the
Borrower in one of the manners specified in the following paragraph of this
(S)6.8 or as otherwise permitted by law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this (S)6.8
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in (S)6.6 (as
such address may be changed from time to time pursuant to said (S)6.6) or (ii)
by serving a copy thereof upon it at its address set forth in (S)6.6 (as such
address may be changed from time to time pursuant to said (S)6.6).
6.9. Severability. In the event that any provision of this letter
------------
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be
<PAGE>
-22-
invalid or unenforceable, the remainder of this letter agreement, and the
application of such provision to Persons, properties or circumstances other than
those as to which it has been held invalid and unenforceable, shall not be
affected thereby, and each provision of this letter agreement shall be valid and
enforced to the fullest extent permitted by law.
VII. DEFINED TERMS
-------------
7.1. Definitions. In addition to terms defined elsewhere in this letter
-----------
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Adjusted Debt" - All Indebtedness of the Borrower and/or any of its
Subsidiaries, other than any such Indebtedness which consists of Deferred
Revenue.
"Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Revolving Loans then outstanding, plus (ii) all then undrawn
----
amounts of letters of credit issued by the Bank for the account of the Borrower,
plus (iii) all amounts then drawn on any such letter of credit which at said
- ----
date shall not have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - As determined at any date, 80% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.
"Capital Expenditures" - All acquisitions of machinery, equipment, land,
leaseholds, buildings, leasehold improvements and all other expenditures for
purposes which are considered to be fixed assets under generally accepted
accounting principles consistently applied. When a fixed asset is acquired by a
lease which is required to be capitalized pursuant to generally accepted
accounting principles, the amount required to be so capitalized shall be
considered to be an expenditure in the year such asset is first leased.
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in (S)7.2(b) below.
"Current Liabilities" - All liabilities of the Borrower and/or any
Subsidiary of the Borrower properly shown as "current liabilities" on a
consolidated balance sheet of the Borrower and Subsidiaries prepared in
accordance with generally accepted accounting principles consistently applied;
provided that "Current Liabilities" will in no event be deemed to include any
liabilities which represent Deferred Revenue.
"Deferred Revenue" - Any liabilities of the Borrower which represent sums
actually received by the Borrower under software maintenance contracts and
which, in accordance with generally accepted accounting principles consistently
applied, are properly shown as "deferred revenue" on the Borrower's balance
sheet.
<PAGE>
-23-
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Expiration Date" - December 1, 1997, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person's balance sheet at
the date as of which Indebtedness, is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
"Loan Documents" - Each of this letter agreement, the Revolving Note, the
Security Agreement, the Pledges and each other instrument, document or agreement
evidencing, securing, guaranteeing or relating in any way to any of the
Revolving Loans or any of the letters of credit issued hereunder, all whether
now existing or hereafter arising or entered into.
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $3,500,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents and Receivables (less an allowance for bad debt
consistent with the Borrower's prior experience).
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, company, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of bona fide sales made to customers of the Borrower (which customers
---- ----
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and
<PAGE>
-24-
which remain unpaid no more than 90 days past the respective invoice dates of
such Receivables, the payment of which is not in dispute. Unless the Bank in its
sole discretion otherwise determines with respect to any Receivable, a
Receivable which would otherwise be a Qualified Receivable shall be deemed not
to be a Qualified Receivable (i) if the Bank does not have a fully perfected
first priority security interest in such Receivable; (ii) if such Receivable is
not free and clear of all adverse interests in favor of any Person other than
the Bank; (iii) if such Receivable is subject to any deduction, offset, contra
account, counterclaim or condition; (iv) if a field examination made by the Bank
fails to confirm that such Receivable exists and satisfies all of the criteria
set forth herein to be a Qualified Receivable; (v) if such Receivable is not
properly invoiced at the date of sale; (vi) if the customer or account debtor
has disputed liability or made any claim with respect to the Receivable or the
merchandise covered thereby or with respect to any other Receivable due from
said customer to the Borrower; (vii) if the customer or account debtor has filed
a petition for bankruptcy or any other application for relief under the
Bankruptcy Code or has effected an assignment for the benefit of creditors, or
if any petition or any other application for relief under the Bankruptcy Code
has been filed against said customer or account debtor, or if the customer or
account debtor has suspended business, become insolvent, ceased to pay its debts
as they become due, or had or suffered a receiver or trustee to be appointed for
any of its assets or affairs; (viii) if the customer or account debtor has
failed to pay other Receivables so that an aggregate of 25% of the total
Receivables owing to the Borrower by such customer or account debtor has been
outstanding for more than 90 days past their respective due dates; (ix) if such
Receivable is owed by the United States government or any agency or department
thereof (unless assigned to the Bank under the Federal Assignment of Claims
Act); or (x) if the Bank reasonably believes that collection of such Receivable
is insecure or that it may not be paid by reason of financial inability to pay
or otherwise, or that such Receivable is not for any reason suitable for use as
a basis for borrowing hereunder.
"Receivables" - All of the Borrower's present and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.
"Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding the (i) total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person. Total
intangible assets shall be deemed to include, but shall not be limited to, the
excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred
<PAGE>
-25-
expenses (including, but not limited to, unamortized debt discount and expense,
organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
7.2. Security Agreement. (a) The Borrower acknowledges and agrees that
------------------
the "Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement and/or with respect to any letter of credit
which may be issued by the Bank for the account of the Borrower.
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without limitation
and in addition to the Collateral described therein, all of the Borrower's
files, books and records (including, without limitation, all electronically
recorded data) all whether now owned or existing or hereafter acquired,
created or arising. The Borrower hereby grants to the Bank a security
interest in all such Collateral in order to secure the full and prompt
payment and performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as defined in
(S)5.1 of this letter agreement), the Bank may, at any time, notify account
debtors that the Collateral has been assigned to the Bank and that payments
by such account debtors shall be made directly to the Bank. At any time
after the occurrence of an Event of Default, the Bank may collect the
Borrower's Receivables, or any of same, directly from account debtors and
may charge the collection costs and expenses to the Borrower.
<PAGE>
-26-
This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.
Very truly yours,
CANDELA CORPORATION
By ___________________________
Name:
Title:
Accepted and agreed:
FLEET NATIONAL BANK
By ___________________________
Its
By ___________________________
Its
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(b) 5% Stockholders
Item 2.1(e) Litigation
Item 2.1(j) Location of Collateral; record owners of Premises
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 5.1(m) Permitted Majority Owners
<PAGE>
EXHIBIT 10.10.1
[FLEET LOGO APPEARS HERE]
December 15, 1998
Mr. F. Paul Broyer
Chief Financial Officer
Candela Corporation
530 Boston Post Road
Wayland, MA 01778
Dear Paul:
This letter supersedes my letter dated December 10, 1998. Reference is hereby
made to the Letter Agreement between Candela Corporation ("Candela" or the
"Borrower") and Fleet National Bank (the "Bank") dated February 13, 1997, as
amended by letters dated September 16, 1997, March 10, 1998 and April 23rd, 1998
(collectively referred to as the "Agreement").
We are pleased to inform you that Fleet National Bank (the "Bank") has approved
the renewal of the $3,500,000 Line of Credit to Candela Corporation (the
"Borrower") through December 1, 1999 subject to the existing terms and
conditions. In connection with this renewal, we have lowered the pricing on the
Line of Credit to the Bank's Prime Rate as well as a lower commitment fee of
3/8% on the entire facility. Please sign below to indicate your acceptance of
these terms. Upon receipt of your acceptance of this commitment letter, we shall
authorize our attorney to prepare the necessary documentation to amend the
existing Agreement. This commitment shall expire unless accepted by December 31,
1998.
In addition, the financial covenants have been amended as shown below and become
effective with the quarter ending December 31, 1998 and thereafter.
1. Section 3.7 Debt to Worth: Defined as Shareholders' Equity less
-------------------------
Intangible Assets plus Subordinated Debt divided by Tangible Capital
Base, Leverage cannot exceed:
Quarter ending 12/31/98 2.00:1.00
Quarter ending 3/31/99 1.75:1.00
Quarter ending 6/30/99 1.50:1.00
Thereafter 1.50:1.00
2. Section 3.8 Net Worth: Starting with the quarter ending 12/31/98 and
---------------------
for any quarter thereafter, Tangible Capital Base must be $8,500,000
plus 80% of quarterly Net Income earned after 12/31/98 and new
Stockholders' Equity or Subordinated Debt raised after 12/31/98; test
not to be reduced by losses.
3. Section 3.9 Profitability: Quarterly Net Income After Taxes must exceed
-------------------------
$500,000 for the quarter ending 12/31/98 and each quarter thereafter.
4. Section 3.10 Liquidity: Defined as Cash and A/R divided by Current
----------------------
Liabilities, including Fleet borrowings, less Deferred Revenue,
Restructuring Reserve and Warranties, Quick Ratio must exceed 1.00:1.00
for the quarter ending 12/31/98 and each quarter thereafter.
<PAGE>
ALLONGE TO PROMISSORY NOTE
--------------------------
The maturity date of the attached Promissory Note dated February 13, 1997 for
$3,500,000 is hereby extended to December 1, 1999 from December 31, 1998. The
interest rate shall be decreased from Prime + 1% to Prime.
This Allonge will be governed by the terms and conditions of the Letter
Agreement made as of the 13th day of February 1997 by and between Candela
Corporation and Fleet National Bank and amended by our letters September 16,
1997, March 10, 1998 and April 23rd, 1998 (collectively referred to as the
"Agreement"). Nothing herein shall be deemed to constitute a waiver, release or
amendment of any terms of the Agreement.
/s/ [illegible signature] /s/ F. Paul Broyer
- ------------------------------ -------------------------------
Witness F. Paul Broyer
Chief Financial Officer
Candela Corporation
- ------------------------------ -------------------------------
Witness Olaperi Onipede
Vice President
Fleet National Bank
<PAGE>
The Borrower represents and warrants that the execution of this commitment
letter has been duly authorized by the Borrower by all necessary corporate and
other action and that the execution will not conflict with, violate the
provisions of, or cause a default or constitute an event which, with the passage
of time or giving of notice or both, could cause a default on the part of the
Borrower under its charter documents or by-laws or under any contract,
agreement, law, rule, order, ordinance, franchise, instrument or other document,
or result in the imposition of any lien or encumbrance on any property or asset
of the Borrower. In addition, the statements, representations and warranties
made in the Agreement continue to be correct as of the date hereof and the
Borrower is in compliance with all terms of the Agreement. Except as expressly
affected hereby, the Agreement remains in full force and effect as heretofore.
Sincerely,
Fleet National Bank
/s/ Olaperi Onipede
Olaperi Onipede Agreed and Accepted: /s/ F. Paul Broyer
----------------------
Vice President by: F. Paul Broyer
High Technology Division title: Chief Financial Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this prospectus of Candela Corporation for
the Pre-effective Amendment No. 1 to Form S-1 of our report dated July 29,
1998, except for the information in the first paragraph of Note 6, for which
the date is August 7, 1998, relating to the consolidated financial statements
of Candela Corporation and its Subsidiaries as of June 27, 1998 and June 28,
1997, and for each of the three years in the period ended June 27, 1998, which
appears in such prospectus. We also consent to the use in this prospectus of
our report on the Financial Statement Schedule, which appears in Schedule II(b)
and to the reference to us under the heading "Experts" in such prospectus.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-27-1998 JUN-28-1997 JUL-03-1999 JUN-27-1998
<PERIOD-START> JUN-29-1997 JUN-30-1996 JUN-27-1998 JUN-28-1997
<PERIOD-END> JUN-27-1998 JUN-28-1997 MAR-27-1999 MAR-28-1998
<CASH> 1,615 2,674 8,059 1,140
<SECURITIES> 0 0 0 0
<RECEIVABLES> 9,456 9,045 10,775 7,357
<ALLOWANCES> 1,037 197 854 965
<INVENTORY> 8,419 6,776 6,809 8,152
<CURRENT-ASSETS> 18,961 20,104 27,545 17,319
<PP&E> 7,879 7,831 7,608 7,765
<DEPRECIATION> 4,759 4,308 5,075 4,588
<TOTAL-ASSETS> 22,604 24,837 30,448 21,136
<CURRENT-LIABILITIES> 16,322 13,072 16,567 15,464
<BONDS> 0 0 0 0
0 0 55 55
0 0 0 0
<COMMON> 55 54 0 0
<OTHER-SE> 5,340 10,192 10,855 4,554
<TOTAL-LIABILITY-AND-EQUITY> 22,604 24,837 30,448 21,136
<SALES> 37,025 35,505 39,881 24,962
<TOTAL-REVENUES> 37,025 35,505 40,032 24,991
<CGS> 20,707 18,650 18,993 14,100
<TOTAL-COSTS> 20,707 18,650 18,993 14,100
<OTHER-EXPENSES> 20,279 16,168 14,512 16,118
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 235 107 377 181
<INCOME-PRETAX> (4,277) 638 6,150 (5,408)
<INCOME-TAX> 175 400 1,940 78
<INCOME-CONTINUING> (4,452) 238 4,210 (5,486)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (4,452) 238 4,210 (5,486)
<EPS-BASIC> (.812) .042 0.77 (1.00)
<EPS-DILUTED> (.812) .042 0.72 (1.00)
</TABLE>
