<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarter ended April 1, 2000
Commission file number 0-14742
CANDELA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 04-2477008
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
530 Boston Post Road, Wayland, Massachusetts 01778
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (508) 358-7400
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS OUTSTANDING AT MAY 15, 2000
---------------------------- ----------------------------
Common Stock, $.01 par value 11,363,437
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<PAGE>
CANDELA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
Part I. Financial Information:
Item 1. Unaudited Condensed Consolidated Balance Sheets
as of April 1, 2000 and July 3, 1999 3
Unaudited Condensed Consolidated
Statements of Operations and
Comprehensive Income for the three
month and nine month periods ended
April 1, 2000 and March 27, 1999 4
Unaudited Condensed Consolidated
Statements of Cash Flows for the
nine month periods ended April 1,
2000 and
March 27, 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Cautionary Statements 17-18
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 18
Part II. Other Information:
Item 1. Legal proceedings 19-20
Item 6. Exhibits and Reports on Form 8-K 20
Exhibit 27.1 Financial Data Schedule 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CANDELA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 1, JULY 3,
ASSETS 2000 1999
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 32,929 $ 10,055
ACCOUNTS RECEIVABLE, NET 16,882 12,337
NOTES RECEIVABLE 1,298 2,186
INVENTORIES 8,071 6,927
OTHER CURRENT ASSETS 1,582 928
- ---------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 60,762 32,433
- ---------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 2,573 2,626
DEFERRED TAX ASSETS 3,493 1,100
OTHER ASSETS 267 292
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 67,095 $ 36,451
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 4,364 $ 4,846
ACCRUED PAYROLL AND RELATED EXPENSES 2,382 3,735
ACCRUED WARRANTY COSTS 2,822 2,502
INCOME TAXES PAYABLE 3,453 3,185
RESTRUCTURING RESERVE 1,157 1,519
OTHER ACCRUED LIABILITIES 1,975 1,132
CURRENT PORTION OF LONG-TERM DEBT 13 415
DEFERRED INCOME 3,655 1,913
- ---------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,821 19,247
- ---------------------------------------------------------------------------------------
LONG-TERM DEBT 3,018 3,181
- ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
- ---------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
COMMON STOCK 114 56
ADDITIONAL PAID-IN CAPITAL 39,930 18,562
RETAINED EARNINGS (ACCUMULATED LOSS) 5,770 (3,846)
ACCUMULATED OTHER COMPREHENSIVE INCOME (1,558) (749)
- ---------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 44,256 14,023
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,095 $ 36,451
=======================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED: FOR THE NINE MONTHS ENDED:
APRIL 1, MARCH 27, APRIL 1, MARCH 27,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
LASERS AND OTHER PRODUCTS $ 14,771 $ 12,847 $ 41,979 $ 31,254
PRODUCT-RELATED SERVICE 3,502 2,275 8,315 6,373
SKIN CARE CENTER 934 722 2,732 2,254
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 19,207 15,844 53,026 39,881
COST OF SALES:
LASERS AND OTHER PRODUCTS 5,293 4,908 15,806 13,213
PRODUCT-RELATED SERVICE 1,904 1,394 4,767 4,213
SKIN CARE CENTER 588 518 1,783 1,567
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COST OF SALES 7,785 6,820 22,356 18,993
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 11,422 9,024 30,670 20,888
OPERATING EXPENSES:
SELLING, GENERAL, AND ADMINISTRATIVE 5,681 4,586 15,809 12,131
RESEARCH AND DEVELOPMENT 1,432 933 3,616 2,381
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 7,113 5,519 19,425 14,512
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 4,309 3,505 11,245 6,376
OTHER INCOME (EXPENSE):
INTEREST INCOME 398 29 1,034 60
INTEREST EXPENSE (120) (136) (364) (377)
OTHER 42 (21) 163 91
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) 320 (128) 833 (226)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,629 3,377 12,078 6,150
PROVISION FOR INCOME TAXES 972 1,470 2,462 1,940
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,657 $ 1,907 $ 9,616 $ 4,210
=====================================================================================================================
BASIC EARNINGS PER SHARE $ 0.33 $ 0.23 $ 0.90 $ 0.51
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.21 $ 0.82 $ 0.48
=====================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 11,179 8,248 10,648 8,230
EQUIVALENT WEIGHTED AVERAGE SHARES OUTSTANDING 12,280 9,252 11,738 8,762
=====================================================================================================================
NET INCOME $ 3,657 $ 1,907 $ 9,616 $ 4,210
OTHER COMPREHENSIVE INCOME NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (756) (199) 35 110
- ---------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 2,901 $ 1,708 $ 9,651 $ 4,100
=====================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended:
April 1, March 27,
2000 1999
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,616 $ 4,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 518 589
Provision for bad debts 230 72
Accretion of debt discount 71 52
Increase (decrease) in cash from working capital:
Accounts receivable (3,328) (944)
Notes receivable 1,168 (175)
Inventories (1,174) 540
Other current assets (598) (979)
Other assets (2,414) (32)
Accounts payable (2,521) (179)
Accrued payroll and related expenses (1,363) 511
Deferred income 1,742 (129)
Accrued warranty costs 320 340
Income taxes payable 159 1,944
Accrued restructuring charges (362) (356)
Other accrued liabilities 851 996
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 2,915 6,460
- -----------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of assets -- 293
Purchases of property and equipment (468) (112)
- -----------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (468) 181
- -----------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments of long-term debt (78) (627)
Repayments of line of credit -- (2,700)
Principal payments of capital lease obligations (567) (540)
Proceeds from the issuance of debt and stock warrants -- 3,700
Proceeds from the issuance of common stock 21,425 90
- -----------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 20,780 (77)
- -----------------------------------------------------------------------------------
Effect of exchange rates on cash and cash equivalents (353) (120)
- -----------------------------------------------------------------------------------
Net increase in cash and cash equivalents 22,874 6,444
- -----------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 10,055 1,615
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 32,929 $ 8,059
===================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and
notes do not include all of the disclosures made in the Annual Report on Form
10-K of Candela Corporation (the "Company") for fiscal 1999, which should be
read in conjunction with these financial statements. The financial
information included herein is unaudited; however, the condensed consolidated
balance sheet as of July 3, 1999 was derived from the audited consolidated
balance sheet dated July 3, 1999. However, in the opinion of management, the
statements include all necessary adjustments for a fair presentation of the
interim results and are prepared and presented in a manner consistent with
the Company's Annual Report on Form 10-K. The results for the three and nine
month periods ended April 1, 2000 are not necessarily indicative of the
results to be expected for the full year.
In accordance with generally accepted accounting principles, all share and
per share calculations amounts have been restated to reflect the Company's
3-for-2 stock split effective on January 28, 2000. (See Note 5)
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 1, 2000 JULY 3, 1999
------------- ------------
<S> <C> <C>
Raw materials $ 2,629 $ 1,643
Work in process 1,715 1,395
Finished goods 3,727 3,889
--------- --------
$ 8,071 $ 6,927
======== ========
</TABLE>
3. DEBT
On December 1, 1999, the Company's revolving bank line of credit expired. No
borrowings were outstanding at the time of expiration.
4. STOCK OFFERING
In July, 1999, the Company completed a public offering of 3,645,000 shares of
common stock, of which 2,249,781 shares were sold by the Company and
1,395,219 shares were sold by certain selling shareholders. $19,805,573 was
received in cash after underwriting discounts upon completion of the
offering. Issuance costs of approximately $585,000 were incurred in
conjunction with the offering, of which $411,796 were paid in the current
fiscal year, the balance was previously reflected as a prepaid balance in the
financial statements for the year ended July 3, 1999.
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the period and, if
there are dilutive securities in a period of net income, diluted earnings per
share is computed by including common stock equivalents outstanding for the
6
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
period in the denominator. Common stock equivalents include shares issuable
upon the exercise of stock options or warrants, net of shares assumed to have
been purchased with the proceeds, using the treasury stock method.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR
Net income $ 3,657 $ 1,907 $ 9,616 $ 4,210
======= ======= ======= =======
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares
outstanding 11,179 8,248 10,648 8,230
------- ------- ------- -------
Earnings per share $ 0.33 $ 0.23 $ 0.90 $ 0.51
======= ======= ======= =======
DILUTED EARNINGS PER SHARE
Weighted average shares
outstanding 11,179 8,248 10,648 8,230
Effect of dilutive securities:
Stock options 572 656 522 378
Stock warrants 529 348 568 154
------- ------- ------- -------
Adjusted weighted average
shares outstanding 12,280 9,252 11,738 8,762
------- ------- ------- -------
Earnings per share $ 0.30 $ 0.21 $ 0.82 $ 0.48
======= ======= ======= =======
</TABLE>
During the three month period ended April 1, 2000, there were no options to
purchase shares of common stock that were excluded from the calculation of
diluted earnings per share because the options' exercise price was greater
than the average market price of the common stock while during the nine month
period there were 157,500 shares. All warrants to purchase shares of common
stock were included in the computation of diluted EPS.
During the three month period ended March 27, 1999, there were 48,750 options
to purchase shares of common stock that were not included in the calculation
of diluted earnings per share because the exercise prices of the options were
greater than the average market price of the common stock. There were no
warrants to purchase common stock that were excluded from the calculation of
diluted earnings per share because the exercise prices of the warrants were
less than the average market price of the common stock.
During the nine month period ended March 27, 1999, there were 212,550 options
to purchase shares of common stock, and warrants to purchase 422,974 shares
of common stock that were not included in the calculation of diluted earnings
per share because the exercise prices of the options and warrants were
greater than the average market price of the common stock.
7
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On January 12, 2000, the Company's Board of Directors approved a 3-for-2
stock split, payable in the form of a 50% stock dividend. All shareholders
of record at the close of business on January 28, 2000 received one
additional share for every two shares of common stock owned. In accordance
with generally accepted accounting principles, all prior period per share
amounts are split adjusted.
6. RESTRUCTURING CHARGES
During the quarter ended December 27, 1997, the Company recorded
restructuring charges of $2,609,000 resulting from management's decision to
close the skin care center located in Scottsdale, Arizona. The following
table reflects the restructuring charges incurred during the nine month
period ended April 1, 2000:
<TABLE>
<CAPTION>
LEASEHOLD
IMPROVEMENTS
PAYROLL AND AND FIXED FACILITY
SEVERANCE ASSETS COSTS TOTAL
--------- ------ ----- -----
<S> <C> <C> <C> <C>
Balance at July 3, 1999 $ 210 $ 797 $ 512 $ 1,519
Cash Charges (52) -- (154) (206)
Non-Cash Charges -- (156) -- (156)
- --------------------------------------------------------------------------------------------
Balance at April 1, 2000 $ 158 $ 641 $ 358 $ 1,157
===========================================================================================
</TABLE>
7. INCOME TAXES
The provision for income taxes results from a combination of activities
including both the domestic and foreign subsidiaries of the Company. The
provision for income taxes for the nine months ended April 1, 2000, reflects
a reduction of the valuation allowance against the deferred tax asset in the
amount of $2,393,000, of which $798,000 was recognized in the current
quarter. The total provision for income taxes includes tax provisions
calculated in Japan and Spain at rates in excess of the U.S. statutory tax
rate. We had deferred tax assets of $4,214,000 at the beginning of the
current fiscal year. A valuation allowance had then been provided against
the deferred tax asset in the amount of $3,114,000, leaving a net deferred
tax asset of $1,100,000. The valuation allowance has been reduced by
$2,393,000 in the current year effectively increasing the net deferred tax
asset to $3,493,000. The effective tax rate for the year is expected to be
approximately 20%, in comparison to 24% for fiscal 1999, due to anticipated
reductions in the valuation allowance. It is expected that the valuation
allowance will be fully utilized during the current fiscal year.
8
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. SEGMENT 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.
<TABLE>
<CAPTION>
LINE OF BUSINESS DATA: THREE MONTHS ENDED NINE MONTHS ENDED
April 1, March 27, April 1, March 27,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Product Sales and Service $ 18,273 $ 15,122 $ 50,294 $ 37,627
Skin Care/Health Spa Services 934 722 2,732 2,254
-------- -------- -------- --------
Total Revenue $ 19,207 $ 15,844 $ 53,026 $ 39,881
======== ======== ======== ========
OPERATING INCOME (LOSS):
Product Sales and Service $ 4,494 $ 3,867 $ 11,805 $ 7,232
Skin Care/Health Spa Services (185) (362) (560) (856)
-------- -------- -------- --------
Total Operating Income $ 4,309 $ 3,505 $ 11,245 $ 6,376
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of
January 1, July 3,
2000 1999
<S> <C> <C>
TOTAL ASSETS: (NET INTERCOMPANY ACCOUNTS)
Product Sales and Service $64,923 $34,250
Skin Care/Health Spa Services 2,172 2,201
------- --------
Total Assets $67,095 $36,451
======= =======
</TABLE>
Product Sales and Service assets increased primarily due to the proceeds
received from the Company's public offering completed in July, 1999.
9. STOCK REPURCHASE PROGRAM
On November 23, 1999, the Company's Board of Directors approved an open
market stock repurchase program that enables the Company to purchase up to
750,000 shares of its common stock. The program is in effect for two years,
from December 13, 1999 to December 12, 2001, and may be suspended or
discontinued by the Board at any time. All such purchases will be transacted
on the Nasdaq Stock Market at prevailing open market prices and will be paid
for with general corporate funds. Any such purchases will be accounted for
at cost and the shares repurchased will be restored to the status of
unauthorized but unissued shares. The Board has delegated to the discretion
of Candela's Chief Executive Officer and Chief Financial Officer the
authority to determine the timing of the repurchase program's commencement
and the timing of any subsequent purchases.
9
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. 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 of 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 sought 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 included various tort claims against us and contract-related
claims against The Regents and Beckman. The complaint asserted that we
interfered with the licensing of the dynamic cooling technology to the
plaintiffs. The complaint sought unspecified general, special, punitive and
exemplary damages plus costs and attorneys' fees against us as well as the
"disgorgement" of any benefit received by us 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. Both we and The Regents
moved to dismiss the complaint. On August 27, 1999, the court granted in
part both our and The Regents motion, but gave New Star Lasers permission to
file an amended complaint. On October 25, 1999, New Star Lasers filed a
second amended complaint, to which we filed an answer denying New Star's
material allegations and raising several affirmative defenses. We believe
that an adverse outcome of the New Star Lasers' tort claims against us 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 Dynamic Cooling Device ("DCD") was
developed is invalid and unenforceable, our rights to the DCD technology
pursuant to the license agreement could no longer be proprietary, which
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. On or about February 2, 2000 the Company reached an
agreement in principle conditionally to settle New Star's claims against
the Company. In connection with this agreement, on February 2, 2000, we
granted New Star a sublicense to the use of the DCD technology for certain
laser systems that New Star manufactures. Pursuant to the parties'
settlement in principle, New Star will dismiss the claims it has asserted
against us. Both the sublicense and settlement of the litigation are
contingent on a favorable outcome to our arbitration against The Regents,
which is described below. In light of the conditional settlement of our
arbitration against The Regents (described below), Candela and The Regents
are currently engaged in negotiations to obtain a global resolution of New
Star's claims against Candela and The Regents.
By letter dated September 17, 1999, The Regents purported to give us notice
of alleged default under the parties' exclusive license agreement, as
amended ("the Agreement") on the grounds (1) that we had failed to make
necessary royalty payments to The Regents pursuant to the Agreement; and (2)
that we had not complied with our sublicensing obligations under the
Agreement.. The Regents informed us that we had sixty days in which to cure
the alleged defaults. We maintain and have informed The Regents that we are
in full compliance with each of the terms of the Agreement, including with
respect to our royalty payments to The Regents and our sublicensing efforts.
On September 29, 1999, we commenced an arbitration before the American
Arbitration Association ("AAA") against The Regents in which we sought a
declaration that we are not in default of any of our obligations under the
Agreement. On October 27, 1999, The Regents issued another notice by which
it purported to terminate our rights to sublicense the DCD technology. This
notice is also the subject of the AAA arbitration. On November 9, 1999, the
arbitrator issued an interim order of protection prohibiting The Regents
from issuing a notice of termination or licensing the DCD technology to any
third party until ten days after the award of judgment in the arbitration.
Proceedings in the arbitration have been stayed in light of the parties
conditional settlement
10
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
agreement (described below). In the event that settlement agreement becomes
null and void, an arbitration hearing is likely to be scheduled to occur in
or after July 2000. We believe that an adverse outcome of the arbitration
with The Regents could have a material adverse effect on our operations and
financial condition, including losing our rights to the DCD technology
and/or being required to pay substantially higher future and historical
royalty payments to The Regents for the use of the DCD technology. Also on
October 27, 1999, The Regents sent us another notice of default arising out
of its claim that we have refused to indemnify The Regents in connection
with the New Star litigation. The notice gave us sixty days to cure the
alleged default. We intend to contest this notice of default. Should we not
cure the alleged default or not be successful in challenging the alleged
default, there could be a material adverse effect on our operations and
financial condition, including losing our rights to the DCD technology.
In response to the second October 27, 1999 notice of default, we commenced
a declaratory judgment action against The Regents in a Massachusetts
Superior Court. The Regents removed the case to the United States District
Court for the District of Massachusetts. On or about December 23, 1999,
the parties filed a stipulation and joint motion requesting that the action
be stayed on account of any alleged failure to indemnify The Regents until
conclusion of the arbitration. The Court granted the parties' motion on
December 29, 1999. On February 18, 2000, after a mediation, Candela and
The Regents concluded a confidential, conditional settlement of the
arbitration pursuant to which the parties agreed to clarify the royalty
terms of the Agreement, and that The Regents will be permitted to grant
further licenses to DCD technology, subject to the minimum terms and
royalty sharing specified in the Agreement. The settlement agreement is
conditioned upon the resolution of the New Star litigation (see above) on
or before June 18, 2000. In the event the New Star litigation is not
resolved during that period, the settlement agreement with The Regents will
become null and void, and the parties will proceed to arbitration.
From time to time, we are a party to various legal proceedings incidental to
our business. We believe that none of such other presently pending legal
proceedings will have a material adverse effect upon our financial position,
results of operation, or liquidity.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board "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. Originally, the statement had been effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities", which postponed the adoption of SFAS 133 until fiscal years
beginning after June 15, 2000. Accordingly, the Company plans to implement
SFAS 133 for its fiscal year 2001.
The derivative instruments and hedging activities entered into by Candela
include foreign currency forward contracts to protect against currency
fluctuation for amounts due between itself and its foreign subsidiaries. At
April 1, 2000, the Company held foreign currency forward contracts with
notional value
11
<PAGE>
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
totaling approximately $5,375,000 compared to forward contracts with a value
of $1,914,000 held at March 27, 1999. The present contracts have maturity
dates prior to August 14, 2000. The carrying and net fair value of these
contracts at April 1, 2000, was $0 and ($65,000), respectively, compared to
$0 and $14,000 respectively, at March 27, 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the first quarter of fiscal
year 2001 and is currently assessing the impact, if any, on its consolidated
results of operations and financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequences of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to
have a material impact on the Company's financial position or results of
operations.
12
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We research, develop, manufacture, market and service lasers used to perform
aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. We market our 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. We derive our revenue from: the sales of lasers and other
products; the provision of product-related services; and the operations of our
remaining skin care center. Greater than 50% of our revenue in recent periods
has come from international sales.
RESULTS OF OPERATIONS
REVENUE. Revenue source by geography is reflected in the following table:
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 1, MARCH 27,
2000 1999 CHANGE
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
US Revenue $ 8,754 46% $ 7,089 45% $ 1,665 23%
Foreign Revenue 10,453 54% 8,755 55% 1,698 19%
------- ------- -------
Total Revenue $19,207 100% $15,844 100% $ 3,363 21%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 1, MARCH 27,
2000 1999 CHANGE
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
US Revenue $25,040 47% $18,195 45% $ 6,845 38%
Foreign Revenue 27,986 53% 21,686 54% 6,300 29%
------- ------- -------
Total Revenue $53,026 100% $39,881 100% $13,145 33%
======= ======= =======
</TABLE>
US revenue increased substantially over the three month period due to our
initial introduction of the V-Beam laser to the US market, which is used in the
treatment of vascular lesions. US revenue for the nine month period was also
positively impacted by increased sales to our US distributors supporting the
obstetrician, gynecologist, and general and vascular surgeon market. Foreign
revenue for the three month period increased due to strong sales of our
GentleLASE and AlexLAZR systems, especially in the Asian Pacific Rim. Foreign
revenue for the nine month period was positively impacted by increased sales in
our Japanese subsidiary, including sales by our Osaka, Japan sales office which
became operational in the fiscal fourth quarter of last year.
13
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Revenue source by type is reflected in the following table:
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 1, MARCH 27,
2000 1999 CHANGE
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Lasers and other
Products $14,771 77% $12,847 81% $ 1,924 15%
Product-related service 3,502 18% 2,275 14% 1,227 54%
Skin care centers 934 5% 722 5% 212 30%
------- ------- -------
Total Revenue $19,207 100% $15,844 100% $ 3,363 21%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 1, MARCH 27,
2000 1999 CHANGE
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Lasers and other
Products $41,979 79% $31,254 78% $10,725 34%
Product-related service 8,315 16% 6,373 16% 1,942 30%
Skin care centers 2,732 5% 2,254 6% 478 21%
------- ------- -------
Total Revenue $53,026 100% $39,881 100% $13,145 33%
======= ======= =======
</TABLE>
The increase in laser product revenue for the three and nine month periods
resulted from a substantial increase in sales of our GentleLASE-Registered
Trademark- and AlexLAZR-TM- product lines as well as the sales of the
GentlePEEL-TM- system which was not available until this fiscal year. The
initial sales of the V-Beam-TM- system also positively impacted the three month
period, increasing sales of our vascular products despite limited availability
and a decrease in revenue from ScleroPlus-TM- systems. Product-related service
increased substantially for both the three and nine month periods due to
increased sales of cryogen coolant and service contracts. Skin care center
revenue increased as a result of increased marketing and promotion.
GROSS PROFIT. Gross profit increased to $11,412,000, or 59% of revenues for the
three month period ended April 1, 2000, compared to gross profit of $9,034,000,
or 57% for the same period one year earlier. For the nine month period ended
April 1, 2000, gross profit increased to $30,670,000, or 58% of revenues,
compared to $20,888,000 and 52% of revenues for the same period a year earlier.
The increase in gross profit, over the same period a year earlier, is
principally the result of increased sales of higher margin laser systems such as
the GentleLASE-Registered Trademark- and V-Beam-TM-, and higher absorption of
fixed portions of manufacturing overhead due to our higher sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses increased from $4,586,000 in the three month period ended March 27,
1999, to $5,681,000 for the three month period ending April 1, 2000. As a
percentage of revenue, selling, general and administrative expenses increased
slightly to 30% of revenues in comparison to 29% of revenues in the year prior.
Selling, general, and administrative costs were impacted by increased legal
costs associated with litigation surrounding the Dynamic Cooling Device as well
as spending for larger sales and marketing staffs over the same period a year
earlier. For the nine month period ended April 1, 2000, selling, general and
administrative expenses
14
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
amounted to $15,809,000, an increase over expenses of $12,131,000 incurred a
year earlier. This increase is primarily a result of the increased litigation
costs as well as an increase in marketing and sales staff, including costs for
our Osaka, Japan sales office which was not operational in the same period a
year earlier. Selling, general and administrative expenses were 30% of revenues
for both of the nine month periods ended April 1, 2000 and March 27,1999,
respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending increased to
$1,432,000 for the three months ended April 1, 2000, compared to $933,000 for
the same period one year earlier. For the nine month period ending April 1,
2000, research and development spending increased $1,235,000, to $3,616,000,
from $2,381,000 in the same period a year earlier. Research and development
spending increased due to the cost of developing our new vascular laser system,
the Vbeam-TM-, as well as an overall increase in our research and development
staff.
RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2,609,000 resulting from management's decision to close the skin care center
located in Scottsdale, Arizona. For the nine month period ended April 1, 2000, a
total of $362,000 was charged against this reserve, representing costs
associated with the Scottsdale facility. $126,000 of these costs were charged
against the reserve in the current quarter. We continue 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.
OTHER INCOME/EXPENSE. Net other income and expense was $320,000 in income for
the three months ended April 1, 2000, in comparison to expenses of $128,000 for
the same period a year earlier. For the nine month period ended April 1, 2000,
net other income and expense amounted to $833,000 in income in comparison to
$226,000 in expenses for the same period a year earlier. These increases in
other income resulted primarily from increased interest income resulting from a
higher level of invested cash during the period.
INCOME TAXES. The provision for income taxes results from a combination of
activities including both the domestic and foreign subsidiaries of the Company.
The provision for income taxes for the nine months ended April 1, 2000, reflects
a reduction of the valuation allowance against the deferred tax asset in the
amount of $2,393,000, of which $798,000 was recognized in the current quarter.
The total provision for income taxes includes tax provisions calculated in Japan
and Spain at rates in excess of the U.S. statutory tax rate. We had deferred tax
assets of $4,214,000 at the beginning of the current fiscal year. A valuation
allowance had then been provided against the deferred tax asset in the amount of
$3,114,000, leaving a net deferred tax asset of $1,100,000. The valuation
allowance has been reduced by $2,393,000 in the current year effectively
increasing the net deferred tax asset to $3,493,000. The effective tax rate for
the year is expected to be approximately 20%, in comparison to 24% for fiscal
1999, due to anticipated reductions in the valuation allowance. It is expected
that the valuation allowance will be fully utilized during the current fiscal
year.
15
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $2,915,000 for the nine months
ended April 1, 2000, in comparison to $6,460,000 for the same period a year
earlier. The decrease reflects improved profitability in the period offset by a
reduction in our accounts payable, an increase in our accounts receivable, as
well as increased payments for income taxes and accrued payroll. Cash used for
investing activities totaled $468,000 for the nine months ended April 1, 2000,
compared to proceeds of $181,000 for the same period in the prior year. Cash
provided by financing activities amounted to $20,780,000 in comparison to cash
used for financing activities of $299,000 for the same period a year earlier.
This reflects the receipt of proceeds from the issuance of common stock
amounting to $21,425,000 primarily resulting from our July, 1999 stock offering.
Cash and cash equivalents at April 1, 2000, increased by $22,874,000 to
$32,929,000 from $10,055,000 at July 3, 1999, due principally to cash received
in our stock offering completed in July, 1999.
We completed a public offering in July, 1999 of 3,645,000 shares of common
stock, of which 2,249,781 shares were sold by us and 1,395,219 shares were sold
by certain selling shareholders. $19,805,573 of proceeds was received by the
Company from the sale of its shares in cash after underwriting discounts upon
completion of the offering. We incurred approximately $585,000 of issuance costs
in conjunction with the offering, of which $411,796 were paid in the current
fiscal year.
In relation to our eight-year, 9.75% subordinated notes, a total of $136,000 has
been accreted to the notes through April 1, 2000, resulting in a long-term
liability balance of $3,001,000 at quarter end. A total of $71,000 of interest
expense has been recorded in the current fiscal year, of which $24,000 was
recorded in the three month period ended April 1, 2000.
On November 23, 1999, the Board of Directors approved an open market stock
repurchase program that enables us to purchase up to 750,000 shares of its
common stock. The program is in effect for two years, from December 13, 1999 to
December 12, 2001, and may be suspended or discontinued by the Board at any
time. All such purchases will be transacted on the Nasdaq Stock Market at
prevailing open market prices and will be paid for with general corporate funds.
Any such purchases will be accounted for at cost and held as treasury stock.
On December 1, 1999, our revolving bank line of credit expired. No borrowings
were outstanding at the time of expiration.
On January 12, 2000, our Board of Directors approved a 3-for-2 stock split,
payable in the form of a 50% stock dividend. All shareholders of record at the
close of business on January 28, 2000 received one additional share for every
two shares of common stock owned.
16
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board "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. Originally, the statement had been effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities", which postponed
the adoption of SFAS 133 until fiscal years beginning after June 15, 2000. As
such, the Company plans to implement SFAS 133 for our fiscal year 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company will adopt SAB
101 as required in the first quarter of fiscal year 2001 and is currently
assessing the impact, if any, on its consolidated results of operations and
financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
YEAR 2000 READINESS DISCLOSURE STATEMENT
We have executed a plan designed to make our products, information technology
systems and equipment Year 2000 ready. To date, we have experienced no
significant problems in our products, business interruptions or material adverse
effects from the Year 2000 issue. However, we could still experience material
unanticipated problems and costs caused by undetected errors or defects from the
Year 2000 issue. We cannot guarantee that our Year 2000 readiness plan has been
successfully implemented, and actual results could still differ materially from
our plan.
CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
including, without limitation, statements concerning the future of the industry,
product development, business strategy (including the possibility of future
acquisitions), anticipated operational and capital expenditure levels, continued
17
<PAGE>
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
acceptance and growth of our products, and dependence on significant customers
and suppliers. This Quarterly Report on Form 10-Q 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," "intend", "continue" or other
similar expressions. These statements discuss future expectations, and may
contain projections of results of operations or of financial condition or state
other forward-looking information. 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 "Cautionary Statements" in our annual
report filed on Form 10-K dated October 1, 1999, as well as other risks and
uncertainties referenced in this Quarterly Report. These risks include, but are
not limited to, the following:
o Our dependence on GentleLASE increases our susceptibility to competitive
changes in the marketplace.
o Our exclusive rights to the DCD technology could become non-exclusive
because our amended license agreement requires us to make commercially
reasonable efforts to conclude the sublicense agreements with third
parties, or we could lose rights to the DCD technology altogether if a
court challenge to the underlying patent is successful.
o Because we derive more than half of our revenue from international sales,
we are susceptible to currency fluctuations, negative economic changes
taking place in foreign marketplaces, and other risks associated with
conducting business overseas.
o The failure to obtain alexandrite rods for the GentleLASE and ALEXlazr from
our sole supplier would impair our ability to manufacture and sell these
laser systems, which accounted for more than half or our revenue in recent
periods.
o The cost of closing our skin care centers may be higher than management has
estimated to date, and higher actual costs would negatively impact our
operating results.
o Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing and
selling some of our products or require us to incur substantial costs from
litigation or development of non-infringing technology.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At April 1, 2000, the Company held foreign currency forward contracts with
notional value totaling approximately $5,375,000 compared to forward contracts
with a value of $1,914,000 held at March 27, 1999. The present contracts have
maturity dates prior to August 14, 2000. The carrying and net fair value of
these contracts at April 1, 2000, was $0 and ($65,000), respectively, compared
to $0 and $14,000 respectively, at March 27, 1999.
18
<PAGE>
CANDELA CORPORATION
PART II OTHER INFORMATION
ITEM 1 -- 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 of 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 sought 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 included various tort claims against us and contract-related
claims against The Regents and Beckman. The complaint asserted that we
interfered with the licensing of the dynamic cooling technology to the
plaintiffs. The complaint sought unspecified general, special, punitive and
exemplary damages plus costs and attorneys' fees against us as well as the
"disgorgement" of any benefit received by us 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. Both we and The Regents
moved to dismiss the complaint. On August 27, 1999, the court granted in part
both our and The Regents motion, but gave New Star Lasers permission to file
an amended complaint. On October 25, 1999, New Star Lasers filed a second
amended complaint, to which we filed an answer denying New Star's material
allegations and raising several affirmative defenses. We believe that an
adverse outcome of the New Star Lasers' tort claims against us 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 Dynamic Cooling Device ("DCD") was developed is invalid and
unenforceable, our rights to the DCD technology pursuant to the license
agreement could no longer be proprietary, which 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. On
or about February 2, 2000 the Company reached an agreement in principle
conditionally to settle New Star's claims against the Company. In connection
with this agreement, on February 2, 2000, we granted New Star a sublicense to
the use of the DCD technology for certain laser systems that New Star
manufactures. Pursuant to the parties' settlement in principle, New Star will
dismiss the claims it has asserted against us. Both the sublicense and
settlement of the litigation are contingent on a favorable outcome to our
arbitration against The Regents, which is described below. In light of the
conditional settlement of our arbitration against The Regents (described
below), Candela and The Regents are currently engaged in negotiations to
obtain a global resolution of New Star's claims against Candela and The
Regents.
By letter dated September 17, 1999, The Regents purported to give us notice of
alleged default under the parties' exclusive license agreement, as amended ("the
Agreement") on the grounds (1) that we had failed to make necessary royalty
payments to The Regents pursuant to the Agreement; and (2) that we had not
complied with our sublicensing obligations under the Agreement. The Regents
informed us that we had sixty days in which to cure the alleged defaults. We
maintain and have informed The Regents that we are in full compliance with each
of the terms of the Agreement, including with respect to our royalty payments to
The Regents and our sublicensing efforts. On September 29, 1999, we commenced an
arbitration before the American Arbitration Association ("AAA") against The
Regents in which we sought a declaration that we are not in default of any of
our obligations under the Agreement. On October 27, 1999, The Regents issued
another notice by which it purported to terminate our rights to sublicense the
DCD technology. This notice is also the subject of the AAA arbitration. On
November 9, 1999, the arbitrator issued an interim order of protection
prohibiting The Regents from issuing a notice of termination or licensing the
DCD technology to any third party until ten days after the award of judgment in
the arbitration. Proceedings in the arbitration have been stayed in light of the
parties conditional settlement agreement (described below). In the event that
settlement agreement becomes null and void, an arbitration hearing is likely to
be scheduled to occur in or
19
<PAGE>
CANDELA CORPORATION
PART II, ITEM 1 - LEGAL PROCEEDINGS (CONTINUED)
after July 2000. We believe that an adverse outcome of the arbitration with
The Regents could have a material adverse effect on our operations and
financial condition, including losing our rights to the DCD technology and/or
being required to pay substantially higher future and historical royalty
payments to The Regents for the use of the DCD technology. Also on October
27, 1999, The Regents sent us another notice of default arising out of its
claim that we have refused to indemnify The Regents in connection with the
New Star litigation. The notice gave us sixty days to cure the alleged
default. We intend to contest this notice of default. Should we not cure the
alleged default or not be successful in challenging the alleged default,
there could be a material adverse effect on our operations and financial
condition, including losing our rights to the DCD technology. In response to
the second October 27, 1999 notice of default, we commenced a declaratory
judgment action against The Regents in a Massachusetts Superior Court. The
Regents removed the case to the United States District Court for the District
of Massachusetts. On or about December 23, 1999, the parties filed a
stipulation and joint motion requesting that the action be stayed on account
of any alleged failure to indemnify The Regents until conclusion of the
arbitration. The Court granted the parties' motion on December 29, 1999. On
February 18, 2000, after a mediation, Candela and The Regents concluded a
confidential, conditional settlement of the arbitration pursuant to which the
parties agreed to clarify the royalty terms of the Agreement, and that The
Regents will be permitted to grant further licenses to DCD technology,
subject to the minimum terms and royalty sharing specified in the Agreement.
The settlement agreement is conditioned upon the resolution of the New Star
litigation (see above) on or before June 18, 2000. In the event the New Star
litigation is not resolved during that period, the settlement agreement with
The Regents will become null and void, and the parties will proceed to
arbitration.
From time to time, we are a party to various legal proceedings incidental to our
business. We believe that none of such other presently pending legal proceedings
will have a material adverse effect upon our financial position, results of
operation, or liquidity.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1, Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on March 28, 2000 pertaining to the Company's
change in independent auditors.
A Form 8-K was filed on April 21, 2000 in regard to the Company's
3-for-2 stock split.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDELA CORPORATION
Registrant
Date: MAY 15, 2000 /S/ GERARD E. PUORRO
------------ ------------------------------------------------------
Gerard E. Puorro
(President and Chief Executive Officer)
Date: MAY 15, 2000 /S/ F. PAUL BROYER
------------ ------------------------------------------------------
F. Paul Broyer
(Senior Vice President of Finance and Administration,
Chief Financial Officer and Treasurer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from SEC Form 10Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> JUL-01-2000 JUL-03-2000 JUL-01-2000 JUL-03-1999
<PERIOD-END> APR-01-2000 MAR-27-1999 APR-01-2000 MAR-27-1999
<CASH> 32,929 8,059 32,929 8,059
<SECURITIES> 0 0 0 0
<RECEIVABLES> 18,097 10,775 18,097 10,775
<ALLOWANCES> 1,215 854 1,215 854
<INVENTORY> 8,071 6,809 8,071 6,809
<CURRENT-ASSETS> 60,762 27,545 60,762 27,545
<PP&E> 8,127 7,608 8,127 7,608
<DEPRECIATION> 5,554 5,075 5,554 5,075
<TOTAL-ASSETS> 67,095 30,448 67,095 30,448
<CURRENT-LIABILITIES> 19,821 16,567 19,821 16,567
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 114 55 114 55
<OTHER-SE> 44,142 10,855 44,142 10,855
<TOTAL-LIABILITY-AND-EQUITY> 67,095 30,448 67,095 30,448
<SALES> 19,207 15,884 53,026 39,881
<TOTAL-REVENUES> 19,647 15,873 54,223 40,032
<CGS> 7,785 6,820 22,356 18,993
<TOTAL-COSTS> 7,785 6,820 22,356 18,993
<OTHER-EXPENSES> 7,113 5,519 19,425 14,512
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 120 136 364 377
<INCOME-PRETAX> 4,629 3,377 12,078 6,150
<INCOME-TAX> 972 1,470 2,462 1,940
<INCOME-CONTINUING> 3,657 1,907 9,616 4,210
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 3,657 1,907 9,616 4,210
<EPS-BASIC> 0.33 0.23 0.90 0.51
<EPS-DILUTED> 0.30 0.21 0.82 0.48
</TABLE>
