UNITED STATES
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 quarterly period ended September 27, 2003.

 

Commission file number 000-14742

 

CANDELA CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

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  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

Yes  o  No  ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

CANDELA CORPORATION

Index

 

Part I.	Financial Information:
	Item 1.	Unaudited Condensed Consolidated Balance Sheets as of September 27, 2003 and June 28, 2003
		Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended September 27, 2003 and September 28, 2002
		Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended September 27, 2003 and September 28, 2002
		Notes to Unaudited Condensed Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Cautionary Statements
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk
	Item 4.	Controls and Procedures
Part II.	Other Information:
	Item 1.	Legal Proceedings
	Item 6.	Exhibits and Reports on Form 8-K

 

2

 

Part I.  Financial Information

Item 1 - Financial Statements

 

CANDELA CORPORATION

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

 

		September 27, 2003			June 28, 2003
					(Restated)
Assets
Current assets:
Cash and cash equivalents		$	30,146		$	31,870
Accounts receivable, net		26,065			26,572
Notes receivable		1,198			1,086
Inventories, net		12,033			10,834
Other current assets		947			658
Total current assets		70,389			71,020
Property and equipment, net		3,170			3,327
Deferred tax assets		5,032			4,760
Prepaid licenses		1,184			1,228
Other assets		172			166
Total assets		$	79,947		$	80,501
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	5,185		$	5,271
Accrued payroll and related expenses		2,762			4,656
Accrued warranty costs		4,022			3,628
Income taxes payable		1,746			3,528
Other accrued liabilities		3,141			2,755
Deferred income		2,866			2,779
Current liabilities of discontinued operations		1,975			1,095
Total current liabilities		21,697			23,712
Other long-term liabilities		2,593			3,393
Long-term liabilities of discontinued operations		2,536			48
Total liabilities		26,826			27,153
Stockholders’ equity:
Common stock		130			129
Additional paid-in capital		49,008			48,479
Accumulated earnings		17,300			17,904
Treasury stock, at cost		(12,997		)	(12,997		)
Accumulated other comprehensive loss		(320		)	(167		)
Total stockholders’ equity		53,121			53,348
Total liabilities and stockholders’ equity		$	79,947		$	80,501

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

3

 

CANDELA CORPORATION

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

		For the three months ended:
		September 27, 2003			September 28, 2002
					(Restated)
Revenue
Lasers and other products		$	15,357		$	10,488
Product-related service		3,329			2,757
Total revenue		18,686			13,245
Cost of sales
Lasers and other products		7,630			4,605
Product-related service		1,743			1,996
Total cost of sales		9,373			6,601
Gross profit		9,313			6,644
Operating expenses:
Selling, general and administrative		5,403			4,610
Research and development		1,076			866
Total operating expenses		6,479			5,476
Income from operations		2,834			1,168
Other income (expense):
Interest income		79			75
Interest expense		(4		)	(106		)
Other income ,net		32			342
Total other income, net		107			311
Income from continuing operations before income taxes		2,941			1,479
Provision for income taxes		1,152			532
Income from continuing operations		1,789			947
Discontinued operations:
Loss from discontinued Skin Care Center operations of $473 and $331, less income tax benefit of $175 and $119, respectively		(298		)	(212		)
Loss on closure of Skin Care Center, of $3,348 less income tax benefit of $1,253		(2,095		)	—
		(2,393		)	(212		)
Net (loss) income		$	(604	)	$	735
Net income (loss) per share of common stock:
Basic:
Income from continuing operations		$	0.17		$	0.10
Loss from discontinued operations		(0.23		)	(0.02		)
Net (loss) income		$	(0.06	)	$	0.08
Diluted:
Income from continuing operations		$	0.16		$	0.10
Loss from discontinued operations		(0.21		)	(0.02		)
Net (loss) income		$	(0.05	)	$	0.08
Weighted average shares outstanding		10,694			9,644
Adjusted weighted average shares outstanding		11,094			9,782

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

4

 

CANDELA CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		For the three months ended:
		September 27, 2003			September 28, 2002
					(Restated)
Cash flows from operating activities:
Net (loss) income		$	(604	)	$	735
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Provision for the disposal of discontinued operations		2,095			—
Depreciation and amortization		159			201
Provision for bad debts		(28		)	26
Effect of exchange rate changes on foreign currency denominated assets and liabilities		9			(32		)
Accretion of debt discount		—			(5		)
Increase (decrease) in cash from working capital:
Accounts receivable		(21		)	2,974
Notes receivable		(16		)	599
Inventories		(1,027		)	(1,287		)
Other current assets		(272		)	(510		)
Other assets		62			42
Accounts payable		60			(2,566		)
Accrued payroll and related expenses		(1,935		)	(759		)
Deferred revenue		42			(758		)
Accrued warranty costs		392			(130		)
Income taxes payable		(711		)	509
Long-term portion of deferred revenue		(795		)	(4		)
Loss from discontinued operations		298			212
Other accrued liabilities		324			(378		)
Net cash used for operating activities		(1,968		)	(1,131		)
Cash flows from investing activities:
Purchases of property and equipment		(17		)	(55		)
Net cash used for investing activities		(17		)	(55		)
Cash flows from financing activities:
Principal payments of long-term debt		—			(185		)
Proceeds from the issuance of common stock		531			70
Net cash provided by (used for) financing activities		531			(115		)
Effect of exchange rates on cash and cash equivalents		(270		)	72
Net decrease in cash and cash equivalents		(1,724		)	(1,229		)
Cash and cash equivalents at beginning of period		31,870			19,657
Cash and cash equivalents at end of period		$	30,146		$	18,428

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

5

 

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 year 2003, which should be read in conjunction with these financial statements.  The financial information included herein is unaudited, with the exception of the condensed consolidated balance sheet as of June 28, 2003, which was derived from the audited consolidated balance sheet dated June 28, 2003.  However, in the opinion of management, the statements include all necessary adjustments, consisting of normal recurring accruals, for a fair presentation of the quarterly results and are prepared and presented in a manner consistent with the Company’s Annual Report on Form 10-K. The results for the three month period ended September 27, 2003 are not necessarily indicative of the results to be expected for the full year.

 

2.                   Discontinued Operations

 

On September 27, 2003 management initiated a plan to close its only remaining skin care center. The closure is accounted for as a discontinued operation in accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities”. As a result, in the fiscal quarter ended September 27, 2003 the Company has recorded a $2,095 charge for the accrual of $3,000 of future occupancy costs, primarily relating to future lease payments for the Boston facility, and $348 of severance obligations and other related costs of closure, net of anticipated tax benefits of $1,253. Approximately 45 positions have been eliminated as a result of this restructuring plan, of which 43 employees have been terminated as of September 27, 2003. In addition, all prior period financial statements have been restated to reflect skin care centers operations as discontinued.

 

Prior to fiscal 2002, the Company recorded combined restructuring charges of $3,721 resulting from management’s decision to close the skin care center located in Scottsdale, Arizona. During the three month-period ended December 29, 2001, the Company secured a sublease for the Scottsdale facility.  The sublessee commenced making payments to the landlord on behalf of the Company on April 1, 2002.

 

As a result of the sublease, the Company revised the estimate of future costs associated with the Scottsdale facility and, in the quarter ended March 30, 2002, reversed $693,000 of the restructuring reserve which represents primarily the amount of future contractual sublease payments as well as revisions to the net realizable value of certain leasehold improvements.

 

The following table reflects the combined restructuring charges incurred in the most recent quarter (in thousands):

 

(in thousands)		Payroll and Severance			Leasehold Improvements and Fixed Assets			Facility Costs			Total
Balance at June 28, 2003		$	50		$	304		$	25		$	379
Reduction of reserve due to cash payments		(19		)							(19		)
Non-cash amortization relating to the Scottsdale reserve		(17		)	(26		)				(43		)
Additions to reserve due to the closure of the Boston Facility		139			124			3,085			3,348
Balance at September 27, 2003		$	153		$	402		$	3,110		$	3,665

 

For the quarter ended September 27, 2003, the Company accrued $3,348 of costs anticipated for the closing of the remaining spa center. Additionally, the reserve was reduced by $62 in costs associated with the Scottsdale facility.

 

6

 

2.                   Discontinued Operations, continued

 

Revenue for discontinued operations for the three months ended September 27, 2003 and September 28, 2002, was $415, and $558, respectively. The net liability at September 27, 2003 of $4,511 consists primarily of the restructuring reserve of $3,665, and deferred gift certificate revenue of $1,169. The net liability at June 28, 2003 of $1,143 consists primarily of deferred gift certificate revenue of $1,201, and the restructuring reserve of $379, partially offset by cash deposits of $96 and inventory of $93.

 

3.                   Stock-based Compensation

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 requires the disclosure of the effects of a company’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” by providing alternative methods of transition to the fair-value method of accounting for stock-based employee compensation under SFAS No. 123. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting” to require disclosure of the effects of a company’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. In accordance with SFAS No. 148, the Company has adopted the disclosure-only provision of SFAS No. 123 and the enhanced disclosures as required by SFAS No. 148.

 

Had compensation cost for the Company’s stock plans been determined consistent with SFAS No. 123, the Company’s net gain (loss) would have been as follows:

 

		For the three months ended:
(in thousands, except share and per share data)		September 27, 2003			September 28, 2002
Net (loss) income, as reported		$	(604	)	$	735
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects Stock options		(363		)	(332		)
Pro forma net income (loss)		$	(967	)	403
Earnings (loss) per share:
Basic—as reported		$	(0.06	)	$	0.08
Basic—pro forma		$	(0.09	)	$	0.04
Diluted—as reported		$	(0.05	)	$	0.08
Diluted—pro forma		$	(0.09	)	$	0.04

 

In computing this pro-forma amount the Company has used the Black-Scholes pricing model using the following assumptions for options granted in fiscal years 2004 and 2003:

 

		2004		2003
Risk-free interest rate		4.25	%	4.25	%
Estimated volatility		76	%	78	%
Expected life for stock options (yrs)		2.99		3.65
Expected life for stock purchase plan (yrs)		0.5		0.5
Expected dividends		—		—

 

7

 

4.                   Earnings Per Share

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period and, if there are dilutive securities, diluted earnings per share is computed by including common stock equivalents outstanding for the 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.

 

		For the three months ended:
(in thousands, except share and per share data)		September 27, 2003			September 28, 2002
Basic shares used in the calculation of earnings per share		10,694			9,644
Effect of dilutive securities:
Stock options		375			68
Stock warrants		25			70
Diluted shares used in the calculation of earnings per share		11,094			9,782
Per share effect of dilutive securities on income from continuing operations		$	0.01		$	0.0
Per share effect of dilutive securities on net income		$	0.01		$	0.0

 

During the three month period ended September 27, 2003 all options to purchase shares of common stock were included in the computation of diluted earnings per share. During the three month period ended September 28, 2002, 381,264 options to purchase shares of common stock were excluded from the calculation of diluted earnings per share because the exercise price of such options was greater than the average market price of the common stock for the period.

 

5.                   Comprehensive Income (Loss)

 

Components of comprehensive income (loss) include net income (loss) and certain transactions that have generally been reported in the consolidated statement of stockholders’ equity.

 

		For the three months ended:
(in thousands)		September 27, 2003			September 28, 2002
Net (loss) income		$	(604	)	$	735
Foreign currency translation adjustment		(153		)	8
Total comprehensive (loss) income		$	(757	)	$	743

 

8

 

6.                   Inventories

 

(in thousands)		September 27, 2003			June 28, 2003
					(restated)
Raw materials		$	4,284		$	4,123
Work in process		533			469
Finished goods		7,216			6,242
		$	12,033		$	10,834

 

7.                   Segment Information

 

The Company operates principally in one industry segment: the design, manufacture, sale, and service of medical devices and related equipment. The results in this segment have been presented in the Consolidated Statements of Operations for the appropriate periods.

 

8.                   Guarantees

 

The Company’s products generally carry a standard one-year warranty, except for Vbeam products which typically carry a three-year warranty. The Company sets aside a reserve based on anticipated warranty claims at the time product revenue is recognized. In anticipation of actual warranty claims, the Company amortizes the reserve ratably over the life of the warranty, thereby offsetting actual warranty claims incurred. Actual warranty claims incurred and charged to product costs of sales during an interim period may be more or less than the amount of amortized warranty reserve allocated against them. Factors that affect the Company’s product warranty liability include the number of installed units, the anticipated cost of warranty repairs and historical and anticipated rates of warranty claims.

 

The following table reflects changes in the Company’s accrued warranty account during the three-month period ended September 27, 2003:

 

(in thousands)
Beginning Balance June 28, 2003		$	6,666
Plus accruals related to new sales		1,226
Less amortization of prior period accruals		(1,271		)
Ending Balance on September 27, 2003		$	6,621

 

The Company also offers extended service contracts that may be purchased after a standard warranty has expired. Service contracts may be purchased for periods from one to five years. The Company recognizes service contract revenue ratably over the life of the contract. Actual service contract expenses incurred and charged to service costs of sales during an interim period may be more or less than the amount of amortized service contract revenue recognized in that period.

 

9

 

The following table reflects changes in the Company’s deferred revenue account during the three-month period ended September 27, 2003:

 

(in thousands)
Beginning balance June 28, 2003		$	3,086
Plus deferral of new service contract sales		1,558
Less recognition of deferred revenue		(1,778		)
Ending balance on September 27, 2003		$	2,866

 

The Company has an agreement (the “Agreement”) with an independent leasing company whereby the Company will purchase delinquent leases (the “UNL Provision”) relating to Company products purchased by customers and financed through the leasing company.  The Company is required to honor the UNL Provision when the leasing company’s aggregate losses reach levels specified in the Agreement.  The UNL Provision of the Agreement was recently eliminated for any lease initiated after December 31, 2002.  Since the inception of the Agreement, the cumulative amounts paid to the leasing company under the UNL Provision have not been significant.

 

9.                   Asset Acquisition

 

On January 8, 2003, the Company acquired substantially all of the assets of Applied Optronics, the diode division of Schwartz Electro-Optics, Inc., for approximately $1,200 in cash. Applied Optronics was a leading manufacturer of high-powered, pulsed and CW lasers, and was a component supplier to the OEM market that serves a variety of industries including the military, medical, industrial, research and robotics fields. Applied Optronics was the lead supplier of the diodes for the Company’s Smoothbeam™ diode laser system. In accordance with SFAS No. 141 “Business Combinations,” the Company records acquisitions under the purchase method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values.

 

The asset acquisition consisted primarily of fixed assets, including production and office equipment, and inventory located at the division’s facility in New Jersey. The acquisition increased the Company’s net Property and Equipment by approximately $800 and Inventory by approximately $400. For the period from June 29, 2003 to September 27, 2003, the Applied Optronics operation generated approximately $145 in revenue from diode sales to third-party customers.

 

10

 

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 sale of diodes to other manufacturers.  Over half of our revenue in recent periods has come from international sales.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventories, warranty obligations, contingencies, restructurings and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in the Annual Report on Form 10-K of the Company for fiscal year 2003.

 

11

 

Results of Operations

 

Revenue.

 

Revenue source by geography is reflected in the following table:

 

		Three months ended:
(in thousands)		September 27, 2003					September 28, 2002					Change
US revenue		$	7,852		42	%	$	5,556		42	%	$	2,296		41	%
Foreign revenue		10,834			58	%	7,689			58	%	3,145			41	%
Total revenue		$	18,686		100	%	$	13,245		100	%	$	5,441		41	%

 

Revenue increased by $5,441, or 41% during the three month period ended September 27, 2003, compared to the three month period ended September 28, 2002, due primarily to an increase in the worldwide demand for the Company’s technology related to the volume increase in our GentleLase of $3,012, smoothbeam of $872 and service related revenue of $572. US revenue increased $2,296, or 41%, while overseas revenue increased $3,145, or 41%.

 

Revenue source by type is reflected in the following table:

 

		Three months ended
(in thousands)		September 27, 2003					September 28, 2002					Change
Revenue
Lasers and other products		$	15,357		82	%	$	10,488		79	%	$	4,869		46	%
Product-related service		3,329			18	%	2,757			21	%	572			21	%
Total revenue		$	18,686		100	%	$	13,245		100	%	$	5,441		41	%

 

The increase in laser product revenue for the three month period ended September 27, 2003, compared to the three month period ended September 28, 2002, resulted from an increase in the sales volume of both our GentleLase™ and Smoothbeam™ product lines. The GentleLase™ contributed approximately $3,012, and the Smoothbeam™ contributed approximately $872 to this increase in revenue. Product related service increased $572 during the quarter due to more service related contracts.

 

Gross Profit.  Gross profit was $9,313 or 50% of revenues for the three month period ended September 27, 2003, compared to gross profit of $6,644 or 50% for the same period one year earlier. This increase in gross profit results principally from the increase in sales volume of both our GentleLase™ and Smoothbeam™ product lines.

 

Selling, General and Administrative Expense.  Selling, general and administrative expenses increased from $4,610 in the three month period September 28, 2002, to $5,403 for the three month period ending September 27, 2003. This increase was primarily due to increased legal and accounting fees of approximately $300, and higher commission payments and employee-related expenses of $360 as compared to the year-earlier figures.

 

Research and Development Expense.   Research and development spending increased from $866 for the three-month period ended September 28, 2002 to $1,076 for the three-month period ended September 27, 2003 due primarily to an increased number of active programs.

 

12

 

Other Income/Expense.  Net other income was $107 for the three months ended September 27, 2003, compared to income of $311 for the three months ended September 28, 2002.  This decrease in other income resulted from the absence of a Q1, 2003 royalty payment of $322 offset by a decrease in interest expense of approximately $100.  The royalty payment related to royalties earned since August 2000 from the Company’s August 11, 2000 settlement agreement with the Regents of the University of California and New Star Technology, Inc.  No further receipts are due under this agreement at the present time.

 

Income Taxes. The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries of the Company.  We recorded a 31.5% tax benefit for the period ended September 27, 2003, compared to the three month period ended September 28, 2002, in which we recorded a 36% tax rate.   The provision for income taxes for the three months ended September 27, 2003, differs from the U.S. statutory rate as a result of a tax provision calculated for income generated in Japan and Spain at rates in excess of the U.S. statutory rate and a benefit for the deduction related to the extraterritorial income exclusion.  The provision for income taxes at a 31.5% rate for the three month period ending September 27, 2003, differs from the provision for income taxes at a 36% rate for the three month period ended September 28, 2002, primarily due to an increase in net income derived from European operations and a net decrease in income derived from operations in Japan.

 

Discontinued Operations

 

During the quarter, the Company permanently closed its only remaining skin care center, which was located in Boston. The closure of the Boston spa, together with the earlier closing of the Company’s Scottsdale, Arizona spa, and the associated cessation of this line of business, is accounted for as discontinued operations. As a result of the closure of the Boston Skin care center, in the fiscal quarter ended September 27, 2003, the Company recorded a $2,095 charge for the accrual of $3,000 of future occupancy costs and $348 of severance obligations and other related costs of closure, net of anticipated tax benefits of $1,253. In addition, both the financial statements for the three months ended September 27, 2003 and all prior financial statements have been restated to reflect skin care center operations as discontinued. While the building landlord has given the Company written notice that it believes the Company is in default under the lease, the Company has indicated that it plans to honor all of its obligations under the lease. The Company believes that the size of the accrual that it has established is sufficient to cover all future leasehold expenses for the remainder of the lease term. Leasehold expenses could potentially be mitigated if the landlord elects to relet or sublease the property.

 

13

 

Liquidity and Capital Resources

 

Cash used by operating activities amounted to $1,968 for the three months ended September 27, 2003, in comparison to cash used by operating activities in the amount of $1,131 for the same period one year earlier. This increase in cash used for the three-month period ended September 27, 2003 compared to the same period a year earlier primarily reflects the payment of income taxes during the current year.  Cash used by investing activities totaled $17 for the three months ended September 27, 2003, compared to $55 for the same period in the prior year.  This change reflects less cash used to support the Oracle software implementation. Cash provided by for financing activities amounted to $531 in comparison to cash used of $115 for the same period a year earlier.  The change in cash provided by financing primarily reflects net proceeds from the issuance of stock coupled with the absence of long-term debt during the current year.

 

On November 8, 2002, we paid in full the outstanding principal and accrued interest of our 9.75% subordinated notes (the “Notes”) totaling $2,990,463 plus an early redemption premium of $236,800. As a result of the payment, the Company will have no future principal or interest payments relating to the Notes.

 

Outstanding contractual obligations of the Company are reflected in the following table:

 

(in thousands)

 

		Total			Year 1			Year 2			Year 3			Thereafter
Operating leases		$	4,988		$	1,214		$	1,054		$	915		$	1,805

 

We also maintain a renewable $10,000,000 revolving credit agreement with a major bank with interest at the bank’s base rate, or LIBOR plus 2.25%.  Any borrowings outstanding under the line of credit are due on demand or according to a payment schedule established at the time funds are borrowed.  The line of credit is unsecured.  The agreement contains restrictive covenants limiting the establishment of new liens, and the purchase of margin stock.  No amounts were outstanding under the line of credit as of September 27, 2003.

 

We believe that cash balances will be sufficient to meet anticipated cash requirements for the next twelve months.  However, we cannot be sure that we will not require additional capital beyond the amounts currently forecasted by us, or that any such required additional capital will be available on reasonable terms, if at all, when such capital becomes required.

 

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 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 June 28, 2003, as well as other risks and uncertainties referenced in this Quarterly Report.  These risks include, but are not limited to, the following:

 

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•                  Because we typically 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.

 

•                  The failure to obtain alexandrite rods for certain laser systems from our sole supplier would impair our ability to manufacture and sell these laser systems, which has accounted for a substantial portion of our revenue in certain recent periods.

 

•                  The cost of closing our remaining skin care center may be higher than management has estimated to date, and higher actual costs would negatively impact our operating results.

 

•                  Our failure to respond to rapid changes in technology and intense competition in the laser industry could make our lasers obsolete.

 

•                  Like other companies in our industry, we are subject to a regulatory review process and our failure to receive necessary government clearances or approvals could affect our ability to sell our products and remain competitive.

 

•                  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.

 

•                  Achieving complete compliance with FDA regulations is difficult, and if we fail to comply, we could be subject to FDA enforcement action.

 

•                  Claims by others that our products infringe their patents or other intellectual property rights, or that the patents which we own or have licensed rights to are invalid, 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.

 

•                  We could incur substantial costs as a result of product liability claims.

 

•                  We may be unable to attract and retain management and other personnel we need to succeed.

 

•                  Our failure to manage acquisitions and joint ventures effectively may divert management attention from our core business and cause us to incur additional debt, liabilities or costs.

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

As of September 27, 2003, our cash balances are exposed to interest rate risk.  We are exposed to foreign currency risk due to accounts receivable from our foreign subsidiaries.

 

We have cash equivalents that primarily consist of commercial paper, overnight repurchase agreements and money market accounts.  We believe that any near term changes in interest rates will be immaterial to any potential losses in future earnings, cash flow and fair values.

 

Candela has foreign subsidiaries in Japan, Spain, France and Germany and is exposed to movements in the exchange rate between the Euro, Japanese Yen and the U.S. Dollar.  Sales from the United States direct to customers or distributors in foreign countries are invoiced in U.S. dollars and are not exposed to foreign currency risk.  From time to time, we enter into foreign currency exchange and option contracts to reduce the exposure associated with current transactions and anticipated transactions denominated in foreign currencies.  However, we do not engage in foreign currency speculation.  On September 27, 2003, we did not hold any open foreign currency contracts.

 

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Item 4 - Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of members of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of September 27, 2003 (the “Evaluation Date”).  Based on that evaluation, members of our management, including our Chief Executive Officer and our Chief Financial Officer, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report the information required to be included in this quarterly report within the required time period.

 

Management has taken notice, however, of certain complications we encountered in the process of entering data while implementing a new accounting software system during calendar year 2003 and transitioning from the Company’s prior accounting system. Management has discussed the implementation complications with both the Audit Committee of the Board of Directors of the Company as well as the Company’s independent auditors. The Company’s independent auditors have concluded that the complications encountered with the implementation indicate the existence of a material weakness in internal control. Nevertheless, management believes that despite these implementation issues and the related weakness in internal control, our financial statements and related disclosures, as filed to date, present fairly, in all material respects, our financial condition and results of operations for the respective periods. We also believe that this weakness has not adversely affected our ability to report, in a timely manner, material information required to be included in our periodic filings with the Securities and Exchange Commission. We believe as well that we have taken the steps necessary to prevent such data entry issues from occurring in the future.

 

(b) Changes in internal controls. Except for implementing additional controls to address the data entry implementation complications discussed above, there have been no changes in our internal controls during our first fiscal quarter that have materially affected, or are reasonably likely to affect, our internal controls.

 

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CANDELA CORPORATION

 

Part II.  Other Information

 

Item 1 - Legal Proceedings

 

From time to time, we are a party to various legal proceedings incidental to our business. We believe that none of the legal proceedings which are presently pending will have a material adverse effect upon our financial position, results of operations, or liquidity.

 

ITEM 6 - Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

Exhibit 31.1		Rule 13A-14(a)/15d-14(a) Certification of the Chief Executive Officer
Exhibit 31.2		Rule 13A-14(a)/15d-14(a) Certification of the Chief Financial Officer
Exhibit 32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)                                 Reports on Form 8-K

 

On October 28, 2003, Candela Corporation announced its financial results for the first quarter 2004.  A copy of Candela Corporation’s first quarter results are attached to the filing as Exhibit 99.1.

 

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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:		November 10, 2003			/s/ Gerard E. Puorro
					Gerard E. Puorro
					(President and Chief Executive Officer)
Date:	November 10, 2003				/s/ F. Paul Broyer
					F. Paul Broyer
					(Senior Vice President, Finance and Administration and Chief Financial Officer)

 

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