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 April 2, 2005.

 

Commission file number 000-14742

 

CANDELA CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		04-2477008
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
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 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 ý  No  o

 

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.	Financial Statements Unaudited Consolidated Balance Sheets as of April 2, 2005 and July 3, 2004	3
		Unaudited Consolidated Statements of Operations for the three-month periods ended April 2, 2005 and March 27, 2004, and for the nine-month periods ended April 2, 2005 and March 27, 2004	4
		Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended April 2, 2005 and March 27, 2004	5
		Notes to Unaudited Consolidated Financial Statements	6-11
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-18
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	18
	Item 4.	Controls and Procedures	18
Part II.	Other Information:
	Item 1.	Legal proceedings	19
	Item 6.	Exhibits	19
	Signatures
	Index to Exhibits

 

2

 

Part I.  Financial Information

 

Item 1 - Financial Statements

 

CANDELA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(in thousands)		April 2, 2005			July 3, 2004
		(unaudited)
Assets:
Current assets:
Cash and cash equivalents		$	47,302		$	37,139
Restricted cash		225			257
Accounts receivable, net		34,014			34,302
Notes receivable		1,390			1,151
Inventories, net		12,815			13,571
Other current assets		2,171			2,184
Total current assets		97,917			88,604
Property and equipment, net		3,375			3,406
Deferred tax assets		5,661			5,914
Prepaid licenses		922			1,054
Other assets		223			1,501
Total assets		$	108,098		$	100,479
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	9,501		$	6,973
Accrued payroll and related expenses		3,899			5,428
Accrued warranty costs		5,063			4,946
Income taxes payable		1,837			1,844
Other accrued liabilities		4,286			3,586
Deferred income (current portion)		5,050			3,421
Current liabilities of discontinued operations		1,315			1,019
Total current liabilities		30,951			27,217
Other long-term liabilities		5,105			3,945
Long-term liabilities of discontinued operations		546			2,548
Total liabilities		36,602			33,710
Stockholders’ equity:
Common stock		247			246
Treasury stock, at cost		(12,997		)	(12,997		)
Additional paid-in capital		53,569			53,069
Accumulated earnings		30,124			26,023
Accumulated other comprehensive income		553			428
Total stockholders’ equity		71,496			66,769
Total liabilities and stockholders’ equity		$	108,098		$	100,479

 

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

 

3

 

CANDELA CORPORATION

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

		For the three months ended:						For the nine months ended:
		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Revenue
Lasers and other products		$	28,483		$	23,509		$	70,365		$	58,769
Product-related service		6,199			4,141			14,912			11,465
Total revenue		34,682			27,650			85,277			70,234
Cost of sales
Lasers and other products		13,005			11,399			30,391			28,555
Product-related service		4,947			2,273			12,139			6,142
Litigation related charges		4,829			—			4,829			—
Total cost of sales		22,781			13,672			47,359			34,697
Gross profit		11,901			13,978			37,918			35,537
Operating expenses:
Selling, general and administrative		11,281			9,572			27,938			22,793
Research and development		1,910			1,460			4,866			3,951
Litigation related charges		773			—			773			—
Total operating expenses		13,964			11,032			33,577			26,744
Income (loss) from operations		(2,063		)	2,946			4,341			8,793
Other income (expense):
Interest income		162			73			399			228
Interest expense		—			(6		)	—			(13		)
Other income (expense), net		(93		)	(14		)	25			398
Total other income		69			53			424			613
Income (loss) from continuing operations before income taxes		(1,994		)	2,999			4,765			9,406
Benefit (Provision) for income taxes		638			(1,039		)	(1,525		)	(3,215		)
Income (loss) from continuing operations		(1,356		)	1,960			3,240			6,191
Discontinued operations:
Loss from discontinued Skin Care Center operations of $473 less income tax benefit of $175		—			—			—			(298		)
Gain (loss) on closure of skin care center including revision of leasehold obligations of $1,374 and provision of $(3,348) less income tax expense of $(515) and income tax benefit of $1,253		—			—			859			(2,095		)
Net (loss) income		$	(1,356	)	$	1,960		$	4,099		$	3,798
Net income (loss) per share of common stock
Basic:
Income (loss) from continuing operations		$	(.06	)	$	.09		$	.14		$	.28
Gain (loss) from discontinued operations		—			—			.04			(.11		)
Net income		$	(.06	)	$	.09		$	.18		$	.17
Diluted:
Income from continuing operations		$	(.06	)	$	.09		$	.14		$	.27
Gain (loss) from discontinued operations		—			—			.04			(.10		)
Net income		$	(.06	)	$	.09		$	.18		$	.17
Basic weighted average shares outstanding		22,408			22,150			22,366			21,759
Diluted weighted average shares outstanding		22,408			23,016			23,062			22,601

 

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

 

4

 

CANDELA CORPORATION

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		For the nine months ended:
		April 2, 2005			March 27, 2004
Cash flows from operating activities:
Net income		$	4,099		$	3,798
Adjustments to reconcile net income to net cash  provided by (used for) operating activities:
(Revision of) provision for disposal of discontinued operations		(1,374		)	2,095
Depreciation and amortization		556			471
Provision for bad debts		908			754
Effect of exchange rate changes on foreign currency  denominated assets and liabilities		(35		)	15
Increase (decrease) in cash from working capital:
Accounts receivable		(632		)	(5,549		)
Notes receivable		(571		)	596
Inventories		976			(4,430		)
Other current assets		1,072			(827		)
Other assets		373			(278		)
Accounts payable		2,268			(503		)
Accrued payroll and related expenses		(1,540		)	(960		)
Deferred revenue		1,598			408
Accrued warranty costs		98			1,226
Income taxes payable		229			(665		)
Long term portion of deferred revenue		1,146			(693		)
Loss from discontinued operations		—			298
Other accrued liabilities		710			1,111
Change in restricted cash		32			—
Net cash provided by (used for) operating activities		9,913			(3,133		)
Cash flows from investing activities:
Purchases of property and equipment		(553		)	(193		)
Net cash used for investing activities		(553		)	(193		)
Cash flows from financing activities:
Proceeds from the issuance of common stock		501			3,277
Net cash provided by financing activities		501			3,277
Effect of exchange rates on cash and cash equivalents		302			314
Net increase in cash and cash equivalents		10,163			265
Cash and cash equivalents at beginning of period		37,139			31,870
Cash and cash equivalents at end of period		$	47,302		$	32,135

 

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

 

5

 

Candela Corporation

Notes to Consolidated Financial Statements

 

1.                            Basis of Presentation

 

The accompanying unaudited 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”, or “Candela”) for fiscal year 2004, which should be read in conjunction with these financial statements.  The financial information included herein is unaudited, with the exception of the consolidated balance sheet as of July 3, 2004, which was derived from the audited consolidated balance sheet dated July 3, 2004. However, in the opinion of management, the financial 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 and nine-month periods ended April 2, 2005 are not necessarily indicative of the results to be expected for the full year.

 

2.                            Litigation Related Charges

 

On February 17^th 2005, an arbitrator issued an interim decision in the dispute concerning Candela’s royalty obligations under its Amended and Restated License Agreement with The Regents of the University of California (the “Regents”). In connection with this interim decision the Company recognized charges of approximately $5.6 million during the third fiscal quarter of 2005. These charges consist of the settlement of prior year royalty claims made by the Regents against the Company of approximately $3.4 million, royalty claims for the Company’s first and second fiscal quarters of 2005 of approximately $0.5 and $0.9 million, respectively, and $0.8 million in attorney fees, interest, and professional costs as reimbursement of those charges to the Regents as required by the aforementioned license agreement. The royalty charges have been listed as a separate line under cost of goods sold on the accompanying income statement. All other charges have been listed as a separate line within operating expenses. The arbitrator will issue a final decision with actual damages after he reviews further post-arbitration submissions by the parties as to the final calculation of damages. The Company presently expects that, based on the charges that it has already recorded in connection with the interim judgment, that there will not likely be any material additional charges related to this matter in future periods.

 

3.                            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 Statement of Financial Accounting Standards (“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 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, all 45 employees have been terminated.

 

During the three-month period ended October 2, 2004, the landlord for the Boston facility secured a sublease for that property.  The Company was not able to determine the future economic benefit of the sublease at that time. The sublessee commenced making payments to the landlord during December of 2004.  As a result of these and future payments scheduled under the sublease, the Company revised the estimated future costs associated with the Boston facility and, in the quarter ended January 1, 2005, reversed approximately $859 of the restructuring reserve. This reversal represents the aforementioned anticipated economic benefit due to sublessee payments of $1,703, net of legal and other fees of approximately $329 and income taxes of approximately $515, and was recognized in the three-month period ended January 1, 2005.

 

6

 

3.                            Discontinued Operations, continued.

 

The following table reflects the combined restructuring charges incurred in the nine month period ended April 2, 2005:

 

(in thousands)		Leasehold Improvements and Fixed Assets			Facility Costs			Total
Balance at July 3, 2004		$	197		$	2,809		$	3,006
Reduction of reserve due to cash payments					415			415
Non-cash amortization relating to the Scottsdale reserve		75			—			75
Reduction of reserve due to revision of leasehold obligation		—			1,374			1,374
Balance at April 2, 2005		$	122		$	1,020		$	1,142

 

At April 2, 2005, the discontinued segment had a net liability of approximately $1.9 million consisting primarily of the aforementioned reserve of $1.1 million and deferred gift certificate revenue of $0.8 million. Revenues for discontinued operations for the quarter ended September 27, 2003 were approximately $0.4 million. There have been no subsequent revenues.

 

4.                            Stock-based Compensation

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share-Based Payment” (“FAS 123R”). FAS 123R is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). The Company is required to adopt the provisions of FAS123R as of the beginning of its first fiscal quarter of 2006, beginning July 3, 2005. This statement establishes standards for and requires the recognition of the cost of employment-related services settled in share-based payment. The adoption of the provisions of FAS 123R will have a material impact on the Company’s consolidated financial statements.

 

Currently and until the adoption of FAS 123R, the Company follows the provisions of FAS 123. The provisions of FAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. Candela has elected to continue to apply APB 25 in accounting for its stock option incentive plans.

 

In accordance with APB 25 and related interpretations, compensation expense for stock options is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. Generally, the exercise price for stock options granted to employees equals or exceeds the fair market value of Candela common stock at the date of grant, thereby resulting in no recognition of compensation expense by Candela. For awards that generate compensation expense as defined under APB 25, the Company calculates the amount of compensation expense and recognizes the expense over the vesting period of the award.

 

7

 

4.                            Stock-based Compensation, continued.

 

Had compensation cost for Candela’s stock option plans been determined based on the fair value method set forth in FAS 123, Candela’s net income (loss) and basic and diluted net income(loss) per common share would have been changed to the pro forma amounts indicated below:

 

		For the three months ended:						For the nine months ended:
(in thousands, excepts per share data)		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Net (loss) income , as reported		$	(1,356	)	$	1,960		$	4,099		$	3,798
Add: stock-based employee compensation expense included in reported net income (loss), net of related tax effects		—			—			—			—
Deduct: total stock-based employee compensation expense, determined under fair value based method for all awards, net of related tax effects		(118		)	(969		)	(407		)	(731		)
Pro forma net income (loss)		$	(1,474	)	$	991		$	3,692		$	3,067
Net income (loss) per share of common stock
Basic - as reported		$	(0.06	)	$	0.09		$	0.18		$	0.17
Basic - pro forma		$	(0.07	)	$	0.04		$	0.17		$	0.14
Diluted - as reported		$	(0.06	)	$	0.09		$	0.18		$	0.17
Diluted - pro forma		$	(0.06	)	$	0.04		$	0.16		$	0.14

 

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 2005 and 2004:

 

		2005		2004
Risk-free interest rate		4.25	%	4.25	%
Estimated volatility		77	%	76	%
Expected life for stock options (yrs)		2.99		2.99
Expected life for stock purchase plan (yrs)		0.5		0.5
Expected dividends		—		—

 

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, diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator.

 

8

 

5.                            Earnings Per Share, continued.

 

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:						For the nine months ended:
(in thousands, except per share data)		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Basic shares used in the calculation of earnings per share		22,408			22,150			22,366			21,759
Effect of dilutive securities:
Stock options		—			866			696			842
Stock warrants		—			—			—			—
Diluted shares used in the calculation of earnings per share		22,408			23,016			23,062			22,601
Per share effect of dilutive securities on income (loss) from continuing operations		$	.00		$	.00		$	.00		$	.01
Per share effect of dilutive securities on net income (loss)		$	.00		$	.00		$	.00		$	.00

 

During the nine month period ended April 2, 2005, options to purchase 360,265 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.  During the three month period ended April 2, 2005, options to purchase 1,015,038 shares of common stock were excluded from the calculation of diluted earnings per share since their effect would be anti-dilutive due to the Company’s net loss for the period. During the three and nine month periods ended March 27, 2004, options to purchase 217,625 and 125,518 shares of common stock, respectively, 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.

 

6.                            Comprehensive Income

 

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:						For the nine months ended:
(in thousands)		April 2, 2005			March 27, 2004			April 2, 2005			March 27, 2004
Net income (loss)		$	(1,356	)	$	1,960		$	4,099		$	3,798
Foreign currency translation adjustment		(898		)	(58		)	125			637
Total comprehensive income (loss)		$	(2,254	)	$	1,902		$	4,224		$	4,435

 

9

 

7.                            Inventories

 

(in thousands)		April 2, 2005			July 3, 2004
Raw materials		$	2,918		$	4,833
Work in process		70			556
Finished goods		9,827			8,182
		$	12,815		$	13,571

 

8.                            Segment Information

 

The Company operates 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.

 

9.         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 records 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 nine-month period ended April 2, 2005:

 

(in thousands)
Beginning balance July 3, 2004		$	8,257
Plus accruals related to new sales		4,196
Less amortization of prior period accruals		4,513
Ending balance on April 2, 2005		$	7,940

 

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.

 

10

 

9.         Guarantees, continued.

 

The following table reflects changes in the Company’s deferred revenue account during the nine-month period ended April 2, 2005:

 

(in thousands)
Beginning balance July 3, 2004		$	4,055
Plus deferral of new service contract sales		7,015
Less recognition of deferred revenue		3,792
Ending balance on April 2, 2005		$	7,278

 

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 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.

 

10.                     Commitments and Contingencies

 

The Company has received demands for payment of bankruptcy preference claims relating to payments the Company received in the ordinary course of business prior to the bankruptcy of DVI Strategic Partner Group (DVI). The Company is in the process of researching the claims, but feels that no preferential treatment was bestowed upon it during the months leading up to the aforementioned bankruptcy, and accordingly believes the demand is without merit.

 

From time to time, the Company is a party to various legal proceedings incidental to its business.  Except for the bankruptcy preference claims in the DVI matter, the Company believes that none of the legal proceedings that are presently pending, if adversely decided to the Company, will have a material adverse effect upon its financial position, results of operations, or liquidity.

 

11

 

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 to physicians and personal care 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, and the provision of product-related services.

 

Critical Accounting Policies

 

This discussion and analysis of our financial condition and results of operations is 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. We evaluate our estimates and judgments on an on-going basis, including those related to revenue recognition, bad debts, inventories, warranty obligations, contingencies, restructurings and income taxes. We base our estimates and judgments on historical experience and on various other assumptions that we believe 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 and judgments under different assumptions or conditions. A discussion of our critical accounting policies and the related estimates and judgments affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for fiscal year 2004.

 

12

 

Results of Operations

 

Revenue.

 

Revenue source by geographic region is reflected in the following table:

 

		For the three months ended:
(in thousands)		April 2, 2005					March 27, 2004					Change
US revenue		$	15,073		43	%	$	12,975		47	%	$	2,098		16	%
Foreign revenue		19,609			57	%	14,675			53	%	4,934			34	%
Total revenue		$	34,682		100	%	$	27,650		100	%	$	7,032		25	%

 

 

		For the nine months ended:
		April 2, 2005					March 27, 2004					Change
US revenue		$	37,653		44	%	$	32,069		46	%	$	5,584		17	%
Foreign revenue		47,624			56	%	38,165			54	%	9,459			25	%
Total revenue		$	85,277		100	%	$	70,234		100	%	$	15,043		21	%

 

Consolidated Overview

 

Consolidated revenue increased $7.0 and $15.0 million, to $34.7 and $85.3 million for the three and nine-month periods, respectively, ended April 2, 2005, as compared to the three and nine-month periods ended March 27, 2004. The increase was due primarily to uniform increase in demand for our products and product-related service on a worldwide basis, coupled with our continued expansion into newer markets.

 

Foreign revenue increased 34% or $4.9 million for the three-month period ended April 2, 2005, as compared to the three-month period ended March 27, 2004. Revenue in South America, Europe and Asia increased approximately $2.1, $1.7 and $1.1 million, respectively as compared to the same period in the prior year.

 

Foreign revenue increased 25% or $9.5 million for the nine-month period ended April 2, 2005, as compared to the nine-month period ended March 27, 2004. Year-to-date foreign revenue increased across all countries.  Year-to-date revenue in Europe increased approximately $3.9 million accounting for 26% of this comparative increase while revenue in South America increased over 500 percent, accounting for approximately $3.6 million or 24% of the year over year comparative increase. Increases in Asia totaled approximately $2.0 million or approximately 13% of the year-to-date, period over period increase.

 

US revenue increased by $2.1 and $5.6 million, respectively, for the three and nine month periods ended April 2, 2005, as compared to the same periods during the prior fiscal year. This increase was generally uniform over all US sales territories.

 

13

 

Revenue source by type is reflected in the following table:

 

		For the three months ended:
(in thousands)		April 2, 2005					March 27, 2004					Change
Revenue
Lasers and other products		$	28,483		82	%	$	23,509		85	%	$	4,974		21	%
Product-related service		6,199			18	%	4,141			15	%	2,058			50	%
Total revenue		$	34,682		100	%	$	27,650		100	%	$	7,032		25	%

 

		For the nine months ended:
		April 2, 2005					March 27, 2004					Change
Revenue
Lasers and other products		$	70,365		83	%	$	58,769		84	%	$	11,591		20	%
Product-related service		14,912			17	%	11,465			16	%	3,452			30	%
Total revenue		$	85,277		100	%	$	70,234		100	%	$	15,043		21	%

 

Laser and other product revenue increased approximately $5.0 million for the three month period ended April 2, 2005, as compared to the three month period ended March 27, 2004. Revenues from sales of our GentleLase™ product line increased approximately $2.4 million during this period to account for almost 50% of this incremental increase.  In addition, the Ellipse™ product line launched during the quarter accounted for $0.9 million in incremental revenue while the GentleYag™, Alex™, and VBeam™ product lines added revenue increases of $0.9 million, $0.7 million, $0.6 million respectively. These increases were partially offset by a reduction in revenue from sales of the Smoothbeam™ product line.

 

Product-related service increased $2.1 million during the third fiscal quarter as compared to the same period in the prior year. This increase was primarily due to the growing size of our installed base and the larger number of service contracts associated with that base. In addition, several foreign distributors made larger than normal consumable purchases during the quarter.

 

Laser and other product revenue increased approximately $11.6 million for the nine month period ended April 2, 2005, compared to the nine month period ended March 27, 2004. This year over year increase was driven primarily by the introduction of the GentleYag™ product line which was launched during the third quarter of fiscal 2004 and the introduction of the Ellipse™ product line during the third quarter of fiscal 2005. These two product lines accounted for approximately $10.7 million and $0.9 million, respectively, of the increase.  The legacy product lines had mixed results but together did not incrementally add to the period over period increase.

 

Product-related service increased $3.5 million for the nine month period ended April 2, 2005, compared to the nine month period ended March 27, 2004. This increase was primarily due to the growing size of our installed base and the larger number of service contracts associated with that base.

 

Litigation Related Charges.   On February 17^th 2005, an arbitrator issued an interim decision in the dispute concerning our royalty obligations under our Amended and Restated License Agreement with The Regents of the University of California (the “Regents”). In connection with this interim decision we recognized charges of approximately $5.6 million during the current fiscal quarter. These charges consist of the settlement of prior year royalty claims made by the Regents against the Company of approximately $3.4 million, royalty claims for our first and second fiscal quarters of 2005 of approximately $0.5 and $0.9 million, respectively, and $0.8 million in attorney fees, interest, and professional costs as reimbursement of those charges to the Regents as required by the aforementioned license agreement. The royalty charges have been listed as a separate line under cost of goods sold. All other charges have been listed as a separate line within operating expenses. The arbitrator will issue a final decision with actual damages after he reviews further post-arbitration submissions by the parties as to the final calculation of damages. The Company presently expects that, based on the charges that it has already recorded in connection with the interim judgment, that there will not likely be any material additional charges related to this matter in future periods. As a result of the arbitrator's interim ruling, Candela will incur royalty obligations to the Regents on future sales of the DCD at a higher royalty rate than it has recognized on DCD sales over the past few years.

 

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