SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended July 1, 1995
Commission file number 0-14742
CANDELA LASER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2477008
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
As of September 22, 1995, 5,238,807 shares of the registrant's Common Stock,
$.01 par value, were issued and outstanding. The aggregate market value of the
registrant's voting stock held by non-affiliates of the registrant as of
September 22, 1995, based upon the closing price of such stock on The NASDAQ
Stock Market on that date, was approximately $10,840,000.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Proxy Statement for the Annual Meeting of
Shareholders to be held on November 16, 1995 Part III
EXHIBIT INDEX IS LOCATED ON PAGE 40
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PART I
Item 1. Business
General
Candela Laser Corporation (the "Company") is in the business of providing
medical solutions through the application of a variety of technologies. The
Company designs, manufactures, markets and services lasers for a variety of
medical applications. The Company also licenses medical products and sells them
through its worldwide distribution network and utilizes externally funded
resources to support the development of new medical and scientific lasers.
Since its inception in 1970, the Company has designed and marketed custom and
scientific lasers, and since 1984 has designed and marketed laser systems for
medical applications. In June 1987, the Company commercially introduced its
urology laser system to treat kidney stones, and in March 1988 it commercially
introduced a dermatology/plastic surgery laser system to treat vascular skin
lesions. The Company has since received United States Food and Drug
Administration ("FDA") clearances to market these products for additional
applications and has introduced new generations of these laser systems. In
December 1990, the Company commercially introduced a new dermatology/plastic
surgery laser system to treat pigmented lesions of the skin, such as age spots.
The Company has since received FDA clearance to market this laser for the
removal of multicolored tattoos. In September 1994, the Company also received
FDA clearance to market an alexandrite laser for the treatment of tattoos, and
subsequently received FDA clearance to market this laser for the treatment of
Nevus of Ota and pigmented lesions like Nevus of Ota. In April 1995, the
Company received FDA clearance to market a new dermatology/plastic surgery laser
system to treat leg veins. The Company has a number of different lasers under
development including pulsed dye lasers and solid state lasers. The Company
plans to continue to apply its technical expertise to develop systems for
providing new clinical solutions.
The Company continues to build on its strengths in urology and
dermatology/plastic surgery. Accordingly, the Company has entered into several
strategic alliances that were aimed at acquiring new and complementary products
to enhance the Company's position in these markets.
During fiscal 1994, the Company's position in the urology market was
strengthened with the addition of two FDA cleared cryogenic devices for the
treatment of prostatic tissue and liver metastases. The LCS 3000, which has FDA
clearance for ablation of prostatic tissue and the treatment of liver
metastases, and the LCS 2000, which has FDA clearance for the treatment of liver
metastases, both employ the precise application of extreme cold to destroy
diseased tissue. In October 1993, the Company entered into an agreement with
Cryogenic Technology Limited ("Cryotech") that gave the Company the exclusive
worldwide (except the United Kingdom) right to distribute these two cryosurgical
devices. Cryotech has since been subject to liquidation proceedings in the
United Kingdom and, in August 1995, Spembly Medical Limited ("Spembly") entered
into an agreement to purchase the assets of Cryotech, including the rights to
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the LCS 3000 and LCS 2000. The Company and Spembly have entered into an
agreement in principal under which Spembly will manufacture a line of
cryosurgical devices essentially similar to the former Cryotech LCS 3000 and LCS
2000 which the Company will market. Under the proposed agreement, the Company
will have exclusive rights to distribute these devices in certain geographical
areas. There can be no assurance, however, that the Company will enter a
definitive agreement with Spembly.
In the dermatology/plastic surgery market, the Company has pursued
opportunities to build on its strengths in worldwide distribution as well as
acquire new technology. In October 1993, the Company, through its wholly owned
Japanese subsidiary, Candela KK, entered into an agreement with Laser
Industries, Ltd. that gives Candela KK the exclusive right to distribute Laser
Industries Nd:Yag and CO2 surgical lasers, surgical ultrasound aspirator and all
related accessories for these products in Japan. Marketed under the Sharplan
tradename, this agreement leverages the Company's distribution strength in
Japan. Also, in June 1994, the Company entered into an agreement to acquire
certain assets from Derma-Lase, Ltd. The assets acquired are principally the
rights to market FDA cleared products which enable the Company to market a broad
line of lasers to treat tattoos and pigmented lesions. These agreements
leverage the Company's strengths in worldwide distribution and service as well
as its strong position in the dermatology/plastic surgery market.
The Company markets and services its products in the United States through
both a direct sales force and independent distributors. Internationally, the
Company markets and services its products through regionally managed independent
distributors, except in Japan, where Candela KK, in combination with a network
of independent distributors, markets and services the products.
In August 1995, the Company incorporated a wholly owned subsidiary, Candela
Skin Care Centers, Inc., for the purpose of establishing a chain of laser
cosmetic centers both in the United States and abroad. It is intended that these
centers will be staffed by board certified dermatologists and plastic surgeons
and will offer a complete range of laser cosmetic treatments in non-hospital
settings. The first center will be located in Massachusetts and is expected to
open in the second quarter of fiscal 1996.
Background and Technology
Lasers are optical devices which produce intense and narrow beams of light. A
laser consists of an active medium, such as a crystal, gas or liquid, that
amplifies light when excited by an external energy source (usually either an
optical source, such as a flashlamp, or an electric discharge). Light emitted
by the active medium is reflected inside the laser cavity, causing the intensity
of the light to increase and form usable output. Lasers are used in an
increasing number of diverse applications.
Cryosurgical devices use subzero temperatures to destroy abnormal tissue.
This tissue is then left in situ to be sloughed or reabsorbed by the body.
Cryosurgical devices typically use liquid nitrogen or other refrigerants to
create a freezing environment. Cryosurgical devices are also used in an
increasing number of diverse applications, with procedures ranging from topical
dermatological treatments to the use of cryoprobes in minimally invasive
surgery.
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Commercialized Medical Products
The Company's research and development efforts, in conjunction with related
research at leading medical institutions, have resulted in the development and
commercialization of the Company's medical laser systems. The Company has also
commercialized a number of laser systems and cryosurgical devices through
strategic alliances with other companies. The Company's medical products
include the following:
LaserTripter [TM]. The Company's LaserTripter model MDL 3000 is the most
recent generation of the Company's urology laser system. It employs a
photoacoustic effect to fragment kidney and biliary stones with little or no
damage to surrounding soft tissue. The laser operates at a wavelength that is
selectively absorbed by the stones and not the tissue. The effectiveness of the
LaserTripter is not limited by location, composition or the number of stones.
The Company believes that its urology laser system offers advantages over the
current alternative treatment techniques for kidney stones which include
surgical intervention, extracorporeal shock wave lithotripsy ("ESWL") and
endoscopic techniques. ESWL uses externally generated shock waves to break
stones in the kidney, allowing fragments to be passed by the patient. However,
ESWL equipment is more expensive to purchase and install than the Company's
system. In addition, it may not be as effective as the LaserTripter in treating
ureteral stones in the lower two-thirds of the ureter because the stones are
difficult to localize with ESWL technology. Current endoscopic techniques
include: baskets; electrohydraulic lithotripters ("EHL") which employ a high
voltage discharge, and ultrasonic lithotripters ("UL") which use a rigid
metallic probe vibrating at ultrasonic frequency. EHL's high-voltage discharge
can cause incidents of perforation of the ureter, and UL's heat generation can
cause damage to the surrounding soft tissue.
LaserTripter Related Products. The following is a partial list of accessory
products that the Company offers for sale in conjunction with its LaserTripter:
MiniScope [TM] Plus: one of the smallest semi-rigid ureteroscopes on the
market, it is used with the LaserTripter in the treatment of kidney stones.
RadioGold [TM] Fibers: an optical fiber with a gold-coated distal end
designed to allow physicians to see the fiber under fluoroscopy which
provides increased safety and ability to manage especially difficult cases.
Vascular Lesion Laser. The SPTL-1b is the Company's latest generation of
laser systems for the treatment of benign vascular lesions of the skin. These
lesions are characterized by the presence of abnormal blood vessels that lie
beneath the surface of the skin. Port wine stains are congenital lesions that
appear as light pink lesions at birth and progressively darken and roughen with
age. Telangiectasia, or "spider veins," are vascular lesions that develop with
age on many people over the age of 30.
The SPTL-1b is available with a variety of handpieces, including 10mm, 7mm,
5mm, 3mm, and 2mm, providing fast and effective treatment of large and small
lesions.
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The Company's SPTL-1b utilizes what is known as selective photothermolysis to
treat vascular skin lesions. Selective photothermolysis allows for the
destruction of specific abnormal blood vessels, accomplished by using a specific
wavelength, pulse duration and energy level to ensure sufficient destruction of
the abnormal blood vessels while avoiding damage to the surrounding normal skin.
This treatment can be used on people of all ages and has been particularly
effective in treating infants and young children with unwanted birthmarks.
Pigmented Lesion Laser/TatuLAZR. The Pigmented Lesion Laser/TatuLAZR, or
PLTL, is two lasers packaged and marketed as a single dermatology/plastic
surgery laser system. It includes a pulsed dye laser, as well as a Q-switched
alexandrite laser. The pulsed dye laser is used to treat benign pigmented skin
lesions and red and related color tattoos. Benign pigmented skin lesions result
from the proliferation of non-malignant pigmented cells and include cafe au lait
birthmarks, freckles and age spots. Similar to the Company's SPTL-1b laser
described above, this laser effectively treats benign pigmented lesions by
utilizing selective photothermolysis to injure the abnormal pigmented cells
while avoiding damage to the surrounding skin. The Q-switched alexandrite is
used to treat multicolored tattoos, such as blue, black and green, the most
common colors used in both amateur and professional tattoos. The Q-switched
alexandrite, using the same principle of selective photothermolysis described
above, destroys the tattoo dye while avoiding damage to surrounding skin.
YAGLAZR-400, YAGLAZR-600, RUBYLAZR. The Company introduced the YAGLAZR-400,
YAGLAZR-600 and RUBYLAZR in July 1994. These products, which result from the
Company's acquisition of rights from Derma-Lase, join the Company's SPTL-1b
and PLTL to offer the dermatology/plastic surgery market the widest range of
laser wavelengths for the treatment of cutaneous lesions and tattoos.
ScleroLASER. The Company received FDA clearance to market its ScleroLASER for
the treatment of leg veins in April 1995. The ScleroLASER is a tunable,
flashlamp pumped dye laser which is designed to treat leg veins up to 1mm in
size and features a unique elliptical spot designed to fit the linear
configuration of the target vessels. Currently, the most common therapy for the
treatment of leg veins is sclerotherapy. This treatment consists of a needle
injection of a chemical directly into the vessels and is often painful for the
patient.
LCS 3000. The LCS 3000 is a cryosurgical system that is FDA cleared for the
ablation of prostatic tissue and treatment of liver metastases. It employs up
to five independently controlled reusable probes to destroy diseased tissue by
the precise application of extreme cold. The probes are available in a variety
of shapes and sizes and are color coded for ease of use.
LCS 2000. The LCS 2000 is a cryosurgical system that is FDA cleared for the
treatment of liver metastases. The LCS 2000 offers similar features to the LCS
3000, except that it operates with only two probes.
Medical Products Under Development
The Company has developed, and continues to develop, new medical products and
applications for its existing products. As the Company learns of possible new
medical applications of interest, it evaluates the applications and, if
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appropriate, assembles a team to research and develop a new product or
application in cooperation with leading physicians and medical institutions.
The Company is currently conducting research on a number of applications of
interest. The Company believes that its advanced laser research and engineering
activities are important to maintain and enhance the Company's technical
expertise.
Where required, the Company is conducting these clinical research efforts
under Investigational Device Exemptions (IDE's) granted by the FDA. The Company
must, in many instances, receive FDA clearance before commercializing the
applications cited above and believes that it can obtain such clearances for its
products, but there can be no assurance that such clearances will be received.
See "Government Regulations."
Medical Research Agreements
The Company has conducted joint research with physicians at Massachusetts
General Hospital ("MGH"), the New England Medical Center, Boston University
School of Medicine, University of California, the Childrens Hospital and
elsewhere under research agreements. Generally, when the Company enters into
research agreements, the Company has rights to acquire exclusive licenses to any
jointly developed technology and may pay a royalty to the institution. The
Company anticipates continuing joint research and licensing arrangements with
medical research institutions.
In addition to internally funded research projects, the Company has received a
number of Small Business Innovation Research ("SBIR") grants and contracts to
explore the feasibility of extending its laser technology to new applications.
Research is being conducted with several different types of lasers, including
pulsed dye lasers and solid state lasers.
Marketing and Service
North America. The Company markets its medical systems through both a direct
sales force and independent distributors. With the exception of the geographic
areas covered by independent distributors, the Company has direct sales
representatives with territories covering all of North America. The independent
distributors, who have significant medical laser distribution experience, have
exclusive arrangements for their geographic areas.
The Company's focus is on optimizing patient care and physician productivity.
The Company maintains a staff of nurse clinicians to train customers. In
addition, the Company conducts and participates in regional workshops where
physicians knowledgeable in the use of the Company's systems instruct other
doctors in their use.
Promotional activities conducted by the Company include direct mail,
workshops, presentations at trade shows, and in-vitro demonstrations at medical
conventions.
International. The Company sells a significant portion of its medical systems
outside the United States. The Company has a wholly owned Japanese subsidiary
that coordinates the activities of several Japanese distributors. In addition,
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the Company has a branch office in Singapore to develop and maintain independent
distributor relationships throughout the Asia Pacific region. The Company has a
branch office in The Netherlands to develop and maintain independent distributor
relationships in Europe, the Middle East and Africa. International revenue was
approximately as follows during the last three fiscal years:
1995 1994 1993
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International revenue:
Total $13,772,000 $15,091,000 $15,775,000
As percentage of revenue 52% 51% 48%
See also Note 9 to the Company's Consolidated Financial Statements.
Service. The Company's principal service center and depot is located at its
Massachusetts headquarters. In addition, the Company has direct service
representatives throughout the United States and a depot at its wholly owned
subsidiary in Japan. The Company's independent distributors maintain depot and
service representatives adequate to cover their installed systems and have
primary responsibility to service such systems. The Company's recommended
preventive maintenance, coupled with continuing technical education for service
representatives, help to ensure product reliability.
Manufacturing and Suppliers
The Company's manufacturing operations consist principally of the assembly and
testing of components purchased from outside suppliers. The Company also
manufactures certain power supplies and other subassemblies used in its
products.
The Company depends upon, and will continue to depend upon, a number of
outside suppliers for the components that it has used to assemble laser systems
produced to date, and for products it may manufacture. In addition, the Company
relies upon a single source for its cryosurgical products, as well as some other
components. To date, the Company has not experienced, nor does it expect, any
significant delays in obtaining dyes, optical and electro-optical components,
electronic or any other components and raw materials for its products, most of
which are available from multiple well-established sources. There can be no
assurance, however, that the Company's supplies of components, raw materials and
cryosurgical products will continue to be available in sufficient quantities and
in a timely manner in the future.
Competition
Competition in the medical industry is intense, and technological developments
are expected to continue at a rapid pace. The Company utilizes proprietary
technology, product features, performance and price in addition to its market
reputation as competitive methods depending upon the product, market or
geographic area in which it is competing. The Company competes against other
manufacturers, some of which may have greater financial, marketing, and
technical resources than the Company, as well as against alternative medical
technologies. In addition, some companies have developed, and other established
companies may attempt to develop, products for the same medical applications as
the Company's systems.
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Patents and Proprietary Information
The Company owns United States and foreign patents for its urology and benign
vascular and pigmented lesion dermatology/plastic surgery laser systems and
United States patents for endoscopes. The Company also has several other United
States and foreign patents and pending patent applications for other medical
laser systems. The Company treats its design and technical data as
confidential, and relies on nondisclosure safeguards, such as confidentiality
agreements, laws protecting trade secrets and noncompetition agreements to
protect proprietary information. There can be no assurance, however, that these
measures will adequately protect the Company's technology or that others will
not independently develop such technological expertise.
The Company is a licensee under patent license agreements that grant the
Company rights to use certain laser technologies and applications. Under these
license agreements, the Company has paid, and continues to pay, royalties.
Under the federal government's SBIR program, the Company retains rights to any
invention and the ownership of all data developed. In return, the government
receives a royalty-free license on any patent for federal government use and it
reserves certain other rights, including the right to require the Company to
license others to use the technology in certain limited circumstances.
Governmental Regulation
The Company's products are subject to government regulation in the United
States and other countries. In order to manufacture, clinically test and
market products for human diagnostic and therapeutic use, the Company must
comply with mandatory regulations and safety standards established by the FDA
and comparable state and foreign regulatory agencies. Typically, products must
meet regulatory standards as safe and effective for their intended use prior to
being marketed for human applications. The clearance process is expensive and
time consuming, and no assurance can be given that any agency will grant
clearance for the sale of the Company's products or that the length of time the
process will require will not be extensive. The Company has met FDA
requirements under the 510(k) procedure for the products it is currently
marketing.
There are two principal methods by which FDA regulated medical devices may be
marketed in the United States. One method is an FDA premarket notification
filing under Section 510(k) of the Food, Drug and Cosmetics Act. Applicants
under the 510(k) procedure must demonstrate that the device for which clearance
is sought is substantially equivalent to devices on the market pursuant to a
510(k) procedure or prior to the medical device legislation of 1976. The review
period for a 510(k) application is 90 days from the date of filing the
application, although such review periods have often been extended.
Applications filed pursuant to 510(k) are often subject to questions and
requests for clarification that can extend the review period beyond the initial
review period. Marketing of the product must be deferred until written
clearance is received from the FDA. In some instances, an IDE is required for
clinical trials for a 510(k) notification.
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The alternate method, where section 510(k) is not available, is to obtain
premarket approval ("PMA") from the FDA. Under the PMA procedure, the applicant
must obtain an IDE before beginning the substantial clinical testing that is
required to determine the safety and efficacy. The preparation of a PMA
application is significantly more complex and time consuming than the 510(k)
application. The review period under a PMA application is 180 days from the
date of filing, although such review times have been substantially extended
recently. The FDA often responds with requests for additional information or
clinical reports, which can extend the review period beyond the initial review
period.
In addition, the Company is required to obtain FDA approval to conduct
clinical studies with certain of the medical laser systems it has under
development. All of these products will require filing of a 510(k) or PMA for
commercialization of the product, and some may require the filing of an IDE with
the FDA. The Company is currently approved to conduct clinical studies under
the IDE regulations. There can be no assurance that the appropriate approvals
from the FDA will be granted for the Company's products or that the process to
obtain such approvals will not be excessively expensive or lengthy. The failure
to receive requisite approvals for the Company's products or processes, when and
if developed, or significant delays in obtaining such approvals would prevent
the Company from commercializing new products as anticipated and would have a
materially adverse effect on the business of the Company.
The FDA also imposes various requirements on manufacturers and sellers of
products under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA also may require postmarket
testing and surveillance programs to monitor a product's effects.
The Company is also subject to regulation under the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health ("CDRH") of the FDA, which requires laser manufacturers to file new
product and annual reports; to maintain quality control, product testing and
sales records; to incorporate certain design and operating features in lasers
sold to end-users and to certify and label each laser sold to an end-user as
belonging to one of four classes, based on the level of radiation from the laser
that is accessible to users. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. The CDRH
is empowered to seek fines and other remedies for violations of the regulatory
requirements. The Company believes that it has complied in all material
respects with CDRH requirements.
Foreign sales of the Company's laser systems are subject in each case to the
regulatory requirements of the FDA and the recipient country. These vary widely
among the countries and may include technical approvals, such as electrical
safety, as well as the demonstration of clinical efficacy. The Company is
currently working to meet foreign country regulatory requirements for certain of
its products. There can be no assurance that additional approvals will be
obtained.
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Research and Development
During the past three fiscal years, the Company spent the following amounts on
Company-sponsored and federal government SBIR-sponsored research:
1995 1994 1993
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Company-sponsored research and development $3,733,000 $3,810,000 $4,562,000
SBIR-sponsored research and development $ 443,000 $ 937,000 $ 769,000
Under the SBIR Program, a portion of a federal agency's research and
development budget is awarded to small businesses that have 500 or fewer
employees. There are two phases to an SBIR award: Phase I provides funding for
determining the scientific and technical merit and feasibility of a proposed
idea; and Phase II provides funding to further develop a proposed idea, taking
into consideration the scientific and technical merit and feasibility evidenced
by Phase I results. After completion of the two phases using government funds,
the Company is expected to commercialize the new product using funds generated
by the Company.
Customers
The Company's customers include distributors, hospitals and medical doctors.
The Company is not dependent upon any single customer. See Note 9 to the
Company's Consolidated Financial Statements.
Backlog
The Company does not believe that backlog is necessarily indicative of trends
in its business.
Employees
As of July 1, 1995, the Company had 123 full-time employees of which 17 were
in research, development and engineering, 39 were in manufacturing and quality
assurance, 23 were in service, 32 were in sales and marketing, and 12 were in
finance and administrative positions. None of the Company's employees is
represented by a union, and the Company believes its relationship with its
employees is good.
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Executive Officers
The current executive officers of the Company are as follows:
Name Age Position
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Gerard E. Puorro 48 President, Chief Executive Officer and Director
Judith A. Bednarz 49 Vice President, Marketing
Paul M. DeLuca 48 Vice President, Manufacturing
James C. Hsia, Ph.D 49 Senior Vice President, Research
William B. Kelley 40 Vice President, North American Sales and Service
Diane M. Marcou 29 Corporate Controller and Treasurer
Richard J. Olsen 62 Senior Vice President and Assistant Secretary
Kenji Shimizu 42 Executive Vice President
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve until their successors are duly elected and qualified,
subject to earlier removal by the Board of Directors. There are no family
relationships among any of the executive officers or directors of the Company.
Mr. Puorro was appointed a Director of the Company in September 1991. Mr.
Puorro has been President and Chief Executive Officer of the Company since April
1993. From April 1989 until April 1993, he was Senior Vice President and Chief
Financial Officer of the Company. He was elected Chief Operating Officer in
December 1992. Prior to joining the Company, and since 1982, he was Vice
President and Controller at Massachusetts Computer Corporation.
Ms. Bednarz was appointed Vice President, Marketing in July 1995. She has
been with the Company since November 1988 and previously held the positions of
Marketing Director and Group Product Director. From 1976 to 1988, Ms. Bednarz
held marketing management positions at Lifeline Systems, Inc., Dyonics and
Instrumentation Lab, Inc.
Mr. DeLuca has been Vice President, Manufacturing since January 1993. He has
been with the Company since August 1989 and was previously Director of
Manufacturing. From 1981 to 1989, Mr. DeLuca held manufacturing management
positions with Technology for Imaging, Inc. and Kontron Instruments, Inc.
Dr. Hsia has been Senior Vice President, Research, of the Company since July
1991. He has been with the Company since October 1985, and was previously Vice
President, Research and Development. Prior to joining the Company, and since
1982, he was Vice President, Research and Development at Laser Science, Inc.
Mr. Kelley has been Vice President, North American Sales and Service, since
April 1993. From January 1993 until April 1993 he was Vice President, Domestic
Sales. He has been with the Company since 1987 and previously held the
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positions of National Sales Manager and Eastern Regional Sales Manager. Prior
to joining the Company, Mr. Kelley held a number of sales and sales management
positions in the medical industry.
Ms. Marcou, a certified public accountant, was appointed Corporate Controller
and Treasurer in July 1995. She has been with the Company since November 1991
and previously held the positions of Group Finance Director and Manager,
Financial Accounting and Reporting. Prior to joining the Company, she was a
Senior Associate at Coopers & Lybrand.
Mr. Olsen has been Senior Vice President of the Company since July 1995. He
has been with the Company since May 1985 and previously held the positions of
Vice President, Corporate Development and Chief Financial Officer.
Mr. Shimizu has been Executive Vice President of the Company since April 1993.
He has been with the Company since March 1987 and was previously Vice President,
International Sales and Marketing. From 1977 to 1987, he was employed by Nippon
Infrared Industries, Ltd. of Tokyo.
Item 2. Properties
The Company leases two adjacent facilities totaling approximately 60,000
square feet for its operations in Wayland, Massachusetts, which is located
approximately 20 miles west of Boston. Effective September 1995, the Company
has terminated the lease on one facility totaling approximately 25,000 square
feet and has consolidated operations into the remaining facility. The lease on
this facility expires in March 1996, and the Company has an option to renew the
lease for a period of two years at a market rate rental at the time of exercise.
Management of the Company believes that its current facilities are suitable and
adequate for its near-term needs.
Item 3. Legal Proceedings
In April 1995, the Company received notification from the Federal Aviation
Administration (FAA) that it is conducting an investigation into the
circumstances surrounding a potential violation by the Company of Federal
hazardous materials transportation laws which occurred on March 31, 1995. The
investigation relates to the shipment of a substance contained in certain of the
Company's dye products which, when transported in air commerce, is required to
be declared as a hazardous material and is also subject to certain shipping,
packaging and labeling procedures. The purpose of the investigation is to
determine if the Company violated Federal Regulations regarding the packaging
and labeling of such material. Under provisions of the law, the Company could
be subject to civil penalties. The investigation is ongoing and the amount of
any potential penalties has not been determined. The Company has complied with
and been cooperative with all requests of the FAA.
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Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal 1995, no matters were submitted to a vote
of security holders of the Company through the solicitation of proxies or
otherwise.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock trades on The NASDAQ Stock Market under the symbol
"CLZR."
At September 22, 1995, there were 502 holders of record of the Company's
common stock and the last sales price of the Company's common stock was $3 15/16
on that day.
The following table sets forth quarterly high and low prices of the common
stock for the indicated fiscal periods:
1995 1994
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High Low High Low
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First Quarter $4 1/4 $2 5/8 $3 1/2 $1 11/16
Second Quarter 3 1/4 1 3/8 5 3/4 3
Third Quarter 2 7/8 1 7/16 4 1/4 3
Fourth Quarter 3 1 3/4 4 1/8 2 5/8
The Company has never paid a cash dividend and has no present intention to pay
cash dividends in the foreseeable future. The Board of Directors currently
intends to retain any future earnings for use in the Company's business.
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Item 6. Selected Financial Data
The table set forth below contains certain financial data for each of the last
five fiscal years of the Company. This data should be read in conjunction with
the detailed information, financial statements and notes thereto, as well as
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
(in thousands, except per share data)
Statement of Operations Data: 1995 1994 1993 1992 1991
-------- ------- -------- ------- -------
Revenue $26,466 $29,612 $33,158 $35,410 $36,518
Gross profit 11,539 13,651 13,434 19,763 20,979
Income (loss) from operations (1,638) 673 (9,106) 3,809 1,968
Income (loss) before
extraordinary item (1,577) 614 (9,208) 2,729 1,509
Net income (loss) (1,577) 614 (9,208) 3,729 2,039
Income (loss) per share:
Before extraordinary item (.30) .12 (1.78) .51 .27
Net income (loss) (.30) .12 (1.78) .70 .37
Weighted average number of
common and common equivalent
shares outstanding 5,228 5,208 5,180 5,304 5,490
Balance Sheet Data: 1995 1994 1993 1992 1991
-------- ------- -------- ------- -------
Working capital $ 8,413 $ 9,438 $ 8,775 $17,611 $13,200
Total assets 16,325 20,024 20,269 28,697 24,693
Current portion of long-term
debt 470 102 114 83 47
Long-term debt 476 203 305 330 179
Stockholders' equity 9,047 10,525 9,671 18,432 14,263
- 15 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
Revenue for fiscal 1995 was $26,466,000, a decrease of 11% from revenue of
$29,612,000 in fiscal 1994. This decrease is primarily the result of a change
in product mix toward lower priced products offset in part by an increase in
unit volume. International revenue as a percentage of total revenue continued
to grow in fiscal 1995 representing 52% of revenue in fiscal 1995 versus 51% in
fiscal 1994.
Gross margin decreased to 44% in fiscal 1995 from 46% in fiscal 1994,
reflecting the change in product mix toward lower priced products as well as
volume decreases in the Company's higher margin urology products.
Research and development spending decreased 2% to $3,733,000 in fiscal 1995
from $3,810,000 in fiscal 1994. As a percent of revenue, research and
development spending increased to 14% in fiscal 1995 from 13% in fiscal 1994.
The Company continues to build on its strengths in the urology and dermatology
markets and internal development efforts have been refocused accordingly. The
Company expects expenditures for research and development to be between 7% and
10% of revenue going forward.
Selling, general and administrative expenses increased 3% to $9,444,000 in
fiscal 1995 from $9,168,000 in fiscal 1994. This increase is primarily
attributable to increases in labor and related expenses as a result of an
increase in the Company's direct salesforce. As a result of both increased
spending and lower revenue, selling, general and administrative spending as a
percentage of revenue, increased to 36% in fiscal 1995 from 31% in fiscal 1994.
Interest income decreased to $69,000 in fiscal 1995 from $97,000 in fiscal
1994 as a result of lower average cash balances. Other income in fiscal 1995
and 1994 results primarily from foreign currency transactions as well as losses
relating to the disposal of property and equipment.
Provision for income taxes in fiscal 1995 results from taxable income in the
Company's subsidiary in Japan. Income taxes provided for in fiscal 1994 reflect
an effective tax rate of 39%. This is higher than the U.S. statutory rate of
34%, because it includes both foreign taxes, which generally are higher than the
U.S. statutory rate, and state income taxes.
As a result of the foregoing factors, the Company incurred a net loss of
$1,577,000, or $0.30 per share in fiscal 1995, compared to net income of
$614,000, or $0.12 in fiscal 1994.
Fiscal 1994 Compared to Fiscal 1993
Revenue for fiscal 1994 was $29,612,000, a decrease of 11% from revenue of
$33,158,000 in fiscal 1993. This decrease is primarily the result of reductions
in volume and price of the Company's vascular lesion laser due to product
- 16 -
maturity and intense competition. In response to this, the Company began
selling a revitalized version of this laser in the third quarter of fiscal 1994.
During the second half of fiscal 1994, the Company also began marketing a
revitalized version of its urology laser and new cryogenic products for the
treatment of prostate tissue and liver metastases, which the Company is selling
under a distribution agreement. International revenue as a percentage of total
revenue continued to grow in fiscal 1994 representing 51% of revenue in fiscal
1994 versus 48% in fiscal 1993.
Gross margin increased to 46% in fiscal 1994 from 41% in fiscal 1993,
reflecting lower manufacturing costs that resulted from the restructure actions
of fiscal 1993, as well as lower product costs from the revitalization of the
Company's urology and vascular lesion lasers.
Research and development spending decreased 16% to $3,810,000 in fiscal 1994
from $4,562,000 in fiscal 1993. As a percent of revenue, research and
development spending decreased to 13% in fiscal 1994 from 14% in fiscal 1993.
These decreases primarily reflect actions taken during the restructuring in
fiscal 1993, including lower labor expenses.
Selling, general and administrative expenses decreased 16% to $9,168,000 in
fiscal 1994 from $10,978,000 in fiscal 1993. As a percent of revenue, selling,
general and administrative spending decreased to 31% in fiscal 1994 from 33% in
fiscal 1993. These decreases are primarily attributable to decreases in labor
and related expenses as a result of the restructuring in the third quarter of
fiscal 1993 as well as lower selling and marketing program expenses in fiscal
1994.
Interest income decreased to $97,000 in fiscal 1994 from $133,000 in fiscal
1993 as a result of lower average cash balances. Other income in fiscal 1994
and 1993 results primarily from foreign currency transactions as well as losses
relating to the disposal of property and equipment.
Income taxes provided for in fiscal 1994 reflect an effective tax rate of 39%.
This is higher than the U.S. statutory rate of 34%, because it includes both
foreign taxes, which generally are higher than the U.S. statutory rate, and
state income taxes. Provision for income taxes in fiscal 1993 results from
taxable income in the Company's subsidiary in Japan. Effective July 4,1993, the
Company changed its method for accounting for income taxes in compliance with
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes." The impact of this change in fiscal 1994 was not significant.
As a result of the foregoing factors, net income was $614,000, or $0.12 per
share in fiscal 1994, compared to a net loss of $9,208,000, or $1.78 in fiscal
1993.
Liquidity and Capital Resources
Cash and equivalents at July 1, 1995 decreased to $2,532,000 from $3,782,000
at July 2, 1994. This decrease results primarily from a net loss of $1,577,000
and payments of approximately $2,432,000 related to accounts payable as well as
technology license and regulatory rights acquisitions during the year. These
- 17 -
uses were offset in part by a $2,065,000 reduction in trade receivables and
proceeds of $708,000 from the issuance of debt.
During fiscal 1995, the Company borrowed $708,000 on a two year 1.9% note with
a foreign bank. The Company's remaining short-term and long-term debt is
comprised solely of capital lease obligations, which was $116,000 and $122,000
at July 1, 1995, versus $102,000 and $203,000 at July 2, 1994.
The Company believes its existing funds are sufficient to meet the operating
requirements of the Company for the foreseeable future.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data are included herein and are
indexed under item 14 (a) (1)-(2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
- 18 -
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the Directors of the Company, see the section
entitled "Election of Directors" appearing in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on November 16,
1995, which section is incorporated herein by reference. The current executive
officers of the Company are set forth under the caption "Executive Officers" in
Item 1 of this Form 10-K.
Item 11. Executive Compensation
See the section entitled "Executive Compensation and Other Information
Concerning Officers and Directors" appearing in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on November 16,
1995, which section is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on November 16, 1995, which section is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See the section entitled "Certain Transactions" appearing in the Company's
Proxy Statement in connection with its Annual Meeting of Shareholders to be held
on November 16, 1995, which section is incorporated herein by reference.
- 19 -
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following items are filed as part of this report:
(1) Consolidated Financial Statements: Page
----
Report of Independent Accountants 23
Consolidated Balance Sheets - July 1, 1995 and
July 2, 1994 24
Consolidated Statements of Operations - Years
ended July 1, 1995, July 2, 1994 and July 3, 1993 25
Consolidated Statements of Stockholders' Equity -
Years Ended July 1, 1995, July 2, 1994 and July 3, 1993 26
Consolidated Statements of Cash Flows - Years Ended
July 1, 1995, July 2, 1994 and July 3, 1993 27
Notes to Consolidated Financial Statements 28
(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 38
The report of the registrant's independent accountants with respect to the
above-listed financial statements and financial statement schedule appears on
page 23 of this report.
All other financial statements and schedules not listed have been omitted
since the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable, material or required.
(3) Exhibits: Except as otherwise noted, the following documents are
incorporated by reference from the Company's Registration Statement on Form
S-3 (File Number 33-24565):
3.1 Certificate of Incorporation, as amended
3.2 <FN9> By-laws of the Company, as amended and restated
3.3 <FN1> Agreement of Merger between Candela Corporation, Inc., a
Massachusetts corporation, and Candela Laser Corporation, a
Delaware corporation
4.1 <FN6> Form of Rights Agreement dated as of September 4, 1992 between
the Company and The First National Bank of Boston, as Rights
Agent, which includes as Exhibit A thereto the Form of Rights
Certificate
10.1 <FN1> 1985 Incentive Stock Option Plan
10.2 1987 Stock Option Plan
10.2.1 <FN2> 1989 Stock Plan
10.2.2 <FN3> 1990 Employee Stock Purchase Plan
10.2.3 <FN3> 1990 Non-Employee Director Stock Option Plan
10.2.4 <FN7> 1993 Non-Employee Director Stock Option Plan
10.3 <FN7> Lease for premises at 526 Boston Post Road, Wayland,
Massachusetts
- 20 -
10.4 <FN7> Lease for premises at 530 Boston Post Road, Wayland,
Massachusetts
10.5 Patent License Agreement between the Company and Patlex
Corporation effective as of July 1, 1988
10.6 <FN4> License Agreement among the Company, Technomed International,
Inc. and Technomed International S.A. dated as of December 20,
1990
10.7 <FN5> License Agreement between the Company and Pillco Limited
Partnership effective as of October 1, 1991
10.8 <FN8> Distribution Agreement between the Company and Cryogenic
Technology Limited, dated October 15, 1993
10.9 <FN10> Asset Purchase Agreement between the Company and Derma-Lase,
Limited and Derma-Lase, Inc. dated June 23, 1994.
10.10 <FN11> Employment Agreement between the Company and Gerard E. Puorro,
President and Chief Executive Officer dated August 8, 1994.
22.0 <FN11> Subsidiaries of the Company
24.0 <FN11> Consent of Independent Accountants (Coopers & Lybrand, L.L.P.)
<FN1> Previously filed as an exhibit to Registration Statement No. 33-5448B
and incorporated herein by reference.
<FN2> Previously filed as an exhibit to the Company's Amended and Restated
Annual Report on Form 10-K for the fiscal year ended June 30, 1988, and
incorporated herein by reference.
<FN3> Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1990, and incorporated herein
by reference.
<FN4> Previously filed as an exhibit to Form 10-Q for the quarter ended
December 29, 1990, and incorporated herein by reference.
<FN5> Previously filed as an exhibit to Form 10-Q for the quarter ended
September 28, 1991, and incorporated herein by reference.
<FN6> Previously filed as an exhibit to Form 8-K, dated September 8, 1992,
and incorporated herein by reference.
<FN7> Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended July 3, 1993, and incorporated herein by
reference.
<FN8> Previously filed as an exhibit to Form 10-Q for the quarter ended
January 1, 1994, and incorporated herein by reference.
<FN9> Previously filed as an exhibit to Form 10-Q for the quarter ended
April 2, 1994, and incorporated herein by reference.
<FN10> Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended July 2, 1994, and incorporated herein by
reference.
<FN11> Filed herewith.
- 21 -
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ended July 1, 1995.
(c) The Company hereby files, as part of this Form 10-K, the exhibits listed in
Item 14(a)(3) above.
(d) The Company hereby files, as part of this Form 10-K, the consolidated
financial statement schedules listed in Item 14(a)(2) above.
- 22 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Candela Laser Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Candela Laser Corporation listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Candela Laser
Corporation as of July 1, 1995 and July 2, 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended July 1, 1995 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
August 4, 1995 ------------------------
COOPERS & LYBRAND L.L.P.
- 23 -
Consolidated Balance Sheets
July 1, 1995 and July 2, 1994
(dollars in thousands)
Assets 1995 1994
- --------------------------------------------------- -------- --------
Current assets:
Cash and equivalents (Note 1) $ 2,532 $ 3,782
Accounts receivable (net of allowance of $361 and
$445 in 1995 and 1994, respectively) (Note 1) 5,037 7,563
Notes receivable 1,853 1,392
Inventory (Note 3) 5,314 5,401
Other current assets 479 596
-------- --------
Total current assets 15,215 18,734
Property and equipment, net (Note 4) 750 1,002
Other assets 360 288
-------- --------
$16,325 $20,024
======== ========
Liabilities and Stockholders' Equity 1995 1994
- --------------------------------------------------- -------- --------
Current liabilities:
Current portion of long-term debt (Note 6) $ 470 $ 102
Deferred income (Note 5) 1,377 1,879
Accounts payable 2,160 3,992
Accrued payroll and related expenses 624 916
Accrued warranty costs 648 796
Income taxes payable 677 457
Other accrued liabilities 846 1,154
-------- --------
Total current liabilities 6,802 9,296
Long-term debt (Note 6) 476 203
Commitments (Note 6)
Stockholders' equity (Note 7):
Common stock, $.01 par value: 15,000,000 shares
authorized; 5,435,711 and 5,420,742 shares
issued in 1995 and 1994, respectively 54 54
Additional paid-in capital 18,349 18,326
Treasury stock, at cost: 196,904 in 1995 and 1994 (1,574) (1,574)
Retained deficit (8,333) (6,756)
Accumulated translation adjustment 551 475
-------- --------
Total stockholders' equity 9,047 10,525
-------- --------
$16,325 $20,024
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- 24 -
Consolidated Statements of Operations
For the years ended July 1, 1995, July 2, 1994 and July 3, 1993
(in thousands, except per share data)
1995 1994 1993
-------- -------- --------
Revenue $26,466 $29,612 $33,158
Cost of sales 14,927 15,961 19,724
-------- -------- --------
Gross profit 11,539 13,651 13,434
Operating expenses:
Research and development 3,733 3,810 4,562
Selling, general and administrative 9,444 9,168 10,978
Restructure and other costs (Note 2) - - 7,000
-------- -------- --------
Total operating expenses 13,177 12,978 22,540
-------- -------- --------
Income (loss) from operations (1,638) 673 (9,106)
Other income (expense):
Interest income 69 97 133
Interest expense (47) (47) (61)
Other 539 291 176
-------- -------- --------
Total other income (expense) 561 341 248
-------- -------- --------
Income (loss) before income taxes (1,077) 1,014 (8,858)
Provision for income taxes 500 400 350
-------- -------- --------
Net income (loss) $(1,577) $ 614 $(9,208)
======== ======== ========
Net income (loss) per share $ (0.30) $ 0.12 $ (1.78)
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 5,228 5,208 5,180
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- 25 -
Consolidated Statements of Stockholders' Equity
For the years ended July 1, 1995, July 2, 1994 and July 3, 1993
(in thousands)
Common Stock Additional Retained Treasury Stock Accumulated
------------- Paid-in Earnings --------------- Translation
Shares Amount Capital (Deficit) Shares Amount Adjustment Total
------ ------ ---------- --------- ------ -------- ----------- -------
Balance, June 27, 1992 5,350 $54 $18,006 $ 1,838 (194) $(1,565) $ 99 $18,432
Sale of common stock
under stock plans 45 246 246
Exercise of stock warrants 1 8 8
Net loss (9,208) (9,208)
Currency translation adjustment 193 193
------ ------ ---------- --------- ------ -------- ----------- --------
Balance, July 3, 1993 5,396 54 18,260 (7,370) (194) (1,565) 292 9,671
Sale of common stock
under stock plans 25 66 66
Purchase of common stock (3) (9) (9)
Net income 614 614
Currency translation adjustment 183 183
------ ------ ---------- --------- ------ -------- ----------- --------
Balance, July 2, 1994 5,421 54 18,326 (6,756) (197) (1,574) 475 10,525
Sale of common stock
under stock plans 15 23 23
Net loss (1,577) (1,577)
Currency translation adjustment 76 76
------ ------ ---------- --------- ------ -------- ----------- --------
Balance, July 1, 1995 5,436 $54 $18,349 $(8,333) (197) $(1,574) $551 $ 9,047
====== ====== ========== ========= ====== ======== =========== ========
The accompanying notes are an integral part of the consolidated financial statements.
- 26 -
Consolidated Statements of Cash Flows
For the years ended July 1, 1995, July 2, 1994, and July 3, 1993
(in thousands)
1995 1994 1993
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(1,577) $ 614 $(9,208)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 605 649 711
Deferred income taxes - - 1,197
Provision for restructure and other costs - - 7,000
Loss on disposal of property and equipment 24 3 32
Change in assets and liabilities:
Accounts receivable 2,526 (1,375) 2,438
Notes receivable (461) 290 (1,008)
Inventory (48) 786 (1,471)
Refundable income taxes - 1,405 (1,013)
Other current assets 117 386 (40)
Other assets (72) 52 29
Accounts payable (1,832) 830 (1,235)
Accrued payroll and related expenses (292) (101) (444)
Deferred income (502) 45 -
Accrued warranty costs (148) (610) (473)
Income taxes payable 220 5 265
Other accrued liabilities (308) (1,404) (282)
-------- -------- --------
Total adjustments (171) 961 5,706
-------- -------- --------
Net cash provided by (used for) operating
activities (1,748) 1,575 (3,502)
Cash flows from investing activities:
Payment for additions to property and
equipment (209) (391) (436)
Divestiture of joint venture - - (276)
-------- -------- --------
Net cash used for investing activities (209) (391) (712)
Cash flows from financing activities:
Proceeds from issuance of debt 708 - -
Payments of capital lease obligations (100) (114) (104)
Proceeds from issuance of common stock, net 23 66 254
Repurchase of common stock - (9) -
-------- -------- --------
Net cash provided by (used for) financing
activities 631 (57) 150
Accumulated translation adjustment 76 183 193
-------- -------- --------
Net increase (decrease) in cash and equivalents (1,250) 1,310 (3,871)
Cash and equivalents at beginning of period 3,782 2,472 6,343
-------- -------- --------
Cash and equivalents at end of period $ 2,532 $ 3,782 $ 2,472
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- 27 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Candela Laser
Corporation and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
The Company's fiscal year ends on the Saturday nearest June 30.
Certain amounts from prior years have been reclassified to conform to the
current year's presentation.
Cash and Equivalents
The Company classifies investments purchased with a maturity of three months
or less at the date of acquisition as cash equivalents. At July 1, 1995 and
July 2, 1994, substantially all cash equivalents were invested in U.S. Treasury
Bills.
The Company had approximately $385,000 of restricted cash included in the July
2, 1994 cash balance. This restricted cash served as collateral for irrevocable
letters of credit obtained in fiscal 1994 which matured at various dates during
the first quarter of fiscal 1995.
Accounts Receivable and Notes Receivable
The Company's trade accounts receivables and notes receivables are primarily
from sales to end users and distributors servicing the urology and dermatology
markets and reflect a broad domestic and international customer base. The
Company does not require collateral and has not historically experienced
significant credit losses related to receivables from individual customers or
groups of customers in any particular industry or geographic area. One
distributor customer accounted for 23% of total receivables at July 1, 1995.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Purchased property and equipment is recorded at cost. Property and equipment
purchased under capital lease obligations is recorded at the lesser of cost or
the present value of the minimum lease payments required during the lease
period. Laser systems are capitalized at cost. Significant improvements are
capitalized; maintenance and repairs are charged to expense as incurred. Upon
sale or retirement of property and equipment, the costs and accumulated
depreciation are removed from the accounts and any gain or loss is included in
- 28 -
other income (expense). Depreciation and amortization are provided using the
straight-line method over estimated useful lives as follows:
Number
of Years
--------
Leasehold improvements and assets under capital lease 2 to 5
Office furniture and other equipment 3 to 5
Laser systems 3
Revenue Recognition
Product sales - Revenue from product sales, except sales to certain
distributors, are generally recognized at the time of shipment. Shipments made
to distributors, where payment is dependent on resale of the system, are not
recognized unless the distributor demonstrates that the system is sold.
Grants - Grants represent revenue earned through government contracts granted
under the Small Business Innovation Research program. Government contracts
limit reimbursement to 100% of allowable direct costs and a negotiated rate for
indirect costs. Revenue is recognized as reimbursable costs are incurred.
Service Contracts - Revenue from the sale of service contracts is deferred and
recognized on a straight-line basis over the contract period.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation." Assets and liabilities are
translated into U.S. dollars at current exchange rates, while income and expense
items are translated at average rates of exchange prevailing during the year.
Exchange gains and losses arising from translation of the Japanese subsidiary
balance sheet are accumulated as a separate component of stockholders' equity.
Net exchange gains resulting from foreign currency transactions amounted to
$514,000, $285,000 and $211,000 for fiscal 1995, 1994 and 1993, respectively,
and are included in other income (expense).
The Company uses forward foreign exchange contracts to hedge some foreign
denominated receivables. The related gains and losses are deferred and
recognized as the forward contracts are settled. At July 1, 1995, the Company
had forward contracts to sell 85.5 million Japanese yen for $1,000,000 at
various dates in fiscal 1996.
Product Warranty Costs
The Company's warranty policy on end user sales of medical devices is
generally one year on parts and labor. Distributor sales generally include a
- 29 -
parts warranty only. Estimated future costs for initial product warranties are
provided for at the time of sale.
Earnings (Loss) Per Share
Primary earnings (loss) per common share is computed by dividing net income
(loss) attributable to common stock by the weighted average number of shares of
common stock and, if dilutive, common stock equivalents. Common stock
equivalents include shares issuable upon the exercise of stock option or
warrants, net of shares assumed to have been purchased with the proceeds.
2. Restructure and Other Costs
In the third quarter of 1993, the Company recorded restructure and other costs
of $7,000,000. This restructure included a decision to discontinue the
development of certain ophthalmology products resulting in a write-off of the
related inventory of approximately $2,800,000. The Company also implemented
design modifications to one of its dermatology products which resulted in a
$1,400,000 write-off of related inventory and the establishment of a reserve of
$1,100,000 for anticipated upgrade and warranty costs. In addition, the Company
reserved $700,000 to cover anticipated legal expenses associated with patent
infringement cases as well as $1,000,000 to cover severance and the related
costs of a reduction in force.
In completing the implementation of the restructure plan in fiscal 1994, the
Company used approximately $500,000 of residual amounts originally reserved for
inventory and severance related costs for legal expenses in excess of the amount
previously provided. No material restructure reserves remained at July 2, 1994.
3. Inventory
Inventory consists of the following at July 1, 1995 and July 2, 1994 (in
thousands):
1995 1994
------ ------
Raw Materials $2,126 $1,907
Work in process 1,699 1,169
Finished goods 1,489 2,325
------ ------
$5,314 $5,401
====== ======
- 30 -
4. Property and Equipment
Property and equipment consists of the following at July 1, 1995 and July 2,
1994 (in thousands):
1995 1994
------ ------
Leasehold improvements $ 190 $ 187
Office furniture 621 614
Laser systems 483 454
Computers and other equipment 2,756 2,586
------ ------
4,050 3,841
Less accumulated depreciation and amortization 3,300 2,839
------ ------
Property and equipment, net $ 750 $1,002
====== ======
Depreciation expense was approximately $470,000, $484,000 and $652,000 for
fiscal 1995, 1994 and 1993, respectively.
Assets under capital lease obligations of $587,000 and $567,000 are included
in property and equipment at July 1, 1995 and July 2, 1994, respectively.
Accumulated depreciation on these assets was $396,000 and $283,000 at July 1,
1995 and July 2, 1994, respectively.
5. Deferred Income
Deferred income consists of the following at July 1, 1995 and July 2, 1994 (in
thousands):
1995 1994
------ ------
Service contract revenue $ 957 $ 902
Shipments to distributors - 368
Customer deposits 112 176
Other 308 433
------ ------
$1,377 $1,879
====== ======
6. Long-Term Obligations
Lease Commitments
The Company leases facilities under noncancellable operating leases. These
leases expire in March and May 1996 with two and one year renewal options,
respectively. Future minimum lease payments under noncancellable operating
leases are approximately $403,000 for fiscal 1996 and none thereafter.
Total rent expense was approximately $571,000, $546,000 and $544,000 for
fiscal 1995, 1994 and 1993, respectively.
- 31 -
Long-term Debt
The Company's long-term debt consists of the following at July 1, 1995 and
July 2, 1994 (in thousands):
1995 1994
---- ----
Unsecured term bank loan; interest at 1.9%; quarterly
payments of principle and interest through June 1997 $708
Obligations under capital leases with options to
purchase equipment; interest from 9.88% to 12.26%;
payments of principle and interest through March 2002 238 $305
---- ----
946 305
Less current portion 470 102
---- ----
$476 $203
==== ====
In June 1995, the Company borrowed 60 million Japanese yen at 1.9% on a two
year note from a foreign bank.
The Company had additions to capital lease obligations of approximately
$33,000 and $110,000 in fiscal 1995 and 1993, respectively, for the acquisition
of certain equipment. These obligations are collateralized against the
respective equipment. There were no additions to capital lease obligations in
fiscal 1994.
Cash paid for interest, including interest on capital lease obligations,
totaled approximately $47,000, $47,000 and $61,000 for fiscal 1995, 1994, and
1993, respectively.
As of July 1, 1995, the Company's approximate minimum payment requirements
under long-term debt agreements are as follows (in thousands):
Fiscal
------ ----
1996 $498
1997 449
1998 28
1999 9
2000 7
----
Total minimum payments 991
Less interest 45
----
Present value of minimum payments 946
Less current portion 470
----
Long-term obligations $476
====
- 32 -
7. Stockholders' Equity
Stock Plans
1985, 1987 and 1989 Stock Option Plans: The 1985, 1987 and 1989 Stock Option
Plans provide for the granting of incentive stock options to employees to
purchase common stock at not less than the fair market value of the stock on the
date of grant. The 1987 and 1989 Stock Option Plans also provide for the
granting of nonqualified stock options. The options generally become
exercisable ratably over two or four years from the date of grant and expire ten
years from the date of the grant. The maximum number of shares to which options
may be granted under the 1985, 1987 and 1989 Plans is 129,178, 200,000 and
750,000 respectively. The Board of Directors has terminated the granting of
options under the 1985 and 1987 plans. On July 21, 1995, the Board of Directors
approved the repricing of certain previously outstanding stock options. Options
outstanding at prices ranging from $5.50 to $14.00 were amended to $3.1875, the
fair market value of the stock on that date.
1990 and 1993 Non-Employee Director Stock Option Plans: The 1990 and 1993
Non-Employee Director Stock Option Plans provide for the issuance of options for
the purchase of up to 60,000 and 80,000 shares of common stock, respectively.
Under these plans, each director who is neither an employee nor an officer
receives a one-time grant of an option to purchase 10,000 shares of common stock
at an exercise price equal to the fair market value of the common stock on the
date of grant. The options generally become exercisable in equal amounts over a
period of two or four years from the date of grant, expire seven or ten years
after the date of grant and are nontransferable.
The following is a summary of stock option activity under these plans:
Number of
Shares
---------
Balance at June 27, 1992 504,005
Granted ($3.125 - $3.375 per share) 264,500
Exercised ($1.865 - $8.50 per share) (12,997)
Canceled ($5.50 - $18.50 per share) (90,184)
---------
Balance at July 3, 1993 665,324
Granted ($3.25 - $5.50 per share) 47,964
Exercised ($1.865 per share) (224)
Canceled ($3.375 - $15.25 per share) (96,695)
---------
Balance at July 2, 1994 616,369
Granted ($1.50 - $2.75 per share) 250,000
Canceled ($1.865 - $15.00 per share) (114,098)
---------
Balance at July 1, 1995 ($1.50 - $15.50 per share) 752,271
=========
Exercisable at July 1, 1995 ($3.00 - $15.50 per share) 496,646
=========
Options available for grant at July 1, 1995 109,067
=========
- 33 -
1990 Employee Stock Purchase Plan: The 1990 Employee Stock Purchase Plan
provides for the sale of up to 500,000 shares of common stock to eligible
employees. The shares are issuable at the lesser of 85% of the average market
price on the first or last day of semiannual periods. Substantially all full-
time employees are eligible to participate in the plan.
The following is a summary of shares issued under this plan:
Shares Price per share
------ ---------------
1993 31,703 $2.75 - $7.00
1994 24,912 $2.50 - $2.75
1995 14,969 $1.50
Reserved Shares
The Company has reserved 1,261,217 shares of common stock for issuance under
its stock plans.
Common Stock Warrants
In connection with a litigation settlement in January 1991, the Company issued
warrants to purchase 300,000 shares of common stock in March 1992. The exercise
price for the warrants is $6.875 per share, the fair market value of the
Company's common stock on the date of the settlement. These warrants will
expire in November 2000. During fiscal 1993, 1,305 warrants were exercised. No
warrants were exercised during fiscal 1995 or 1994.
Stockholder Rights Plan
On September 4, 1992, the Company adopted a Stockholder Rights Plan under
which it declared a dividend of one common stock purchase Right for each share
of the Company's common stock outstanding on September 22, 1992. The Rights are
not currently exercisable, but would become exercisable if certain triggering
events occur, such as the initiation of certain tender offers for the Company's
common stock. If such an event occurs, each Right would initially entitle
shareholders to purchase one share of the Company's common stock at an exercise
price of $48 per share, subject to adjustment. In the event that the Rights are
exercised after further triggering events, each Right would entitle holders to
purchase, for the exercise price then in effect, shares of the Company's common
stock (or other property, under certain circumstances) having a value of twice
the exercise price. Such Rights do not extend to any shareholders whose action
triggered the Rights. The Company can in certain circumstances redeem the
Rights at $.005 per Right. The Rights expire on September 22, 2002, unless
redeemed earlier by the Company.
- 34 -
8. Income Taxes
The components of income before income taxes and the related provision for
income taxes consists of the following for fiscal 1995, 1994 and 1993 (in
thousands):
1995 1994 1993
-------- ------- --------
Income (loss) before income taxes:
Domestic $(2,332) $ 638 $(9,280)
Foreign 1,255 376 422
-------- ------- --------
$(1,077) $ 1,014 $(8,858)
======== ======= ========
Provision for income taxes:
Current provision (benefit):
Federal $ - $ 92 $(1,055)
State 7 16 (150)
Foreign 493 292 455
-------- ------- --------
500 400 (750)
Deferred provision: -------- ------- --------
Federal - - $ 1,100
State - - -
-------- ------- --------
- - $ 1,100
-------- ------- --------
Total provision for income taxes $ 500 $ 400 $ 350
======== ======= ========
The components of the Company's deferred tax assets consist of the following
at July 1, 1995 and July 2, 1994 (in thousands):
1995 1994
------- -------
Federal and state net operating loss carryforwards $1,851 $1,069
Federal and state tax credit carryforwards 1,759 1,762
Inventory valuation reserves 692 389
Warranty reserve 209 275
Deferred revenue 123 173
Intercompany profit 265 265
Insurance reserve 50 50
Other 228 324
------- -------
Net deferred tax assets before valuation allowance 5,177 4,307
Valuation allowance against net deferred tax assets (5,177) (4,307)
------- -------
Net deferred tax assets $ 0 $ 0
======= =======
The deferred provision results from differences in the timing of recognition
of revenue and expense for financial and tax purposes. In fiscal 1993, the tax
effect of the deferred provision was $1,100,000 which related to the reduction
of deferred income taxes resulting from recognition of net operating losses.
- 35 -
A reconciliation from the federal statutory tax rate to the effective tax rate
is as follows:
1995 1994 1993
----- ---- -----
Statutory rate (34)% 34% (34)%
State taxes - 2 (1)
Differences between foreign and
U.S. tax rates 30 17 3
Utilization of deferred tax assets (25) (17) -
Unbenefited losses 72 - 35
Other 3 3 1
----- ---- -----
Effective tax rate 46% 39% 4%
===== ==== =====
Actual income taxes paid were $364,000, $375,000 and $265,000 in fiscal 1995,
1994 and 1993, respectively.
At July 1, 1995, the Company had net operating loss carryforwards available
for federal income tax purposes of approximately $4,250,000 which expire from
2008 to 2009. In addition, the Company has approximately $1,400,000 of credit
carryforwards for federal income tax purposes expiring at various dates through
2009.
9. Segment, Geographic and Major Customer Information
The Company operates principally in a single industry segment to design,
manufacture and sell medical devices and related equipment.
- 36 -
Geographic information for fiscal 1995, 1994 and 1993 is as follows (in
thousands):
1995 1994 1993
-------- -------- --------
Revenue:
United States $18,599 $22,022 $25,348
Intercompany 4,537 5,734 5,825
-------- -------- --------
23,136 27,756 31,173
Europe - - 387
Japan 7,867 7,590 7,423
-------- -------- --------
31,003 35,346 38,983
Elimination (4,537) (5,734) (5,825)
-------- -------- --------
$26,466 $29,612 $33,158
======== ======== ========
Operating income(loss):
United States (2,507) 650 (9,180)
Europe (7) (6) (231)
Japan 781 167 476
Elimination 95 (138) (171)
-------- -------- --------
$(1,638) $ 673 $(9,106)
======== ======== ========
Identifiable assets:
United States 13,763 19,331 20,069
Europe 468 530 1,744
Japan 5,744 5,395 4,925
Elimination (3,650) (5,232) (6,469)
-------- -------- --------
$16,325 $20,024 $20,269
======== ======== ========
United States revenue includes export sales to unaffiliated companies located
principally in Western Europe, the Middle East, and in the Asia-Pacific region,
which approximated $5,905,000, $7,501,000 and $7,965,000 for fiscal 1995, 1994
and 1993, respectively.
A distributor customer accounted for 13% of revenue in fiscal 1993.
10. Employee Benefit Plans
The Company offers a savings plan which allows eligible U.S. employees to make
tax-deferred contributions, a portion of which are matched by the Company.
Company contributions vest ratably with three years of employment and amounted
to $68,000, $71,000 and $84,000 in fiscal 1995, 1994 and 1993, respectively.
- 37 -
SCHEDULE II
CANDELA LASER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
for the years ended July 1, 1995, July 2, 1994 and July 3, 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions Deductions Balance at
Beginning Charged to from End of
Description of Period Income Reserves Period
----------------------- ---------- ---------- ---------- ----------
Reserves deducted from assets to which they apply (in thousands):
Allowance for doubtful accounts:
Year ended July 1, 1995 $445 $ - $84 $361
==== ==== === ====
Year ended July 2, 1994 $308 $159 $22 $445
==== ==== === ====
Year ended July 3, 1993 $282 $ 87 $61 $308
==== ==== === ====
- 38 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 27, 1995.
CANDELA LASER CORPORATION
By: Gerard E. Puorro
-----------------
Gerard E. Puorro, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Gerard E. Puorro President, Chief Executive September 27, 1995
- -------------------- Officer and Director
Gerard E. Puorro (Principal Executive Officer)
Diane M. Marcou Corporate Controller and September 27, 1995
- -------------------- Treasurer
Diane M. Marcou (Principal Accounting Officer)
Kenneth D. Roberts Chairman of the Board September 27, 1995
- -------------------- of Directors
Kenneth D. Roberts
Richard J. Cleveland Director September 27, 1995
- --------------------
Richard J. Cleveland
Robert E. Dornbush Director September 27, 1995
- --------------------
Robert E. Dornbush
Theodore G. Johnson Director September 27, 1995
- --------------------
Theodore G. Johnson
Douglas W. Scott Director September 27, 1995
- --------------------
Douglas W. Scott
- 39 -
EXHIBIT INDEX
Pages
-----
10.10 Employment Agreement between the Company
and Gerard E. Puorro, President and Chief
Executive Officer dated August 4, 1994. 41-51
22.0 Subsidiaries of the Company 52
24.0 Consent of Independent Accountants 53
(Coopers & Lybrand L.L.P.)
- 40 -