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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 1, 2000
Commission file number 0-14742
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CANDELA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2477008
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
530 BOSTON POST ROAD,
WAYLAND, MASSACHUSETTS
01778
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code:
(508) 358-7400
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS OUTSTANDING AT FEBRUARY 9, 2000
----- -------------------------------
Common Stock, $.01 par value 7,382,637
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CANDELA CORPORATION
INDEX
PAGE(S)
--------
Part I. Financial Information:
Item 1. Unaudited Condensed Consolidated Balance Sheets as of
January 1, 2000 and July 3, 1999............................ 3
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income for the three month and six month
periods
ended January 1, 2000 and December 26, 1998................. 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six month period ended January 1, 2000 and
December 26, 1998........................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-15
Cautionary Statements....................................... 15-16
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 16
Part II. Other Information:
Item 1. Legal proceedings........................................... 17-18
Item 4 Submission of Matters to a Vote of Security Holders......... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
Exhibit 27.1 Financial Data Schedule........................ 18
2
PART I. FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
CANDELA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JANUARY 1, JULY 3,
2000 1999
----------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $31,294 $10,055
Accounts receivable, net.................................. 12,855 12,337
Notes receivable.......................................... 2,442 2,186
Inventories............................................... 6,732 6,927
Other current assets...................................... 1,240 928
------- -------
Total current assets.................................... 54,563 32,433
Property and equipment, net................................. 2,648 2,626
Deferred tax assets......................................... 2,695 1,100
Other assets................................................ 312 292
------- -------
Total Assets............................................ $60,218 $36,451
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,914 $ 4,846
Accrued payroll and related expenses...................... 1,849 3,735
Accrued warranty costs.................................... 2,619 2,502
Income taxes payable...................................... 2,407 3,185
Restructuring reserve..................................... 1,283 1,519
Other accrued liabilities................................. 2,051 1,132
Current portion of long-term debt......................... 24 415
Deferred income........................................... 2,655 1,913
------- -------
Total current liabilities............................... 16,802 19,247
------- -------
Long-term debt.............................................. 2,994 3,181
------- -------
Commitments and contingencies............................... -- --
------- -------
Stockholders' equity:
Common stock.............................................. 73 56
Additional paid-in capital................................ 38,838 18,562
Retained earnings (accumulated deficit)................... 2,112 (3,846)
Accumulated other comprehensive income.................... (601) (749)
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Total stockholders' equity.............................. 40,422 14,023
------- -------
Total Liabilities and Stockholders' Equity.............. $60,218 $36,451
======= =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED: FOR THE SIX MONTHS ENDED:
--------------------------- ---------------------------
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1999 2000 1998
----------- ------------- ----------- -------------
Revenues:
Lasers and other products........................... $14,116 $10,385 $27,208 $18,407
Product related service............................. 2,730 2,098 4,813 4,098
Skin care center.................................... 933 816 1,798 1,532
------- ------- ------- -------
Total revenues.................................... 17,779 13,299 33,819 24,037
Cost of sales:
Lasers and other products........................... 5,463 4,505 10,513 8,306
Product related service............................. 1,583 1,473 2,863 2,816
Skin care center.................................... 626 521 1,195 1,050
------- ------- ------- -------
Total cost of sales............................... 7,672 6,499 14,571 12,172
------- ------- ------- -------
Gross profit.......................................... 10,107 6,800 19,248 11,865
Operating expenses:
Selling, general, and administrative................ 5,128 4,213 10,129 7,546
Research and development............................ 1,202 760 2,183 1,448
------- ------- ------- -------
Total operating expenses.......................... 6,330 4,973 12,312 8,994
------- ------- ------- -------
Income from operations................................ 3,777 1,827 6,936 2,871
Other income (expense):
Interest income..................................... 417 20 635 31
Interest expense.................................... (117) (163) (244) (241)
Other............................................... (20) 79 121 112
------- ------- ------- -------
Total other income (expense)...................... 280 (64) 512 (98)
------- ------- ------- -------
Income before income taxes............................ 4,057 1,763 7,448 2,773
Provision for income taxes............................ 811 370 1,489 470
------- ------- ------- -------
Net income............................................ $ 3,246 $ 1,393 $ 5,959 $ 2,303
======= ======= ======= =======
Basic earnings per share(1)........................... $ 0.45 $ 0.25 $ 0.84 $ 0.42
Diluted earnings per share(1)......................... $ 0.40 $ 0.24 $ 0.75 $ 0.41
======= ======= ======= =======
Weighted average shares outstanding(1)................ 7,290 5,482 7,073 5,480
Adjusted weighted average shares outstanding(1)....... 8,151 5,739 7,930 5,650
======= ======= ======= =======
Net Income............................................ $ 3,246 $ 1,393 $ 5,959 $ 2,303
Other comprehensive income net of tax:
Foreign currency translation adjustment............. 336 (18) 791 308
------- ------- ------- -------
Comprehensive Income.................................. $ 3,582 $ 1,375 $ 6,750 $ 2,611
======= ======= ======= =======
- --------------------------
(1) See footnote 5 for information on subsequent stock split.
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED:
---------------------------
JANUARY 1, DECEMBER 26,
2000 1998
----------- -------------
Cash flows from operating activities:
Net income................................................ $ 5,959 $ 2,303
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 333 455
Provision for bad debts................................. 215 63
Accretion of debt discount.............................. 48 24
Increase (decrease) in cash from working capital:
Accounts receivable................................... (404) (1,532)
Notes receivable...................................... 71 574
Inventories........................................... 272 769
Other current assets.................................. (225) (572)
Other assets.......................................... (1,661) (52)
Accounts payable...................................... (1,083) (736)
Accrued payroll and related expenses.................. (1,896) 13
Deferred income....................................... 738 226
Accrued warranty costs................................ 117 305
Income taxes payable.................................. (886) 434
Accrued restructuring charges......................... (236) (225)
Other accrued liabilities............................. 1,124 801
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Net cash provided by operating activities................... 2,486 2,850
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Cash flows from investing activities:
Purchases of property and equipment....................... (356) (121)
------- -------
Net cash used for investing activities...................... (356) (121)
------- -------
Cash flows from financing activities:
Principal payments of long-term debt...................... (78) (519)
Repayments of line of credit.............................. -- (2,700)
Principal payments of capital lease obligations........... (556) (220)
Proceeds from the issuance of debt and stock warrants..... -- 3,700
Proceeds from the issuance of common stock................ 20,292 38
------- -------
Net cash provided by financing activities................... 19,658 299
------- -------
Effect of exchange rates on cash and cash equivalents....... (549) 206
------- -------
Net increase in cash and cash equivalents................... 21,239 3,234
------- -------
Cash and cash equivalents at beginning of period............ 10,055 1,615
------- -------
Cash and cash equivalents at end of period.................. $31,294 $ 4,849
======= =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
5
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and
notes do not include all of the disclosures made in the Annual Report on
Form 10-K of Candela Corporation (the "Company") for fiscal 1999, which should
be read in conjunction with these financial statements. The financial
information included herein is unaudited; however, the condensed consolidated
balance sheet as of July 3, 1999 was derived from the audited consolidated
balance sheet dated July 3, 1999. However, in the opinion of management, the
statements include all necessary adjustments for a fair presentation of the
interim results and are prepared and presented in a manner consistent with the
Company's Annual Report on Form 10-K. The results for the three and six month
periods ended January 1, 2000 are not necessarily indicative of the results to
be expected for the full year.
2. INVENTORIES
Inventories consist of the following (in thousands):
JANUARY 1, 2000 JULY 3, 1999
---------------- -------------
Raw materials................................... $1,853 $1,643
Work in process................................. 1,155 1,395
Finished goods.................................. 3,724 3,889
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$6,732 $6,927
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3. DEBT
On December 1, 1999, the Company's revolving bank line of credit expired. No
borrowings were outstanding at the time of expiration.
4. STOCK OFFERING
In July, 1999, the Company completed a public offering of 2,430,000 shares
of common stock, of which 1,499,854 shares were sold by the Company and 930,146
shares were sold by certain selling shareholders. $19,805,573 was received in
cash after underwriting discounts upon completion of the offering. Issuance
costs of approximately $585,000 were incurred in conjunction with the offering,
of which $411,796 were paid in the current fiscal year, the balance was
previously reflected as a prepaid balance in the financial statements for the
year ended July 3, 1999.
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the period and, if
there are dilutive securities in a period of net income, diluted earnings per
share is computed by including common stock equivalents outstanding for the
period in the denominator. Common stock equivalents include shares issuable upon
the exercise of stock
6
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
5. EARNINGS PER SHARE (CONTINUED)
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 SIX MONTHS ENDED
--------------------------- ---------------------------
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
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NUMERATOR
Net income...................................... $3,246 $1,393 $5,959 $2,303
====== ====== ====== ======
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares outstanding............. 7,290 5,482 7,073 5,480
------ ------ ------ ------
Earnings per share.............................. $ 0.45 $ 0.25 $ 0.84 $ 0.42
====== ====== ====== ======
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding............. 7,290 5,482 7,073 5,480
Effect of dilutive securities:
Stock options................................. 512 196 510 147
Stock warrants................................ 349 61 348 23
------ ------ ------ ------
Adjusted weighted average shares outstanding.... 8,151 5,739 7,931 5,650
------ ------ ------ ------
Earnings(loss) per share........................ $ 0.40 $ 0.24 $ 0.75 $ 0.41
====== ====== ====== ======
During the three and six month periods ended January 1, 2000, there were
1,500 options with an expiration date of March 29, 2000 to purchase shares of
common stock that were excluded from the calculation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common stock. All warrants to purchase shares of common stock were
included in the computation of diluted EPS. During the three month period ended
December 26, 1998, there were 133,000 options to purchase shares of common
stock, and warrants to purchase 281,983 shares of common stock that were not
included in the calculation of diluted earnings per share because the exercise
prices of the options and warrants were greater than the average market price of
the common stock. During the six month period ended December 26, 1998, there
were 258,173 options to purchase shares of common stock, and warrants to
purchase 281,983 shares of common stock that were not included in the
calculation of diluted earnings per share because the exercise prices of the
options and warrants were greater than the average market price of the common
stock.
On January 12, 2000, the Company's Board of Directors approved a 3-for-2
stock split, payable in the form of a 50% stock dividend. All shareholders of
record at the close of business on January 28, 2000 will receive one additional
share for every two shares of common stock owned. The additional shares will be
distributed to shareholders on or about February 28, 2000. In accordance with
generally accepted accounting principles a stock split is not reflected until
the ex-dividend date. The ex-dividend date for the Company is February 29, 2000,
therefore, these financial statements do not reflect the stock split. Upon
completion of this stock dividend, Candela will have approximately 11 million
shares of common stock outstanding.
7
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
5. EARNINGS PER SHARE (CONTINUED)
The following pro-forma earnings per share numbers are presented as if the
stock dividend was issued during the quarter ended January 1, 2000.
FOR THE THREE MONTHS
ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
2000 1998 2000 1998
----------- ------------- ----------- -------------
Net income...................................... $ 3,246 $1,393 $ 5,959 $2,303
PRO-FORMA BASIC EARNINGS PER SHARE
Pro-forma weighted average shares outstanding... 10,935 8,223 10,610 8,220
------- ------ ------- ------
Pro-Forma earnings per share.................... $ 0.30 $ 0.17 $ 0.56 $ 0.28
======= ====== ======= ======
PRO-FORMA DILUTED EARNINGS PER SHARE
Pro-forma adjusted weighted average shares
outstanding.................................... 12,227 8,609 11,895 8,475
------- ------ ------- ------
Pro-forma earnings per share.................... $ 0.27 $ 0.16 $ 0.50 $ 0.27
======= ====== ======= ======
6. RESTRUCTURING CHARGES
During the quarter ended December 27, 1997, the Company recorded
restructuring charges of $2,609,000 resulting from management's decision to
close the skin care center located in Scottsdale, Arizona. The following table
reflects the restructuring charges incurred during the six month period ended
January 1, 2000:
LEASEHOLD
IMPROVEMENTS
PAYROLL AND AND FIXED FACILITY
SEVERANCE ASSETS COSTS TOTAL
----------- ------------ -------- --------
Balance at July 3, 1999............................... $210 $ 797 $512 $1,519
Cash Charges.......................................... (39) -- (95) (134)
Non-Cash Charges...................................... -- (102) -- (102)
---- ----- ---- ------
Balance at January 1, 2000............................ $171 $ 695 $417 $1,283
==== ===== ==== ======
7. INCOME TAXES
The provision for income taxes results from a combination of activities
including both the domestic and foreign subsidiaries of the Company. The
provision for income taxes for the six months ended January 1, 2000, reflects a
reduction of the valuation allowance against the deferred tax asset in the
amount of $1,595,000, of which $797,000 was recognized in the current quarter.
The total provision for income taxes includes tax provisions calculated in Japan
and Spain at a rate in excess of the U.S. statutory tax rate. The Company had
deferred tax assets of $4,214,000 at the beginning of the current fiscal year. A
valuation allowance had then been provided against the deferred tax asset in the
amount of $3,114,000 leaving a net deferred tax asset of $1,100,000. The
valuation allowance has been reduced by $1,595,000 in the current year
effectively increasing the net deferred tax asset to $2,695,000. The effective
tax rate for the year is
8
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
expected to be approximately 20% due to anticipated reductions in the valuation
allowance. It is expected that the valuation allowance will be fully utilized
during the current fiscal year.
8. SEGMENT INFORMATION
The Company operates principally in two industry segments; the design,
manufacture, sale, and service of medical devices and related equipment; and the
performance of services in the skin care/health spa industry.
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JANUARY 1, DECEMBER 26, JANUARY 1, DECEMBER 26,
LINE OF BUSINESS DATA: 2000 1998 2000 1998
- ---------------------- ----------- ------------- ----------- -------------
REVENUE:
Product Sales and Service..................... $16,846 $12,483 $32,021 $22,505
Skin Care/Health Spa Services................. 933 816 1,798 1,532
------- ------- ------- -------
Total Revenue................................... $17,779 $13,299 $33,819 $24,037
======= ======= ======= =======
OPERATING INCOME (LOSS):
Product Sales and Service..................... $ 3,976 $ 2,036 $ 7,311 $ 3,365
Skin Care/Health Spa Services................. (199) (209) (375) (494)
------- ------- ------- -------
Total Operating Income.......................... $ 3,777 $ 1,827 $ 6,936 $ 2,871
======= ======= ======= =======
AS OF AS OF
JANUARY 1, JULY 3,
2000 1999
----------- -------------
TOTAL ASSETS: (NET INTERCOMPANY ACCOUNTS)
Product Sales and Service..................... $57,800 $34,250
Skin Care/Health Spa Services................. 2,418 2,201
------- -------
Total Assets.................................... $60,218 $36,451
======= =======
Product Sales and Service assets increased primarily due to the proceeds
received from the Company's public offering completed in July, 1999.
9. STOCK REPURCHASE PROGRAM
On November 23, 1999, the Company's Board of Directors approved an open
market stock repurchase program that enables the Company to purchase up to
500,000 shares of its common stock. The program is in effect for two years, from
December 13, 1999 to December 12, 2001, and may be suspended or discontinued by
the Board at any time. All such purchases will be transacted on the Nasdaq Stock
Market at prevailing open market prices and will be paid for with general
corporate funds. Any such purchases will be accounted for at cost and held as
treasury stock. The Board has delegated to the discretion of Candela's Chief
Executive Officer and Chief Financial Officer the authority to determine the
timing of the repurchase program's commencement and the timing of any subsequent
purchases. To date, no stock repurchases of the Company's stock have occurred.
9
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. SFAS 133 requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. Originally, the statement had been effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities", which postponed
the adoption of SFAS 133 until fiscal years beginning after June 15, 2000.
Accordingly, the Company plans to implement SFAS 133 for its fiscal year 2001.
The derivative instruments and hedging activities entered into by Candela
include foreign currency forward contracts to protect against currency
fluctuation for amounts due between itself and its foreign subsidiaries. At
January 1, 2000, the Company held foreign currency forward contracts with
notional value totaling approximately $4,442,000 compared to forward contracts
with a value of $1,463,000 held at December 26, 1998. The present contracts have
maturity dates prior to April 28, 2000. The carrying and net fair value of these
contracts at January 1, 2000, was $0 and $3,551, respectively, compared to $0
and ($70,000) respectively, at December 26, 1998.
10
CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We research, develop, manufacture, market and service lasers used to perform
aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. We market our products directly and through a network of
distributors to end users. Our traditional customer base includes plastic and
cosmetic surgeons and dermatologists. More recently we have expanded our sales
to a broader group of practitioners consisting of general practitioners and
certain specialists including obstetricians, gynecologists and general and
vascular surgeons. We have also begun to target electrologists in the
hair-removal market. We derive our revenue from: the sales of lasers and other
products; the provision of product-related services; and the operations of our
remaining skin care center. Greater than 50% of our revenue in recent periods
has come from international sales.
RESULTS OF OPERATIONS
REVENUE. Revenue source by geography is reflected in the following table:
THREE MONTHS ENDED
-----------------------------------------------------------------
JANUARY 1, 2000 DECEMBER 26, 1998 CHANGE
------------------- --------------------- -------------------
$ % $ % $ %
-------- -------- ---------- -------- -------- --------
(IN THOUSANDS)
US Revenue............................... $ 8,105 46% $ 6,967 52% $1,138 16%
Foreign Revenue.......................... 9,674 54% 6,332 48% 3,342 53%
------- ------- ------
Total Revenue............................ $17,779 100% $13,299 100% $4,480 34%
======= ======= ======
SIX MONTHS ENDED
-----------------------------------------------------------------
JANUARY 1, 2000 DECEMBER 26, 1998 CHANGE
------------------- --------------------- -------------------
$ % $ % $ %
-------- -------- ---------- -------- -------- --------
US Revenue............................... $16,287 48% $12,228 51% $4,059 33%
Foreign Revenue.......................... 17,532 52% 11,809 49% 5,723 48%
------- ------- ------
Total Revenue............................ $33,819 100% $24,037 100% $9,782 41%
======= ======= ======
The increase in foreign revenue for the three and six month periods is
attributable to increased sales by our Japanese subsidiary, including sales by
our Osaka, Japan sales office, which was not operational in our second quarter
of fiscal 1999. US sales were impacted by increased sales to our US distributors
supporting the obstetrician, gynecologist and general and vascular surgeon
market.
11
CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue source by type is reflected in the following table:
THREE MONTHS ENDED
-----------------------------------------------------------------
JANUARY 1, 2000 DECEMBER 26, 1998 CHANGE
------------------- --------------------- -------------------
$ % $ % $ %
-------- -------- ---------- -------- -------- --------
Lasers and other products................ $14,116 80% $10,385 78% $3,731 36%
Product related service.................. 2,730 15% 2,098 16% 632 30%
Skin care centers........................ 933 5% 816 6% 117 14%
------- ------- ------
Total Revenue............................ $17,779 100% $13,299 100% $4,480 34%
======= ======= ======
SIX MONTHS ENDED
-----------------------------------------------------------------
JANUARY 1, 2000 DECEMBER 26, 1998 CHANGE
------------------- --------------------- -------------------
$ % $ % $ %
-------- -------- ---------- -------- -------- --------
(IN THOUSANDS)
Lasers and other products................ $27,208 81% $18,407 77% $8,801 48%
Product related service.................. 4,813 14% 4,098 17% 715 17%
Skin care centers........................ 1,798 5% 1,532 6% 266 17%
------- ------- ------
Total Revenue............................ $33,819 100% $24,037 100% $9,782 41%
======= ======= ======
The increase in laser product revenue for both the three and six month
periods resulted from a substantial increase in sales of our
GentleLASE-Registered Trademark- product line, as well as increased shipments of
the ScleroPlus-TM- and AlexLAZR-TM- systems. The impact of increased shipments
of the GentleLASE-Registered Trademark- in the 2(nd) quarter of the prior year
is also reflected in the reduced change in the increase from the first to the
second quarter of the current fiscal year from a 63% increase in the first
quarter to a 36% increase in the second quarter. We also began shipping the
GentlePEEL-TM- system, which was not available in the same periods a year
earlier. Skin care center revenue increased as a result of increased marketing
and promotion.
GROSS PROFIT. Gross profit increased to $10,107,000, or 57% of revenues for
the three month period ended January 1, 2000, compared to gross profit of
$6,800,000, or 51% for the same period one year earlier. For the six month
period ended January 1, 2000, gross profit increased to $19,248,000, or 57% of
revenues, compared to $11,865,000 and 49% of revenues for the same period a year
earlier. The increase in gross profit, over the same period a year earlier, is
principally the result of increased sales of higher margin laser systems and
higher absorption of fixed portions of manufacturing overhead due to our higher
sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased from $4,213,000 in the three month period
ended December 26, 1998, to $5,128,000 for the three month period ending
January 1, 2000. As a percentage of revenue, selling, general and administrative
expenses decreased to 29% of revenues in comparison to 31% of revenues in the
year prior. Selling, general, and administrative costs were impacted by
increased legal costs associated with litigation surrounding the Dynamic Cooling
Device, as well as spending for larger sales and marketing staffs over the same
period a year earlier. For the six month period ended January 1, 2000, selling,
general and administrative expenses amounted to $10,129,000, an increase over
expenses of $7,546,000 incurred a year earlier. This increase is primarily a
result of the increased marketing and sales staff, including costs for our
Osaka, Japan sales
12
CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
office which was not operational in the same period a year earlier. Selling,
general and administrative expenses were 30% and 31% of revenues for the six
month periods ended January 1, 2000 and December 26, 1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending
increased to $1,202,000 for the three months ended January 1, 2000, compared to
$760,000 for the same period one year earlier. For the six month period ending
January 1, 2000, research and development spending increased $735,000, to
$2,183,000, from $1,448,000 in the same period a year earlier. Research and
development spending increased due to the cost of developing our new pulsed dye
laser system, the Vbeam-TM-, as well as an overall increase in our research and
development staff.
RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2,609,000 resulting from management's decision to close the skin care center
located in Scottsdale, Arizona. For the six month period ended January 1, 2000,
a total of $236,000 was charged against this reserve, representing costs
associated with the Scottsdale facility. $111,000 of these costs were charged
against the reserve in the current quarter. We continue to pursue a sublease of
the Scottsdale facility, but if this effort is not successful, we could incur
additional costs in excess of our existing reserve. Management believes that the
current reserve will be adequate so that no additional material charges will
need to be recognized for at least the next 18 months, unless we are
unsuccessful in subleasing or terminating our Scottsdale lease.
OPERATING INCOME. Operating income for the quarter ended January 1, 2000,
increased 107% to $3,777,000, or 21% of revenues, compared to $1,827,000 and 14%
of revenues for the same quarter one year earlier. For the six month period
ended January 1, 2000, operating income increased 142% to $6,936,000, or 21% of
revenue, compared to $2,871,0000 and 12% of revenues for the same period a year
ago.
OTHER INCOME/EXPENSE. Net other income and expense was $280,000 in income
for the three months ended January 1, 2000, in comparison to expenses of $64,000
for the same period a year earlier. For the six month period ended January 1,
2000, net other income and expense amounted to $512,000 in income in comparison
to $98,000 in expenses for the same period a year earlier. These increases in
other income resulted primarily from increased interest income resulting from a
higher level of invested cash during the period.
INCOME TAXES. The provision for income taxes results from a combination of
activities including both the domestic and foreign subsidiaries of the Company.
The provision for income taxes for the six months ended January 1, 2000,
reflects a reduction of the valuation allowance against the deferred tax asset
in the amount of $1,595,000, of which $797,000 was recognized in the current
quarter. The total provision for income taxes includes tax provisions calculated
in Japan and Spain at a rate in excess of the U.S. statutory tax rate. We had
deferred tax assets of $4,214,000 at the beginning of the current fiscal year. A
valuation allowance had then been provided against the deferred tax asset in the
amount of $3,114,000, leaving a net deferred tax asset of $1,100,000. The
valuation allowance has been reduced by $1,595,000 in the current year
effectively increasing the net deferred tax asset to $2,695,000. The effective
tax rate for the year is expected to be approximately 20% due to anticipated
reductions in the valuation allowance. It is expected that the valuation
allowance will be fully utilized during the current fiscal year.
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CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $2,486,000 for the six
months ended January 1, 2000, in comparison to $2,850,000 for the same period a
year earlier. The decrease reflects improved profitability in the period offset
by a reduction in accounts payable as well as increased payments for income
taxes and accrued payroll. Cash used for investing activities totaled $356,000
for the six months ended January 1, 2000, compared to $121,000 for the same
period in the prior year. Cash provided by financing activities amounted to
$19,658,000 in comparison to $299,000 for the same period a year earlier. This
reflects the receipts of the proceeds from the issuance of common stock
amounting to $20,292,000 primarily resulting from our July, 1999 stock offering.
Cash and cash equivalents at January 1, 2000, increased by $21,239,000 to
$31,294,000 from $10,055,000 at July 3, 1999, due principally to cash received
in our stock offering completed in July, 1999.
We completed a public offering in July, 1999 of 2,430,000 shares of common
stock, of which 1,499,854 shares were sold by us and 930,146 shares were sold by
certain selling shareholders. $19,805,573 of proceeds was received by the
Company from the sale of its shares in cash after underwriting discounts upon
completion of the offering. We incurred approximately $585,000 of issuance costs
in conjunction with the offering, of which $411,796 were paid in the current
fiscal year.
In relation to our eight-year, 9.75% subordinated notes, a total of $113,000
has been accreted to the notes through January 1, 2000, resulting in a long term
liability balance of $2,977,000 at quarter end. A total of $48,000 of interest
expense has been recorded in the current fiscal year, of which $24,000 was
recorded in the three month period ended January 1, 2000.
On November 23, 1999, the Board of Directors approved an open market stock
repurchase program that enables us to purchase up to 500,000 shares of its
common stock. The program is in effect for two years, from December 13, 1999 to
December 12, 2001, and may be suspended or discontinued by the Board at any
time. All such purchases will be transacted on the Nasdaq Stock Market at
prevailing open market prices and will be paid for with general corporate funds.
Any such purchases will be accounted for at cost and held as treasury stock. The
Board has delegated to the discretion of Candela's Chief Executive Officer and
Chief Financial Officer the authority to determine the timing of the repurchase
program's commencement and the timing of any subsequent purchases. To date, no
stock repurchases of the Company's stock have occurred.
On December 1, 1999, the Company's revolving bank line of credit expired. No
borrowings were outstanding at the time of expiration.
On January 12, 2000, the Company's Board of Directors approved a 3-for-2
stock split, payable in the form of a 50% stock dividend. All shareholders of
record at the close of business on January 28, 2000 will receive one additional
share for every two shares of common stock owned. The additional shares will be
distributed to shareholders on or about February 28, 2000. Upon completion of
this stock dividend, Candela will have approximately 11 million shares of common
stock outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including
14
CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives"), and for hedging activities. SFAS 133 requires
companies to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair value,
gains or losses, depends on the intended use of the derivative and its resulting
designation. Originally, the statement had been effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 ("SFAS 137"),
"Accounting for Derivative Instruments and Hedging Activities", which postponed
the adoption of SFAS 133 until fiscal years beginning after June 15, 2000. As
such, the Company plans to implement SFAS 133 for our fiscal year 2001.
YEAR 2000 READINESS DISCLOSURE STATEMENT
To date, the Company has not experienced any disruptions related to the
Year 2000 issue, either in-house or with suppliers, distributors, or customers.
In addition, we have questioned representatives of Litton Airtron Synoptics, our
sole supplier for Alexandrite rods, and PSS, a major distributor, and have
reviewed publicly available disclosures relating to PSS. Based on this review,
we are not aware of any information to indicate that Litton or PSS have
experienced or will experience any substantial Year 2000 problems. In addition,
we have conducted an informal survey of our other suppliers, significant
customers, and business partners. This survey indicates that many of our
suppliers and customers are Year 2000 compliant, and we have not experienced any
disruptions to date. We are not, however, in a position to verify the accuracy
or completeness of the information we receive from third parties.
CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
including, without limitation, statements concerning the future of the industry,
product development, business strategy (including the possibility of future
acquisitions), anticipated operational and capital expenditure levels, continued
acceptance and growth of our products, and dependence on significant customers
and suppliers. This Quarterly Report on Form 10-Q contains forward-looking
statements that we have made based on our current expectations, estimates and
projections about our industry, operations, and prospects, not historical facts.
We have made these forward-looking statements pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"believe," "expect," "anticipate," "estimate," "intend", "continue" or other
similar expressions. These statements discuss future expectations, and may
contain projections of results of operations or of financial condition or state
other forward-looking information. These forward-looking statements are subject
to business and economic risks and uncertainties, and our actual results of
operations may differ materially from those contained in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Cautionary Statements" in our annual
report filed on Form 10-K dated October 1, 1999, as well as other risks and
uncertainties referenced in this Quarterly Report. These risks include, but are
not limited to, the following:
- Our dependence on GentleLASE increases our susceptibility to competitive
changes in the marketplace.
- Our exclusive rights to the DCD technology could become non-exclusive
because our amended license agreement requires us to make commercially
reasonable efforts to conclude the sublicense
15
CANDELA CORPORATION
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
agreements with third parties, or we could lose rights to the DCD
technology altogether if a court challenge to the underlying patent is
successful.
- Because we derive more than half of our revenue from international sales,
we are susceptible to currency fluctuations, negative economic changes
taking place in foreign marketplaces, and other risks associated with
conducting business overseas.
- The failure to obtain alexandrite rods for the GentleLASE and ALEXlazr
from our sole supplier would impair our ability to manufacture and sell
these laser systems, which accounted for more than half or our revenue in
recent periods.
- The cost of closing our skin care centers may be higher than management
has estimated to date, and higher actual costs would negatively impact our
operating results.
- Claims by others that our products infringe their patents or other
intellectual property rights could prevent us from manufacturing and
selling some of our products or require us to incur substantial costs from
litigation or development of non-infringing technology.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At January 1, 2000, the Company held foreign currency forward contracts with
notional value totaling approximately $4,442,000 compared to forward contracts
with a value of $1,463,000 held at December 26, 1998. The present contracts have
maturity dates prior to April 28, 2000. The carrying and net fair value of these
contracts at January 1, 2000, was $0 and $3,551, respectively, compared to $0
and ($70,000) respectively, at December 26, 1998.
16
CANDELA CORPORATION
PART II OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
On March 5, 1999, New Star Lasers, Inc. and its subsidiary Laser
Aesthetics, Inc. filed a complaint in the U.S. District Court for the Eastern
District of California against The Regents of the University of California (the
"Regents"), the Beckman Laser Institute and Medical Clinic ("Beckman") and
Candela. In the complaint, New Star Lasers sought a declaration that its
technology does not infringe the Regents' patent pertaining to dynamic cooling
technology to which we are a licensee, or in the alternative that the patent is
invalid and not infringed by the plaintiff's technology. The complaint also
included various tort claims against us and contract-related claims against the
Regents and Beckman. The complaint asserted that we interfered with the
licensing of the dynamic cooling technology to the plaintiffs. The complaint
sought unspecified general, special, punitive and exemplary damages plus costs
and attorneys' fees against Candela as well as the "disgorgement" of any benefit
received by Candela as a result of the alleged receipt of any of New Star
Lasers' trade secrets from Beckman and the Regents. We intend to defend this
matter vigorously. Both Candela and the Regents moved to dismiss the complaint.
On August 27, 1999, the court granted in part both Candela's and the Regents'
motion, but gave New Star Lasers permission to file an amended complaint. On
October 25, 1999, New Star Lasers filed a second amended complaint, to which we
filed an answer denying New Star's material allegations and raising several
affirmative defenses. We believe that an adverse outcome of New Star Lasers'
tort claims against Candela will not have a material adverse effect on our
operations and financial condition. However, if New Star Lasers were to obtain a
declaration that the Regents' patent under which the DCD was developed is
invalid or unenforceable, Candela's rights to the DCD technology pursuant to the
license agreement could no longer be exclusive, which could aversely impact our
operations and financial condition. The Regents have requested that we indemnify
them in connection with this litigation pursuant to the license agreement
between the Regents and Candela. We have rejected this request. On or about
February 2, 2000 the Company reached an agreement in principle conditionally to
settle New Star's claims against the Company. In connection with this agreement,
on February 2, 2000 Candela granted New Star a sublicense to the use of DCD
technology for certain laser systems that New Star manufactures. Pursuant to the
parties' settlement in principle, the terms of which are currently being
finalized, New Star will dismiss the claims it has asserted against the Company.
Both the sublicense and settlement of the litigation are contingent on a
favorable outcome to Candela's arbitration against the Regents, which is
described below.
By letter dated September 17, 1999, The Regents purported to give Candela
notice of alleged default under the parties' exclusive license agreement, as
amended ("the Agreement") on the grounds (1) that Candela has failed to make
necessary royalty payments to The Regents pursuant to the Agreement; and
(2) that Candela has not complied with its sublicensing obligations under the
Agreement. The Regents informed Candela that it has sixty days in which to cure
the alleged defaults. Candela maintains and has informed The Regents that it is
in full compliance with each of the terms of the Agreement, including with
respect to its royalty payments to The Regents and its sublicensing efforts. On
September 28, 1999, we commenced an arbitration before the American Arbitration
Association ("AAA") against the Regents in which we seek a declaration that we
are not in default of any of our obligations under the Agreement. On
October 27, 1999, the Regents issued another notice by which it purported to
terminate our right to sublicense the DCD technology. This notice is also the
subject of the AAA arbitration. On November 9, 1999, the arbitrator issued an
interim order of protection prohibiting the Regents from issuing a notice of
termination or licensing the DCD technology to any third party until ten days
after the award of judgment in the arbitration. The arbitration hearing is
currently scheduled for May 1, 2000. We believe that an adverse outcome of the
arbitration with The Regents could have a material adverse effect on our
operations and financial condition, including losing our rights to the DCD
technology and/or being required to pay substantially higher future and
historical royalty payments to the Regents for the use of
17
CANDELA CORPORATION
ITEM 1--LEGAL PROCEEDINGS (CONTINUED)
DCD technology. Also on October 27, 1999, The Regents sent us another notice of
default arising out of its claim that we have refused to indemnify The Regents
in connection with the New Star litigation. The notice gives us sixty days to
cure the alleged default. We intend to contest this notice of default. Should we
not cure the alleged default or not be successful in challenging the alleged
default, there could be a material adverse effect on our operations and
financial condition, including losing our rights to the DCD technology. In
response to the second October 27, 1999 notice of default, Candela commenced a
declaratory judgment action against The Regents in a Massachusetts Superior
Court. The Regents removed the case to the United States District Court for the
District of Massachusetts. On or about December 23, 1999, the parties filed a
stipulation and joint motion requesting that the action be stayed pending the
arbitration and that The Regents be precluded form terminating the Agreement on
account of any alleged failure to indemnify the Regents until conclusion of the
arbitration. The Court granted the parties' motion on December 29, 1999. The
parties have also agreed to attempt to mediate all of their outstanding
disputes. A mediation is scheduled for February 18, 2000.
From time to time, the Company is a party to various legal proceedings
incidental to its business. The Company believes that none of such other
presently pending legal proceedings will have a material adverse effect upon its
financial position, results of operation, or liquidity.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 20, 2000, the Company held its Annual Shareholder meeting. At the
meeting, the Shareholders acted upon the following proposals: (i) election of
directors; and (ii) ratification of the firm of PricewaterhouseCoopers LLP as
independent accountants for the fiscal year ending July 1, 2000.
Votes "For" represent affirmative votes and do not include abstentions or
broker non-votes. In cases where a signed proxy was submitted without direction,
the shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy.
Voting results were as follows:
BROKER
MATTER FOR AGAINST WITHHELD ABSTAIN NON-VOTES
- ------ --------- -------- -------- -------- ---------
I. ELECTION OF DIRECTORS:
Gerard E. Puorro........................... 6,380,207 6,205 N/A N/A -0-
Kenneth D. Roberts......................... 6,380,207 6,205 N/A N/A -0-
Theodore G. Johnson........................ 6,380,107 6,305 N/A N/A -0-
Douglas W. Scott........................... 6,380,212 6,200 N/A N/A -0-
Richard J. Cleveland, MD................... 6,380,212 6,200 N/A N/A -0-
Nancy Nager................................ 6,376,107 10,305 N/A N/A -0-
II. RATIFICATION OF INDEPENDENT ACCOUNTANTS:
6,373,776 1,950 N/A 10,686 -0-
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 1,
2000.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDELA CORPORATION
Registrant
Date: February 11, 2000 /s/ GERARD E. PUORRO
GERARD E. PUORRO
(PRESIDENT AND CHIEF EXECUTIVE OFFICER)
Date: February 11, 2000 /s/ F. PAUL BROYER
F. PAUL BROYER
(SENIOR VICE PRESIDENT OF FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL OFFICER AND
TREASURER)
19