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, 2000 Commission file number 0-14742
CANDELA 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 a 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 a check mark if the disclosure of delinquent filers, pursuant to
Item 405 of Regulation S-K, is not contained herein and will not be contained in
the 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, 2000, 11,435,788 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, 2000, based upon the closing price of such stock on The NASDAQ
Stock Market on that date, was approximately $118,561,230.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a Definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended July 1, 2000.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
PART I
ITEM 1. BUSINESS
Candela Corporation is a pioneer in the development and commercialization of
advanced aesthetic laser systems that allow physicians and personal care
practitioners to treat a wide variety of cosmetic and medical conditions
including:
- vascular lesion treatment of facial spider veins, leg veins,
rosacea, scars, stretch marks, warts, port wine stains and
hemangiomas
- hair removal
- removal of benign pigmented lesions such as age spots and tattoos
- microdermabrasion for skin exfoliation
Since our founding 30 years ago, we have continuously developed and enhanced
applications of laser technology. In the mid-1980's we began developing laser
technology for medical applications, and since that time have shipped
approximately 4,000 lasers to 50 countries. Since the early 1990's we have
focused our organizational resources on developing laser technology for use
solely in the aesthetic and cosmetic laser industry. Our introduction of new
dermatology/plastic surgery laser systems during the mid-1990's allowed us to
expand rapidly in this area. Candela's product line of today offers
comprehensive and technologically sophisticated aesthetic laser systems - used
by dermatologists, plastic surgeons and electrologists, including the following:
- GentleLASE-Registered Trademark- Plus with DCD-TM- Cool Comfort for
permanent hair reduction and the treatment of large leg veins,
- Vbeam-TM- with DCD Cool Comfort for treating all vascular lesions,
- ALEXLAZR-TM- and YAGLAZR-TM-, for treating pigmented lesions and
tattoos, and
- GentlePeel-TM- microdermabrasion system for skin exfoliation.
The discretionary income of aging baby boomers continues to rise and create new
opportunities for Candela. This market places a premium on good health and
personal appearance, and has demonstrated a willingness to pay for health and
cosmetic products and services. The growing popularity of laser treatments among
the general population is also spurring demand for Candela's products. Today,
American women spend an estimated $2 billion a year on hair removal products and
services. Increasingly, lasers are proving an attractive alternative for women,
as well as many men, in eliminating unwanted hair. Still in the early stages of
development, the laser hair removal market is expected to experience rapid
growth over the next five years.
The company is dedicated to developing safe and effective products. Its
aesthetic laser systems are further distinguished by being among the fastest,
smallest and most affordable in their respective markets. Candela believes that
it has increasingly captured significant market share because of these product
attributes and is committed to continual innovation to meet the needs of its
markets.
INDUSTRY OVERVIEW
Medical lasers use the unique characteristics of laser light to achieve precise
and efficacious therapeutic effects, often in a non-invasive manner. The precise
color, concentration, and controllability of different types of laser light
provide for the
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delivery of a wide range of specialized treatments. First introduced in the
1960's, the use of lasers for medical applications grew rapidly in the 1990's as
technical advances made medical lasers more effective and reliable. Medical
lasers today are used for numerous types of procedures falling into four broad
categories: ophthalmic surgery, aesthetic and cosmetic procedures, general
surgery, and dental procedures. Candela competes solely within the growing
market for lasers performing aesthetic and cosmetic procedures including:
- removal of unwanted hair from the face, legs, back, and other body
areas
- treatment of facial veins and leg veins, rosacea, red birthmarks,
scars, stretch marks, warts
- removal of pigmented lesions and tattoos.
Lasers produce intense bursts of highly focused light to treat skin tissues. A
laser's wavelength (color), energy level, spot size and pulse width (exposure
time) are optimized for the specific treatment. Hair removal and the treatment
of various leg vein malformations require the deepest laser penetration for
successful treatment while scars, stretch marks, and red birthmarks (port wine
stains and hemangiomas) require less laser penetration. Pigmented lesions such
as sunspots, liver spots and tattoos are typically surface conditions that
require the least amount of penetration. Different conditions may require the
use of different types of lasers, and an active aesthetic and cosmetic practice
addressing a broad range of laser procedures requires multiple lasers.
In the pioneering years of the cosmetic and aesthetic laser industry from the
late 1980's to the mid 1990's, the market for laser procedures was focused on
vascular conditions such as port wine stains and hemangiomas and the development
of treatments for pigmented lesions, such as tattoos. Equipment available in
this period tended to be expensive, slow, and bulky. In addition, laser
applications addressed the needs of relatively small patient populations, served
by a narrow group of specialists.
In the last half of the 1990's, the development of computer driven beam delivery
systems called scanners increased the interest of a growing number of physicians
by providing procedures to new, larger market segments, such as wrinkle removal.
During this period, the complexity and cost of equipment from many vendors still
inhibited sales. However, clinical experience was broadening, leading to better
development efforts for new applications, which are now resulting in the next
generation of aesthetic and cosmetic lasers.
The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The major factors converging to drive this growth are:
- the economics of practitioners in a tough medical reimbursement
environment,
- the rising discretionary income of aging baby boomers, and
- the development of technology that allows for new, effective
procedures for conditions that have large patient populations.
Aesthetic and cosmetic laser vendors, who are able to deliver lasers that are
cost effective, reliable, and easy to use, will be well positioned to take
advantage of such broader-based industry growth.
Managed care and reimbursement restrictions in the U.S. and similar constraints,
such as socialized medicine, outside the U.S., are motivating practitioners to
emphasize aesthetic and cosmetic procedures that are delivered on a private,
fee-for-service basis. While cosmetic procedures were once the domain of plastic
surgeons and dermatologists, reimbursement reductions coupled with the reliable
revenue stream from private-pay procedures have piqued the interest of other
specialties, including general practice physicians.
Key technical developments required for the broader cosmetic laser markets
relate to ease-of-use, speed, lower costs, safety, and effective elimination of
undesirable side effects. These factors are critical for broader segments of
practitioners who wish to build aesthetic and cosmetic laser practices. These
factors are also
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important for minimizing the disruption of a patient's normal routine and for
building demand for procedures addressing very large patient populations.
BUSINESS STRATEGY
Candela believes that a convergence of price and performance is occurring in the
aesthetic and cosmetic laser industry, driving the expansion of the market. We
believe we have the necessary infrastructure in place to capitalize on this
expansion. Candela's objective is to establish itself as the leading provider of
aesthetic and cosmetic lasers by using its proprietary technology and expertise
in light and tissue interaction, as well as by developing market-oriented
products that utilize related technologies. Our business strategy is focused on
the following goals:
- reduce product costs,
- increase penetration of our traditional customer base,
- expand sales beyond our traditional customer base,
- expand our domestic marketing and distribution channels,
- expand our international marketing and distribution channels,
- continue investing in research and development, and
- broaden additional applications for our Dynamic Cooling Device
("DCD").
REDUCE PRODUCT COSTS. We apply bottom-up engineering, focusing on each component
to improve the performance of each device while reducing its size, complexity,
and cost. We believe our approach leads to lasers with fewer parts and greater
manufacturing efficiency, resulting in lower production costs that enable us to
offer more reliable products at more affordable prices.
INCREASE PENETRATION OF OUR TRADITIONAL CUSTOMER BASE. Our traditional customer
base consists of dermatologists and plastic and cosmetic surgeons. We believe
that the affordability of our products will enable us to penetrate further into
the dermatologist and plastic and cosmetic surgeon markets. We have conducted
surveys that indicate that only approximately one-third of the 17,000
dermatologists and plastic and cosmetic surgeons in the U.S. presently have
lasers. We believe that affordability has been a major obstacle preventing the
remaining practitioners from purchasing a laser. As competition for patients
among practitioners increases, those practitioners with aesthetic and cosmetic
lasers will be able to differentiate themselves.
EXPAND SALES BEYOND OUR TRADITIONAL CUSTOMER BASE. We seek collaborative
relationships that expand upon our traditional customer base, such as our
relationship with Physicians Sales & Services ("PSS"). We believe those
specialist practitioners outside our traditional customer base are a market
with a large growth potential. In December 1998, we entered into a three year
distribution arrangement with PSS that gives PSS the exclusive right to
distribute the GentleLASE-Registered Trademark- and ScleroPLUS-TM- to
specific office-based specialists. The agreement with PSS specifies that our
products will be the exclusive aesthetic and cosmetic lasers sold by PSS. In
addition, we have begun an innovative leasing program to target
electrologists in the U.S. as potential customers of the
GentleLASE-Registered Trademark- for hair removal.
EXPAND OUR DOMESTIC MARKETING AND DISTRIBUTION CHANNELS. The U.S. presently
represents almost 50% of our sales and is the largest single geographic market
for our products. We have increased the size of our U.S. direct sales force to
better address the needs of our traditional core markets.
EXPAND OUR INTERNATIONAL MARKETING AND DISTRIBUTION CHANNELS. Outside of the
U.S. we continue to strengthen our long-standing positions in Europe and Japan
and are seeking to expand our markets in Asia and Latin America. We currently
have direct sales offices in Madrid, Frankfurt, and Tokyo and are anticipating
opening an
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additional sales office in Hong Kong. An office was opened in Osaka, Japan on
June 1, 1999. Over the past year we increased the number and improved the
quality of our international independent distributor channel. We currently
utilize 34 independent distributors in 46 countries.
CONTINUE INVESTING IN R&D. We believe that investment in research and
development is necessary to remain a leader in the aesthetic and cosmetic laser
market. Our research and development approach is to develop high-quality,
reliable, and affordable products that continue to address existing markets and
allow us to enter into and expand new markets. Our research and development
staff works closely with our marketing and operations groups to ensure our goals
are met. Our strategy has been to drive technology that is market applicable and
addresses voids in the marketplace. To that end, Candela will continue to apply
technologies to reduce the size and complexity of its technology and products,
increase the speed and ease with which therapeutic applications can be
delivered, improve its ability to build and deliver lasers at affordable prices,
and address expanding therapeutic applications and markets. Candela has numerous
research and development arrangements with leading hospitals and medical
laboratories in the U.S.
BROADEN ADDITIONAL APPLICATIONS FOR OUR DYNAMIC COOLING DEVICE ("DCD").
Recently, the aesthetic and cosmetic laser market has begun to recognize the
importance of effective cooling delivery systems for laser treatment,
especially in such large market segments as hair removal and treatment of leg
veins. Currently, DCD is an integral component of our GentleLASE-Registered
Trademark- and is sold as an attachment to our ScleroPLUS-TM-. We intend to
broaden the incorporation of DCD into all of our lasers and believe by doing
so we can address major new market opportunities.
THE MARKET FOR AESTHETIC AND COSMETIC LASERS
Our traditional customer base for aesthetic and cosmetic lasers consists of
dermatologists and plastic and cosmetic surgeons. In addition, other
practitioner groups are emerging as potential customers, including general
practitioners, obstetricians, gynecologists, and general and vascular surgeons.
In the U.S., according to the American Medical Association and various
societies, there are approximately 10,000 dermatologists, and 7,000 plastic and
cosmetic surgeons. Practitioners in other specialties that are beginning to buy
aesthetic and cosmetic lasers include 70,000 general and family practitioners,
35,000 obstetricians and gynecologists, and 28,000 general and vascular
surgeons. In addition, the aesthetic and cosmetic laser market includes
non-medical practitioners, notably electrologists, of which there are an
estimated 6,000 in the U.S.
The end markets for cosmetic laser procedures encompass broad and growing
patient groups, including aging "baby boomers" as well as younger age groups.
According to the U.S. Census Bureau, at the end of 1998 the number of "baby
boomers" in the 35 to 54 age range was approximately 80 million, representing
more than 29% of the total U.S. population. This large population group
generally has a high level of disposable income and has exhibited a strong
demand for aesthetic and cosmetic procedures. We believe that as the cost of
treatments decreases and the popularity of laser cosmetic procedures such as
hair removal increases, the target market for these procedures will expand
beyond the baby boomers to include a broad range of women and men aged 17 to 65.
Demographic factors similar to the U.S. underlie the growth of the aesthetic and
cosmetic laser market outside of the U.S.
HAIR REMOVAL. We believe that the great majority of the 108 million women over
the age of 16 in the U.S. employ one or more techniques for temporary hair
removal from various parts of the body. Also, a growing number of men are
removing hair by means other than their daily shaving routine. A number of
techniques are used to pull hair from the follicle including waxing,
depilatories, and tweezing. In the waxing process, a lotion, generally
beeswax-based, is spread on the area to be treated and is then rapidly peeled
off, pulling out the entrapped hairs. Depilatories employ rotating spring coils
or slotted rubber rolls to trap and pull out the hairs. Tweezing involves
removing individual hairs with a pair of tweezers. Pulling hair from the
follicle produces temporary results, but is often painful and may cause skin
irritation. Depilatory creams, which contain chemicals to dissolve hair,
frequently leave a temporary unpleasant odor and may also cause skin irritation.
Shaving is the
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most widely used method of hair removal, especially for legs and underarms, but
produces the shortest-term results. Hair bleaches do not remove hair, but
instead lighten the color of hair so that it is less visible. A principal
drawback of all of these methods is that they require frequent treatment.
Before the advent of laser hair removal, electrolysis was the only method
available for the long-term removal of body hair. Electrolysis is a process in
which an electrologist inserts a needle directly into a hair follicle and
activates an electric current in the needle, which disables the hair follicle.
The tiny blood vessels in each hair follicle are heated and coagulated,
presumably cutting off the blood supply to the hair matrix, or are destroyed by
chemical action depending upon modality used. The success rate for electrolysis
is variable depending upon the skill of the electrologist and always requires a
series of treatments. Electrolysis is time-consuming, expensive and sometimes
painful. There is also some risk of skin blemishes and a rising concern relating
to needle infection. Because electrolysis requires that each hair follicle be
treated separately and can only treat visible hair follicles, the treatment of
an area as small as an upper lip may require numerous visits at an aggregate
cost of up to $1,000. The American Electrology Association estimates that
approximately one million people per year undergo electrology procedures.
Although we believe the large majority of all electrolysis treatments are for
facial hair, the neck, breasts and bikini line are also treated. Because hair
follicles are disabled one at a time, electrolysis is rarely used to remove hair
from large areas such as the back, chest, abdomen, and legs. We believe lasers
enable the practitioner to address a potentially larger market than electrolysis
by treating a larger area of the body more quickly and with better results.
We believe the market for laser-based hair removal is in its early stages and
that this market will grow as the customer compares laser treatments to other
hair removal methods that are currently available. The benefits include:
- significant longer term cosmetic improvement,
- treatment of larger areas in each treatment session,
- less discomfort during and immediately after procedures,
- reduced procedure time and number of treatments,
- reduced risk of scarring and infection,
- non-invasive procedures, and
- no risk of cross-contamination.
VASCULAR LESIONS. Benign vascular lesions are generally enlarged and
proliferating blood vessels that appear on the surface of the skin as splotches,
dots, bulges, and spider shapes in a variety of colors ranging from red to
purple. Different types of benign vascular lesions include the following:
- varicose veins, which are large veins greater than 1mm in diameter and
often bulge above the skin surface,
- leg telangiectasias, which are smaller spider veins up to 1mm in
diameter in size appearing as single strands,
- facial and truncal telangiectasias, which are spider veins and other
dilated veins that appear on the face and other parts of the body,
- port wine stains, which are vascular birthmarks characterized by a red
or purple discoloration of the skin,
- hemangiomas, which are protuberances that consist of dilated vessels,
which often appear on newborns within one month of birth, and
- stretch marks and scars.
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Varicose leg veins typically result when damaged valves cause blood to stagnate
rather than be pumped back to the heart, causing the vein walls to stretch and
bulge. Varicose veins affect a significant portion of the U.S. adult population
and increase in prevalence with age. To date, treatment for varicose veins has
been predominantly performed on women. Other benign vascular lesions include
port wine stains, hemangiomas, and facial and truncal telangiectasias or spider
veins. It is estimated that in 1997 there were approximately 661,000 procedures
performed in the U.S. to remove vascular lesions and the number of procedures is
expected to increase to an estimated 2.6 million in 2002.
PIGMENTED LESIONS/TATTOOS: Benign pigmented lesions can be both epidermal and
dermal, natural or man-made (tattoos), and can constitute a significant cosmetic
problem to those who have them.
MICRODERMABRASION: A significant percentage of the population suffers from fine
lines and wrinkles or older looking skin as a result of the normal aging
process, which is often exacerbated by the effects of sun damage and smoking.
This is the primary group of candidates for microdermabrasion procedures. While
there are a variety of techniques used for smoothing skin including botox and
collagen injections, chemical peels and laser skin resurfacing,
microdermabrasion has become an accepted alternative for efficacious treatment
of fine lines on the skin, blending of scars, acne scars and other
imperfections. Developed in the mid 1990's, microdermabrasion experienced
explosive growth fueled by improved technology and patient acceptance of the
procedure.
CANDELA'S PRODUCTS
We develop, manufacture, market, and service lasers used to perform procedures
addressing patients' aesthetic and cosmetic concerns. We offer a comprehensive
range of products based on proprietary technologies. Our products focus on the
major aesthetic and cosmetic laser applications including:
- hair removal,
- non-invasive treatment of facial and leg veins and other benign
vascular lesions,
- removal of benign pigmented lesions such as age spots and tattoos,
- treatment of scars and stretch marks, and
- microdermabrasion.
Intense light technology forms the basis for most of our products. Our patented
technology uses thermal energy generated by an intense pulsed laser light source
to selectively eliminate unwanted skin blemishes without damaging the
surrounding healthy tissue, and to remove facial or other unwanted hair
throughout the body. Candela's objective is to establish itself as the leading
provider of aesthetic and cosmetic lasers by continually striving to develop
smaller, faster, and less expensive devices. Candela has been a pioneer in the
laser industry. From the start, our mission has been to lead the way in the
development of innovative laser products. Significant innovations include:
- a pulsed dye laser system with integrated DCD to treat vascular
lesions while minimizing the problematic side effects of postoperative
bruising, commonly referred to as purpura,
- a hair removal laser with integrated DCD.
GENTLELASEPLUS. The GentleLASEPlus, integrated with DCD, is a high-energy,
long-pulse solid-state laser that generates laser light in the near infrared
wavelength range. It is used for both hair removal and the treatment of large
(1mm or larger) leg veins. The technology incorporated in the GentleLASEPlus
uses high energy
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directed through an Alexandrite rod, which achieves selective heating while
keeping the temperature of the skin below its damage threshold. The longer
Alexandrite laser wavelength enables GentleLASEPlus to penetrate skin surfaces
deeper than traditional Ruby lasers, and the large spot size (15mm) allows the
practitioner to treat a larger area more quickly.
The DCD is integrated into the design of GentleLASEPlus and delivers a short
burst of cryogen coolant onto targeted areas of the skin undergoing treatment.
DCD selectively cools only the top layer of the skin, while leaving the targeted
underlying hair follicle, vein or other structure at normal temperature. As a
result, higher levels of laser energy can be delivered during treatment, while
minimizing thermal injury, pain, and the inconvenience associated with
anesthetics. The design of the hand-held DCD enables the practitioner to clearly
see the area being treated, and the combined efficiency of GentleLASEPlus and
DCD reduces the risks of over treatment, which can result in white spots on the
skin, or under treatment which can result in brown spots.
GentleLASEPlus was initially cleared for marketing by the FDA in December 1997
for treating facial veins and vascular lesions and we commenced sales in March
1998. Candela began selling GentleLASE-Registered Trademark- for hair removal
in the U.S. in July 1998, when it received FDA marketing clearance for hair
removal. In August 1998, we were issued a CE Mark on GentleLASE-Registered
Trademark-, clearing it for sale in 15 European A countries.
We introduced an enhanced version of the GentleLASE-Registered Trademark-, the
GentleLASE PLUS-Registered Trademark-, on September 22, 1999. The GentleLASE
PLUS-Registered Trademark- features a larger spot size for faster treatment
times, an elliptical spot option for improved alignment when treating large leg
veins, and a foot pedal for greater physician convenience in operating the
system.
Hair removal typically requires three to five treatments to achieve efficacious
results due to the growth cycle of hair follicles. A typical treatment can range
from approximately $200 for an upper lip and chin procedure to as much as $1,000
per treatment for the back or chest.
VBEAM-TM-. The Vbeam delvers the safety and efficacy of the clinically proven
pulsed dye laser (PDL) while minimizing the problematic side effects of
postoperative bruising, commonly referred to as purpura. It features Candela's
patented Dynamic Cooling Device (DCD) to protect the epidermis. The system comes
in a choice of four colors, an industry first, and is priced very competitively.
Vbeam provides treatment of facial spider veins, port wine stains, leg
telangiectasias, hemangiomas, poikiloderma, rosacea, scars, warts, stretch
marks, vulvodynia, and other vascular abnormalities in adults, children and
infants. The Vbeam's user-adjustable laser pulse duration (1.5-40msec) features
Candela's innovative ultra-long pulse duration, the longest offered in a dye
laser. Most treatments of vascular lesions cost between $300 and $800, depending
on the length and type of procedure. The combination of Vbeam(TM) and
GentleLASE-Registered Trademark- offers the capability to treat a majority of
leg veins in patients seeking treatment. A predecessor product to Vbeam, the
SPTL-1b, is currently marketed in Japan, pending Ministry of Health approval of
Vbeam. The Vbeam was cleared for marketing by the FDA in the U.S. in January
2000, and it supplements our earlier ScleroPlus laser originally approved in
1995.
ALEXLAZR-TM- AND YAGLAzr-TM-. We offer two types of lasers to address removal of
a broad range of pigmented lesions and most tattoos.
The ALEXlazr-TM- is a short-pulsed solid-state laser, which emits near-infrared
light for the non-invasive removal of tattoo pigments and pigmented lesions such
as freckles and Nevus of Ota, a bluish colored, non-vascular, pigmented lesion,
generally found among persons of Asian descent. The ALEXlazr-TM- was cleared by
the FDA for marketing for these uses in the U.S. in 1994. The ALEXlazr-TM- has a
fiber optic delivery system that produces an even beam distribution without hot
spots. Its wavelength maximizes beam penetration, providing positive results
with deeper pigments and is effective in the removal of most tattoo pigments
except red.
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The YAGlazr-TM- is a short-pulsed Nd/YAG laser, which is able to emit both near
infrared and green light, for the non-invasive removal of red tattoos and the
treatment of brown benign pigmented lesions, such as age spots and sunspots. The
YAGlazr-TM- was cleared for marketing by the FDA for these uses in the U.S. in
1994. The YAGlazr-TM- has variable pulse repetition frequency to optimize
treatment time, and dual wavelengths that broaden treatment options, allowing
for removal of tattoos which have red pigments as well as tattoos in darker skin
types.
GENTLEPEEL-TM- The GentlePeel microdermabrasion system provides skin exfoliation
of the face, hands, neck and eye areas. The GentlePeel is designed for
practioners with patients who care about their appearance but have concerns
about the recovery time from more invasive procedures. GentlePeel treatments are
generally performed in less than 20 minutes. Clients look healthy and vibrant
immediately - no discomfort, no healing time, and no need for dressings or
camouflage make up. GentlePeel clinical indications include general
dermabrasion, blending of scars and other imperfections, acne scar revision and
skin exfoliation.
DYNAMIC COOLING DEVICE. Currently, DCD is integrated into GentleLASEPlus and
Vbeam systems, as described above.
SALES AND DISTRIBUTION
We pursue a global marketing, sales and distribution strategy which is centrally
managed out of our Wayland, Massachusetts headquarters. Separate regional
managers for the Americas, Europe and the Middle East, and Asia ensure that the
differing needs of each region are identified and satisfied. International sales
are an important contributor to our revenue. During our 2000 fiscal year, the
U.S. and Canada comprised 48% of our revenue, Japan and the Far East 32%, Europe
19%, and the rest of the world 1%.
We sell our products through our direct sales force and a network of independent
distributors. The particular mix of direct sales and distributors varies by
region. Generally, our distributors enter into a two to three year exclusive
agreement during which they typically agree not to sell our competitors'
products. Our sales strategy is to choose the most productive and practicable
distribution channel within each of our geographic markets.
We sell products in the U.S. primarily through our direct sales force to our
traditional customer base of dermatologists and plastic and cosmetic surgeons.
In addition, several independent distributors enhance our coverage of this
traditional customer base. In order to expand outside our traditional customer
base in the U.S., we entered into a three-year distribution arrangement with PSS
in December 1998 that gives PSS the exclusive right to distribute the
GentleLASE-Registered Trademark- and ScleroPLUS-TM- to specific office-based
specialists. The PSS agreement has been amended to include our new Vbeam-TM-
laser and any new products that are developed during the term of the agreement.
PSS is a division of PSS World Medical, Inc., and is the largest distributor of
medical supplies, equipment, and pharmaceuticals to office-based physicians in
the U.S. Through its nationwide sales force of 700 representatives, PSS offers
our products to approximately 100,000 office sites containing family practice
and general practice physicians, ob/gyn specialists and/or general and vascular
surgeons. The agreement with PSS specifies that our products will be the only
aesthetic and cosmetic lasers sold by PSS.
Outside the U.S. we sell our products in Western Europe, Japan, Central and
South America, including Brazil, the Middle East, and the Pacific Rim through
direct sales offices and distribution relationships. We have 35 employees in our
direct sales offices in Madrid, Frankfurt, Bangkok, Paris, Tokyo, and Osaka. We
plan to open an additional direct sales office in northern Japan. We have
established distribution relationships throughout Europe, Japan, Africa, Central
and South America, including Brazil, and the Middle East. Outside the U.S. we
currently utilize 37 distributors in 46 countries.
The following chart shows data relating to Candela's international activities
during each of the last two fiscal years by geographic region. Revenue generated
from
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regions other than the U.S. includes sales from Candela's German, Spanish,
French, and Japanese subsidiaries, as well as sales shipped directly to
international locations from the U.S. Candela does not record or report, either
internally or externally, operating profit or assets in the same manner it
aggregates revenues.
YEAR ENDED
---------------------------------
July 1, 2000 July 3, 1999
----------------- ---------------
REVENUE:
(in 000's)
United States and Canada ............................... $ 36,353 $ 28,135
Japan and Far East ..................................... 24,005 18,175
Europe ................................................. 14,608 11,837
United States shipments to other regions of the world .. 424 391
SERVICE AND SUPPORT
We believe that quick and effective delivery of service is important to our
customers. We strive to respond to service calls within 24 hours and to complete
the call within 48 hours to minimize practitioner disruption. Our principal
service center and parts depot is located at our Wayland, Massachusetts
headquarters. Parts depots are also located at our sales offices in Japan,
Spain, Germany and France. Independent distributors maintain parts depots and
service representatives adequate to cover their installed systems and have
primary responsibility to service such systems. In addition, we have service
representatives in each of our markets worldwide.
Product maintenance and repair following the warranty period provides an
additional recurring source of revenue. Customers may elect to purchase a
service contract or to purchase service on a time-and-materials basis. Our
service contracts vary by the type of systems and the level of services desired
by the customer and are typically for a 12 to 24 month period after the initial
warranty period expires. Initial warranties on all laser products cover parts
and service for twelve months. Customers may elect to purchase an additional 2
years of warranty on GentleLASE-Registered Trademark-. Our newest product, the
V-Beam-Registered Trademark- laser system, comes with a 3-year, full-service
warranty that includes maintenance and consumables.
Candela emphasizes education and support of its customers. Our recommended
preventative maintenance, coupled with continuing technical education for
service representatives, helps to ensure product reliability. After a sale, the
system is installed and supported by a Candela qualified service engineer. After
installation of a system at the customer's location, a nurse clinician provides
the practitioner with training and clinical support.
MANUFACTURING
We design, manufacture, assemble, and test our branded products other than the
GentlePeel system at our Wayland, Massachusetts facility. Ensuring adequate and
flexible production capacity, continuous cost reduction, and superior product
quality are top priorities of our manufacturing organization. We achieve our
goals by:
- working closely with the research and development organization,
including significant early involvement in product design;
- continually improving our just-in-time manufacturing and inventory
processes; and
- effectively managing a limited number of the most qualified suppliers.
Our facility has ISO 9001 certification and EN 46001 registration. ISO 9001
certification provides guidelines for the quality of company systems associated
with the design, manufacturing, installation, and servicing of company products.
EN 46001
9
standards are European quality requirements specifically relating to the design
of medical devices.
Our products are manufactured with standard components and subassemblies
supplied by subcontractors to our specifications. We purchase certain components
and subassemblies from a limited number of suppliers.
If our suppliers are unable to meet our requirements on a timely basis, our
production could be interrupted until we obtain an alternative source of supply.
To date, we have not experienced significant delays in obtaining dyes, optical
and electro-optical components, electronic components, and raw materials for our
products.
RESEARCH AND DEVELOPMENT
We believe that our advanced research and engineering activities are crucial to
maintaining and enhancing our business, and we are currently conducting research
on a number of applications. We believe that our in-house research and
development staff has demonstrated its ability to develop innovative new
products that meet evolving market needs. Our core competencies include:
- applied laser physics and technology,
- new imaging methods,
- tissue optics,
- photochemistry,
- laser-tissue interaction,
- clinical research, and
- engineering and design of medical laser devices.
As we discover new technologies or applications with commercial potential, we
assemble a team to develop the new product or application in cooperation with
leading physicians and medical and research institutions. In most instances, we
must receive FDA clearance before marketing new products or applications.
Our research and development team works with our operations group to design our
products for ease of manufacturing and assembly and with our marketing group to
respond to market opportunities. We believe that this interaction between
functional groups facilitates the introduction of new products with the right
balance of features, performance, quality, and cost. To date our research and
development effort has relied primarily on internal development building on our
core technologies, rather than through acquisition.
In addition, Candela conducts joint research with physicians affiliated with
various medical and research institutions. One example of technology developed
through joint research is our DCD that was developed in conjunction with the
Beckman Laser Institute at the University of California, Irvine. We anticipate
continuing joint research and licensing arrangements with medical research
institutions.
As of July 1, 2000, our research and development staff consisted of 32 people,
eight of whom have advanced degrees including four Ph.Ds. The core members of
our research and development team have been with us for an average of ten years.
CUSTOMERS
We currently sell our products primarily to physicians. The majority of our
sales in the U.S. are financed through leasing companies. Although our sales are
not dependent on any single customer or distributor, our sales to PSS have
increased and we expect sales to PSS to continue to represent a significant
portion of sales. Our customers are located in more than 40 countries. We have
recently begun an
10
innovative program to target the estimated 6,000 electrologists in the U.S. as
potential customers for GentleLASEPlus for hair removal, positioning
GentleLASEPlus as an adjunct to traditional electrolysis methods.
COMPETITION
Competition in the aesthetic and cosmetic laser industry is intense and
technological developments are expected to continue at a rapid pace. Although
there are over 20 manufacturers of aesthetic and cosmetic lasers, we believe
that only Candela and a few others offer a broad range of products able to
address multiple applications. Unlike Candela, few, if any, of our competitors
focus exclusively on the cosmetic and aesthetic laser market. We believe that
our principal competitors are currently Coherent and ESC Medical Systems. We
compete on the basis of proprietary technology, product features, performance,
service, price, and reputation. Some of our competitors have greater financial,
marketing, and technical resources than we do. In addition, some competitors
have developed, and others may attempt to develop, products with applications
similar to ours.
We believe that many factors will affect our competitive position in the future,
including our ability to:
- develop and manufacture new products that meet the needs of our
markets,
- respond to competitive developments and technological changes,
- manufacture our products at lower cost,
- retain a highly qualified research and engineering staff, and
- provide sales and service to a worldwide customer base.
PROPRIETARY RIGHTS
We own several U.S. and foreign patents and have four U.S. and one foreign
patent applications pending to protect our rights in certain technical aspects
of our hair removal, benign vascular lesion, pigmented lesion, and other laser
systems. The expiration dates for our issued U.S. patents range from December 8,
2006 to February 5, 2017.
In addition to our portfolio of patents issued and pending, we license patented
technology from third parties. We use DCD under a license agreement to patent
rights owned by the Regents of the University of California. In August, 2000, we
entered into an agreement to amend the license agreement whereby in exchange for
an annual exclusivity fee, which will be prepaid in full in the amount of
approximately $1.5 million by Candela, Candela will obtain exclusive license
rights to the DCD (subject to certain limited license rights of Cool Touch) in
the following fields of use: procedures that involve skin resurfacing and
rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, Inc.
("Cool Touch"), a subsidiary of New Star, will obtain a license to the DCD on a
co-exclusive basis with Candela, in certain narrower fields of use. Cool Touch
is restricted in its ability to assign its license rights to certain existing
competitors of Candela. Candela will receive one-half of all royalty income
payable to the Regents from Cool Touch. Under the amended agreement, Candela no
longer is required by the Regents to negotiate sublicenses to third parties.
However, Candela will receive one-half of all royalties due from any other
entity that licenses the DCD technology from the Regents in other fields of use.
We rely primarily on a combination of patent, copyright, and trademark laws to
establish and protect our proprietary rights. We also rely on trade secret laws,
confidentiality procedures, and licensing arrangements to establish and protect
our technology rights. In addition, we seek to protect our proprietary
11
rights by using confidentiality agreements with employees, consultants,
advisors, and others. We cannot be certain that these agreements will adequately
protect our proprietary rights in the event of any unauthorized use or
disclosure, that our employees, consultants, advisors, or others will maintain
the confidentiality of such proprietary information, or that our competitors
will not otherwise learn about or independently develop such proprietary
information.
Despite our efforts to protect our intellectual property, unauthorized third
parties may attempt to copy aspects of our products, to violate our patents, or
to obtain and use our proprietary information. In addition, the laws of some
foreign countries do not protect our intellectual property to the same extent as
do the laws of the U.S. The loss of any material trademark, trade name, trade
secret, or copyright could hurt our business, results of operations, and
financial condition.
We believe that our products do not infringe from the rights of third parties.
However, we cannot be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result in
costly litigation or require us to obtain a license to third party intellectual
property. In addition, we cannot be certain that such licenses will be available
on reasonable terms or at all, which could hurt our business, results of
operations, and financial condition. We have received correspondence from
Palomar Medical Technologies, the exclusive licensee from Star Medical
Technologies of certain United States patents, and also from Star Medical,
offering to grant us a nonexclusive license to such patents. We have engaged in
discussions with Palomar relative to these patents, but have not yet decided on
a specific course of action.
GOVERNMENT REGULATION
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either "510(k) clearance" or "PMA approval" in advance from the U.S. Food and
Drug Administration pursuant to the Federal Food, Drug, and Cosmetic Act. The
FDA's 510(k) clearance process usually takes from four to twelve months, but it
can last longer. The process of obtaining PMA approval is much more costly,
lengthy, and uncertain and generally takes from one to three years or even
longer. We cannot be sure that 510(k) clearance or PMA approval will ever be
obtained for any product we propose to market.
The FDA decides whether a device must undergo either the 510(k) clearance or PMA
approval process based upon statutory criteria. These criteria include the level
of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
pre-market notification requesting 510(k) clearance, unless an exemption
applies. The pre-market notification must demonstrate that the proposed device
is "substantially equivalent" in intended use and in safety and effectiveness to
a legally marketed "predicate device" that is either in class I, class II, or is
a "pre-amendment" class III device (i.e., one that was in commercial
distribution before May 28, 1976) for which the FDA has not yet decided to
require PMA approval.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance, but
the FDA can review any such decision. If the FDA disagrees with a manufacturer's
decision not to seek a new 510(k) clearance, the agency may retroactively
require the manufacturer to submit a pre-market notification requiring 510(k)
clearance. The FDA also can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance is obtained. We have modified
some of our 510(k) cleared devices, but have determined that, in our view, new
510(k) clearances are not required. We cannot be certain that the FDA would
agree with any of our decisions not to seek 510(k) clearance. If the FDA
requires us to seek 510(k) clearance for any modification, we also may be
required to cease marketing and/or recall the modified device until we obtain a
new 510(k) clearance.
12
Devices deemed by the FDA to pose the greatest risk such as life-sustaining,
life-supporting, or implantable devices, or deemed not substantially equivalent
to a legally marketed predicate device, are placed in class III. Such devices
are required to undergo the PMA approval process in which the manufacturer must
prove the safety and effectiveness of the device to the FDA's satisfaction. A
PMA application must provide extensive pre-clinical and clinical trial data and
also information about the device and its components regarding, among other
things, manufacturing, labeling, and promotion. After approval of a PMA, a new
PMA or PMA supplement is required in the event of a modification to the device,
its labeling, or its manufacturing process.
A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
("IDE") application approved in advance by the FDA for a limited number of
patients, unless the product is deemed a nonsignificant risk device eligible for
more abbreviated IDE requirements. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical trials
may begin if the IDE application is approved by the FDA and the appropriate
institutional review boards at the clinical trial sites.
To date, the FDA has deemed our products to be class II devices eligible for the
510(k) clearance process. We believe that most of our products in development
will receive similar treatment. However, we cannot be certain that FDA will not
deem one or more of our future products to be a class III device and impose the
more burdensome PMA approval process.
PERVASIVE AND CONTINUING FDA REGULATION. A host of regulatory requirements apply
to marketed devices such as our laser products, including labeling regulations,
the Quality System Regulation (which requires manufacturers to follow elaborate
design, testing, control, documentation, and other quality assurance
procedures), the Medical Device Reporting regulation (which requires that
manufacturers report to the FDA certain types of adverse events involving their
products), and the FDA's general prohibition against promoting products for
unapproved or "off label" uses. Class II devices such as ours also can have
special controls such as performance standards, post-market surveillance,
patient registries, and FDA guidelines that do not apply to class I devices.
Unanticipated changes in existing regulatory requirements or adoption of new
requirements could hurt our business, financial condition, and results of
operations.
We are subject to inspection and market surveillance by the FDA for compliance
with regulatory requirements. If the FDA finds that we have failed to comply
with applicable requirements, the agency can institute a wide variety of
enforcement actions. The FDA sometimes issues a public warning letter, but also
may pursue more drastic remedies, such as refusing our requests for 510(k)
clearance or PMA approval of new products, withdrawing product approvals already
granted to us, requiring us to recall products, or asking a court to require us
to pay civil penalties or criminal fines, adhere to operating restrictions, or
close down our operations. Ultimately, criminal prosecution is available to FDA
as punishment for egregious offenses. Any FDA enforcement action against us
could hurt our business, financial condition, and results of operation.
OTHER U.S. REGULATION. We also must comply with numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control, and hazardous
substance disposal. We cannot be sure that we will not be required to incur
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not hurt our business, financial condition, and
results of operations.
FOREIGN REGULATION. International sales are subject to foreign government
regulation, the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
Companies are now required to obtain the CE Mark prior to sale of certain
medical devices within the EU. During this process, the sponsor must demonstrate
compliance with ISO manufacturing and quality requirements. In addition, Candela
is currently awaiting
13
Ministry of Health approval in Japan to market the ScleroPLUS-TM- and the
Vbeam-TM-, and in Korea to market the Vbeam-TM-.
Candela and its products may also be subject to other federal, state, local, or
foreign regulations relating to health and safety, environmental matters,
quality assurance, and the like. Candela's compliance with laws that regulate
the discharge of materials into the environment or otherwise relate to the
protection of the environment does not have a material effect on its ongoing
operations. Candela has not made any material expenditures for environmental
control facilities.
PRODUCT LIABILITY AND WARRANTIES
Our products are generally covered by a one-year warranty, while our Vbeam(TM)
has a three-year warranty. We set aside a reserve based on anticipated warranty
claims. We believe such reserves to be adequate, but in the event of a major
product problem or recall, such reserves may be inadequate to cover all costs,
and such an event could have a material adverse effect on our business,
financial condition, and results of operations.
Our business involves the inherent risk of product liability claims. We maintain
appropriate product liability insurance with respect to our products with a
coverage limit of $13 million in the aggregate. We cannot be certain that with
respect to our current or future products, such insurance coverage will continue
to be available on terms acceptable to us or that such coverage will be adequate
for liabilities that may actually be incurred.
THE SKIN CARE CENTERS
In June 1996, we began an effort to own and operate skin care centers offering
cosmetic laser treatments utilizing our equipment along with other cosmetic
services traditionally offered by high-end spas. We pursued this strategy by
purchasing an operating spa in Boston in 1996. In March 1997, we opened a new
facility in Scottsdale, Arizona, with no pre-existing customer base. We
subsequently decided to reduce our focus on our skin care center efforts. We
closed our Scottsdale, Arizona facility in the quarter ended December 27, 1997,
and in January of 1999 ceased to offer aesthetic laser procedures at our Boston
skin care center, although we continue to offer health and beauty services from
this location. We are actively seeking buyers to assume the leases and purchase
the assets of both the Scottsdale and Boston facilities in order to concentrate
on our core business of manufacturing and servicing advanced aesthetic laser
systems.
EMPLOYEES
As of July 1, 2000, we employed 311 people in the following areas of our
organization:
- 32 in research, development, and engineering,
- 42 in manufacturing and quality assurance,
- 25 in service positions,
- 31 in sales and marketing,
- 29 in finance and administrative positions and all others,
- 117 in our clinic and health spa subsidiary, including both full and
part-time employees, and
- 35 in our international sales and service subsidiaries.
14
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133," which postponed the adoption date of SFAS No. 133. As such, the
Company is not required to adopt the statement until fiscal 2001. Had the
Company implemented SFAS No. 133 for the current reporting period, there would
have been no material effect on operational results.
In December 1999, The Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company has not assessed
the effect that such adoption may have on its consolidated results of operations
and financial position.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
NAME AGE POSITION
------ ----- ---------
Gerard E. Puorro 53 President, Chief Executive Officer and
Director
F. Paul Broyer 51 Senior Vice President of Finance and
Administration, Chief Financial Officer,
and Treasurer
William B. Kelley 45 Vice President, North American and Latin
American Sales
William McGrail 39 Vice President, Operations
Toshio Mori 48 Vice President, President of Candela KK
Robert J. Wilber 42 Vice President, European Sales
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.
Mr. Broyer was appointed Senior Vice President of Finance and Administration,
Chief Financial Officer, and Treasurer in July 1998. Mr. Broyer joined the
Company in October 1996 as Vice President and Chief Financial Officer. Prior to
joining the Company, Mr. Broyer held the position of Vice President Finance at
Integrated Genetics from 1994 to 1996. From 1987 until 1994, Mr. Broyer was
Corporate Controller for Laserdata, Inc. and held earlier positions with Avatar
Technologies and Data General Corporation.
Mr. Kelley was named Vice President of North American and Latin American Sales
in July 1998. Mr. Kelley was previously Vice President, North American Sales and
Service, from April 1993 through June 1998. From January 1993 until April
15
1993 he was Vice President, Domestic Sales. He has been with the Company since
1987 and previously held the 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.
Mr. McGrail was named Vice President of Operations in May 2000. Previously, Mr.
McGrail served in the positions of Vice President of Development Engineering
since July 1998. Mr. McGrail also served in the position of Director of
Engineering since August 1994. From 1987 to 1992, he held the positions of
Senior Software Engineer and Software Design Engineer. Prior to joining Candela,
Mr. McGrail was employed with Raytheon Corporation.
Mr. Mori was named Vice President, President of Candela K.K. in July 1998, after
serving as President and Representative Director of Candela K.K. since September
1996. Previously, Mr. Mori held the positions of Director of Candela K.K. from
September 1992 to September 1996, and General Manager from September 1989 to
September 1992. From 1976 to 1989, he was employed by Sansui Electric Co. Ltd.
in Tokyo.
Mr. Wilber was appointed Vice President of European Sales in February 1999,
after serving as Vice President, Worldwide Service since August 1997.
Previously, Mr. Wilber held the position of Director of Worldwide Service from
October 1993 to August 1997. He has been with the Company since September of
1989 and was previously a Finance Group Director. From 1989 to 1992 Mr. Wilber
held the positions of International Accounting Manager, Customer Service
Manager, and Director of Financial Planning and Analysis. Prior to joining the
Company, Mr. Wilber held positions at Sony Corporation of America, Massachusetts
Computer Corporation, and National Semiconductor/Data Terminal Systems.
ITEM 2. PROPERTIES
We lease a facility totaling approximately 35,000 square feet for our operations
in Wayland, Massachusetts, which is located approximately 20 miles west of
Boston. The lease on this facility was amended in April 1998 to extend the
expiration date to March 2003. Candela's management believes that its current
facilities are suitable and adequate for our near-term needs.
Candela's subsidiary, Candela Skin Care Centers, Inc, currently leases the
following facilities:
1) Candela Skin Care Center of Scottsdale, Inc., 7,555 square feet located at
6939 E. Main Street, Scottsdale, AZ. The lease on this facility is for a period
of ten years, expiring on June 30, 2006, with a provision for two five-year
extensions; and
2) Candela Skin Care Center of Boston, Inc., 20,728 square feet located at 28
Arlington Street, Boston, MA. The lease on this facility is for a period of 15
years, and commenced on June 1, 1994.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 2000, Candela reached a settlement of legal disputes with the
Regents of the University of California ("Regents") and New Star Technology,
Inc. (`New Star"), relating to the Dynamic Cooling Device ("DCD") licensed by
Candela from the Regents. Candela had commenced an arbitration against the
Regents seeking a declaration that it was in compliance with its amended license
agreement with the Regents. New Star had commenced litigation against Candela
and the Regents arising from its unsuccessful efforts to obtain a license to the
DCD technology from the Regents. Pursuant to the settlement, all three parties
agreed to dismiss with prejudice all pending proceedings in the U.S. District
Court for the Eastern District of California and the District of Massachusetts,
and before the American Arbitration Association, and to exchange full releases.
In addition, Candela and the Regents agreed to a further amendment of the
16
DCD license agreement between Candela and the Regents to provide that, in
exchange for an annual exclusivity fee, which will be prepaid in full in the
amount of approximately $1.5 million by Candela, Candela will obtain
exclusive license rights to the DCD (subject to certain limited license
rights of Cool Touch) in the following fields of use: procedures that involve
skin resurfacing and rejuvenation, vascular skin lesions, and laser hair
removal. Cool Touch, Inc. ("Cool Touch"), a subsidiary of New Star, will
obtain a license to the DCD, on a co-exclusive basis with Candela, in certain
narrower fields of use. The settlement agreement also contains restrictions
on Cool Touch's ability to assign its license rights to certain existing
competitors of Candela. Candela will receive one-half of all royalty income
payable to the Regents from Cool Touch. Under the amended agreement, Candela
will no longer be required by the Regents to negotiate sublicenses to third
parties. However, Candela will receive one-half of all royalties due from any
other entity that licenses the DCD technology from the Regents in other
fields of use. The annual exclusivity fee is payable upon closing with the
Regents and Cool Touch in one payment, and will be amortized over the
remaining life of the Regents' DCD patent. The amended license agreement
specifies that, from the date of settlement, Candela's royalty obligation to
the Regents will be computed based upon the list price (or price to
distributors) on the DCD component of the laser system. While this
modification retains the historical percentage royalty rate previously
payable to the Regents, it will prospectively apply to more components sold
and as a result will increase Candela's royalty payments compared to the
method of computing royalties prior to the modification. Finally, Candela has
agreed to provide a non-assignable contract not to sue Cool Touch relating to
a patent owned by Candela. The parties' August 11, 2000 settlement is
binding. The parties are currently negotiating a definitive settlement
agreement and amended license agreement. The parties' August 11, 2000
settlement agreement provides that any dispute concerning these documents
will be promptly and conclusively resolved by the mediator who facilitated
the settlement.
From time to time, we are a party to various legal proceedings incidental to our
business. We believe that none of the other presently pending legal proceedings
will have a material adverse effect upon our financial position, results of
operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Candela's common stock trades on The NASDAQ Stock Market under the symbol
"CLZR."
At September 22, 2000, there were 375 holders of record of the Company's common
stock and the closing sales price of the Company's common stock was $11.25.
The following table sets forth quarterly high and low closing sales prices of
the common stock for the indicated fiscal periods:
HIGH LOW
------- ------
FISCAL 2000
First Quarter.................................. $11.7500 $ 6.7087
Second Quarter................................. 12.7500 6.7087
Third Quarter.................................. 18.1250 11.5420
Fourth Quarter................................. 14.0000 9.0000
FISCAL 1999
First Quarter.................................. $ 3.1667 $ 1.7920
Second Quarter................................. 4.0207 2.0000
Third Quarter.................................. 6.6667 3.7500
Fourth Quarter................................. 13.6253 5.4167
DIVIDEND POLICY
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.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The table set forth below contains certain consolidated 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 related
notes, as well as Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEAR ENDED
-----------------------------------------------------------------
JULY 1, JULY 3, JUNE 27, JUNE 28, JUNE 29,
CONSOLIDATED STATEMENT OF OPERATIONS DATA: 2000 1999 1998 1997 1996
- ----------------------------------------- ---- ---- ---- ---- ----
REVENUE:
Lasers and other products.................... $60,340 $46,708 $25,917 $25,601 $20,403
Product related service...................... 11,320 8,801 8,405 7,660 7,861
Skin care centers............................ 3,730 3,079 2,703 2,244 2,149
------- ------- ------- ------- -------
Total revenue........................... 75,390 58,588 37,025 35,505 30,413
COST OF SALES:
Lasers and other products.................... 22,703 18,623 11,272 11,195 9,159
Product related service...................... 6,802 5,715 6,954 5,563 6,560
Skin care centers............................ 2,377 2,125 2,481 1,892 1,114
------- ------- ------- ------- ------
Total cost of sales .................... 31,882 26,463 20,707 18,650 16,833
GROSS PROFIT:
Lasers and other products.................... 37,637 28,085 14,645 14,406 11,244
Product related service...................... 4,518 3,086 1,451 2,097 1,301
Skin care centers............................ 1,353 954 222 352 1,035
------- ------- ------- ------- --------
Total gross profit...................... 43,508 32,125 16,318 16,855 13,580
OPERATING EXPENSES:
Research and development .................... 4,822 3,998 2,399 2,488 1,818
Selling, general & administrative............ 21,669 17,891 15,271 13,680 9,873
Restructuring charge (1).................... 0 0 2,609 0 0
------- ------- ------- ------- -------
Total operating expenses................ 26,491 21,889 20,279 16,168 11,691
------- ------- ------- ------- -------
Income (loss) from operations ................. 17,017 10,236 (3,961) 687 1,889
OTHER INCOME (EXPENSE):
Interest income.............................. 1,427 115 42 84 93
Interest expense............................. (482) (492) (235) (107) (49)
Other (income) expense....................... 242 (3) (123) (26) (207)
------- -------- -------- -------- --------
Total other income (expense)............ 1,187 (380) (316) (49) (163)
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES............. 18,204 9,856 (4,277) 638 1,726
Provision for income taxes.................... 3,641 2,365 175 400 481
------- ------- ------- ------- -------
NET INCOME (LOSS)............................. $14,563 $ 7,491 $(4,452) $ 238 $ 1,245
======= ======= ======== ======= =======
Basic earnings(loss)per share................ $ 1.33 $ .91 $ (.54) $ .03 $ .16
Diluted earnings(loss)per share.............. $ 1.19 $ .82 $ (.54) $ .03 $ .15
Weighted average shares outstanding.......... 10,932 8,250 8,219 8,097 7,982
Adjusted weighted average shares outstanding. 12,190 9,179 8,219 8,510 8,478
JULY 1, JULY 3, JUNE 27, JUNE 28, JUNE 29
CONSOLIDATED BALANCE SHEET DATA: 2000 1999 1998 1997 1996
- ------------------------------- ---- ---- ---- ---- ----
Cash and cash equivalents.................... $34,863 $10,055 $ 1,615 $ 2,674 $ 3,041
Working capital.............................. 44,255 13,186 2,639 7,032 8,608
Total assets................................. 73,164 36,451 22,604 24,837 19,334
Long-term debt............................... 3,034 3,181 887 1,519 557
Total stockholders' equity................... 48,563 14,023 5,395 10,246 9,965
Total liabilities and stockholders' equity... 73,164 36,451 22,604 24,837 19,334
(1) During the quarter ended December 27, 1997, a restructuring charge was
recorded and a reserve established in the amount of $2.6 million resulting
from the closure of the skin care center located in Scottsdale, Arizona.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE FOLLOWING
DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN REVENUE, GROSS
MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS INCLUDING
WORDS SUCH AS "ANTICIPATE", "BELIEVE", "PLAN", "ESTIMATE", "EXPECT", AND
"INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING STATEMENTS.
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" AS WELL AS OTHER RISKS AND UNCERTAINTIES REFERENCED
IN THIS PROSPECTUS.
OVERVIEW
We research, develop, manufacture, market, and service lasers used to perform
aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. Candela markets its 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. Over 50% of our revenue in fiscal 2000 came from
international sales.
We derive our revenue from:
- the sale of lasers and other products;
- the provision of product related services; and
- the operations of our remaining skin care center.
Domestic and international product sales are generated principally through our
direct sales force based in the U.S. and five international offices. Prior to
fiscal 1999, a relatively small portion of our sales have come through our
network of independent distributors. In December 1998, we entered into an
exclusive distributorship arrangement with Physician Sales and Service (PSS)
whose 700 representatives target general practice physicians and certain
specialists in the U.S. Sales to distributors for the years ended July 1, 2000
and July 3, 1999, increased as a result of this arrangement.
We typically assemble products in our Wayland, Massachusetts, facility in the
quarter in which they are shipped, and backlog has not been significant. We
experience some seasonal reduction of our product sales in the quarter ending in
September due to the summer holiday schedule of physicians and their patients.
All product shipments include a 12-month parts and service warranty. The
anticipated cost associated with the warranty coverage is accrued at the time of
shipment and amortized over the warranty period as a cost of sales charged to
service revenue. Costs associated with product installation are also recognized
as costs of product-related service revenue. Both such anticipated and actual
costs have no associated revenue and therefore reduce the gross profit from
product related service revenue.
Product related service revenue consists of revenue from maintenance and repair
services and the sale of spare parts and consumables. We derive revenue from
extended warranty contracts, which are typically for a 12 to 24 month period. An
extended 24 month warranty contract is standard with the purchase of our
V-Beam-TM- system. In addition, we provide on- site service worldwide on a
time-and-materials basis directly or through our distributors.
In June 1996, we began an effort to own and operate skin care centers offering
cosmetic laser treatments utilizing our equipment, along with providing other
cosmetic services traditionally offered by high-end spas. We pursued this
strategy
20
by purchasing an existing spa in Boston in 1996. In March 1997, we opened a new
skin care center in Scottsdale, Arizona, with no pre-existing client base. We
subsequently decided to reduce our focus on our skin care center efforts and to
renew our commitment to our core aesthetic and cosmetic laser business. In the
quarter ending December 27, 1997, we closed our Scottsdale facility because it
had failed to generate any material revenue from its inception, recorded a
restructuring charge, and established a reserve in the amount of $2.6 million
which represented the anticipated cost associated with this closure. In January
1999, we ceased to offer aesthetic laser procedures at our Boston skin care
center because the rate of performance was insufficient to justify the
associated costs, but we continue to provide personal care and health and beauty
services from this location. We are actively seeking buyers to assume the leases
and purchase the assets of both the Scottsdale and Boston facilities.
International revenue, consisting of sales from our subsidiaries in Germany,
France, Spain, and Japan, and sales shipped directly to international locations
from the U.S., during the fiscal years ended July 1, 2000, and July 3, 1999,
represented 52% of total sales, and 53% for the year ended June 27, 1998.
Our fiscal year consists of the 52 or 53-week period ending on the Saturday
closest to June 30 of each year. The years ended July 1, 2000, July 3, 1999, and
June 27, 1998, contained 52, 53 and 52 weeks, respectively.
RESULTS OF OPERATIONS
The following tables set forth selected financial data for the periods
indicated, expressed as percentages.
FOR THE YEAR ENDED
----------------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
---- ---- ----
REVENUE MIX:
(PERCENTAGE OF TOTAL REVENUE)
Lasers and other products 80.0% 79.7% 70.0%
Product related service 15.0 15.0 22.7
Skin care centers 5.0 5.3 7.3
----- ----- -----
Total 100.0% 100.0% 100.0%
OPERATING RATIOS:
GROSS PROFIT
(PERCENTAGE OF EACH REVENUE CATEGORY)
Lasers and other products 62.4% 60.1% 56.5%
Product related service 39.9 35.1 17.3
Skin care centers 36.3 31.0 8.2
----- ----- -----
Total 57.7% 54.8% 44.1%
OPERATING EXPENSE
(PERCENTAGE OF TOTAL REVENUE)
Research and development 6.4% 6.8% 6.5%
Selling, general and administrative 28.7 30.5 41.2
Restructuring charge 0.0 0.0 7.1
----- ----- -----
Total 35.1 37.3 54.8
----- ----- -----
Income (loss) from operations 22.6 17.5 (10.7)
Other income (expense) 1.5 (0.6) (0.9)
----- ----- -----
Net income (loss) before income taxes 24.1 16.9 (11.6)
Provision for income taxes 4.8 4.0 0.4
----- ----- -----
Net income (loss) 19.3% 12.8% (12.0)%
===== ===== =====
21
FISCAL YEAR ENDED JULY 1, 2000 COMPARED TO FISCAL YEAR ENDED JULY 3, 1999
REVENUE. Total revenue increased 29% to $75.4 million in fiscal 2000 from
$58.6 million in fiscal 1999. International revenue, consisting of sales from
our subsidiaries in Germany, Spain, and Japan, and sales shipped directly to
international locations from the U.S., was 52% of total revenue for both
fiscal 2000 and fiscal 1999. Laser and product revenue increased 29% to $60.3
million in fiscal 2000 from $46.7 million in fiscal 1999. This was due to our
initial shipments of our new Vbeam-TM- laser system for the treatment of
vascular lesions and continued strong sales of our GentleLASE-Registered
Trademark- hair removal system. Product-related service revenue increased 29%
to $11.3 million in fiscal 2000 from $8.8 million in fiscal 1999. This
increase was attributable to increased shipments of consumables used with our
Vbeam-TM-, GentleLASE-Registered Trademark-, and Sclero products as well as
an increase in the sale of service contracts. Skin care center revenue
increased 21% to $3.7 million in fiscal 2000 compared to $3.1 million in
1999, due to increased marketing and promotional activities for our Boston
Spa.
GROSS PROFIT. Gross profit increased to $43.5 million or 58% of revenue in
fiscal 2000 from $32.1 million or 55% of revenue in fiscal 1999 mainly as a
result of increased sales of higher margin GentleLASE-Registered Trademark-
and Vbeam-Registered Trademark- systems. Gross profit on lasers and other
products increased to $37.6 million or 62% in fiscal 2000 compared to $28.1
million or 60% in fiscal 1999. Gross profit for service revenue in fiscal
2000 increased to $4.5 million or 40% of revenue compared to $3.1 million or
35% of revenue for fiscal 1999 resulting from the increase in the number of
units in service. Skin care center gross profit for fiscal year 2000
increased to $1.35 million or 36% of revenue in comparison to $0.95 million
or 31% of revenue for fiscal year 1999 resulting from a combination of
increased number of services and emphasis placed on cost control within the
center.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending for fiscal
2000 increased 21% to $4.8 million, from $4.0 million for fiscal 1999. The
increase in research and development expense reflects efforts to develop new
products and product improvements designed to enhance, augment, and expand our
existing product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense increased 21% to $21.7 million in fiscal 2000, from $17.9 million in
fiscal 1999. This reflects additional expenditures incurred to support our
increased sales volume. This includes increased commission and travel costs as
well as expenditures relating to our offices in Frankfurt, Paris, and Osaka.
These offices were opened during the course of fiscal 1999 and 2000 and did not
have a full year of expenses in fiscal 1999. Selling, general and administrative
expenses were 29% of revenue in fiscal 2000 compared to 31% for fiscal 1999.
RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million resulting from the closure of the skin care center located in
Scottsdale, Arizona. During fiscal 2000, a total of $476,000 was charged against
this reserve, representing costs associated with the closure of the Scottsdale
facility leaving a reserve balance of $1.0 million. Candela continues 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 reserve established to date will be sufficiently adequate so
that no additional material charges will need to be recorded for at least the
next 18 months.
OPERATING INCOME. Income from operations for the year ended July 1, 2000,
increased by $6.8 million to $17.0 million, up from $10.2 million a year
earlier. The improved performance was a result of increased revenue from product
sales.
OTHER INCOME/EXPENSE. For the fiscal year ended July 1, 2000, total other income
was $1.2 million in comparison to other expense of $0.4 million for the same
period a year earlier. This increase was a result of increased interest income
due to our substantially higher cash balances in fiscal 2000 in comparison to
fiscal 1999. Operating margins for future periods will be impacted by a modified
royalty formulation with respect to our DCD license from the Regents negotiated
in August of 2000, since the same royalty rate will mow apply to more components
sold.
22
INCOME TAXES. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries. The provision for
income taxes for the year ended July 1, 2000, reflects the utilization of tax
credits generated in the current and tax provisions calculated in Japan and
Spain at a rate in excess of the U.S. statutory tax rate. As of July 3, 1999,
there were no federal net operating loss carryforwards and the federal tax
credit carryforwards. We also released $3.1 million of the valuation allowance
against our deferred tax asset in fiscal 2000. The effective tax rate for fiscal
2000 and 1999 are approximately 20% and 24%, respectively.
During fiscal 2000, Candela believed it was more likely than not that a portion
of the deferred tax asset would be utilized during the current year. Therefore,
the Company, in accordance with the Statement of Financial Accounting Standards
Board No. 109 "Accounting for Income Taxes", decreased in valuation allowance
against current year taxable income, resulting in a decrease to its effective
rate.
FISCAL YEAR ENDED JULY 3, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 27, 1998
REVENUE. Total revenue increased 58% to $58.6 million in fiscal 1999 from
$37.0 million in fiscal 1998. International product revenue, consisting of
sales from our subsidiaries in Germany, Spain, and Japan, and sales shipped
directly to international locations from the U.S., was 52% of total revenue
for fiscal 1999 compared to 53% for the same period in 1998. Laser and
product revenue increased 80% to $46.7 million in fiscal 1999 from $25.9
million in fiscal 1998. This was due mainly to a significant increase in the
volume of both domestic and international shipments of the
GentleLASE-Registered Trademark-, which we began shipping in March 1998.
Product-related service revenue increased 5% to $8.8 million in fiscal 1999
from $8.4 million in fiscal 1998. This increase was attributable to shipments
of consumables used with the GentleLASE-Registered Trademark- and Sclero
products. Skin care center revenue increased 14% to $3.1 million in 1999
compared to $2.7 million in 1998, due to increased marketing and promotional
activities for our Boston Spa.
GROSS PROFIT. Gross profit increased to $32.1 million or 55% of revenue in
fiscal 1999 from $16.3 million or 44% of revenue in fiscal 1998 as a result
of increased sales of higher margin GentleLASE-Registered Trademark- and
higher absorption of fixed portions of manufacturing overhead. Gross profit
on lasers and other products increased to $28.0 million or 60% in fiscal 1999
compared to $14.6 million or 57% in fiscal 1998. Gross profit for service
revenue in fiscal 1999 increased to $3.1 million or 35% of revenue compared
to $1.5 million or 17% of revenue for fiscal 1998. Skin care center gross
profit for the year ended July 3, 1999 was positively impacted, in comparison
to 1998, by the closure of the Scottsdale facility in the second quarter of
fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending for fiscal
1999 increased 67% to $4.0 million, from $2.4 million for fiscal 1998. The
increase in research and development expense reflects efforts to develop
products and product improvements designed to enhance, augment, and expand
existing product lines. Research and development expense also includes
approximately $481,000 of management bonuses, which are tied to pre-tax profits.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expense increased 17% to $17.9 million in fiscal 1999, from $15.3 million in
fiscal 1998. This reflects increased staffing levels in the sales and marketing
departments incurred to support revenue growth, partially offset by savings
realized from operating one skin care center rather than two during the first
six months of the fiscal year. Also affecting selling, general and
administrative expense for fiscal 1999 was an expense of approximately $1.3
million for the payment of management bonuses that are tied to pre-tax profits
derived from product and service revenue. In fiscal 1998, the management bonus
accrued amounted to approximately $325,000. In relation to revenue, selling,
general and administrative expenses were 31% of revenue in fiscal 1999 compared
to 41% for fiscal 1998.
RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million resulting
23
from the closure of the skin care center located in Scottsdale, Arizona. During
fiscal 1999, a total of $476,000 was charged against this reserve, representing
costs associated with the closure of the Scottsdale facility leaving a reserve
balance of $1.5 million.
OPERATING INCOME. Income from operations for the year ended July 3, 1999,
increased by $14.2 million, from a loss of $4.0 million in fiscal 1998 to a
profit of $10.2 million, in fiscal 1999. The improved performance was a result
of both increased revenue from product sales and reduced expenses in connection
with operations of the skin care centers.
OTHER INCOME/EXPENSE. For the fiscal year ended July 3, 1999, total other
expense was $380,000 in comparison to $316,000 for the same period a year
earlier. The increase resulted from an increase in interest expenses from the
debt issued in October, 1998, partially offset by a decrease in exchange losses
from our foreign operations and an increase in interest income resulting from
higher cash balances.
INCOME TAXES. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries. The provision for
income taxes for the year ended July 3, 1999, reflects the utilization of the
domestic net operating loss and tax credit carryforwards and tax provisions
calculated in Japan and Spain at a rate in excess of the U.S. statutory tax
rate. We had a net operating loss carryforward of approximately $2.2 million and
tax credit carryforwards of approximately $1.6 million at June 28, 1998, the
beginning of the current fiscal year. Based on current year operating results,
we utilized all of the federal net operating loss carryforwards and the federal
tax credit carryforwards. We also released $1.1 million of the valuation
allowance against our deferred tax asset in fiscal 1999. The effective tax rate
for fiscal 1999 is approximately 24%.
During the second quarter of fiscal 1999, Candela believed that it was more
likely than not that a portion of the deferred tax asset would be utilized
during 2000. Therefore, the Company, in accordance with the Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes", decreased
its valuation allowance for the portion related to the utilization of the net
operating loss and tax credit carryforwards against current year taxable income,
resulting in a decrease to its effective rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $8.5 million for fiscal 2000
compared to $8.8 million in fiscal 1999, reflecting increased operating profit
offset by an increase in account receivables and other assets. Cash used in
investing activities totaled $554,000 for fiscal 2000 compared to $161,000 for
the same period a year earlier resulting from a reduction in the amount of
assets sold in fiscal 2000. Cash provided by financing activities amounted to
$18.1 million in 2000 in comparison to $15,000 for 1999. This was a result of
completing our secondary offering in July, 1999, with the proceeds offset by the
cost of Candela shares repurchased in the open market during the fourth quarter
of fiscal 2000.
Cash and cash equivalents at July 1,2000, increased by $24.8 million to $34.9
million from $10.1 million at July 3, 1999, primarily due to the cash proceeds
received from our July, 1999 secondary offering.
We completed a public offering in July 1999, for 3,645,000 shares of common
stock, of which 2,249,781 shares were sold by Candela and 1,395,219 shares were
sold by certain selling shareholders. We received approximately $19.1 million in
net proceeds from the sale of our shares.
On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million, secured by the
Company's assets. The notes become due in October, 2006, and require quarterly
interest payments. In addition, we issued warrants to purchase 555,000 shares of
common stock to the note holders that have an exercise price of $2.67 per share.
The relative fair value ascribed to the warrants is $836,000 and has been
recorded as a component of Additional Paid-In Capital in Stockholders Equity.
The relative fair value of the debt was recorded as $2,864,000. The debt will be
accreted to face value using the
24
interest method over eight years, which will result in interest expense of
$836,000 over the eight-year period in addition to the 9.75% face interest.
The Company also maintains a renewable $5,000,000 revolving credit agreement
with a major bank with interest at the bank's base rate. Any borrowings
outstanding under the line of credit are due on demand or according to a payment
schedule established at the time funds are borrowed. The line of credit is
unsecured. The agreement contains restrictive covenants limiting the
establishment of new liens, and the purchase of margin stock. No amounts were
outstanding under the line of credit as of July 1, 2000.
Our remaining short-term and long-term debt is comprised of capital lease
obligations in the amount of $15,000 and $9,000, respectively, at July 1, 2000,
compared to $310,000 and $252,000, respectively, at July 3, 1999.
We believe that cash balances will be sufficient to meet anticipated cash
requirements through the first quarter of fiscal 2002. However, we cannot be
sure that we will not require additional capital beyond the amounts currently
forecasted by us, nor that any such required additional capital will be
available on reasonable terms, if at all, at such as it becomes required.
YEAR 2000 READINESS DISCLOSURE STATEMENT
We have executed a plan designed to make our products, information technology
systems and equipment Year 2000 ready. To date, we have experienced no
significant problems in our products, business interruptions or material adverse
effects from the Year 2000 issue. However, we could still experience material
unanticipated problems and costs caused by undetected errors or defects from the
Year 2000 issue. We cannot guarantee that our Year 2000 readiness plan has been
successfully implemented, and actual results could still differ materially from
our plan
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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," "continue" or other similar
words. These statements discuss future expectations, and may contain projections
of results of operations or of financial condition or state other
forward-looking information. When considering forward-looking statements, you
should keep in mind the cautionary statements in this Annual Report on Form
10-K. The cautionary statements noted below and other factors noted throughout
this Annual Report on Form 10-K could cause our actual results to differ
significantly from those contained in any forward-looking statement. We may not
update or publicly release the results of these forward-looking statements to
reflect events or circumstances after the date hereof.
BECAUSE WE DERIVE MORE THAN HALF OF OUR REVENUE FROM INTERNATIONAL SALES,
INCLUDING APPROXIMATELY ONE-THIRD OF OUR REVENUE FROM JAPAN AND THE ASIA-PACIFIC
MARKETPLACE IN FISCAL 2000, WE ARE SUSCEPTIBLE TO CURRENCY FLUCTUATIONS,
NEGATIVE ECONOMIC CHANGES TAKING PLACE IN JAPAN AND THE ASIA-PACIFIC
MARKETPLACE, AND OTHER RISKS ASSOCIATED WITH CONDUCTING BUSINESS OVERSEAS.
25
We sell a significant portion of our products and services outside the U.S. and
Canada. International sales, consisting of sales from our subsidiaries in
Germany, Spain, and Japan, and sales shipped directly to international locations
from the U.S., accounted for 52% of our revenue for fiscal year 2000, and we
expect that they will continue to be significant. As a result, a major part of
our revenues and operating results could be adversely affected by risks
associated with international sales. In particular, significant fluctuations in
the exchange rates between the U.S. dollar and foreign currencies could cause us
to lower our prices and thus reduce our profitability, or could cause
prospective customers to push out orders because of the increased relative cost
of our products in the aftermath of a currency devaluation or currency
fluctuation. Other risks associated with international sales which we have faced
in the past include:
- longer payment cycles common in foreign markets,
- failure to obtain or significant delays in obtaining necessary import
or foreign regulatory approvals for our products, and
- difficulties in staffing and managing our foreign operations.
THE FAILURE TO OBTAIN ALEXANDRITE RODS FOR THE GENTLELASE-Registered
Trademark- AND ALEXLAZR-TM-FROM OUR SOLE SUPPLIER WOULD IMPAIR OUR ABILIty to
MANUFACTURE AND SELL GENTLELASE-Registered Trademark-.
We use Alexandrite rods to manufacture the GentleLASE-Registered Trademark-
and the ALEXlazr-TM-, which account for a significant portion of Our total
revenues. We depend exclusively on Litton Airtron Synoptics to supply these
rods, for which no alternative supplier meeting our quality standards exists.
We cannot be certain that Litton will be able to meet our future requirements
at current prices or at all. To date, we have been able to obtain adequate
supplies of Alexandrite rods in a timely manner, but any extended
interruption in our supplies could hurt our results.
DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL.
Our quarterly revenue and operating results are difficult to predict and may
swing sharply from quarter to quarter. Historically, our first fiscal quarter
has had the least amount of revenue in any quarter of our fiscal year. The
results of the first quarter are directly impacted by the seasonality of the
purchasing cycle. In the last three fiscal years, first quarter revenue has been
below the previous quarter's revenue in the range of 11.0% to 19.1%.
If our quarterly revenue or operating results fall below the expectations of
investors or public market analysts, the price of our common stock could fall
substantially. Our quarterly revenue is difficult to forecast for many reasons,
some of which are outside of our control, including the following:
MARKET SUPPLY AND DEMAND
- potential increases in the level and intensity of price competition
between us and our competitors,
- potential decrease in demand for our products, and
- possible delays in market acceptance of our new products.
CUSTOMER BEHAVIOR
- changes in or extensions of our customers' budgeting and purchasing
cycles, and
- changes in the timing of product sales in anticipation of new product
introductions or enhancements by us or our competitors.
26
COMPANY OPERATIONS
- absence of significant product backlogs,
- our effectiveness in our manufacturing process,
- unsatisfactory performance of our distribution channels, service
providers, or customer support organizations, and
- timing of any acquisitions and related costs.
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.
We have renewed our commitment to expand and diversify our core cosmetic and
surgical laser equipment business. As part of this refocus, we decided to reduce
our focus on our efforts to own and operate centers which would offer cosmetic
laser treatments utilizing our equipment, along with providing other cosmetic
services traditionally offered by high-end spas. Although we are actively
seeking buyers for the two skin care centers we opened which are located in
Scottsdale, Arizona, and Boston, Massachusetts, we cannot be certain that a sale
or sublease of either facility will be completed on favorable terms or at all.
We have established a reserve to accrue for the anticipated costs of terminating
the Scottsdale facility, but we can't be sure that such a reserve will be
adequate. To date, we have not established a reserve in connection with the
Boston facility, which we are continuing to operate as a spa without providing
cosmetic laser services.
OUR FAILURE TO RESPOND TO RAPID CHANGES IN TECHNOLOGY AND INTENSE COMPETITION IN
THE LASER INDUSTRY COULD MAKE OUR LASERS OBSOLETE.
The aesthetic and cosmetic laser equipment industry is subject to rapid and
substantial technological development and product innovations. To be successful,
we must be responsive to new developments in laser technology and new
applications of existing technology. Our financial condition and operating
results could be hurt if our products fail to compete favorably in response to
such technological developments, or we are not agile in responding to
competitors' new product introductions or product price reductions. In addition,
we compete against numerous companies offering products similar to ours, some of
which have greater financial, marketing, and technical resources than we do. We
cannot be sure that we will be able to compete successfully with these companies
and our failure to do so could hurt our business, financial condition, and
results of operations.
LIKE OTHER COMPANIES IN OUR INDUSTRY, WE ARE SUBJECT TO A REGULATORY REVIEW
PROCESS AND OUR FAILURE TO RECEIVE NECESSARY GOVERNMENT CLEARANCES OR APPROVALS
COULD AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND REMAIN COMPETITIVE.
The types of medical devices that we seek to market in the U.S. generally must
receive either "510(k) clearance" or "PMA approval" in advance from the U.S.
Food and Drug Administration (FDA) pursuant to the Federal Food, Drug, and
Cosmetic Act. The FDA's 510(k) clearance process usually takes from four to
twelve months, but it can last longer. The process of obtaining PMA approval is
much more costly and uncertain and generally takes from one to three years or
even longer. To date, the FDA has deemed our products eligible for the 510(k)
clearance process. We believe that most of our products in development will
receive similar treatment. However, we cannot be sure that the FDA will not
impose the more burdensome PMA approval process upon one or more of our future
products, nor can we be sure that 510(k) clearance or PMA approval will ever be
obtained for any product we propose to market.
Many foreign countries in which we market or may market our products have
regulatory bodies and restrictions similar to those of the FDA. Particularly,
for example, we are awaiting Ministry of Health approval in Japan for the sale
of ScleroPLUS-TM- and the Vbeam-TM-. We cannot be certain that we will be able
to obtain (or continue to obtain)
27
any such government approvals or successfully comply with any such foreign
regulations in a timely and cost-effective manner, if at all, and our failure to
do so could adversely affect our ability to sell our products.
WE HAVE MODIFIED SOME OF OUR PRODUCTS WITHOUT FDA CLEARANCE. THE FDA COULD
RETROACTIVELY DECIDE THE MODIFICATIONS WERE IMPROPER AND REQUIRE US TO CEASE
MARKETING AND/OR RECALL THE MODIFIED PRODUCTS.
Any modification to one of our 510(k) cleared devices that could significantly
affect its safety or effectiveness, or that would constitute a major change in
its intended use, requires a new 510(k) clearance. The FDA requires every
manufacturer to make this determination in the first instance, but the FDA can
review any such decision. We have modified some of our marketed devices, but we
believe that new 510(k) clearances are not required. We cannot be certain that
the FDA would agree with any of our decisions not to seek 510(k) clearance. If
the FDA requires us to seek 510(k) clearance for any modification, we also may
be required to cease marketing and/or recall the modified device until we obtain
a new 510(k) clearance.
ACHIEVING COMPLETE COMPLIANCE WITH FDA REGULATIONS IS DIFFICULT, AND IF WE FAIL
TO COMPLY, WE COULD BE SUBJECT TO FDA ENFORCEMENT ACTION.
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. The FDA's regulatory scheme is complex,
especially the Quality System Regulation, which requires manufacturers to follow
elaborate design, testing, control, documentation, and other quality assurance
procedures. This complexity makes complete compliance difficult to achieve.
Also, the determination as to whether a QSR violation has occurred is often
subjective. If the FDA finds that we have failed to comply with the QSR or other
applicable requirements, the agency can institute a wide variety of enforcement
actions, including a public warning letter or other stronger remedies, such as:
- fines, injunctions, and civil penalties against us,
- recall or seizure of our products,
- operating restrictions, partial suspension, or total shutdown of our
production,
- refusing our requests for 510(k) clearance or PMA approval of new
products,
- withdrawing product approvals already granted, and
- criminal prosecution.
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.
Our industry has been characterized by frequent litigation regarding patent and
other intellectual property rights. Patent applications are maintained in
secrecy in the U.S. until such patents are issued and are maintained in secrecy
for a period of time outside the U.S. Accordingly, we can conduct only limited
searches to determine whether our technology infringes any patents or patent
applications of others. Any claims of patent infringement would be
time-consuming and could:
- result in costly litigation,
- divert our technical and management personnel,
- cause product shipment delays,
- require us to develop non-infringing technology, or
28
- require us to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the laser industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and often require the payment of
ongoing royalties, which could hurt our gross margins. In addition, we cannot be
sure that the necessary licenses would be available to us on satisfactory terms,
or that we could redesign our products or processes to avoid infringement, if
necessary. Accordingly, an adverse determination in a judicial or administrative
proceeding, or the failure to obtain necessary licenses, could prevent us from
manufacturing and selling some of our products, which could hurt our business,
results of operations, and financial condition. On the other hand, we may have
to start costly and time consuming litigation in order to enforce our patents,
to protect trade secrets, and know-how owned by us or to determine the
enforceability, scope, and validity of the proprietary rights of others. We have
received correspondence from Palomar Medical Technologies, the exclusive
licensee from Star Medical Technologies of certain United States patents, and
also from Star Medical, offering to grant us a nonexclusive license to such
patents. We have engaged in discussions with Palomar relative to these patents,
but have not yet decided on a specific course of action.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS.
There are various risks of physical injury to the patient when using our lasers
for aesthetic and cosmetic treatments. Injuries often result in product
liability or other claims being brought against the practitioner utilizing the
device and us. The costs and management time we would have to spend in defending
or settling any such claims, or the payment of any award in connection with such
claims, could hurt our business, results of operations, and financial condition.
Although we maintain product liability insurance, we cannot be certain that our
policy will provide sufficient coverage for any claim or claims that may arise,
or that we will be able to maintain such insurance coverage on favorable
economic terms.
WE MAY BE UNABLE TO ATTRACT AND RETAIN MANAGEMENT AND OTHER PERSONNEL WE NEED TO
SUCCEED.
The loss of any of our senior management or other key research, development,
sales, and marketing personnel, particularly if lost to competitors, could hurt
our future operating results. Our future success will depend in large part upon
our ability to attract, retain, and motivate highly skilled employees. We cannot
be certain that we will attract, retain, and motivate sufficient numbers of such
personnel.
OUR FAILURE TO MANAGE FUTURE ACQUISITIONS AND JOINT VENTURES EFFECTIVELY MAY
DIVERT MANAGEMENT ATTENTION FROM OUR CORE BUSINESS AND CAUSE US TO INCUR
ADDITIONAL DEBT, LIABILITIES OR COSTS.
We may acquire businesses, products, and technologies that complement or expand
our business. We may also consider joint ventures and other collaborative
projects. We may not be able to:
- identify appropriate acquisition or joint venture candidates,
- successfully negotiate, finance, or integrate any businesses,
products, or technologies that we acquire, or
- successfully manage any joint ventures or collaborations.
Furthermore, the integration of any acquisition or joint venture may divert
management time and resources. If we fail to manage these acquisitions or joint
ventures effectively we may incur debts or other liabilities or costs which
could harm our operating results or financial condition. While we from time to
time
29
evaluate potential acquisitions of businesses, products, and technologies,
consider joint ventures and other collaborative projects, and anticipate
continuing to make these evaluations, we have no present understandings,
commitments, or agreements with respect to any acquisitions or joint ventures.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At July 1, 2000, the Company held foreign currency forward contracts with
notional values totaling approximately $4,621,515 for the deliverance of
239,789,349 Japanese Yen, 826,885 German Marks, 262,959,104 Spanish Pesetas, and
3,524,487 French Francs. These contracts have maturities prior to September 13,
2000.The Company held foreign currency forward contracts with notional values
totaling approximately $5,307,086 for the deliverance of 631,844,877 Japanese
Yen at July 3, 1999. The carrying and net fair value of these contracts at July
1, 2000, was $0 and ($65,591), respectively, compared to $0 and $86,090,
respectively, at July 3, 1999. The net fair value is computed by subtracting the
value of the contracts using the yearend exchange rate (the notional value) from
the value of the forward contracts computed at the contracted exchange rates.
We have cash equivalents and marketable securities that primarily consist of
commercial paper, corporate bonds and overnight money market accounts. Interest
rate return is fixed at the time of investment.
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
The information required under this item is incorporated by reference to the
Company's report on Form 8-K dated March 21, 2000 filed with the commission.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors of the Company required under this item is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A to be filed with the Commission not later than 120
days after the close of the Company's fiscal year ended July 1, 2000 under the
headings "Election of Directors" and "Section 16(a) Reporting Delinquencies."
The information concerning executive officers of the Company set forth under the
caption "Executive Officers" in Item 1 of this Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission not later than 120 days after the close of
the Company's fiscal year ended July 1, 2000 under the heading "Section 16(a)
Reporting Delinquencies."
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission nor later than 120 days after the close of the
30
Company's fiscal year ended July 1, 2000, under the heading "Compensation and
Other Information Concerning Directors and Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference to
the Company's definitive proxy statement pursuant to Regulation 14A, to be filed
with the Commission not later than 120 days after the close of the Company's
fiscal year ended July 1, 2000, under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information, if any, required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, to be filed with the Commission within 120 days after the close of the
Company's fiscal year ended July 1, 2000, under the heading "Certain
Transactions."
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:
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets - July 1, 2000 and July 3, 1999 F-3
Consolidated Statements of Operations - Years ended July 1, 2000,
July 3, 1999, and June 27, 1998 F-4
Consolidated Statements of Stockholders' Equity - Years Ended
July 1, 2000, July 3, 1999, and June 27, 1998 F-5
Consolidated Statements of Cash Flows - Years Ended July 1, 2000,
July 3, 1999, and June 27, 1998 F-6
Notes to Consolidated Financial Statements F-7
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts F-21
The reports of the registrant's independent auditors with respect to the
above-listed financial statements and financial statement schedule appears on
page F-1 and F-2 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-1 (File Number 333-78339):
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 < FN2 > 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
10.2.5 < FN13 > 1998 Stock Plan
10.3 < FN7 > Lease for premises at 526 Boston Post Road, Wayland,
Massachusetts
10.4 < FN7 > Lease for premises at 530 Boston Post Road,
Wayland, Massachusetts
10.5 < FN7 > 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
31
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-Laser, Limited and Derma-Lase, Inc. dated
June 23, 1994.
10.10 < FN13 > Letter Agreement between the Company and Fleet Bank
dated February 13, 1997
10.10.1 < FN13 > Amendment to Letter Agreement between the Company
and Fleet Bank dated December 15, 1998.
10.11* < FN11 > Exclusive Distribution Agreement dated as of
December 21, 1999, by and among the Company and
Physicians Sales and Service.
10.12* < FN11 > Exclusive License Agreement dated as of
February 13,1995 and amended October 15, 1998, by
and among the Company and the Regents of the
University of California.
10.12.1* Settlement Agreement dated August 11, 2000 and
among the Company, the Regents of the University of
California, and Cool Touch, Inc.
10.13 < FN12 > Note and Warrant Purchase Agreement, dated
as of October 15, 1998 by and among the Company,
Massachusetts Capital Resource Company, William D.
Witter and Michael D.Witter.
10.13.1 < FN12 > Form of Note delivered to the Company in the
aggregate principal amount of $3,700,000 to
Massachusetts Capital Resource Company, William D.
Witter and Michael D. Witter.
10.13.2 < FN12 > Form of Common Stock Purchase Warrant to
purchase an aggregate of 370,000 shares of the
Company's Common Stock delivered to Massachusetts
Capital Resource Company, William D. Witter and
Michael D. Witter.
21.1 < FN11 > Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP (Independent
Accountants)
23.2 Consent of Ernst & Young, LLP (Independent Auditors)
27.1 Financial Data Schedule
_
* Confidential treatment as to certain portions has been requested pursuant to
Rule 24b-2.
< FN1 > Previously filed as an exhibit to Registration Statement
No. 33-54448B 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 > Previously filed as an exhibit to Form 10-Q for the
quarter ended March 27, 1999 and incorporated
herein for reference.
< FN12 > Previously filed as an exhibit to the Company's
Amended and Restated Annual Report on Form 10-K for
the fiscal year ended June 27, 1998, and
incorporated herein by reference.
< FN13 > Previously filed as an exhibit to Registration
Statement No. 333-78339 and incorporated herein by
reference.
(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, 2000.
(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.
32
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 28, 2000.
CANDELA CORPORATION
By: /s/ 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
--------- ----- ----
/s/ Gerard E. Puorro President, Chief Executive September 28, 2000
------------------------- Officer, and Director
Gerard E. Puorro (Principal Executive Officer)
/s/ F. Paul Broyer Senior Vice President of September 28, 2000
------------------------- Finance and Administration,
F. Paul Broyer Treasurer and Chief Financial
Officer
/s/ Kenneth D. Roberts Chairman of the Board September 28, 2000
------------------------- of Directors
Kenneth D. Roberts
/s/ Richard J. Cleveland Director September 28, 2000
-------------------------
Richard J. Cleveland
/s/ Theodore G. Johnson Director September 28, 2000
-------------------------
Theodore G. Johnson
/s/ Nancy Nager Director September 28, 2000
-------------------------
Nancy Nager
/s/ Douglas W. Scott Director September 28, 2000
-------------------------
Douglas W. Scott
33
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors Candela Corporation
We have audited the accompanying consolidated balance sheet of Candela
Corporation and subsidiaries as of July 1, 2000 and the related statements of
operations and comprehensive income, stockholders' equity and cash flows for the
year ended July 1, 2000. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance as to 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 audit provides 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
Corporation and subsidiaries at July 1, 2000, and the results of its operations
and its cash flows for the year ended July 1, 2000 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ERNST & YOUNG LLP
Boston, Massachusetts
August 11, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Candela Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, of
stockholders' equity and cash flows, present fairly, in all material
respects, the financial position of Candela Corporation and its Subsidiaries
at July 3, 1999, and the results of their operations and their cash flows for
each of the two years in the period ended July 3, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule for each of the two years in the period ended
July 3, 1999, presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated
financial statements. 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 based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
August 23, 1999
F-2
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND JULY 3, 1999
(DOLLARS IN THOUSANDS)
ASSETS 2000 1999
- ------ ---- ----
Current assets:
Cash and cash equivalents (Note 1) $ 34,863 $ 10,055
Accounts receivable (net of allowance of $1,207 and
$998 in 2000 and 1999, respectively)(Notes 1 & 8) 19,875 12,337
Notes receivable 1,813 2,186
Inventories (Notes 1 & 2) 8,386 6,927
Other current assets 885 928
-------- --------
Total current assets 65,822 32,433
Property and equipment, net (Note 3) 2,462 2,626
Deferred tax assets (Note 7) 4,643 1,100
Other assets 237 292
-------- --------
Total assets $ 73,164 $ 36,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 4,654 $ 4,846
Accrued payroll and related expenses 2,351 3,735
Accrued warranty costs 3,295 2,502
Income taxes payable 3,332 3,185
Restructuring reserve (Note 10) 1,043 1,519
Other accrued liabilities 1,467 1,132
Current portion of long-term debt(Note 5) 15 415
Deferred income (Note 4) 5,410 1,913
-------- --------
Total current liabilities 21,567 19,247
Long-term debt (Note 5) 3,034 3,181
Commitments and contingencies(Note 5) - -
Stockholders' equity (Note 6):
Common stock, $.01 par value: 30,000,000
shares authorized; 11,501,241 and 8,347,497
shares issued and outstanding in 2000
and 1999, respectively 115 83
Additional paid-in capital 41,924 18,535
Treasury stock, at cost; 280,000 shares (3,046) -
Accumulated earnings (deficit) 10,717 (3,846)
Accumulated other comprehensive income (1,147) (749)
-------- --------
Total stockholders' equity 48,563 14,023
-------- --------
Total liabilities and stockholders' equity $ 73,164 $ 36,451
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- --------
Revenue:
Lasers and other products $ 60,340 $ 46,708 $ 25,917
Product related service 11,320 8,801 8,405
Skin care centers 3,730 3,079 2,703
-------- -------- --------
Total revenue 75,390 58,588 37,025
Cost of sales:
Lasers and other products 22,703 18,623 11,272
Product related service 6,802 5,715 6,954
Skin care centers 2,377 2,125 2,481
-------- -------- --------
Total cost of sales 31,882 26,463 20,707
-------- -------- --------
Gross profit 43,508 32,125 16,318
Operating expenses:
Research and development 4,822 3,998 2,399
Selling, general and administrative 21,669 17,891 15,271
Restructuring charge - - 2,609
-------- -------- --------
Total operating expenses 26,491 21,889 20,279
-------- -------- --------
Income (loss) from operations 17,017 10,236 (3,961)
Other income (expense)
Interest income 1,427 115 42
Interest expense (482) (492) (235)
Other income (expense) 242 (3) (123)
-------- -------- --------
Total other income (expense) 1,187 (380) (316)
-------- -------- --------
Income (loss) before income taxes 18,204 9,856 (4,277)
Provision for income taxes 3,641 2,365 175
-------- -------- --------
Net income (loss) $ 14,563 $ 7,491 $ (4,452)
======== ======== ========
Basic earnings (loss) per share $ 1.33 $ 0.91 $ (0.54)
Diluted earnings (loss) per share $ 1.19 $ 0.82 $ (0.54)
======== ======== ========
Weighted average shares outstanding 10,932 8,250 8,219
Adjusted weighted average shares
outstanding 12,190 9,179 8,219
======== ======== ========
Net income (loss) $ 14,563 $ 7,491 $ (4,452)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment (318) (14) (607)
-------- -------- --------
Comprehensive income (loss) $ 14,245 $ 7,477 $ (5,059)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL ACCUMULATED OTHER
PAID-IN EARNINGS COMPREHENSIVE
COMMON STOCK CAPITAL TREASURY STOCK (DEFICIT) INCOME TOTAL
------------- -------- -------------- ---------- -------- -------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JUNE 29, 1997 8,130 $81 $17,196 - $- $ (6,885) $(146) $10,246
Sale of common stock
under stock plans 89 1 184 185
Net loss (4,452) (4,452)
Currency translation
adjustment (584) (584)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE JUNE 27, 1998 8,219 82 17,380 - - (11,337) (730) 5,395
Sale of common stock
under stock plans 126 1 309 310
Exercise of stock
warrants 3 10 10
Issuance of stock
warrants 836 836
Net income 7,491 7,491
Currency translation
adjustment (19) (19)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 3, 1999 8,348 83 18,535 - - (3,846) (749) 14,023
Sale of common stock
under stock plans 693 7 1,856 1,863
Exercise of stock
warrants 210 2 788 790
Secondary offering 2,250 23 19,101 19,124
Purchase of treasury stock (280) (3,046) (3,046)
Disqualifying dispositions
of stock options 1,644 1,644
Net income 14,563 14,563
Currency translation
adjustment (398) (398)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 1, 2000 11,501 $115 $ 41,924 (280) $ (3,046) $ 10,717 $(1,147) $ 48,563
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CANDELA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(IN THOUSANDS)
2000 1999 1998
------ ------ -------
Cash flows from operating activities:
Net income (loss) $ 14,563 $ 7,491 $ (4,452)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation and amortization 715 751 815
Provision for bad debts 312 268 844
Provision for restructuring charges - - 2,609
Accretion of interest on debt discount 96 66 -
Increase (decrease) in cash from working capital:
Accounts receivable (7,984) (3,905) (950)
Notes receivable 629 (488) (434)
Inventories (1,247) 362 (810)
Other current assets 91 (762) 314
Other assets (3,542) (1,114) 664
Accounts payable 443 361 (1,046)
Accrued payroll and related expenses (1,278) 2,415 491
Deferred income 3,499 78 (241)
Accrued warranty costs 793 488 683
Income taxes payable 1,646 2,849 (154)
Restructuring reserve (476) (289) (501)
Other accrued liabilities 265 213 303
-------- -------- --------
Net cash provided by (used for) operating
activities 8,525 8,784 (1,865)
Cash flows from investing activities:
Proceeds from sale of assets - 363 24
Purchases of property and equipment (554) (524) (317)
-------- -------- --------
Net cash used for investing activities (554) (161) (293)
Cash flows from financing activities:
Net borrowings from (repayments of) lines
of credit - (2,700) 1,700
Proceeds from issuance of debt and stock
warrants - 3,700 396
Principal payments on debt (78) (668) (441)
Payments of capital lease obligations (574) (638) (390)
Proceeds from issuance of common stock 21,777 321 184
Purchases of treasury stock (3,046) - -
-------- -------- --------
Net cash provided by financing activities 18,079 15 1,449
Effect of exchange rate changes on
cash and cash equivalents (1,242) (198) (350)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 24,808 8,440 (1,059)
Cash and cash equivalents at beginning
of period 10,055 1,615 2,674
-------- -------- --------
Cash and cash equivalents at end of period $ 34,863 $ 10,055 $ 1,615
======== ======== ========
Cash paid during the year for:
Interest $ 387 $ 366 $ 235
Income taxes 3,099 $ 615 $ 356
Non-cash activity:
Capital lease financing $ - $ 42 $ 84
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company researches, develops, manufactures, markets, and services lasers and
other devices used to perform aesthetic and cosmetic procedures.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Candela
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. The years ended
July 1, 2000, July 3, 1999, and June 27, 1998 contain 52, 53 and 52 weeks,
respectively.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. It is the belief
of the Company's management that all necessary adjustments have been made for an
accurate presentation of results. Actual results could differ from those
estimates and impact future results of operations and cash flows.
CASH AND CASH EQUIVALENTS
The Company classifies investments purchased with a maturity at the date of
acquisition of three months or less as cash equivalents. These are valued at
cash plus accrued interest, which approximates market value. At July 1, 2000,
and July 3, 1999, substantially all cash equivalents were invested in overnight
Repurchase Agreements, U.S. Treasury Bills with a major bank, or commercial
paper issued by a major bank. The Company had letters of credit outstanding at
July 1, 2000, amounting to $37,727 with expiration dates varying between August
15, and September 30, 2000.
FINANCIAL INSTRUMENTS
The Company operates internationally, with sales offices, customers, and vendors
in several countries outside of the United States. The Company may reduce its
exposure to fluctuations in foreign exchange rates by creating offsetting
positions through the use of foreign currency forward contracts, a type of
derivative financial instrument. Foreign currency exposures are accounted for on
an accrual basis. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
At July 1, 2000, the Company held foreign currency forward contracts with
notional values totaling approximately $6,179,614 for the deliverance of
387,425,844 Japanese Yen, 826,885 German Marks, 262,959,104 Spanish Pesetas, and
3,524,487 French Francs. These contracts have maturities prior to September 13,
2000. The Company held foreign currency forward contracts with notional values
totaling approximately $5,307,086 for the deliverance of
F-7
631,844,877 Japanese Yen at July 3, 1999. The carrying and net fair value of
these contracts at July 1, 2000, was $0 and ($52,921), respectively, compared to
$0 and $86,090, respectively, at July 3, 1999. The net fair value is computed by
subtracting the value of the contracts using the year-end exchange rate (the
notional value) from the value of the forward contracts computed at the
contracted exchange rates.
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 dermatology market, 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.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market,
using a standard costing system.
PROPERTY AND EQUIPMENT
Purchased property and equipment is recorded at cost. Property and equipment
purchased under capital lease arrangements is recorded at the lesser of cost or
the present value of the minimum lease payments required during the lease
period. Laser systems used for testing are capitalized at cost. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives as follows:
NUMBER OF YEARS
---------------
Leasehold improvements and assets under capital lease 2 to 13
Office furniture and other equipment 3 to 5
Laser systems 3
REVENUE RECOGNITION
PRODUCT SALES - Revenue from product sales, except sales to certain
distributors, is recognized at the time of shipment. Shipments made to
distributors, for which payment to the Company is dependent on resale of the
system, are not recognized as revenue unless the distributor demonstrates that
the system is sold.
GRANTS - Revenue from U.S. government contracts is 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. The
revenue is recognized as reimbursable costs are incurred.
SERVICE - Revenue from the sale of service contracts is deferred and recognized
on a straight-line basis over the contract period. Revenue from service
administered by Candela is recognized as the services are provided. Amounts
received from the sale of gift certificates by Candela Skin Care Centers
("CSCC") are deferred and recognized as revenue when the services are provided.
F-8
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $782,000,
$604,000 and $608,000 for the years ending July 1, 2000, July 3, 1999 and June
27, 1998, respectively.
FOREIGN CURRENCY TRANSLATION
The activity of the Company's foreign subsidiaries is 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, Spanish, German, and
French subsidiary balance sheets are accumulated as a separate component of
stockholders' equity. Net exchange gain or (loss) resulting from foreign
currency transactions amounted to $190,000, ($20,000) and ($138,000) for fiscal
2000, 1999, and 1998, respectively, and are included in other expense.
PRODUCT WARRANTY COSTS
The length of the Company's warranty on end user sales of medical devices is
generally one year on parts and labor except on our Vbeam-TM- system, which
carries a standard three-year warranty. An extended warranty is also
available for purchase for our GentleLASE-Registered Trademark- systems.
Distributor sales generally include a parts warranty only. Estimated future
costs for initial product warranties are provided for at the time of sale.
STOCK SPLIT
On January 19, 2000, the Board of Directors approved a three-for-two stock
split, payable in the form of a 50% stock dividend, to all shareholders of
record on January 28, 2000. Except for shares authorized, references to number
of shares and to per share information in the consolidated financial statements
have been adjusted to reflect the stock split.
TREASURY STOCK
The Board of Directors approved a share repurchase program whereby the Company
has the option to repurchase up to 750,000 of its common shares between December
13, 1999 and December 12, 2001. The Company has implemented the plan through
open market purchases, which are paid for with general corporate funds. As of
July 1, 2000, the Company had repurchased 280,000 shares.
EARNINGS (LOSS) PER SHARE
(numbers in thousands, except FOR THE YEARS ENDED
per share amounts) ------------------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
-------- -------- --------
NUMERATOR
Net income (loss) $14,563 $ 7,491 $(4,452)
======= ======== ========
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares outstanding 10,932 8,250 8,219
-------- -------- --------
Basic earnings (loss) per share $ 1.33 $ 0.91 $ (0.54)
======= ======== ========
F-9
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding 10,932 8,250 8,219
Effect of dilutive warrants 702 317 -
Effect of dilutive options 556 612 -
-------- -------- --------
Adjusted weighted average shares
outstanding 12,190 9,179 8,219
-------- -------- --------
Diluted earnings (loss) per share $ 1.19 $ 0.82 $ (0.54)
======= ======== ========
During the years ended July 1, 2000, July 3, 1999, and June 27, 1998, options
and warrants to purchase 157,500, 6,884 and 304,371 shares of common stock,
respectively, were not included in the computation of diluted earnings (loss)
per share because they would have had an anti-dilutive effect.
DIVIDENDS
The Company currently intends to retain future earnings for use in its business
and, therefore, does not expect to pay dividends in the foreseeable future.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has disclosed herein
pro forma net income and pro forma earnings per share in the footnotes using the
fair value based method for fiscal 2000, 1999, and 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement 133," which postponed the adoption date of
SFAS No. 133. As such, the Company is not required to adopt SFAS 133 until
fiscal 2001. Had the Company implemented SFAS No. 133 for the current reporting
period, there would have been no material effect on operational results.
In December 1999, The Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company has not assessed
the effect that such adoption may have on its consolidated results of operations
and financial position.
UNCERTAINTIES
The Company is subject to risks common to companies in the aesthetic laser
industry, including (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval
and adequate patent and other proprietary rights protection of its products
and services, (ii) the content and timing of decisions made by the Food &
Drug Administration and other agencies regarding the procedures for which the
Company's products may be approved, (iii) the ability of the Company to
manufacture adequate supplies of its products for development and
commercialization activities, (iv) the accuracy of the Company's estimates of
the size and characteristics of markets to be addressed by the Company's
products and services, (v) market acceptance of the Company's product and
services, (vi) the Company's ability to obtain reimbursement for its products
from third-party payers, where appropriate, and (vii) the accuracy of the
F-10
Company's information concerning the products and resources of competitors
and potential competitors.
2. INVENTORIES
Inventories consist of the following (in thousands):
JULY 1, JULY 3,
2000 1999
---- ----
Raw materials $2,750 $1,643
Work in process 602 1,395
Finished goods 5,034 3,889
------ ------
$8,386 $6,927
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JULY 1, JULY 3,
2000 1999
---- ----
Leasehold improvements $2,268 $2,173
Office furniture 977 791
Laser systems 483 482
Computers and other equipment 4,486 4,265
----- -----
8,214 7,711
Less accumulated depreciation and amortization (5,752) (5,085)
----- -----
Property and equipment, net $2,462 $2,626
====== ======
Depreciation expense was approximately $715,000, $751,000, and $684,000 for
fiscal 2000, 1999, and 1998, respectively.
Assets under capital lease obligations of $989,000 and $487,000 are included in
property and equipment at July 1, 2000 and July 3, 1999, respectively.
Accumulated depreciation on these assets was $811,000 and $413,000 at July 1,
2000 and July 3, 1999, respectively.
4. DEFERRED INCOME
Deferred income consists of the following (in thousands):
JULY 1, JULY 3,
2000 1999
---- ----
Service contract revenue $ 2,041 $ 941
Extended service plans 2,228 -
Gift certificate revenue 730 510
Customer deposits 270 -
Other deferred sales revenue 141 462
------- -------
$ 5,410 $ 1,913
======= =======
F-11
5. DEBT AND LEASE OBLIGATIONS
LINE OF CREDIT
During fiscal 2000, the Company obtained a renewable $5,000,000 revolving credit
agreement with a major bank with interest at the bank's base rate or LIBOR plus
225 basis points. Any borrowings outstanding under the line of credit are due on
demand or according to a payment schedule established at the time funds are
borrowed. The line of credit is unsecured. The agreement contains restrictive
covenants limiting the establishment of new liens, and the purchase of margin
stock. No amounts were outstanding under the line of credit as of July 1, 2000.
During fiscal 1999, the Company maintained a renewable $3,500,000 revolving
credit agreement with a major bank with interest at the bank's prime lending
rate. No amounts were outstanding under the line of credit as of July 3, 1999.
This line of credit expired on December 1, 1999.
SUBORDINATED NOTES
On October 15, 1998, the Company issued eight-year, 9.75%, subordinated term
notes ("Note Agreement") to three investors in the aggregate amount of $3.7
million, secured by the assets of the Company. The notes become due in
October 2006, and require quarterly interest payments. The Company is
required to make mandatory quarterly principal payments of $185,000, along
with any unpaid interest, beginning on January 31, 2002. In addition, the
Company issued warrants to purchase 370,000 shares of common stock (555,000
shares post-split) to the note holders which have an exercise price of $4.00
per share and are exercisable through October 2006. The relative fair value
ascribed to the warrants of $836,000 (measured as of the date of issuance)
was estimated using a Black-Scholes model assuming a 4.5% risk free rate of
return, an eight-year life of the warrant, a 72% volatility factor for an
eight-year period and no dividend rate. The relative fair value of the
warrants has been recorded as a component of Additional Paid-In Capital. The
relative fair value of the debt was recorded as $2,864,000. In addition to
the 9.75% stated interest rate, interest expense of an additional $836,000
will be accreted to debt using the interest method over the eight-year life
of the debt to bring the value of that debt to its $3.7 million face value.
The Note Agreement also contains clauses that prohibit the Company from
redeeming the notes earlier than November 1, 2001, except in certain
circumstances. The Company is also subject to an early redemption premium
amounting to 10% if paid in the first year following November 1, 2001. This
premium decreases by 2% per year for the next two years following November 1,
2001 and allows for the Company to redeem the notes without penalty after
November 1, 2004. The agreement contains restrictive covenants establishing
maximum leverage, certain minimum ratios, and minimum levels of net income.
BANK LOAN
In June 1997, the Company obtained an unsecured term bank loan denominated in
75,000,000 Japanese Yen bearing interest at 1.745% per annum with quarterly
payments of principal and interest. This bank loan was paid in full September
1999.
In June 1998, the Company obtained a term bank loan denominated in 50,000,000
Japanese Yen, collateralized by a customer note receivable, bearing interest at
F-12
1.825% per annum with payment of interest in advance. The principal became due
and was paid in August 1998.
LONG-TERM DEBT
The Company's long-term debt consists of the following (dollars in thousands):
JULY 1, JULY 3,
2000 1999
-------- --------
Subordinated notes, eight-year term, 9.75% interest rate, quarterly
interest payments due through October, 2006
quarterly principal payments commencing in January, 2002 $ 3,025 $ 2,929
Obligations under capital leases collateralized by the related equipment
interest from 5.8% to 12.31% per annum; payments of principal
and interest through March 2002 24 598
Unsecured term bank loan denominated in 75,000,000 Japanese yen; interest
at 1.745% per annum; quarterly payments of principal and interest
through September 1999 _ 69
----- -----
3,049 3,596
Less current portion 15 415
------- -------
Total long-term debt $ 3,034 $ 3,181
======= =======
As of July 1, 2000, the Company's scheduled maturities under debt and
capital lease obligations are as follows (in thousands):
Fiscal
2001 $ 15
2002 379
2003 740
2004 740
2005 and thereafter 1,850
------
Total obligations 3,724
Less: future accretion (675)
------
Long-term obligations $3,049
======
OPERATING LEASE COMMITMENTS
The Company leases several facilities and automobiles under noncancellable lease
arrangements. The facility leases may be adjusted for increases in maintenance
and insurance costs above specified levels. In addition, certain facility leases
contain escalation provisions based on certain specified criteria, and one lease
calls for the payment of additional rent based on a percentage of gross revenues
above a base gross sales level for that particular location. These operating
leases expire in various years through 2009. These leases may be renewed for
periods ranging from one to five years.
Future minimum lease payments under noncancellable operating leases with initial
terms of one year or more consisted of the following at July 3, 2000:
(in thousands)
2001 $ 799
2002 673
2003 415
2004 208
2005 and thereafter 688
-----
Total minimum lease payments $2,783
======
F-13
Total rent expense was approximately $912,000, $769,000, and $848,000 for fiscal
2000, 1999, and 1998, respectively.
6. STOCKHOLDERS' EQUITY
STOCK PLANS
1990 CANDELA CORPORATION EMPLOYEE STOCK PURCHASE PLAN
The 1990 Employee Stock Purchase Plan (the "Purchase Plan") provides for the
sale of up to 750,000 shares of common stock to eligible employees. The shares
are issued 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 Purchase Plan. At July 1, 2000 there were 484,504 shares
available for grant.
The following is a summary of shares issued under the Purchase Plan:
RANGE OF
SHARES PRICE PER SHARE
------ ---------------
1998 22,824 $1.67 - $2.50
1999 31,802 $1.67 - $3.33
2000 25,382 $7.75 - $8.33
1985, 1987, 1989 AND 1998 CANDELA CORPORATION STOCK OPTION PLANS
The 1985, 1987, 1989 and 1998 Stock Option Plans (the "Stock Option Plans")
provide for the granting of incentive stock options to employees for the
purchase of common stock at an exercise price not less than the fair market
value of the stock on the date of grant. The Stock Option Plans also provide for
the granting of non-qualified stock options.
The Board of Directors has terminated the granting of options under the 1985 and
1987 Stock Option Plans. Options granted under the 1989 Stock Option Plan become
exercisable ratably over two or four years from the date of grant and expire ten
years from the date of the grant. Options granted under the 1998 Stock Option
Plan become exercisable on the date of grant or in installments, as specified by
a Committee established by the Board of Directors, and expire ten years from the
date of the grant. The maximum number of shares for which options may be granted
under the 1989 Stock Option Plan is 1,500,000 shares. The maximum number of
shares for which options may be granted under the 1998 Stock Option Plan is
750,000 shares.
On April 28, 1998, the Board of Directors approved the repricing of certain
outstanding stock options granted under the 1989 Stock Option Plan priced at
$5.83 and $5.42. The exercise price of these options was amended to $2.17, the
fair market value of the stock on that date.
F-14
1990 AND 1993 CANDELA CORPORATION NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS
The 1990 and 1993 Non-Employee Director Stock Option Plans (the "Non-Employee
Director Plans," collectively with the Stock Option Plans, the "Plans") provide
for the issuance of options for the purchase of up to 90,000 and 120,000 shares
of common stock, respectively. Under the Non-Employee Director 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. Under the
Non-Employee Director Plans, options become exercisable in equal amounts over a
period of four and two years, respectively. Shares under the Non-Employee
Director Plans expire four and ten years, respectively, after the date of grant
and are nontransferable.
The following is a summary of stock option activity under the Plans:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES OPTION PRICE PER SHARE
Balance at June 28, 1997 1,291,886 $ 3.2533
Granted 365,801 $2.17 -$ 3.17 $ 2.7352
Exercised (65,837) $1.83 -$ 2.25 $ 2.0801
Canceled (404,960) $1.83 -$ 6.58 $ 4.7011
-------
Balance at June 27, 1998 1,186,890 $ 2.4800
Granted 571,500 $2.29 -$ 5.63 $ 3.6533
Exercised (94,940) $1.33 -$ 5.00 $ 2.4352
Canceled (189,843) $2.13 -$ 5.17 $ 2.7977
-------
Balance at July 3, 1999 1,473,607 $ 3.0470
Granted 172,500 $8.33 -$12.04 $10.1875
Exercised (635,294) $1.00 -$ 5.63 $ 3.3127
Canceled (165,375) $2.17 -$ 9.67 $ 5.9191
--------
Balance at July 1, 2000 845,438 $ 5.0869
--------
Options available for grant at July 1, 2000 478,875
=======
The following table summarizes information about stock options under the Plans
outstanding at July 1, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------ ----------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 7/1/00 LIFE (YEARS) PRICE AT 7/1/00 PRICE
-------------------------------------------------------------------------- ----------------------------------
$ 1.8333-$ 2.2500 211,848 3.72 $ 2.1802 177,728 $ 2.1802
$ 2.2917-$ 3.8333 223,317 7.09 $ 3.0366 150,840 $ 3.1258
$ 4.1250-$ 4.6667 176,337 8.15 $ 4.5515 75,087 $ 4.3962
$ 5.0000-$ 8.3333 76,436 8.55 $ 6.0371 18,564 $ 6.0544
$12.0420-$12.0420 157,500 9.54 $12.0420 0 $ 0.0000
------- -
$ 1.8333-$12.0420 845,438 7.06 $ 5.0869 422,219 $ 3.0824
======= =======
F-15
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
option plans. Accordingly, no compensation expense has been recognized for
options granted to employees and directors of the Company. Had compensation
expense for the Plans been determined based on the fair value at the grant date
for awards under the Plans consistent with the methodology prescribed under SFAS
No. 123, the Company's net income and net income per share would have been
reduced by $579,000, or $.05 per share in 2000, $479,000 or $.08 per share in
1999, and $45,000 or $.01 per share in 1998. The weighted average fair value of
the options granted under the Plans in 2000, 1999 and 1998, calculated using the
Black-Scholes pricing model, was $7.54, $2.16, and $1.66 per share,
respectively. The weighted average fair value of shares issued under the
Purchase Plan for 2000, 1999, and 1998 calculated using the Black-Scholes
pricing model, were $4.87, $.92, and $3.29 per share. The following assumptions
were used in the Black-Scholes pricing model for options granted in 2000, 1999,
and 1998, respectively:
2000 1999 1998
---- ---- ----
risk-free interest rate 6.61% 4.84% 5.95%
estimated volatility 82% 77% 83%
expected life for stock options (yrs) 4.06 3.8 6
expected life for stock purchase plan (yrs) .5 .5 .5
expected dividends none none none
The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of the pro-forma effect on net income in future years because SFAS
No. 123 does not take into consideration pro-forma expenses related to options
granted prior to 1996.
CANDELA CORPORATION COMMON STOCK WARRANTS
In connection with a litigation settlement in January 1991, the Company
authorized warrants to purchase 300,000 shares of common stock (450,000
shares post-split) in March 1992. The exercise price for the warrants is
$6.875 per share, which was not affected by the stock split. These warrants
will expire in November 2000. There were 300,833 warrants outstanding at July
1, 2000. (See Note 5)
The Company also issued warrants to purchase 370,000 shares of common stock
(555,000 shares post-split) to the note holders of the Company's $3.7 million
debt issuance in October, 1998, at a price of $4.00 per warrant, which was
not affected by the stock split. At July 1, 2000, 465,000 warrants were
outstanding. (See Note 5)
RESERVED SHARES
The Company has reserved 4,151,523 shares of common stock for issuance under its
Purchase, Stock Option, Non-Employee Director Plans and Warrants.
CANDELA CORPORATION 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 (the 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
F-16
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.
7. INCOME TAXES
The components of income before income taxes and the related provision for
income taxes consists of the following periods (in thousands):
FOR YEARS ENDED
--------------------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
-------- ------- ---------
Income (loss) before income taxes:
Domestic $16,559 $ 8,063 $(4,686)
Foreign 1,645 1,793 409
------- ------- -------
$18,204 $ 9,856 $(4,277)
======= ======= =======
Provision for income taxes:
Current provision:
Federal $ 5,341 $ 1,890 $ -
State 707 635 26
Foreign 1,136 940 149
------- ------- -------
Total current provision for income taxes 7,184 3,465 175
Deferred provision:
Federal (3,543) (1,100) -
------- -------- -------
Total provision for income taxes $ 3,641 $ 2,365 $ 175
======= ======= =======
The components of the Company's deferred tax assets consist of the following (in
thousands):
JULY 1, JULY 3,
2000 1999
---- ----
State net operating loss carryforwards $ - $ 108
State tax credit carryforwards 321 315
Inventory valuation reserves 599 1,022
Warranty reserve 2,237 1,001
Deferred revenue 344 368
Bad debt reserve 391 360
Restructuring reserve 412 608
Pre-opening expense 256 260
Other 83 172
------ ------
Gross deferred tax asset 4,643 4,214
Valuation allowance - (3,114)
------ ------
Net deferred tax assets $4,643 $1,100
====== ======
F-17
A reconciliation from the federal statutory tax rate to the effective tax rate
is as follows:
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
---- ---- -----
Statutory rate 35% 34% 34%
State taxes 4 4 -
Differences between foreign and
U.S. tax rates 2 3 -
Utilization of deferred tax assets (17) (14) -
Unbenefitted losses - (6) (35)
Other (4) 3 (3)
---- --- ----
Effective tax rate 20 % 24 % (4)%
=== === ===
As of July 3, 1999 the Company had approximately $3.1 million of valuation
allowance relating to a deferred tax asset resulting principally from U.S. tax
losses, research and development tax credits, and timing differences relating to
U.S. assets and liabilities. Income tax expense for the year ended July 1, 2000,
has been reduced by approximately $3.1 million through a reduction in the
valuation allowance. As of July 1, 2000, the Company has no valuation allowance
against the deferred tax asset. In accounting for the deferred tax asset, the
Company has relied on historic data to determine the necessity of providing a
valuation allowance for this asset. Under the requirements of SFAS No. 109,
"Accounting for Income Taxes", Candela believed it more likely than not that the
deferred tax asset would be fully utilized against future income taxes.
8. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER 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.
GEOGRAPHIC DATA
Geographic information for fiscal 2000 and fiscal 1999 is as follows (in
thousands):
2000 1999
---- ----
Revenue:
United States $ 47,482 $ 39,403
Intercompany 17,690 14,374
-------- --------
65,172 53,777
Europe 8,010 6,059
Japan 19,898 13,126
-------- --------
93,080 72,962
Elimination (17,690) (14,374)
-------- --------
Consolidated total $ 75,390 $ 58,588
======== ========
Income from operations:
United States $ 16,034 $ 9,381
Europe (782) 404
Japan 1,709 1,411
Elimination 56 (960)
-------- --------
Consolidated total $ 17,017 $ 10,236
======== ========
F-18
Geographic identification of long-term assets:
United States $ 7,291 $ 3,975
Europe 51 43
Japan - -
-------- --------
Consolidated total $ 7,342 $ 4,018
======== ========
LINE OF BUSINESS DATA
Revenue:
Product sales and service $ 71,660 $ 55,509
Skin care/health spa services 3,730 3,079
-------- --------
Total revenue $ 75,390 $ 58,588
======== ========
Income (loss) from operations:
Product sales and service $ 17,647 $ 11,321
Skin care/health spa services (630) (1,085)
-------- --------
Total income (loss) from operations $ 17,017 $ 10,236
======== ========
Depreciation and amortization:
Product sales and service $ 331 $ 520
Skin care/health spa services 384 221
-------- --------
Total depreciation and amortization $ 715 $ 741
======== ========
Capital expenditures:
Product sales and service $ 336 $ 566
Skin care/health spa services 218 0
-------- --------
Total capital expenditures $ 554 $ 566
======== ========
Total assets: (net of intercompany accounts)
Product sales and service $ 71,151 $ 34,250
Skin care/health spa services 2,013 2,201
-------- --------
Total assets $ 73,164 $ 36,451
======== ========
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 $11,781,000, $11,218,000, and $7,695,000 for fiscal 2000,
1999, and 1998, respectively. One customer, a domestic distributor, accounted
for 13% of net revenue and 22.2% of gross receivables as of July 1, 2000 in
comparison to 8% of net revenue and 16.6% of gross receivables as of July 3,
1999. In addition, two foreign distributors accounted for 7.8% and 9.6% of gross
receivables at July 3, 1999.
The Company depends on a single vendor for Alexandrite rods used to manufacture
the GentleLASE-Registered Trademark- and the ALEXlazr-TM-. These products
account for a significant portion of our total revenues.
9. 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 $168,000, $102,000, and $58,000 in fiscal 2000, 1999, and 1998, respectively.
10. RESTRUCTURING COSTS AND OTHER CHARGES
During the second quarter ended December 27, 1997, the Company recorded a
restructuring charge against income in the amount of $2,609,000. This charge
F-19
represents the anticipated costs associated with closing the Scottsdale,
Arizona, LaserSpa-TM-, including costs of maintaining the facility, reserve
for leasehold improvements and fixed assets (carrying value before reserve of
$1,123,000), and a reserve against loss upon liquidation of the equipment at
the site. Charges against the reserve for the years ended July 1, 2000 and
July 3, 1999 total $476,000 and $476,000, respectively, leaving a reserve
balance of $1,043,000 at July 1, 2000. Candela continues to pursue a sublease
of the Scottsdale facility, but if this effort is not successful, the Company
could incur additional costs in excess of our existing reserve.
LEASEHOLD
IMPROVEMENTS
PAYROLL AND AND FIXED FACILITY CAPITALIZED
SEVERANCE ASSETS COSTS START UP COSTS TOTAL
----------- ----------- --------- -------------- -------
Balance at December 27, 1997 $ 419 $ 1,123 $ 887 $ 180 $ 2,609
Cash Charges (134) - (161) - (295)
Non-Cash Charges - (139) - (180) (319)
---------- -------- -------- ------- -------
Balance at June 27, 1998 285 984 726 - 1,995
Cash Charges (75) - (214) - (289)
Non-Cash Charges - (187) - - (187)
--------- ------- ------- ------- -------
Balance at July 3, 1999 210 797 512 - 1,519
Cash Charges (65) - (206) - (271)
Non-Cash Charges - (205) - - (205)
--------- ------- ------- ------- -------
Balance at July 1, 2000 $ 145 $ 592 $ 306 $ - $ 1,043
========= ======= ======= ======== =======
As of July 1, 2000, the payroll and severance costs will be paid through
December, 2003 and the facility lease expires in 2006.
11. LEGAL PROCEEDINGS
On August 11, 2000, Candela reached a settlement of legal disputes with the
Regents of the University of California and New Star Technology, Inc.,
relating to the Dynamic Cooling Device ("DCD") licensed by Candela from the
Regents. Pursuant to the settlement, all three parties agreed to dismiss with
prejudice all pending proceedings in the U.S. District Court for the Eastern
District of California and the District of Massachusetts, and before the
American Arbitration Association, and to exchange full releases. In addition,
Candela pre-paid a fee of $1,500,000 in exchange for exclusive rights to DCD
in certain fields of use.
From time to time, the Company is a party to various legal proceedings
incidental to our business. The Company believes that none of the other
presently pending legal proceedings will have a material adverse effect upon our
financial position, results of operations, or liquidity.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTER
1999 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
Revenues $10,738 $13,299 $15,844 $18,707
Gross profit 5,064 6,800 9,024 11,237
Net income 910 1,393 1,907 3,281
Earnings per common share
Basic earnings per share $ 0.11 $ 0.17 $ 0.23 $ 0.39
Diluted earnings per share $ 0.11 $ 0.16 $ 0.21 $ 0.33
F-20
QUARTER
2000 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
Revenues $16,040 $17,779 $19,207 $22,364
Gross profit 9,141 10,107 11,422 12,837
Net Income 2,714 3,246 3,657 4,946
Earning per common share
Basic earnings per share $ 0.26 $ 0.30 $ 0.33 $ 0.44
Diluted earnings per share $ 0.23 $ 0.27 $ 0.30 $ 0.40
F-21
SCHEDULE II
CANDELA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
COLUMN A COLUMN B COLUMN C COLUMN D
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, 2000 $ 998 $ 312 $ 103 $1,207
====== ====== ====== ======
Year ended July 3, 1999 $1,038 $ 268 $ 308 $ 998
====== ====== ====== ======
Year ended June 27, 1998 $ 197 $ 866 $ 25 $1,038
====== ====== ====== ======
Restructuring reserve:
Year ended July 1, 2000 $1,519 $ 0 $ 476 $1,043
====== ====== ====== ======
Year ended July 3, 1999 $1,995 $ 0 $ 476 $1,519
====== ====== ====== ======
Year ended June 27, 1998 $ 0 $2,609 $ 614 $1,995
====== ====== ====== ======
F-22
EXHIBIT INDEX
Page
----
G10.12.1 Settlement Agreement 38
21 Subsidiaries of the Company 39
23.1 Consent of PricewaterhouseCoopers LLP, 40
Independent Accountants
23.2 Consent of Ernst & Young LLP, 41
Independent Auditors