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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarter ended March 27, 1999
Commission file number 0-14742
CANDELA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 04-2477008
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS OUTSTANDING AT MAY 10, 1999
----- ---------------------------
Common Stock, $.01 par value 5,545,887
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CANDELA CORPORATION
INDEX
Page(s)
Part I. Financial Information:
Item 1. Unaudited Condensed Consolidated Balance Sheets
as of March 27, 1999 and June 27, 1998 3
Unaudited Condensed Consolidated Statements of
Operations for the three and nine month periods ended
March 27, 1999 and March 28, 1998 4
Unaudited Condensed Consolidated Statements of Cash
Flows for the nine month periods ended March 27, 1999
and March 28, 1998 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Cautionary Statements 13-15
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 15
Part II. Other Information:
Item 1. Legal proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Exhibit 10.1, Exclusive Distribution Agreement dated as of
December 21, 1999, by and among the Company and Physicians
Sales and Services
Exhibit 10.2, Exclusive License Agreement dated February
14, 1995 and amended October 15, 1998 by and among the
Company and The Regents of the University of California.
Exhibit 27.1 Financial Data Schedule
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CANDELA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 27, June 27,
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 8,059 $ 1,615
Accounts receivable, net 9,921 8,419
Notes receivable 1,582 1,486
Inventories 6,809 7,241
Other current assets 1,174 200
- --------------------------------------------------------------------------------------------------
Total current assets 27,545 18,961
- --------------------------------------------------------------------------------------------------
Property and equipment, net 2,533 3,120
Other assets 370 523
- --------------------------------------------------------------------------------------------------
Total Assets $30,448 $ 22,604
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- --------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 4,574 $ 4,292
Accrued payroll and related expenses 1,889 1,319
Accrued warranty costs 2,356 2,012
Income taxes payable 2,254 335
Restructuring reserve 1,639 1,995
Other accrued liabilities 1,680 957
Lines of credit and short-term notes - 3,052
Current portion of long-term debt 488 597
Deferred income 1,687 1,763
- --------------------------------------------------------------------------------------------------
Total current liabilities 16,567 16,322
- --------------------------------------------------------------------------------------------------
Long-term debt 2,971 887
- --------------------------------------------------------------------------------------------------
Commitments and contingencies - -
- --------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 55 55
Additional paid-in capital 18,577 17,407
Accumulated deficit (7,127) (11,337)
Cumulative translation adjustment (595) (730)
- --------------------------------------------------------------------------------------------------
Total Stockholders' equity 10,910 5,395
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 30,448 $ 22,604
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
REVENUE:
PRODUCTS $ 12,847 $5,789 $ 31,254 $ 16,735
SERVICE AND OTHER 2,997 2,828 8,627 8,227
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 15,844 8,617 39,881 24,962
COST OF REVENUE:
PRODUCTS 4,908 2,555 13,213 7,447
SERVICE AND OTHER 1,912 2,219 5,780 6,653
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COST OF REVENUE 6,820 4,774 18,993 14,100
- -----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,024 3,843 20,888 10,862
OPERATING EXPENSES:
SELLING, GENERAL, AND ADMINISTRATIVE 4,586 3,331 12,131 11,421
RESEARCH AND DEVELOPMENT 933 659 2,381 1,979
RESTRUCTURING CHARGE - - - 2,609
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,519 3,990 14,512 16,009
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 3,505 (147) 6,376 (5,147)
OTHER INCOME (EXPENSE):
INTEREST INCOME 29 12 60 29
INTEREST EXPENSE (136) (47) (377) (181)
OTHER (21) (12) 91 (109)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (128) (47) (226) (261)
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 3,377 (194) 6,150 (5,408)
PROVISION FOR INCOME TAXES 1,470 - 1,940 78
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $1,907 ($194) $4,210 ($5,486)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $0.35 $(0.04) $0.77 $(1.01)
DILUTED EARNINGS (LOSS) PER SHARE $0.31 $(0.04) $0.72 $(1.01)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,498 5,448 5,486 5,446
ADJUSTED WEIGHTED AVERAGE SHARES 6,168 5,448 5,841 5,446
OUTSTANDING
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
CANDELA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the nine months ended:
March 27, March 28,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,210 $ (5,486)
Adjustments to reconcile net income (loss) to net
Cash provided by (used for) operating activities:
Depreciation and amortization 589 586
Provision for restructuring charges - 2,609
Accretion of imputed interest for debt discount 52 -
Provision for bad debts 72 790
Increase (decrease) in cash from working capital:
Accounts receivable (944) 1,343
Notes receivable (175) 79
Inventories 540 (1,550)
Other current assets (979) (40)
Other assets (32) 583
Accounts payable (179) (88)
Accrued payroll and related expenses 511 (60)
Deferred income (129) (260)
Accrued warranty costs 340 36
Income taxes payable 1,944 (388)
Accrued restructuring charges (356) (484)
Other accrued liabilities 994 640
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 6,460 (1,690)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale (purchase) of property, plant and equipment 181 (170)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 181 (170)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings from (repayments of) line of credit (2,700) 950
Proceeds from issuance of debt and stock warrants 3,700 -
Principal payments of long-term debt (627) (468)
Proceeds from equipment financing - 84
Principal payments of capital lease obligations (540) (284)
Proceeds from the issuance of common stock 90 164
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (77) 446
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash and cash equivalents (120) (120)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,444 (1,534)
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,615 2,674
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,059 $ 1,140
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
and notes do not include all of the disclosures made in the Annual
Report on Form 10-K of Candela Corporation (the "Company") for fiscal
1998, which should be read in conjunction with these financial
statements. The financial information included herein is unaudited,
with the exception of the consolidated balance sheet which was derived
from the audited consolidated balance sheet dated June 27, 1998.
However, in the opinion of management, the statements include all
necessary adjustments for a fair presentation of the quarterly results
and are prepared and presented in a manner consistent with the
Company's Annual Report on Form 10-K. The results for the three and
nine month periods ended March 27, 1999, are not necessarily indicative
of the results to be expected for the full year.
2. INVENTORIES
Inventories consist of the following (in thousands):
MARCH 27, 1999 JUNE 27, 1998
-------------- -------------
Raw materials $2,348 $3,110
Work in process 1,833 1,062
Finished goods 2,628 3,069
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$6,809 $7,241
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3. DEBT
On October 15, 1998, the Company issued eight-year, 9.75% subordinated
notes to three investors in the aggregate amount of $3,700,000. The notes
become due in October, 2006, and require quarterly interest payments. In
addition, the Company issued warrants to purchase 370,000 shares of common
stock to the note holders that have an exercise price of $4.00 per share.
The value ascribed to the warrants, using the Black Scholes pricing model,
is $1,080,000 (measured as of the date of issuance). This value has been
recorded as a component of Additional Paid-In Capital and represents a
discount to Long-Term Debt. Interest expense, equal to such value, will be
accreted to debt over the eight-year life of the warrants.
On October 22, 1998, $2,700,000 of the note proceeds was used to retire
the full amount then outstanding on the Company's line of credit. In
December, 1998, this line of credit was renewed and will expire on
December 1, 1999, bearing interest at the bank's prime lending rate and
collateralized by domestic accounts receivable, inventories, and a
pledge of subsidiary stock. At March 27, 1999, there were no borrowings
outstanding on this line of credit and no amounts were drawn from the
line during the period.
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the
period and, if there are dilutive securities, diluted earnings per
share is computed by including common stock equivalents outstanding for
the period. Common stock equivalents include shares issuable upon the
exercise of stock options or warrants, net of shares assumed to have
been purchased with the proceeds, using the treasury stock method.
6
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the three months ended For the nine months ended
-------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
--------- --------- --------- ---------
NUMERATOR
Net income(loss) $ 1,907 $ (194) $ 4,210 $(5,486)
------- ------- ------- -------
------- ------- ------- -------
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares
outstanding 5,498 5,448 5,486 5,446
------- ------- ------- -------
Earnings(loss) per share $ 0.35 $ (0.04) $ 0.77 $ (1.01)
------- ------- ------- -------
------- ------- ------- -------
DILUTED EARNINGS PER SHARE
Weighted average shares
outstanding 5,498 5,448 5,486 5,446
Effect of dilutive securities:
Stock options 438 -- 252 --
Stock warrants 232 -- 103 --
------- ------- ------- -------
Adjusted weighted average
shares outstanding 6,168 5,448 5,841 5,446
------- ------- ------- -------
Earnings(loss) per share $ 0.31 $ (0.04) $ 0.72 $ (1.01)
------- ------- ------- -------
------- ------- ------- -------
During the third quarter of 1999, options to purchase 32,500 shares of
common stock at exercise prices ranging from $8.50 to $14.50 and with
expiration dates ranging up to March 10, 2009 were outstanding, but were
not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
stock. During the nine months ended March 27, 1999, options to purchase
326,500 shares of common stock at exercise prices ranging from $5.75 to
$14.50 and with expiration dates ranging up to January 12, 2011, were
outstanding, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common stock. Warrants to purchase 281,983 shares of common
stock with exercise prices of $6.875 and with an expiration date of
November 2000 were also outstanding, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common stock.
Options to purchase 481,634 and 349,211 shares of common stock during the
three and nine month periods ending March 28, 1998, respectively, at
exercise prices ranging up to $14.50 and expiration dates ranging up to
August 21, 2007, were outstanding, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common stock. Warrants to
purchase 281,983 share of common stock with exercise prices of $6.875 and
an expiration date of November 2000 were also outstanding, but were not
included in the computation of diluted EPS because the warrants' exercise
prices were greater than the average market price of the commons stock.
Additionally, options totaling 108,000 and 171,000, respectively, for the
three and nine months ended March 28, 1998, were not included in the
earnings per share calculation as a result of the losses in each of those
periods.
7
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. RESTRUCTURING CHARGES
During the quarter ended December 27, 1997, the Company recorded
restructuring charges of $2,609,000 resulting from management's decision
to close the skin care center located in Scottsdale, Arizona. During the
nine months ended March 27, 1999, $355,000 was charged against this
reserve, representing costs associated with the shutdown of the
Scottsdale facility.
6. INCOME TAXES
The provision for income taxes results from a combination of activities of
both the domestic and foreign subsidiaries of the Company. Provision for
income taxes for the nine months ended March 27, 1999, reflects the
utilization of the Company's domestic net operating loss carryforwards and
minimum tax provisions calculated in Japan at a rate in excess of the U.S.
statutory tax rate.
The Company had a net operating loss carryforward of approximately
$2,174,000 and tax credit carryforwards of approximately $1,595,000 at
June 28, 1998, the beginning of the current fiscal year. Based on current
year operating results, the Company anticipates utilizing all of the net
operating loss carryforward and tax credit carryforwards.
The Company had provided valuation allowances for 100% of the deferred tax
assets resulting from the net operating loss and tax credit carryforwards.
Income tax expense for the nine month period ended March 27, 1999 has been
reduced by $1,274,000 through a reduction in the valuation allowance.
The Company expects the effective tax rate for the year to be
approximately 36.5% which assumes the utilization of the remaining
$662,000 of the deferred tax asset through a reduction in the valuation
allowance during the last quarter of the current fiscal year.
7. COMPREHENSIVE INCOME
Effective the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive
Income." This statement establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of this statement had no impact on the Company's net income or
stockholders' equity. The Company's comprehensive earnings were as
follows:
For the three months ended For the nine months ended
----------------------------------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
--------- --------- --------- ---------
Net income $ 1,907 $ (194) $ 4,210 $(5,486)
Foreign currency translation
adjustment, net (142) 23 166 (331)
------- ------- ------- -------
$ 1,765 $ (171) $ 4,376 $(5,817)
------- ------- ------- -------
------- ------- ------- -------
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information."
Based on the management approach to segment reporting, SFAS No. 131
establishes
8
CANDELA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
requirements to report selected segment information and to report
entity-wide disclosures about products and services, major customers and
the countries in which the entity holds material assets and reports
material revenue. The Company will adopt SFAS No. 131 for its fiscal year
ending July 3, 1999, and management is currently evaluating its effects on
the Company's reporting of segment information.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. SFAS 133 requires companies
to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative
and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The
Company plans to implement SFAS 133 for its fiscal year 2000. Had the
Company implemented the policy in the current period, it would have
increased assets and liabilities equal to the notional amount of
forward currency contracts held by the Company in the amount of
$1,914,000, and there would have been no material impact on the
statements of operations.
9
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW:
Candela Corporation develops, manufactures, and distributes innovative
clinical solutions that enable physicians, surgeons and personal care
practitioners to treat selected cosmetic and medical problems using lasers,
cryosurgery and other proven technologies. Currently, the Company is expanding
from its core customer base of plastic surgeons and dermatologists and has
entered into a strategic distribution agreement to reach family and general
practice physicians, ob/gyn specialists, and general and vascular surgeons. In
addition, the Company operates one Company-owned skin care center.
RESULTS OF OPERATIONS
Total revenue for the three and nine month periods ended March 27,
1999, were $15,844,000 and $39,881,000 respectively, in comparison to
$8,617,000 and $24,962,000 for the three and nine month periods in the prior
year, representing an 84% and 60% increase, respectively. The increases
resulted primarily from a significant increase in shipments of the Company's
hair removal laser, the GentleLASE(TM), which the Company began shipping in
March, 1998. International product sales were 62% for the nine months of 1999
compared to 71% for the same period in 1998.
Revenue for the third quarter and year to date, fiscal 1999 and 1998:
($ in 000's) 3 MONTHS 9 MONTHS
-------- -------
FY 99 FY 98 CHANGE FY 99 FY 98 CHANGE
----- ----- ------ ----- ------ ------
Laser operations $15,123 $ 7,941 90% $37,627 $22,927 64%
Skin care centers 721 676 7% 2,254 2,035 11%
------- ------- ------- -------
Total $15,844 $ 8,617 84% $39,881 $24,962 60%
Gross profits were 57% and 52%, respectively, for the three month and nine
month periods ended March 27, 1999, compared to gross profits of 45% and 44% for
the same periods one year earlier. The improved gross margins are the result of
increased sales of higher margin laser systems and higher absorption of fixed
portions of manufacturing overhead than in the same periods a year earlier.
Gross profit for the nine months ended March 27, 1999, was favorable impacted
by a reduction of the accrued warranty expense associated with the
GentleLASE(TM). This reduction was based on our actual experience with first
year warranty cost relating to GentleLASE(TM) shipments.
Selling, general and administrative expenses increased from $3,331,000
to $4,586,000, for the three month period ending March 27, 1999, in
comparison to the same period in the prior year, an increase of 38%. This
increase is primarily a result of the increased costs incurred in supporting
the Company's revenue growth, specifically, additional marketing and sales
staff. Selling, general and administrative expenses decreased as a percentage
of revenue to 29% from 39% for the same three month period a year ago. For
the nine month period ended March 27, 1999, selling, general and
administrative expenses increased 6%, from $11,421,000 to $12,131,000, in
comparison to the same nine month period a year earlier. This increase
reflects increased staffing levels in the Company's sales and marketing
departments partially offset by savings realized from one, rather than two,
skin care centers during the first six months of the fiscal year. Also
impacting selling, general and administrative expense for the first nine
months of fiscal 1999 was the accrual of approximately $600,000 for the
payment of management bonuses which are tied to pre-tax profits derived from
product and service revenue. In the first nine months of fiscal 1998, pre-tax
profit targets had not yet been achieved, and no accrual was taken until the
fourth quarter. We currently expect to accrue an additional $600,000 in
management bonuses for the fourth quarter of fiscal 1999. Selling, general,
and administrative expenses for the nine month period ended March 27, 1999,
decreased to 30% as a percentage of revenue in comparison to 46% for the same
period in the prior year.
10
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
All research and development spending is for laser operations and
increased 42% to $933,000 for the three months ended March 27, 1999, compared to
$659,000 for the same period one year earlier. For the nine month period ended
March 27, 1999, research and development spending increased 20% to $2,381,000 in
comparison to $1,979,000 for the same period in the prior year. The increase in
research and development reflect the Company's efforts to develop products and
product improvements designed to enhance, augment, and expand the Company's
existing product lines.
During the quarter ended December 27, 1997, a restructuring charge was
recorded and a reserve established in the amount of $2,609,000 resulting from
management's decision to close the skin care center located in Scottsdale,
Arizona. During the nine months ended March 27, 1999, a total of $355,000 was
charged against this reserve, representing costs associated with the
Scottsdale facility. 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 recognized for at least the next 18 months.
Income from operations was $3,505,000 for the three months ended March 27,
1999, compared to a loss of $147,000 for the same period in the prior year.
Income from operations for the nine month period ended March 27, 1999, increased
by $11,523,000, from a loss of $5,147,000 to a profit of $6,376,000, in
comparison to the same nine month period in the prior year.
Other income and expense reflected $128,000 in expenses for the three
months ended March 27, 1999, in comparison to expenses of $47,000 for the same
period a year earlier. This increase was primarily caused by increased interest
charges resulting from a higher level of average borrowings during the period
and non-cash interest charges related to the warrants issued in conjunction with
the Company's subordinated notes. For the nine month period ended March 27,
1999, other income and expense reflected $226,000 in expenses in comparison to
$261,000 in expenses, for the same period a year earlier. The improvement
resulted from exchange gains realized at the Company's foreign subsidiaries,
relative to exchange losses in the same period a year earlier that were
partially offset by increased interest costs.
The provision for income taxes results from a combination of activities
of both the domestic and foreign subsidiaries of the Company. Provision for
income taxes for the three and nine months ended March 27, 1999, reflects the
utilization of a portion of the Company's domestic net operating loss
carryforwards and minimum tax provisions calculated in Japan at a rate in
excess of the U.S. statutory tax rate. The Company had a net operating loss
carryforward of approximately $2,174,000 and tax credit carryforwards of
approximately $1,595,000 at June 28, 1998, the beginning of the current
fiscal year. Based on current year operating results, the Company anticipates
utilizing all of the net operating loss carryforward and the tax credit
carryforwards. The Company had provided valuation allowances for 100% of the
deferred tax assets resulting from the net operating loss and tax credit
carryforward. Income tax expense for the nine month period ended March 27,
1999 has been reduced by $1,284,000 through a reduction in the valuation
allowance. The Company expects to utilize an additional $662,000 of the
deferred tax asset through a reduction in the valuation allowance during the
last quarter of the current fiscal year. The effective tax rate for the year
is expected to be approximately 36.5%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $6,460,000 for the nine
months ended March 27, 1999, in comparison to cash used for operating activities
of $1,690,000 for the same period a year earlier reflecting increased operating
earnings during the current period. Cash provided by investing activities
totaled $181,000 for the nine months ended March 27, 1999 compared to cash used
for investing activities of $170,000 for the same period in the prior year. Cash
used for financing activities amounted to $77,000 in
11
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
comparison to cash provided from financing activities of $446,000 for the same
period a year earlier. This reflects $3,700,000 in cash provided from the
issuance of eight-year, 9.75% subordinated notes and warrants, offset by
payments of $2,700,000 on the Company's line of credit and payments on
short-term notes by the Company's Japanese subsidiary for 74,999,000 Japanese
Yen, or $627,000 based on average exchange rates for the nine month period. The
Company borrowed $950,000 on its line of credit during the same nine month
period a year ago.
Cash and cash equivalents at March 27, 1999, increased by $6,444,000 to
$8,059,000 from $1,615,000 at June 27, 1998, due principally to higher cash
receipts resulting from increases in shipments of the Company's new laser.
On October 15, 1998, the Company issued eight-year, 9.75% subordinated
notes to three investors in the aggregate amount of $3,700,000. The notes become
due in October, 2006, and require quarterly interest payments. In addition, the
Company issued warrants to purchase 370,000 shares of common stock to the note
holders that have an exercise price of $4.00 per share. The value ascribed to
the warrants, using the Black Scholes pricing model, is $1,080,000 (measured as
of the date of issuance). This value has been recorded as a component of
Additional Paid-In Capital and represents a discount to Long-Term Debt. Interest
expense, equal to such value, will be accreted to debt over the eight-year life
of the warrants.
The Company also maintains a $3,500,000 line of credit with a major bank
which expires December 1, 1999. The line of credit bears interest at the bank's
prime lending rate and is collateralized by total domestic accounts receivable,
inventories, and a pledge of subsidiary stock. At March 27, 1999, the Company
had no borrowings outstanding on this line of credit.
The Company's Japanese subsidiary has borrowed funds to be used for
payment of equipment purchases made from the parent corporation. At March 27,
1999, this liability was $138,000, converted at the quarter-end exchange rate.
The Company's remaining short-term and long-term debt is comprised of capital
lease obligations which were $350,000 and $299,000, respectively, at March 27,
1999, compared to $362,000 and $828,000, respectively, at June 27, 1998.
YEAR 2000 COMPLIANCE
The Company has established a committee to assess the implications of Year
2000 issues on operations, from information and financial systems to each aspect
of its manufacturing processes, in order to determine the extent to which the
Company may be adversely affected by Year 2000 issues. Indications based on the
internal assessment, which is approximately 80% complete, reveals minimal impact
of Year 2000 issues on the Company. The Company has completed the initial
assessment of Year 2000 issues. Though limited testing of systems has been
performed to date, the Company has developed its systems and products with Year
2000 in mind, thus minimizing the impact of the change. The Company will conduct
further testing and/or an external audit following the conclusion of its
internal assessment. To date there has been a limited number of hours devoted to
Year 2000 issues, with minimal costs expended in systems upgrades directly
relating to Year 2000 issues. Present estimates for further expenditures of both
employee time and expenses to address Year 2000 issues are between 40 and 120
hours and up to $15,000 of incremental expenses. All expenditures will be
expensed as incurred and they are not expected to have a significant impact on
the Company's ongoing results of operations.
12
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has undertaken an informal survey of its suppliers' Year 2000
compliance status with responses indicating Year 2000 compliance at this time.
Further, the Company has conferred with significant customers to assure that
various systems used for data and information exchanges between them will be
compatible following December 31, 1999.
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing or interface with key customers,
or with processing orders and billing. However, if certain critical third party
providers, such as those supplying electricity, water or telephone service,
experience difficulties resulting in disruption of service to the Company, a
shutdown of the Company's operations at individual facilities could occur for
the duration of any such disruption.
The Company is developing contingency plans relating to Year 2000
issues. There can be no assurance that Year 2000 issues will not have a material
adverse effect on the Company's business, results of operation and financial
condition.
CAUTIONARY STATEMENTS
In addition to the other information in this Quarterly Report on Form 10-Q,
the following cautionary statements should be considered carefully in evaluating
the Company and its business. Statements contained in this Form 10-Q that are
not historical facts (including, without limitation, statements concerning
anticipated operational and capital expense levels and such expense levels
relative to the Company's total revenues) and other information provided by the
Company and its employees from time to time may contain certain
"forward-looking" information, as that term is defined by (i) the Private
Securities Litigation Reform Act of 1995 (the "Act") and, (ii) in releases made
by the Securities and Exchange Commission (the "SEC"). The factors identified in
the cautionary statements below, among other factors, could cause actual results
to differ materially from those suggested in such forward-looking statements.
The cautionary statements below are being made pursuant to the provisions of the
Act and with the intention of obtaining the benefits of the "safe harbor"
provisions of the Act.
HEAVY DEPENDENCE ON ONE PRODUCT. We introduced our GentleLASE system in March
1998. GentleLASE's sales have grown rapidly and accounted for more than half of
our total revenue in the most recent fiscal quarter, ended March 27, 1999. Heavy
dependence on GentleLASE sales increases our susceptibility to changes in the
marketplace, such as competitors' reducing prices or adding new features to
their products, or customers ordering fewer of our products. Changes in the
marketplace that result in reduced sales of the GentleLASE(TM) system would hurt
our financial results.
WE COULD LOSE OUR EXCLUSIVITY TO KEY TECHNOLOGY. We developed our Dynamic
Cooling Device ("DCD"), which is used to selectively cool the subject's
outermost layers of skin during cosmetic laser treatments, under an exclusive
license to patent rights owned by the Regents of the University of California
(the "Regents"). The DCD is an integral component of our biggest-selling
device, the GentleLASE, and is also currently sold as an attachment to our
other principal laser device, the ScleroPLUS. We believe the efficacy of the
DCD has been a key element in the recent growth in sales of our laser
devices. In October of 1998, we entered into an amendment of the license
agreement which now gives us an exclusive right under the Regents' patent to
make, use and sell the dynamic cooling technology in all fields of use.
However, this amendment also imposes on us an obligation to negotiate in good
faith and make commercially reasonable efforts to conclude sublicensing
agreements with third parties, subject to certain stipulated minimum terms
and conditions. If we fail to negotiate in good faith or enter into
sublicenses with third parties within certain time periods, the Regents may
then grant license rights to such third parties directly, provided that
Candela will receive 50% of all revenues received under such licenses. While
no such sublicenses or further licenses have been granted by us or the
Regents to date, principal competitors of ours, or new entrants into the
medical laser industry, may successfully conclude licensing arrangements
providing them with access to the dynamic cooling technology. While our
agreement provides that we would receive 50% of all revenues received under
such licenses, the loss of exclusivity to this technology could hurt our
financial results. In addition, another laser company has filed suit
challenging the validity of the patent rights to DCD held by the Regents.
While we believe this suit is without merit, we can't be certain that the
Regents' patent rights will not be reduced or invalidated, which could also
hurt our business and financial results.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's quarterly operating
results may vary significantly from quarter to quarter, depending upon factors
such as the timing of product sales, the timing of expenditures in anticipation
of future product orders, the introduction and market acceptance of new
products, effectiveness in managing manufacturing processes, changes in cost and
availability of labor and product components, order cancellations, the budgetary
cycles of its customers, the timing of regulatory approvals and the cost of
operating the Company's skin care center. The Company's ability to accurately
13
forecast future revenues and income for any period is necessarily limited, and
any forward-looking information provided from time to time by the Company
represents only management's then-best current
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
estimate of future results or trends, and actual results may differ materially
from those contained in the Company's estimates.
POTENTIAL VOLATILITY OF STOCK PRICE. There has been significant volatility in
the market price of securities of companies in the medical device industry.
Factors such as announcements of new products by the Company or its competitors,
quarterly fluctuations in the financial results of the Company or its
competitors, shortfalls in the Company's actual financial results compared to
results previously forecast by stock market analysts, conditions in the medical
device industry and the financial markets and the economy generally could cause
the market price of the Company's securities to fluctuate substantially and may
adversely affect the price of the Company's securities.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. A significant portion of the
Company's revenues are attributable to international operations and those
revenues are likely to continue to represent a significant portion of the
Company's revenues in future periods. The Company's international business and
financial performance may be adversely affected by a number of factors,
including without limitation, fluctuations in exchange rates, tariffs and other
trade barriers, adverse tax regulation, and adverse political and economic
conditions. Adverse effects on the Company's international operations may have
materially adverse effects on the Company's overall financial condition and
operating results.
BUSINESS STRATEGIC DEVELOPMENT. The Company has renewed its commitment to expand
and diversify its core cosmetic and surgical laser equipment business. As part
of this refocus, the Company has decided not to pursue additional skin care
treatment or spa centers, and is actively seeking buyers for the two facilities
it has sponsored in Scottsdale, Arizona and Boston, Massachusetts. The Company
anticipates that the sale of both facilities will be finalized within the fiscal
year, but no assurances can be made that the sale/sublease will be completed on
terms favorable to the Company or at all within this time frame. Reserves have
been established to cover the closure of the Scottsdale, Arizona, facility,
however, there can be no assurances that the reserves will be adequate.
GOVERNMENTAL REGULATION. Medical devices are subject to governmental approval
before they can be utilized for clinical studies or sold commercially. In
addition, the Company's activities in connection with its CSCC business may
subject the Company to additional regulation under state and federal laws. The
process for obtaining the necessary approvals and compliance with applicable
regulations can be costly and time-consuming. Many foreign countries in which
the Company markets or may market its products have similar regulatory bodies
and restrictions. There is no assurance that the Company will be able to obtain
any such government approvals or successfully comply with any such regulations
in a timely and cost-effective manner, if at all, and failure to do so may have
an adverse effect on the Company's financial condition and results of
operations.
RISKS ASSOCIATED WITH PRODUCT LIABILITY. The administration of medical and
cosmetic treatments using laser products is subject to various risks of physical
injury to the patient which may result in product liability or other claims
against the Company. The costs and resources involved in defending or settling
any such claims, or the payment of any award in connection therewith, may
adversely affect the Company's financial condition and operating results. The
Company maintains product liability insurance, but there is no assurance that
its policy will provide sufficient coverage for any claim or claims that may
arise, or that the Company will be able to maintain such insurance coverage on
favorable economic terms.
14
CANDELA CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RAPID TECHNOLOGICAL CHANGE; COMPETITION. The medical laser industry is subject
to rapid and substantial technological development and product innovations. To
be successful, the Company must be responsive to new developments in laser
technology and new applications of existing technology, and the Company's
financial condition and operating results may be adversely affected by the
failure of new or existing products to compete favorably in response to such
technological developments. In addition, the Company competes against numerous
other companies offering products similar to those of the Company and/or
alternative products and technologies, some of which have greater financial,
marketing and technical resources than the Company. There can be no assurance
the Company will be able to compete successfully with these companies. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON ATTRACTING AND RETAINING KEY EMPLOYEES. The Company's success will
depend in large part on its ability to attract and retain highly-qualified
scientific, technical, managerial, sales and marketing, management and other
personnel. Competition for such personnel is intense and any decline in the
Company's ability to attract and retain such personnel may have adverse effects
on its financial condition and operating results.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 27, 1999, the Company held foreign currency forward contracts with
notional value totaling approximately $1,914,000 (228,556,000 Japanese Yen)
compared to forward contracts a value of $1,352,000 (172,951,000 Japanese
Yen) held at March 28, 1998. These contracts have maturity dates prior to
July 22, 1999. The past contracts carrying and net fair value of these
contracts at March 27, 1999, was $0 and $14,000, respectively, compared to $0
and $25,000 respectively, at March 28, 1998.
15
CANDELA CORPORATION
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 5, 1999, New Star Lasers, Inc., and its subsidiary Laser Aesthetics,
Inc., filed a complaint in the United States District Court for the Eastern
District of California against The Regents of the University of California
(the "Regents"), the Beckman Laser Institute and Medical Clinic ("Beckman")
and Candela. In the complaint New Star Lasers is seeking a declaration that
its technology does not infringe the U.S. Patent No. 5,814,040 issued to the
Regents and pertaining to dynamic cooling technology, or in the alternative
that the patent is invalid and not infringed by the plaintiff's technology.
The complaint also includes various tort claims against us and
contract-related claims against the Regents and Beckman. The complaint asserts
that we interfered with the licensing of the dynamic cooling technology to
the plaintiffs. We intend to defend this matter vigorously, and have filed a
motion to dismiss the case on jurisdictional grounds. That motion is pending.
The Regents have orally requested that we indemnify them in connection with
this litigation pursuant to the license agreement between the Regents and
Candela. We have rejected this request.
From time to time, we are a party to various legal proceedings incidental to
its business. We believe that none of the other presently pending legal
proceedings will have a material adverse effect upon our financial position,
results of operation, or liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 12, 1999, the Company held its Annual Shareholder meeting. At the
meeting, the Shareholders acted upon the following proposals: (I) election of
directors; (ii) ratification of the firm of PricewaterhouseCoopers LLP as
independent accountants for the fiscal year ending July 3, 1999; and (iii)
ratification of the adoption of the 1998 Stock Plan.
Votes "For" represent affirmative votes and do not include abstentions or broker
non-votes. In cases where a signed proxy was submitted without direction, the
shares represented by the proxy were voted "For" each proposal in the manner
disclosed in the Proxy Statement and Proxy.
Voting results were as follows:
Broker
Matter For Against Withheld Abstain Non-votes
I. ELECTION OF DIRECTORS:
Gerard E. Puorro 3,980,998 41,669 N/A N/A -0-
Kenneth D. Roberts 3,984,756 37,911 N/A N/A -0-
Theodore G. Johnson 3,983,405 39,262 N/A N/A -0-
Douglas W. Scott 3,985,556 37,111 N/A N/A -0-
Richard J. Cleveland, MD 3,982,605 40,062 N/A N/A -0-
Robert E. Dornbush 3,985,654 37,013 N/A N/A -0-
II. RATIFICATION OF INDEPENDENT ACCOUNTANTS:
3,983,672 13,215 N/A 25,780 -0-
III. 1998 STOCK PLAN:
833,516 276,963 N/A 24,860 2,887,328
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1*, Exclusive Distribution Agreement dated as of December
21, 1999, by and among the Company and Physicians, Sales, and
Services.
Exhibit 10.2*, Exclusive License Agreement dated February 14, 1995
and amended October 15, 1998 by and among the Company and The
Regents of the University of California.
Exhibit 27.1, Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 27,
1999.
* Confidential treatment as to certain portions has been requested pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANDELA CORPORATION
Registrant
Date: May 10, 1999 /s/ Gerard E. Puorro
------------ --------------------------------------------
Gerard E. Puorro
(President and Chief Executive Officer)
Date: May 10, 1999 /S/ F. Paul Broyer
------------ --------------------------------------------
F. Paul Broyer
(Senior Vice President of Finance and
Administration, Chief Financial Officer
and Treasurer)
17