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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

** **

**Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

** **

**For the quarterly period ended December 27, 2008.**

** **

**Commission file number 000-14742**

** **

**CANDELA CORPORATION**

(Exact name of registrant as specified in its charter)

* *

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

 

| **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 checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x     No  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large Accelerated Filer o |   | Accelerated Filer x |   | Non-Accelerated Filer o |   | Smaller Reporting Company o |
|--------------------------------|--------|--------------------------|--------|------------------------------|--------|----------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule12b-2 of theExchange Act) Yes o  No  x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

| **Class**                               | ** ** | **Outstanding  at February 4, 2009** |
|-----------------------------------------|------------|-------------------------------------------|
| Common Stock,  $.01 par value per share |       | 22,887,829                                |

 

 

 

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**CANDELACORPORATION****Table of Contents**

 
| ** **    | ** **             | ** **                                                                                                                                                           | ** ** | **Page** |
|---------------|------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Part I.  | Financial Information: |                                                                                                                                                                 |       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 1.                | Unaudited Financial Statements                                                                                                                                       |       |     |
|          |                   |                                                                                                                                                                 |       |     |
|          |                   | Condensed  Consolidated Balance Sheets as of December 27, 2008 and June 28,  2008                                                                          |       | 3        |
|          |                   |                                                                                                                                                                 |       |     |
|          |                   | Condensed Consolidated Statements  of Operations and Comprehensive Loss for the three and six-month periods  ended December 27, 2008 and December 29, 2007 |       | 4        |
|          |                   |                                                                                                                                                                 |       |     |
|          |                   | Condensed Consolidated Statements of  Cash Flows for the six-month periods ended December 27, 2008 and  December 29, 2007                                  |       | 5        |
|          |                   |                                                                                                                                                                 |       |     |
|          |                   | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                    |       | 6 - 19   |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                          |       | 20 - 25  |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 3.                | Quantitative  and Qualitative Disclosure about Market Risk                                                                                                           |       | 26       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 4.                | Controls and  Procedures                                                                                                                                             |       | 26       |
|          |                   |                                                                                                                                                                 |       |     |
| Part II. | Other Information:     |                                                                                                                                                                 |       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 1.                | Legal proceedings                                                                                                                                                    |       | 27 - 29  |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 4.                | Submission  of Matters to a Vote of Security Holders                                                                                                                 |       | 30       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 5.                | Other Information                                                                                                                                                    |       | 30       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Item 6.                | Exhibits                                                                                                                                                             |       | 31       |
|          |                   |                                                                                                                                                                 |       |     |
|          | Signatures             |                                                                                                                                                                 | 32         |
|          |                   |                                                                                                                                                                 |       |     |
|          | Index to  Exhibits     |                                                                                                                                                                 | 33         |

 

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**Part I.  FinancialInformation**

 

**Item 1 -Financial Statements**

 

**CANDELA CORPORATION****Consolidated Balance Sheets**(in thousands, except per-share data)(unaudited)

 
| ** **                                                                                                                                        | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                        |       |                  |       |              |       |
| Current assets:                                                                                                                                   |       |                  |       |              |       |
| Cash and cash  equivalents                                                                                                                        |       | $                     | 23,998     |              | $          | 21,030 |   |
| Restricted cash                                                                                                                                   |       | 13                    |       | 29                |       |
| Marketable  securities                                                                                                                            |       | 2,678                 |       | 12,131            |       |
| Accounts  receivable, net of allowance for doubtful accounts of $3,038 and $2,322 at  December 27 and June 28, respectively             |       | 34,129                |       | 43,320            |       |
| Notes receivable                                                                                                                                  |       | 877                   |       | 728               |       |
| Inventories, net                                                                                                                                  |       | 30,565                |       | 33,141            |       |
| Other current  assets                                                                                                                             |       | 14,779                |       | 9,043             |       |
| Total current  assets                                                                                                                             |       | 107,039               |       | 119,422           |       |
| Property and  equipment, net                                                                                                                      |       | 3,803                 |       | 4,027             |       |
| Deferred tax  assets                                                                                                                              |       | 5,155                 |       | 8,065             |       |
| Goodwill                                                                                                                                          |       | —                |       | 13,225            |       |
| Acquired  Intangible assets, net                                                                                                                  |       | 174                   |       | 6,916             |       |
| Marketable  securities, long-term                                                                                                                 |       | 656                   |       | 3,512             |       |
| Other assets                                                                                                                                      |       | 1,787                 |       | 2,928             |       |
| Total assets                                                                                                                                      |       | $                     | 118,614    |              | $          | 158,095 |   |
|                                                                                                                                              |       |                  |       |              |       |
| **Liabilities and Stockholders’ Equity**                                                                                                     |       |                  |       |              |       |
| Current  liabilities:                                                                                                                             |       |                  |       |              |       |
| Accounts payable                                                                                                                                  |       | $                     | 11,663     |              | $          | 15,917 |   |
| Accrued payroll  and related expenses                                                                                                             |       | 4,203                 |       | 4,680             |       |
| Accrued warranty  costs, current                                                                                                                  |       | 4,917                 |       | 5,373             |       |
| Sales tax  payable                                                                                                                                |       | 964                   |       | 919               |       |
| Other accrued  liabilities                                                                                                                        |       | 8,725                 |       | 9,257             |       |
| Deferred  revenue, current                                                                                                                        |       | 11,629                |       | 13,614            |       |
| Current  liabilities of discontinued operations                                                                                                   |       | 1,564                 |       | 1,200             |       |
| Total current  liabilities                                                                                                                        |       | 43,665                |       | 50,960            |       |
| Deferred tax  liability, long-term                                                                                                                |       | 291                   |       | 2,099             |       |
| Accrued warranty  costs, long-term                                                                                                                |       | 685                   |       | 725               |       |
| Deferred  revenue, long-term                                                                                                                      |       | 3,874                 |       | 4,522             |       |
| Total  liabilities                                                                                                                                |       | 48,515                |       | 58,306            |       |
|                                                                                                                                              |       |                  |       |              |       |
| Stockholders’  equity:                                                                                                                       |       |                  |       |              |       |
| Common stock,  $.01 par value, 60,000,000 shares authorized; 26,156,000 and 26,123,000  issued at December 27 and June 28, respectively |       | 262                   |       | 261               |       |
| Treasury stock,  3,450,000 common shares at December 27 and June 28, respectively,  at cost                                             |       | (24,855               | )          | (24,855           | )          |
| Additional paid-in  capital                                                                                                                       |       | 75,021                |       | 73,174            |       |
| Accumulated  earnings                                                                                                                             |       | 16,668                |       | 45,588            |       |
| Accumulated  other comprehensive income                                                                                                           |       | 3,003                 |       | 5,621             |       |
| Total  stockholders’ equity                                                                                                                  |       | 70,099                |       | 99,789            |       |
| Total  liabilities and stockholders’ equity                                                                                                  |       | $                     | 118,614    |              | $          | 158,095 |   |

 

***The accompanying notes are anintegral part of the unaudited condensed consolidated financial statements.***

 

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**CANDELACORPORATIONCondensed Consolidated Statements of Operations and Comprehensive Loss(in thousands, except per-share data)**

 
| ** **                                                     | ** ** | **For the three months ended:** | ** ** | **For the six months ended:** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **December 27,**                               | ** ** | **December 29,**                             | ** ** | **December 27,** | ** ** | **December 29,** | ** ** |
| ** **                                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| **Revenue**                                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lasers and other  products                                     |       | $                                                   | 18,785     |                                              | $          | 24,858 |   | $ | 35,886 |   | $ | 51,311 |   |
| Product-related  service                                       |       | 9,972                                               |       | 10,850                                            |       | 19,535 |   | 19,499 |   |
| Total revenue                                                  |       | 28,757                                              |       | 35,708                                            |       | 55,421 |   | 70,810 |   |
| **Cost of  sales**                                             |       |                                                |       |                                              |       |   |   |   |   |
| Lasers and other  products                                     |       | 10,910                                              |       | 11,916                                            |       | 19,528 |   | 24,073 |   |
| Product-related  service                                       |       | 7,687                                               |       | 7,289                                             |       | 15,263 |   | 13,174 |   |
| Total cost of  sales                                           |       | 18,597                                              |       | 19,205                                            |       | 34,791 |   | 37,247 |   |
| **Gross  profit**                                              |       | 10,160                                              |       | 16,503                                            |       | 20,630 |   | 33,563 |   |
| **Operating  expenses:**                                       |       |                                                |       |                                              |       |   |   |   |   |
| Selling, general  and administrative                           |       | 15,698                                              |       | 17,678                                            |       | 30,373 |   | 32,316 |   |
| Research and  development                                      |       | 3,591                                               |       | 2,822                                             |       | 5,921 |   | 5,220 |   |
| Total operating  expenses                                      |       | 19,289                                              |       | 20,500                                            |       | 36,294 |   | 37,536 |   |
| **Loss  from operations**                                      |       | (9,129                                              | )          | (3,997                                            | )          | (15,664 | ) | (3,973 | ) |
| **Other  income (expense):**                                   |       |                                                |       |                                              |       |   |   |   |   |
| Interest income                                                |       | 174                                                 |       | 500                                               |       | 417 |   | 963 |   |
| Other expense,  net                                            |       | (304                                                | )          | (2,518                                            | )          | (621 | ) | (1,777 | ) |
| Total other  expense                                           |       | (130                                                | )          | (2,018                                            | )          | (204 | ) | (814 | ) |
| **Loss  from continuing operations before income taxes**       |       | (9,259                                              | )          | (6,015                                            | )          | (15,868 | ) | (4,787 | ) |
| **Benefit  from income taxes**                                 |       | (2,707                                              | )          | (2,298                                            | )          | (5,794 | ) | (1,952 | ) |
| **Loss  from continuing operations**                           |       | (6,552                                              | )          | (3,717                                            | )          | (10,074 | ) | (2,835 | ) |
| **Loss  from discontinued operations, net of income taxes**    |       | (18,393                                             | )          | (833                                              | )          | (18,881 | ) | (1,528 | ) |
| **Net  Loss**                                                  |       | $                                                   | (24,945    | )                                                 | $          | (4,550 | ) | $ | (28,955 | ) | $ | (4,363 | ) |
| ** **                                                     |       |                                                |       |                                              |       |   |   |   |   |
| **Net  loss per share of common stock:**                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic and  diluted                                             |       |                                                |       |                                              |       |   |   |   |   |
| Loss from  continuing operations                               |       | $                                                   | (0.29      | )                                                 | $          | (0.16 | ) | $ | (0.44 | ) | $ | (0.12 | ) |
| Loss from discontinued  operations                             |       | (0.81                                               | )          | (0.04                                             | )          | (0.83 | ) | (0.07 | ) |
| Net loss                                                       |       | $                                                   | (1.10      | )                                                 | $          | (0.20 | ) | $ | (1.27 | ) | $ | (0.19 | ) |
|                                                           |       |                                                |       |                                              |       |   |   |   |   |
| **Weighted  average shares outstanding:**                      |       |                                                |       |                                              |       |   |   |   |   |
| Basic and  diluted                                             |       | 22,707                                              |       | 22,652                                            |       | 22,702 |   | 22,778 |   |
|                                                           |       |                                                |       |                                              |       |   |   |   |   |
| **Net  loss**                                                  |       | $                                                   | (24,945    | )                                                 | $          | (4,550 | ) | $ | (28,955 | ) | $ | (4,363 | ) |
| **Other  comprehensive income (loss):**                        |       |                                                |       |                                              |       |   |   |   |   |
| Foreign currency  translation adjustment                       |       | (1,360                                              | )          | 797                                               |       | (2,618 | ) | 1,569 |   |
| Unrealized gain  on available-for-sales securities, net of tax |       | —                                              |       | 1,039                                             |       | — |   | 777 |   |
| **Comprehensive  loss**                                        |       | $                                                   | (26,305    | )                                                 | $          | (2,714 | ) | $ | (31,573 | ) | $ | (2,017 | ) |

 

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

 

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**CANDELA CORPORATION****CondensedConsolidated Statements of Cash Flows** (in thousands) (unaudited)

 
| ** **                                                                                 | ** ** | **For the six months ended:** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **December 27,**                             | ** ** | **December 29,** | ** ** |
| ** **                                                                                 | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                                   |       | $                                                 | (28,955    | ) | $ | (4,363 | ) |
| Adjustments to reconcile  net loss to net cash (used by) provided by operating activities: |       |                                              |       |   |   |
| Non-cash items  reported in discontinued operations                                        |       | 16,784                                            |       | — |   |
| Gain on  other-than-temporary impairment of investment                                     |       | —                                            |       | 2,546 |   |
| Share-based  compensation expense                                                          |       | 1,785                                             |       | 2,056 |   |
| Depreciation and  amortization                                                             |       | 1,806                                             |       | 1,440 |   |
| Provision for  bad debts                                                                   |       | 3,378                                             |       | 1,486 |   |
| Other non-cash  items                                                                      |       | 81                                                |       | (41 | ) |
| Changes in  operating assets and liabilities                                               |       |                                              |       |   |   |
| Accounts  receivable                                                                       |       | 7,100                                             |       | (435 | ) |
| Notes receivable                                                                           |       | 149                                               |       | 493 |   |
| Inventories                                                                                |       | 819                                               |       | (5,305 | ) |
| Other current  assets                                                                      |       | 1,057                                             |       | (2,078 | ) |
| Other assets                                                                               |       | 1,904                                             |       | 62 |   |
| Accounts payable                                                                           |       | (3,059                                            | )          | 9,626 |   |
| Accrued payroll  and related expenses                                                      |       | (302                                              | )          | (927 | ) |
| Deferred revenue                                                                           |       | (2,446                                            | )          | 1,474 |   |
| Accrued warranty  costs                                                                    |       | (487                                              | )          | (1,528 | ) |
| Income taxes  payable and deferred                                                         |       | (6,133                                            | )          | (1,150 | ) |
| Other accrued  liabilities                                                                 |       | (561                                              | )          | (2,523 | ) |
| Restricted cash                                                                            |       | 16                                                |       | 19 |   |
| Net cash (used  by) provided by operating activities                                       |       | (7,064                                            | )          | 852 |   |
|                                                                                       |       |                                              |       |   |   |
| **Cash  flows from investing activities:**                                                 |       |                                              |       |   |   |
| Purchases of  property and equipment                                                       |       | (675                                              | )          | (1,648 | ) |
| Maturities of  held-to-maturity marketable securities                                      |       | 11,194                                            |       | 8,168 |   |
| Purchases of  held-to-maturity marketable securities                                       |       | —                                            |       | (13,920 | ) |
| Acquisition of  intangible assets                                                          |       | —                                            |       | (75 | ) |
| Net cash  provided by (used by) investing activities                                       |       | 10,519                                            |       | (7,475 | ) |
|                                                                                       |       |                                              |       |   |   |
| **Cash  flows from financing activities:**                                                 |       |                                              |       |   |   |
| Proceeds from  the issuance of common stock                                                |       | 55                                                |       | 97 |   |
| Purchase of  treasury stock                                                                |       | —                                            |       | (2,400 | ) |
| Net cash  provided by (used by) financing activities                                       |       | 55                                                |       | (2,303 | ) |
|                                                                                       |       |                                              |       |   |   |
| Effect of  exchange rates on cash and cash equivalents                                     |       | (542                                              | )          | 1,561 |   |
|                                                                                       |       |                                              |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                  |       | 2,968                                             |       | (7,365 | ) |
| **Cash and  cash equivalents at beginning of period**                                      |       | 21,030                                            |       | 27,152 |   |
| **Cash  and cash equivalents at end of period**                                            |       | $                                                 | 23,998     |   | $ | 19,787 |   |

 

***The accompanying notes are an integral partof the unaudited condensed consolidated financial statements****.*

 

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**CandelaCorporation**

**Notes toCondensed Consolidated Financial Statements (unaudited)**

 

**1.****                   Basis ofPresentation and Consolidation**

 

*Basis ofPresentation*

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions for Form 10-Qand Article 10 of Regulation S-X. The year-end consolidated balance sheetis derived from our audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments, consistingonly of those of a normal recurring nature, considered necessary for a fairpresentation of our financial position, results of operations and cash flows atthe dates and for the periods indicated. Actual results may differ from theseestimates.

 

The results for the threeand six-month periods ended December 27, 2008 are not necessarilyindicative of results to be expected for the remainder of the fiscal year. Theinformation contained in the interim financial statements should be read inconjunction with Management’s Discussion and Analysis and the financialstatements and notes thereto included in the Candela Corporation 2008 Form 10-Kfiled with the Securities and Exchange Commission (“SEC”).

 

*Basisof Consolidation*

The financial statementsinclude the accounts of Candela Corporation and its subsidiaries. Inter-companytransactions and balances have been eliminated. Investments in which we are notable to exercise significant influence over the investee are accounted forunder the cost method.

 

*SignificantAccounting Policies*

As required, the Companyadopted SFAS No. 157 for its financial assets on June 29, 2008 (Note2).  Adoption does not have a material impact on the Company’s financialposition or results of operations at this time.

 

There have been no otherchanges in our significant accounting policies during the six months ended December 27,2008 as compared to the significant accounting policies described in our AnnualReport on Form 10-K for the fiscal year ended June 28, 2008.

 

**2.****                   RecentAccounting Pronouncements**

 

In April 2008, theFinancial Accounting Standards Board (“FASB”) finalized FASB Staff Position (“FSP”)No. 142-3, *Determination of the UsefulLife of Intangible Assets*. The position amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB Statementof Financial Accounting Standard (“SFAS”) No. 142,  Goodwill and Other Intangible Assets. Theposition applies to intangible assets that are acquired individually or with agroup of other assets and both intangible assets acquired in businesscombinations and asset acquisitions. FSP 142-3 is effective for fiscalyears beginning after December 15, 2008, and interim periods within thosefiscal years. We do not believe that the adoption of FSP 142-3 will have amaterial effect on our consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities an amendment of FASBStatement No. 133*. SFAS No. 161 requires disclosuresof how and why an entity uses derivative instruments, how derivativeinstruments and related hedged items are accounted for and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. SFAS No. 161 is effective forfiscal years beginning after November 15, 2008, with early adoption permitted.We are currently evaluating the additional disclosure required by SFAS No. 161on our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised “R”), *Business Combinations*. This standardchanges the accounting for business combinations by requiring that an acquiringentity measures and recognizes identifiable assets acquired and liabilitiesassumed at the acquisition date

 

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fair value with limitedexceptions. The changes include the treatment of acquisition relatedtransaction costs, the valuation of any non-controlling interest at acquisitiondate fair value, the recording of acquired contingent liabilities atacquisition date fair value and the subsequent re-measurement of suchliabilities after acquisition date, the recognition of capitalized in-processresearch and development, the accounting for acquisition-related restructuringcost accruals subsequent to acquisition date, and the recognition of changes inthe acquirer’s income tax valuation allowance. SFAS No. 141(R) iseffective for fiscal years beginning after December 15, 2008, with earlyadoption prohibited. We will evaluate the impact of the pending adoption ofSFAS No. 141(R) on our consolidated financial statements if andwhen the Company enters into a business combination.

 

In February 2007,the FASB issued SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment of SFAS No. 115*. SFAS No. 159 permitscompanies to choose to measure certain financial instruments and certain otheritems at fair value and requires unrealized gains and losses on items for whichthe fair value option has been elected to be reported in earnings. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. Adoptiondoes not have a material impact on the Company’s financial position or resultsof operations at this time.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*. SFAS No. 157 establishes a frameworkfor measuring the fair value of assets and liabilities. This framework isintended to provide increased consistency in how fair value determinations aremade under various existing accounting standards which permit, or in some casesrequire, estimates of fair market value. SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. In February 2008, the FASB issued FSP No. FAS 157-1,*Application of SFAS No. 157 toSFAS No. 13 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underSFAS No. 13*, and FSP No. FAS 157-2, *Effective Date of SFAS No. 157*.Collectively, the FSPs defer the effective date of SFAS No. 157 tofiscal years beginning after December 15, 2008, for non-financial assetsand non-financial liabilities except for items that are recognized or disclosedat fair value on a recurring basis at least annually, and amends the scope ofSFAS 157. As required, the Company adopted SFAS No. 157 for itsfinancial assets on June 29, 2008.  Adoption does not have a materialimpact on the Company’s financial position or results of operations at thistime. The Company has not yet determined the impact on its financial statementsof the June 28, 2009 adoption of SFAS No. 157 as it pertains tonon-financial assets and liabilities.

 

SFAS No. 157establishes a fair value hierarchy that requires the use of observable marketdata, when available, and prioritizes the inputs to valuation techniques usedto measure fair value in the following categories:

 

·                  Level 1 - Valuation is based uponquoted prices for identical instruments traded in active markets. Level 1instruments include securities traded on active exchange markets, such as theNew York Stock Exchange.

 

·                  Level 2 - Valuation is based uponquoted prices for similar instruments in active markets, quoted prices for identicalor similar instruments in markets that are not active and model-based valuationtechniques for which all significant assumptions are observable in the market.

 

**·**                 Level 3 - Valuation is generated frommodel-based techniques that use significant assumptions not observable in themarket. These unobservable assumptions reflect our own estimates of assumptionsmarket participants would use in pricing the asset or liability.

 

Our cash and cashequivalents consist of cash on deposit at various financial institutions at December 27,2008 and include approximately $6.2 million invested in money market funds.Since the Company did not elect the fair-value option on these or any otherinstruments, we do not have any financial assets or liabilities that require recordingof fair value at December 27, 2008.

 

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**3.****                   DiscontinuedOperations**

 

Candela Skin CareCenters (“CSCC”)

On September 27,2003 management initiated a plan to close its only remaining skin care center.The closure was accounted for as a discontinued operation in accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* and SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.In determining the amount of the facilities closure accrual, we are required toestimate such factors as future vacancy rates. These estimates are reviewedquarterly and may result in revisions to established facility reserves.

 

Inolase (2002)Ltd.

In the fiscal quarterended December 27, 2008, in connection with the Company’s plan to focus onits core products, management initiated a plan to close its Inolase (2002) Ltd.(“Inolase”) subsidiary. In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, the Company classified the operating results ofthis business as discontinued operations in the accompanying statements ofoperations. In addition, the assets and liabilities of the discontinuedoperations not disposed of as of December 27, 2008 have been reflected asassets held for disposal and liabilities held for disposal in the accompanyingconsolidated balance sheet as of December 27, 2008.

 

The Company determinedthat there was no future cash value inherent to its Inolase subsidiary and,accordingly, decided to shut down this reporting unit as its fair value waszero. As part of that process the Company recognized a 100% impairment lossassociated with the goodwill, other intangible assets, inventory, and fixedassets. These components of the loss recognized during the three-month periodended December 27, 2008 are as follows:

 
| ** **                               | ** ** | **In thousands** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| Goodwill                                 |       | $                     | 10,596     |   |
| Patents &  developed technology |       | 5,162                 |       |
| Inventory                                |       | 1,681                 |       |
| Property and  equipment, net             |       | 237                   |       |
|                                     |       | $                     | 17,676     |   |

 

In accordance with SFAS No. 146,the Company also recorded restructuring charges of approximately $0.4 millionat December 27, 2008 associated with future occupancy costs, minimumtermination benefits, and professional service fees.

 

A summary of theoperating results of the discontinued operations are as follows:

 
| ** **                                                                   | ** ** | **For the three months ended:** | ** ** | **For the six months ended:** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                      | ** ** | **December 27,  2008**                         | ** ** | **December 29,  2007**                       | ** ** | **December 27,  2008** | ** ** | **December 29,  2007** | ** ** |
| Revenue                                                                      |       | $                                                   | 65         |                                              | $          | 373 |   | $ | 274 |   | $ | 744 |   |
| Loss from  discontinued operations                                           |       | (1,146                                              | )          | (991                                              | )          | (1,779 | ) | (1,763 | ) |
| Provision for  (benefit from) Income tax from discontinued operations        |       | 463                                                 |       | (158                                              | )          | 318 |   | (235 | ) |
| Net loss on  disposal of discontinued operations, net of tax benefit of $892 |       | (16,784                                             | )          | —                                            |       | (16,784 | ) | — |   |
| Loss from  discontinued operations, net                                      |       | $                                                   | (18,393    | )                                                 | $          | (833 | ) | $ | (18,881 | ) | $ | (1,528 | ) |

 

As of December 27,2008, the Company had assets held for disposal of approximately $0.1 millionand liabilities held in connection with such assets of approximately $0.4million. These amounts are comprised of the assets and liabilities of theInolase reporting unit. The assets held for disposal primarily represent cashand accounts receivable, net. The liabilities associated with such assetsprimarily represent accounts payable and accrued expenses.

 

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Current liabilities ofdiscontinued operations consist of the following:

 
| **(in thousands)**                     | ** ** | **December 27,**

**2008** | ** ** | **June 28,**

**2008** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Facility closure  and other costs - CSCC    |       | $                               | 342        |                        | $          | 361 |   |
| Deferred  revenue, gift certificates - CSCC |       | 839                             |       | 839                         |       |
| Facility closure  and other costs - Inolase |       | 383                             |       | —                      |       |
|                                        |       | $                               | 1,564      |                        | $          | 1,200 |   |

 

**4.****                   Stock-basedCompensation**

 

Effective July 3,2005, the Company implemented the fair value recognition provisions of SFAS No. 123revised (“SFAS No. 123R”) and Staff Accounting Bulletin 107 (“SAB 107”)for all share-based compensation that was not vested as of July 2, 2005.The Company adopted SFAS No. 123R using a modified prospectiveapplication, as permitted under SFAS No. 123R. Accordingly, prior periodamounts were not restated.  Under thisapplication, the Company is required to record compensation expense for allawards granted after the date of adoption and for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.Compensation cost is being recognized over the period that an employee providesservice in exchange for the award.

 

The application of SFAS No. 123Rand SAB 107 during the three-month periods ended December 27, 2008 and December 29,2007 resulted in the recognition of share-based compensation expense ofapproximately $0.9 million and $1.2 million, respectively. For the six-monthperiod ended December 27, 2008 and December 29, 2007, recognition ofshared-based compensation expense was approximately $1.8 million and $2.1 million,respectively.  These expenses weredivided between cost of sales and operating expense cost centers based upon thefunctional responsibilities of the individuals holding the respective options.

 

As of December 27,2008, there was approximately $2.7 million of total unrecognized compensationcost related to non-vested stock options and Stock Appreciation Rights (“SARs”)granted under the Company’s incentive plans. This cost is expected to berecognized over a weighted-average period of 1.1 years.

 

The amount of cashreceived from the exercise of stock options for the six-month periods ended December 27,2008 and December 29, 2007 was approximately $18,000 and $0.1 million,respectively.

 

None of theoptions or SARs outstanding at December 27, 2008 had cash-settlementfeatures.

 

***Stock Compensation Plans***

 

### **General Discussion**

Stock optionsprovide the holder with the right to purchase common stock. The exercise priceper share of “incentive stock options” within the meaning of Section 422of the Internal Revenue Code of 1986, as amended, granted under the 1998 StockPlan may not be less than the fair market value per share of common stock onthe date of grant.  In the case of anincentive stock option granted to an employee possessing more than 10% of the totalcombined voting power of all classes of stock of the Company, the exerciseprice per share may not be less than 110% of the fair market value per share ofcommon stock on the date of grant.

 

Stock AppreciationRights (“SARs”) provide the holder the right to receive an amount, payable instock, cash or in any combination of these, as specified by a Committeeestablished by the Board of Directors, equal to the excess of the market valueof our common shares on the date of exercise over the grant price at the timeof the grant. The grant price of a SAR may not be less than the fair marketvalue per share of common stock on the date of grant, provided that the grantprice of SARs granted in tandem with stock options shall equal the exerciseprice of the related stock option.

 

### **1990 Candela Corporation Employee Stock PurchasePlan**

The 1990 EmployeeStock Purchase Plan (the “Purchase Plan”) provides for the sale of up to 1.5million shares of common stock to eligible employees. The shares are issued at85% of the average

 

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high/low marketprice on the last day of semi-annual periods rounded up to the nearest penny.Substantially all full-time employees are eligible to participate in thePurchase Plan. At December 27, 2008 there were approximately 622,000shares available for sale. Compensation expense for the purchase plan isrecognized over the vesting period.

 

1998 Candela Corporation Amended and Restated Stock Plan

Effective December 12,2006, the Third Amended and Restated 1998 Stock Plan (“1998 Stock Plan”) wasamended, by affirmative vote at the Company’s Annual Meetingof Shareholders held on the same date, to increase the number of shares for which options and rights could be grantedby 2.5 million shares to a maximum of 7.8 millionshares.

 

Options and rights granted under the 1998 Stock 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. Upon exercise of a SAR, only the net number of shares of common stock issued in connection with such exercise shall be deemed “issued” for this purpose. The Company may satisfy the awards upon exercise with either newly-issued or treasury shares.

 

There were approximately 0.6 million stock-based SARs granted during the six-month period ended December 27, 2008. The SARs granted to employees become exercisable ratably over one to four years, while the SARs granted to directors become exercisable over two years.

 

There were approximately 4.3 million outstanding options/SARs at December 27, 2008 with a weighted-average exercise price of $8.19 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 7.72 years.

 

Of the total 4.3 million outstanding options/SARs, there were approximately 1.8 million of exercisable options/SARs at December 27, 2008 with a weighted-average exercise price of $10.39 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 6.19 years.

 

The total intrinsic value of options exercised during the six-month period ended December 27, 2008 was approximately $18,000.

 

The 1998 Stock Plan expired pursuant to its terms on September 18, 2008. As such, there were no options/SARs available for grant under this plan at December 27, 2008.

 

2008 Candela Corporation Stock Plan

The Company’s 2008Stock Plan was adopted by the Board of Directors on October 27, 2008 andapproved by the stockholders on December 12, 2008. The 2008 Stock Planpermits the Company to make grants of incentive stock options, non-qualifiedstock options, stock appreciation rights (“SARs”), restricted stock awards andrestricted stock units (“RSUs”), which are referred to hereafter individuallyas a “Stock Right” and collectively as “Stock Rights.”

 

The 2008 StockPlan authorizes the issuance of up to 1,300,000 shares of the Company’s CommonStock. The shares of Common Stock subject to Stock Rights may be authorized butunissued shares of Common Stock or shares of Common Stock reacquired by theCompany in any manner. Any shares of Common Stock subject to a Stock Rightwhich for any reason expires or terminates unexercised or terminates withoutthe delivery of shares of Common Stock may again be available for future grantsunder the 2008 Stock Plan. No employee may be granted options and/or SARs withrespect to more than 700,000 shares of Common Stock in any one fiscal year. Noemployee may be granted restricted stock or RSUs having a fair market value inexcess of $2,000,000 in any one fiscal year. The number of shares of CommonStock available under the 2008 Stock Plan, the award limits and a grantee’srights with respect to Stock Rights granted, unless otherwise specificallyprovided in the written instrument relating to the grant of such Stock Right,shall be adjusted upon the occurrence of any of the following: stock dividends,stock splits, consolidation, mergers, recapitalizations, reorganizations,dissolution or liquidation.

 

As of December 27,2008, no awards had been granted under the 2008 Stock Plan.

 

The CompensationCommittee of the Board of Directors administers the 2008 Stock Plan. Subject tothe provisions of the 2008 Stock Plan, the Compensation Committee has theauthority to select the

 

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persons to whomStock Rights are granted and determine the terms of each Stock Right. Subjectto certain limitations set forth in the 2008 Stock Plan, the Board of Directorsmay appoint other committees to administer the 2008 Stock Plan and also maydelegate to any officer of the Company certain authority under the 2008 StockPlan, including the authority to grant Stock Rights.

 

Incentive stockoptions may be granted to employees of the Company. Non-Qualified options,SARs, restricted stock and RSUs may be granted to any employee, officer,Director or consultant of the Company.

 

The CompensationCommittee may grant incentive stock options, nonqualified stock options andSARs in tandem with an option or on a free standing basis. Each option or SARexpires on the date specified by the Compensation Committee, but not more than (i) tenyears from the date of grant in the case of options and SARs generally and (ii) fiveyears from the date of grant in the case of incentive stock options granted toan employee possessing more than ten percent (10%) of the total combined votingpower of all classes of stock of the Company. Options and SARs are subject toearly termination in certain circumstances. The exercise price per share ofCommon Stock of an option may not be less than “fair market value” (as definedin the 2008 Stock Plan) per share of Common Stock on the date of grant. In thecase of an incentive stock option to be granted to an employee possessing morethan ten percent (10%) of the total combined voting power of all classes ofstock of the Company, the exercise price per share of Common Stock may not beless than one hundred ten percent (110%) of the fair market value per share ofCommon Stock on the date of grant. The aggregate fair market value (determinedon the date of grant) of the shares of Common Stock subject to incentive stockoptions granted to an employee and which first become exercisable during anycalendar year cannot exceed $100,000. The grant price of SARs may not be lessthan the fair market value per share of Common Stock on the date of grant,provided that the grant price of SARs granted in tandem with an option shallequal the exercise price of the related option. Options and SARs may either befully exercisable at the time of the grant or may become exercisable in suchinstallments as the Compensation Committee may specify. The CompensationCommittee has the right to accelerate the date of exercise of any installmentof any option or SAR.

 

The CompensationCommittee may grant restricted stock and RSUs. The instrument relating to thegrant of restricted stock and RSUs will specify the restrictions that theCompensation Committee may impose, the number of shares of restricted CommonStock to be granted, and such other provisions as the Compensation Committeemay determine. The restrictions may lapse separately or in combination at suchtimes, under such circumstances, in such installments, upon the satisfaction ofperformance goals or otherwise, as the Compensation Committee determines at thetime of the grant of the restricted stock or RSUs. Except as otherwise providedin the applicable instrument relating to the grant of the restricted stock orRSUs, a grantee shall have all of the rights of a stockholder with respect tothe restricted stock, and such grantee shall have none of the rights of astockholder with respect to RSUs until such time as shares of Common Stock arepaid in settlement of the RSUs.

 

The CompensationCommittee may take any action as may be necessary to ensure that Stock Rightsgranted under the 2008 Stock Plan qualify as “performance-based compensation”within the meaning of Section 162(m) of the Code. Any Stock Rightgranted under the 2008 Stock Plan which is intended to qualify as “performance-basedcompensation” may be conditioned on the attainment of one or more of thefollowing performance goals: earnings, earnings before interest and taxes,earnings before interest, taxes, depreciation and amortization, earnings pershare, economic value created, market share, net income (before or aftertaxes), operating income, adjusted net income after capital charge, return onassets, return on capital (based on earnings or cash flow), return on equity,return on investment, revenue, cash flow, operating margin, share price, totalstockholder return, total market value, and strategic business criteria,consisting of one or more objectives based on meeting specified marketpenetration goals, productivity measures, geographic business expansion goals,cost targets, customer satisfaction or employee satisfaction goals, goalsrelating to merger synergies, management of employment practices and employeebenefits, or supervision of litigation or information technology, and goalsrelating to acquisitions or divestitures of subsidiaries, affiliates or jointventures.

 

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Incentive stockoptions are not transferable by the optionee or grantee except by will or by thelaws of descent and distribution. Non-Qualified options, SARs, restricted stockand RSUs are transferable to the extent determined by the CompensationCommittee and as set forth in the instrument relating to the grant of any suchnon-qualified options, SARs, restricted stock and RSUs.

 

Unless otherwisespecified in the instrument relating to the grant of an incentive stockoptions, if an incentive stock option optionee ceases to be employed other thanreason of death or disability, all unvested incentive stock options shallterminate and the vested incentive stock options shall terminate on the earlierof three months after the date of termination of employment or the specifiedexpiration date. If an incentive stock option optionee ceases to be employed byreason of death or disability, all unvested incentive stock options shallterminate and the vested incentive stock options shall terminate on the earlierof one hundred and eighty days after the date of termination of employment orthe specified expiration date. The Compensation Committee shall specify in theinstrument relating to the grant of nonqualified options, SARs, restrictedstock and RSUs the treatment of such Stock Rights upon a grantee’s terminationof employment.

 

In the event of amerger, sale or consolidation of the Company, or a similar “acquisition,” theadministrator, or the board of directors of any successor, in its discretion,may either (i) provide for appropriate substitutions or assumptions ofoutstanding awards, (ii) provide that all option and stock appreciationrights must be exercised, to the extent exercisable, within a specified periodfollowing notice at the end of which period all outstanding options or stockappreciation rights will terminate, (iii) provide for the termination ofall options and stock appreciation rights in exchange for a cash payment equalto the excess of the fair market value of the shares subject to such award overthe exercise price of such award or (iv) terminate all awards, other thanoptions and stock appreciation rights, on such terms and conditions as theadministrator or the board of directors of any successor deemsappropriate.  The 2008 Stock Plan shallautomatically expire on October 27, 2018, except as to options outstandingon that date.

 

The Board ofDirectors may adopt amendments to the 2008 Stock Plan, subject, in certaincases, to stockholder approval, and may terminate the 2008 Stock Plan at anytime (although such action shall not affect Stock Rights previously granted).No Stock Rights may be granted under the 2008 Stock Plan after October 26,2018.

 

**5.****                   Earnings orloss per Share**

 

Basic earnings orloss per share is computed by dividing net income or loss by the weightedaverage number of shares of common stock outstanding for the period. If thereare dilutive securities, diluted earnings per share is computed by includingcommon stock equivalents outstanding for the period in the denominator. Commonstock equivalents include shares issuable upon the exercise of stock options orwarrants, net of shares assumed to have been purchased with the proceeds, usingthe treasury stock method.

 
| ** **                                                         | ** ** | **For the three months ended:** | ** ** | **For the six months ended:** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **December 27,**

**2008**                     | ** ** | **December 29,**

**2007**                   | ** ** | **December 27,**

**2008** | ** ** | **December 29,**

**2007** | ** ** |
| Shares used in  the calculation of Basic earnings per share        |       | 22,707                                              |       | 22,652                                            |       | 22,702 |   | 22,778 |   |
| Effect of  dilutive securities:                                    |       |                                                |       |                                              |       |   |   |   |   |
| Stock  options/SAR’s                                          |       | —                                              |       | —                                            |       | — |   | — |   |
| Diluted shares  used in the calculation of earnings per share      |       | 22,707                                              |       | 22,652                                            |       | 22,702 |   | 22,778 |   |

 

During the three andsix-month periods ended December 27, 2008 and December 29, 2007,respectively, potential common shares consisting of all shares issuable uponexercise of stock options/SARs have been excluded from the computation ofdiluted loss per share as their effect would have been anti-dilutive.

 

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**6.    Marketable Securities**

 

The Company accounts for marketable securities inaccordance with SFAS 115*, Accounting for CertainInvestments in Debt and Equity Securities*. SFAS 115 establishes theaccounting and reporting requirements for all debt securities and forinvestments in equity securities that have readily determinable fairvalues.  All marketable securities mustbe classified as one of the following: held-to-maturity, available-for-sale, ortrading.

 

The Company classifies its marketable debt securitiesas held-to-maturity when the Company has the intent and ability to hold them tomaturity. Held-to-maturity debt securities are reported at amortized cost whichapproximates fair value. Current marketable securities include debt investmentswith original maturities that are expected to mature in more than three monthsand less than or equal to twelve months and equity investments. Long-termmarketable securities include debt securities that have remaining maturities ofone to three years. Unrealized losses related to the held-to-maturitysecurities are not considered a permanent decline in the market value of suchsecurities.

 

Marketablesecurities consist of the following:

 
| ** **                               | ** ** | **December 27, 2008** | ** ** | **June 28, 2008** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                  | ** ** | **Net Carrying  Amount**   | ** ** | **Fair Value**         | ** ** | **Unrealized  loss** | ** ** | **Net Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Unrealized  loss** | ** ** |
| Short-term  (Held-to-maturity):          |       |                            |       |                        |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                               | 1,000      |                        | $          | 1,004 |   | $ | 4 |   | $ | 9,000 |   | $ | 9,055 |   | $ | 55 |   |
| Certificates of  deposit                 |       | 1,678                           |       | 1,686                       |       | 8 |   | 3,131 |   | 3,134 |   | 3 |   |
| Total marketable  securities, short-term |       | $                               | 2,678      |                        | $          | 2,690 |   | $ | 12 |   | $ | 12,131 |   | $ | 12,189 |   | $ | 58 |   |
|                                     |       |                            |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term  (Held-to-maturity):           |       |                            |       |                        |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                               | —     |                        | $          | — |   | $ | — |   | $ | 2,000 |   | $ | 2,014 |   | $ | 14 |   |
| Certificates of  deposit                 |       | 656                             |       | 657                         |       | 1 |   | 1,512 |   | 1,502 |   | (10 | ) |
| Total marketable  securities, long-term  |       | $                               | 656        |                        | $          | 657 |   | $ | 1 |   | $ | 3,512 |   | $ | 3,516 |   | $ | 4 |   |

 

Held-to-maturityinvestments at December 27, 2008 mature as follows:

 
| ** **                    | ** ** | **Fiscal Year Ended** | ** ** | ** ** | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------|------------|
| **(in thousands)**       | ** ** | **2009**                        | ** ** | **2010**   | ** ** | **Total** | ** ** |
| Government-backed  securities |       | $                               | 1,000      |       | $          | — |   | $ | 1,000 |   |
| Certificates of  deposit      |       | 822                             |       | 1,512      |       | 2,334 |   |
|                          |       | $                               | 1,822      |       | $          | 1,512 |   | $ | 3,334 |   |

 

**7.****                   Inventories**

 

Inventoriesconsist of the following:

 
| **(in thousands)** | ** ** | **December 27,**

**2008** | ** ** | **June 28,**

**2008** | ** ** |
|-------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Raw materials           |       | $                               | 13,223     |                        | $          | 13,720 |   |
| Work in process         |       | 1,233                           |       | 1,635                       |       |
| Finished goods          |       | 16,109                          |       | 17,786                      |       |
|                    |       | $                               | 30,565     |                        | $          | 33,141 |   |

 

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**8.****                    Property andEquipment**

 

Property andequipment consists of the following:

 
| ** **                                | ** ** | **December 27,** | ** ** | **June 28,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| **(in thousands)**                   | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Leasehold  improvements                   |       | $                     | 388        |              | $          | 1,014 |   |
| Office furniture                          |       | 332                   |       | 718               |       |
| Computers,  software, and other equipment |       | 7,817                 |       | 11,845            |       |
|                                      |       | $                     | 8,537      |              | $          | 13,577 |   |
| Less:  accumulated depreciation           |       | (4,734                | )          | (9,550            | )          |
| Property and  equipment, net              |       | $                     | 3,803      |              | $          | 4,027 |   |

 

Depreciation expense was approximately$0.3 million for each of the three-month periods ended December 27, 2008and December 29, 2007, respectively.

 

Depreciation expense wasapproximately $0.6 million for each of the six-month periods ended December 27,2008 and December 29, 2007, respectively.

 

The decreases in thevarious components of property and equipment, as well as in accumulateddepreciation, are directly related to the impairment charges recorded inconnection with the discontinued operation more fully explained in Note 3.

 

**9.****                    Goodwill andAcquired Intangible Assets**

 

Goodwill andacquired intangible assets consist of the following:

 
| **(in thousands)**                   | ** ** | **December 27,  2008** | ** ** | **June 28,  2008** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Goodwill                                  |       | $                           | —     |                    | $          | 13,225 |   |
| Intangible  assets with finite lives:     |       |                        |       |                    |       |
| Patents                                   |       | $                           | 174        |                    | $          | 3,128 |   |
| Developed  technology                     |       | —                      |       | 6,009                   |       |
|                                      |       | 174                         |       | 9,137                   |       |
| Accumulated  amortization:                |       |                        |       |                    |       |
| Patents                                   |       | —                      |       | (886                    | )          |
| Developed  technology                     |       | —                      |       | (1,335                  | )          |
|                                      |       | —                      |       | (2,221                  | )          |
| Intangible  assets with finite lives, net |       | $                           | 174        |                    | $          | 6,916 |   |

 

The changes in the carryingamount of goodwill for the six-month period ended December 27, 2008 are asfollows:

 
| ** **                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| Balance at  June 28, 2008          |       | $                       | 13,225     |   |
| Effect of  foreign currency adjustments |       | (2,629                  | )          |
| Impairment  Charge                      |       | (10,596                 | )          |
| Balance at  December 27, 2008      |       | $                       | —     |   |

 

Amortizationexpense was approximately $0.4 for each of the three-month periods endedDecember  27, 2008 and December 29, 2007, respectively.

 

Amortizationexpense was approximately $0.8 for each of the six-month periods ended December 27, 2008 and December 29, 2007, respectively.

 

**10.****             DerivativeInstruments and Hedging Activity**

 

The Company enters intofinancial instruments to reduce its exposure to fluctuations in foreignexchange rates by creating offsetting positions through the use of foreign currencyforward contracts.  Changes to the fairvalue of derivative contracts that do not qualify for hedge accounting arereported in other income (expense) in the period of the change. For derivativesthat qualify for hedge

 

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accounting, the Companyrecognizes the instruments as either assets or liabilities in the statement offinancial position and measures those instruments at fair value. Changes in thefair value of the derivatives are recorded in shareholders’ equity as acomponent of other comprehensive income along with an offsetting adjustmentagainst the basis of the derivative instrument itself.

 

The Company had threeforeign currency forward contracts outstanding at December 27, 2008 in thenotional amount of approximately 1.4 million Euros or approximately $2.0million. These derivative contracts serve to mitigate the foreign currency riskof a substantial portion of our Euro-denominated inter-company balances at December 27,2008. None of the aforementioned derivatives qualified for hedge accounting at December 27,2008.

 

**11.****             WarrantyReserve**

 

The Company’s products generally carry astandard warranty. The Company maintains a reserve based on anticipatedwarranty claims at the time product revenue is recognized. Factors that affectthe Company’s product warranty liability include the number of installed units,the anticipated cost of warranty repairs and historical and anticipated ratesof warranty claims.

 

The following tablereflects changes in the Company’s accrued warranty account during the three andsix-month periods ended December 27, 2008 and December 29, 2007,respectively:

 
| ** **                             | ** ** | **For the three months ended:** | ** ** | **For the six months ended:** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **December 27,**                               | ** ** | **December 29,**                             | ** ** | **December 27,** | ** ** | **December 29,** | ** ** |
| **(in thousands)**                | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Beginning  balance                     |       | $                                                   | 6,413      |                                              | $          | 6,755 |   | $ | 6,098 |   | $ | 7,613 |   |
| Incremental  accruals on current sales |       | 1,450                                               |       | 1,365                                             |       | 2,986 |   | 2,537 |   |
| Amortization of  prior-period accruals |       | (2,261                                              | )          | (2,035                                            | )          | (3,482 | ) | (4,065 | ) |
| Ending balance                         |       | $                                                   | 5,602      |                                              | $          | 6,085 |   | $ | 5,602 |   | $ | 6,085 |   |

 

**12.****             DeferredRevenue**

 

The Company offersextended service contracts that may be purchased for periods from one to fiveyears. The Company recognizes service contract revenue ratably over the life ofthe contract. Actual service contract expenses incurred and charged to servicecosts of sales during an interim period may be more or less than the amount ofamortized service contract revenue recognized in that period.

 

Revenues are recognizedwhen a signed non-cancelable purchase order exists, the product is shipped,title and risk have passed to the customer, the fee is fixed or determinable,and collection is considered probable. Circumstances which generally precludethe immediate recognition of revenue include shipping terms of FOB destinationor the existence of a customer acceptance clause in a contract based uponcustomer inspection of the product. In these instances, revenue is deferreduntil adequate documentation is obtained to ensure that these criteria havebeen fulfilled.

 

The following tablereflects changes in the Company’s deferred revenue account during the three andsix-month periods ended December 27, 2008 and December 29, 2007,respectively:

 
| ** **                                  | ** ** | **For the three months ended:** | ** ** | **For the six months ended:** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **December 27,**                               | ** ** | **December 29,**                             | ** ** | **December 27,** | ** ** | **December 29,** | ** ** |
| **(in thousands)**                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Beginning  balance                          |       | $                                                   | 15,165     |                                              | $          | 14,731 |   | $ | 18,136 |   | $ | 13,751 |   |
| Deferral of new  sales                      |       | 3,862                                               |       | 4,246                                             |       | 8,244 |   | 9,435 |   |
| Recognition of  previously deferred revenue |       | (3,524                                              | )          | (3,752                                            | )          | (10,877 | ) | (7,961 | ) |
| Ending balance                              |       | $                                                   | 15,503     |                                              | $          | 15,225 |   | $ | 15,503 |   | $ | 15,225 |   |

 

**13.****            ****Common Stock Buyback**

 

325,000 shares ofcommon stock were purchased for approximately $2.4 million during the six-monthperiod ended December 29, 2007.

 

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**14.****            ****Commitments and Contingencies**

 

TheCompany has an agreement with the Regents of the University of California (“Regents”)for exclusive license rights to the Dynamic Cooling Device (“DCD”), subject tocertain limited license rights of Cool Touch, Inc. (“Cool Touch”), in thefollowing fields of use: procedures that involve skin resurfacing andrejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, asubsidiary of New Star Technology, Inc., obtained a license to the DCD ona co-exclusive basis with the Company, in certain narrower fields of use.

 

TheCompany’s agreement with the Regents called for an annual license fee of $0.3million and a minimum annual royalty obligation of $1 million or 3%, whicheveris greater. The multi-year annual fee of $0.3 million was paid to the Regentsin a lump sum of $3.0 million and is being amortized over the remaining life ofthe patent agreement, which as of December 27, 2008 was less than seven years. The royaltyand the amortization of the annual license fee payment are reflected in theCompany’s consolidated statement of income. The unamortized portion of thelicense fee payment is reflected in other current assets and in other assets atDecember 27, 2008 and June 28,2008, respectively.

 

**15.****            ****Income Taxes**

 

The Company adopted theprovisions of FIN 48 effective July 1, 2007. FIN 48 addressesthe accounting for and disclosure of uncertainty in income tax positions byprescribing a minimum recognition threshold that a tax position is required tosatisfy before being recognized in the financial statements. FIN 48 alsoprovides guidance on de-recognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.

 

The cumulative effect ofadopting FIN 48 was a decrease in tax reserves of approximately$0.1 million, resulting in an offsetting increase to the July 1, 2007Retained Earnings balance.

 

The Company filesincome tax returns in the United States (“U.S.”) on a federal basis and in manyU.S. state and foreign jurisdictions. The three most significant taxjurisdictions are the U.S., Spain, and Japan. The associated tax filingsremain subject to examination by applicable tax authorities for a certainlength of time following the tax year to which those filings relate. The 2006and 2007 fiscal tax years remain subject to examination by the IRS forU.S. federal tax purposes, our 2004 through 2007 fiscal tax years remainsubject to examination by the appropriate governmental agencies for Spanish andJapanese tax purposes.

 

**16.****            ****Legal Proceedings**

 

The Company is currently involved in two litigationmatters with Palomar Medical Technologies, Inc. (“Palomar”).

 

·                  Palomar asserts that it is the exclusivelicensee from The General Hospital Corporation (“Mass. General”) of U.S. PatentNo. 5,735,844 (the “‘844 Patent”) and U.S. Patent No. 5,595,568,which is related to the ‘844 Patent (the “‘568 Patent”).  On August 9, 2006, Palomar filed suitagainst the Company in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of the ‘844Patent. Palomar seeks compensatory and treble damages, as well as attorneys’ feesand injunctive relief. In November 2006, the Company answered thecomplaint by denying Palomar’s allegations and asserting a variety ofaffirmative defenses and counterclaims against Palomar. This response includeda counterclaim by the Company against Palomar seeking a declaratory judgmentthat the ‘568 Patent is either invalid, or products manufactured by the Companydo not infringe the ‘568 Patent, or both. In November 2006, Palomar filedan answer denying the Company’s counterclaim. In February 2007, Palomarmoved to amend its Complaint to add The General Hospital Corporation as aparty, to add a claim for infringement by Candela of the ‘568 Patent, and toallege that additional Candela products infringe the ‘568 Patent. Palomar’smotion to amend its Complaint was granted in August 2007. In February 2007,Candela moved to amend its Answer and Counterclaims to add allegations ofinequitable conduct, double-patenting and violation of Mass. Gen. Laws Ch. 93Aby Palomar. The Company’s motion to amend its Answer and Counterclaims wasgranted in March 2007. Palomar filed a general denial response to Candela’sAmended Answer and Counterclaim in March 2007. In August 2007, theparties had a Markman hearing before the U.S. District Court Judge presidingover the above-described

 

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legal proceeding. In aMarkman hearing, the Court interprets the definition of the disputed claim termof a patent. On October 31, 2008, the Company requested a stay of the casewith the Court, which was granted on November 17, 2008. The Company did sobased upon a third party’s re-examination request that was granted by theUnited States Patent and Trademark Office on August 29, 2008. There-examination is with respect to both the ‘568 and ‘844 Patents,including many of the Claims at issue in this case.  On December 9, 2008, Candela filed requestsfor re-examination of the ‘568 and ‘844 Patents with the United States Patent &Trademark Office asserting that all claims currently in dispute with Palomar beheld invalid.  On January 7, 2009,the United States Patent and Trademark Office granted the Company’sre-examination request of the ‘844 Patent and the ‘568 Patent.   The United States Patent and TrademarkOffice stated that there are substantial new questions of patentability for allclaims asserted against the Company by Palomar.

 

·                  On August 10, 2006, the Company filedsuit against Palomar in the United States District Court for the District ofMassachusetts, asserting willful infringement by Palomar of U.S. PatentNos. 6,659,999, 5,312,395 (the “395 Patent”), and 6,743,222 (the “‘222Patent”). The Company seeks compensatory and treble damages for the patentinfringement, as well as attorneys’ fees and an injunction against Palomar toprevent Palomar’s continuing infringement. The Company served its complaint onPalomar in August 2006. In October 2006, the Company amended theCompany’s suit against Palomar by removing from the suit allegations thatPalomar infringes Patent 6,659,999. In October 2006, Palomar answered theCompany’s amended complaint by denying the Company’s allegations and assertingan affirmative defense of inequitable conduct with respect to the ‘395 Patent.In addition, Palomar filed a demand for a declaratory judgment seeking ajudicial determination that Palomar products either do not infringe the ‘395Patent and ‘222 Patent or that such patents are invalid. In November 2006,the Company answered the counterclaim by denying Palomar’s allegations. In February 2008,Palomar filed a request for re-examination of the Company’s ‘222 Patent withthe United States Patent and Trademark Office (“PTO”). In March 2008, thePTO granted re-examination. In June 2008, the Court stayed the case untilthe PTO rules on the re-examination.

 

While the Company intends to vigorouslycontest Palomar’s allegations, and to pursue its ownclaims against Palomar, each lawsuit is inherently uncertain andunpredictable as to its ultimate outcome. An adverseoutcome in Palomar’s suit against the Company would materiallyhurt the Company’s business, financial condition, results of operations andcash flows.

 

·                  In December 2006,the Company filed suit against Palomar in the United States District Court forthe Eastern District of Texas, Lufkin Division, asserting that Palomarinfringes one or more claims of United States patents Nos: 5,810,801, 6,659,999and 6,120,497. The Company sought compensatory and treble damages for pastinfringement, as well as attorneys’ fees and an injunction against Palomar fromfuture infringement. In January 2007, Palomar answered the complaint bydenying the Company’s allegations and filing a declaratory judgment motionseeking a court ruling that it did not infringe such patents and/or that suchpatents were invalid. In addition, Palomar filed a motion to transfer the caseto the United States District Court for the District of Massachusetts. In February 2007,the Company added Massachusetts General Hospital as a party to its action. TheCourt denied Palomar’s motion to transfer the case to Massachusetts. Theparties had a six day trial, beginning on September 29, 2008.  Attrial, the Company alleged that Claims 11-14 of the 5,810,801 Patent wasinfringed by Palomar’s Lux 1540, Lux1540Z, LuxIR and Lux DeepIR.  On October 7,2008, the jury returned a verdict in favor of Palomar. The jury found that noneof the alleged Palomar products infringe on Claims 11-14 of the Company’s5,810,801 patent and that all such Claims are invalid. The Company filed aJudgment as a Matter of Law motion with the Court in an attempt to reverse theinvalidity ruling. On December 30, 2008, the Court entered finaljudgment in favor of Palomar.

 

·                  On April 2 and April 22, 2008,respectively, two substantially similar putative class action lawsuits,entitled Western Pa. Elec. Employees Pension Fund, et al., 1:08-cv-10551-DPW (“WesternPa.”) and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW  (“Caballero”), were filed against Candela andtwo of its officers in the United States District Court for the District ofMassachusetts purporting to assert claims for violations of §§10(b) and 20(a) ofthe Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,and seeking, among other things, compensatory damages and reasonable costs andexpenses.  On July 10, 2008, the court consolidated the cases (the “ConsolidatedClass Action”) and appointed

 

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lead plaintiff and leadcounsel.  On August 25, 2008, lead plaintiff filed a consolidatedamended complaint purporting to be brought on behalf of all open-marketpurchasers of Candela common stock from November 1, 2005 through August 21,2006, and alleging that Candela made certain false and misleading statements toinvestors expressing optimism regarding its financial condition and failed todisclose (i) the possibility that Palomar, one of Candela’s leadingcompetitors, would initiate patent enforcement litigation against Candela and (ii) thatCandela was purportedly losing market share to its competitors.

 

·                  On April 16, 2008, a shareholder derivativeaction entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532, was filed inMassachusetts Superior Court for Middlesex County against the individualmembers of Candela’s board of directors and certain of its current and formerofficers, purporting to assert claims for breach of fiduciary duty and relatedclaims arising out of allegations similar to those asserted in the class actionlitigation discussed above (the “Derivative Action”).  The complaintsought on behalf of Candela, among other things, damages, restitution, andinjunctive relief.

 

On January 16, 2009,the parties to the Consolidated Class Action and the Derivative Actionfiled stipulations of settlement, together with supporting documents, in theUnited States District Court for the District of Massachusetts andMassachusetts Superior Court for Middlesex County, respectively. Under theterms of the proposed Consolidated Class Action settlement, Candela willpay $3.85 million into a settlement fund for the benefit of the class members.Under the terms of the proposed Derivative Action settlement, Candela will payfor attorneys’ fees and has agreed to adopt certain corporate governancechanges.  Candela’s insurer will fund all payments contemplated by theproposed settlements.  Neither the Company nor any of the individualdefendants admit any wrongdoing under either of the proposed settlements, whichare being entered into in return for the release of all claims.  Theproposed settlements are subject to preliminary and final approval by the respectivecourts.

 

·                  On February 19, 2008, Cardiofocus, Inc.(“Cardiofocus”) filed suit against the Company and eight other companies in theUnited States District Court for the District of Massachusetts, assertingwillful infringement by the Company of U.S. Patents 6,457, 780, 6,159,203 and5,843,073. Cardiofocus seeks compensatory and treble damages, as well asattorneys’ fees and injunctive relief. On April 21, 2008, the Companyanswered Cardiofocus’ complaint and asserted a variety of counterclaims againstCardiofocus. The Company intends to vigorously defend against the lawsuit.Based upon Candela’s request, on July 23, 2008, the United States Patent &Trademark Office (“PTO”) agreed to re-examine the validity of the Cardiofocuspatents. On October 14, 2008, the Court agreed to stay this matter for aminimum of one year, up to a maximum of two years, but no later than the PTO’sdecision with respect to the re-examination proceedings.

 

From time to time, the Company is party to various legal proceedings incidentalto its business. The Company believes that none of the legal proceedings, otherthan the lawsuit initiated by Palomar, that are presently pending, if adverselydecided against us, will have a material adverse effect upon the Company’s  financial position, results of operations, orliquidity.

 

**17.****            ****Other Income**

 

In August 2007the Company recognized a $0.6 million gain on the receipt of additional cashconsideration related to the acquisition of Solx, Inc., a privately heldcompany, by OccuLogix, Inc., a publicly traded company (NasdaqGM: OCCX).Candela Corporation originally held 19.99% of the outstanding common stock ofSolx, Inc., on an as-converted basis, prior to Solx’s acquisition byOccuLogix in August 2006.

 

As a result of thistransaction, Candela received approximately $1.0 million in cash at the time ofclosing, future cash consideration of approximately $2.5 million, andapproximately 1.3 million shares of common stock in OccuLogix, Inc.

 

TheCompany classified the common shares of OccuLogix as available-for-sale securities recorded at fair valuebased upon quoted market prices. The temporary differences between cost andfair value were presented in the consolidated financial statements in accumulated other comprehensive

 

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incomewithin stockholders’ equity, net of any related tax effect. At December 29,2007, in the opinion ofmanagement, the value of the investment in the common shares of OccuLogixsustained an other-than-temporary impairment in value and the Company recognized an associated $2.5 million loss ofwhich approximately $2.4 million was reclassified from accumulated othercomprehensive income.

 

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**CandelaCorporation**

 

**Item 2 -****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Overview**

 

We research, develop,manufacture, market, sell, distribute, and service lasers and light-basedproducts used to perform aesthetic and cosmetic procedures. We sell our lasersto physicians and personal care practitioners. We market our products directlyand through a network of distributors to end-users. Our traditional customerbase includes plastic and cosmetic surgeons and dermatologists. More recently,we have expanded our sales to a broader group of practitioners consisting of generalpractitioners and certain specialists including obstetricians, gynecologistsand general and vascular surgeons. We derive our revenue from the sales oflasers, light-based devices, and other products, as well as product-relatedservices.

 

**CriticalAccounting Policies**

 

****This discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We evaluate our estimates andjudgments on an on-going basis, including those related to revenue recognition,allowance for doubtful accounts, inventory reserves, warranty reserves,contingencies, valuation of long-lived assets, stock-based compensation,restructurings and income taxes. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates and judgments under different assumptions or conditions.****

 

****A discussion of our criticalaccounting policies and the related estimates and judgments affecting thepreparation of our consolidated financial statements is included in our AnnualReport on Form 10-K for fiscal year 2008. Information with respect tochanges in our Critical Accounting Policies during the six-month period ended December 27,2008 may be found in Note 1 of the Notes to Condensed Consolidated FinancialStatements (unaudited) in this Form 10-Q, which information isincorporated herein by reference.****

 

**CriticalAccounting Estimates**

 

Therehave been no significant changes in our critical accounting estimates duringthe six months ended December 27, 2008 as compared to the criticalaccounting estimates disclosed in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report on Form 10-Kfor the fiscal year ended June 28, 2008.

 

**RecentAccounting Pronouncements**

 

Informationwith respect to Recent Accounting Pronouncements may be found in Note 2 ofNotes to Condensed Consolidated Financial Statements (unaudited) in this Form 10-Q,which information is incorporated herein by reference.

 

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**Results of Operations**

 

***Revenue***

 

Revenue source bygeographic region is reflected in the following table:

 
| ** **               | ** ** | **For the three months ended:** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**  | ** ** | **December 27,  2008**                         | ** ** | **December 29,  2007** | ** ** | **Increase (Decrease)** | ** ** |
| U.S.                     |       | $                                                   | 8,637      |   | 30 | % | $ | 13,680 |   | 38 | % | $ | (5,043 | ) | -37 | % |
| All other  countries     |       | 20,120                                              |       | 70 | % | 22,028 |   | 62 | % | (1,908 | ) | -9 | % |
| Total worldwide  revenue |       | $                                                   | 28,757     |   | 100 | % | $ | 35,708 |   | 100 | % | $ | (6,951 | ) | -19 | % |

 
| ** **               | ** ** | **For the six months ended:** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**  | ** ** | **December 27,  2008**                       | ** ** | **December 29,  2007** | ** ** | **Increase (Decrease)** | ** ** |
| U.S.                     |       | $                                                 | 17,503     |   | 32 | % | $ | 30,199 |   | 43 | % | $ | (12,696 | ) | -42 | % |
| All other  countries     |       | 37,918                                            |       | 68 | % | 40,611 |   | 57 | % | (2,693 | ) | -7 | % |
| Total worldwide  revenue |       | $                                                 | 55,421     |   | 100 | % | $ | 70,810 |   | 100 | % | $ | (15,389 | ) | -22 | % |

 

Consolidated revenue was$28.8 million for the three-month period ended December 27, 2008, ascompared to $35.7 million for the same period ended December 29, 2007. Theoverall decrease in quarterly revenue of approximately $7.0 million wascomprised primarily of revenue declines of $5.0 million in the U.S. and $3.0million in Europe, offset slightly by a $0.9 million increase in Japan. Thedecrease in U.S. and European revenues was directly related to the slowingeconomy combined with the tightening credit markets.

 

Consolidated revenue was$55.4 million for the six-month period ended December 27, 2008, as comparedto $70.8 million for the same period ended December 29, 2007. The overalldecrease of $15.4 million was driven by decreases in the U.S. and Europe. Thedecrease in revenues was directly related to the slowing economy combined withthe tightening credit markets.

 

Revenue source bytype is reflected in the following table:

 
| ** **                 | ** ** | **For the three months ended:** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**    | ** ** | **December 27,  2008**                         | ** ** | **December 29,  2007** | ** ** | **Increase (Decrease)** | ** ** |
| Lasers and other  products |       | $                                                   | 18,784     |   | 65 | % | $ | 24,896 |   | 70 | % | $ | (6,112 | ) | -25 | % |
| Product-related  services  |       | 9,973                                               |       | 35 | % | 10,812 |   | 30 | % | (839 | ) | -8 | % |
| Total revenue              |       | $                                                   | 28,757     |   | 100 | % | $ | 35,708 |   | 100 | % | $ | (6,951 | ) | -19 | % |

 
| ** **                 | ** ** | **For the six months ended:** | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**    | ** ** | **December 27,  2008**                       | ** ** | **December 29,  2007** | ** ** | **Increase (Decrease)** | ** ** |
| Lasers and other  products |       | $                                                 | 35,886     |   | 65 | % | $ | 51,394 |   | 73 | % | $ | (15,508 | ) | -30 | % |
| Product-related  services  |       | 19,535                                            |       | 35 | % | 19,416 |   | 27 | % | 119 |   | 1 | % |
| Total revenue              |       | $                                                 | 55,421     |   | 100 | % | $ | 70,810 |   | 100 | % | $ | (15,389 | ) | -22 | % |

 

Thedecrease in revenue from lasers and other products for the three-month periodended December 27, 2008, compared to the same period ended December 29,2007, was directly related to the general reduction in sales in the U.S. andEuropean markets due to the slowing economy combined with the tightening creditmarkets.

 

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Thedecrease in revenue from lasers and other products for the six-month periodended December 27, 2008, compared to the same period ended December 29,2007, was directly related to the general reduction in sales in the U.S. andEuropean markets due to the slowing economy combined with the tightening creditmarkets.

 

Product-related servicesdecreased approximately $0.8 million or 8% in the three-month period ended December 27,2008 as compared to the same period ended December 29, 2007. The decreaseis primarily related to fluctuating consumable sales.

 

Product-related servicesincreased approximately $100,000 or 1% in the six-month period ended December 27,2008 as compared to the same period ended December 29, 2007. The slightincrease is primarily related to the increase in the number of service-relatedcontracts sold.

 

***Gross Profit.***Grossprofit was approximately $10.2 million or 35.3% for the three-month periodended December 27, 2008 as compared to $16.5 million or 46.2% for the sameperiod ended December 29, 2007. The decrease in gross profit for thethree-month period ended December 27, 2008 as compared to the same periodin the previous fiscal year is primarily due to changes in product mix, changesin regional mix, and a greater proportion of revenues being derived from thesale of product-related services in the current period which carry a lowermargin than sales of lasers. It was also affected by an increase in ourinventory reserve of approximately $1.2 which was determined to be necessarydue to the current economic conditions.

 

Gross profit was approximately $20.6million or 37.2% for the six-month period ended December 27, 2008 ascompared to $33.6 million or 47.4% for the same period ended December 29,2007. The decrease in gross profit for the six-month period ended December 27,2008 as compared to the same period in the previous fiscal year is due tochanges in product mix and a greater proportion of revenues being derived fromthe sale of product-related services in the current period. It was alsoaffected by an increase in our inventory reserve of approximately $1.2 whichwas determined to be necessary due to the current economic conditions.

 

***Selling, General and Administrative Expense. ***Selling,general and administrative (SG&A) expenses were approximately $15.7 millionfor the three-month period ended December 27, 2008 compared to $17.7 millionfor the three-month period ending December 29, 2007. As a percentage ofrevenue, SG&A expenses increased to 54.6% from 49.5% of revenues in thecomparative prior-year period. The $2.0 million decrease was primarilycomprised of a $0.9 million reduction in sales-related costs, a $1.2 million indecreased legal and audit fees, and decreases in labor and labor related costsof $0.8 million, offset by an increase in accounts receivable and salesreserves of approximately $0.9 million.

 

Forthe six-month period ended December 27, 2008, S,G&A expenses decreased toapproximately $30.4 million from approximately $32.3 million for the sameperiod ended December 29, 2007. As a percentage of revenue, S,G&Aexpenses increased to 54.8% from 45.6% of revenues in the comparative prioryear period. The $2.0 million decrease was primarily comprised of a $1.4million reduction in sales-related costs, a $0.6 million in decreased legal andaudit fees, and decreases in labor and labor related costs of $1.0 million,offset by an increase in accounts receivable and sales reserves ofapproximately $1.0 million.

 

***Research and Development Expense.***      Research and development(R&D) spending increased to approximately $3.6 million for the three-monthperiod ended December 27, 2008, from approximately $2.8 million for thecomparative prior-year period. The increase was primarily driven by thewrite-off of certain intellectual property. The Company had acquired certainpatents and rights in an attempt to commercialize a light-based product. Basedon current economic and market conditions, management decided to indefinitelysuspend all future development efforts relative to this technology and itsunderlying product potential.

 

For the six-month period ended December 27, 2008,Research and development (R&D) expenses increased to approximately $5.9million from approximately $5.2 million for the same period ended December 29,2007. Again, the increase was primarily driven by the write-off of certainintellectual property. The Company had acquired certain patents and rights inan attempt to commercialize a light-based product. Based on current economicand market conditions, management decided to indefinitely suspend all futuredevelopment efforts relative to this technology and its underlying productpotential.

 

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***OtherIncome/Expense. ***Otherexpense was approximately $0.1 million for the three-months ended December 27,2008, as compared to approximately $2.0 million for the same period ended December 29,2007. The year-over-year decrease of approximately $1.9 million from theprior-year comparable period is due to the recognition of a $2.5 million losson the other-than-temporary impairment of our holdings of common shares ofOccuLogix, Inc. (Note 17) in the comparable fiscal period, combined with a$0.3 million decrease in interest income earned and a $0.3 million increase inforeign currency expense during the current fiscal quarter.

 

Other expense wasapproximately $0.2 million for the six-months ended December 27, 2008, ascompared to approximately $0.8 million for the same period ended December 29,2007. The year-over-year decrease is primarily due to the Company havingrecognized the above-referenced $2.5 million loss offset by higher interestincome in the six-month period ended December 29, 2007 as compared todecreased interest income offset by losses on certain foreign currencypositions experienced during the six-month period ended December 27, 2008.

 

The decrease ininterest income earned during the six-month period ended December 27,2008, as compared to the same period in the prior fiscal year, is primarilyrelated to a decrease in cash and cash equivalents and in investments duringthe trailing twelve-month period ended December 27, 2008 combined withdecreasing market interest rates.

 

***IncomeTaxes.*** The (benefit) provision for income taxes resultsfrom a combination of activities of the Company and its domestic and foreignsubsidiaries. We recorded effective tax rates of approximately 36% and 30% foreach of the six-month periods ended December 27, 2008 and December 29,2007, respectively. The effective tax rate for the period ended December 27,2008 differs from the statutory rate primarily due to differences in foreigntax rates, R&D credits and other permanent items. The effective rate forthe period ended December 29, 2007 differs from the statutory rateprimarily due to differences in foreign tax rates and other permanent items.The foreign rate difference is due to income reported in a high tax ratejurisdiction combined with losses benefited in a jurisdiction with a lower taxrate.

 

The Company alsorecorded a discrete tax benefit during the six months ended December 27,2008 for the effect of the reinstatement of the R&D credit in the US.  During the six month period ended December 29,2007 the Company reported a discrete expense item of $0.1 million resultingfrom a change in the statutory tax rate in Germany. The effect of the change inthe German statutory rate on current earnings is fully reflected in oureffective tax rate indicated above.

 

**Liquidityand Capital Resources**

 

Our cash and cashequivalents and our investment in short and long-term marketable securities at December 27,2008 totaled approximately $27.3 million compared with approximately $46.1million at December 29, 2007. Principal components of the decrease includegrowth in our inventory over the trailing twelve months, the use of cash forour stock repurchase program, and the general funding of operations. Wecontinue to have no long-term debt. We believe that the combination of existingcash and cash equivalents, and marketable securities on hand, along with cashto be generated by future operations and amounts available under our line ofcredit, will be sufficient to meet our ongoing operating and capital expenditurerequirements for the foreseeable future. However, we cannot be sure that wewill not require additional capital beyond the amounts currently forecasted byus, or that any such required additional capital will be available onreasonable terms, if at all, as it becomes required.

 

Cash used byoperating activities amounted to approximately $7.1 million for the six-monthperiod ended December 27, 2008 as compared to cash provided by operatingactivities of approximately $0.9 million for the same period in the prior year.The increase in cash used by operating activities is primarily attributable toour year-to-date net loss combined with an overall decrease in currentliabilities in the normal course of business.

 

**Off-Balance Sheet Arrangements**

 

Our only off-balancesheet arrangements consist of non-cancelable operating leases entered into inthe ordinary course of business and the license agreement with the Regents. Thetable below in the next section titled “Contractual Obligations” shows theamounts of our operating lease commitments and purchase commitments payable byyear.

 

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**ContractualObligations**

 

Outstanding contractualobligations of the Company are reflected in the following table:

 
| **(in thousands)**        | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **After  5 years** | ** ** |
|--------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| Royalty commitments            |       | $         | 3,250      |                            | $          | 1,000                          |       | $                              | 1,250      |                    | $          | 500 |   | $ | 500 |   |
| Operating leases               |       | 2,806     |       | 1,363                           |       | 1,150                          |       | 187                            |       | 106                     |       |
| Total  contractual obligations |       | $         | 6,056      |                            | $          | 2,363                          |       | $                              | 2,400      |                    | $          | 687 |   | $ | 606 |   |

 

#### **Cautionary Statements**

 

Certain statementscontained herein may constitute “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995 (“Reform Act”). We mayalso make forward-looking statements in other reports filed with the Securitiesand Exchange Commission, in materials delivered to stockholders and in pressreleases. In addition, our representatives may from time to time make oralforward-looking statements. Forward-looking statements provide currentexpectations of future events based on certain assumptions and include anystatement that does not directly relate to any historical or current fact.Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,”“projects,” and similar expressions, may identify such forward-lookingstatements. Such forward-looking statements include but are not limited to:that we have the necessary infrastructure in place to capitalize on expansion;the affordability of our products will allow for expansion; that we can lowerproduction costs; or that the market will expand beyond baby boomers. We assumeno obligation to update or revise any forward-looking statements whether as aresult of new information, future events or otherwise. The risks anduncertainties that may affect forward-looking statements and/or our businessinclude, among others, those discussed in “Cautionary Statements” in our AnnualReport filed on Form 10-K for the fiscal year ended June 28, 2008, aswell as other risks and uncertainties referenced in this Quarterly Report on Form 10-Q,and the following:

 

·                  On August 9,2006, one of our competitors, Palomar Medical Technologies, Inc. (“Palomar”),alleged that the manufacture, use and sale of our products for laser hairremoval willfully infringe certain United States patents. Public announcementsconcerning this and related litigation between the two parties that areunfavorable to us may result in significant declines in our stock price. Anadverse ruling or judgment in this matter is likely to cause our stock price todecline significantly. Litigation with Palomar is expensive and is likely to beprotracted, and our intellectual property position as well as our cash positionmay be weakened as a result of an adverse ruling or judgment. Whether or not weare successful in the pending lawsuit, litigation may consume substantialamounts of our financial resources and divert management’s attention away fromour core business.  Please see Part II,Item 1 (Legal Proceedings) for a further discussion of the Palomar litigation.

 

·                  Claims by othersthat our products infringe their patents or other intellectual property rights,or that the patents which we own or have licensed rights to are invalid, couldprevent us from manufacturing and selling some of our products or could requireus to incur substantial costs from litigation, licenses or the development ofnon-infringing technology.

 

·                  Our receipt offinal approval from the respective courts in the Western Pa, Caballero andForlenzo lawsuits.  Please see Part II,Item 1 (Legal Proceedings) for a further discussion of the Western Pa,Caballero and Forlenzo litigation.

 

·                  Our principalsource of liquidity is our current cash and equivalents and marketableinvestments. Our ability to generate cash from operations is dependant upon ourability to generate revenue from selling our lasers and other products andproviding product-related services. A decrease in demand for our products andrelated services or increases in operating costs would likely have an adverseeffect on our liquidity.

 

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·                  Disappointingquarterly revenue or operating results could cause the price of our commonstock to fall.

 

·                  Because wetypically derive more than half of our revenue from international sales, we aresusceptible to currency fluctuations, negative economic changes taking place inforeign marketplaces, and other risks associated with conducting businessoverseas.

 

·                  The failure toobtain alexandrite rods for certain laser systems from our sole supplier wouldimpair our ability to manufacture and sell these laser systems, which hasaccounted for a substantial portion of our revenue in certain recent periods.

 

·                  Our failure torespond to rapid changes in technology and intense competition in the laserindustry could make our lasers obsolete.

 

·                  Like othercompanies in our industry, we are subject to a regulatory review process andour failure to receive necessary government clearances or approvals couldaffect our ability to sell our products and remain competitive.

 

·                  We have modified some of our products withoutFDA clearance.  The FDA couldretroactively decide the modifications were improper and require us to ceasemarketing and/or recall the modified products.

 

·                  Achievingcomplete compliance with FDA regulations is difficult, and if we fail tocomply, we could be subject to FDA enforcement action.

 

·                  We could incursubstantial costs as a result of product liability claims, including but notlimited to costs as a result of product failures for which we are responsibleunder warranty obligations and as a result of our customer’s potentialunavailability of liability insurance coverage.

 

·                  We may be unableto attract and retain management and other personnel we need to succeed.

 

·                  Our failure tomaintain effective internal control over financial reporting could have amaterial adverse effect on our business, operating results, and stock price.

 

·                  Our failure tomanage acquisitions and joint ventures effectively may divert managementattention from our core business and cause us to incur debt, liabilities orcosts.

 

·                  Our businesscould also be negatively impacted if our customers or suppliers experiencedisruptions resulting from tighter capital and credit markets, or a slowdown inthe general economy. As a result, customers may modify, delay or cancel plansto purchase our products or services, and suppliers may increase their prices,reduce their output or change their terms of sale. Additionally, if customers’or suppliers’ operating and financial performance deteriorates, or if they areunable to make scheduled payments or obtain credit, customers may not be ableto pay, or may delay payment of, accounts receivable owed to us and suppliersmay restrict credit or impose different payment terms. Any inability ofcustomers to pay us for our products and services, or any demands by suppliersfor different payment terms, may adversely affect the Company’s earnings andcash flow.

 

We caution readersnot to place undue reliance upon any forward-looking statements, which speakonly as of the date made. We expressly disclaim any obligation or undertakingto release publicly any updates or revisions to any such statements to reflectany change in our expectations or any change in events, conditions orcircumstances on which any such statement is based.

 

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**Item 3 -Quantitative and Qualitative Disclosures about Market Risk**

 

We have cash equivalentsand marketable securities that consist of money market mutual funds,certificates of deposit, US government securities, fixed income corporatesecurities and equity investments. The majority of these investments havematurities within one to three years. We believe that our exposure to interestrate risk is minimal due to the term and type of our investments and thosefluctuations in interest rates would not have a material adverse effect on ourresults of operations.

 

We have international subsidiaries that transact business in foreign currencies and, therefore, we are exposed to foreign currency exchange risk resulting from fluctuations in foreign currencies. This risk could adversely impact our results and financial condition. For the six-month period ended December 27, 2008, approximately 41% and 24% of the Company’s costs and expenses, respectively, were denominated in foreign currencies. In addition, approximately 33% and 29% of the Company’s consolidated assets were subject to foreign currency exchange fluctuations as of December 27, 2008 and June 28, 2008, respectively, while approximately 49% and 48% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of December 27, 2008 and June 28, 2008, respectively. From time to time, we may enter into foreign currency exchange contracts to reduce our exposure to foreign currency exchange risk and variability in operating results due to fluctuation in exchange rates underlying the value of current transactions and anticipated transactions denominated in foreign currencies. These contracts obligate us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These contracts are denominated in the same currency in which the underlying transactions are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. The principal foreign currencies applicable to our business are the Euro and the Yen.

 

Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in other income (expense) in the period of the change. For derivatives that qualify for hedge accounting, the Company recognizes the instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Changes in the fair value of the derivatives are recorded in shareholders’ equity as a component of other comprehensive income along with an offsetting adjustment against the basis of the derivative instrument itself.

 

TheCompany had three foreign currency forward contracts outstanding at December 27,2008 in the notional amount of approximately 1.4 million Euros orapproximately $2.0 million. These derivative contracts serve to mitigate theforeign currency risk of a substantial portion of our Euro-denominatedinter-company balances at December 27, 2008. None of the aforementionedderivatives qualified for hedge accounting at December 27, 2008.

 

**Item 4 - Controls and Procedures**

 

***Evaluation of Disclosure Controlsand Procedures***

Our Chief Executive Officer and Acting Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of December 27, 2008, the end of the period covered by this quarterly report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation, our Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Securities Exchange Act of 1934, as amended.

 

***Changes in Internal Controls overFinancial Reporting***

 

There have been no changes in the Company’s internalcontrols over financial reporting that occurred during the quarter ended December 27,2008 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**CandelaCorporation**

 

**Part II.  Other Information**

 

**Item 1 - Legal Proceedings**

 

The Company is currently involved in two litigationmatters with Palomar Medical Technologies, Inc. (“Palomar”).

 

·            Palomar asserts that it is the exclusivelicensee from The General Hospital Corporation (“Mass. General”) of U.S. PatentNo. 5,735,844 (the “‘844 Patent”) and U.S. Patent No. 5,595,568,which is related to the ‘844 Patent (the “‘568 Patent”).  On August 9, 2006, Palomar filed suitagainst the Company in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of the ‘844Patent. Palomar seeks compensatory and treble damages, as well as attorneys’fees and injunctive relief. In November 2006, the Company answered thecomplaint by denying Palomar’s allegations and asserting a variety ofaffirmative defenses and counterclaims against Palomar. This response includeda counterclaim by the Company against Palomar seeking a declaratory judgmentthat the ‘568 Patent is either invalid, or products manufactured by the Companydo not infringe the ‘568 Patent, or both. In November 2006, Palomar filedan answer denying the Company’s counterclaim. In February 2007, Palomarmoved to amend its Complaint to add The General Hospital Corporation as aparty, to add a claim for infringement by Candela of the ‘568 Patent, and toallege that additional Candela products infringe the ‘568 Patent. Palomar’smotion to amend its Complaint was granted in August 2007. In February 2007,Candela moved to amend its Answer and Counterclaims to add allegations ofinequitable conduct, double-patenting and violation of Mass. Gen. Laws Ch. 93Aby Palomar. The Company’s motion to amend its Answer and Counterclaims wasgranted in March 2007. Palomar filed a general denial response to Candela’sAmended Answer and Counterclaim in March 2007. In August 2007, theparties had a Markman hearing before the U.S. District Court Judge presidingover the above-described legal proceeding. In a Markman hearing, the Courtinterprets the definition of the disputed claim term of a patent. On October 31,2008, the Company requested a stay of the case with the Court, which wasgranted on November 17, 2008.  The Company did so based upon a thirdparty’s re-examination request that was granted by the United States Patent andTrademark Office on August 29, 2008. The re-examination is withrespect to both the ‘568 and ‘844 Patents, including many of the Claims atissue in this case.  On December 9,2008, Candela filed requests for re-examination of the ‘568 and ‘844Patents with the United States Patent & Trademark Office assertingthat all claims currently in dispute with Palomar be held invalid.  On January 7, 2009, the United StatesPatent and Trademark Office granted the Company’s re-examination request of the‘844 Patent and the ‘568 Patent.   TheUnited States Patent and Trademark Office stated that there are substantial newquestions of patentability for all claims asserted against the Company byPalomar.

 

·            On August 10, 2006, the Company filedsuit against Palomar in the United States District Court for the District ofMassachusetts, asserting willful infringement by Palomar of U.S. PatentNos. 6,659,999, 5,312,395 (the “395 Patent”), and 6,743,222 (the “‘222Patent”). The Company seeks compensatory and treble damages for the patentinfringement, as well as attorneys’ fees and an injunction against Palomar toprevent Palomar’s continuing infringement. The Company served its complaint onPalomar in August 2006. In October 2006, the Company amended theCompany’s suit against Palomar by removing from the suit allegations thatPalomar infringes Patent 6,659,999. In October 2006, Palomar answered theCompany’s amended complaint by denying the Company’s allegations and assertingan affirmative defense of inequitable conduct with respect to the ‘395 Patent.In addition, Palomar filed a demand for a declaratory judgment seeking ajudicial determination that Palomar products either do not infringe the ‘395Patent and ‘222 Patent or that such patents are invalid. In November 2006,the Company answered the counterclaim by denying Palomar’s allegations. In February 2008,Palomar filed a request for re-examination of the Company’s ‘222 Patent withthe United States Patent and Trademark Office (“PTO”). In March 2008, thePTO granted re-examination. In June 2008, the Court stayed the case untilthe PTO rules on the re-examination.

 

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While the Company intendsto vigorously contest Palomar’s allegations, and to pursueits own claims against Palomar, each lawsuit is inherentlyuncertain and unpredictable as to its ultimate outcome. Anadverse outcome in Palomar’s suit against the Company wouldmaterially hurt the Company’s business, financial condition, results ofoperations and cash flows.

 

·            In December 2006, the Company filedsuit against Palomar in the United States District Court for the EasternDistrict of Texas, Lufkin Division, asserting that Palomar infringes one ormore claims of United States patents Nos: 5,810,801, 6,659,999 and 6,120,497.The Company sought compensatory and treble damages for past infringement, aswell as attorneys’ fees and an injunction against Palomar from futureinfringement. In January 2007, Palomar answered the complaint by denyingthe Company’s allegations and filing a declaratory judgment motion seeking acourt ruling that it did not infringe such patents and/or that such patentswere invalid. In addition, Palomar filed a motion to transfer the case to theUnited States District Court for the District of Massachusetts. In February 2007,the Company added Massachusetts General Hospital as a party to its action. TheCourt denied Palomar’s motion to transfer the case to Massachusetts. Theparties had a six day trial, beginning on September 29, 2008.  Attrial, the Company alleged that Claims 11-14 of the 5,810,801 Patent wasinfringed by Palomar’s Lux 1540, Lux1540Z, LuxIR and Lux DeepIR.  On October 7,2008, the jury returned a verdict in favor of Palomar. The jury found that noneof the alleged Palomar products infringe on Claims 11-14 of the Company’s5,810,801 patent and that all such Claims are invalid. The Company filed aJudgment as a Matter of Law motion with the Court in an attempt to reverse theinvalidity ruling. On December 30, 2008, the Court entered finaljudgment in favor of Palomar.

 

·            On April 2 and April 22, 2008,respectively, two substantially similar putative class action lawsuits,entitled Western Pa. Elec. Employees Pension Fund, et al., 1:08-cv-10551-DPW (“WesternPa.”) and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW (“Caballero”),were filed against Candela and two of its officers in the United StatesDistrict Court for the District of Massachusetts purporting to assert claimsfor violations of §§10(b) and 20(a) of the Securities Exchange Act of1934 and Rule 10b-5 promulgated thereunder, and seeking, among otherthings, compensatory damages and reasonable costs and expenses.  On July 10,2008, the court consolidated the cases (the “Consolidated Class Action”)and appointed lead plaintiff and lead counsel.  On August 25, 2008,lead plaintiff filed a consolidated amended complaint purporting to be broughton behalf of all open-market purchasers of Candela common stock from November 1,2005 through August 21, 2006, and alleging that Candela made certain falseand misleading statements to investors expressing optimism regarding itsfinancial condition and failed to disclose (i) the possibility thatPalomar, one of Candela’s leading competitors, would initiate patentenforcement litigation against Candela and (ii) that Candela waspurportedly losing market share to its competitors.

 

·            On April 16, 2008, a shareholderderivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532,was filed in Massachusetts Superior Court for Middlesex County against the individualmembers of Candela’s board of directors and certain of its current and formerofficers, purporting to assert claims for breach of fiduciary duty and relatedclaims arising out of allegations similar to those asserted in the class actionlitigation discussed above (the “Derivative Action”).  The complaintsought on behalf of Candela, among other things, damages, restitution, andinjunctive relief.

 

On January 16, 2009,the parties to the Consolidated Class Action and the Derivative Actionfiled stipulations of settlement, together with supporting documents, in theUnited States District Court for the District of Massachusetts andMassachusetts Superior Court for Middlesex County, respectively. Under theterms of the proposed Consolidated Class Action settlement, Candela willpay $3.85 million into a settlement fund for the benefit of the class members.Under the terms of the proposed Derivative Action settlement, Candela will payfor attorneys’ fees and has agreed to adopt certain corporate governance changes. Candela’s insurer will fund all payments contemplated by the proposedsettlements.  Neither the Company nor any of the individual defendantsadmit any wrongdoing under either of the proposed settlements, which are beingentered into in return for the release of all claims.  The proposedsettlements are subject to preliminary and final approval by the respectivecourts.

 

·            On February 19, 2008, Cardiofocus, Inc.(“Cardiofocus”) filed suit against the Company and eight other companies in theUnited States District Court for the District of Massachusetts,

 

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asserting willfulinfringement by the Company of U.S. Patents 6,457, 780, 6,159,203 and5,843,073. Cardiofocus seeks compensatory and treble damages, as well asattorneys’ fees and injunctive relief. On April 21, 2008, the Companyanswered Cardiofocus’ complaint and asserted a variety of counterclaims againstCardiofocus. The Company intends to vigorously defend against the lawsuit.Based upon Candela’s request, on July 23, 2008, the United States Patent &Trademark Office (“PTO”) agreed to re-examine the validity of the Cardiofocuspatents. On October 14, 2008, the Court agreed to stay this matter for aminimum of one year, up to a maximum of two years, but no later than the PTO’sdecision with respect to the re-examination proceedings.

 

From time to time, the Company is party to various legal proceedingsincidental to its business. The Company believes that none of the legalproceedings, other than the lawsuit initiated by Palomar, that are presentlypending, if adversely decided against us, will have a material adverse effectupon the Company’s  financial position,results of operations, or liquidity.

 

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**Item 4 — Submission of Matters to a Vote ofSecurity Holders**

 

On December 12, 2008, the Company held its annualmeeting of shareholders and voted on four proposals.

 

1)              At the Meeting, six (6) directorswere elected to hold office until the Company’s next****annual meeting. The vote was as follows:

 
| ** **            | ** ** | **FOR**    | ** ** | **WITHHOLD** | ** ** |
|-----------------------|------------|------------|------------|--------------|------------|
| George A. Abe         |       | 16,820,713 |       | 3,901,866    |       |
| Ben  Bailey, III |       | 17,279,996 |       | 3,442,583    |       |
| Nancy E. Nager        |       | 16,816,100 |       | 3,906,479    |       |
| Gerard E. Puorro      |       | 17,004,497 |       | 3,718,082    |       |
| Kenneth D.  Roberts   |       | 16,892,819 |       | 3,829,760    |       |
| Douglas W. Scott      |       | 16,596,684 |       | 4,125,895    |       |

 

2)              At the meeting, theproposal to adopt the Company’s 2008 Stock Plan, and the reserve of 1,300,000shares of the Company’s Common Stock for issuance under the 2008 Stock Plan,was approved as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 10,350,539 |       | 4,389,918   |       | 76,670      |       |

 

3)              At the meeting, theproposal to adopt an amendment to the amended and restated Certificate ofIncorporation to create a class of Preferred Stock and authorize an issuance ofup to 5,000,000 shares of Preferred Stock was not approved as approval by morethan 50% of the shares outstanding was required. The vote was as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 11,040,915 |       | 3,705,926   |       | 70,286      |       |

 

4)              At the Meeting, thevote on a proposal to ratify the selection of BDO Seidman, LLP to serve as theCompany’s independent registered public accounting firm for the fiscal yearending June 27, 2009, was approved as follows:

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 19,839,353 |       | 642,280     |       | 240,945     |       |

 

**Item 5 — Other Information**

 

None.

 

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**Item 6 - Exhibits**

 

(a)                                  Exhibits

 
| Exhibit 10.2.8 |   | Amendment Number One to  the Candela Corporation Employee Stock Purchase Plan                                                                                         |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                  |
| Exhibit 10.19  |   | Candela Corporation  2008 Stock Plan                                                                                                                                  |
|                |   |                                                                                                                                                                  |
| Exhibit 10.20  |   | Form of Candela  Corporation 2008 Stock Plan Notice of Stock Appreciation Right Grant                                                                            |
|                |   |                                                                                                                                                                  |
| Exhibit 3(i)   |   | Amended and Restated  Certificate of Incorporation of Candela Corporation                                                                                             |
|                |   |                                                                                                                                                                  |
| Exhibit 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer                                                                                      |
|                |   |                                                                                                                                                                  |
| Exhibit 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  of the Principal Financial Officer                                                                                  |
|                |   |                                                                                                                                                                  |
| Exhibit 32.1   |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |
|                |   |                                                                                                                                                                  |
| Exhibit 32.2   |   | Certification of the  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |                   |   | CANDELA  CORPORATION                                |
|--------|------------------------|--------|-----------------------------------------------------|
|   |                   |   |                                                |
|   |                   |   |                                                |
| Date:  | February 5,  2009 |   | /s/ Robert E.  Quinn                                |
|   |                   |   | Robert E. Quinn                                     |
|   |                   |   | Vice President,  Finance, Treasurer, and            |
|   |                   |   | Corporate  Controller (Principal Financial Officer) |

 

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**CandelaCorporation**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                       |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                  |
| Exhibit 10.2.8  |       | Amendment Number One to  the Candela Corporation Employee Stock Purchase Plan                                                                                         |
|                 |       |                                                                                                                                                                  |
| Exhibit 10.19   |       | Candela Corporation  2008 Stock Plan                                                                                                                                  |
|                 |       |                                                                                                                                                                  |
| Exhibit 10.20   |       | Form of Candela  Corporation 2008 Stock Plan Notice of Stock Appreciation Right Grant                                                                            |
|                 |       |                                                                                                                                                                  |
| Exhibit 31.1    |       | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer                                                                                      |
|                 |       |                                                                                                                                                                  |
| Exhibit 31.2    |       | Rule 13a-14(a)/15d-14(a) Certification  of the Principal Financial Officer                                                                                  |
|                 |       |                                                                                                                                                                  |
| Exhibit 32.1    |       | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |
|                 |       |                                                                                                                                                                  |
| Exhibit 32.2    |       | Certification of the  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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