Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 

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

** **

**For the quarterly period ended March 28, 2009**

 

**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**

 

----

 

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 has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes o  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 mark whether the registrant is ashell company (as defined in Rule12b-2 of the Exchange 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 May 5, 2009** |
|-----------------------------------------|------------|-------------------------------------|
| Common Stock,  $.01 par value per share |       | 22,887,829                          |

 

 

 

----

Tableof Contents

 

**CANDELACORPORATION**

**Table ofContents**

 
| ** ** | ** **              | ** **                                                                                                                                                     | **Page** |
|------------|-------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| Part I.    | Financial  Information: |                                                                                                                                                           |
|       |                    |                                                                                                                                                           |     |
|       | Item 1.                 | Unaudited  Financial Statements                                                                                                                                |     |
|       |                    |                                                                                                                                                           |     |
|       |                    | Condensed Consolidated Balance Sheets as of March 28,  2009 and June 28, 2008                                                                                  | 3        |
|       |                    |                                                                                                                                                           |     |
|       |                    | Condensed Consolidated Statements of Operations and  Comprehensive Income (Loss) for the three and nine-month periods ended March  28, 2009 and March 29, 2008 | 4        |
|       |                    |                                                                                                                                                           |     |
|       |                    | Condensed Consolidated Statements of Cash Flows for  the nine-month periods ended March 28, 2009 and March 29, 2008                                            | 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 - 28  |
|       |                    |                                                                                                                                                           |     |
|       | Item  6.                | Exhibits                                                                                                                                                       | 29       |
|       |                    |                                                                                                                                                           |     |
|       | Signatures              |                                                                                                                                                           | 30       |
|       |                    |                                                                                                                                                           |     |
|       | Index to Exhibits       | 31                                                                                                                                                             |

 

2

----

Table of Contents

 

**Part I.  Financial Information**

 

**Item 1 - Financial Statements**

 

**CANDELACORPORATION**

**ConsolidatedBalance Sheets**

(in thousands, exceptper-share data)

(unaudited)

 
| ** **                                                                                                                                     | ** ** | **March 28,** | ** ** | **June 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                     |       |               |       |              |       |
| Current assets:                                                                                                                                |       |               |       |              |       |
| Cash and cash  equivalents                                                                                                                     |       | $                  | 22,988     |              | $          | 21,030 |   |
| Restricted cash                                                                                                                                |       | 1,013              |       | 29                |       |
| Marketable  securities                                                                                                                         |       | 1,756              |       | 12,131            |       |
| Accounts  receivable, net of allowance for doubtful accounts of $2,861 and $2,322 at  March 28 and June 28, respectively             |       | 33,020             |       | 43,320            |       |
| Notes receivable                                                                                                                               |       | 905                |       | 728               |       |
| Inventories, net                                                                                                                               |       | 27,874             |       | 33,141            |       |
| Other current  assets                                                                                                                          |       | 14,345             |       | 9,043             |       |
|                                                                                                                                           |       |               |       |              |       |
| Total current  assets                                                                                                                          |       | 101,901            |       | 119,422           |       |
| Property and  equipment, net                                                                                                                   |       | 3,564              |       | 4,027             |       |
| Deferred tax  assets                                                                                                                           |       | 6,300              |       | 8,065             |       |
| Goodwill                                                                                                                                       |       | —             |       | 13,225            |       |
| Acquired  Intangible assets, net                                                                                                               |       | 174                |       | 6,916             |       |
| Marketable  securities, long-term                                                                                                              |       | —             |       | 3,512             |       |
| Other assets                                                                                                                                   |       | 1,668              |       | 2,928             |       |
|                                                                                                                                           |       |               |       |              |       |
| Total assets                                                                                                                                   |       | $                  | 113,607    |              | $          | 158,095 |   |
|                                                                                                                                           |       |               |       |              |       |
| **Liabilities and Stockholders’ Equity**                                                                                                  |       |               |       |              |       |
| Current  liabilities:                                                                                                                          |       |               |       |              |       |
| Accounts payable                                                                                                                               |       | $                  | 10,072     |              | $          | 15,917 |   |
| Accrued payroll  and related expenses                                                                                                          |       | 4,754              |       | 4,680             |       |
| Accrued warranty  costs, current                                                                                                               |       | 4,961              |       | 5,373             |       |
| Sales tax  payable                                                                                                                             |       | 584                |       | 919               |       |
| Other accrued  liabilities                                                                                                                     |       | 7,200              |       | 9,257             |       |
| Deferred  revenue, current                                                                                                                     |       | 10,983             |       | 13,614            |       |
| Current  liabilities of discontinued operations                                                                                                |       | 1,330              |       | 1,200             |       |
|                                                                                                                                           |       |               |       |              |       |
| Total current  liabilities                                                                                                                     |       | 39,884             |       | 50,960            |       |
| Deferred tax  liability, long-term                                                                                                             |       | 291                |       | 2,099             |       |
| Accrued warranty  costs, long-term                                                                                                             |       | 627                |       | 725               |       |
| Deferred  revenue, long-term                                                                                                                   |       | 3,798              |       | 4,522             |       |
|                                                                                                                                           |       |               |       |              |       |
| Total  liabilities                                                                                                                             |       | 44,600             |       | 58,306            |       |
|                                                                                                                                           |       |               |       |              |       |
| Stockholders’  equity:                                                                                                                    |       |               |       |              |       |
| Common stock,  $.01 par value, 60,000,000 shares authorized; 26,175,000 and 26,123,000  issued at March 28 and June 28, respectively |       | 262                |       | 261               |       |
| Treasury stock,  3,450,000 common shares at March 28 and June 28, respectively, at  cost                                             |       | (24,855            | )          | (24,855           | )          |
| Additional  paid-in capital                                                                                                                    |       | 75,645             |       | 73,174            |       |
| Accumulated  earnings                                                                                                                          |       | 16,168             |       | 45,588            |       |
| Accumulated  other comprehensive income                                                                                                        |       | 1,787              |       | 5,621             |       |
|                                                                                                                                           |       |               |       |              |       |
| Total  stockholders’ equity                                                                                                               |       | 69,007             |       | 99,789            |       |
|                                                                                                                                           |       |               |       |              |       |
| Total  liabilities and stockholders’ equity                                                                                               |       | $                  | 113,607    |              | $          | 158,095 |   |

 

***The accompanying notes are an integral part of the unaudited condensedconsolidated financial statements****.*

 

3

----

Table of Contents

 

**CANDELACORPORATION**

**CondensedConsolidated Statements of Operations and Comprehensive Income (Loss)**

**(inthousands, except per-share data)**

 
| ** **                                                           | ** ** | **For the three months ended:** | ** ** | **For the nine months ended:** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **March 28,**              | ** ** | **March 29,**             | ** ** | **March 28,** | ** ** | **March 29,** | ** ** |
| ** **                                                           | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                           | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)**                | ** ** |
| **Revenue**                                                          |       |                            |       |                           |       |   |   |   |   |
| Lasers and other  products                                           |       | $                               | 18,528     |                           | $          | 27,986 |   | $ | 54,414 |   | $ | 79,380 |   |
| Product-related  service                                             |       | 11,238                          |       | 10,413                         |       | 30,773 |   | 29,829 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Total revenue                                                        |       | 29,766                          |       | 38,399                         |       | 85,187 |   | 109,209 |   |
| **Cost of  sales**                                                   |       |                            |       |                           |       |   |   |   |   |
| Lasers and other  products                                           |       | 9,673                           |       | 12,872                         |       | 29,201 |   | 36,944 |   |
| Product-related  service                                             |       | 8,160                           |       | 8,738                          |       | 23,423 |   | 21,913 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Total cost of  sales                                                 |       | 17,833                          |       | 21,610                         |       | 52,624 |   | 58,857 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Gross  profit**                                                    |       | 11,933                          |       | 16,789                         |       | 32,563 |   | 50,352 |   |
| **Operating  expenses:**                                             |       |                            |       |                           |       |   |   |   |   |
| Selling, general  and administrative                                 |       | 10,797                          |       | 17,873                         |       | 41,170 |   | 50,191 |   |
| Research and  development                                            |       | 2,488                           |       | 2,418                          |       | 8,409 |   | 7,637 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Total operating  expenses                                            |       | 13,285                          |       | 20,291                         |       | 49,579 |   | 57,828 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Loss  from operations**                                            |       | (1,352                          | )          | (3,502                         | )          | (17,016 | ) | (7,476 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Other  income (expense):**                                         |       |                            |       |                           |       |   |   |   |   |
| Interest income                                                      |       | 8                               |       | 367                            |       | 425 |   | 1,330 |   |
| Other expense,  net                                                  |       | (16                             | )          | (78                            | )          | (637 | ) | (1,855 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Total other  expense                                                 |       | (8                              | )          | 289                            |       | (212 | ) | (525 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Loss  from continuing operations before income taxes**             |       | (1,360                          | )          | (3,213                         | )          | (17,228 | ) | (8,001 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Benefit  from income taxes**                                       |       | (465                            | )          | (1,375                         | )          | (6,259 | ) | (3,328 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Loss  from continuing operations**                                 |       | (895                            | )          | (1,838                         | )          | (10,969 | ) | (4,673 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Income  (loss) from discontinued operations, net of income taxes** |       | 430                             |       | (218                           | )          | (18,451 | ) | (1,746 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Net  Loss**                                                        |       | $                               | (465       | )                              | $          | (2,056 | ) | $ | (29,420 | ) | $ | (6,419 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Net  loss per share of common stock:**                             |       |                            |       |                           |       |   |   |   |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Basic                                                                |       |                            |       |                           |       |   |   |   |   |
| Loss from  continuing operations                                     |       | $                               | (0.04      | )                              | $          | (0.08 | ) | $ | (0.48 | ) | $ | (0.21 | ) |
| Income (loss)  from discontinued operations                          |       | 0.02                            |       | (0.01                          | )          | (0.81 | ) | (0.08 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Net loss                                                             |       | $                               | (0.02      | )                              | $          | (0.09 | ) | $ | (1.29 | ) | $ | (0.29 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Diluted                                                              |       |                            |       |                           |       |   |   |   |   |
| Loss from  continuing operations                                     |       | $                               | (0.04      | )                              | $          | (0.08 | ) | $ | (0.48 | ) | $ | (0.21 | ) |
| Income (loss)  from discontinued operations                          |       | 0.02                            |       | (0.01                          | )          | (0.81 | ) | (0.08 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| Net loss                                                             |       | $                               | (0.02      | )                              | $          | (0.09 | ) | $ | (1.29 | ) | $ | (0.29 | ) |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Weighted  average shares outstanding:**                            |       |                            |       |                           |       |   |   |   |   |
| Basic and  diluted                                                   |       | 22,725                          |       | 22,672                         |       | 22,710 |   | 22,743 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Net  loss**                                                        |       | $                               | (465       | )                              | $          | (2,056 | ) | $ | (29,420 | ) | $ | (6,419 | ) |
| **Other  comprehensive income (loss):**                              |       |                            |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment                             |       | (1,216                          | )          | 1,965                          |       | (3,834 | ) | 3,534 |   |
| Unrealized gain  on available-for-sales securities, net of tax       |       | —                          |       | —                         |       | — |   | 777 |   |
|                                                                 |       |                            |       |                           |       |   |   |   |   |
| **Comprehensive  loss**                                              |       | $                               | (1,681     | )                              | $          | (91 | ) | $ | (33,254 | ) | $ | (2,108 | ) |

 

***Theaccompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.***

 

4

----

Table of Contents

 

**CANDELA CORPORATION**

**Condensed Consolidated Statements of Cash Flows**

(inthousands)

(unaudited)

 
| ** **                                                                   | ** ** | **For the nine months ended:** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **March 28,**             | ** ** | **March 29,** | ** ** |
| ** **                                                                   | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                              | (29,420    | ) | $ | (6,419 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                           |       |   |   |
| Non-cash items  reported in discontinued operations                          |       | 17,143                         |       | — |   |
| Loss on  other-than-temporary impairment of investment                       |       | —                         |       | 2,546 |   |
| Share-based  compensation expense                                            |       | 2,619                          |       | 2,912 |   |
| Depreciation and  amortization                                               |       | 2,304                          |       | 2,188 |   |
| Provision for  bad debts                                                     |       | 3,495                          |       | 2,058 |   |
| Other non-cash  items                                                        |       | 267                            |       | 195 |   |
| Changes in  operating assets and liabilities                                 |       |                           |       |   |   |
| Accounts  receivable                                                         |       | 8,882                          |       | (5,148 | ) |
| Notes receivable                                                             |       | (177                           | )          | 754 |   |
| Inventories                                                                  |       | 5,887                          |       | (9,009 | ) |
| Other current  assets                                                        |       | 1,592                          |       | (2,848 | ) |
| Other assets                                                                 |       | 1,306                          |       | 50 |   |
| Accounts payable                                                             |       | (9,839                         | )          | 6,018 |   |
| Accrued payroll  and related expenses                                        |       | (462                           | )          | (999 | ) |
| Deferred revenue                                                             |       | (3,777                         | )          | 3,477 |   |
| Accrued warranty  costs                                                      |       | (285                           | )          | (2,245 | ) |
| Income taxes  payable and deferred                                           |       | (3,524                         | )          | (3,350 | ) |
| Other accrued  liabilities                                                   |       | (3,858                         | )          | (896 | ) |
| Restricted cash                                                              |       | (984                           | )          | 19 |   |
|                                                                         |       |                           |       |   |   |
| Net cash used by  operating activities                                       |       | (8,831                         | )          | (10,697 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                   |       |                           |       |   |   |
| Purchases of  property and equipment                                         |       | (689                           | )          | (2,120 | ) |
| Maturities of  held-to-maturity marketable securities                        |       | 12,772                         |       | 15,940 |   |
| Purchases of  held-to-maturity marketable securities                         |       | —                         |       | (14,250 | ) |
| Acquisition of  intangible assets                                            |       | —                         |       | (233 | ) |
|                                                                         |       |                           |       |   |   |
| Net cash  provided by (used by) investing activities                         |       | 12,083                         |       | (663 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                           |       |   |   |
| Proceeds from  the issuance of common stock                                  |       | 64                             |       | 194 |   |
| Purchase of  treasury stock                                                  |       | —                         |       | (2,400 | ) |
|                                                                         |       |                           |       |   |   |
| Net cash  provided by (used by) financing activities                         |       | 64                             |       | (2,206 | ) |
|                                                                         |       |                           |       |   |   |
| Effect of  exchange rates on cash and cash equivalents                       |       | (1,358                         | )          | 3,535 |   |
|                                                                         |       |                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                    |       | 1,958                          |       | (10,031 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash  and cash equivalents at beginning of period**                        |       | 21,030                         |       | 27,152 |   |
|                                                                         |       |                           |       |   |   |
| **Cash  and cash equivalents at end of period**                              |       | $                              | 22,988     |   | $ | 17,121 |   |

 

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

 

5

----

Table ofContents

 

**CandelaCorporation**

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

 

**1.****      ****Basis of Presentation andConsolidation**

 

*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 nine-month periods ended March 28, 2009 are not necessarily indicativeof results to be expected for the remainder of the fiscal year. The informationcontained in the interim financial statements should be read in conjunctionwith Management’s Discussion and Analysis and the financial statements andnotes thereto included in the Candela Corporation 2008 Form 10-K filedwith the Securities and Exchange Commission (“SEC”).

 

*Basisof Consolidation*

The financial statements include the accounts ofCandela Corporation and its subsidiaries. Inter-company transactions andbalances have been eliminated. Investments in which we are not able to exercisesignificant influence over the investee are accounted for under the costmethod.

 

*SignificantAccounting Policies*

As required, the Companyadopted SFAS No. 157 for its financial assets on June 29, 2008. Adoption does not have a material impact on the Company’s financial position orresults of operations at this time. See Note 3 — Fair Value Measurements.

 

On December 28,2008, we adopted SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, an amendment of FASBStatement No. 133. SFAS No. 161 requires additional disclosures aboutthe Company’s objectives in using derivative instruments and hedgingactivities, the method of accounting for such instruments under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and its relatedinterpretations, and tabular disclosures of the effects of such instruments andrelated hedged items on our financial position, financial performance, and cashflows. See Note 11 — Derivative Instruments and Hedging Activity.

 

There have been no otherchanges in our significant accounting policies during the nine months ended March 28,2009 as compared to the significant accounting policies described in our AnnualReport on Form 10-K for the fiscal year ended June 28, 2008.

 

**2.****      ****Recent Accounting 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 December 2007, theFASB issued SFAS No. 141(R), *Business Combinations*, which replaces SFAS No. 141. The statement retains the fundamentalrequirements in SFAS No. 141 that the acquisition method of accounting(previously referred to as the purchase method of accounting) be used for allbusiness combinations, but requires a number of changes, including changes inthe way assets and liabilities are recognized as a result of businesscombinations.It also requires the capitalization of in-process research anddevelopment at fair value and requires the expensing of acquisition-relatedcosts as incurred. In April 2009, the FASB issued FSP FAS 141(R)-1 which amendsSFAS No. 141(R) by establishing a model to account for certainpre-acquisition contingencies. Under the FSP, an acquirer is required torecognize at fair value an asset acquired or a liability assumed in a businesscombination that arises from a contingency if the acquisition-date fair valueof that asset or liability can be determined during the measurement period. Ifthe acquisition-date fair value cannot be determined, then the acquirer shouldfollow the recognition criteria in SFAS No. 5, *Accountingfor Contingencies*, and FASB Interpretation No. 14, *Reasonable Estimation of the Amount of a Loss – an interpretation ofFASB Statement No. 5*. SFAS No. 141(R) and FSP FAS 141(R)-1are effective for us beginning June 28, 2009, and will apply prospectively tobusiness combinations completed on or after that date. The impact of theadoption of SFAS No. 141(R) and FSP FAS 141(R)-1 will depend on the natureof acquisitions completed after the date of adoption.

 

6

----

Table of Contents

 

In April 2009, the FASBissued three related Staff Positions: (i) FSP 157-4, Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability haveSignificantly Decreased and Identifying Transactions That Are Not Orderly (“FSP157-4”), (ii) SFAS 115-2 and SFAS 124-2, Recognition and Presentation ofOther-Than-Temporary Impairment (“FSP 115-2” and “FSP 124-2”), and (iii) SFAS107-1 and APB 28-1, Interim Disclosures about Fair Value of FinancialInstruments (“FSP 107” and “APB 28-1”), which will be effective for interim andannual periods ending after June 15, 2009. FSP 157-4 provides guidance on how todetermine the fair value of assets and liabilities under SFAS 157 in thecurrent economic environment and reemphasizes that the objective of a fairvalue measurement remains an exit price. If we were to conclude that there hasbeen a significant decrease in the volume and level of activity of the asset orliability in relation to normal market activities, quoted market values may notbe representative of fair value and we may conclude that a change in valuationtechnique or the use of multiple valuation techniques may be appropriate. FSP115-2 and FSP 124-2 modify the requirements for recognizingother-than-temporarily impaired debt securities and revise the existingimpairment model for such securities, by modifying the current intent andability indicator in determining whether a debt security isother-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure ofinstruments under the scope of SFAS 157 for both interim and annual periods. Weare currently evaluating these Staff Positions and the impact, if any, thatadoption will have on our financial position and results of operation.

 

**3.****      ****Fair Value Measurements**

 

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. TheCompany did not elect to re-measure any of its existing financial assets orliabilities under the provisions of this standard. Accordingly, adoption didnot have a material impact on the Company’s financial position or results ofoperations at that 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 upon quoted prices foridentical instruments traded in active markets. Level 1 instruments includesecurities traded on active exchange markets, such as the New York StockExchange.

 

·      Level 2 - Valuation is based upon quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active and model-based valuation techniquesfor which all significant assumptions are observable in the market.

 

·      Level 3 - Valuation is generated from model-basedtechniques that use significant assumptions not observable in the market. Theseunobservable assumptions reflect our own estimates of assumptions marketparticipants would use in pricing the asset or liability.

 

Our cash and cashequivalents consist of cash on deposit at various financial institutions at March 28,2009 and include approximately $6.9 million invested in money market fundswhich are measured at fair value on a recurring basis using type Level Iinputs. 

 

The fair value of ourderivatives are measured using type Level 2 inputs and had a fair value of lessthan $0.1 million at March 28, 2009. Also see Note 11 — Derivative Instruments and Hedging Activity.

 

7

----

Table of Contents

 

**4.****      ****Discontinued Operations**

 

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, the Companyclassified the operating results of this business as discontinued operations inthe accompanying statements of operations.

 

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 nine-month periodended March 28, 2009 are as follows:

 
| ** **                               | ** ** | **In thousands** | ** ** |
|------------------------------------------|------------|------------------|------------|
| Goodwill                                 |       | $                | 10,596     |   |
| Patents &  Developed Technology |       | 5,162            |       |
| Inventory                                |       | 1,681            |       |
| Fixed Assets,  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 nine months ended:** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **March 28,**              | ** ** | **March 29,**             | ** ** | **March 28,** | ** ** | **March 29,** | ** ** |
| **(in thousands)**                                                           | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                                      |       | $                               | 21         |                           | $          | 491 |   | $ | 295 |   | $ | 744 |   |
|                                                                         |       |                            |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations                                  |       | (116                            | )          | (258                           | )          | (1,895 | ) | (1,940 | ) |
| Provision for  (benefit from) Income tax from discontinued operations        |       | (905                            | )          | (40                            | )          | (587 | ) | (194 | ) |
| Net loss on  disposal of discontinued operations, net of tax benefit of $533 |       | (359                            | )          | —                         |       | (17,143 | ) | — |   |
|                                                                         |       |                            |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations, net                             |       | $                               | 430        |                           | $          | (218 | ) | $ | (18,451 | ) | $ | (1,746 | ) |

 

During the three-monthperiod ended March 28, 2009 we recognized certain residual revenues, incurredongoing operating expenses, and made required adjustments to income taxes inthe ordinary course of business.

 

As of March 28,2009, the Company had no assets or liabilities held in connection with thedisposal of Inolase other than the accrual for future occupancy costs andprofessional fees detailed in the table below.

 

8

----

Table of Contents

 

Current liabilities ofdiscontinued operations consist of the following:

 
| ** **                                  | ** ** | **March 28,** | ** **  | **June 28,** | ** ** |
|---------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| **(in thousands)**                          | ** ** | **2009**           | ** **  | **2008**          | ** ** |
| Facility closure  and other costs - CSCC    |       | $                  | 311         |              | $          | 361 |   |
| Deferred  revenue, gift certificates - CSCC |       | 839                |        | 839               |       |
| Facility closure  and other costs - Inolase |       | 180                |        | —            |       |
|                                        |       |               |        |              |       |
|                                        |       | $                  |  1,330 |              | $          | 1,200 |   |

 

**5.      Stock-based Compensation**

#  

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 March 28, 2009 and March 29,2008 resulted in the recognition of share-based compensation expense ofapproximately $0.9 million and $0.8 million, respectively. For the nine-monthperiod ended March 28, 2009 and March 29, 2008, recognition ofshared-based compensation expense was approximately $2.6 million and $2.8million, respectively.  These expenseswere divided between cost of sales and operating expense cost centers basedupon the functional responsibilities of the individuals holding the respectiveoptions.

 

As of March 28,2009, there was approximately $2.5 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 nine-month periods ended March 28,2009 and March 29, 2008 was approximately $18,000 and $0.1 million,respectively.

 

None of theoptions or SARs outstanding at March 28, 2009 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 thetotal combined voting power of all classes of stock of the Company, theexercise price per share may not be less than 110% of the fair market value pershare of common 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 high/low market price on the last day of semi-annual periodsrounded up to the nearest penny. Substantially all full-time employees areeligible to participate in the Purchase Plan. At March 28, 

 

9

----

Table of Contents

 

2009 there wereapproximately 603,000 shares available for sale. Compensation expense for thepurchase plan is recognized 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 nine-month period ended March 28, 2009. 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 4.2 million outstanding options/SARs at March 28, 2009 with a weighted-average exercise price of $8.25 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 7.47 years.

 

Of the total 4.2 million outstanding options/SARs, there were approximately 2.5 million of exercisable options/SARs at March 28, 2009 with a weighted-average exercise price of $9.09 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 6.74 years.

 

The total intrinsic value of options exercised during the nine-month period ended March 28, 2009 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 March 28, 2009.

 

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.

 

There were approximately 1.0 million stock-based SARs granted under this Plan during the three-month period ended March 28, 2009. The SARs granted to employees become exercisable ratably over one to two years. No SARs were granted to directors during the three-month period ended March 28, 2009.

 

10

Table of Contents

 

Due to forfeitures, there were approximately 0.9 million outstanding SARs under this Plan at March 28, 2009 with a weighted-average exercise price of $0.41 per share, an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of 9.79 years.

 

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 persons to whom Stock Rights are granted and determinethe terms of each Stock Right. Subject to certain limitations set forth in the2008 Stock Plan, the Board of Directors may appoint other committees toadminister the 2008 Stock Plan and also may delegate to any officer of theCompany certain authority under the 2008 Stock Plan, including the authority togrant 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, non-qualified 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, 

 

11

----

Table of Contents

 

cost targets,customer satisfaction or employee satisfaction goals, goals relating to mergersynergies, management of employment practices and employee benefits, orsupervision of litigation or information technology, and goals relating toacquisitions or divestitures of subsidiaries, affiliates or joint ventures.

 

Incentive stockoptions are not transferable by the optionee or grantee except by will or bythe laws of descent and distribution. Non-Qualified options, SARs, restrictedstock and 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.

 

**6.****      ****Earnings or loss 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 nine months ended:** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **March 28,**              | ** ** | **March 29,**             | ** ** | **March 28,** | ** ** | **March 29,** | ** ** |
| **(in thousands, except per share data)**                     | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Shares used in  the calculation of Basic earnings per share   |       | 22,725                          |       | 22,672                         |       | 22,710 |   | 22,743 |   |
| Effect of  dilutive securities:                               |       |                            |       |                           |       |   |   |   |   |
| Stock  options/SAR’s                                     |       | —                          |       | —                         |       | — |   | — |   |
|                                                          |       |                            |       |                           |       |   |   |   |   |
| Diluted shares  used in the calculation of earnings per share |       | 22,725                          |       | 22,672                         |       | 22,710 |   | 22,743 |   |

 

12

----

Table of Contents

 

During the three-monthperiod ended March 28, 2009 all but 73 potential common shares issuableupon exercise of stock options/SARs were excluded from the calculation ofdiluted earnings per share from discontinued operations as their effect wouldhave been anti-dilutive.

 

During the three andnine-month periods ended March 28, 2009 and March 29, 2008,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.

 

**7.****      ****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.

 

See Note 3 for related disclosures relative to fairvalue measurements.

 

Marketable securities consist of the following:

 
| ** **                               | ** ** | **March 28, 2009** | ** ** | **June 28, 2008** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **(in thousands)**                       | ** ** | **Net Carrying Amount** | ** ** | **Fair Value**         | ** ** | **Unrealized  loss** | ** ** | **Net Carrying Amount** | ** ** | **Fair Value** | ** ** | **Unrealized  (gain) loss** | ** ** |
| Short-term  (Held-to-maturity):          |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                       | —     |                   | $          | — |   | $ | — |   | $ | 9,000 |   | $ | 9,055 |   | $ | 55 |   |
| Certificates of  deposit                 |       | 1,756                   |       | 1,764                  |       | 8 |   | 3,131 |   | 3,134 |   | 3 |   |
|                                     |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Total marketable  securities, short-term |       | $                       | 1,756      |                   | $          | 1,764 |   | $ | 8 |   | $ | 12,131 |   | $ | 12,189 |   | $ | 58 |   |
|                                     |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Long-term  (Held-to-maturity):           |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                       | —     |                   | $          | — |   | $ | — |   | $ | 2,000 |   | $ | 2,014 |   | $ | 14 |   |
| Certificates of  deposit                 |       | —                  |       | —                 |       | — |   | 1,512 |   | 1,502 |   | (10 | ) |
|                                     |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Total marketable  securities, long-term  |       | $                       | —     |                   | $          | — |   | $ | — |   | $ | 3,512 |   | $ | 3,516 |   | $ | 4 |   |

 

Held-to-maturityinvestments at March 28, 2009 mature as follows:

 
| ** **                    | ** ** | **Fiscal Year Ended** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------|------------|------------|------------|
| **(in thousands)**            | ** ** | **2009**              | ** ** | **2010**   | ** ** | **Total** | ** ** |
| Government-backed  securities |       | $                     | —     |       | $          | — |   | $ | — |   |
| Certificates of  deposit      |       | 244                   |       | 1,512      |       | 1,756 |   |
|                          |       |                  |       |       |       |   |   |
|                          |       | $                     | 244        |       | $          | 1,512 |   | $ | 1,756 |   |

 

13

----

Table of Contents

 

**8.****      ****Inventories**

 

Inventoriesconsist of the following:

 
| ** **         | ** ** | **March 28,** | ** ** | **June 28,** | ** ** |
|--------------------|------------|--------------------|------------|-------------------|------------|
| **(in thousands)** | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| Raw materials      |       | $                  | 10,416     |              | $          | 13,720 |   |
| Work in process    |       | 924                |       | 1,635             |       |
| Finished goods     |       | 16,534             |       | 17,786            |       |
|               |       |               |       |              |       |
|               |       | $                  | 27,874     |              | $          | 33,141 |   |

 

**9.****      ****Property and Equipment**

 

Property andequipment consists of the following:

 
| ** **                                | ** ** | **March 28,** | ** **  | **June 28,** | ** ** |
|-------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| **(in thousands)**                        | ** ** | **2009**           | ** **  | **2008**          | ** ** |
| Leasehold  improvements                   |       | $                  | 388         |              | $          | 1,014 |   |
| Office furniture                          |       | 407                |        | 718               |       |
| Computers,  software, and other equipment |       | 7,667              |        | 11,845            |       |
|                                      |       |               |        |              |       |
|                                      |       | $                  |  8,462 |              | $          | 13,577 |   |
| Less:  accumulated depreciation           |       | (4,898             | )           | (9,550            | )          |
|                                      |       |               |        |              |       |
| Property and  equipment, net              |       | $                  | 3,564       |              | $          | 4,027 |   |

 

Depreciation expense wasapproximately $0.3 million for each of the three-month periods ended March 28,2009 and March 29, 2008, respectively.

 

Depreciation expense wasapproximately $0.9 million for each of the nine-month periods ended March 28,2009 and March 29, 2008, respectively.

 

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

 

**10.    Goodwilland Acquired Intangible Assets**

** **

Goodwill andacquired intangible assets consist of the following:

 
| **(in thousands)**                        | ** ** | **March 28,  2009** | ** ** | **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 |   |

 

14

----

Table of Contents

 

The changes in the carryingamount of goodwill for the nine-month period ended March 28, 2009 are asfollows:

 
| ** **                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at  June 28, 2008          |       | $                  | 13,225     |   |
|                                    |       |               |       |
| Effect of  foreign currency adjustments |       | (2,629             | )          |
|                                    |       |               |       |
| Impairment  Charge                      |       | (10,596            | )          |
|                                    |       |               |       |
| Balance at  March 28, 2009         |       | $                  | —     |   |

 

Therewas no amortization expense for the three-month period ended March 28,2009 as the assets were previously fully impaired. Amortization expense wasapproximately $0.4 million for the three-month periods ended March 29, 2008.

 

Amortizationexpense was approximately $0.8 million and $1.3 million for the nine-month periods ended March 28,2009 and March 29, 2008, respectively.

 

**11.****   ****Derivative****Instruments****and Hedging Activity**

 

Foreign Currency Risk: The Company uses derivative instruments to reduceits exposure to fluctuations in foreign exchange rates by creating offsettingpositions through the use of foreign currency forward contracts. Changes to thefair value 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 accounting, the Company recognizes the instruments aseither assets or liabilities in the statement of financial position andmeasures those instruments at fair value. Changes in the fair value of thederivatives are recorded in shareholders’ equity as a component of othercomprehensive income along with an offsetting adjustment against the basis ofthe derivative instrument itself.

 

We had no derivatives that qualified for hedgeaccounting during the three or nine-month periods ended March 28, 2009.

 

During the three and nine-month periods ended March 28,2009, we recognized the following gains (losses) on derivatives and theirrelated hedged items which were solely comprised of inter-company payables andreceivables in the normal course of business.

 
| ** **                             | ** ** | **For the three  months ended:** | ** ** | **For the nine months   ended:** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **March 28,**               | ** ** | **March 28,**               | ** ** |
| **(in thousands)**                     | ** ** | **2009**                         | ** ** | **2009**                         | ** ** |
| Other income  (expense) - derivatives  |       | $                                | 12         |                             | $          | (429 | ) |
| Other income  (expense) - hedged items |       | (6                               | )          | 187                              |       |
|                                   |       |                             |       |                             |       |
| Total                                  |       | $                                | 6          |                             | $          | (242 | ) |

 

We did not enter into any other derivative or hedgecontracts for any other risks during the three and nine-month periods ended March 28,2009.

 

The Company had three foreign currency forwardcontracts outstanding at March 28, 2009 in the notional amount ofapproximately 0.9 million Euros or approximately $1.3 million and a fairvalue of less than $0.1 million. These derivative contracts serve to mitigatethe foreign currency risk of a substantial portion of our Euro-denominatedinter-company balances at March 28, 2009.

 

**12.    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.

 

15

----

Table ofContents

 

# The following table reflects changesin the Company’s accrued warranty account during the three and nine-monthperiods ended March 28, 2009 and March 29, 2008, respectively:

** **
| ** **                             | ** ** | **For the three months ended:** | ** ** | **For the nine months ended:** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **March 28,**              | ** ** | **March 29,**             | ** ** | **March 28,** | ** ** | **March 29,** | ** ** |
| **(in thousands)**                     | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Beginning  balance                     |       | $                               | 5,602      |                           | $          | 6,085 |   | $ | 6,098 |   | $ | 7,613 |   |
| Incremental  accruals on current sales |       | 1,254                           |       | 1,784                          |       | 4,227 |   | 4,102 |   |
| Amortization of  prior-period accruals |       | (1,268                          | )          | (2,324                         | )          | (4,737 | ) | (6,170 | ) |
|                                   |       |                            |       |                           |       |   |   |   |   |
| Ending balance                         |       | $                               | 5,588      |                           | $          | 5,545 |   | $ | 5,588 |   | $ | 5,545 |   |

 

**13.    DeferredRevenue**

#  

# The Company offers extended servicecontracts that may be purchased for periods from one to five years. The Companyrecognizes service contract revenue ratably over the life of the contract.Actual service contract expenses incurred and charged to service costs of salesduring an interim period may be more or less than the amount of amortizedservice contract revenue recognized in that period.

#  

# Revenues are recognized when a signednon-cancelable purchase order exists, the product is shipped, title and riskhave passed to the customer, the fee is fixed or determinable, and collectionis considered probable. Circumstances which generally preclude the immediaterecognition of revenue include shipping terms of FOB destination or theexistence of a customer acceptance clause in a contract based upon customerinspection of the product. In these instances, revenue is deferred untiladequate documentation is obtained to ensure that these criteria have beenfulfilled.

#  

# The following table reflects changesin the Company’s deferred revenue account during the three and nine-monthperiods ended March 28, 2009 and March 29, 2008, respectively:

 
| ** **                                  | ** ** | **For the three months ended:** | ** ** | **For the nine months ended:** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **March 28,**              | ** ** | **March 29,**             | ** ** | **March 28,** | ** ** | **March 29,** | ** ** |
| **(in thousands)**                          | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Beginning  balance                          |       | $                               | 15,503     |                           | $          | 15,225 |   | $ | 18,136 |   | $ | 13,751 |   |
| Deferral of new  sales                      |       | 3,651                           |       | 5,081                          |       | 11,449 |   | 14,516 |   |
| Recognition of  previously deferred revenue |       | (4,373                          | )          | (3,350                         | )          | (14,804 | ) | (11,311 | ) |
|                                        |       |                            |       |                           |       |   |   |   |   |
| Ending balance                              |       | $                               | 14,781     |                           | $          | 16,956 |   | $ | 14,781 |   | $ | 16,956 |   |

 

**14.****   ****Common Stock Buyback**

 

325,000 shares ofcommon stock were purchased for approximately $2.4 million during thenine-month period ended March 29, 2008.

 

**15.****   ****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 March 28, 2009 was less than seven years. The royalty and the amortization of theannual license fee payment are reflected in the Company’s consolidatedstatement of income. The unamortized portion of the license fee payment isreflected in other current assets and in other assets at March 28,2009 and June 28, 2008,respectively.

 

16

----

Table of Contents

 

**16.****    ****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 and penalties,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 fiscalyears ended 2006 and later remain subject to examination by the IRS forU.S. federal tax purposes, our fiscal years ended 2005 and later remainsubject to examination by the appropriate governmental agencies for Spanish andJapanese tax purposes.

 

In connection with thepreparation of the financial statements, the Company performed an analysis toascertain if it was more likely than not that it would be able to utilize itsnet deferred tax assets of approximately $16.9 million.

 

As part of that analysis,management considered the following as positive evidence outweighing thenegative evidence of the recent pre-tax book losses:

 

·      The net temporary differences resulting in thedeferred tax assets and in the deferred tax liabilities are expected to reversein similar time periods.

 

·      The Company has a consistent taxpaying history.

 

·      Current projections of future taxable income, exclusiveof reversing temporary differences, indicate a return to taxable income in areasonable period of time.

 

Based upon theaforementioned, we have concluded that the positive evidence outweighs thenegative evidence and, thus, that those deferred tax assets not otherwisesubject to a valuation allowance are realizable on a “more likely than not”basis.

 

**17.****    ****Legal Proceedings**

 

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

 

·        Palomar assertsthat it is the exclusive licensee from The General Hospital Corporation (“Mass.General”) of U.S. Patent No. 5,735,844 (the “‘844 Patent”) and U.S. PatentNo. 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 

 

17

----

Table of Contents

 

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.  In November 2008,the Court stayed the case until the United States Patent and Trademark Office rules onthe re-examination.  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 UnitedStates Patent and Trademark Office granted the Company’s re-examination requestof the ‘844 Patent and the ‘568 Patent.  The United States Patent and Trademark Office stated that there aresubstantial new questions of patentability for all claims asserted against theCompany by Palomar.

 

·        On August 10,2006, the Company filed suit against Palomar in the United States DistrictCourt for the District of Massachusetts, asserting willful infringement byPalomar of U.S. Patent Nos. 6,659,999, 5,312,395 (the “395 Patent”), and6,743,222 (the “‘222 Patent”). The Company seeks compensatory and trebledamages for the patent infringement, as well as attorneys’ fees and aninjunction against Palomar to prevent Palomar’s continuing infringement. TheCompany served its complaint on Palomar in August 2006. In October 2006,the Company amended the Company’s suit against Palomar by removing from thesuit allegations that Palomar infringes Patent 6,659,999. In October 2006,Palomar answered the Company’s amended complaint by denying the Company’sallegations and asserting an affirmative defense of inequitable conduct withrespect to the ‘395 Patent. In addition, Palomar filed a demand for adeclaratory judgment seeking a judicial determination that Palomar productseither do not infringe the ‘395 Patent and ‘222 Patent or that such patents areinvalid. In November 2006, the Company answered the counterclaim bydenying Palomar’s allegations. In February 2008, Palomar filed a requestfor re-examination of the Company’s ‘222 Patent with the United States Patent andTrademark Office (“PTO”). In March 2008, the PTO granted re-examination.In June 2008, the Court stayed the case until the PTO rules on there-examination.

 

While the Company intends to vigorouslycontest Palomar’s allegations, and to pursue its own claims againstPalomar, 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 and cashflows.

 

·        On April 2and April 22, 2008, respectively, two substantially similar putative classaction lawsuits, entitled Western Pa. Elec. Employees Pension Fund, et al.,1:08-cv-10551-DPW (“Western Pa.”) 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 UnitedStates District Court for the District of Massachusetts purporting to assertclaims for violations of §§10(b) and 20(a) of the Securities ExchangeAct of 1934 and Rule 10b-5 promulgated thereunder, and seeking, amongother things, 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 shareholder derivative action entitled Forlenzo v. Puorro, et al., Civ.No. 08-1532, was filed in Massachusetts Superior Court for MiddlesexCounty against the individual members of Candela’s board of directors andcertain of its current and former officers, purporting to assert claims forbreach of fiduciary duty and related claims arising out of allegations similarto those asserted in the class action litigation discussed above (the 

 

18

----

Table of Contents

 

“Derivative Action”). The complaint sought on behalf of Candela, among other things, damages,restitution, and injunctive 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 therespective courts.  In February 2009and March 2009, the District Court of Massachusetts and MassachusettsSuperior Courts, respectively, provided preliminary approval of thesettlements.

 

On February 19, 2008,Cardiofocus, Inc. (“Cardiofocus”) filed suit against the Company and eightother companies in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of U.S. Patents6,457, 780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and trebledamages, as well as attorneys’ fees and injunctive relief. On April 21,2008, the Company answered Cardiofocus’ complaint and asserted a variety ofcounterclaims against Cardiofocus. The Company intends to vigorously defendagainst the lawsuit. Based upon Candela’s request, on July 23, 2008, theUnited States Patent & Trademark Office (“PTO”) agreed to re-examinethe validity of the Cardiofocus patents. On October 14, 2008, the Courtagreed to stay this matter for a minimum of one year, up to a maximum of twoyears, but no later than the PTO’s decision with respect to the re-examinationproceedings.

 

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.  While we believe that the likelihood ofloss in each of the disclosed proceedings is reasonably possible, thepossibility of loss or range of loss for each matter is not estimable.

 

**18.****   ****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 securitiesrecorded at fair value based upon quoted market prices. The temporarydifferences between cost and fair value were presented in the consolidatedfinancial statements in accumulatedother comprehensive income within stockholders’ equity, net of any related taxeffect. At March 29, 2008, in the opinion of management, the value of theinvestment in the common shares of OccuLogix sustained an other-than-temporaryimpairment in value and theCompany recognized an associated $2.5 million loss of which approximately $2.4million was reclassified from accumulated other comprehensive income.

 

19

----

Table of Contents

 

**CandelaCorporation**

 

**Item 2 -****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

We research, develop, manufacture,market, sell, distribute, and service lasers and light-based products used toperform aesthetic and cosmetic procedures. We sell our lasers to physicians andpersonal care practitioners. We market our products directly and through anetwork of distributors to end-users. Our traditional customer base includesplastic and cosmetic surgeons and dermatologists. More recently, we haveexpanded 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 nine-month period ended March 28,2009 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 nine months ended March 28, 2009 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.

 

20

----

Table of Contents

 

**Results of Operations**

 

***Revenue***

 

Revenue source bygeographic region is reflected in the following table:

 
| ** **               | ** ** | **For the three months ended:** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **March 28,**              | ** ** | **March 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**       | ** ** | **2009**                        | ** ** | **2008** | ** ** | **Increase (Decrease)** | ** ** |
| U.S.                     |       | $                               | 9,935      |   | 33 | % | $ | 12,927 |   | 34 | % | $ | (2,992 | ) | -23 | % |
| All other  countries     |       |                            | 19,831     |   | 67 | % |   | 25,472 |   | 66 | % |   | (5,641 | ) | -22 | % |
|                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total worldwide  revenue |       | $                               | 29,766     |   | 100 | % | $ | 38,399 |   | 100 | % | $ | (8,633 | ) | -22 | % |

 
| ** **               | ** ** | **For the nine months ended:** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 28,**             | ** ** | **March 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**       | ** ** | **2009**                       | ** ** | **2008** | ** ** | **Increase (Decrease)** | ** ** |
| U.S.                     |       | $                              | 27,438     |   | 32 | % | $ | 43,125 |   | 39 | % | $ | (15,687 | ) | -36 | % |
| All other  countries     |       | 57,749                         |       | 68 | % | 66,084 |   | 61 | % | (8,335 | ) | -13 | % |
|                     |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Total worldwide  revenue |       | $                              | 85,187     |   | 100 | % | $ | 109,209 |   | 100 | % | $ | (24,022 | ) | -22 | % |

 

Consolidated revenue was$29.8 million for the three-month period ended March 28, 2009, as comparedto $38.4 million for the same period ended March 29, 2008. The overalldecrease in quarterly revenue of approximately $8.6 million was driven byreductions in all regions of the world. The breakdown is as follows, U.S. $3.0million, Europe of $2.8 million, Pacific Rim $2.5 million and Latin America$0.3 million. The decreases appear to be directly related to the slowingeconomy combined with the tightening credit markets. This quarter internationalrevenue represents 67% of the total revenue which is similar to the same periodlast year.

 

Consolidated revenue was$85.2 million for the nine-month period ended March 28, 2009, as comparedto $109.2 million for the same period ended March 29, 2008. The overalldecrease of $24.0 million we believe was directly related to the slowing economycombined with the tightening credit markets. The U.S. represents the majorshortfall in the nine-month results as it decreased by $15.7 million withEurope decreasing by $7.1 million. International revenues represent 68% of thetotal revenue as compared to 61% for the comparable period last year.

 

Revenue source bytype is reflected in the following table:

 
| ** **                 | ** ** | **For the  three months ended:** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 28,**               | ** ** | **March 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **Increase (Decrease)** | ** ** |
| Lasers and other  products |       | $                                | 18,528     |   | 62 | % | $ | 27,987 |   | 73 | % | $ | (9,459 | ) | -34 | % |
| Product-related  services  |       | 11,238                           |       | 38 | % | 10,412 |   | 27 | % | 826 |   | 8 | % |
|                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total revenue              |       | $                                | 29,766     |   | 100 | % | $ | 38,399 |   | 100 | % | $ | (8,633 | ) | -22 | % |

 
| ** **                 | ** ** | **For the nine months ended:** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **March 28,**             | ** ** | **March 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **Increase (Decrease)** | ** ** |
| Lasers and other  products |       | $                              | 54,414     |   | 64 | % | $ | 79,380 |   | 73 | % | $ | (24,966 | ) | -31 | % |
| Product-related  services  |       | 30,773                         |       | 36 | % | 29,829 |   | 27 | % | 944 |   | 3 | % |
|                       |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Total revenue              |       | $                              | 85,187     |   | 100 | % | $ | 109,209 |   | 100 | % | $ | (24,022 | ) | -22 | % |

 

Thedecrease in revenue from lasers and other products for the three-month periodended March 28, 2009, as compared to the same period ended March 29,2008, was experienced in all geographic regions of the world. We believe thisis directly related to the uncertainty in the global economy combined withtightening worldwide credit markets. Decreases were realized across all productlines with no one product family experiencing a materially larger decrease thananother. While there was some degradation in average selling prices (ASP), theshortfall was primarily driven by the sale of fewer units in all globalregions.

 

21

----

Table of Contents

 

Thedecrease in revenue from lasers and other products for the nine-month periodended March 28, 2009, as compared to the same period ended March 29,2008, was experienced in all geographic regions of the world with the exceptionof Latin America which realized a small increase. The U.S. experienced thelargest year-over-year decrease as it dropped by approximately 37%. We believethis decrease to be directly related to the slowing economy and the tighteningcredit markets, of which the U.S. has felt the greatest impact to date.Decreases were realized across all product lines with no one product familyexperiencing a materially larger decrease than another.

 

Product-related servicesincreased approximately $0.8 million or 8% in the three-month period ended March 28,2009 as compared to the same period ended March 29, 2008. The increase isprimarily related to fluctuating consumable sales.

 

Product-related servicesincreased approximately $0.9 million or 3% in the nine-month period ended March 28,2009 as compared to the same period ended March 29, 2008. The slightincrease is primarily related to the increase in the number of service-relatedcontracts sold.

 

***Gross Profit.***Grossprofit was approximately $11.9 million or 40.1% for the three-month period endedMarch 28, 2009, as compared to $16.8 million or 43.7% for the same periodended March 29, 2008. The decrease in gross profit for the three-monthperiod ended March 28, 2009, as compared to the same period in theprevious fiscal year, is primarily due to changes in product mix, changes inregional mix, and a greater proportion of revenues being derived from the saleof product-related services in the current period which carry a lower marginthan sales of lasers.

 

Gross profit was approximately $32.6 millionor 38.2% for the nine-month period ended March 28, 2009, as compared to$50.4 million or 46.2% for the same period ended March 29, 2008. Thedecrease in gross profit for the nine-month period ended March 28, 2009,as compared to the same period in the previous fiscal year, is due to changesin product mix, a greater proportion of revenues being derived from the sale ofproduct-related services, and certain product reliability problems whichnegatively impacted our service margins. It was also affected by an increase inour inventory reserve of approximately $1.2 million which was determined to benecessary due to the current economic conditions.

 

We believe that we have resolved asubstantial number of the above-mentioned product reliability problems andexpect to see a positive impact on our service margins in future fiscalperiods.

 

***Selling, General and Administrative Expense.  ***Selling,general and administrative (SG&A) expenses were approximately $10.8 millionfor the three-month period ended March 28, 2009, as compared to $17.9million for the three-month period ending March 29, 2008. As a percentageof revenue, SG&A expenses decreased to 36.3% from 46.9% of revenues in thecomparative prior-year period. The $7.0 million decrease was primarily comprisedof a $3.6 million reduction in legal cost, a $1.8 million reduction insales-related costs, a $0.5 million reduction in marketing programs, and adeduction in labor and labor related costs of $0.6 million.

 

Forthe nine-month period ended March 28, 2009, SG&A expenses decreased toapproximately $41.2 million from approximately $50.2 million in the comparativeperiod ended March 29, 2008. Concurrently, due to decreasingyear-over-year revenues, SG&A expenses increased as a percentage ofrevenues to 48.3% in the nine-month period ended March 28, 2009, from46.5% of revenues in the comparative period. The $9.0 million decrease wasprimarily comprised of a $4.0 million reduction in legal cost (see Part II,Item 1 for a full discussion), a $1.6 million reduction in sales-related costs,a $1.2 million reduction in marketing programs, and a reduction in labor andlabor related costs of $2.0 million.

 

***Research and Development Expense.***  Research and development(R&D) spending increased to approximately $2.5 million for the three-monthperiod ended March 28, 2009, from approximately $2.4 million for thecomparative prior-year period. The slight increase is attributed to theincreased efforts to finalize and implement improvements to our products.

 

For the nine-month period ended March 28, 2009,Research and development (R&D) expenses increased to approximately $8.4million from approximately $7.6 million for the same period ended March 29,2008. The increase was primarily driven by the write-off of certain intellectualproperty. The Company had 

 

22

----

Table of Contents

 

acquired certain patents and rights in an attempt tocommercialize a light-based product. Based on current economic and marketconditions, management decided to cease all future development efforts relativeto this technology and its underlying product potential.

 

***OtherIncome/Expense. ***Other expense was less than $0.1 millionfor the three-months ended March 28, 2009, as compared to approximately$0.3 million for the same period ended March 29, 2008. The year-over-yeardecrease is directly related to decreased interest income earned during thethree-month period ended March 28, 2009, as compared to the comparableperiod ended March 29, 2008, due to a decrease in cash and cashequivalents and in investments during the trailing twelve-month period ended March 28,2009 combined with decreasing market interest rates

 

Other expense wasapproximately $0.2 million for the nine-months ended March 28, 2009, ascompared to approximately $0.5 million for the same period ended March 29,2008. The year-over-year decrease is primarily due to the Company havingrecognized a $2.5 million loss on the other-than-temporary impairment of ourholdings of common shares of OccuLogix, Inc. (Note 18) in the comparablefiscal period, which was offset by higher interest income during the sameperiod. This compares to decreased interest income offset by losses on certainforeign currency positions experienced during the nine-month period ended March 28,2009.

 

***IncomeTaxes.*** The(benefit) provision for income taxes results from a combination of activitiesof the Company and its domestic and foreign subsidiaries. We recorded effectivetax rates of approximately 36% and 32% for each of the nine-month periods endedMarch 28, 2009 and March 29, 2008, respectively. The effective taxrate for the period ended March 28, 2009 differs from the statutory rateprimarily due to state taxes, differences in foreign tax rates, R&D creditsand other permanent items. The effective rate for the period ended March 29,2008 differs from the statutory rate primarily due to state taxes, differencesin foreign tax rates and other permanent items. The foreign rate difference isdue to income reported in a high tax rate jurisdiction combined with lossesbenefited in a jurisdiction with a lower tax rate.

 

The Company alsorecorded a discrete tax benefit during the nine months ended March 28, 2009for the effect of the reinstatement of the R&D credit in the US.  During the nine month period ended March 29,2008 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 March 28,2009 totaled approximately $24.7 million compared with approximately $38.2million at March 29, 2008. The principal component of the decrease is thegeneral funding of operations. We continue to have no long-term debt. Webelieve that the combination of existing cash and cash equivalents, andmarketable securities on hand, along with cash to be generated by futureoperations and amounts available under our line of credit, will be sufficientto meet our ongoing operating and capital expenditure requirements for theforeseeable future. However, we cannot be sure that we will not requireadditional capital beyond the amounts currently forecasted by us, or that anysuch required additional capital will be available on reasonable terms, if atall, as it becomes required.

 

Cash used byoperating activities amounted to approximately $8.8 million for the nine-monthperiod ended March 28, 2009 as compared to cash used by operatingactivities of approximately $10.7 million for the same period in the prioryear. The decrease in cash used by operating activities is primarilyattributable to our year-to-date net loss combined with certain non-cashexpenses or losses, offset by an overall monetization of assets and liabilitiesin the normal course of business.

 

23

----

Table of Contents

 

**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.

 

**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           |       | $         | 2,250      |                  | $          | 1,000           |       | $               | 500        |               | $          | 750 |   | $ | — |   |
| Operating leases               |       | 2,182     |       | 1,136                 |       | 898             |       | 138             |       | 10                 |       |
|                           |       |      |       |                  |       |            |       |            |       |               |       |
| Total  contractual obligations |       | $         | 4,432      |                  | $          | 2,136           |       | $               | 1,398      |               | $          | 888 |   | $ | 10 |   |

 

#### **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 themanufacture, use and sale of our products for laser hair removal willfullyinfringe certain United States patents. Public announcements concerning thisand related litigation between the two parties that are unfavorable to us mayresult in significant declines in our stock price. An adverse ruling orjudgment in this matter is likely to cause our stock price to declinesignificantly. 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 others that our products infringe theirpatents or other intellectual property rights, or that the patents which we ownor have licensed rights to are invalid, could prevent us from manufacturing andselling some of our products or could require us to incur substantial costs fromlitigation, licenses or the development of non-infringing technology.

 

·      Our receipt of final approval from therespective courts in the Western Pa, Caballero and Forlenzo lawsuits.  Please see Part II, Item 1 (LegalProceedings) for a further discussion of the Western Pa, Caballero and Forlenzolitigation.

 

24

----

Table of Contents

 

·        Our principal source of liquidity is our current cashand equivalents and marketable investments. Our ability to generate cash fromoperations is dependant upon our ability to generate revenue from selling ourlasers and other products and providing product-related services. A decrease indemand for our products and related services or increases in operating costswould likely have an adverse effect on our liquidity.

 

·        Disappointing quarterly revenue or operating resultscould cause the price of our common stock to fall.

 

·        Because we typically derive more than half of ourrevenue from international sales, we are susceptible to currency fluctuations,negative economic changes taking place in foreign marketplaces, and other risksassociated with conducting business overseas.

 

·        The failure to obtain alexandrite rods for certainlaser systems from our sole supplier would impair our ability to manufactureand sell these laser systems, which has accounted for a substantial portion ofour revenue in certain recent periods.

 

·        Our failure to respond to rapid changes in technologyand intense competition in the laser industry could make our lasers obsolete.

 

·        Like other companies in our industry, we are subjectto a regulatory review process and our failure to receive necessary governmentclearances or approvals could affect our ability to sell our products andremain competitive.

 

·        We have modified some of ourproducts without FDA clearance.  The FDAcould retroactively decide the modifications were improper and require us tocease marketing and/or recall the modified products.

 

·        Achieving complete compliance with FDA regulations isdifficult, and if we fail to comply, we could be subject to FDA enforcementaction.

 

·        We could incur substantial costs as a result ofproduct liability claims, including but not limited to costs as a result ofproduct failures for which we are responsible under warranty obligations and asa result of our customer’s potential unavailability of liability insurancecoverage.

 

·        We may be unable to attract and retain management andother personnel we need to succeed.

 

·        Our failure to maintain effective internal controlover financial reporting could have a material adverse effect on our business,operating results, and stock price.

 

·        Our failure to manage acquisitions and joint ventureseffectively may divert management attention from our core business and cause usto incur debt, liabilities or costs.

 

·        Our business could also be negatively impacted if ourcustomers or suppliers experience disruptions resulting from tighter capitaland credit markets, or a slowdown in the general economy. As a result,customers may modify, delay or cancel plans to purchase our products orservices, and suppliers may increase their prices, reduce their output orchange their terms of sale. Additionally, if customers’ or suppliers’ operatingand financial performance deteriorates, or if they are unable to make scheduledpayments or obtain credit, customers may not be able to pay, or may delaypayment of, accounts receivable owed to us and suppliers may restrict credit orimpose different payment terms. Any inability of customers to pay us for ourproducts and services, or any demands by suppliers for different payment terms,may adversely affect the Company’s earnings and cash 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.

 

25

----

Table of Contents

 

**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 nine-month period ended March 28, 2009, approximately 43% and 25% of the Company’s cost of sales and expenses, respectively, were denominated in foreign currencies. In addition, approximately 34% and 29% of the Company’s consolidated assets were subject to foreign currency exchange fluctuations as of March 28, 2009 and June 28, 2008, respectively, while approximately 52% and 48% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of March 28, 2009 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.

 

The Company had threeforeign currency forward contracts outstanding at March 28, 2009 in thenotional amount of approximately 0.9 million Euros or approximately $1.3million. These derivative contracts serve to mitigate the foreign currency riskof a substantial portion of our Euro-denominated inter-company balances at March 28,2009. None of the aforementioned derivatives qualified for hedge accounting at March 28,2009.

 

# **Item 4 - Controls and Procedures**

#  

***Evaluation of Disclosure Controlsand Procedures***

Our Chief Executive Officer and Acting Chief FinancialOfficer (our principal executive officer and principal financial officer,respectively) have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended) as of March 28, 2009, the endof the period covered by this quarterly report on Form 10-Q. Managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving their objectivesand management necessarily applies its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. Management has designedsuch controls and procedures to provide reasonable assurance of achieving theirobjectives. Based on the evaluation, our Chief Executive Officer andActing Chief Financial Officer have concluded that, as of the end of the periodcovered by this report, the Company’s disclosure controls and procedures wereeffective to provide reasonable assurance of achieving their objective.

 

***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 March 28,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

26

----

Table ofContents

 

**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 isthe exclusive licensee from The General Hospital Corporation (“Mass. General”)of U.S. Patent No. 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 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 at issuein this case.  In November 2008, theCourt stayed the case until the United States Patent and Trademark Office rules onthe re-examination.  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 UnitedStates Patent and Trademark Office granted the Company’s re-examination requestof the ‘844 Patent and the ‘568 Patent.  The United States Patent and Trademark Office stated that there aresubstantial new questions of patentability for all claims asserted against theCompany by Palomar.

 

·      On August 10, 2006, theCompany filed suit against Palomar in the United States District Court for theDistrict of Massachusetts, asserting willful infringement by Palomar of U.S.Patent Nos. 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.

 

27

----

Table of Contents

 

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.

 

·      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, ashareholder derivative 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.  In February 2009 and March 2009,the District Court of Massachusetts and Massachusetts Superior Courts,respectively, provided preliminary approval of the settlements.

 

On February 19, 2008,Cardiofocus, Inc. (“Cardiofocus”) filed suit against the Company and eightother companies in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of U.S. Patents6,457, 780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and trebledamages, as well as attorneys’ fees and injunctive relief. On April 21,2008, the Company answered Cardiofocus’ complaint and asserted a variety of counterclaimsagainst Cardiofocus. The Company intends to vigorously defend against thelawsuit. Based upon Candela’s request, on July 23, 2008, the United StatesPatent & Trademark Office (“PTO”) agreed to re-examine the validity ofthe Cardiofocus patents. On October 14, 2008, the Court agreed to staythis matter for a minimum of one year, up to a maximum of two years, but nolater than the PTO’s decision 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.  While we believe that the likelihood ofloss in each of the disclosed proceedings is reasonably possible, thepossibility of loss or range of loss for each matter is not estimable.

 

28

----

Tableof Contents

 

# **Item 6 - Exhibits**

#  

| (a)     Exhibits |
|---------------------------------|
|                            |   |
| 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 |

 

29

----

Table of Contents

 

**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:  | May 5, 2009 |                | /s/ Robert E. Quinn |
|   |             |                | Robert E. Quinn |
|   |             |                | Vice President,  Finance, Treasurer, and |
|   |             |                | Corporate Controller  (Principal Financial Officer) |

 

30

----

Table of Contents

 

**CandelaCorporation**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                       |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                  |
| 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 |

 

31

----