**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-Q**

 

| **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|----------------------------------------------------------------------------------------------|
|                                                                                         |
| **For the quarterly period ended  December 28, 2002.**                                       |

 

**Commissionfile number 000-14742**

** **

**CANDELA CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                                       |   | **04-2477008**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)                   |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **530  Boston Post Road, Wayland, Massachusetts**                                  |   | **01778**                             |
| (Address of principal  executive offices)                                          |   | (Zip code)                            |
|                                                                               |   |                                  |
| Registrant’s telephone  number, including area code:  **(508) 358-7400** |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

Yes  o  No  ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                     |   | **Outstanding at February 7, 2003** |
|-------------------------------|--------|-------------------------------------|
| Common Stock, $.01 par  value |   | 10,210,248                          |

 

 

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**CANDELA CORPORATION**

**Index**

 
| Part I.  | Financial Information: |
|----------|------------------------|
|     |                   |   |
|     | Item 1.                | Unaudited  Condensed Consolidated Balance Sheets as of December 28, 2002 and June 29,  2002 |
|     |                   |   |
|     |                   | Unaudited  Condensed Consolidated Statements of Operations and Comprehensive Income  (Loss) for the three-month and six-month periods ended December 28, 2002 and  December 29, 2001 |
|     |                   |   |
|     |                   | Unaudited  Condensed Consolidated Statements of Cash Flows for the six-month periods  ended December 28, 2002 and December 29, 2001 |
|     |                   |   |
|     |                   | Notes  to Unaudited Condensed Consolidated Financial Statements |
|     |                   |   |
|     | Item  2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|     |                   |   |
|     |                   | Cautionary Statements |
|     |                   |   |
|     | Item  3.               | Quantitative  and Qualitative Disclosure about Market Risk |
|     |                   |   |
|     | Item 4.                | Controls and  Procedures |
|     |                   |   |
| Part II. | Other Information:     |
|     |                   |   |
|     | Item 1.                | Legal proceedings |
|     |                   |   |
|     | Item 6.                | Exhibits and  Reports on Form 8-K |
|     |                   |   |
|     |                   | Signatures |
|     |                   |   |
|     |                   | Certifications |
|     |                   |   |
|     |                   | Exhibits |

 

2

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**PartI.  Financial Information**

 

**Item1 - Financial Statements**

** **

**CANDELA CORPORATION**

**Condensed Consolidated Balance Sheets**

(in thousands)

(unaudited)

 
|                                             |   | **December  28,  2002** |   | **June 29,  2002** |   |
|--------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
| Assets                                           |   |                    |   |               |   |
| Current assets:                                  |   |                    |   |               |   |
| Cash and cash equivalents                        |   | $                       | 19,270 |               | $      | 19,628 |   |
| Accounts receivable, net                         |   | 21,943                  |   | 23,827             |   |
| Notes receivable                                 |   | 569                     |   | 1,262              |   |
| Inventories, net                                 |   | 12,213                  |   | 12,118             |   |
| Other current assets                             |   | 1,255                   |   | _870               |   |
| Total current assets                             |   | 55,250                  |   | 57,705             |   |
| Property and equipment, net                      |   | 2,801                   |   | 3,156              |   |
| Deferred tax assets                              |   | 5,212                   |   | 5,442              |   |
| Prepaid licenses                                 |   | 1,317                   |   | 1,405              |   |
| Other assets                                     |   | 175                     |   | 183                |   |
| Total assets                                     |   | $                       | 64,755 |               | $      | 67,891 |   |
|                                             |   |                    |   |               |   |
| Liabilities and  Stockholders’ Equity       |   |                    |   |               |   |
| Current liabilities:                             |   |                    |   |               |   |
| Accounts payable                                 |   | $                       | 2,842  |               | $      | 5,133 |   |
| Accrued payroll and related  expenses            |   | 2,209                   |   | 3,003              |   |
| Accrued warranty costs                           |   | 4,411                   |   | 4,452              |   |
| Income taxes payable                             |   | 2,147                   |   | 1,604              |   |
| Restructuring reserve                            |   | 455                     |   | 559                |   |
| Other accrued liabilities                        |   | 2,898                   |   | 2,723              |   |
| Current portion of  long-term debt               |   | —                  |   | 740                |   |
| Deferred revenue                                 |   | 3,771                   |   | 4,357              |   |
| Total current liabilities                        |   | 18,733                  |   | 22,571             |   |
| Long-term portion of  deferred revenue           |   | 2,414                   |   | 2,352              |   |
| Long-term debt                                   |   | —                  |   | 2,115              |   |
| Total liabilities                                |   | 21,147                  |   | 27,038             |   |
|                                             |   |                    |   |               |   |
| Stockholders’ equity:                       |   |                    |   |               |   |
| Common stock                                     |   | 124                     |   | 119                |   |
| Additional paid-in capital                       |   | 45,232                  |   | 43,869             |   |
| Accumulated earnings                             |   | 12,289                  |   | 11,085             |   |
| Treasury stock, at cost                          |   | (12,997                 | )      | (12,997            | )      |
| Accumulated other  comprehensive loss            |   | (1,040                  | )      | (1,223             | )      |
| Total stockholders’ equity                  |   | 43,608                  |   | 40,853             |   |
| Total liabilities and  stockholders’ equity |   | $                       | 64,755 |               | $      | 67,891 |   |

 

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

 

3

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**CANDELACORPORATION**

**Condensed Consolidated Statements of Operations andComprehensive Income (Loss)**

(in thousands, except pershare data)

(unaudited)

 
|                                                                               |   | **For the  three months ended:** |   | **For the six  months ended:** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                               |   | **December  28,  2002**          |   | **December  29,  2001**        |   | **December  28,  2002** |   | **December  29,  2001** |   |
| Revenue                                                                            |   |                             |   |                           |   |   |   |   |   |
| Lasers and other products                                                          |   | $                                | 14,912 |                           | $      | 10,254 |   | $ | 25,400 |   | $ | 17,113 |   |
| Product-related service                                                            |   | 3,116                            |   | 3,069                          |   | 5,873 |   | 5,895 |   |
| Skin care center                                                                   |   | 538                              |   | 833                            |   | 1,096 |   | 1,528 |   |
| Total revenue                                                                      |   | 18,566                           |   | 14,156                         |   | 32,369 |   | 24,536 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Cost of sales                                                                      |   |                             |   |                           |   |   |   |   |   |
| Lasers and other products                                                          |   | 6,772                            |   | 5,111                          |   | 11,374 |   | 8,051 |   |
| Product-related service                                                            |   | 2,291                            |   | 2,256                          |   | 4,290 |   | 4,397 |   |
| Skin care center                                                                   |   | 391                              |   | 677                            |   | 815 |   | 1,227 |   |
| Total cost of sales                                                                |   | 9,454                            |   | 8,044                          |   | 16,479 |   | 13,675 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Gross profit                                                                       |   | 9,112                            |   | 6,112                          |   | 15,890 |   | 10,861 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Operating expenses:                                                                |   |                             |   |                           |   |   |   |   |   |
| Selling, general and  administrative                                               |   | 6,657                            |   | 6,814                          |   | 11,732 |   | 12,518 |   |
| Research and development                                                           |   | 1,086                            |   | 1,236                          |   | 1,952 |   | 2,248 |   |
| Total operating expenses                                                           |   | 7,743                            |   | 8,050                          |   | 13,684 |   | 14,766 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Income (loss) from  operations                                                     |   | 1,369                            |   | (1,938                         | )      | 2,206 |   | (3,905 | ) |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Other income (expense):                                                            |   |                             |   |                           |   |   |   |   |   |
| Interest income                                                                    |   | 60                               |   | 131                            |   | 135 |   | 366 |   |
| Interest expense                                                                   |   | (73                              | )      | (120                           | )      | (179 | ) | (239 | ) |
| Other income (expense)                                                             |   | (622                             | )      | 412                            |   | (281 | ) | 364 |   |
| Total other income  (expense)                                                      |   | (635                             | )      | 423                            |   | (325 | ) | 491 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before income  taxes                                                 |   | 734                              |   | (1,515                         | )      | 1,881 |   | (3,414 | ) |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Provision for (benefit  from) income taxes                                         |   | 264                              |   | (354                           | )      | 677 |   | (1,022 | ) |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Net income (loss)                                                                  |   | $                                | 470    |                           | $      | (1,161 | ) | $ | 1,204 |   | $ | (2,392 | ) |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Basic earnings (loss) per  share                                                   |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Diluted earnings (loss) per  share                                                 |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | ) |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Weighted average shares  outstanding                                               |   | 9,877                            |   | 10,176                         |   | 9,760 |   | 10,151 |   |
| Adjusted weighted average  shares outstanding                                      |   | 10,004                           |   | 10,176                         |   | 9,859 |   | 10,151 |   |
|                                                                               |   |                             |   |                           |   |   |   |   |   |
| Net Income (loss)                                                                  |   | $                                | 470    |                           | $      | (1,161 | ) | $ | 1,204 |   | $ | (2,392 | ) |
| Other comprehensive income  (net of tax):  Foreign currency translation adjustment |   | (115                             | )      | 188                            |   | (107 | ) | 456 |   |
| Comprehensive income (loss)                                                        |   | $                                | 355    |                           | $      | (973 | ) | $ | 1,097 |   | $ | (1,936 | ) |

 

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

 

4

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**CANDELACORPORATION**

**CondensedConsolidated Statements of Cash Flows**

(in thousands)

(unaudited)

 
|                                                                                                 |   | **For the six  months ended:** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                 |   | **December  28,  2002**        |   | **December  29,  2001** |   |
| Cash flows from operating  activities:                                                               |   |                           |   |   |   |
| Net income (loss)                                                                                    |   | $                              | 1,204  |   | $ | (2,392 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used for) operating activities: |   |                           |   |   |   |
| Depreciation and  amortization                                                                       |   | 411                            |   | 265 |   |
| Provision for bad debts                                                                              |   | (43                            | )      | 159 |   |
| Effect of exchange rate  changes on foreign currency denominated assets and liabilities              |   | 2                              |   | (144 | ) |
| Accretion of debt discount                                                                           |   | 475                            |   | 50 |   |
| Increase (decrease) in cash  from working capital:                                                   |   |                           |   |   |   |
| Accounts receivable                                                                                  |   | 1,887                          |   | 1,936 |   |
| Notes receivable                                                                                     |   | 686                            |   | 551 |   |
| Inventories                                                                                          |   | (75                            | )      | (273 | ) |
| Other current assets                                                                                 |   | (389                           | )      | 56 |   |
| Other assets                                                                                         |   | 100                            |   | 91 |   |
| Accounts payable                                                                                     |   | (2,278                         | )      | (1,525 | ) |
| Accrued payroll and related  expenses                                                                |   | (796                           | )      | (334 | ) |
| Deferred revenue                                                                                     |   | (514                           | )      | (72 | ) |
| Accrued warranty costs                                                                               |   | (50                            | )      | 163 |   |
| Income taxes payable                                                                                 |   | 811                            |   | (1,534 | ) |
| Restructuring reserve                                                                                |   | (104                           | )      | (239 | ) |
| Other accrued liabilities                                                                            |   | 178                            |   | 175 |   |
| Net cash provided by (used  for) operating activities                                                |   | 1,505                          |   | (3,067 | ) |
|                                                                                                 |   |                           |   |   |   |
| Cash flows from investing  activities:                                                               |   |                           |   |   |   |
| Purchases of property and  equipment                                                                 |   | (70                            | )      | (778 | ) |
| Net cash used for investing  activities                                                              |   | (70                            | )      | (778 | ) |
|                                                                                                 |   |                           |   |   |   |
| Cash flows from financing  activities:                                                               |   |                           |   |   |   |
| Principal payments of  long-term debt                                                                |   | (3,330                         | )      | (185 | ) |
| Net borrowings (repayments)  on other long-term liabilities                                          |   | —                         |   | 177 |   |
| Proceeds from the issuance  of common stock                                                          |   | 1,368                          |   | 319 |   |
| Repurchase of treasury  stock                                                                        |   | —                         |   | (4,849 | ) |
| Net cash used for financing  activities                                                              |   | (1,962                         | )      | (4,538 | ) |
|                                                                                                 |   |                           |   |   |   |
| Effect of exchange rates on  cash and cash equivalents                                               |   | 169                            |   | (217 | ) |
|                                                                                                 |   |                           |   |   |   |
| Net decrease in cash and  cash equivalents                                                           |   | (358                           | )      | (8,600 | ) |
| Cash and cash equivalents  at beginning of period                                                    |   | 19,628                         |   | 32,318 |   |
| Cash and cash equivalents  at end of period                                                          |   | $                              | 19,270 |   | $ | 23,718 |   |

 

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

 

5

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### **CANDELA CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements**

 

**1.****                   Basisof Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements and notes do not include all of the disclosures made inthe Annual Report on Form 10-K of Candela Corporation (the “Company”) forfiscal year 2002, which should be read in conjunction with these financial statements.  The financial information included herein isunaudited, with the exception of the condensed consolidated balance sheet as ofJune 29, 2002, which was derived from the audited consolidated balance sheetdated June 29, 2002.  However, in theopinion of management, the statements include all necessary adjustments,consisting principally of normal recurring accruals, for a fair presentation ofthe quarterly results and are prepared and presented in a manner consistentwith the Company’s Annual Report on Form 10-K. The results for the three- andsix-month periods ended December 28, 2002 are not necessarily indicative of theresults to be expected for the full year.

 

**2.****                   NewAccounting Pronouncements**

 

In April 2002, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.145, *“Rescission of FASB Statement No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”*.SFAS No. 145 rescinds the following pronouncements: SFAS No. 4, *“Reporting Gains and Losses from Extinguishment ofDebt”*, SFAS No. 44, *“Accountingfor Intangible Assets of Motor Carriers”,*SFAS No. 64, *“Extinguishments of Debt Made to Satisfy Sinking-FundRequirements”* and SFAS No. 13, *“Accountingfor Leases”*, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions. SFAS No. 145 also makes technicalcorrections to other existing authoritative pronouncements to clarify meanings,or describe their applicability under changed conditions. In compliance withSFAS No. 145, the Company recognized the one-time charge related to theextinguishment of its long-term debt (see Note 6) as a component of otherincome (expense) rather than as an extraordinary item.

 

In June 2002, the FASB issued SFAS No. 146, “*Accountingfor Costs Associated with Exit or Disposal Activities*”. SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)*”,(“EITF No. 94-3”).  SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred.  EITF No. 94-3 allowed for an exit cost liability to berecognized at the date of an entity’s commitment to an exit plan. SFAS No. 146also requires that liabilities recorded in connection with exit plans beinitially measured at fair value.  The provisions of SFAS No. 146 areeffective for exit or disposal activities that are initiated after December 31,2002, with early adoption encouraged.  The Company does not expect theadoption of SFAS No. 146 will have a material impact on its financial positionor results of operations.

 

In November 2002, the FASB issued Interpretation No.45 (“FIN 45”), “*Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”.*FIN 45addresses financial accounting for, and disclosure of, guarantees.  FIN 45 requires certain guarantees to berecorded at fair value, as opposed to the existing standard of recording aliability only when a loss is probable and reasonably estimable according toSFAS No. 5, *“Accountingfor Contingencies”*. In accordance with FIN 45, the Company hasamended its disclosure related to product warranties.  The adoption of FIN 45 is not expected to have a material impacton the Company’s financial position and results of operations.

 

In December 2002, the FASB issued SFAS No. 148, “*Accountingfor Stock-Based Compensation – Transition and Disclosure.”*SFAS No.148 requires the disclosure of the effects of a company’s accounting policywith respect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements. SFAS No. 148amends SFAS No. 123, *“Accounting for Stock-Based Compensation”*by providing alternative methods of transition to the fair-value

 

6

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method of accounting for stock-based employeecompensation under SFAS No. 123. SFAS No. 148 also amends the disclosureprovisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, *“InterimFinancial Reporting”* to require disclosure of the effects of acompany’s accounting policy with respect to stock-based employee compensationon reported net income and earnings per share in annual and interim financialstatements. In accordance with SFAS No. 148, the Company has disclosed themethod of accounting for stock-based employee compensation in the CriticalAccounting Policies section of Item 2 of this interim report. The adoption ofSFAS No. 148 had no impact on the Company’s financial position and results ofoperations.

 

**3.****                   EarningsPer Share**

 

Basic earnings per share is computed by dividing netincome by the weighted average number of shares of common stock outstanding forthe period and, if there are dilutive securities, diluted earnings per share iscomputed by including common stock equivalents outstanding for the period inthe denominator.

 

Common stock equivalents include shares issuable uponthe exercise of stock options or warrants, net of shares assumed to have beenpurchased with the proceeds, using the treasury stock method.

 
|                                          |   | **For the  three months ended:** |   | **For the six  months ended:** |   |
|-----------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(in thousands, excepts per share data)**    |   | **December  28,  2002**          |   | **December  29,  2001**        |   | **December  28,  2002** |   | **December  29,  2001** |   |
| *Numerator*                                   |   |                             |   |                           |   |   |   |   | ** ** |
| Net income (loss)                             |   | $                                | 470    |                           | $      | (1,161 | ) | $ | 1,204 |   | $ | (2,392 | **)** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| *Denominator*                                 |   |                             |   |                           |   |   |   |   | ** ** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| Basic (Loss) Earnings per  Share              |   |                             |   |                           |   |   |   |   | ** ** |
| Weighted average shares  outstanding          |   | 9,877                            |   | 10,176                         |   | 9,760 |   | 10,151 | ** ** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| Earnings (loss) per share                     |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | **)** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| Diluted Earnings (Loss) per  Share            |   |                             |   |                           |   |   |   |   |   |
| Weighted average shares  outstanding          |   | 9,877                            |   | 10,176                         |   | 9,760 |   | 10,151 | ** ** |
| Effect of dilutive  securities:               |   |                             |   |                           |   |   |   |   | ** ** |
| Stock options                                 |   | 111                              |   | —                         |   | 84 |   | — | ** ** |
| Stock warrants                                |   | 16                               |   | —                         |   | 15 |   | — | ** ** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| Adjusted weighted average  shares outstanding |   | 10,004                           |   | 10,176                         |   | 9,859 |   | 10,151 | ** ** |
|                                          |   |                             |   |                           |   |   |   |   | ** ** |
| Diluted earnings (loss) per  share            |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | **)** |

 

During the six-month periods ended December 28, 2002and December 29, 2001, there were 676,733 and 1,034,946 options to purchaseshares of common stock that were respectively excluded from the calculation ofdiluted earnings per share because the exercise price of such options wasgreater than the average market price of the common stock for the period.

 

7

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**4.****                   Inventories**

** **

Inventories consist of the following:

** **
| **(in  thousands)** |   | **December  28,  2002** |   | **June 29,  2002** |   |
|---------------------|--------|-------------------------|--------|--------------------|--------|
| Raw materials       |   | $                       | 4,568  |               | $      | 4,615 |   |
| Work in process     |   | 874                     |   | 1,037              |   |
| Finished goods      |   | 6,771                   |   | 6,466              |   |
|                |   | $                       | 12,213 |               | $      | 12,118 |   |

 

**5.****                   RestructuringCharges**

 

During the quarters ended December 27, 1997 and June30, 2001, the Company recorded combined restructuring charges of $3,721,000resulting from management’s decision to close the skin care center located inScottsdale, Arizona. During the three-month period ended December 29, 2001, theCompany secured a sublease for the Scottsdale facility. Per the subleaseagreement, the sublessee will pay all costs associated with the facilitythrough the end of the lease term ending June 2006. As an incentive to thesublessee, the Company agreed to pay eight months of rent during the life ofthe sublease.  The sublessee commencedmaking payments to the landlord on behalf of the Company on April 1, 2002.

 

As a result of the sublease, the Company revised theestimate of future costs associated with the Scottsdale facility and, in thequarter ended March 30, 2002, reversed $693,000 of the restructuring reserve,which represents primarily the amount of future contractual sublease paymentsas well as revisions to the net realizable value of certain leaseholdimprovements.

 

The following table reflects the restructuring chargesincurred during the six-month period ended December 28, 2002:

 
| **(in thousands)**            |   | **Payroll and  Severance** |   | **Leasehold  Improvements  and Fixed  Assets** |   | **Facility  Costs** |   | **Total** |   |
|-------------------------------|--------|----------------------------|--------|------------------------------------------------|--------|---------------------|--------|-----------|--------|
| Balance at June 29, 2002      |   | $                          | 112    |                                           | $      | 410                 |   | $         | 37     |   | $ | 559 |   |
| Cash charges                  |   | (38                        | )      |                                           |   | (12                 | )      | (50       | )      |
| Non-cash charges              |   |                       |   | (54                                            | )      |                |   | (54       | )      |
| Balance at December 28,  2002 |   | $                          | 74     |                                           | $      | 356                 |   | $         | 25     |   | $ | 455 |   |

 

**6.****                   Debt**

 

In 1998, the Company issued eight-year, 9.75%subordinated term notes (“Note Agreement”) to three investors in the aggregateamount of $3,700,000, secured by the assets of the Company.  The notes were due in October 2006, andrequired quarterly interest payments. The Company was required to make mandatory quarterly principal paymentsof $185,000, along with any unpaid interest, beginning on January 31, 2002.

 

The notes permitted early repayment with a decreasingearly redemption premium amount through October 31, 2004. The Company repaidthe entire debt evidenced by the notes on November 8, 2002.  As a

 

8

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result of the early repayment the Company incurred aone-time charge evidenced by the notes of $677,302 during the three-monthperiod ended December 28, 2002. This charge represents the unamortized balanceof the fair value of common stock warrants issued in conjunction with theoriginal debt issuance ($440,502) and the early redemption premium. The cashpaid was calculated as follows:

** **
| Outstanding principal  balance                               |   | $       | 2,960,000 |   |
|--------------------------------------------------------------|--------|---------|-----------|--------|
| Early redemption premium                                     |   | 236,800 |      |
| Interest for the period  October 1, 2002 to November 8, 2002 |   | 30,463  |      |
| Total                                                        |   | $       | 3,227,263 |   |

 

During the three-monthperiod ended December 28, 2002, two of the warrant holders exercised warrantsresulting in 435,000 shares of common stock and an increase in the Company'scash balance of $1,157,600.

 

**7.****                   SegmentInformation**

 

The Company operates principally in two industrysegments: the design, manufacture, sale, and service of medical devices andrelated equipment; and the performance of services in the skin care/health spaindustry.

 
|                           |   | **For the  three months ended:** |   | **For the six  months ended:** |   |
|--------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(in thousands)**             |   | **December  28,  2002**          |   | **December  29,  2001**        |   | **December  28,  2002** |   | **December  29,  2001** |   |
| Revenue:                       |   |                             |   |                           |   |   |   |   |   |
| Product sales and service      |   | $                                | 18,028 |                           | $      | 13,323 |   | $ | 31,273 |   | $ | 23,008 |   |
| Skin care/health spa  services |   | 538                              |   | 833                            |   | 1,096 |   | 1,528 |   |
| Total revenue                  |   | $                                | 18,566 |                           | $      | 14,156 |   | $ | 32,369 |   | $ | 24,536 |   |
|                           |   |                             |   |                           |   |   |   |   |   |
| Operating income (loss):       |   |                             |   |                           |   |   |   |   |   |
| Product sales and service      |   | $                                | 1,864  |                           | $      | (1,518 | ) | $ | 3,032 |   | $ | (3,038 | ) |
| Skin care/health spa  services |   | (495                             | )      | (420                           | )      | (826 | ) | (867 | ) |
| Total operating income  (loss) |   | $                                | 1,369  |                           | $      | (1,938 | ) | $ | 2,206 |   | $ | (3,905 | ) |

 
|                                       |   | **As of  December 28, 2002** |         | **As of  June 29, 2002** |   |
|--------------------------------------------|--------|------------------------------|--------------|--------------------------|--------|
| Total assets:  (net intercompany accounts) |   |                         |         |                     |   |
| Product sales and service                  |   | $                            |  63,960 |                     | $      |  67,123 |   |
| Skin care/health spa  services             |   | 795                          |         | 768                      |   |
| Total assets                               |   | $                            |  64,755 |                     | $      |  67,891 |   |

 

**8.****                Guarantees**

 

The Company’s products generally carry a standardone-year warranty, except for Vbeam products that typically carry a three-yearwarranty. The Company sets aside a reserve based on anticipated warranty claimsat the time product revenue is recognized. In anticipation of actual warrantyclaims, the Company amortizes the reserve ratably over the life of the warrantythereby offsetting actual warranty claims incurred. Actual warranty claimsincurred and charged to product costs of sale during an interim period may bemore or less than the amount of amortized warranty reserve allocated againstthem. Factors that affect the Company’s product warranty liability include thenumber of installed units, the anticipated cost of warranty repairs andhistorical and anticipated rates of warranty claims.

 

9

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The following table reflects changes in the Company’saccrued warranty account during the six-month period ended December 28,2002:

 
| **(in  thousands)**                         |   |   |   |
|---------------------------------------------|--------|--------|--------|
| Beginning balance June 29,  2002            |   | $      | 4,452  |   |
| Plus accruals related to  new sales         |   | 2,400  |   |
| Less amortization of prior  period accruals |   | (2,441 | )      |
| Ending balance on December  28, 2002        |   | $      | 4,411  |   |

 

The Company also offers extended service contractsthat may be purchased after a standard warranty has expired. Service contractsmay be purchased for periods from one to five years. The Company recognizesservice contract revenue ratably over the life of the contract. Actual servicecontract expenses incurred and charged to service costs of sales during aninterim period may be more or less than the amount of amortized servicecontract revenue recognized in that period.

 

The following table reflects changes in the Company’sdeferred revenue account during the six-month period ended December 28,2002:

 
| **(in  thousands)**                          |   |   |   |
|----------------------------------------------|--------|--------|--------|
| Beginning balance June 29,  2002             |   | $      | 4,357  |   |
| Plus deferral of new  service contract sales |   | 948    |   |
| Less recognition of  deferred revenue        |   | (1,534 | )      |
| Ending balance on December  28, 2002         |   | $      | 3,771  |   |

 

The Company has an agreement (the Agreement) with anindependent leasing company whereby the Company will purchase delinquent leases(the UNL Provision) relating to Company products purchased by customers andfinanced through the leasing company. The Company is required to honor the UNL Provision when the leasingcompany's aggregate losses reach levels specified in the Agreement.  The UNL Provision of the Agreement wasrecently eliminated for any lease initiated after December 31, 2002.  Since the inception of the Agreement, thecumulative amounts paid to the leasing company under the UNL Provision have notbeen significant.

 

**9.****                Stock-basedCompensation**

 

****Inaccordance with Accounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees”*, the Company does not recognizecompensation expense for options granted with exercise prices at fair marketvalue of the underlying common stock to employees and directors of the Companyunder our various option plans. If the Company accounted for such options, inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 *Accountingfor Stock-Based Compensation”*, it would use a fair-value method todetermine the effect on net income and earnings per share of compensationexpense for options granted to employees and directors.****

 

10

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The following table reflects the pro-forma effects ifthe fair value method had been applied to all awards during the three- andsix-month periods ended December 28, 2002 and December 29, 2001:

 
|                                                                                                                                  |   | **For the  three months ended:** |   | **For the six  months ended:** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(in thousands, excepts per share data)**                                                                                            |   | **December  28,  2002**          |   | **December  29,  2001**        |   | **December  28,  2002** |   | **December 29,  2001** |   |
| Net income (loss), as  reported                                                                                                       |   | $                                | 470    |                           | $      | (1,161 | ) | $ | 1,204 |   | $ | (2,392 | ) |
|                                                                                                                                  |   |                             |   |                           |   |   |   |   |   |
| Add: stock-based employee  compensation expense included in reported net income, net of related tax  effects                          |   | —                           |   | —                         |   | — |   | — |   |
|                                                                                                                                  |   |                             |   |                           |   |   |   |   |   |
| Deduct: total stock-based  employee compensation expense determined under fair value based method for  all awards, net of tax effects |   | —                           |   | (47                            | )      | (413 | ) | (581 | ) |
|                                                                                                                                  |   |                             |   |                           |   |   |   |   |   |
| Pro forma net income (loss)                                                                                                           |   | $                                | 470    |                           | $      | (1,208 | ) | $ | 791 |   | $ | (2,973 | ) |
|                                                                                                                                  |   |                             |   |                           |   |   |   |   |   |
| Earnings per share                                                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Basic - as reported                                                                                                                   |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Basic - pro  forma                                                                                                                    |   | $                                | 0.05   |                           | $      | (0.12 | ) | $ | 0.08 |   | $ | (0.29 | ) |
|                                                                                                                                  |   |                             |   |                           |   |   |   |   |   |
| Diluted - as reported                                                                                                                 |   | $                                | 0.05   |                           | $      | (0.11 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Diluted - pro forma                                                                                                                   |   | $                                | 0.05   |                           | $      | (0.12 | ) | $ | 0.08 |   | $ | (0.29 | ) |

 

**10.****            LegalProceedings**

 

From time to time, the Company is a party to variouslegal proceedings incidental to our business. The Company believes that none ofthe legal proceedings which are presently pending will have a material adverseeffect upon our financial position, results of operations, or liquidity.

 

Reference is hereby made to the arbitration proceedingwith Physicians Sales and Service, Inc. ("PSS"), a division of PSSWorld Medical, Inc. as reported in the 10-K for the fiscal year ended June 29,2002.  No material developments in theresolution of this matter have transpired since then.

 

**11.    Subsequentevent**

 

On January 8, 2003, the Company acquired substantiallyall of the assets of Applied Optronics, the diode division of Schwartz Electro-Optics,Inc., for approximately $1.2 million in cash.

 

11

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**CANDELA CORPORATION**

 

**Item2 -****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Overview**

 

We research, develop, manufacture, market and service lasers used toperform aesthetic and cosmetic procedures. We sell our lasers principally tomedical practitioners.  We market ourproducts directly and through a network of distributors to end-users. Ourtraditional customer base includes plastic and cosmetic surgeons anddermatologists. More recently we have expanded our sales to a broader group ofpractitioners consisting of general practitioners and certain specialistsincluding obstetricians, gynecologists and general and vascular surgeons.   We derive our revenue from:  the sale of lasers and other products; theprovision of product-related services; and the operation of our remaining skincare center.  Over half of our revenuein recent periods has come from international sales.

 

**Critical Accounting Policies**

 

****The discussion and analysis of ourfinancial condition and results of operations are 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. On an on-going basis, weevaluate our estimates, including those related to revenue recognition, baddebts, inventories, warranty obligations, contingencies, restructurings andincome taxes. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. A discussion of our critical accounting policies andthe related judgments and estimates affecting the preparation of ourconsolidated financial statements is included in the Annual Report on Form 10-Kof the Company for fiscal year 2002.****

 

****Accounting for Stock-based Compensation********In accordance withAccounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees,”*we do not recognize compensation expense for options granted with exerciseprices at fair market value of the underlying common stock to employees anddirectors of the Company under our various option plans. If we accounted forsuch options in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 123 *Accountingfor Stock-Based Compensation,”* we would use a fair-value method todetermine the effect on net income and earnings per share of compensationexpense for options granted to employees and directors.****

 

12

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**Results of Operations**

 

***Revenue. ***Revenuesource by geography is reflected in the following table:

 
|               |   | **For the  three months ended:** |   |
|--------------------|--------|----------------------------------|--------|
| **(in thousands)** |   | **December  28, 2002**           |   | **December  29, 2001** |   | **Change** |   |
| US revenue         |   | $                                | 8,405  |   | 45 | % | $ | 5,955 |   | 42 | % | $ | 2,450 |   | 41 | % |
| Foreign revenue    |   | 10,161                           |   | 55 | % | 8,201 |   | 58 | % | 1,960 |   | 24 | % |
|               |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue      |   | $                                | 18,566 |   | 100 | % | $ | 14,156 |   | 100 | % | $ | 4,410 |   | 31 | % |

 
|            |   | **For the six  months ended:** |   |
|-----------------|--------|--------------------------------|--------|
|            |   | **December  28, 2002**         |   | **December  29, 2001** |   | **Change** |   |
| US revenue      |   | $                              | 14,518 |   | 45 | % | $ | 9,527 |   | 39 | % | $ | 4,991 |   | 52 | % |
| Foreign revenue |   | 17,851                         |   | 55 | % | 15,009 |   | 61 | % | 2,842 |   | 19 | % |
|            |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue   |   | $                              | 32,369 |   | 100 | % | $ | 24,536 |   | 100 | % | $ | 7,833 |   | 32 | % |

 

Revenue increased over the three-month and six-month periods endedDecember 28, 2002, compared to the same periods ended December 29, 2001, dueprimarily to the replacement of a major North American distributor with adirect sales force beginning in the second quarter of fiscal year 2002. For thethree month-period ended December 28, 2002, direct sales of lasers and relatedservices to domestic customers increased approximately $2,800,000, while salesto domestic distributors decreased approximately $100,000 and revenue from theskin care center also decreased approximately $300,000 as compared to the sameperiod one year earlier. For the six month-period ended December 28, 2002,direct sales of lasers and related services to domestic customers increasedapproximately $5,600,000, while sales to domestic distributors decreasedapproximately $200,000 and revenue from the skin care center also decreasedapproximately $400,000 as compared to the same period one year earlier.

 

Foreign revenue also increased during the three-month period endedDecember 28, 2002, compared to the same period one year earlier, due primarilyto increases in sales of lasers and related services to the Asia Pacific marketof approximately $1,000,000 and to European market of approximately $900,000.For the six-month period ended December 28, 2002, sales of lasers and relatedservices to the Asia Pacific market increased $2,200,000, and sales of lasersand related services to the European markets increased approximately $600,000as compared to the same period one year earlier. For both the three-month andsix-month periods ended December 28, 2002, sales generated by our subsidiariesin France, Germany and Spain have steadily replaced the sales channels formerlyfilled by direct sales from the United States and sales to Europeandistributors. In the three-month period ended December 28, 2002, revenueprovided by these subsidiaries increased approximately $1,000,000, whilerevenue provided by European distributors and direct sales forces from the U.S.decreased approximately $100,000 as compared to the same period one yearearlier. For the six-month period ended December 28, 2002, revenue provided bythese subsidiaries increased approximately $1,200,000 while revenue provided byEuropean distributors and direct sales forces from the U.S. decreased approximately$600,000. As the European subsidiaries continue to grow, we expect this trendto continue.

 

13

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Revenue source bytype is reflected in the following table:

 
|                      |   | **For the  three months ended:** |   |
|---------------------------|--------|----------------------------------|--------|
| **(in thousands)**        |   | **December  28,  2002**          |   | **December  29,  2001** |   | **Change** |   |
| Revenue                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Lasers and other products |   | $                                | 14,912 |   | 80 | % | $ | 10,254 |   | 72 | % | $ | 4,658 |   | 45 | % |
| Product related service   |   | 3,116                            |   | 17 | % | 3,069 |   | 22 | % | 47 |   | 2 | % |
| Skin care centers         |   | 538                              |   | 3 | % | 833 |   | 6 | % | (295 | ) | -35 | % |
| Total revenue             |   | $                                | 18,566 |   | 100 | % | $ | 14,156 |   | 100 | % | $ | 4,410 |   | 31 | % |

 
|                      |   | **For the six  months ended:** |   |
|---------------------------|--------|--------------------------------|--------|
|                      |   | **December  28,  2002**        |   | **December  29,  2001** |   | **Change** |   |
| Revenue                   |   |                           |   |   |   |   |   |   |   |   |   |   |   |
| Lasers and other products |   | $                              | 25,400 |   | 78 | % | $ | 17,113 |   | 70 | % | $ | 8,287 |   | 48 | % |
| Product related service   |   | 5,873                          |   | 18 | % | 5,895 |   | 24 | % | (22 | ) | 0 | % |
| Skin care centers         |   | 1,096                          |   | 3 | % | 1,528 |   | 6 | % | (432 | ) | -28 | % |
| Total revenue             |   | $                              | 32,369 |   | 100 | % | $ | 24,536 |   | 100 | % | $ | 7,833 |   | 32 | % |

 

The increase in laser product revenue for the three-month period endedDecember 28, 2002, compared to the three-month period ended December 29, 2001,resulted from an increase in the sales volume and average selling price of ourSmoothbeam and VbeamTM product lines, and an increase in sales volume of ourGentleLaseTM products. The increase in volume and average selling price of theSmoothbeam and VbeamTM products contributed approximately $1,300,000 and$1,800,000, respectively to the increase in revenue. The increase in salesvolume of the GentleLaseTM products contributed approximately $1,200,000 to thisincrease in revenue while maintaining a consistent average selling price. Skincare center revenue decreased primarily due to a continuing decrease in thesale of accessories and treatments.

 

The increase in laser product revenue for the six-month period endedDecember 28, 2002, compared to the six-month period ended December 29, 2001,also resulted primarily from an increase in the sales volume and averageselling price of our Smoothbeam and VbeamTM product lines, and an increase insales volume of our GentleLaseTM products. The increase in volume and averageselling price of the Smoothbeam and VbeamTM products contributed approximately$1,300,000 and $2,900,000, respectively to the increase in revenue. Theincrease in sales volume of the GentleLaseTM products contributed approximately$3,600,000 to this increase in revenue while maintaing a relatively consistentaverage selling price. Skin care center revenue decreased primarily due to acontinuing decrease in the sale of accessories and treatments.

 

***GrossProfit. ***Grossprofit increased to $9,112,000 or 49% of revenues for the three month periodended December 28, 2002, compared to gross profit of $6,112,000 or 43% for thesame period one year earlier.  Grossprofit increased to $15,890,000 or 49% of revenues for the six-month periodended December 28, 2002, compared to gross profit of $10,861,000 or 44% for thesame period one year earlier.  Theincreases in gross profit result principally from the increase in sales volumeand average selling price of our SmoothbeamTM and VbeamTM product lines, and theincrease in sales volume of the GentleLaseTM products.

 

***Selling, General and AdministrativeExpense. ***Selling,general and administrative expenses decreased to $6,657,000 for the three-monthperiod ending December 28, 2002 from $6,814,000 for the three-month periodDecember 29, 2001.  As a percentage ofrevenue, selling, general and administrative expenses decreased to 36% from 48%of revenues for the same respective periods. Selling, general andadministrative expenses decreased to $11,732,000 for the six-month periodending December 28, 2002 from $12,518,000 for the six-month period endedDecember 29, 2001. For the six-month period ending December 28, 2002, selling,general and administrative expenses decreased to 36% from 51% of revenues ascompared to the same period one year earlier. The decrease in selling, generaland administrative expenses is

 

14

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due to a $300,000 increase in the provision for bad debt expenseassociated with a North American distributor, a $180,000 increase in theprovision for bad debt expense associated with our subsidiary in France and a$90,000 legal settlement in the Skin Care Center during the six-month periodended December 29, 2001 and a $200,000 decrease in costs associated withoutside market research consultants during the six-month period endedDecember 28, 2002.

 

***Research and Development Expense.***   Research and development spending decreasedto $1,086,000 for the three-month period ended December 28, 2002 from$1,236,000 for the three-month period ended December 29, 2001 due primarily tomanagement pay cuts and staff reductions. For the six-month periods endedDecember 28, 2002 and December 29, 2001, research and development expensesdecreased to $1,952,000 from $2,248,000, respectively. As a percentage ofsales, research and development expenses decreased to 6% from 9% during boththe three- and six-month periods ended December 28, 2002 and December 29, 2001,respectively. Research and development expenses are expected to return to alevel of approximately 9% of sales during the remainder of fiscal year 2003with the replacement of research staff and the initiation of new projects.

 

***Other Income/Expense. ***Net other expense was$635,000 for the three months ended December 28, 2002 compared to net otherincome of $423,000 for the three months ended December 28, 2001. For thesix-month period ended December 28, 2002, net other expense was $325,000compared to net other income of $491,000 for the six-month period endedDecember 29, 2001. This decrease in net other income during the six-monthperiod ending December 28, 2002 is due primarily to a one-time charge of$677,000 related to the extinguishment of our long-term debt. Decreases ininterest income of $231,000 and foreign currency losses of $230,000 for thesix-month period were offset by the receipt of a royalty payment of $322,000relating to royalties earned since August 2000 from the Company’s August 11,2000 settlement agreement with the Regents of the University of California andNew Star Technology, Inc. The decrease in interest income is the result oflower cash balances and interest rates during the six-month period endedDecember 28, 2002 as compared to the same period one year earlier.

 

The decrease in net other income (expense) for the three-month periodended December 28, 2002 resulted primarily from the one-time charge of $677,000related to the extinguishment of our long-term debt and foreign currency lossesof approximately $400,000 as compared to the same period one year earlier.

 

***Income Taxes.*** Theprovision for income taxes results from a combination of activities of both thedomestic and foreign subsidiaries of the Company.  We recorded a 36% effective tax rate for both the three- andsix-month periods ended December 28, 2002, compared to the three- and six-monthperiods ended December 29, 2001, in which we recorded 23% and 30% tax benefitsrespectively.   The provision for incometaxes for the six months ended December 28, 2002 differs from the U.S.statutory rate as a result of a tax provision calculated for income generatedin Japan at a rate in excess of the U.S. statutory rate offset by a benefit forthe deduction related to the extraterritorial income exclusion.

 

**Liquidityand Capital Resources**

 

Cash provided byoperating activities amounted to $1,505,000 for the six months ended December28, 2002, in comparison to cash used by operating activities in the amount of$3,067,000 for the same period one year earlier. This increase in cash providedby operating activities for the six-month period ended December 28, 2002compared to the same period a year primarily reflects the effects of a netprofit. Cash used by investing activities totaled $70,000 for the six monthsended December 28, 2002, compared to $778,000 for the same period in the prioryear.  This change primarily reflectsless cash used to support our Oracle software implementation. Cash used forfinancing activities amounted to $2,065,000 for the six-month period endedDecember 28, 2002 in comparison to $4,538,000 for the same period a yearearlier.  The change in cash used forfinancing primarily reflects the absence of repurchases of stock by thecorporation in the six-month period ended December 28, 2002 offset by principalpayments to pay-off long-term debt.

 

On November 8, 2002, we paid in full the outstanding principal andaccrued interest of our 9.75% subordinated notes (the “Notes”) totaling$2,990,463 plus an early redemption premium of $236,800. As a result of thepayment, the Company will have no future principal or interest paymentsrelating to the Notes.

 

Outstanding contractual obligations of the Company as of December 28,2002, are reflected in the following table:

 

15

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| **(in  thousands)** |   | **Total** |   | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |   | **After  5 years** |   |
|---------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|---------------|--------|--------------------|--------|
| Operating leases    |   | $         | 5,615  |                  | $      | 1,297         |   | $             | 2,855  |               | $      | 1,122 |   | $ | 341 |   |
|                     |        |           |        |                       |        |               |        |               |        |                    |        |  |  |  |  |  |

 

We maintain a renewable $5,000,000 revolving credit agreement with amajor bank with interest at the bank’s base rate.  Any borrowings outstanding under the line of credit are due ondemand or according to a payment schedule established at the time funds areborrowed.  Borrowings under therevolving credit agreement are unsecured. The agreement contains restrictive covenants limiting the establishmentof new liens, and the purchase of margin stock.  No amounts were outstanding under the line of credit as ofDecember 28, 2002.

 

On January 8, 2003, subsequent to the end of the quarter, the Companyacquired substantially all of the assets of Applied Optronics, the diodedivision of Schwartz Electro-Optics, Inc., for approximately $1.2 million incash.

 

We believe that cash balances will be sufficient to meet anticipatedcash requirements for the next twelve months. However, we cannot be sure that we will not require additional capitalbeyond the amounts currently forecasted by us, or that any such requiredadditional capital will be available on reasonable terms, if at all, when suchcapital becomes required.

 

**AccountingPronouncements**

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, *“Rescission of FASB Statement No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections”*. SFASNo. 145 rescinds the following pronouncements: SFAS No. 4, *“Reporting Gains and Losses from Extinguishment ofDebt”*, SFAS No. 44, *“Accountingfor Intangible Assets of Motor Carriers”,*SFAS No. 64, *“Extinguishments of Debt Made to Satisfy Sinking-FundRequirements”* and SFAS No. 13, *“Accountingfor Leases”*, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions. SFAS No. 145 also makes technicalcorrections to other existing authoritative pronouncements to clarify meanings,or describe their applicability under changed conditions. In compliance withSFAS No. 145, we recognized the one-time charge related to the extinguishmentof its long-term debt (see Note 6) as a component of other income (expense)rather than as an extraordinary item.

 

In June 2002, the FASB issued SFAS No. 146, “*Accountingfor Costs Associated with Exit or Disposal Activities*”.  SFASNo. 146 addresses financial accounting and reporting for costs associated withexit or

disposal activities and nullifies Emerging IssuesTask Force Issue No. 94-3, “*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*”, (“EITF No. 94-3”).  SFASNo. 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred.  EITF No.94-3 allowed for an exit cost liability to be recognized at the date of anentity’s commitment to an exit plan. SFAS No. 146 also requires thatliabilities recorded in connection with exit plans be initially measured atfair value.  The provisions of SFAS No. 146 are effective for exit ordisposal activities that are initiated after December 31, 2002, with earlyadoption encouraged.  We do not expect the adoption of SFAS No. 146 willhave a material impact on its financial position or results of operations.

 

In November 2002, the FASB issued InterpretationNo. 45 (“FIN 45”), “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”.*FIN45 addresses financial accounting for, and disclosure of, guarantees. FIN 45requires certain guarantees to be recorded at fair value, as opposed to theexisting standard of recording a liability only when a loss is probable andreasonably estimable according to SFAS No. 5, *“Accounting for Contingencies”*.In accordance with FIN 45, the Company has amended its disclosure related toproduct warranties.  The adoption of FIN45 is not expected to have a material impact on our financial position andresults of operations.

 

16

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In December 2002, the FASB issued SFAS No. 148, “*Accountingfor Stock-Based Compensation – Transition and Disclosure.”*SFAS No.148 requires the disclosure of the effects of a company’s accounting policywith respect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements. SFAS No. 148amends SFAS No. 123, *“Accounting for Stock-Based Compensation”*by providing alternative methods of transition to the fair-value method ofaccounting for stock-based employee compensation under SFAS No. 123. SFAS No.148 also amends the disclosure provisions of SFAS No. 123 and AccountingPrinciples Board Opinion No. 28, *“Interim Financial Reporting”* to requiredisclosure of the effects of a company’s accounting policy with respect tostock-based employee compensation on reported net income and earnings per sharein annual and interim financial statements. In accordance with SFAS No. 148,the Company has disclosed the method of accounting for stock-based employeecompensation in the Critical Accounting Policies section of Item 2 of thisinterim report. The adoption of SFAS No. 148 had no impact on our financialposition and results of operations.

 

17

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**CautionaryStatements**

 

This Quarterly Report on Form 10-Q contains forward-looking statementsincluding, without limitation, statements concerning the future of theindustry, product development, business strategy (including the possibility offuture acquisitions), anticipated operational and capital expenditure levels,continued acceptance and growth of our products, and dependence on significantcustomers and suppliers.  This QuarterlyReport on Form 10-Q contains forward-looking statements that we have made basedon our current expectations, estimates and projections about our industry,operations, and prospects, not historical facts. We have made theseforward-looking statements pursuant to the provisions of the Private SecuritiesLitigation Reform Act of 1995.  Thesestatements can be identified by the use of forward-looking terminology such as“may,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “intend”, “continue”or other similar expressions.  Thesestatements discuss future expectations, and may contain projections of resultsof operations or of financial condition or state other forward-lookinginformation.  These forward-lookingstatements are subject to business and economic risks and uncertainties, andour actual results of operations may differ materially from those contained inthe forward-looking statements.  Factorsthat could cause or contribute to such differences include, but are not limitedto, those discussed in “Cautionary Statements” in our annual report filed onForm 10-K dated June 29, 2002, as well as other risks and uncertaintiesreferenced in this Quarterly Report. These risks include, but are not limited to, the following:

 

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

 

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

 

•                  The cost ofclosing our remaining skin care center may be higher than management hasestimated to date, and higher actual costs would negatively impact ouroperating results.

 

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

 

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

 

•                  We have modifiedsome of our products without FDA clearance. The FDA could retroactively decidethe modifications were improper and require us to cease marketing and/or recallthe modified products.

 

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

 

•                  Claims by othersthat our products infringe their patents or other intellectual property rights,or that the patents which we own or have licensed rights to are invalid, couldprevent us from manufacturing and selling some of our products or require us toincur substantial costs from litigation or development of non-infringingtechnology.

 

•                  We could incursubstantial costs as a result of product liability claims.

 

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

 

•                  Our failure tomanage acquisitions and joint ventures effectively may divert managementattention from our core business and cause us to incur additional debt,liabilities or costs.

 

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**Item3 - Quantitative and Qualitative Disclosures About Market Risk**

 

As of December 28,2002, our cash balances are exposed to interest rate risk.  We are exposed to foreign currency risk dueto accounts receivable from our foreign subsidiaries.

 

We have cashequivalents that primarily consist of commercial paper, overnight repurchaseagreements and money market accounts. We believe that any near term changes in interest rates will beimmaterial to any potential losses in future earnings, cash flow and fairvalues.

 

As of December 28,2002, we hold foreign currency contracts with notional values totaling $966,000for the delivery of 980,018 Euros. These contracts have maturities prior to March 20, 2003.  The aggregate fair value of our forwardforeign exchange contracts outstanding was $ (55,292.47) as of December 28,2002. The net fair value is computed by subtracting the value of the contractsusing the year-end forward rates (the notional value) from the value of theforward contracts computed at the contracted exchange rates.  We believe that any near term changes incurrency rates will be immaterial to any potential losses in future earnings,cash flow and fair values because any adjustments to fair value offset thechange in the fair value of the foreign currency intercompany receivables.

 

# **Item 4 - Controls and Procedures**

 

(a)          Evaluation of disclosurecontrols and procedures.

 

An evaluation wasperformed under the supervision and with the participation of members of ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our “disclosurecontrols and procedures” (as defined in the Securities Exchange Act of 1934Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90days before the filing date of this quarterly report.  Based on that evaluation, members of our management, includingour Chief Executive Officer and our Chief Financial Officer, have concluded thatas of the Evaluation Date, our disclosure controls and procedures wereeffective in enabling us to record, process, summarize and report theinformation required to be included in this quarterly report within therequired time period.

 

(b)         Changes in internalcontrols.

 

There have been nosignificant changes in our internal controls or, to our knowledge, in otherfactors that could significantly affect our disclosure controls and proceduressubsequent to the Evaluation Date.

 

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**CANDELACORPORATION**

 

**PartII.  Other Information**

 

# **Item 1 - Legal Proceedings**

 

From time to time, we are a party to various legal proceedingsincidental to our business. We believe that none of the legal proceedings whichare presently pending will have a material adverse effect upon our financialposition, results of operations, or liquidity.

 

# **ITEM 6 - Exhibits and Reports on Form 8-K**

 
| (a)          | Exhibits                                                                                                                |
|--------------|-------------------------------------------------------------------------------------------------------------------------|
|         |
| Exhibit 99.1 | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|         |                                                                                                                    |
| Exhibit 99.2 | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|         |
| (b)          | Reports on Form 8-K                                                                                                |
|         |                                                                                                                    |
|         | None                                                                                                                    |
|              |                                                                                                                         |  |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                    |   | CANDELA CORPORATION                                                                              |   |
|-------------------------|--------|--------------------------------------------------------------------------------------------------|--------|
|                    |   | Registrant                                                                                       |   |
|                    |   |                                                                                             |   |
|                    |   |                                                                                             |   |
| Date: February 11, 2003 |   | /s/ Gerard E. Puorro                                                                             |   |   |
|                    |   | Gerard E. Puorro  (President and Chief Executive Officer)                                        |   |
|                    |   |                                                                                             |   |
|                    |   |                                                                                             |   |
| Date: February 11, 2003 |   | /s/ F. Paul Broyer                                                                               |   |   |
|                    |   | F. Paul Broyer  (Senior Vice President, Finance and Administration  and Chief Financial Officer) |   |

 

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**CERTIFICATION**

 

I, Gerard E. Puorro, certify that:

 

1.         I have reviewed thisquarterly report on Form 10-Q of Candela Corporation;

 

2.         Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.         Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.         The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a)          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.         The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)          all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.         The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: February 11, 2003 |   | /s/ Gerard E. Puorro                                        |   |
|-------------------------|--------|-------------------------------------------------------------|--------|
|                    |   | Gerard E. Puorro  President and Chief Executive Officer**** |   |
|                    |   |                                                        |   |

 

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**CERTIFICATION**

 

I, F. Paul Broyer, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Candela Corporation;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)          all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: February 11, 2003 |   | /s/ F. Paul Broyer                      |   |
|-------------------------|--------|-----------------------------------------|--------|
|                    |   | F. Paul Broyer  Chief Financial Officer |   |

 

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