** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

----

 

**FORM 10-Q**

 

**Quarterly report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For thequarterly period ended March 29, 2003.**

 

**Commissionfile number 000-14742**

 

| **CANDELA  CORPORATION**                                                           |
|------------------------------------------------------------------------------------|
| (Exact name 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** |

 

----

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý     No  o

 

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

Yes  o     No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                     |   | **Outstanding at May 12, 2003** |
|-------------------------------|--------|---------------------------------|
| Common Stock,  $.01 par value |   | 10,471,305                      |

 

 

----

 

**CANDELA CORPORATION**

**Index**

 
| Part I.  | Unaudited  Financial Information: |
|----------|-----------------------------------|
|     |                              |
|     | Item 1.                           | Unaudited  Condensed Consolidated Balance Sheets as of March 29, 2003 and June 29, 2002 |
|     |                              |   |
|     |                              | Unaudited  Condensed Consolidated Statements of Operations and Comprehensive Income  (Loss) for the three-month and nine-month periods ended March 29, 2003 and  March 30, 2002 |
|     |                              |   |
|     |                              | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine-month periods  ended March 29, 2003 and March 30, 2002 |
|     |                              |   |
|     |                              | 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

----

 

**Part I.  Financial Information**

 

**Item1 – Unaudited Financial Statements**

 

**CANDELA CORPORATION**

**Condensed ConsolidatedBalance Sheets**

(in thousands)

(unaudited)

 
|                                                |   | **March 29,  2003** |       | **June 29,  2002** |       |
|-----------------------------------------------------|--------|---------------------|------------|--------------------|------------|
| **Assets**                                          |   |                | ** ** |               | ** ** |
| **Current assets:**                                 |   |                |       |               |       |
| **Cash and cash equivalents**                       |   | **$**               | **21,315** | ** **         | **$**      | **19,628** | ** ** |
| **Accounts receivable, net**                        |   | **25,518**          | ** ** | **23,827**         | ** ** |
| **Notes receivable**                                |   | **801**             | ** ** | **1,262**          | ** ** |
| **Inventories, net**                                |   | **11,692**          | ** ** | **12,118**         | ** ** |
| **Other current assets**                            |   | **2,201**           | ** ** | **870**            | ** ** |
| **Total current assets**                            |   | **61,527**          | ** ** | **57,705**         | ** ** |
| **Property and equipment, net**                     |   | **3,425**           | ** ** | **3,156**          | ** ** |
| **Deferred tax assets**                             |   | **5,097**           | ** ** | **5,442**          | ** ** |
| **Prepaid licenses**                                |   | **1,273**           | ** ** | **1,405**          | ** ** |
| **Other assets**                                    |   | **188**             | ** ** | **183**            | ** ** |
| **Total assets**                                    |   | **$**               | **71,510** | ** **         | **$**      | **67,891** | ** ** |
|                                                |   |                |       |               |       |
| **Liabilities and Stockholders’ Equity**       |   |                |       |               |       |
| **Current liabilities:**                            |   |                |       |               |       |
| **Accounts payable**                                |   | **$**               | **4,021**  | ** **         | **$**      | **5,133** | ** ** |
| **Accrued payroll and related expenses**            |   | **3,047**           | ** ** | **3,003**          | ** ** |
| **Accrued warranty costs**                          |   | **4,633**           | ** ** | **4,452**          | ** ** |
| **Income taxes payable**                            |   | **2,762**           | ** ** | **1,604**          | ** ** |
| **Restructuring reserve**                           |   | **409**             | ** ** | **559**            | ** ** |
| **Other accrued liabilities**                       |   | **3,225**           | ** ** | **2,723**          | ** ** |
| **Current portion of long-term debt**               |   | **—**          | ** ** | **740**            | ** ** |
| **Deferred revenue**                                |   | **4,127**           | ** ** | **4,357**          | ** ** |
| **Total current liabilities**                       |   | **22,224**          | ** ** | **22,571**         | ** ** |
| **Long-term portion of deferred revenue**           |   | **2,445**           | ** ** | **2,352**          | ** ** |
| **Long-term debt**                                  |   | **—**          | ** ** | **2,115**          | ** ** |
| **Total liabilities**                               |   | **24,669**          | ** ** | **27,038**         | ** ** |
|                                                |   |                | ** ** |               | ** ** |
| **Stockholders’ equity:**                      |   |                |       |               |       |
| **Common stock**                                    |   | **125**             | ** ** | **119**            | ** ** |
| **Additional paid-in capital**                      |   | **45,769**          | ** ** | **43,869**         | ** ** |
| **Accumulated earnings**                            |   | **14,909**          | ** ** | **11,085**         | ** ** |
| **Treasury stock, at cost**                         |   | **(12,997**         | **)**      | **(12,997**        | **)**      |
| **Accumulated other comprehensive loss**            |   | **(965**            | **)**      | **(1,223**         | **)**      |
| **Total stockholders’ equity**                 |   | **46,841**          | ** ** | **40,853**         | ** ** |
| **Total liabilities and stockholders’ equity** |   | **$**               | **71,510** | ** **         | **$**      | **67,891** | ** ** |

 

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

 

3

----

 

**CANDELA CORPORATION**

**Condensed ConsolidatedStatements of Operations and Comprehensive Income (Loss)**

(in thousands, except per share data)

(unaudited)

 
|                                             |   | **For the three months ended:** |       | **For the nine months ended:** |       |
|--------------------------------------------------|--------|---------------------------------|------------|--------------------------------|------------|
|                                             |   | **March 29,  2003**             |       | **March 30,  2002**            |       | **March 29,  2003** |   | **March 29,  2002** |   |
| **Revenue**                                      |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Lasers and other products**                    |   | **$**                           | **18,044** | ** **                     | **$**      | **11,983** | ** ** | **$** | **43,444** | ** ** | **$** | **29,096** | ** ** |
| **Product-related service**                      |   | **3,395**                       | ** ** | **3,490**                      | ** ** | **9,268** | ** ** | **9,385** | ** ** |
| **Skin care center**                             |   | **548**                         | ** ** | **674**                        | ** ** | **1,644** | ** ** | **2,202** | ** ** |
| **Total revenue**                                |   | **21,987**                      | ** ** | **16,147**                     | ** ** | **54,356** | ** ** | **40,683** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Cost of sales**                                |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Lasers and other products**                    |   | **8,133**                       | ** ** | **5,284**                      | ** ** | **19,506** | ** ** | **13,335** | ** ** |
| **Product-related service**                      |   | **2,310**                       | ** ** | **3,010**                      | ** ** | **6,600** | ** ** | **7,408** | ** ** |
| **Skin care center**                             |   | **359**                         | ** ** | **504**                        | ** ** | **1,175** | ** ** | **1,731** | ** ** |
| **Total cost of sales**                          |   | **10,802**                      | ** ** | **8,798**                      | ** ** | **27,281** | ** ** | **22,474** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Gross profit**                                 |   | **11,185**                      | ** ** | **7,349**                      | ** ** | **27,075** | ** ** | **18,209** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Operating expenses:**                          |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Selling, general and administrative**          |   | **6,762**                       | ** ** | **7,006**                      | ** ** | **18,494** | ** ** | **19,524** | ** ** |
| **Research and development**                     |   | **1,218**                       | ** ** | **1,260**                      | ** ** | **3,170** | ** ** | **3,508** | ** ** |
| **Restructuring reserve**                        |   | **—**                      | ** ** | **(693**                       | **)**      | **—** | ** ** | **(693** | **)** |
| **Total operating expenses**                     |   | **7,980**                       | ** ** | **7,573**                      | ** ** | **21,664** | ** ** | **22,339** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Income (loss)  from  operations**         |   | **3,205**                       | ** ** | **(224**                       | **)**      | **5,411** | ** ** | **(4,130** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Other income (expense):**                      |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Interest income**                              |   | **428**                         | ** ** | **169**                        | ** ** | **563** | ** ** | **534** | ** ** |
| **Interest expense**                             |   | **(35**                         | **)**      | **(120**                       | **)**      | **(214** | **)** | **(359** | **)** |
| **Other income (expense)**                       |   | **255**                         | ** ** | **113**                        | ** ** | **(26** | **)** | **478** | ** ** |
| **Total other income (expense)**                 |   | **648**                         | ** ** | **162**                        | ** ** | **323** | ** ** | **653** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Income (loss) before income taxes**            |   | **3,853**                       | ** ** | **(62**                        | **)**      | **5,734** | ** ** | **(3,477** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Provision for (benefit from) income taxes**    |   | **1,233**                       | ** ** | **229**                        | ** ** | **1,910** | ** ** | **(793** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Net income  (loss)**                      |   | **$**                           | **2,620**  | ** **                     | **$**      | **(291** | **)** | **$** | **3,824** | ** ** | **$** | **(2,684** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Basic earnings (loss) per share**              |   | **$**                           | **0.26**   | ** **                     | **$**      | **(0.03** | **)** | **$** | **0.39** | ** ** | **$** | **(0.26** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Diluted earnings (loss) per share**            |   | **$**                           | **0.25**   | ** **                     | **$**      | **(0.03** | **)** | **$** | **0.38** | ** ** | **$** | **(0.26** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Weighted average shares outstanding**          |   | **10,189**                      | ** ** | **9,641**                      | ** ** | **9,903** | ** ** | **10,194** | ** ** |
| **Adjusted weighted average shares outstanding** |   | **10,437**                      | ** ** | **9,641**                      | ** ** | **10,028** | ** ** | **10,194** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Net Income (loss)**                            |   | **$**                           | **2,620**  | ** **                     | **$**      | **(291** | **)** | **$** | **3,824** | ** ** | **$** | **(2,684** | **)** |
| **Other comprehensive income (net of tax):**     |   |                            |       |                           |       |   |   |   |   |
| **Foreign currency translation adjustment**      |   | **49**                          | ** ** | **305**                        | ** ** | **183** | ** ** | **761** | ** ** |
| **Comprehensive income (loss)**                  |   | **$**                           | **2,669**  | ** **                     | **$**      | **14** | ** ** | **$** | **4,007** | ** ** | **$** | **(1,923** | **)** |

 

The accompanyingnotes are an integral part of the unaudited condensed consolidated financialstatements.

 

4

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**CANDELA CORPORATION**

**Condensed ConsolidatedStatements of Cash Flows**

(in thousands)

(unaudited)

 
|                                                                                                     |   | **For the nine months ended:** |       |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                     |   | **March 29,  2003**            |       | **March 30,  2002** |   |
| **Cash flows from operating activities:**                                                                |   |                           | ** ** |   | ** ** |
| **Net income (loss)**                                                                                    |   | **$**                          | **3,824**  | ** ** | **$** | **(2,684** | **)** |
| **Adjustments to reconcile net income (loss) to net cash  provided by (used for) operating activities:** |   |                           | ** ** |   | ** ** |
| **Depreciation and amortization**                                                                        |   | **682**                        | ** ** | **393** | ** ** |
| **Provision for bad debts**                                                                              |   | **(259**                       | **)**      | **163** | ** ** |
| **Effect of exchange rate changes on foreign currency  denominated assets and liabilities**              |   | **18**                         | ** ** | **39** | ** ** |
| **Reversal of restructuring reserve**                                                                    |   | **—**                     | ** ** | **(693** | **)** |
| **Accretion of debt discount**                                                                           |   | **475**                        | ** ** | **76** | ** ** |
| **Increase (decrease) in cash from working capital:**                                                    |   |                           | ** ** |   | ** ** |
| **Accounts receivable**                                                                                  |   | **(1,184**                     | **)**      | **(724** | **)** |
| **Notes receivable**                                                                                     |   | **467**                        | ** ** | **459** | ** ** |
| **Inventories**                                                                                          |   | **724**                        | ** ** | **(1,493** | **)** |
| **Other current assets**                                                                                 |   | **(1,309**                     | **)**      | **(137** | **)** |
| **Other assets**                                                                                         |   | **133**                        | ** ** | **128** | ** ** |
| **Accounts payable**                                                                                     |   | **(1,184**                     | **)**      | **(804** | **)** |
| **Accrued payroll and related expenses**                                                                 |   | **18**                         | ** ** | **263** | ** ** |
| **Deferred revenue**                                                                                     |   | **(243**                       | **)**      | **204** | ** ** |
| **Accrued warranty costs**                                                                               |   | **132**                        | ** ** | **490** | ** ** |
| **Income taxes payable**                                                                                 |   | **1,471**                      | ** ** | **(1,417** | **)** |
| **Restructuring reserve**                                                                                |   | **(150**                       | **)**      | **(343** | **)** |
| **Long-term portion of deferred revenue**                                                                |   | **81**                         | ** ** | **(251** | **)** |
| **Other accrued liabilities**                                                                            |   | **475**                        | ** ** | **1,226** | ** ** |
| **Net cash provided by (used for) operating activities**                                                 |   | **4,171**                      | ** ** | **(5,105** | **)** |
|                                                                                                     |   |                           | ** ** |   | ** ** |
| **Cash flows from investing activities:**                                                                |   |                           | ** ** |   | ** ** |
| **Purchases of property and equipment**                                                                  |   | **(967**                       | **)**      | **(906** | **)** |
| **Net cash used for investing activities**                                                               |   | **(967**                       | **)**      | **(906** | **)** |
|                                                                                                     |   |                           | ** ** |   | ** ** |
| **Cash flows from financing activities:**                                                                |   |                           | ** ** |   | ** ** |
| **Principal payments of long-term debt**                                                                 |   | **(3,330**                     | **)**      | **(189** | **)** |
| **Net borrowings (repayments) on other long-term liabilities**                                           |   | **(643**                       | **)**      | **237** | ** ** |
| **Proceeds from the issuance of common stock**                                                           |   | **1,902**                      | ** ** | **378** | ** ** |
| **Repurchase of treasury stock**                                                                         |   | **—**                     | ** ** | **(5,215** | **)** |
| **Net cash used for financing activities**                                                               |   | **(2,071**                     | **)**      | **(4,789** | **)** |
|                                                                                                     |   |                           | ** ** |   | ** ** |
| **Effect of exchange rates on cash and cash equivalents**                                                |   | **554**                        | ** ** | **(854** | **)** |
|                                                                                                     |   |                           | ** ** |   | ** ** |
| **Net increase (decrease) in cash and cash equivalents**                                                 |   | **1,687**                      | ** ** | **(11,654** | **)** |
| **Cash and cash equivalents at beginning of period**                                                     |   | **19,628**                     | ** ** | **32,318** | ** ** |
| **Cash and cash equivalents at end of period**                                                           |   | **$**                          | **21,315** | ** ** | **$** | **20,664** | ** ** |

 

The accompanyingnotes are an integral part of the unaudited condensed consolidated financialstatements.

 

5

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**CANDELACORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements**

 

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

 

The accompanyingunaudited condensed consolidated financial statements and notes do not includeall of the disclosures made in the Annual Report on Form 10-K of CandelaCorporation (the “Company”) for fiscal year 2002, which should be read inconjunction with these financial statements. The financial information included herein is unaudited, with theexception of the condensed consolidated balance sheet as of June 29, 2002,which was derived from the audited consolidated balance sheet dated June 29,2002.  However, in the opinion ofmanagement, the statements include all necessary adjustments, consistingprincipally of normal recurring accruals, for a fair presentation of thequarterly results and are prepared and presented in a manner consistent withthe Company’s Annual Report on Form 10-K. The results for the three- andnine-month periods ended March 29, 2003 are not necessarily indicative of theresults to be expected for the full year.

 

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

 

InApril 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, *“Rescissionof FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections”*. SFAS No. 145 rescinds the followingpronouncements: SFAS No. 4, *“ReportingGains and Losses from Extinguishment of Debt”*, SFAS No. 44, *“Accou**nting for Intangible Assets of Motor Carriers”*, SFASNo. 64, “*Extinguishments of Debt Madeto Satisfy Sinking-Fund Requirements*” and SFAS No. 13, “*Accounting for Leases,*” to eliminate aninconsistency between the required accounting for sale-leaseback transactions.SFAS No. 145 also makes technical corrections to other existing authoritativepronouncements to clarify meanings, or describe their applicability underchanged conditions. In compliance with SFAS No. 145, the Company recognized theone-time charge related to the extinguishment of its long-term debt (see Note6) as a component of other income (expense) rather than as an extraordinaryitem.

 

In June 2002, the FASBissued SFAS No. 146, “*Accounting for CostsAssociated 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, “*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.  The Company does not expect the adoption of SFAS No.146 will have a material impact on its financial position or results ofoperations.

 

In November 2002, theFASB issued Interpretation No. 45 (“FIN 45”), “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*”. FIN 45 addresses financialaccounting for, and disclosure of, guarantees. FIN 45 requires certainguarantees to be recorded at fair value, as opposed to the existing standard ofrecording a liability only when a loss is probable and reasonably estimable accordingto 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 the Company’s financialposition and results of operations.

 

In December 2002, theFASB issued SFAS No. 148, “*Accounting forStock-Based Compensation — Transition and Disclosure.”* SFAS No. 148requires the disclosure of the effects of a company’s accounting policy withrespect 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 forStock-Based Compensation*” by providing alternative methods oftransition to the fair-value method of accounting for stock-based employeecompensation under SFAS No. 123. SFAS No.

 

6

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148 also amends thedisclosure provisions of SFAS No. 123 and Accounting Principles Board  Opinion No. 28, “*Interim Financial Reporting”* to require disclosure of theeffects of a company’s accounting policy with respect to stock-based employeecompensation on reported net income and earnings per share in annual andinterim financial statements. In accordance with SFAS No. 148, the Company hasdisclosed the method of accounting for stock-based employee compensation inNote 9. The adoption of SFAS No. 148 had no impact on the Company’sfinancial position and results of operations.

 

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

 

Basic earnings per shareis computed by dividing net income by the weighted average number of shares ofcommon stock outstanding for the period and, if there are dilutive securities,diluted earnings per share is computed by including common stock equivalentsoutstanding for the period in the denominator.

 

Common stock equivalentsinclude shares issuable upon the exercise of stock options or warrants, net ofshares assumed to have been purchased with the proceeds, using the treasurystock method.

 

(in thousands, excepts pershare data)

 
|                                             |   | **For the three months ended:** |       | **For the nine months ended:** |       |
|--------------------------------------------------|--------|---------------------------------|------------|--------------------------------|------------|
|                                             |   | **March 29,  2003**             |       | **March 30,  2002**            |       | **March 29,  2003** |   | **March 30,  2002** |   |
| ***Numerator***                                  |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Net Income (loss)**                            |   | **$**                           | **2,620**  | ** **                     | **$**      | **(291** | **)** | **$** | **3,824** | ** ** | **$** | **(2,684** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| ***Denominator***                                |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Basic (Loss) Earnings per Share**              |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Weighted average shares outstanding**          |   | **10,189**                      | ** ** | **9,641**                      | ** ** | **9,903** | ** ** | **10,194** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Earnings per share**                           |   | **$**                           | **0.26**   | ** **                     | **$**      | **(0.03** | **)** | **$** | **0.39** | ** ** | **$** | **(0.26** | **)** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Diluted Earnings per Share**                   |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Weighted average shares outstanding**          |   | **10,189**                      | ** ** | **9,641**                      | ** ** | **9,903** | ** ** | **10,194** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Effect of dilutive securities:**               |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Stock options**                                |   | **227**                         | ** ** | **—**                     | ** ** | **104** | ** ** | **—** | ** ** |
| **Stock warrants**                               |   | **21**                          | ** ** | **—**                     | ** ** | **21** | ** ** | **—** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Adjusted weighted average shares outstanding** |   | **10,437**                      | ** ** | **9,641**                      | ** ** | **10,028** | ** ** | **10,194** | ** ** |
|                                             |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Earnings per share**                           |   | **$**                           | **0.25**   | ** **                     | **$**      | **(0.03** | **)** | **$** | **0.38** | ** ** | **$** | **(0.26** | **)** |

 

During the three- andnine-month periods ended March 29, 2003 there were 30,854 and 141,135 options,respectively, to purchase shares of common stock that were excluded from thecalculation of diluted earnings per share because the exercise price of suchoptions was greater than the average market price of the common stock for theperiod.  During the three- andnine-month periods ended March 30, 2002 there were options to purchase1,006,945 and 888,733 shares, respectively, that were excluded from thecalculation of diluted earnings per share for the same reason.

 

7

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**4.****                   Inventories**

 

Inventories consist of the following:

 
|                |   | **March 29,  2003** |       | **June 29,  2002** |       |
|---------------------|--------|---------------------|------------|--------------------|------------|
|                |   |                | ** ** |               | ** ** |
| **Raw materials**   |   | **$**               | **5,206**  | ** **         | **$**      | **4,615** | ** ** |
| **Work in process** |   | **658**             | ** ** | **1,037**          | ** ** |
| **Finished goods**  |   | **5,828**           | ** ** | **6,466**          | ** ** |
|                |   | **$**               | **11,692** |               | **$**      | **12,118** | ** ** |

 

**5.****                   RestructuringCharges**

 

During the quarters endedDecember 27, 1997 and June 30, 2001, the Company recorded combinedrestructuring charges of $3,721,000 resulting from management’s decision toclose the skin care center located in Scottsdale, Arizona. During thethree-month period ended December 29, 2001, the Company secured a sublease forthe Scottsdale facility. Per the sublease agreement, the sublessee will pay allcosts associated with the facility through the end of the lease term endingJune 2006. As an incentive to the sublessee, the Company agreed to pay eightmonths of rent during the life of the sublease.  The sublessee commenced making payments to the landlord on behalfof the Company on April 1, 2002.

 

As a result of thesublease, the Company revised the estimate of future costs associated with theScottsdale facility and, in the quarter ended March 30, 2002, reversed $693,000of the restructuring reserve, which represents primarily the amount of futurecontractual sublease payments as well as revisions to the net realizable valueof certain leasehold improvements.

 

The following tablereflects the restructuring charges incurred during the nine-month period endedMarch 29, 2003:

 
|                          |   | **Payroll  and  Severance** |       | **Leasehold  Improvements  and Fixed  Assets** |       | **Facility  Costs** |       | **Total** |   |
|-------------------------------|--------|-----------------------------|------------|------------------------------------------------|------------|---------------------|------------|-----------|--------|
| **Balance at June 29, 2002**  |   | **$**                       | **112**    | ** **                                     | **$**      | **410**             | ** ** | **$**     | **37** | ** ** | **$** | **559** | ** ** |
| **Cash charges**              |   | **(56**                     | **)**      | **—**                                     | ** ** | **(12**             | **)**      | **(68**   | **)**  |
| **Non-cash charges**          |   | **—**                  | ** ** | **(82**                                        | **)**      | **—**          | ** ** | **(82**   | **)**  |
| **Balance at March 29, 2003** |   | **$**                       | **56**     | ** **                                     | **$**      | **328**             | ** ** | **$**     | **25** | ** ** | **$** | **409** | ** ** |

 

**6.****                   Debt**

 

In 1998, the Companyissued eight-year, 9.75% subordinated term notes to three investors in theaggregate amount 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 earlyrepayment with a decreasing early redemption premium amount through October 31,2004. The Company repaid the entire debt evidenced by the debt on November 8,2002.

 

8

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**7.****                   SegmentInformation**

 

The Company operatesprincipally in two industry segments: the design, manufacture, sale, andservice of medical devices and related equipment; and the performance ofservices in the skin care/health spa industry.

 
|                              |   | **For the three months ended:** |       | **For the nine months ended:** |       |
|-----------------------------------|--------|---------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                |   | **March 29,  2003**             |       | **March 30,  2002**            |       | **March 29,  2003** |   | **March 30,  2002** |   |
| **Revenue:**                      |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Product sales and service**     |   | **$**                           | **21,439** | ** **                     | **$**      | **15,473** | ** ** | **$** | **52,712** | ** ** | **$** | **38,481** | ** ** |
| **Skin care/health spa services** |   | **548**                         | ** ** | **674**                        | ** ** | **1,644** | ** ** | **2,202** | ** ** |
| **Total revenue**                 |   | **$**                           | **21,987** | ** **                     | **$**      | **16,147** | ** ** | **$** | **54,356** | ** ** | **$** | **40,683** | ** ** |
|                              |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Operating income (loss):**      |   |                            | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| **Product sales and service**     |   | **$**                           | **3,523**  | ** **                     | **$**      | **(573** | **)** | **$** | **6,556** | ** ** | **$** | **(3,613** | **)** |
| **Skin care/health spa services** |   | **(318**                        | **)**      | **349**                        | ** ** | **(1,145** | **)** | **(517** | **)** |
| **Total operating income (loss)** |   | **$**                           | **3,205**  | ** **                     | **$**      | **(224** | **)** | **$** | **5,411** | ** ** | **$** | **(4,130** | **)** |

 
|                              |   | **As of  March 29, 2003** |       | **As of  June 29, 2002** |       |
|-----------------------------------|--------|---------------------------|------------|--------------------------|------------|
| **Total assets:**                 |   |                      | ** ** |                     | ** ** |
| (net  intercompany accounts)      |   |                      | ** ** |                     | ** ** |
| **Product sales and service**     |   | **$**                     | **70,888** | ** **               | **$**      | **67,123** | ** ** |
| **Skin care/health spa services** |   | **622**                   | ** ** | **768**                  | ** ** |
| **Total assets**                  |   | **$**                     | **71,510** | ** **               | **$**      | **67,891** | ** ** |

 

# **8.****                   Guarantees**

 

# The Company’s products generally carry a standard one-year warranty,except for Vbeam products that typically carry a three-year warranty. The Company sets aside a reservebased on anticipated warranty claims at the time product revenue is recognized.In anticipation of actual warranty claims, the Company amortizes the reserveratably over the life of the warranty thereby offsetting actual warranty claimsincurred. Actual warranty claims incurred and charged to product costs of salesduring an interim period may be more or less than the amount of amortizedwarranty reserve allocated against them. Factors that affect the Company’s productwarranty liability include the number of installed units, the anticipated costof warranty repairs and historical and anticipated rates of warranty claims.

 

# The following table reflects changes in the Company’s accrued warrantyaccount during the nine-month period ended March 29, 2003:

#  

| **(in  thousands)**                            |   |       |       |
|------------------------------------------------|--------|------------|------------|
| **Beginning Balance June 29, 2002**            |   | **$**      | **4,452**  | ** ** |
| **Plus accruals related to new sales**         |   | **2,601**  | ** ** |
| **Less amortization of prior period accruals** |   | **(2,642** | **)**      |
| **Ending Balance on March 29, 2003**           |   | **$**      | **4,411**  | ** ** |

 

# The Company also offers extended service contracts that may bepurchased after a standard warranty has expired. Service contracts may bepurchased for periods from one to five years. The Company recognizes servicecontract revenue ratably over the life of the contract. Actual service contract

#  

9

----

 

# 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’s deferred revenueaccount during the nine-month period ended March 29, 2003:

#  

| **(in  thousands)**                             |   |       |       |
|-------------------------------------------------|--------|------------|------------|
| **Beginning balance June 29, 2002**             |   | **$**      | **4,357**  | ** ** |
| **Plus deferral of new service contract sales** |   | **1,720**  | ** ** |
| **Less recognition of deferred revenue**        |   | **(1,950** | **)**      |
| **Ending balance on March 29, 2003**            |   | **$**      | **4,127**  | ** ** |

 

# The Company has an agreement (the “Agreement”) with an independentleasing company whereby the Company will purchase delinquent leases (the “UNLProvision”) relating to Company products purchased by customers and financedthrough the leasing company.  TheCompany is required to honor the UNL Provision when the leasing company’saggregate 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**

 

# In accordance withAccounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”*,the Company does not recognize compensation expense for options granted withexercise prices at fair market value of the underlying common stock to employeesand directors of the Company under our various option plans. If the Companyaccounted for such options, in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 123 *Accounting for Stock-Based Compensation”*,it would use a fair-value method to determine the effect on net income andearnings per share of compensation expense for options granted to employees anddirectors.

 

10

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# **10.****            LegalProceedings**

#  

# On March 6, 2003, the Company obtained a favorable decision in itsarbitration proceeding against Physician Sales and Service, Inc. (“PSS”), adivision of PSS World Medical, Inc. The arbitration panel made an interim awardto the Company of $2,200,000 for unpaid amounts previously invoiced, which theCompany earlier reported as revenue. This amount was net of $150,000 separatelyawarded to PSS. The decision also included payment to the Company of $396,000of interest on the outstanding balance owed to the Company. The arbitrationpanel also awarded the Company its attorneys’ fees and expenses, as well as thecosts of arbitration.  This interimdecision will be finalized upon the arbitration panels’ issuance of its orderwith respect to the payment of legal fees and expenses which is expected byJune 4, 2003. In accordance with the arbitration panel’s decision, PSS made a$2,596,000 payment to the Company on April 1, 2003, The Company recognized$396,000 as interest income in the three-month period ended March 29, 2003 andwill recognize the $2,200,000 reduction in accounts receivable during thethree-month period ended June 28, 2003.

#  

# 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.

#  

 

# **11.****            AssetAcquisition**

 

# On January 8, 2003, the Company acquired substantially all of theassets of Applied Optronics, the diode division of Schwartz Electro-Optics,Inc., for approximately $1,200,000 in cash. Applied Optronics was leadingmanufacturer of high-powered, pulsed and CW lasers, and was component supplierto the OEM market that serves a variety of industries including the military,medical, industrial, research and robotics fields. Applied Optronics was thelead supplier of the diodes for the Company’s SmoothbeamTM diode laser system.In accordance with SFAS No. 141 "Business Combinations," the Companyrecords acquisitions under the purchase method of accounting. Accordingly, thepurchase price is allocated to the tangible assets and liabilities andintangible assets acquired, based on their estimated fair values. The assetacquisition consisted primarily of fixed assets, including production andoffice equipment, and inventory located at the division’s facility in NewJersey. The acquisition increased the Company’s net Property and Equipment byapproximately $800,000 and Inventory by approximately $400,000. For the periodfrom January 8, 2003 to March 29, 2003, the Applied Optronics operationgenerated approximately $700,000 in revenue from diode sales to third-partycustomers.

 

11

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

 

**Overview**

 

We research, develop,manufacture, market and service lasers used to perform aesthetic and cosmeticprocedures. We sell our lasers principally to medical practitioners.  We market our products directly and througha network 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.   Wederive our revenue from: the sale of lasers and other products; the provisionof product-related services; the sale of diodes to other manufacturers, and theoperation of our remaining skin care center. Over half of our revenue in recent periods has come from internationalsales.

 

**Critical Accounting Policies**

 

The discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to revenue recognition, bad debts,inventories, warranty obligations, contingencies, restructurings and incometaxes. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valueof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. A discussion of our critical accounting policies and the relatedjudgments and estimates affecting the preparation of our consolidated financialstatements is included in the Annual Report on Form 10-K of the Company forfiscal year 2002.

 

**Results of Operations**

 

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

 
|                |   | **For the three months ended:** |       |               |       |
|---------------------|--------|---------------------------------|------------|--------------------|------------|
| **(in thousands)**  |   | **March 29, 2003**              |       | **March 30, 2002** |       | **Change** |   |
|                |   |                            | ** ** |               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **US revenue**      |   | **$**                           | **11,015** | ** **         | **50**     | **%** | **$** | **8,183** | ** ** | **51** | **%** | **$** | **2,832** | ** ** |
| **Foreign revenue** |   | **10,972**                      | ** ** | **50**             | **%**      | **7,964** | ** ** | **49** | **%** | **3,008** | ** ** |
|                |   |                            | ** ** |               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total revenue**   |   | **$**                           | **21,987** | ** **         | **100**    | **%** | **$** | **16,147** | ** ** | **100** | **%** | **$** | **5,840** | ** ** |

 
|                |   | **For the nine months ended:** |       |               |       |
|---------------------|--------|--------------------------------|------------|--------------------|------------|
|                |   | **March 29, 2003**             |       | **March 30, 2002** |       | **Change** |   |
|                |   |                           | ** ** |               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **US revenue**      |   | **$**                          | **25,534** | ** **         | **47**     | **%** | **$** | **17,710** | ** ** | **44** | **%** | **$** | **7,824** | ** ** |
| **Foreign revenue** |   | **28,822**                     | ** ** | **53**             | **%**      | **22,974** | ** ** | **56** | **%** | **5,848** | ** ** |
|                |   |                           | ** ** |               | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total revenue**   |   | **$**                          | **54,356** | ** **         | **100**    | **%** | **$** | **40,684** | ** ** | **100** | **%** | **$** | **13,672** | ** ** |

 

12

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Revenue increased overthe three-month and nine-month periods ended March 29, 2003, compared to thesame periods ended March 30, 2002, due primarily to the replacement of a majorNorth American distributor with a direct sales force beginning in the secondquarter of fiscal year 2002. For the three month-period ended March 29, 2003,direct sales of lasers and related services to domestic customers increased byapproximately $3,000,000, while sales to domestic distributors decreased byapproximately $50,000 and revenue from the skin care center decreased byapproximately $125,000 as compared to the same period one year earlier. For thenine month-period ended March 29, 2003, direct sales of lasers and relatedservices to domestic customers increased by approximately $8,800,000, whilesales to domestic distributors decreased by approximately $425,000 and revenuefrom the skin care center decreased by approximately $560,000 as compared tothe same period one year earlier.

 

Foreign revenue increasedduring the three-month period ended March 29, 2003, compared to the same periodone year earlier, due primarily to increases in sales of lasers and relatedservices to the Asia Pacific market of approximately $1,300,000 and to theEuropean market of approximately $1,900,000 and decreases in sales to the SouthAmerican market of approximately $200,000. For the nine-month period endedMarch 29, 2003, sales of lasers and related services to the Asia Pacific marketincreased approximately $3,450,000, and to the European markets ofapproximately $2,500,000 and decreases to the South American market ofapproximately $200,000 as compared to the same period one year earlier. Forboth the three-month and nine-month periods ended March 29, 2003, salesgenerated by our subsidiaries in France, Germany and Spain have steadilyreplaced the sales channels formerly filled by direct sales from the UnitedStates and sales to European distributors. In the three-month period ended March29, 2003, revenue provided by these subsidiaries increased approximately$1,800,000, while revenue provided by European distributors and direct salesforces from the U.S. increased by only $100,000 as compared to the same periodone year earlier. For the nine-month period ended March 29, 2003, revenueprovided by these subsidiaries increased approximately $3,000,000 while revenueprovided by European distributors and direct sales forces from the U.S.decreased approximately $500,000. As the European subsidiaries continue togrow, we expect this trend to continue.

 

Revenue source by type isreflected in the following table:

 
|                          |   | **For the three months ended** |       |                |       |       |       |
|-------------------------------|--------|--------------------------------|------------|---------------------|------------|------------|------------|
| **(in thousands)**            |   | **March 29,  2003**            |       | **March 30,  2002** |       | **Change** |       |
| **Revenue**                   |   |                           | ** ** |                | ** ** |       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Lasers and other products** |   | **$**                          | **18,044** | ** **          | **82**     | **%**      | **$**      | **11,983** | ** ** | **74** | **%** | **$** | **6,061** | ** ** | **51** | **%** |
| **Product related service**   |   | **3,395**                      | ** ** | **15**              | **%**      | **3,490**  | ** ** | **22** | **%** | **(95** | **)** | **-3** | **%** |
| **Skin care center**          |   | **548**                        | ** ** | **2**               | **%**      | **674**    | ** ** | **4** | **%** | **(126** | **)** | **-19** | **%** |
| **Total revenue**             |   | **$**                          | **21,987** | ** **          | **100**    | **%**      | **$**      | **16,147** | ** ** | **100** | **%** | **$** | **5,840** | ** ** | **36** | **%** |

 
|                          |   | **For the nine months ended** |       |                |       |       |       |
|-------------------------------|--------|-------------------------------|------------|---------------------|------------|------------|------------|
|                          |   | **March 29,  2003**           |       | **March 30,  2002** |       | **Change** |       |
| **Revenue**                   |   |                          | ** ** |                | ** ** |       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Lasers and other products** |   | **$**                         | **43,444** | ** **          | **80**     | **%**      | **$**      | **29,096** | ** ** | **72** | **%** | **$** | **14,348** | ** ** | **49** | **%** |
| **Product related service**   |   | **9,268**                     | ** ** | **17**              | **%**      | **9,385**  | ** ** | **23** | **%** | **(117** | **)** | **-1** | **%** |
| **Skin care center**          |   | **1,644**                     | ** ** | **3**               | **%**      | **2,202**  | ** ** | **5** | **%** | **(558** | **)** | **-25** | **%** |
| **Total revenue**             |   | **$**                         | **54,356** | ** **          | **100**    | **%**      | **$**      | **40,683** | ** ** | **100** | **%** | **$** | **13,673** | ** ** | **34** | **%** |

 

The increase in laserproduct revenue for the three-month period ended March 29, 2003, compared tothe three-month period ended March 30, 2002, resulted from an increase in thesales volume and average selling price of our GentleLaseTM, SmoothbeamTM andVbeamTM product lines, and the addition of approximately $700,000 in revenue ofdiode sales from the Applied Optronics operation. The increase in sales volumeand average selling price of the GentleLaseTM, SmoothbeamTM and VbeamTM productscontributed

 

13

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approximately $3,100,000and $800,000 and $1,400,000, respectively to the increase in revenue. Skin carecenter revenue decreased primarily due to a continuing decrease in the sale ofaccessories and treatments.

 

The increase in laserproduct revenue for the nine-month period ended March 29, 2003, compared to thenine-month period ended March 30, 2002, also resulted primarily from anincrease in the sales volume and average selling price of all major productlines as well as the addition of approximately $700,000 in new diode sales. Theincrease in volume and average selling price of the GentleLaseTM, SmoothbeamTM,VbeamTM and AlexLazr products contributed approximately $6,600,000, $2,000,000,$4,300,000 and $1,000,000 respectively to the increase in revenue. Skin carecenter revenue decreased primarily due to a continuing decrease in the sale ofaccessories and treatments.

 

***Gross Profit. ***Grossprofit increased to $11,185,000 or 51% of revenue for the three-month periodended March 29, 2003, compared to gross profit of $7,349,000 or 46% of revenuefor the same period one year earlier. Gross profit increased to $27,075,000 or 50% of revenue for thenine-month period ended March 29, 2003, compared to gross profit of $18,209,000or 45% for the same period one year earlier. The increases in gross profit result principally from the increase in salesvolume and average selling price of our GentleLaseTM , SmoothbeamTM and VbeamTMproduct lines and decreases in the actual warranty claims for the Vbeam productline.

 

***Selling, General and AdministrativeExpense.    ***Selling, general andadministrative expenses decreased to $6,762,000 for the three-month periodending March 29, 2003 from $7,006,000 for the three-month period ended March30, 2002. As a percentage of revenue, selling, general and administrativeexpenses decreased to 31% from 43% for the same respective periods. Selling,general and administrative expenses decreased to $18,494,000 for the nine-monthperiod ending March 29, 2003 from $19,524,000 for the nine-month period endedMarch 30, 2002. For the nine-month period ending March 29, 2003, selling,general and administrative expenses decreased to 34% from 48% of revenues ascompared to the same period one year earlier. The decrease in selling, generaland administrative expenses during the three-month period ended March 29, 2003as compared to the same period one year earlier is due primarily to a $300,000increase in the provision for incentive bonuses, offset by decreases in legalexpense of $300,000 and the provision for bad debts of $140,000, both relatedto the interim PSS arbitration agreement. For the nine-month period ended March29, 2003, the decrease in selling, general and administrative expenses is dueprimarily to the increase in provision for incentive bonus and reductions inlegal expense and provision for bad debts referenced above as well as anoverall decrease of approximately $500,000 in marketing expense related totrade shows and new product releases and a decrease of approximately $500,000due to a revised commission policy.

 

***Research and Development Expense.***    Researchand development spending decreased to $1,218,000 for the three-month periodended March 29, 2003 from $1,260,000 for the three-month period ended March 29,2002 due primarily to timing for planned expenditures. For the nine-monthperiods ended March 29, 2003 and March 30, 2002, research and developmentexpenses decreased to $3,170,000 from $3,508,000, respectively. As a percentageof sales, research and development expenses decreased to 6% from 9% during boththe three- and nine-month periods ended March 29, 2003 and March 30, 2002,respectively. Research and development expenses are expected to remain at alevel of approximately 6% of sales during the remainder of fiscal year 2003.

 

***Other Income/Expense.    ***Netother income was $648,000 for the three months ended March 29, 2003 compared tonet other income of $162,000 for the three months ended March 30, 2002. For thenine-month period ended March 29, 2003, net other income was $323,000 comparedto net other income of $653,000 for the six-month period ended March 30, 2002.This increase in net other income during the three-month period ending March29, 2003 was primarily due to an increase in interest income of approximately$400,000 and the recognition of reimbursement of legal expenses of $200,000incurred in fiscal year 2002 occurring from the interim arbitration decisiondetailed in Note 10. These increases were offset by a decrease in interestexpense of approximately $100,000 related to our long-term debt which has beenretired.

 

***Income Taxes.***    Theprovision for income taxes results from a combination of activities of both thedomestic and foreign subsidiaries of the Company.  We recorded 32% and 33% effective tax rates for three- and nine-

 

14

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month periods ended March29, 2003 respectively compared to the nine-month period ended March 30, 2002,in which we recorded a 23% tax benefit. The provision for income taxes for thenine months ended March 29, 2003 differs from the U.S. statutory rate as aresult of a tax provision calculated for income generated in Japan at a rate inexcess of the U.S. statutory rate offset by a benefit for the deduction relatedto the extraterritorial income exclusion.

 

**Liquidity and Capital Resources**

 

Cash provided by operating activities amounted to$4,170,000 for the nine months ended March 29, 2003, in comparison to cash usedby operating activities in the amount of $5,105,000 for the same period oneyear earlier. This increase in cash provided by operating activities for the nine-monthperiod ended March 29, 2003 compared to the same period a year earlierprimarily reflects the effects of a net profit. Cash used by investingactivities totaled $967,000 for the nine months ended March 29, 2003, comparedto $906,000 for the same period in the prior year. These amounts reflect cashused for the acquisition of Applied Optronics during fiscal year 2003 and cashused to support our Oracle software implementation during fiscal year 2002.Cash used for financing activities amounted to $2,071,000 for the nine-monthperiod ended March 29, 2003 in comparison to $4,789,000 for the same period ayear earlier.  The decrease used forfinancing primarily reflects the absence in fiscal year 2003 of repurchases ofstock by the corporation in fiscal year 2002. In fiscal year 2003, the Companyalso made subsequent principal payments of long-term debt which was offset byproceeds from the exercise of stock options and warrants..

 

Subsequent to the end of the quarter on April 1, 2003,payment was received from PSS for $2,596,in accordance with the interimarbitration decision detailed in Note 10.

 

On November 8, 2002, wepaid in full the outstanding principal and accrued interest of our 9.75%subordinated notes (the “Notes”) totaling $2,990,463 plus an early redemptionpremium of $236,800. As a result of the payment, the Company will have nofuture principal or interest payments relating to the Notes.

 

Outstanding contractualobligations of the Company as of March 29, 2003, are reflected in the followingtable:

 

(in thousands)

 
|                  |   | **Total** |      | **Less than  1 year** |   | **1-3 years** |       | **4-5 years** |      | **After  5 years** |   |
|-----------------------|--------|-----------|-----------|-----------------------|--------|---------------|------------|---------------|-----------|--------------------|--------|
| **Operating  leases** |   | **$**     | **5,310** | ** **            | **$**  | **1,302**     | ** ** | **$**         | **2,665** | ** **         | **$**  | **1,133** | ** ** | **$** | **211** | ** ** |
|                       |        |           |           |                       |        |               |            |               |           |                    |        |  |  |  |  |  |

 

We maintain a renewable$5,000,000 revolving credit agreement with a major bank with interest at thebank’s base rate.  Any borrowingsoutstanding under the line of credit are due on demand or according to apayment schedule established at the time funds are borrowed.  Borrowings under the revolving creditagreement are unsecured.  The agreementcontains restrictive covenants limiting the establishment of new liens, and thepurchase of margin stock.  No amountswere outstanding under the line of credit as of March 29, 2003.

 

We believe that cashbalances will be sufficient to meet anticipated cash requirements for the nexttwelve months.  However, we cannot besure that we will not require additional capital beyond the amounts currentlyforecasted by us, or that any such required additional capital will be availableon reasonable terms, if at all, when such capital becomes required.

 

**Accounting Pronouncements**

 

InApril 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 145, *“Rescissionof FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections”*. SFAS No. 145 rescinds the followingpronouncements: SFAS No. 4, *“ReportingGains and Losses from Extinguishment of Debt”*, SFAS No. 44, *“Accounting for Intangible Assets of Motor Carriers”,*SFAS No. 64, *“Extinguishmentsof Debt Made to Satisfy Sinking-Fund Requirements”* and SFASNo. 13, *“Accounting for Leases”*,to eliminate an inconsistency between the

 

15

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required accounting forsale-leaseback transactions. SFAS No. 145 also makes technical corrections toother existing authoritative pronouncements to clarify meanings, or describetheir applicability under changed conditions. In compliance with SFAS No. 145,we recognized the one-time charge related to the extinguishment of itslong-term debt (see Note 6 to financial statements) as a component of otherincome (expense) rather than as an extraordinary item.

 

In June 2002, the FASBissued SFAS No. 146, “*Accounting for Costs Associated with Exit or DisposalActivities*”.  SFAS No. 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task 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, theFASB issued Interpretation No. 45 (“FIN 45”), “*Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers”.*FIN 45 addresses financial accounting for, and disclosureof, guarantees. FIN 45 requires certain guarantees to be recorded at fairvalue, as opposed to the existing standard of recording a liability only when aloss is probable and reasonably estimable according to SFAS 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 our financial position and results of operations.

 

In December 2002, theFASB issued SFAS No. 148, “*Accounting for Stock-Based Compensation – Transitionand Disclosure.”*SFAS No. 148 requires the disclosure of the effectsof a company’s accounting policy with respect to stock-based employeecompensation on reported net income and earnings per share in annual andinterim financial statements. SFAS No. 148 amends SFAS No. 123, *“Accountingfor Stock-Based Compensation”* by providing alternative methods oftransition to the fair-value 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, *“Interim Financial Reporting”*to require disclosure of the effects of a company’s accounting policy withrespect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements. In accordancewith SFAS No. 148, the Company has disclosed the method of accounting forstock-based employee compensation in Note 9 to financial statements. Theadoption of SFAS No. 148 had no impact on our financial position and results ofoperations.

 

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#### **Cautionary Statements**

 

This Quarterly Report onForm 10-Q contains forward-looking statements including, without limitation,statements concerning the future of the industry, product development, businessstrategy (including the possibility of future acquisitions), anticipatedoperational and capital expenditure levels, continued acceptance and growth ofour products, and dependence on significant customers and suppliers.  This Quarterly Report on Form 10-Q containsforward-looking statements that we have made based on our current expectations,estimates and projections about our industry, operations, and prospects, nothistorical facts. We have made these forward-looking statements pursuant to theprovisions of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by theuse of forward-looking terminology such as “may,” “will,” “believe,” “expect,”“anticipate,” “estimate,” “intend”, “continue” or other similarexpressions.  These statements discussfuture expectations, and may contain projections of results of operations or offinancial condition or state other forward-looking information.  These forward-looking statements are subjectto business and economic risks and uncertainties, and our actual results ofoperations may differ materially from those contained in the forward-lookingstatements.  Factors that could cause orcontribute to such differences include, but are not limited to, those discussedin “Cautionary Statements” in our annual report filed on Form 10-K dated June29, 2002, as well as other risks and uncertainties referenced in this QuarterlyReport.  These risks include, but arenot limited to, the following:

 
| • | Because we typically  derive more than half of our revenue from international sales, we are  susceptible to currency fluctuations, negative economic changes taking place  in foreign marketplaces, and other risks associated with conducting business  overseas.                                                                                        |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | The failure to obtain  alexandrite rods for certain laser systems from our sole supplier would  impair our ability to manufacture and sell these laser systems, which has  accounted for a substantial portion of our revenue in certain recent periods.                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | The cost of closing our  remaining skin care center may be higher than management has estimated to  date, and higher actual costs would negatively impact our operating results.                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | Our failure to respond  to rapid changes in technology and intense competition in the laser industry  could make our lasers obsolete.                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | Like other companies in  our industry, we are subject to a regulatory review process and our failure  to receive necessary government clearances or approvals could affect our  ability to sell our products and remain competitive.                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | We have modified some  of our products without FDA clearance. The FDA could retroactively decide the  modifications were improper and require us to cease marketing and/or recall  the modified products.                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | Achieving complete  compliance with FDA regulations is difficult, and if we fail to comply, we  could be subject to FDA enforcement action.                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | Claims by others that  our products infringe their patents or other intellectual property rights, or  that the patents which we own or have licensed rights to are invalid, could  prevent us from manufacturing and selling some of our products or require us  to incur substantial costs from litigation or development of non-infringing  technology. |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | We could incur  substantial costs as a result of product liability claims.                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | We may be unable to  attract and retain management and other personnel we need to succeed.                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| • | Our failure to manage  acquisitions and joint ventures effectively may divert management attention  from our core business and cause us to incur additional debt, liabilities or  costs.                                                                                                                                                                  |

 

17

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

 

As of March 29, 2003, ourcash balances are exposed to interest rate risk.  We are exposed to foreign currency risk due to accountsreceivable from our foreign subsidiaries.

 

We have cash equivalentsthat primarily consist of commercial paper, overnight repurchase agreements andmoney market accounts.  We believe thatany near term changes in interest rates will be immaterial to any potentiallosses in future earnings, cash flow and fair values.

 

As of March 29, 2003, wehold foreign currency contracts with notional values totaling $1,032,654 forthe delivery of 972,291 Euros.  Thesecontracts have maturities prior to June 23, 2003.  The aggregate fair value of our forward foreign exchangecontracts outstanding was$ (34,954) as of March29, 2003. The net fair value is computed by subtracting the value of thecontracts using the period-end forward rates (the notional value) from thevalue of the forward 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.

 

# **Item4 - Controls and Procedures**

 
| (a)    | Evaluation of  disclosure controls and procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | An evaluation was  performed under the supervision and with the participation of members of our  management, including our Chief Executive Officer and our Chief Financial  Officer, of the effectiveness of the design and operation of our “disclosure  controls and procedures” (as defined in the Securities Exchange Act of 1934  Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”) within 90  days before the filing date of this quarterly report.  Based on that evaluation, members of our  management, including our Chief Executive Officer and our Chief Financial  Officer, have concluded that as of the Evaluation Date, our disclosure  controls and procedures were effective in enabling us to record, process,  summarize and report the information required to be included in this  quarterly report within the required time period. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (b)    | Changes in internal  controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | There have been no  significant changes in our internal controls or, to our knowledge, in other  factors that could significantly affect our disclosure controls and  procedures subsequent to the Evaluation Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

18

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**Part II.  OtherInformation**

 

# **Item1 - Legal Proceedings**

 

On March 6, 2003, theCompany obtained a favorable decision in its arbitration proceeding againstPhysician Sales and Service, Inc. (“PSS”), a division of PSS World Medical,Inc. The arbitration panel made an interim award to the Company of $2,200,000for unpaid amounts previously invoiced, which the Company earlier reported asrevenue. This amount was net of $150,000 separately awarded to PSS. Thedecision also included payment to the Company of $396,000 of interest on theoutstanding balance owed to the Company. The arbitration panel also awarded theCompany its attorneys’ fees and expenses, as well as the costs ofarbitration.  This interim decision willbe finalized upon the arbitration panel’s issuance of its order with respect tothe payment of legal fees and expenses which is expected by June 4, 2003. Inaccordance with the arbitration panel’s decision, PSS made a $2,596,000 paymentto the Company on April 1, 2003, The Company recognized $396,000 as interestincome in the three-month period ended March 29, 2003 and will recognize the$2,200,000 reduction in accounts receivable during the three-month period endedJune 28, 2003.

 

From time to time, theCompany is a party to various legal proceedings incidental to our business. TheCompany believes that none of the legal proceedings which are presently pendingwill have a material adverse effect upon our financial position, results ofoperations, or liquidity.

 

# **ITEM6 - 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                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                       |
|   | A report on Form 8-K  was filed on January 8, 2003 (with Items 5 and 7), announcing our acquisition  of the assets of Applied Optronics.   |
|   |                                                                                                                                       |
|   | A report on Form 8-K  was filed on March 6, 2003 (with Items 5 and 7), announcing the decision in  our arbitration proceeding against PSS. |

 

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**SIGNATURES**

 

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

 
|   |                                                                              | CANDELA CORPORATION                      |
|--------|-----------------------------------------------------------------------------------|------------------------------------------|
|   | Registrant                                                                        |
|   |                                                                              |
|   |                                                                              |
| Date:  | May 13, 2003                                                                      | /s/ Gerard E. Puorro                     |   |
|   |                                                                              | Gerard E. Puorro                         |
|   |                                                                              | (President and Chief  Executive Officer) |
|   |                                                                              |                                     |
|   |                                                                              |                                     |
| Date:  | May 13, 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 this quarterly 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 fact or omit to state a material fact  necessary to make the statements made, in light of the circumstances under  which such statements were made, not misleading with respect to the period  covered by this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 3.     | Based on my knowledge, the financial statements, and other financial  information included in this quarterly report, fairly present in all material  respects the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this quarterly report;                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 4.     | The registrant’s other certifying officers and I are responsible for  establishing and maintaining disclosure controls and procedures (as defined  in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (a) | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (b) | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of this  quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (c) | presented in this quarterly report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 5.     | The registrant’s other certifying officers and I have disclosed, based  on our most recent evaluation, to the registrant’s auditors and the audit  committee of registrant’s board of directors (or persons performing the  equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (a) | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (b) | any fraud, whether or not material, that involves management or other  employees who have a significant role in the registrant’s internal controls;  and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 6.     | The registrant’s other certifying officers and I have indicated in  this quarterly report whether or not there were significant changes in  internal controls or in other factors that could significantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 
| Date: May 13, 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 reviewed this quarterly 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 fact or omit to state a material fact necessary  to make the statements made, in light of the circumstances under which such  statements were made, not misleading with respect to the period covered by  this quarterly report;                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 3.     | Based on my knowledge, the financial statements, and other financial  information included in this quarterly report, fairly present in all material  respects the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this quarterly report;                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 4.     | The registrant’s other certifying officers and I are responsible for  establishing and maintaining disclosure controls and procedures (as defined  in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (a) | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this quarterly report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (b) | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of this  quarterly report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (c) | presented in this quarterly report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 5.     | The registrant’s other certifying officers and I have disclosed, based  on our most recent evaluation, to the registrant’s auditors and the audit  committee of registrant’s board of directors (or persons performing the  equivalent function):                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (a) | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                | (b) | any fraud, whether or not material, that involves management or other  employees who have a significant role in the registrant’s internal controls;  and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| 6.     | The registrant’s other certifying officers and I have indicated in  this quarterly report whether or not there were significant changes in  internal controls or in other factors that could significantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 
| Date: May 13, 2003 |   | /s/ F. Paul Broyer      |   |
|--------------------|--------|-------------------------|--------|
|               |   | F. Paul Broyer          |
|               |   | Chief Financial Officer |

 

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