Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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

 

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

 

**Commission file number 000-14742**

 

**CANDELA CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                      | ** ** | **04-2477008**                        |
|---------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction                     |       | (I.R.S. Employer  Identification No.) |
| of incorporation or  organization)                |       |                                  |
|                                              |       |                                  |
| **530 Boston  Post Road, Wayland, Massachusetts** | ** ** | **01778**                             |
| (Address of principal  executive offices)         |       | (Zip code)                            |

 

Registrant’s telephone number, including area code:  **(508)358-7400**

 

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

Yes  x     No  o

 

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

 

Large AcceleratedFiler o           Accelerated Filer x         Non-Accelerated Filer o          Smaller reportingcompany o

 

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

 

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

 

| **Class**                              | ** ** | **November 5, 2008** |
|----------------------------------------|------------|---------------------------|
| Common Stock, $.01 par value per share |       | 22,868,829                |

 

 

 

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Table of Contents

 

**CANDELACORPORATION**

**Table ofContents**

 
| ** **    | ** **             | ** **                                                                                                                                                                  | ** ** | **Page** |
|---------------|------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Part I.  | Financial Information: |                                                                                                                                                                        |       |
|          |                   |                                                                                                                                                                        |       |
|          | Item 1.                | Unaudited Financial Statements                                                                                                                                              |       |     |
|          |                   |                                                                                                                                                                        |       |     |
|          |                   | Condensed  Consolidated Balance Sheets as of September 27, 2008 and June 28,  2008                                                                                |       | 3        |
|          |                   |                                                                                                                                                                        |       |     |
|          |                   | Condensed  Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for  the three-month periods ended September 27, 2008 and September 29,  2007 |       | 4        |
|          |                   |                                                                                                                                                                        |       |     |
|          |                   | Condensed  Consolidated Statements of Cash Flows for the three-month periods ended  September 27, 2008 and September 29, 2007                                     |       | 5        |
|          |                   |                                                                                                                                                                        |       |     |
|          |                   | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                           |       | 6 - 15   |
|          |                   |                                                                                                                                                                        |       |     |
|          | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                 |       | 16 - 20  |
|          |                   |                                                                                                                                                                        |       |     |
|          | Item 3.                | Quantitative  and Qualitative Disclosure about Market Risk                                                                                                                  |       | 21       |
|          |                   |                                                                                                                                                                        |       |     |
|          | Item 4.                | Controls and  Procedures                                                                                                                                                    |       | 21       |
|          |                   |                                                                                                                                                                        |       |     |
| Part II. | Other Information:     |                                                                                                                                                                        |       |
|          |                   |                                                                                                                                                                        |       |
|          | Item 1.                | Legal proceedings                                                                                                                                                           |       | 22 - 23  |
|          |                   |                                                                                                                                                                        |       |     |
|          | Item 6.                | Exhibits                                                                                                                                                                    |       | 24       |
|          |                   |                                                                                                                                                                        |       |     |
|          | Signatures             |                                                                                                                                                                        |       | 25       |
|          |                   |                                                                                                                                                                        |       |     |
|          | Index to  Exhibits     |                                                                                                                                                                        | 26         |
|               |                        |                                                                                                                                                                             |            |          |  |

 

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**Part I.  Financial Information**

 

**Item 1 - Financial Statements**

 

**CANDELA CORPORATION**

**Condensed Consolidated Balance Sheets**

(inthousands, except per-share data)

(unaudited)

 
| ** **                                                                                                                                         | ** ** | **September 27,** | ** ** | **June 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                         | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                         | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                    |       |                   |       |              |       |
| Cash and cash  equivalents                                                                                                                         |       | $                      | 18,737     |              | $          | 21,030 |   |
| Restricted cash                                                                                                                                    |       | 1                      |       | 29                |       |
| Marketable  securities                                                                                                                             |       | 8,196                  |       | 12,131            |       |
| Accounts  receivable, net of allowance for doubtful accounts of $2,451 and $2,322 at  September 27 and June 28, respectively             |       | 34,435                 |       | 43,320            |       |
| Notes receivable                                                                                                                                   |       | 756                    |       | 728               |       |
| Inventories, net                                                                                                                                   |       | 35,123                 |       | 33,141            |       |
| Other current  assets                                                                                                                              |       | 11,973                 |       | 9,043             |       |
| Total current  assets                                                                                                                              |       | 109,221                |       | 119,422           |       |
| Property and  equipment, net                                                                                                                       |       | 4,327                  |       | 4,027             |       |
| Deferred tax  assets                                                                                                                               |       | 8,065                  |       | 8,065             |       |
| Goodwill                                                                                                                                           |       | 12,988                 |       | 13,225            |       |
| Acquired  Intangible assets, net                                                                                                                   |       | 6,535                  |       | 6,916             |       |
| Marketable  securities, long-term                                                                                                                  |       | 2,848                  |       | 3,512             |       |
| Other assets                                                                                                                                       |       | 2,807                  |       | 2,928             |       |
| Total assets                                                                                                                                       |       | $                      | 146,791    |              | $          | 158,095 |   |
|                                                                                                                                               |       |                   |       |              |       |
| **Liabilities and Stockholders’ Equity**                                                                                                      |       |                   |       |              |       |
| Current  liabilities:                                                                                                                              |       |                   |       |              |       |
| Accounts payable                                                                                                                                   |       | $                      | 13,520     |              | $          | 15,917 |   |
| Accrued payroll  and related expenses                                                                                                              |       | 4,388                  |       | 4,680             |       |
| Accrued warranty  costs, current                                                                                                                   |       | 5,374                  |       | 5,373             |       |
| Sales tax  payable                                                                                                                                 |       | 1,126                  |       | 919               |       |
| Other accrued  liabilities                                                                                                                         |       | 7,411                  |       | 9,257             |       |
| Deferred  revenue, current                                                                                                                         |       | 11,342                 |       | 13,614            |       |
| Current  liabilities of discontinued operations                                                                                                    |       | 1,192                  |       | 1,200             |       |
| Total current  liabilities                                                                                                                         |       | 44,353                 |       | 50,960            |       |
| Deferred tax  liability, long-term                                                                                                                 |       | 2,099                  |       | 2,099             |       |
| Accrued warranty  costs, long-term                                                                                                                 |       | 1,039                  |       | 725               |       |
| Deferred  revenue, long-term                                                                                                                       |       | 3,823                  |       | 4,522             |       |
|                                                                                                                                               |       |                   |       |              |       |
| Total  liabilities                                                                                                                                 |       | 51,314                 |       | 58,306            |       |
|                                                                                                                                               |       |                   |       |              |       |
| Stockholders’  equity:                                                                                                                        |       |                   |       |              |       |
| Common stock,  $.01 par value, 60,000,000 shares authorized; 26,156,000 and 26,123,000  issued at September 27 and June 28, respectively |       | 262                    |       | 261               |       |
| Treasury stock,  3,450,000 common shares at September 27 and June 28, respectively,  at cost                                             |       | (24,855                | )          | (24,855           | )          |
| Additional  paid-in capital                                                                                                                        |       | 74,128                 |       | 73,174            |       |
| Accumulated  earnings                                                                                                                              |       | 41,579                 |       | 45,588            |       |
| Accumulated  other comprehensive income                                                                                                            |       | 4,363                  |       | 5,621             |       |
| Total  stockholders’ equity                                                                                                                   |       | 95,477                 |       | 99,789            |       |
| Total  liabilities and stockholders’ equity                                                                                                   |       | $                      | 146,791    |              | $          | 158,095 |   |

 

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

 

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**CANDELA CORPORATION**

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

**(in thousands, except per-share data)**

 
| ** **                                                            | ** ** | **For the three months ended:** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** |
| ** **                                                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                            | ** ** | **(Unaudited)**                                     | ** ** |
| **Revenue**                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Lasers and other  products                                            |       | $                                                   | 17,241     |   | $ | 26,824 |   |
| Product-related  service                                              |       | 9,632                                               |       | 8,649 |   |
| Total revenue                                                         |       | 26,873                                              |       | 35,473 |   |
| **Cost of  sales**                                                    |       |                                                |       |   |   |
| Lasers and other  products                                            |       | 8,777                                               |       | 12,312 |   |
| Product-related  service                                              |       | 7,519                                               |       | 5,885 |   |
| Total cost of  sales                                                  |       | 16,296                                              |       | 18,197 |   |
|                                                                  |       |                                                |       |   |   |
| **Gross  profit**                                                     |       | 10,577                                              |       | 17,276 |   |
| **Operating  expenses:**                                              |       |                                                |       |   |   |
| Selling, general  and administrative                                  |       | 14,974                                              |       | 15,028 |   |
| Research and  development                                             |       | 2,824                                               |       | 2,996 |   |
| Total operating  expenses                                             |       | 17,798                                              |       | 18,024 |   |
|                                                                  |       |                                                |       |   |   |
| **Loss  from operations**                                             |       | (7,221                                              | )          | (748 | ) |
| **Other  income (expense):**                                          |       |                                                |       |   |   |
| Interest income                                                       |       | 243                                                 |       | 463 |   |
| Other income  (expense), net                                          |       | (261                                                | )          | 741 |   |
| Total other  income (expense)                                         |       | (18                                                 | )          | 1,204 |   |
| **(Loss)  income before income taxes**                                |       | (7,239                                              | )          | 456 |   |
| **(Benefit  from) provision for income taxes**                        |       | (3,230                                              | )          | 269 |   |
| **Net  (loss) income**                                                |       | $                                                   | (4,009     | ) | $ | 187 |   |
|                                                                  |       |                                                |       |   |   |
| **Net  (loss) income per share of common stock**                      |       |                                                |       |   |   |
| Basic                                                                 |       | $                                                   | (0.18      | ) | $ | 0.01 |   |
| Diluted                                                               |       | $                                                   | (0.18      | ) | $ | 0.01 |   |
|                                                                  |       |                                                |       |   |   |
| **Weighted  average shares outstanding:**                             |       |                                                |       |   |   |
| Basic                                                                 |       | 22,697                                              |       | 22,905 |   |
| Diluted                                                               |       | 22,697                                              |       | 23,105 |   |
|                                                                  |       |                                                |       |   |   |
| **Net  (loss) income**                                                |       | $                                                   | (4,009     | ) | $ | 187 |   |
| **Other  comprehensive income (loss):**                               |       |                                                |       |   |   |
| Foreign currency  translation adjustment                              |       | (1,258                                              | )          | 772 |   |
| Unrealized gain  (loss) on available-for-sales securities, net of tax |       | —                                              |       | (262 | ) |
| **Comprehensive  (loss) income**                                      |       | $                                                   | (5,267     | ) | $ | 697 |   |

 

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

 

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**CANDELA CORPORATION**

**Condensed Consolidated Statements of Cash Flows**

(inthousands)

(unaudited)

 
| ** **                                                                            | ** ** | **For the three months ended:** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** |
| ** **                                                                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net (loss)  income                                                                    |       | $                                                   | (4,009     | ) | $ | 187 |   |
| Adjustments to  reconcile net (loss) income to net cash used by operating activities: |       |                                                |       |   |   |
| Share-based  compensation expense                                                     |       | 893                                                 |       | 857 |   |
| Depreciation and  amortization                                                        |       | 765                                                 |       | 647 |   |
| Provision for  bad debts                                                              |       | 604                                                 |       | 488 |   |
| Other non-cash  items                                                                 |       | (71                                                 | )          | 184 |   |
| Changes in  operating assets and liabilities                                          |       |                                                |       |   |   |
| Accounts  receivable                                                                  |       | 8,569                                               |       | (1,632 | ) |
| Notes receivable                                                                      |       | (25                                                 | )          | 342 |   |
| Inventories                                                                           |       | (1,961                                              | )          | (1,094 | ) |
| Other current  assets                                                                 |       | 287                                                 |       | (1,572 | ) |
| Other assets                                                                          |       | 1                                                   |       | 2,468 |   |
| Accounts payable                                                                      |       | (1,801                                              | )          | 2,701 |   |
| Accrued payroll  and related expenses                                                 |       | (205                                                | )          | (548 | ) |
| Deferred revenue                                                                      |       | (2,689                                              | )          | 980 |   |
| Accrued warranty  costs                                                               |       | 508                                                 |       | (858 | ) |
| Income taxes  payable and deferred                                                    |       | (3,230                                              | )          | (180 | ) |
| Other accrued  liabilities                                                            |       | (1,244                                              | )          | (4,087 | ) |
| Restricted cash                                                                       |       | 28                                                  |       | 2 |   |
|                                                                                  |       |                                                |       |   |   |
| Net cash used by  operating activities                                                |       | (3,580                                              | )          | (1,115 | ) |
|                                                                                  |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                            |       |                                                |       |   |   |
| Purchases of  property and equipment                                                  |       | (620                                                | )          | (744 | ) |
| Maturities of  held-to-maturity marketable securities                                 |       | 3,484                                               |       | 1,978 |   |
| Purchases of  held-to-maturity marketable securities                                  |       | —                                              |       | (4,856 | ) |
| Acquisition of  intangible assets                                                     |       | —                                              |       | (75 | ) |
|                                                                                  |       |                                                |       |   |   |
| Net cash  provided by (used by) investing activities                                  |       | 2,864                                               |       | (3,697 | ) |
|                                                                                  |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                            |       |                                                |       |   |   |
| Proceeds from  the issuance of common stock                                           |       | 55                                                  |       | 93 |   |
| Purchase of  treasury stock                                                           |       | —                                              |       | (2,400 | ) |
|                                                                                  |       |                                                |       |   |   |
| Net cash  provided by (used by) financing activities                                  |       | 55                                                  |       | (2,307 | ) |
|                                                                                  |       |                                                |       |   |   |
| Effect of  exchange rates on cash and cash equivalents                                |       | (1,632                                              | )          | 772 |   |
|                                                                                  |       |                                                |       |   |   |
| **Net  decrease in cash and cash equivalents**                                        |       | (2,293                                              | )          | (6,347 | ) |
|                                                                                  |       |                                                |       |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | 21,030                                              |       | 27,152 |   |
|                                                                                  |       |                                                |       |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | $                                                   | 18,737     |   | $ | 20,805 |   |

 

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

 

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**CandelaCorporation**

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

 

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

 

*Basis ofPresentation*

 

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

 

The results for thethree-month period ended September 27, 2008 are not necessarily indicativeof results to be expected for the remainder of the fiscal year. The informationcontained in the interim financial statements should be read in conjunctionwith Management’s Discussion and Analysis and the financial statements andnotes thereto included in the Candela Corporation 2008 Form 10-K filedwith the Securities and Exchange Commission (“SEC”).

 

*Basisof Consolidation*

 

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

 

*SignificantAccounting Policies*

 

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

 

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

 

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

 

In April 2008, theFinancial Accounting Standards Board (“FASB”) finalized FASB Staff Position (“FSP”)No. 142-3, *Determination of the UsefulLife of Intangible Assets*. The position amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB Statementof Financial Accounting Standard (“SFAS”) No. 142, Goodwill and OtherIntangible Assets. The position applies to intangible assets that are acquiredindividually or with a group of other assets and both intangible assetsacquired in business combinations and asset acquisitions. FSP 142-3 iseffective for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years. We are currently evaluating the impact ofthe pending adoption of FSP 142-3 on our consolidated financialstatements.

 

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

 

In December 2007,the FASB issued SFAS No. 141 (revised “R”), *Business Combinations*. This standardchanges the accounting for business combinations by requiring that an acquiringentity measures and recognizes identifiable assets acquired and liabilitiesassumed at the acquisition date fair value with limited exceptions. The changesinclude the treatment of acquisition related transaction costs, the valuationof any non-controlling interest at acquisition date fair value, the recordingof acquired contingent liabilities at acquisition date fair value and thesubsequent re-measurement of such liabilities after acquisition date, the recognitionof capitalized in-process research and development, the accounting foracquisition-related restructuring cost accruals 

 

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subsequent to acquisitiondate, and the recognition of changes in the acquirer’s income tax valuationallowance. SFAS No. 141(R) is effective for fiscal years beginningafter December 15, 2008, with early adoption prohibited. We are currentlyevaluating the impact of the pending adoption of SFAS No. 141(R) onour consolidated financial statements. The accounting treatment related topre-acquisition uncertain tax positions will change when SFAS No. 141(R)becomes effective, which will be in first quarter of our fiscal year 2010. Atsuch time, any changes to the recognition or measurement of uncertain taxpositions related to pre-acquisition periods will be recorded through incometax expense, where currently the accounting treatment would require anyadjustment to be recognized through the purchase price.

 

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

 

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157establishes a framework for measuring the fair value of assets and liabilities.This framework is intended to provide increased consistency in how fair valuedeterminations are made under various existing accounting standards whichpermit, or in some cases require, estimates of fair market value. SFAS No. 157is effective for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. In February 2008, the FASBissued FSP No. FAS 157-1, Application of SFAS No. 157 toSFAS No. 13 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underSFAS No. 13, and FSP No. FAS 157-2, Effective Date ofSFAS No. 157. Collectively, the FSPs defer the effective date ofSFAS No. 157 to fiscal years beginning after December 15, 2008,for non-financial assets and non-financial liabilities except for items thatare recognized or disclosed at fair value on a recurring basis at least annually,and amends the scope of SFAS 157. As required, the Company adopted SFAS No. 157for its financial assets on June 29, 2008.  Adoption does not have a material impact onthe Company’s financial position or results of operations at this time. TheCompany has not yet determined the impact on its financial statements of the June 28,2009 adoption of SFAS No. 157 as it pertains to non-financial assets andliabilities.

 

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

 

·                 Level 1 -Valuation is based upon quoted prices for identical instruments traded inactive markets. Level 1 instruments include securities traded on activeexchange markets, such as the New York Stock Exchange.

 

·                 Level 2 -Valuation is based upon quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active and model-based valuation techniques for which all significantassumptions are observable in the market.

 

·                 Level 3 - Valuationis generated from model-based techniques that use significant assumptions notobservable in the market. These unobservable assumptions reflect our ownestimates of assumptions market participants would use in pricing the asset orliability.

 

Our cash and cashequivalents consist of cash on deposit at various financial institutions at September 27,2008 and include approximately $3.3 million invested in money market fundsvalued using Level 1 inputs. We do not have any financial assets or liabilitiesthat require disclosure of fair value at September 27, 2008.

 

**3.      Discontinued Operations**

 

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

 

Current liabilities ofdiscontinued operations consist of the following:

 
| ** **                           | ** ** | **September 27,** | ** ** | **June 28,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------|------------|
| **(in thousands)**              | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| Facility closure  and other costs    |       | $                      | 353        |              | $          | 361 |   |
| Deferred  revenue, gift certificates |       | 839                    |       | 839               |       |
|                                 |       | $                      | 1,192      |              | $          | 1,200 |   |

 

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

 

Effective July 3,2005, the Company implemented the fair value recognition provisions of SFAS No. 123revised (“SFAS No. 123R”) and Staff Accounting Bulletin 107 (“SAB 107”)for all share-based compensation that was not vested as of July 2, 2005.The Company adopted SFAS No. 123R using a modified prospectiveapplication, as permitted under SFAS No. 123R. Accordingly, prior periodamounts were not restated.  Under thisapplication, the Company is required to record compensation 

 

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expense for all awardsgranted after the date of adoption and for the unvested portion of previouslygranted awards that remain outstanding at the date of adoption. Compensationcost is being recognized over the period that an employee provides service inexchange for the award.

 

The application of SFAS No. 123Rand SAB 107 during the three-month periods ended September 27, 2008 and September 29,2007 resulted in the recognition of share-based compensation expense ofapproximately $0.9 million for each period, respectively. These expenses weredivided between cost of sales and operating expense cost centers based upon thefunctional responsibilities of the individuals holding the respective options.

 

As of September 27,2008, there was approximately $3.1 million of total unrecognized compensationcost related to non-vested stock options/Stock Appreciation Rights (“SARs”)granted under the Company’s incentive plans. This cost is expected to berecognized over a weighted-average period of 1.3 years. As of September 29,2007, there was approximately $6.1 million of total unrecognized compensationcost related to non-vested stock options granted under the Company’s incentiveplans.

 

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

 

**StockPlans**

 

### **1990 Candela CorporationEmployee Stock Purchase Plan**

 

The 1990 EmployeeStock Purchase Plan (the “Purchase Plan”) provides for the sale of up to 1.5million shares of common stock to eligible employees. The shares are issued at85% of the market price on the last day of semi-annual periods. Substantiallyall full-time employees are eligible to participate in the Purchase Plan. At September 27,2008 there were approximately 622,000 shares available for sale. Compensationexpense for the purchase plan is recognized over the vesting period.

 

**1998 CandelaCorporation Amended and Restated Stock Plan**

 

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

 

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

 

SARs provide theholder the right to receive an amount, payable in stock, cash or in anycombination of these, as specified by a Committee established by the Board ofDirectors, equal to the excess of the market value of our common shares on thedate of exercise over the grant price at the time of the grant. The grant priceof a SAR may not be less than the fair market value per share of common stockon the date of grant, provided that the grant price of SARs granted in tandemwith stock options shall equal the exercise price of the related stock option.None of the options/SARs outstanding at September 27, 2008 hadcash-settlement features.

 

Options and rights granted under the 1998 Stock Plan become exercisable on the date of grant or in installments, as specified by a Committee established by the Board of Directors, and expire ten years from the date of the grant. Upon exercise of a SAR, only the net number of shares of common stock issued in connection with such exercise shall be deemed “issued” for this purpose. The Company may satisfy the awards upon exercise with either newly-issued or treasury shares.

 

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

 

There were approximately 4.3 million outstanding options/SARs at September 27, 2008 with a weighted-average exercise price of $8.17 per share, an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of 7.93 years.

 

Of the total 4.3 million outstanding options/SARs, there were approximately 1.8 million of exercisable options/SARs at September 27, 2008 with a weighted-average exercise price of $10.48 per share, an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of 6.39 years.

 

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

 

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

 

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

 

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

 
| ** **                                                         | ** ** | **For the three months ended:** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** |
| **(in thousands, except per share data)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Shares used in  the calculation of Basic earnings per share        |       | 22,697                                              |       | 22,905 |   |
| Effect of  dilutive securities: Stock options/SAR’s           |       | —                                              |       | 200 |   |
| Diluted shares  used in the calculation of earnings per share      |       | 22,697                                              |       | 23,105 |   |

 

During the three-monthperiod ended September 27, 2008, potential common shares consisting of allshares issuable upon exercise of stock options/SARs have been excluded from thecomputation of diluted loss per share as their effect would have beenanti-dilutive.

 

During the three-monthperiod ended September 29, 2007, options/SARs to purchase approximately2.4 million shares of common stock were excluded from the calculations ofdiluted earnings per share as their effect would have been anti-dilutive.

 

**6.****                  MarketableSecurities**

 

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

 

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

 

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Marketable securitiesconsist of the following:

 
| ** **                               | ** ** | **September 27, 2008** | ** ** | **June 28, 2008** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                       | ** ** | **Net Carrying  Amount**    | ** ** | **Fair Value**         | ** ** | **Unrealized  gain (loss)** | ** ** | **Net Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Unrealized  gain (loss)** | ** ** |
| Short-term  (Held-to-maturity):          |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                                | 6,000      |                        | $          | 6,013 |   | $ | 13 |   | $ | 9,000 |   | $ | 9,055 |   | $ | 55 |   |
| Certificates of  deposit                 |       | 2,196                            |       | 2,201                       |       | 5 |   | 3,131 |   | 3,134 |   | 3 |   |
| Total marketable  securities, short-term |       | $                                | 8,196      |                        | $          | 8,214 |   | $ | 18 |   | $ | 12,131 |   | $ | 12,189 |   | $ | 58 |   |
|                                     |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term  (Held-to-maturity):           |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| Government-backed  securities            |       | $                                | 2,000      |                        | $          | 2,003 |   | $ | 3 |   | $ | 2,000 |   | $ | 2,014 |   | $ | 14 |   |
| Certificates of  deposit                 |       | 848                              |       | 840                         |       | (8 | ) | 1,512 |   | 1,502 |   | (10 | ) |
| Total marketable  securities, long-term  |       | $                                | 2,848      |                        | $          | 2,843 |   | $ | (5 | ) | $ | 3,512 |   | $ | 3,516 |   | $ | 4 |   |

 

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

 
| ** **                    | ** ** | **Fiscal Year Ended** | ** ** | ** ** | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------|------------|
| **(in thousands)**       | ** ** | **2009**                        | ** ** | **2010**   | ** ** | **Total** | ** ** |
| Government-backed  securities |       | $                               | 6,000      |       | $          | 2,000 |   | $ | 8,000 |   |
| Certificates of  deposit      |       | 2,196                           |       | 848        |       | 3,044 |   |
|                          |       |                            |       |       |       |   |   |
|                          |       | $                               | 8,196      |       | $          | 2,848 |   | $ | 11,044 |   |

 

**7.****                   Inventories**

 

Inventoriesconsist of the following:

 
| ** **              | ** ** | **September 27,** | ** ** | **June 28,** | ** ** |
|-------------------------|------------|------------------------|------------|-------------------|------------|
| **(in thousands)** | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| Raw materials           |       | $                      | 14,772     |              | $          | 13,720 |   |
| Work in process         |       | 1,813                  |       | 1,635             |       |
| Finished goods          |       | 18,538                 |       | 17,786            |       |
|                    |       | $                      | 35,123     |              | $          | 33,141 |   |

 

**8.      Property and Equipment**

 

Property andequipment consists of the following:

 
| ** **                                | ** ** | **September 27,** | ** ** | **June 28,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------|------------|
| **(in thousands)**                   | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| Leasehold  improvements                   |       | $                      | 1,013      |              | $          | 1,014 |   |
| Office furniture                          |       | 688                    |       | 718               |       |
| Computers,  software, and other equipment |       | 12,467                 |       | 11,845            |       |
|                                      |       | $                      | 14,168     |              | $          | 13,577 |   |
| Less:  accumulated depreciation           |       | (9,841                 | )          | (9,550            | )          |
| Property and  equipment, net              |       | $                      | 4,327      |              | $          | 4,027 |   |

 

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

 

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**9.      Goodwilland Acquired Intangible Assets**

 

Goodwill and acquiredintangible assets consist of the following:

 
| **(in thousands)**                   | ** ** | **September 27,  2008** | ** ** | **June 28,  2008** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Goodwill                                  |       | $                            | 12,988     |                    | $          | 13,225 |   |
| Intangible  assets with finite lives:     |       |                         |       |                    |       |
| Patents                                   |       | $                            | 3,128      |                    | $          | 3,128 |   |
| Developed  technology                     |       | 6,009                        |       | 6,009                   |       |
|                                      |       | 9,137                        |       | 9,137                   |       |
| Accumulated  amortization:                |       |                         |       |                    |       |
| Patents                                   |       | (1,016                       | )          | (886                    | )          |
| Developed  technology                     |       | (1,586                       | )          | (1,335                  | )          |
|                                      |       | (2,602                       | )          | (2,221                  | )          |
| Intangible  assets with finite lives, net |       | $                            | 6,535      |                    | $          | 6,916 |   |

 

Thechanges in the carrying amount of goodwill for the three-month period ended September 27,2008 are as follows:

 
| ** **                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| Balance at  June 28, 2008          |       | $                       | 13,225     |   |
|                                    |       |                    |       |
| Effect of  foreign currency adjustments |       | (237                    | )          |
| Balance at  September 27, 2008     |       | $                       | 12,988     |   |

 

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

 

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

 

The Company enters intofinancial instruments to reduce its exposure to fluctuations in foreignexchange rates by creating offsetting positions through the use of foreigncurrency forward contracts.  Changes tothe fair value of derivative contracts that do not qualify for hedge accountingare reported in other income (expense) in the period of the change. Forderivatives that qualify for hedge accounting, the Company recognizes theinstruments as either assets or liabilities in the statement of financialposition and measures those instruments at fair value. Changes in the fairvalue of the derivatives are recorded in shareholders’ equity as a component ofother comprehensive income along with an offsetting adjustment against thebasis of the derivative instrument itself. None of the aforementionedderivatives qualified for hedge accounting at September 27, 2008.

 

The Company had four foreigncurrency forward contracts outstanding at September 27, 2008 in the notionalamount of approximately 2.8 million Euros or approximately $4.1 million. Thesederivative contracts serve to mitigate the foreign currency risk of asubstantial portion of our Euro-denominated inter-company balances at September27, 2008. None of the aforementioned derivatives qualified for hedge accountingat September 27, 2008.

 

**11.****             Warranty Reserve**

 

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

 

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

 

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| ** **                             | ** ** | **For the three months ended:** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** |
| **(in thousands)**                | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Beginning  balance                     |       | $                                                   | 6,098      |   | $ | 7,613 |   |
| Incremental  accruals on current sales |       | 1,964                                               |       | 1,173 |   |
| Amortization of  prior-period accruals |       | (1,649                                              | )          | (2,031 | ) |
| Ending balance                         |       | $                                                   | 6,413      |   | $ | 6,755 |   |

 

**12.****             Deferred Revenue**

 

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

 

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

 

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

 
| ** **                                  | ** ** | **For the three months ended:** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** |
| **(in thousands)**                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Beginning  balance                          |       | $                                                   | 18,136     |   | $ | 13,751 |   |
| Deferral of new  sales                      |       | 3,937                                               |       | 5,189 |   |
| Recognition of  previously deferred revenue |       | (6,908                                              | )          | (4,209 | ) |
| Ending balance                              |       | $                                                   | 15,165     |   | $ | 14,731 |   |

 

**13.    Common Stock Buyback**

 

325,000 shares ofcommon stock were purchased for approximately $2.4 million during thethree-month period ended September 29, 2007.

 

**14.    Commitments andContingencies**

 

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

 

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

 

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

 

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

 

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

 

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

** **

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

 

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

 

·      Palomar asserts that it is the exclusivelicensee from The General Hospital Corporation (“Mass. General”) of U.S. PatentNo. 5,735,844 (the “‘844 Patent”) and U.S. Patent No. 5,595,568,which is related to the ‘844 Patent (the “‘568 Patent”).  On August 9, 2006, Palomar filed suitagainst the Company in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of U.S. Patent No. 5,735,844.Palomar seeks compensatory and treble damages, as well as attorneys’ fees andinjunctive relief. In November 2006, the Company answered the complaint bydenying Palomar’s allegations and asserting a variety of affirmative defensesand counterclaims against Palomar. This response included a counterclaim by theCompany against Palomar seeking a declaratory judgment that United Statespatent No. 5,595,568 (“the ‘568 Patent”) is either invalid, or productsmanufactured by the Company do not infringe the ‘568 Patent, or both. In November 2006,Palomar filed an answer denying the Company’s counterclaim. In February 2007,Palomar moved to amend its Complaint to add The General Hospital Corporation asa party, to add a claim for infringement by Candela of the ‘568 patent, and toallege that additional Candela products infringe the ‘568 Patent. Palomar’smotion to amend its Complaint was granted in August 2007. In February 2007,Candela moved to amend its Answer and Counterclaims to add allegations ofinequitable conduct, double-patenting and violation of Mass. Gen. Laws Ch. 93Aby Palomar. The Company’s motion to amend its complaint was granted in March 2007.Palomar filed a general denial response to Candela’s Amended Answer andCounterclaim in March 2007. In August 2007, the parties had a Markmanhearing before the U.S. District Court Judge presiding over the above-describedlegal proceeding. In a Markman hearing, the Court interprets the definition ofthe disputed claim term of a patent. Pre-trial fact discovery has ended and theparties are in the midst of exchanging expert reports. No trial date has beenestablished, but on October 31, 2008, the Company requested a stay of thecase with the Court.  The Company did sobased 

 

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upon a third party’sre-examination request that was granted by the United States Patent andTrademark Office on August 29, 2008. The re-examination is with respect toboth the ‘568 and ‘844 patents, including many of the Claims at issue in thiscase.

 

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

 

·                  In December 2006, the Company filed suitagainst Palomar in the United States District Court for the Eastern District ofTexas, Lufkin Division, asserting that Palomar infringes one or more claims ofUnited States patents Nos: 5,810,801, 6,659,999 and 6,120,497. The Companysought compensatory and treble damages for past infringement, as well asattorneys’ fees and an injunction against Palomar from future infringement. In January 2007,Palomar answered the complaint by denying the Company’s allegations and filinga declaratory judgment motion seeking a court ruling that it did not infringesuch patents and/or that such patents were invalid. In addition, Palomar fileda motion to transfer the case to the United States District Court for theDistrict of Massachusetts. In February 2007, the Company addedMassachusetts General Hospital as a party to its action. The Court deniedPalomar’s motion to transfer the case to Massachusetts. The parties had a sixday trial, beginning on September 29, 2008.  At trial, the Company alleged that Claims11-14 of the 5,810,801 Patent was infringed by Palomar’s Lux 1540, Lux1540Z,LuxIR and Lux DeepIR.  On October 7,2008, the jury returned a verdict in favor of Palomar. The jury found that noneof the alleged Palomar products infringe on Claims 11-14 of the Company’s5,810,801 patent and that all such Claims are invalid. The Company has filed aJudgment as a Matter of Law motion with the Court in an attempt to reverse theinvalidity ruling.

 

While the Company intendsto vigorously contest Palomar’s allegations, and to pursue its own claims againstPalomar, each lawsuit is inherently uncertain and unpredictable as to its ultimateoutcome. An adverse outcome in Palomar’s suit against the Company wouldmaterially hurt the Company’s business, financial condition, results ofoperations and cash flows.

 

·                  On April 2 and April 22, 2008,respectively, two substantially similar putative class action lawsuits,entitled Western Pa. Elec. Employees Pension Fund, et al., 1:08-cv-10551-DPW (“WesternPa.”) and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW (“Caballero”),were filed against Candela and two of its officers in the United StatesDistrict Court for the District of Massachusetts purporting to assert claimsfor violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, and seeking, among other things, compensatory damagesand reasonable costs and expenses. On June 2, 2008, plaintiffs in theWestern Pa. case formally moved for consolidation and the appointment of leadplaintiff and lead counsel. On July 10, 2008, that motion was granted, thecases were consolidated, and a lead plaintiff and lead counsel were appointed.On August 25, 2008, lead plaintiff filed a consolidated amended complaint.The consolidated and amended complaint purports to be brought on behalf of allopen-market purchasers of Candela common stock from November 1, 2005through August 21, 2006 and alleges that Candela made certain false andmisleading statements to investors expressing optimism regarding its financialcondition and failed to disclose (i) the possibility that Palomar, one ofCandela’s leading competitors, would initiate patent enforcement litigationagainst Candela and (ii) that Candela was purportedly losing market shareto its competitors.

 

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·                  On February 19, 2008, Cardiofocus, Inc.(“Cardiofocus”) filed suit against the Company and eight other companies in theUnited States District Court for the District of Massachusetts, assertingwillful infringement by the Company of U.S. Patent 6,457, 780, 6,159,203 and5,843,073. Cardiofocus seeks compensatory and treble damages, as well asattorneys’ fees and injunctive relief. On April 21, 2008, the Companyanswered Cardiofocus’ complaint and asserted a variety of counterclaims againstCardiofocus. The Company believes the complaint to be without merit and intendsto vigorously defend against the lawsuit. Based upon Candela’s request, on July 23,2008, the United States Patent & Trademark Office (“PTO”) agreed tore-exam the validity of the Cardiofocus patents. On October 14, 2008, theCourt agreed to stay this matter for a minimum of one year; up to a maximum oftwo years, but no later than the PTO’s decision with respect to there-examination proceedings.

 

·                  On April 16, 2008, a shareholderderivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532,was filed in Middlesex County, Massachusetts Superior Court against theindividual members of Candela’s board of directors and certain of its currentand former officers purporting to assert claims for breach of fiduciary dutyand related claims arising out of allegations similar to those asserted in theclass action litigation discussed above. The complaint seeks on behalf ofCandela, among other things, damages, restitution, and injunctive relief.

 

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

 

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

 

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

 

As a result of thistransaction, Candela received approximately $1.0 million in cash at the time ofclosing, future cash consideration of approximately $2.5 million, and approximately1.3 million shares of common stock in OccuLogix, Inc.

 

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**CandelaCorporation**

 

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

 

**Overview**

 

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

 

**CriticalAccounting Policies**

 

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

**** ****

****A discussion of our criticalaccounting policies and the related estimates and judgments affecting thepreparation of our consolidated financial statements is included in our AnnualReport on Form 10-K for fiscal year 2008. Information with respect tochanges in our Critical Accounting Policies during the three-month period endedSeptember 27, 2008 may be found in Note 1 of the Notes to CondensedConsolidated Financial Statements (unaudited) in this Form 10-Q, whichinformation is incorporated herein by reference.****

**** ****

**CriticalAccounting Estimates**

**** ****

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

 

**RecentAccounting Pronouncements**

 

Informationwith respect to Recent Accounting Pronouncements may be found in Note 1 ofNotes to Condensed Consolidated Financial Statements (unaudited) in this Form 10-Q,which information is incorporated herein by reference.

 

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**Results of Operations**

 

***Revenue***

 

Revenue source bygeographic region is reflected in the following table:

 
| ** **               | ** ** | **For the three months ended:** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **September 27,**                              | ** ** | **September 29,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**  | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **Increase (Decrease)** | ** ** |
| U.S.                     |       | $                                                   | 8,987      |   | 33 | % | $ | 16,730 |   | 47 | % | $ | (7,743 | ) | -46 | % |
| All other  countries     |       | 17,886                                              |       | 67 | % | 18,743 |   | 53 | % | (857 | ) | -5 | % |
| Total worldwide  revenue |       | $                                                   | 26,873     |   | 100 | % | $ | 35,473 |   | 100 | % | $ | (8,600 | ) | -24 | % |

 

Consolidated revenue was$26.9 million for the three-month period ended September 27, 2008, ascompared to $35.5 million for the same period ended September 29, 2007.The overall decrease in quarterly revenue of approximately $8.6 million wascomprised primarily of revenue declines of $7.7 million in the U.S. and $1.3million in Europe, offset by slight increases in various other geographicregions. The decrease in U.S. and European revenues was directly related to theslowing economy combined with the tightening credit markets.

 

Revenue source bytype is reflected in the following table:

 
|                       |   | **For the three months ended:** |   |
|----------------------------|--------|-----------------------------------------------------|--------|
|                       |   | **September 27,**                              |   | **September 29,** |   |   |   |   |   |
| **(in thousands)**    |   | **2008**                                            |   | **2007** |   | **Increase (Decrease)** |   |
| Lasers and other  products |   | $                                                   | 17,241 |   | 64 | % | $ | 26,824 |   | 76 | % | $ | (9,583 | ) | -36 | % |
| Product-related  services  |   | 9,632                                               |   | 36 | % | 8,649 |   | 24 | % | 983 |   | 11 | % |
| Total revenue              |   | $                                                   | 26,873 |   | 100 | % | $ | 35,473 |   | 100 | % | $ | (8,600 | ) | -24 | % |

 

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

 

Product-related servicesincreased approximately $1.0 million or 11% in the three-month period ended September 27,2008 as compared to the same period ended September 29, 2007. The increaseis primarily related to the increase in the number of service-related contractssold in addition to an increase in the number of consumables and accessoriessold to support our installed base.

 

***Gross Profit.***Grossprofit was approximately $10.6 million or 39.4% for the three-month period endedSeptember 27, 2008 as compared to $17.3 million or 48.7% for the sameperiod ended September 29, 2007. The decrease in gross profit for thethree-month period ended September 27, 2008 as compared to the same periodin the previous fiscal year is primarily due to changes in product mix, changesin regional mix, and a greater proportion of revenues being derived from thesale of product-related services in the current period which carry a lowermargin than sales of lasers.

 

***Selling, General and Administrative Expense. ***Selling,general and administrative (SG&A) expenses were approximately $15.0 millionfor each of the three-month periods ended September 27, 2008 and September 29,2007, respectively. As a percentage of revenue, SG&A expenses increased to55.7% from 42.4% of revenues in the comparative prior-year period.

* *

***Research and Development Expense.***  Research and development (R&D) spendingdecreased to approximately $2.8 million for the three-month period ended September 27,2008, from approximately $3.0 million for the comparative prior-year period.These expenses are expected to increase in future periods, however, as theCompany transitions to new projects.

 

***OtherIncome/Expense. ***Otherexpense was approximately $18,000 for the three-months ended September 27,2008, as compared to other income of approximately $1.2 million for the sameperiod 

 

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ended September 29,2007. The year-over-year decrease of approximately $1.2 million is dueprimarily to a decrease in interest income earned during the first quarter offiscal 2009 combined with the recognition of a non-recurring gain in the priorfiscal period on the actual receipt of additional contingent cash considerationfrom OccuLogix, Inc. related to its merger agreement with Solx, Inc.

 

The decrease ininterest income earned during the three-month period ended September 27,2008, as compared to the same period in the prior fiscal year, is related to adecrease in market interest rates combined with an overall decrease in cash andcash equivalents and in marketable securities.

 

***IncomeTaxes.*** The (benefit) provision for income taxes resultsfrom a combination of activities of the Company and its domestic and foreignsubsidiaries. We recorded effective tax rates of approximately 45% and 34% foreach of the three-month periods ended September 27, 2008 and September 29,2007, respectively. The effective tax rate for the period ended September 27,2008 differs from the statutory rate primarily due to differences in foreigntax rates and other permanent items. The foreign rate difference is due toincome reported in a high tax rate jurisdiction combined with losses benefitedin a jurisdiction with a lower tax rate. The effective rate for the periodended September 29, 2007 differs from the statutory rate primarily due todifferences in foreign tax rates, R&D credits and other permanent items.

 

The Company alsorecorded a discrete tax expense item during the three-month period endedSeptember 29, 2007 of $0.1 million resulting from a change in the statutory taxrate in Germany. The effect of the change in the German statutory rate oncurrent earnings is fully reflected in our effective tax rate indicated above.

 

**Liquidityand Capital Resources**

 

Our cash and cashequivalents and our investment in short and long-term marketable securities at September 27,2008 totaled approximately $29.8 million compared with approximately $45.2 millionat September 29, 2007. Principal components of the decrease include growthin our inventory over the trailing twelve months, the use of cash for our stockrepurchase program, and the general funding of operations. We continue to haveno long-term debt. We believe that the combination of existing cash and cashequivalents, and marketable securities on hand, along with cash to be generatedby future operations and amounts available under our line of credit, will besufficient to meet our ongoing operating and capital expenditure requirementsfor the foreseeable future. However, we cannot be sure that we will not requireadditional capital beyond the amounts currently forecasted by us, or that anysuch required additional capital will be available on reasonable terms, if atall, as it becomes required. Please see Item 2 – Cautionary Statements foradditional information.

 

Cash used byoperating activities amounted to approximately $3.6 million for the three-monthperiod ended September 27, 2008 as compared to cash used by operatingactivities of approximately $1.1 million for the same period in the prior year.The increase in cash used by operating activities is primarily attributable toour year-to-date net loss and growth in our inventory on-hand, offset bychanges in accounts receivable and various other operating asset and liabilityaccounts in the normal course of business.

 

**Off-Balance Sheet Arrangements**

 

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

 

**ContractualObligations**

 

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

 
| **(in thousands)**        | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **After  5 years** | ** ** |
|--------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------|------------|
| Royalty  commitments           |       | $         | 3,250      |                            | $          | 1,000                          |       | $                              | 1,250      |                    | $          | 500 |   | $ | 500 |   |
| Operating leases               |       | 3,287     |       | 1,618                           |       | 1,324                          |       | 229                            |       | 116                     |       |
| Total  contractual obligations |       | $         | 6,537      |                            | $          | 2,618                          |       | $                              | 2,574      |                    | $          | 729 |   | $ | 616 |   |

 

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#### **Cautionary Statements**

 

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

 

·                        OnAugust 9, 2006, one of our competitors, Palomar Medical Technologies, Inc.(“Palomar”), alleged that the manufacture, use and sale of our products forlaser hair removal willfully infringe certain United States patents. Publicannouncements concerning this and related litigation between the two partiesthat are unfavorable to us may result in significant declines in our stockprice. An adverse ruling or judgment in this matter is likely to cause ourstock price to decline significantly. Litigation with Palomar is expensive andis likely to be protracted, and our intellectual property position as well asour cash position may be weakened as a result of an adverse ruling or judgment.Whether or not we are successful in the pending lawsuit, litigation may consumesubstantial amounts of our financial resources and divert management’sattention away from our core business. Please see Part II, Item 1 (Legal Proceedings) for a furtherdiscussion of the Palomar litigation.

 

·                        Claims byothers that our products infringe their patents or other intellectual propertyrights, or that the patents which we own or have licensed rights to areinvalid, could prevent us from manufacturing and selling some of our productsor require us to incur substantial costs from litigation or development ofnon-infringing technology.

 

·                        Ourprincipal source of liquidity is our current cash and equivalents andmarketable investments. Our ability to generate cash from operations isdependant upon our ability to generate revenue from selling our lasers andother products and providing product-related services. A decrease in demand forour products and related services or increases in operating costs would likelyhave an adverse effect on our liquidity.

 

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

 

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

 

·                        Thefailure to obtain alexandrite rods for certain laser systems from our solesupplier would impair our ability to manufacture and sell these laser systems,which has accounted for a substantial portion of our revenue in certain recentperiods.

 

·                        Ourfailure to respond to rapid changes in technology and intense competition inthe laser industry could make our lasers obsolete.

 

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

 

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

 

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

 

·                        We couldincur substantial costs as a result of product liability claims, including butnot limited to costs as a result of product failures for which we are responsibleunder warranty obligations and as a result of our customer’s potentialunavailability of liability insurance coverage.

 

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

 

·                        Ourfailure to maintain effective internal control over financial reporting couldhave a material adverse effect on our business, operating results, and stockprice.

 

·                        Ourfailure to manage acquisitions and joint ventures effectively may divertmanagement attention from our core business and cause us to incur debt,liabilities or costs.

 

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

 

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

 

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

 

We have international subsidiaries that transact business in foreign currencies and, therefore, we are exposed to foreign currency exchange risk resulting from fluctuations in foreign currencies. This risk could adversely impact our results and financial condition. From time to time, we may enter into foreign currency exchange contracts to reduce our exposure to foreign currency exchange risk and variability in operating results due to fluctuation in exchange rates underlying the value of current transactions and anticipated transactions denominated in foreign currencies. These contracts obligate us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These contracts are denominated in the same currency in which the underlying transactions are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions.

 

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

 

The Company had four foreign currency forward contracts outstanding atSeptember 27, 2008 in the notional amount of approximately 2.8 million Euros orapproximately $4.1 million. These derivative contracts serve to mitigate theforeign currency risk of a substantial portion of our Euro-denominatedinter-company balances at September 27, 2008. None of the aforementionedderivatives qualified for hedge accounting at September 27, 2008.

 

# **Item 4 - Controls and Procedures**

 

***Evaluation of Disclosure Controlsand Procedures***

 

Our Chief Executive Officer and Acting Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 27, 2008, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Securities Exchange Act of 1934, as amended.

 

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

 

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

 

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**CandelaCorporation**

 

**Part II.  Other Information**

 

**Item 1 - Legal Proceedings**

 

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

 

·                Palomar asserts that it is the exclusivelicensee from The General Hospital Corporation (“Mass. General”) of U.S. PatentNo. 5,735,844 (the “‘844 Patent”) and U.S. Patent No. 5,595,568,which is related to the ‘844 Patent (the “‘568 Patent”).  On August 9, 2006, Palomar filed suitagainst the Company in the United States District Court for the District ofMassachusetts, asserting willful infringement by the Company of U.S. Patent No. 5,735,844.Palomar seeks compensatory and treble damages, as well as attorneys’ fees andinjunctive relief. In November 2006, the Company answered the complaint bydenying Palomar’s allegations and asserting a variety of affirmative defensesand counterclaims against Palomar. This response included a counterclaim by theCompany against Palomar seeking a declaratory judgment that United Statespatent No. 5,595,568 (“the ‘568 Patent”) is either invalid, or productsmanufactured by the Company do not infringe the ‘568 Patent, or both. In November 2006,Palomar filed an answer denying the Company’s counterclaim. In February 2007,Palomar moved to amend its Complaint to add The General Hospital Corporation asa party, to add a claim for infringement by Candela of the ‘568 patent, and toallege that additional Candela products infringe the ‘568 Patent. Palomar’smotion to amend its Complaint was granted in August 2007. In February 2007,Candela moved to amend its Answer and Counterclaims to add allegations ofinequitable conduct, double-patenting and violation of Mass. Gen. Laws Ch. 93Aby Palomar. The Company’s motion to amend its complaint was granted in March 2007.Palomar filed a general denial response to Candela’s Amended Answer andCounterclaim in March 2007. In August 2007, the parties had a Markmanhearing before the U.S. District Court Judge presiding over the above-describedlegal proceeding. In a Markman hearing, the Court interprets the definition ofthe disputed claim term of a patent. Pre-trial fact discovery has ended and theparties are in the midst of exchanging expert reports. No trial date has beenestablished, but on October 31, 2008, the Company requested a stay of thecase with the Court.  The Company did sobased upon a third party’s re-examination request that was granted by theUnited States Patent and Trademark Office on August 29, 2008. There-examination is with respect to both the ‘568 and ‘844 patents, includingmany of the Claims at issue in this case.

 

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

 

·                In December 2006, the Company filed suitagainst Palomar in the United States District Court for the Eastern District ofTexas, Lufkin Division, asserting that Palomar infringes one or more claims ofUnited States patents Nos: 5,810,801, 6,659,999 and 6,120,497. The Companysought compensatory and treble damages for past infringement, as well as attorneys’fees and an injunction against Palomar from future infringement. In January 2007,Palomar answered the complaint by denying the Company’s allegations and filinga declaratory judgment motion 

 

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seeking a court ruling thatit did not infringe such patents and/or that such patents were invalid. Inaddition, Palomar filed a motion to transfer the case to the United StatesDistrict Court for the District of Massachusetts. In February 2007, theCompany added Massachusetts General Hospital as a party to its action. TheCourt denied Palomar’s motion to transfer the case to Massachusetts. Theparties had a six day trial, beginning on September 29, 2008.  At trial, the Company alleged that Claims11-14 of the 5,810,801 Patent was infringed by Palomar’s Lux 1540, Lux1540Z,LuxIR and Lux DeepIR.  On October 7,2008, the jury returned a verdict in favor of Palomar. The jury found that noneof the alleged Palomar products infringe on Claims 11-14 of the Company’s5,810,801 patent and that all such Claims are invalid. The Company has filed aJudgment as a Matter of Law motion with the Court in an attempt to reverse theinvalidity ruling.

 

While the Company intendsto vigorously contest Palomar’s allegations, and to pursue its own claims againstPalomar, each lawsuit is inherently uncertain and unpredictable as to its ultimateoutcome. An adverse outcome in Palomar’s suit against the Company wouldmaterially hurt the Company’s business, financial condition, results ofoperations and cash flows.

 

·                On April 2 and April 22, 2008,respectively, two substantially similar putative class action lawsuits,entitled Western Pa. Elec. Employees Pension Fund, et al., 1:08-cv-10551-DPW (“WesternPa.”) and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW (“Caballero”),were filed against Candela and two of its officers in the United StatesDistrict Court for the District of Massachusetts purporting to assert claimsfor violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5promulgated thereunder, and seeking, among other things, compensatory damagesand reasonable costs and expenses. On June 2, 2008, plaintiffs in theWestern Pa. case formally moved for consolidation and the appointment of leadplaintiff and lead counsel. On July 10, 2008, that motion was granted, thecases were consolidated, and a lead plaintiff and lead counsel were appointed.On August 25, 2008, lead plaintiff filed a consolidated amended complaint.The consolidated and amended complaint purports to be brought on behalf of allopen-market purchasers of Candela common stock from November 1, 2005through August 21, 2006 and alleges that Candela made certain false andmisleading statements to investors expressing optimism regarding its financialcondition and failed to disclose (i) the possibility that Palomar, one ofCandela’s leading competitors, would initiate patent enforcement litigationagainst Candela and (ii) that Candela was purportedly losing market shareto its competitors.

 

·                On February 19, 2008, Cardiofocus, Inc.(“Cardiofocus”) filed suit against the Company and eight other companies in theUnited States District Court for the District of Massachusetts, assertingwillful infringement by the Company of U.S. Patent 6,457, 780, 6,159,203 and 5,843,073.Cardiofocus seeks compensatory and treble damages, as well as attorneys’ feesand injunctive relief. On April 21, 2008, the Company answered Cardiofocus’complaint and asserted a variety of counterclaims against Cardiofocus. TheCompany believes the complaint to be without merit and intends to vigorouslydefend against the lawsuit. Based upon Candela’s request, on July 23,2008, the United States Patent & Trademark Office (“PTO”) agreed tore-exam the validity of the Cardiofocus patents. On October 14, 2008, theCourt agreed to stay this matter for a minimum of one year; up to a maximum oftwo years, but no later than the PTO’s decision with respect to there-examination proceedings.

 

·                On April 16, 2008, a shareholderderivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532,was filed in Middlesex County, Massachusetts Superior Court against theindividual members of Candela’s board of directors and certain of its currentand former officers purporting to assert claims for breach of fiduciary dutyand related claims arising out of allegations similar to those asserted in theclass action litigation discussed above. The complaint seeks on behalf ofCandela, among other things, damages, restitution, and injunctive relief.

 

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

 

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# **Item 6 - Exhibits**

 

(a)                                  Exhibits

 
| Exhibit 3(i) |   | Amended and Restated  Certificate of Incorporation of Candela Corporation                                                                                             |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                  |
| Exhibit 31.1 |   | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer                                                                                      |
|              |   |                                                                                                                                                                  |
| Exhibit 31.2 |   | Rule 13a-14(a)/15d-14(a) Certification  of the Principal Financial Officer                                                                                  |
|              |   |                                                                                                                                                                  |
| Exhibit 32.1 |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |
|              |   |                                                                                                                                                                  |
| Exhibit 32.2 |   | Certification of the  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

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

 

 
|   | CANDELA CORPORATION                                 |
|--------|-----------------------------------------------------|
|   |                                                |
|   |                                                |
| Date:  | November 6, 2008                               |   | /s/ Robert E. Quinn |
|   | Robert E. Quinn                                     |
|   | Vice President,  Finance, Treasurer, and            |
|   | Corporate Controller  (Principal Financial Officer) |
|        |                                                     |  |  |

 

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**CandelaCorporation**

 

**INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                       |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                  |
| Exhibit 31.1    |       | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer                                                                                      |
|                 |       |                                                                                                                                                                  |
| Exhibit 31.2    |       | Rule 13a-14(a)/15d-14(a) Certification  of the Principal Financial Officer                                                                                  |
|                 |       |                                                                                                                                                                  |
| Exhibit 32.1    |       | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |
|                 |       |                                                                                                                                                                  |
| Exhibit 32.2    |       | Certification of the  Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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