Use these links to rapidly review the documentCANDELA CORPORATION Index

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

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

For the quarterly period ended September 28, 2002.

Commission file number 000-14742

CANDELA CORPORATION(Exact name of registrant as specified in its charter)

Delaware

04-2477008(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer Identification No.)530 Boston Post Road, Wayland, Massachusetts

01778(Address of principal executive offices)

(Zip code)


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

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of
1934). Yes o    No ý

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

|Class                        |  | Outstanding at November 11, 2002
|---------------------------- |  | --------------------------------
|Common Stock, $.01 par value |  | 9,658,814                       

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CANDELA CORPORATION  Index



|         |  |                        |  |                                                                                                                                                                       |  | Page(s)
|-------- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|Part I.  |  | Financial Information: |  |                                                                                                                                                                      
|         |  | Item 1.                |  | Unaudited Condensed Consolidated Balance Sheets as of September 28, 2002 and June 29, 2002                                                                            |  | 3      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three-month periods ended September 28, 2002 and September 29, 2001 |  | 4      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended September 28, 2002 and September 29, 2001                                 |  | 5      
|         |  |                        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                        |  | 6-10   
|         |  | Item 2.                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                 |  | 11-14  
|         |  |                        |  | Cautionary Statements                                                                                                                                                 |  | 15     
|         |  | Item 3.                |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                             |  | 16     
|         |  | Item 4.                |  | Controls and Procedures                                                                                                                                               |  | 16     
|Part II. |  | Other Information:     |  |                                                                                                                                                                      
|         |  | Item 1.                |  | Legal proceedings                                                                                                                                                     |  | 17     
|         |  | Item 6.                |  | Exhibits and Reports on Form 8-K                                                                                                                                      |  | 17     

2

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Part I. Financial Information

Item 1Financial Statements

CANDELA CORPORATION  Condensed Consolidated Balance Sheets(in thousands)  (unaudited)

|                                      |                                      | September 28, 2002                         |       | June 29, 2002 |       
|------------------------------------- | ------------------------------------ | ------------------------------------------ | ----- | ------------- | ------
|Assets                                |                                      |                                            |       |               |       
|Current assets:                       |                                      |                                            |       |               |       
|                                      | Cash and cash equivalents            |                                            | $     | 18,449        |       
|                                      | Accounts receivable, net             |                                            |       | 20,786        |       
|                                      | Notes receivable                     |                                            |       | 655           |       
|                                      | Inventories, net                     |                                            |       | 13,288        |       
|                                      | Other current assets                 |                                            |       | 1,371         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current assets                       |       |               | 54,549
|Property and equipment, net           |                                      |                                            | 3,021 |               |       
|Deferred tax assets                   |                                      |                                            | 5,327 |               |       
|Prepaid licenses                      |                                      |                                            | 1,361 |               |       
|Other assets                          |                                      |                                            | 174   |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total assets                               |       | $             | 64,432
|                                      |                                      |                                            |       |               |       
|Liabilities and Stockholders' Equity  |                                      |                                            |       |               |       
|Current liabilities:                  |                                      |                                            |       |               |       
|                                      | Accounts payable                     |                                            | $     | 2,896         |       
|                                      | Accrued payroll and related expenses |                                            |       | 2,292         |       
|                                      | Accrued warranty costs               |                                            |       | 4,319         |       
|                                      | Income taxes payable                 |                                            |       | 1,960         |       
|                                      | Restructuring reserve                |                                            |       | 513           |       
|                                      | Other accrued liabilities            |                                            |       | 2,162         |       
|                                      | Current portion of long-term debt    |                                            |       | 740           |       
|                                      | Deferred revenue                     |                                            |       | 3,599         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current liabilities                  |       |               | 18,481
|Long-term portion of deferred revenue |                                      |                                            | 2,349 |               |       
|Long-term debt                        |                                      |                                            | 1,956 |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities                          |       |               | 22,786
|Stockholders' equity:                 |                                      |                                            |       |               |       
|                                      | Common stock                         |                                            |       | 119           |       
|                                      | Additional paid-in capital           |                                            |       | 43,939        |       
|                                      | Accumulated earnings                 |                                            |       | 11,820        |       
|                                      | Treasury stock, at cost              |                                            |       | (12,997       | )     
|                                      | Accumulated other comprehensive loss |                                            |       | (1,235        | )     
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total stockholders' equity                 |       |               | 41,646
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities and stockholders' equity |       | $             | 64,432
|                                      |                                      |                                            |       |               |       

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CANDELA CORPORATION  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)(in thousands, except per share data)  (unaudited)

|                                             |                                         | For the three months ended: |      
|-------------------------------------------- | --------------------------------------- | --------------------------- | -----
|
|Revenue                                      |                                         |                             |      
|                                             | Lasers and other products               |                             | $    
|                                             | Product-related service                 |                             |      
|                                             | Skin care center                        |                             |      
|                                             |                                         |                             |      
|                                             | Total revenue                           |                             |      
|Cost of sales                                |                                         |                             |      
|                                             | Lasers and other products               |                             |      
|                                             | Product-related service                 |                             |      
|                                             | Skin care center                        |                             |      
|                                             |                                         |                             |      
|                                             | Total cost of sales                     |                             |      
|                                             |                                         |                             |      
|Gross profit                                 |                                         |                             | 6,778
|Operating expenses:                          |                                         |                             |      
|                                             | Selling, general and administrative     |                             |      
|                                             | Research and development                |                             |      
|                                             |                                         |                             |      
|                                             | Total operating expenses                |                             |      
|                                             |                                         |                             |      
|Income (loss) from operations                |                                         |                             | 837  
|Other income (expense):                      |                                         |                             |      
|                                             | Interest income                         |                             |      
|                                             | Interest expense                        |                             |      
|                                             | Other income (expense)                  |                             |      
|                                             |                                         |                             |      
|                                             | Total other income (expense)            |                             |      
|                                             |                                         |                             |      
|Income (loss) before income taxes            |                                         |                             | 1,148
|Provision for (benefit from) income taxes    |                                         |                             | 413  
|                                             |                                         |                             |      
|Net income (loss)                            |                                         | $                           | 735  
|                                             |                                         |                             |      
|Basic earnings (loss) per share              |                                         | $                           | 0.08 
|Diluted earnings (loss) per share            |                                         | $                           | 0.08 
|                                             |                                         |                             |      
|Weighted average shares outstanding          |                                         |                             | 9,644
|Adjusted weighted average shares outstanding |                                         |                             | 9,782
|                                             |                                         |                             |      
|Net Income (loss)                            |                                         | $                           | 735  
|Other comprehensive income (net of tax):     |                                         |                             |      
|                                             | Foreign currency translation adjustment |                             |      
|                                             |                                         |                             |      
|Comprehensive income (loss)                  |                                         | $                           | 743  
|                                             |                                         |                             |      

The
accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CANDELA CORPORATION  Condensed Consolidated Statements of Cash Flows(in thousands)  (unaudited)

|                                                      |                                                                                       | For the three months ended:                                                            |                                      
|----------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------
|
|Cash flows from operating activities:                 |                                                                                       |                                                                                        |                                      
|                                                      | Net income (loss)                                                                     |                                                                                        | $                                    
|                                                      | Adjustments to reconcile net income (loss) to net cash used for operating activities: |                                                                                        |                                      
|                                                      |                                                                                       | Depreciation and amortization                                                          |                                      
|                                                      |                                                                                       | Provision for bad debts                                                                |                                      
|                                                      |                                                                                       | Effect of exchange rate changes on foreign currency denominated assets and liabilities |                                      
|                                                      |                                                                                       | Accretion of debt discount                                                             |                                      
|                                                      |                                                                                       | Increase (decrease) in cash from working capital:                                      |                                      
|                                                      |                                                                                       |                                                                                        | Accounts receivable                  
|                                                      |                                                                                       |                                                                                        | Notes receivable                     
|                                                      |                                                                                       |                                                                                        | Inventories                          
|                                                      |                                                                                       |                                                                                        | Other current assets                 
|                                                      |                                                                                       |                                                                                        | Other assets                         
|                                                      |                                                                                       |                                                                                        | Accounts payable                     
|                                                      |                                                                                       |                                                                                        | Accrued payroll and related expenses 
|                                                      |                                                                                       |                                                                                        | Deferred revenue                     
|                                                      |                                                                                       |                                                                                        | Accrued warranty costs               
|                                                      |                                                                                       |                                                                                        | Income taxes payable                 
|                                                      |                                                                                       |                                                                                        | Restructuring reserve                
|                                                      |                                                                                       |                                                                                        | Long-term portion of deferred revenue
|                                                      |                                                                                       |                                                                                        | Other accrued liabilities            
|                                                      |                                                                                       |                                                                                        |                                      
|Net cash used for operating activities                |                                                                                       |                                                                                        | (1,081                               
|Cash flows from investing activities:                 |                                                                                       |                                                                                        |                                      
|                                                      |                                                                                       | Purchases of property and equipment                                                    |                                      
|                                                      |                                                                                       |                                                                                        |                                      
|Net cash used for investing activities                |                                                                                       |                                                                                        | (55                                  
|Cash flows from financing activities:                 |                                                                                       |                                                                                        |                                      
|                                                      |                                                                                       | Principal payments of long-term debt                                                   |                                      
|                                                      |                                                                                       | Net borrowings (repayments) on other long-term liabilities                             |                                      
|                                                      |                                                                                       | Proceeds from the issuance of common stock                                             |                                      
|                                                      |                                                                                       | Repurchase of treasury stock                                                           |                                      
|                                                      |                                                                                       |                                                                                        |                                      
|Net cash used for financing activities                |                                                                                       |                                                                                        | (37                                  
|Effect of exchange rates on cash and cash equivalents |                                                                                       |                                                                                        | (6                                   
|                                                      |                                                                                       |                                                                                        |                                      
|Net decrease in cash and cash equivalents             |                                                                                       |                                                                                        | (1,179                               
|Cash and cash equivalents at beginning of period      |                                                                                       |                                                                                        | 19,628                               
|                                                      |                                                                                       |                                                                                        |                                      
|Cash and cash equivalents at end of period            |                                                                                       | $                                                                                      | 18,449                               
|                                                      |                                                                                       |                                                                                        |                                      

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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CANDELA CORPORATION        Notes to Unaudited Condensed Consolidated Financial Statements

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and notes do not include all of the disclosures made in the Annual Report on
Form 10-K of Candela Corporation (the "Company") for fiscal year 2002, which should be read in conjunction with these financial statements. The financial information included herein
is unaudited, with the exception of the condensed consolidated balance sheet as of June 29, 2002, which was derived from the audited consolidated balance sheet dated June 29, 2002.
However, in the opinion of management, the statements include all necessary adjustments, consisting of normal recurring accruals, for a fair presentation of the quarterly results and are prepared and
presented in a manner consistent with the Company's Annual Report on Form 10-K. The results for the three month period ended September 28, 2002 are not necessarily indicative
of the results to be expected for the full year.

2.    New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 revises the standards of accounting for goodwill and indefinite lived intangible assets by replacing the regular amortization of these assets with the
requirement that they are reviewed annually or more frequently if impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over
their useful lives. The accounting standards of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001 (fiscal year 2003). The adoption of this statement had no
impact on the Company's financial position and results of operations.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 addresses
financial accounting and reporting for the
retirement obligation of an asset. SFAS No. 143 states that companies should recognize the asset retirement cost, at its fair value, as part of the cost of the asset and classify the accrued
amount as a liability in the condensed consolidated balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash outflows. SFAS No. 143 will be effective for fiscal years beginning after June 15, 2002 (fiscal year 2003). The
adoption of this statement had no impact on the Company's financial position and results of operations.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121 by requiring one accounting model to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for fiscal years beginning after December 15, 2001 (fiscal year 2003). The
adoption of this statement had no impact on the Company's financial position and results of operations.

In
April 2002, the FASB issued SFAS 145,"Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement rescinds the following pronouncements: FASB Statement No. 4,"Reporting Gains and Losses from
Extinguishment of Debt", FASB Statement No. 44,"Accounting for Intangible Assets of Motor Carriers"and FASB Statement
No. 64,"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This Statement amends FASB Statement No. 13, "Accounting for Leases",
 to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also
makes technical corrections to other

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existing authoritative pronouncements to clarify meanings, or describe their applicability under changed conditions. The adoption of this statement had no impact on the Company's financial position
and results of operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", ("EITF No. 94-3"). SFAS No. 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. EITF No. 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to
an exit plan. SFAS No. 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company does not expect the adoption of SFAS No. 146 will have a material
impact on its financial position or results of operations.

3.    Earnings Per Share

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

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

For the three months ended:(in thousands, except share and per share data)

September 28,
2002

September 29,
2001Basic Earnings (Loss) per ShareNumeratorNet income (loss)

$
735

$
(1,231
)DenominatorWeighted average share outstanding


9,644


10,766Earnings (Loss) per Share

$
0.08

$
(0.11
)Diluted Earnings (Loss) per ShareWeighted average share outstanding


9,644


10,766Effect of dilutive securities:Stock options


68


Stock warrants


70


Adjusted weighted average shares outstanding


9,782


10,766Earnings (Loss) per Share

$
0.08

$
(0.11
)


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During
the three month periods ended September 28, 2002 and September 29, 2001, there were 381,264 and 757,411 options, respectively, to purchase shares of common stock
that were excluded from the calculation of diluted earnings per share because the exercise price of such options was greater than the average market price of the common stock for the period.

4.    Inventories

(in thousands)

September 28,
2002

June 29,
2002Raw materials

$
4,634

$
4,615Work in process


982


1,037Finished goods


7,672


6,466$
13,288

$
12,118


5.    Restructuring Charges

During the quarters ended December 27, 1997 and June 30, 2001, the Company recorded combined restructuring charges of $3,721,000 resulting from
management's decision to close the skin care center located in Scottsdale, Arizona. During the three month-period ended December 29, 2001, the Company secured a sublease for the Scottsdale
facility. Per the sublease agreement, the sublessee will pay all costs associated with the facility through the end of the lease term ending June 2006. As an incentive to the sublessee, the
Company agreed to pay eight months of rent during the life of the sublease. The sublessee commenced making payments to the landlord on behalf of the Company on April 1, 2002.

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

The
following table reflects the restructuring charges incurred in the most recent quarter (in thousands):

Payroll and
Severance

Leasehold
Improvements
and Fixed
Assets

Facility
Costs

TotalBalance at June 29, 2002

$
112

$
410

$
37

$
559Cash charges


(19
)







(19
)Non-cash charges





(27
)




(27
)Balance at September 28, 2002

$
93

$
383

$
37

$
513


For
the quarter ended September 28, 2002 a total of $46,000 was charged against this reserve, representing costs associated with the Scottsdale facility.

6.    Debt

In 1998, the Company issued eight-year, 9.75% subordinated term notes ("Note Agreement") to three investors in the aggregate amount of $3,700,000,
secured by the assets of the Company. The notes

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become due in October 2006, and require quarterly interest payments. The Company is required to make mandatory quarterly principal payments of $185,000, along with any unpaid interest,
beginning on January 31, 2002. The Note Agreement also contains restrictive covenants establishing maximum leverage, certain minimum ratios, and minimum levels of net income. As of the quarter
ended September 28, 2002 the Company was in violation of minimum net worth levels, for which a waiver has been received for such quarter.

The
notes, which become due in October 2006, require quarterly interest payments and permit early repayment with a decreasing early redemption premium amount through
October 31, 2004. Given the lower currently available interest rates as compared to the loan rate, the Company decided to repay the entire debt as of November 8, 2002. As a result of the
early repayment, the Company will incur a one-time charge of $677,302 during the three-month period ended December 28, 2002. This charge represents the unamortized balance of the
fair value of common stock warrants issued in conjunction with the original debt issuance ($440,502) and the early redemption premium. The repayment amount was calculated as follows:

Outstanding principal balance

$
2,960,000Early redemption premium


236,800Interest for the period October 1 to November 8, 2002


30,463Total

$
3,227,263


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7.    Segment Information

The Company operates principally in two industry segments: the design, manufacture, sale, and service of medical devices and related equipment; and the
performance of services in the skin care/health spa industry.

For the three months ended:(in thousands)

September 28,
2002

September 29,
2001Revenue:Product sales and service

$
13,245

$
9,686Skin care/health spa services


558


694Total revenue

$
13,803

$
10,380Operating income (loss):Product sales and service

$
1,169

$
(1,519
)Skin care/health spa services


(332
)

(447
)Total operating income (loss)

$
837

$
(1,966
)


As of September 28, 2002

As of June 29, 2002Total assets:(net intercompany accounts)Product sales and service

$
63,665

$
67,123Skin care/health spa services


767


768Total assets

$
64,432

$
67,891


8.    Legal Proceedings

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

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

10

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CANDELA CORPORATION

Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We research, develop, manufacture, market and service lasers used to perform aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. We market our products directly and through a network of distributors to end-users. Our traditional customer base includes plastic and cosmetic surgeons and dermatologists.
More recently we have expanded our sales to a broader group of practitioners consisting of general practitioners and certain specialists including obstetricians, gynecologists and general and vascular
surgeons. We derive our revenue from: the sales of lasers and other products; the provision of product-related services; and the operations of our remaining skin care center. Over half of our revenue
in recent periods has come from international sales.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related
to revenue recognition, bad debts, inventories, warranty obligations, contingencies, restructurings and income taxes. We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting
policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in the Annual Report on Form 10-K of the Company for
fiscal year 2002.

Taxes.In accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes,"we recognize deferred income taxes based on the expected future tax consequences of differences between the financial
statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates for the year in which the differences are expected to be reflected in the tax return. Realization is
dependent on the generation of sufficient taxable income in future years. Management continually evaluates the need for a valuation allowance for deferred tax assets based on the probability of
realization determined by expectations for future taxable income and other factors. Although realization is not assured, based on available evidence, management believes it is more likely than not
that the full amount of the net deferred tax asset will be realized. However, the amount realizable could be reduced if estimates of future taxable income are reduced.

Results of Operations

Revenue.Revenue source by geography is reflected in the following table:

|                |  | For the three months ended: |       
|--------------- |  | --------------------------- | ------
|
|US revenue      |  | $                           | 6,114 
|Foreign revenue |  |                             | 7,689 
|                |  |                             |       
|Total revenue   |  | $                           | 13,803
|                |  |                             |       

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Revenue
increased over the three month period ended September 28, 2002, compared to the three month period ended September 29, 2001, due primarily to the replacement of a
major North American distributor with a direct sales force beginning in the second quarter of fiscal year 2002. There were no sales by the distributor during the three months ended
September 29, 2001. Domestically, direct sales of lasers and related services increased approximately $2,800,000 while sales to distributors decreased approximately $100,000 and revenue from
the skin care center also decreased approximately $100,000 during the three-month period ended September 28, 2002 as compared to the same period one year earlier.

Foreign
revenue also increased during the three-month period ended September 28, 2002, compared to the three-month period ended September 29, 2001, due primarily to
increases in sales of lasers and related services to the Asia Pacific market of approximately $1,200,000 that were offset by decreases in sales to the European and South American markets of
approximately $200,000 and $100,000 respectively during the three-month period ended September 28, 2002 as compared to the same period one year earlier.

Revenue
source by type is reflected in the following table:

|              |                           | Three months ended |       
|------------- | ------------------------- | ------------------ | ------
|
|Revenue       |                           |                    |       
|              | Lasers and other products |                    | $     
|              | Product related service   |                    |       
|              | Skin care centers         |                    |       
|              |                           |                    |       
|Total revenue |                           | $                  | 13,803
|              |                           |                    |       

The
increase in laser product revenue for the three month period ended September 28, 2002, compared to the three month period ended September 29, 2001, resulted from an
increase in the sales volume and average selling price of both our GentleLase and Vbeam product lines. The GentleLase contributed approximately $2,400,000 and
the Vbeam contributed approximately $1,100,000 to this increase in revenue. Product related service revenue did not significantly change during the quarter. Skin care center revenue
decreased primarily due to a continued decrease in the sale of accessories and treatments.

Gross Profit.Gross profit increased to $6,778,000 or 49% of revenues for the three month period
ended September 28, 2002, compared to gross profit of $4,749,000 or 46% for the same period one year earlier. This increase in gross profit results principally from the increase in sales volume
and average selling price of both our GentleLase and Vbeam product lines and reduced warranty service costs.

Selling, General and Administrative Expense.Selling, general and administrative expenses decreased
from $5,703,000 in the three month period September 29, 2001, to $5,075,000 for the three month period ending September 28, 2002. As a percentage of revenue, selling, general and
administrative expenses decreased from 55% to 37% of revenues for the same respective periods. Lower legal expenses of $225,000, management pay cuts of approximately $100,000 and lower overall
spending due to fewer new product releases contributed to this decrease in selling, general, and administrative costs.

Research and Development Expense.Research and development spending decreased from $1,012,000 for the
three-month period ended September 29, 2001 to $866,000 for the three-month period ended
September 28, 2002 due primarily to management pay cuts. As a percentage of sales, research and development fell from 10% to 6% but is expected to return to a level of approximately 9% of sales
during fiscal year 2003.

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Other Income/Expense.Net other income was $311,000 for the three months ended September 28,
2002, compared to income of $84,000 for the three months ended September 29, 2001. This increase in other income resulted from a royalty payment of $322,000 offset by a decrease in interest
income of approximately $100,000. The royalty payment relates to royalties earned since August 2000 from the Company's August 11, 2000 settlement agreement with the Regents of the
University of California and New Star Technology, Inc. The decrease in interest income is the result of cash balances and interest rates that were lower during the three-month period ended
September 28, 2002 as compared to the same period one year earlier.

Income Taxes.The provision for income taxes results from a combination of activities of both the
domestic and foreign subsidiaries of the Company. We recorded a 36% effective tax rate for the period ended September 28, 2002, compared to the three month period ended September 29,
2001, in which we recorded a 35% tax benefit. The provision for income taxes for the three months ended September 28, 2002, differs from the U.S. statutory rate as a result of a tax provision
calculated for income generated in Japan at a rate in excess of the U.S. statutory rate and a benefit for the deduction related to the extraterritorial income exclusion.

Liquidity and Capital Resources

Cash used by operating activities amounted to $1,081,000 for the three months ended September 28, 2002, in comparison to cash used by operating activities
in the amount of $2,658,000 for the same period one year earlier. This decrease in cash used for the three-month period ended September 28, 2002 compared to the same period a year earlier
reflects the effects of a net profit. Cash used by investing activities totaled $55,000 for the three months ended September 28, 2002, compared to $443,000 for the same period in the prior
year. This change reflects less cash used to support the Oracle software implementation. Cash used for financing activities amounted to $37,000 in comparison to $877,000 for the same period a year
earlier. The change in cash used for financing primarily reflects the repurchase of stock by the corporation in the period ended September 29, 2001.

In
connection with the outstanding eight-year, 9.75% subordinated notes, a total of $387,000 has been accreted to the notes through September 28, 2002, resulting in a
long-term liability balance of $1,960,000 and a short-term liability balance of $740,000 at quarter end. A total of $76,659 of interest expense has been recorded in the three
month period ended September 28, 2002.

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

Outstanding
contractual obligations of the Company, excluding the repayment of the Notes on November 8, 2002, are reflected in the following table:

|(in thousands)                     |  | Total |       | Less than
1 year |   | 1-3 years |  | 4-5 years |       | After
5 years
|---------------------------------- |  | ----- | ----- | ---------------- | - | --------- |  | --------- | ----- | -------------
|Operating leases                   |  |       | 6,258 |                  |   | 1,287     |  |           | 3,237 |              
|                                   |  |       |       |                  |   |           |  |           |       |              
|Total contractual cash obligations |  | $     | 6,258 |                  | $ | 1,287     |  | $         | 3,237 |              

We
also maintain a renewable $5,000,000 revolving credit agreement with a major bank with interest at the bank's base rate. Any borrowings outstanding under the line of credit are due on
demand or according to a payment schedule established at the time funds are borrowed. The line of credit is unsecured. The agreement contains restrictive covenants limiting the establishment of new
liens, and the purchase of margin stock. No amounts were outstanding under the line of credit as of September 28, 2002.

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

Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 revises the standards of accounting for
goodwill and indefinite lived intangible assets by replacing the regular amortization of these assets with the requirement that they are reviewed annually or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. The accounting standards of SFAS No. 142 are effective for
fiscal years beginning after December 15, 2001 (fiscal year 2003). The adoption of this statement had no impact on our financial position and results of operations.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset. SFAS No. 143 states that companies should recognize the asset retirement cost, at its fair value, as part of the
cost of the asset and classify the accrued amount as a liability in the condensed consolidated balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest
expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. SFAS No. 143 will be effective for fiscal years beginning
after June 15, 2002 (fiscal year 2003). The adoption of this statement had no impact on our financial position and results of operations.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121 by requiring one accounting model to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for fiscal years beginning after December 15, 2001 (fiscal year 2003). The
adoption of this statement had no impact on our financial position and results of operations.

In
April 2002, the FASB issued SFAS 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This
statement rescinds the following pronouncements: FASB Statement No. 4,"Reporting Gains and Losses from Extinguishment of Debt", FASB Statement
No. 44,"Accounting for Intangible Assets of Motor Carriers"and FASB Statement No. 64,"Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements". This Statement amends FASB Statement No. 13,"Accounting for
Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also makes technical corrections to other
existing authoritative pronouncements to clarify meanings, or describe their applicability under changed conditions. The adoption of this statement had no impact on our financial position and results
of operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", ("EITF No. 94-3"). SFAS No. 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. EITF No. 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to
an exit plan. SFAS No. 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS No. 146 are effective for
exit or disposal activities that

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are initiated after December 31, 2002, with early adoption encouraged. We do not expect the adoption of SFAS No. 146 will have a material impact on our financial position or results of
operations.

Cautionary Statements

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



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Item 3Quantitative and Qualitative Disclosures About Market Risk

As of September 28, 2002, our cash and debt are exposed to interest rate risk. We are exposed to foreign currency risk due to accounts receivable from our
foreign subsidiaries.

We
have cash equivalents that primarily consist of commercial paper, overnight repurchase agreements and money market accounts. We believe that any near term changes in interest rates
will be immaterial to any potential losses in future earnings, cash flow and fair values.

As
of September 28, 2002, we hold foreign currency contracts with notional values totaling $1,400,000 for the delivery of 98,539,000 Japanese Yen and 581,932 Euros. These
contracts have maturities prior to December 22, 2002. The aggregate fair value of our forward foreign exchange contracts outstanding was $29,140 as of September 28, 2002. The net fair
value is computed by subtracting the value of the contracts using the year-end forward rates (the notional value) from the value of the forward contracts computed at the contracted
exchange rates. We believe that any near term changes in currency rates will be immaterial to any potential losses in future earnings, cash flow and fair values because any adjustments to fair value
offset the change in the fair value of the foreign currency intercompany receivables.

Item 4Controls and Procedures

(a)  Evaluation
of disclosure controls and procedures.

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

(b)  Changes
in internal controls.

There
have been no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent
to the Evaluation Date.

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CANDELA CORPORATION

Part II. Other Information

Item 1Legal Proceedings

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

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

ITEM 6Exhibits and Reports on Form 8-K



| |  | Exhibit 99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------
| |  | Exhibit 99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





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SIGNATURES

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

|                        |  | CANDELA CORPORATION
Registrant                                                                  
|----------------------- |  | ------------------------------------------------------------------------------------------------
|Date: November 11, 2002 |  | /s/GERARD E. PUORRO                                                                             
|                        |  | Gerard E. Puorro
(President and Chief Executive Officer)                                        
|Date: November 11, 2002 |  | /s/F. PAUL BROYER                                                                               
|                        |  | F. Paul Broyer
(Senior Vice President of Finance and Administration
and Chief Financial Officer)

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CERTIFICATION

I,
Gerard E. Puorro, certify that:



|Date: November 11, 2002 |  |                                         
|----------------------- |  | ----------------------------------------
|                        |  | /s/GERARD E. PUORRO                     
|                        |  | Gerard E. Puorro
Chief Executive Officer

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CERTIFICATION

I,
F. Paul Broyer, certify that:



|Date: November 11, 2002 |  | /s/F. PAUL BROYER                     
|----------------------- |  | --------------------------------------
|                        |  | F. Paul Broyer
Chief Financial Officer

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