Excerpts from the Candela Corporation’s Form 10-K are on pages 146–147.

Required

1. Using the Consolidated Statements of Cash Flows, prepare a summary analysis for the years ended July 3,

2004, June 28, 2003, and June 29, 2002. Analyze the cash flows for Candela Corporation, Inc. for all three years.

2. Explain what information you gain from the statement of cash flows that cannot be found directly from the

balance sheet or income statement.

Item 1. Business.

Candela Corporation is a pioneer in the development and commercialization of advanced aesthetic laser systems that allow physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions including:

• Vascular lesion treatment of rosacea, facial spider veins, leg veins, scars, stretch marks, warts, port wine stains

and hemangiomas

• Hair removal

• Removal of benign pigmented lesions such as age spots, freckles and tattoos

• Skin rejuvenation and wrinkles

• Acne and acne scars

• Psoriasis

• Other skin treatments

Since our founding 34 years ago, we have continuously developed and enhanced applications of laser technology. In the mid-1980s we began developing laser technology for medical applications, and since that time have shipped approximately 7,000 lasers to over 60 countries. Since the early 1990s we have focused our organizational resources on developing laser technology for use solely in the aesthetic and cosmetic laser industry. Our introduction of new dermatology/plastic surgery laser systems during the mid-1990s allowed us to expand rapidly in this area.

Candela’s current product line offers comprehensive and technologically sophisticated aesthetic and medical laser systems used by dermatologists, plastic surgeons and various other medical and personal care practitioners.

The discretionary income of aging baby boomers continues to rise which creates new opportunities for Candela. This market segment places a premium on good health and personal appearance, and has demonstrated a willingness to pay for health and cosmetic products and services. The growing popularity of laser treatments among the general population is also spurring demand for Candela’s products. Last year, Americans spent an estimated $8.3 billion on cosmetic procedures.

Increasingly, lasers are proving an attractive alternative for eliminating unwanted hair. The laser hair removal market has experienced significant growth over the last several years. The Company is dedicated to developing

safe and effective products. Our aesthetic laser systems are further distinguished by being among the fastest, smallest and most affordable in their respective markets. We believe that we have increasingly captured

significant market share because of these product attributes and we are committed to continual innovation to meet the needs of our markets.

 CANDELA CORPORATION AND SUSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended July 3, 2004, June 28, 2003 and June 29, 2002

(in thousands)

             2004        2003         2002

(Restated) (Restated)

Cash flows from operating activities:

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,119    $ 6,814    $ (2,154)

Adjustments to reconcile net income (loss) to net cash

provided by (used for) operating activities:

Provision for the disposal of discontinued operations . . . .                2,095          —             —

Loss from discontinued operations . . . . . . . . . . . . . . . . . . . .                 298      1,013           743

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               668          582           355

Accretion of inputted interest on stock warrants . . . . . . .                     —            475           102

Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                520          (13)          116

Provision for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . .                 955        (682)        (115)

Tax benefit from exercised stock options . . . . . . . . . . . . . . .            (1,223)       (505)           (6)

Effect of exchange rate changes on foreign currency

denominated assets and liabilities . . . . . . . . . . . . . . . . . . .                      26           36          (305)

Changes in assets and liabilities:

Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  (200)        (57)            —

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (7,663)    (2,417)      (3,525)

Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     62          179            (54)

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (2,134)       1,761       (1,661)

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (2,550)          225            175

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (236)          157            305

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   (91)      (1,409)      (3,069)

Accrued payroll and related expenses . . . . . . . . . . . . . . .                     707         1,622        1,139

Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  548            574             24

Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . .                1,776           (921)          830

Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (1,312)        4,168          (784)

Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .                  767               53           813

Net cash provided by (used in) operating activities . . . . . . . . . .       1,132        11,655       (7,071)

Cash flows from investing activities:

Purchase of property, plant and equipment . . . . . . . . . . . . .               (685)       (1,227)      (1,058)

 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . .      (685)       (1,227)      (1,058)

Cash flows from financing activities:

Proceeds from issuance of common stock . . . . . . . . . . . . . .             4,707          4,620           394

Repurchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . .               —               —         (5,215)

Principal payments of long-term debt . . . . . . . . . . . . . . . . .                 —           (3,330)        (370)

Net borrowings (repayments) on line of credit . . . . . . . . . .                 —           (1,114)           50

Net cash provided by (used in) financing activities . . . . . . . . . .       4,707             176       (5,141)

Effect of exchange rate changes on cash and

cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           172          1,552           890

Net increase (decrease) on cash and cash equivalents . . . . . . . .        5,326        12,156    (12,380)

Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . .     31,813       19,657      32,037

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . $ 37,139     $ 31,813   $ 19,657

Cash paid during the year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            $ 15          $ 235        $ 347

Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $ 3,265         $ 751        $ (68)

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