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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2003.

Commission file number 0-22340

PALOMAR MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)


             Delaware   04-3128178  
   (State or other jurisdiction   (I.R.S. Employer Identification No.)  
of incorporation or organization)    

82 Cambridge Street, Burlington, Massachusetts 01803  
   (Address of principal executive offices) (Zip code)  

Registrant’s telephone number, including area code: (781) 993-2300

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 May 13, 2003  
Common Stock, $.01 par value   13,535,314  



Palomar Medical Technologies, Inc. and Subsidiaries

Table of Contents

    Page No.

PART I - Financial Information

  Item 1 Condensed Consolidated Financial Statements (Unaudited)    
                     
         Condensed Consolidated Balance Sheets for the periods ending
December 31, 2002 and March 31, 2003		   1  
                      
             Condensed Consolidated Statements of Operations for the periods ending         
March 31, 2002 and March 31, 2003		   2  
   
                       Condensed Consolidated Statement of Stockholders’ Equity   3  
   
                       Condensed Consolidated Statements of Cash Flows   4  
   
                       Notes to Condensed Consolidated Financial Statements   5  
   
  Item 2 Management’s Discussion and Analysis of Financial Condition and the
Results of Operations		   9  
   
                       Cautionary Statements   13  
   
  Item 3 Quantitative and Qualitative Disclosures About Market Risk   19  
   
  Item 4 Controls and Procedures   19  
 
PART II - Other Information  
   
  Item 1 Legal Proceedings   20  
   
  Item 2 Changes in Securities   20  
   
  Item 3 Defaults Upon Senior Securities   20  
   
  Item 4 Submission of Matters to a Vote of Security Holders   20  
   
  Item 5 Other Information   21  
  Item 6 Exhibits and Reports on Form 8-K   21  
   
SIGNATURES     22  
   
CERTIFICATIONS     23  

i



Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


December 31,
2002		 March 31,
2003
(Unaudited)
                                                                  Assets
Current assets:
        Cash and cash equivalents $ 4,450,076 $    6,939,956
        Accounts receivable, net 4,047,277 4,665,898  
        Inventories 3,847,493 3,713,379
        Other current assets 269,940 215,326
              Total current assets 12,614,786 15,534,559
Property and equipment, net 485,286 436,847
Other assets   298,268   298,268
    $ 13,398,340   $ 16,269,674  
                                                                  Liabilities and Stockholders’ Equity
Current liabilities:  
        Note payable to related party   1,000,000   —
        Accounts payable   1,320,202   1,032,546
        Accrued liabilities   4,619,303   3,711,157  
        Deferred income taxes   1,400,000   1,400,000  
        Deferred revenue   341,084   298,980
              Total current liabilities   8,680,589   6,442,683
                                                                  Stockholders’ equity:
        Common stock, $.01 par value-  
              Authorized - 45,000,000 shares  
              Issued - 11,538,706 and 13,226,452 shares at December 31, 2002
              and March 31, 2003, respectively 115,387 132,265
        Additional paid-in capital 162,021,265 166,755,271
        Accumulated deficit (157,418,901 ) (157,060,545 )
              Total stockholders’ equity   4,717,751   9,826,991  
    $  13,398,340   $ 16,269,674  


The accompanying notes are an integral part of these consolidated financial statements.


-1-



Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)


Three Months Ended
March 31,
     2002
          2003
 
Revenues:      
        Product revenues  $   3,385,683   $   6,105,844  
        Royalty revenues   856,070   235,848  
        Funded product development revenues   —   500,000
             Total revenues   4,241,753   6,841,692  
   
Costs and expenses:  
        Cost of product revenues   2,210,949   2,650,811  
        Cost of royalty revenues   342,428   94,339  
        Research and development   1,064,709   1,261,310  
        Selling and marketing   789,180   1,545,749  
        General and administrative   619,063   980,905  
             Total costs and expenses   5,026,329   6,533,114  
 
             Income (loss) from operations   (784,576 ) 308,578  
       
        Interest income		   20,227   15,221  
        Interest expense   (30,598 ) (23,776 )
        Other income   58,333   58,333  
             Net income (loss)  $     (736,614 ) $       358,356  
Basic net income (loss) per share  $          (0.08 ) $             0.03  
Diluted net income (loss) per share  $          (0.08 ) $             0.03  
Weighted average number of shares outstanding:  
        Basic   10,944,217   11,889,899  
        Diluted   10,944,217   13,310,641  

The accompanying notes are an integral part of these consolidated financial statements.

-2-



Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)


Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Number
of Shares
$0.01
Par Value
Balance, December 31, 2002   11,538,706   $115,387   $ 162,021,265   $(157,418,901 ) $ 4,717,751  
          Net income   —   —   —   358,356   358,356  
          Issuance of common stock for employee stock purchase plan   6,277   63   5,540   —   5,603  
          Issuance of common stock for 2002 employer 401(k) matching
          contribution		   184,109   1,841   193,870   —   195,711  
          Costs incurred related to the issuance of common stock   —   —   (59,375 ) —   (59,375 )
          Exercise of stock options   204,105   2,041   196,904   —   198,945  
          Exchange of note payable for common stock   293,255   2,933   997,067   —   1,000,000  
          Sale of common stock   1,000,000   10,000   3,400,000   —   3,410,000  
Balance, March 31, 2003   13,226,452   $132,265   $ 166,755,271   $(157,060,545 ) $ 9,826,991  

The accompanying notes are an integral part of these consolidated financial statements.

-3-



Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flow
(Unaudited)


Three Months Ended March 31,
2002
2003
Cash flows from operating activities:      
      Net income (loss)  $   (736,614 ) $     358,356  
   
      Adjustments to reconcile net income (loss) from operations to net cash  
          used in operating activities:  
          Depreciation and amortization   73,116   51,439  
          Inventory write-off   —   250,000  
          Changes in assets and liabilities,  
              Accounts receivable   (689,654 ) (618,621 )
              Inventories   422,022   (115,886 )
              Other current assets   84,469   54,614  
              Accounts payable   (607,542 ) (287,656 )
              Accrued liabilities   (397,446 ) (712,435 )
              Deferred revenue   78,309   (42,104 )
                     Net cash used in operating activities  $ (1,773,340 ) $ (1,062,293 )
 
Cash flows from investing activities:  
      Purchases of property and equipment   (80,255 ) (3,000 )
      Decrease in other assets   3,422   —  
                     Net cash used in investing activities  $    (76,833 ) $      (3,000 )
 
Cash flows from financing activities:  
      Proceeds from the exercise of stock options and employee stock purchase         plan   12,964   204,548  
      Costs incurred related to issuance of common stock   (62,500 ) (59,375 )
     Proceeds from the sale of common stock   —     3,410,000
                     Net cash (used in) provided by financing activities  $    (49,536 ) $  3,555,173  
 
Net increase (decrease) in cash and cash equivalents  $ (1,899,709 ) $  2,489,880  
Cash and cash equivalents, beginning of the period   5,825,270   4,450,076  
Cash and cash equivalents, end of the period  $  3,925,561   $  6,939,956  
 
Supplemental disclosure of cash flow information:  
             
       Cash paid for interest  $         1,910   $       11,153  
 
 Supplemental disclosure of noncash financing and investing activities:  
             
       Issuance of stock for employer 401(k) matching contribution  $     180,922   $     195,711  
 
       Preferred stock accrued dividends and interest  $       89,836   $             —  
 
       Issuance of stock for settlement  $     801,138   $              —  
 
       Exchange of note payable for stock  $              —   $  1,000,000  


The accompanying notes are an integral part of these consolidated financial statements.

-4-



Palomar Medical Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements


1. Basis of presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The results of operations for the interim periods shown in this report are not necessarily indicative of expected results for any future interim period or for the entire fiscal year. Palomar Medical Technologies, Inc. and its subsidiaries (the “Company” or “Palomar”) believes that the quarterly information presented includes all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2002.

2. Stock based compensation.

        The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. In accordance with EITF 96-18, the Company records compensation expense equal to the fair value of options and warrants granted to non-employees over the vesting period, which is generally the period of service.

        The following tables illustrate the assumptions used and the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted to employees of the Company for the three months ended March 31, 2002 and 2003, respectively, using the Black-Scholes option-pricing model prescribed by SFAS No. 123.

        Pro forma disclosure. The pro forma effect on the Company of applying SFAS No. 123 for all options and warrants to purchase common stock of the Company would be as follows:


Three Months Ended
March 31,
    2002
  2003
Net income (loss), as reported  $   (736,614 ) $  358,356