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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 June 30, 2004.

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 01803-4107  
         (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). 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 August 9, 2004  
Common Stock, $.01 par value   15,836,725  

Palomar Medical Technologies, Inc. and Subsidiaries

Table of Contents
Page No.
PART I - Financial Information
       
Item 1 Financial Statements
Unaudited Condensed Consolidated Balance Sheets for the periods ending June 30, 2004 and December 31, 2003 1
Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2004 and 2003 2
Unaudited Condensed Consolidated Statement of Stockholders’ Equity 3
Unaudited Condensed Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and the Results of Operations 10
Cautionary Statements 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
       
PART II - Other Information
       
Item 1. Legal Proceedings 25
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 29

i

Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(Unaudited)

June 30,
2004
 December 31,
2003
                                                                   Assets      
Current assets: 
    Cash and cash equivalents  $   17,111,918   $   10,558,946  
    Accounts receivable, net of allowance of $979,392 and $862,114, respectively  7,824,865   6,637,246  
    Inventories  4,141,907   3,385,316  
    Other current assets  722,862   384,785  
       Total current assets  29,801,552   20,966,293  
Property and equipment, net  909,627   582,898  
   
Other assets  111,074   111,074  
Total Assets  $   30,822,253   $   21,660,265  
                                                    Liabilities and Stockholders' Equity 
Current liabilities: 
    Accounts payable  $        812,327   $        655,923  
    Accrued liabilities  6,457,549   4,979,896  
    Deferred income taxes  1,100,000   1,100,000  
    Deferred revenue  2,320,270   560,897  
       Total current liabilities  10,690,146   7,296,716  
Commitments and Contingencies 
   
Stockholders' equity: 
    Preferred stock, $.01 par value- 
       Authorized - 1,500,000 shares 
       Issued - none  --   --  
    Common stock, $.01 par value-      
       Authorized - 45,000,000 shares      
       Issued - 15,826,558 and 14,554,407 shares, respectively  158,266   145,544  
    Additional paid-in capital  170,834,346   168,267,820  
    Accumulated deficit  (150,860,505 ) (154,049,815 )
       Total stockholders' equity  20,132,107   14,363,549  
Total liabilities and stockholders’ equity  $   30,822,253   $   21,660,265  

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

-1-

Palomar Medical Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Income
(Unaudited)

Three Months Ended
June 30,		 Six Months Ended
June 30,
2004
 2003
 2004
 2003
Revenues:                    
    Product revenues   $ 10,686,773   $ 7,738,882   $ 20,313,888   $ 13,844,726  
    Royalty revenues    1,455,227    232,938    1,648,505    468,786  
    Funded product development revenues    1,088,172    700,000    2,101,636    1,200,000  
      Total revenues    13,230,172    8,671,820    24,064,029    15,513,512  
Costs and expenses:  
    Cost of product revenues    3,822,507    3,227,585    7,241,020    5,878,396  
    Cost of royalty revenues    582,091    93,175    659,402    187,514  
    Research and development    2,490,182    1,492,910    5,029,345    2,893,582  
    Selling and marketing    3,124,608    2,127,549    5,805,718    3,673,298  
    General and administrative    1,176,854    1,110,026    2,264,183    1,951,569  
      Total costs and expenses    11,196,242    8,051,245    20,999,668    14,584,359  
      Income from operations    2,033,930    620,575    3,064,361    929,153  
       
    Interest income    38,794    19,770    67,553    34,991  
    Interest expense    (1,521 )  (1,014 )  (3,042 )  (24,790 )
    Other income    18,000    --    161,067    58,333  
      Income from operations before income taxes    2,089,203    639,331    3,289,939    997,687  
       
    Provision (benefit) from income taxes    59,114    (429,521 )  100,629    (429,521 )
      Net income   $ 2,030,089   $ 1,068,852   $ 3,189,310   $ 1,427,208  
Net income per share:  
    Basic   $ 0.13   $ 0.08   $ 0.21   $ 0.11  
    Diluted   $ 0.12   $ 0.07   $ 0.18   $ 0.10  
Weighted average number of shares outstanding:  
    Basic    15,697,135    13,507,281    15,380,446    12,703,061  
    Diluted    17,607,376    15,941,140    17,465,459    14,739,107  

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
 Total
Number
of Shares		 $ 0.01
Par Value		 Additional
Paid-in
Capital		 Accumulated
Deficit		 Stockholders'
Equity
Balance, December 31, 2003      14,554,407   $ 145,544   $ 168,267,820   $ (154,049,815 ) $ 14,363,549  
          Net income    --    --    --    3,189,310    3,189,310  
          Issuance of stock for employee stock purchase plan    10,763    107    104,016    --    104,123  
          Issuance of stock for 2003 employer 401(k) matching contribution    38,819    389    213,514    --    213,903  
          Costs incurred related to the issuance of common stock    --    --    (41,950 )  --    (41,950 )
          Tax benefit from the exercise of stock options    --    --    65,629    --    65,629  
          Exercise of stock options    1,184,569    11,846    2,102,853    --    2,114,699  
          Exercise of warrants    38,000    380    122,464    --    122,844  
Balance, June 30, 2004    15,826,558   $ 158,266   $ 170,834,346   $ (150,860,505 ) $ 20,132,107  

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)

Six Months Ended June 30,
2004
 2003
Cash flows from operating activities:            
     Net income   $ 3,189,310   $ 1,427,208  
   
     Adjustments to reconcile net income to net cash provided (used in)
     operating activities:		  
         Depreciation and amortization    141,183    104,955  
         Increase in accounts receivable allowance    117,278    154,652  
         Tax benefit from the exercise of stock options    65,629    --  
         Changes in assets and liabilities,  
             Accounts receivable    (1,496,479 )  (1,855,613 )
             Inventories    (756,591 )  49,760  
             Other current assets    (146,495 )  (398,035 )
             Accounts payable    156,404    (140,084 )
             Accrued liabilities    1,691,556    (326,943 )
             Deferred revenue    1,759,373    129,774  
                    Net cash provided by (used in) operating activities    4,721,168    (854,326 )
Cash flows from investing activities:  
     Purchases of property and equipment    (467,912 )  (158,624 )
     Decrease in other assets    --    7,194  
                    Net cash (used in) investing activities    (467,912 )  (151,430 )
Cash flows from financing activities:  
     Proceeds from the exercise of stock options, warrants and employee stock
     purchase plan		    2,341,666    642,827  
     Costs incurred related to issuance of common stock    (41,950 )  (120,000 )
     Proceeds from sale of common stock    --    3,410,000  
                    Net cash provided by financing activities    2,299,716    3,932,827  
Net increase in cash and cash equivalents    6,552,972    2,927,071  
Cash and cash equivalents, beginning of the period    10,558,946    4,450,076  
Cash and cash equivalents, end of the period   $ 17,111,918   $ 7,377,147  
Supplemental disclosure of cash flow information:  
      Cash paid for interest   $ 3,042   $ 11,153  
 Supplemental disclosure of noncash financing and investing activities:  
      Issuance of stock for employer 401(k) matching contribution   $ 213,903   $ 195,711  
      Exchange of note payable for common 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

Note 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 ( “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 Palomar’s Form 10-K for the year ended December 31, 2003. Certain prior-period amounts have been reclassified to conform with the current-period presentation.

Note 2 - Stock based compensation

        Palomar follows the intrinsic value method in accordance with 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 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, Palomar 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 table illustrates the effect on net income and earnings per share if Palomar had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. Palomar has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted to employees of Palomar for the three and six months ended June 30, 2004 and 2003, respectively, using the Black-Scholes option-pricing model prescribed by SFAS No. 123.

Pro forma disclosure

        The pro forma effect on Palomar of applying SFAS No. 123 for all options to purchase common stock of Palomar would be as follows:


Three Months Ended
June 30,		 Six Months Ended
June 30,
2004
 2003
 2004
 2003
Net income as reported         $ 2,030,089   $ 1,068,852   $ 3,189,310   $ 1,427,208    
Less: Total stock-based employee  
compensation expense determined  
under fair value based method for  
all awards, net of tax       (16,013,139)  (187,670)  (16,313,412)  (548,803) 
Pro forma net income (loss)