Filed by PhotoMedex, Inc.
Pursuant to Rule 425 under the Securities Exchange Act of 1933, as amended
Subject Company: Surgical Laser Technologies, Inc.
Commission File No. 000-17919
Conference Call held on September 26, 2002
Set forth below is the transcript of a conference call held on
September 26, 2002 at which representatives of PhotoMedex, Inc. and Surgical
Laser Technologies, Inc. discussed and answered questions with respect to the
proposed merger of the two companies, as announced in a press release dated
September 26, 2002.
Operator: Good day everyone and welcome to this PhotoMedex and
Surgical Laser Technologies Conference Call. This
call is being recorded. At this time for opening
remarks and introductions I will turn the call over
to the President and Chief Executive Officer of
PhotoMedex, Mr. Jeff O'Donnell. Mr. O'Donnell, please
go ahead.
Jeff O'Donnell: Thank you. My name is Jeff O'Donnell. I'm
the Chief Executive Officer of PhotoMedex. I want to
wish all of you a good afternoon. With me today are
Dennis McGrath, the Chief Financial Officer and Vice
President of PhotoMedex, Mike Stewart, the President
and CEO of Surgical Laser Technologies and Davis
Woodward, the Chief Financial Officer of Surgical
Laser Technologies. First, I'd like Davis, for you to
read the Safe Harbor Statement.
Davis Woodward: Yes, thank you. The information provided in
this conference call provides forward-looking
statements within the meaning of the Safe Harbor
provisions of the Private Securities Litigation
Reform Act of 1995. These statements are based on
managements' current expectations and beliefs and are
subject to a number of factors and uncertainties that
could cause actual results to differ materially from
those described in the forward-looking statements.
The forward-looking statements provided in this
conference call include statements about future
financial and operating results in the proposed
acquisition of Surgical Laser Technologies, Inc.,
SLT, by PhotoMedex, Inc.
The following factors among others could cause actual
results to differ materially from those described in
the forward looking statements: the risk that SLT's
business will not be integrated successfully with
that of PhotoMedex, costs related to the merger,
failure of the stockholders to approve the merger,
risks relating to technology and product development,
market acceptance, government regulation and
regulatory approval processes, intellectual property
rights and litigation, dependence on strategic
partners, ability to obtain financing, competitive
products and other risks identified in PhotoMedex's
and SLT's filings with the SLT.
PhotoMedex and SLT are under no obligation and
expressly disclaim any such obligation to update or
alter these forward-looking statements whether as a
result of new information, future events or
otherwise.
In connection with the proposed merger, PhotoMedex
will file with the Securities and Exchange Commission
(or SEC) a registration statement on Form S-4. The
registration statement will include a proxy statement
of SLT for a meeting of its stockholders to consider
and vote upon the proposed merger.
The registration statement will also serve as a
prospectus of PhotoMedex with respect to the shares
of PhotoMedex to be distributed to stockholders of
SLT in the proposed transaction. PhotoMedex and SLT
will file the proxy statement/prospectus with the SEC
as soon as practicable.
Investors and security holders are advised to
carefully read the proxy statement/prospectus
regarding the proposed merger transaction when it
becomes available because it will contain important
information about PhotoMedex, SLT, the merger and
related matters.
In addition to the registration statement and proxy
statement/prospectus, both PhotoMedex and SLT file
annual, quarterly and other reports, proxy
statements, registration statements and other
information with the SEC. You may read and copy any
reports, statements or other information filed by
PhotoMedex or SLT at the SEC's public reference rooms
at 450 Fifth Street, N.W., Washington D.C., 20549 or
at any of the SEC's other public reference rooms in
New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on
the public reference rooms.
Investors and security holders may also obtain a free
copy of the proxy statement/prospectus when it is
available and other documents filed by the companies
at the SEC's website at www.sec.gov. Thank you.
Jeff O'Donnell: Thank you, Davis. With that said, let's get into the
exciting news. This morning we issued a press release
announcing the Surgical Laser Technologies merger
with PhotoMedex. The purpose of this conference call
is to provide you with background on the merger and
give you an opportunity to ask questions.
The agenda for today's call will be the following:
Dennis McGrath will review the details of the
agreement announced this morning, I will discuss the
strategic advantages of the merger and Mike Stewart
will talk about the value that PhotoMedex adds to
Surgical Laser Technologies. We will then open it up
for questions.
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I again will remind everyone that my remarks and the
ensuing discussions are based on my vision of the
future and therefore actual results could differ
materially from those described. I refer you to the
full Safe Harbor Statement in today's press release.
We will be filing a proxy statement and prospectus
with the Securities and Exchange Commission regarding
the merger and urge all investors to read it when it
is filed.
The definitive proxy statement and prospectus should
be read before making a decision concerning the
merger. This call should not be considered an offer
to purchase or promotion to buy or sell shares in
PhotoMedex or Surgical Laser Technologies.
This morning we were pleased to announce the signing
of a definitive agreement, a transaction approved by
the Board of the Directors of both companies for
PhotoMedex to acquire Surgical Laser Technologies.
This is a very important event for PhotoMedex and we
wish to take this opportunity to welcome all of the
Surgical Laser Technologies staff and shareholders on
board.
This acquisition will provide SLT the ability to
manage and accelerate one of the most important
elements in their business strategy, rolling out its
contract laser procedure business for doctors'
offices, surgical centers and operating rooms, which
is currently focused in the southeast section of the
United States.
Conversely, it gives PhotoMedex the infrastructure
needed to launch the XTRAC laser system, once full
reimbursement is in place for the procedure in
January.
I would now like to turn the call over to Dennis
McGrath, who will review the details of our exciting
transaction.
Dennis McGrath: Thanks Jeff and good afternoon everyone. I'm pleased
to state that PhotoMedex will acquire SLT by merging
both companies at an exchange ratio of 1.12
PhotoMedex shares for each share of SLT. With the
current outstanding shares of SLT at 2.3 million this
approximates 2.6 million shares to be issued subject
to exercise of options and warrants prior to the
closing.
Using the closing price of PhotoMedex on the day
prior to signing the deal, this would put the value
of the transaction at approximately 3.1 million.
SLT's shareholders will own approximately 9% of the
combined company's stock after the effective date of
the merger.
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We will assume certain warrants approximating 90,000,
which will expire by year end and have strike prices
between 7 dollars and 10 dollars. Any unexercised SLT
options will expire at the date of the merger. SLT's
book value is approximately 7 million dollars, which
includes approximately 800,000 of bank debt net of
its 2 million dollar cash deposit collateralizing the
bank debt.
The process between here and closing will be the
completion and filing of certain SEC documents and
registration requirements together with an SLT
shareholder meeting to vote on the transaction. It is
anticipated that the transaction will close some time
in December this year.
Although limited in what we are allowed to say, some
of the major financial business points of SLT are as
follows: SLT shares the same revenue model as
PhotoMedex, PhotoMedex revenues on an annualized
combined basis post-transaction nearly quadruple,
putting us in the 15 million to 17 million dollar
range, SLT's run rate for 2002 is in the 11 to 12
million dollar range with 85% of its revenue from
recurring revenue sources and one to two million from
laser sales both domestically and internationally.
There are some obvious synergistic integration
savings that appear to be in the millions of dollars,
without considering any impact on our current dual
manufacturing locations. SLT has a manufacturing
location in Montgomeryville, Pennsylvania and, as you
know, we have one in Carlsbad, California.
Post-closing, PhotoMedex has the opportunity to cut
its burn rate significantly and hence accelerate the
road to cash flow break even. SLT adds much needed
infrastructure in field support, as well as 20 years
of experience in quality laser manufacturing located
conveniently 20 minutes from our Pennsylvania
offices. I'm going to turn it back to Jeff.
Jeff O'Donnell: Thanks Dennis. PhotoMedex has spent the last three
years focused on developing the XTRAC laser system to
be the standard of care for psoriasis, which now also
addresses atopic dermatitis, vitiligo and leukoderma.
As you know, our business model calls for the
placement of the laser at no initial cost to the
dermatologist, and revenues are built on a per
procedure fee. Reimbursement and reliability are the
major issues PhotoMedex has been dealing with for the
last year and a half.
The reimbursement process, as everyone has heard
before, takes about a year and a half to complete.
Although we now have over 50 private insurance
companies paying for the procedure at an average of
150 dollars per treatment, we needed to get CPT codes
(or common procedural terminology codes) approved for
this procedure.
As you know, this has already been accomplished and
passed onto the RUC Committee for application of
economics to these new codes. The RUC Committee has
met and, as announced on a previous conference call,
it is our expectation that some time in November we
will be advised that the economics have been assigned
to three specific codes.
The first code is treating patients with under 250
square centimeters of disease. The second code is 250
square centimeters to 500. This de minimus psoriasis
will probably be reimbursed at between 100 and 125
dollars per treatment. Our understanding is that this
patient reimbursement for Medicare and Medicaid will
also have a third code which is really our target
market at 500 square centimeters or above and this
reimbursement will be at approximately 150 dollars or
more.
We also spent the last year and a half crystallizing
the design of the XTRAC, taking a very temperamental
product and making it extremely robust and very
reliable.
We, as an organization believe that all things now
are in place to launch the product. So with most of
the heavy lifting done the company views itself as
being well positioned in the vertical of dermatology,
providing an excellent product, utilizing a shared
revenue plan with the dermatologists, which provided
a recurring revenue stream based on providing
services to the company.
Now we can entertain opportunities that would provide
us with accelerated growth in revenue, profits and
infrastructure. We found Surgical Laser Technologies
offered just that, and as well as an opportunity to
build a presence in other medical procedures or
verticals.
Their company has spent the last 2-1/2 years focused
in the southeast section of the United States
providing lasers to doctors' offices, surgi-centers
and operating rooms and providing trained laser
technicians or nurses to assist in the procedures,
which include orthopedic, OBGYN, urology and general
surgery.
The end result is that the healthcare facility
increases its efficiencies and profits while our new
company receives a fee per procedure to provide the
use of the equipment and these services. 90% of the
revenues from this company are recurring revenue
dollars, either fee for service dollars or
disposables used in these specific surgeries.
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And as Dennis stated, only about 15% of the company
revenues are attributed to laser sales. So it fits
and it fits like a glove. We view the new company as
having a major franchise in dermatology,
dermatologists' offices, surgical centers and
hospitals, providing our various dermatological
procedures on a shared revenue basis.
PhotoMedex has four FDA approved procedures with
anticipated offshoots, and Surgical Laser
Technologies adds five additional medical verticals
with, again, general surgery, OBGYN, orthopedics,
gastroenterology and urology.
We believe that this is the business model of the
future for healthcare companies. We believe that over
the next five years you will see many healthcare
companies mimic this model. We believe that
increasing efficiencies and profits in hospitals, by
allowing them to outsource new technology and the
human resources to operate that technology, we
provide a very welcomed value proposition.
This acquisition is an important move for PhotoMedex
and its shareholders. It is also a logical step in
our growth and development. In addition, it is an
excellent fit.
Surgical Laser Technologies has nearly 20 years
experience in the manufacturing of lasers. I believe
the integration process will be simple and quick and
will allow us to streamline our development of these
products and the roll out of our wide range of
contract services in these various medical verticals.
I believe the merger reflects our conviction that in
creating new procedures, partnering with these
healthcare organizations and providing these
procedures to patients at a reasonable cost will
result in a very exciting and profitable company.
We believe that creating a whole that is greater than
the sum of its parts is very worthy of this exercise.
I'd like now to turn it over to Mike Stewart, the CEO
of Surgical Laser Technologies. Mike.
Michael Stewart: Thank you Jeff. Good afternoon and welcome to all of
you. I appreciate this opportunity to let you know
how pleased we are at SLT to be joining forces with
PhotoMedex and the opportunity to give you a brief
description of SLT.
At SLT, we've worked hard to create what we believe
is a somewhat unique approach to the healthcare
market and believe we're building a very valuable
methodology through the contract surgical procedures
business that we started roughly two years ago with
the acquisition of Surgical Innovations and Services.
We've learned quite a lot in that period of time how
customers view our products and services and believe
that, as Jeff mentioned earlier, that the contract
services approach will be the business model of the
future.
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We've proven that doctors and hospitals will utilize
laser technologies if you eliminate the obstacles
that they typically face in attempting to use them.
We all know what these obstacles are. They are high
capital costs, sometimes high disposable costs, high
maintenance costs and just the overall complexity of
utilizing these various types of technologies.
We know now that if these obstacles are eliminated,
the technologies will be utilized and if you package
those technologies in a program that's cost
effective, customers are glad to be able to outsource
those responsibilities.
To this point, we've been building this distribution
model with lasers that have been effective in surgery
over about a 15 year period, but for all the reasons
I just mentioned, were not, prior to our ability to
provide these services through SIS, being effectively
utilized in the marketplace.
What PhotoMedex provides is the new technology of the
XTRAC system, and we believe this product will be
widely accepted and provide the capital resources
needed to expand our services.
Since our founding as a company, we've been pioneers
in providing high quality innovative laser
technologies and disposable instruments and, more
recently, contract services. I believe coupling these
capabilities with PhotoMedex's technologies and
capabilities will provide for an excellent and very
capable new company.
I also believe, like I know Jeff does, that one plus
one in this case will equal much more than two, and
that we're going to create a very valuable new
medical device company with the unique business model
that will be very welcome in our customer base. Thank
you for listening. I'll turn the call back over to
Jeff at this time.
Jeff O'Donnell: Thanks Mike. I'd like to open it up for questions at
this time.
Operator: Thank you sir. Today's question and answer session
will be conducted electronically. If you'd like to
place yourself in queue to ask a question, please
press star one on your touchtone telephone. Once
again, that is the star key followed by the digit 1
to place yourself in queue to ask a question. We'll
pause for just a moment so everyone has a chance to
signal.
And first we have a question from Eric Petersen with
UCP Research.
Eric Petersen: Hi Jeff.
Jeff O'Donnell: Hi Eric.
Eric Petersen: Does SLT make their own fibers and cables? Is that
something that you -- I believe you outsource that
now. Could you in source that?
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Jeff O'Donnell: Mike.
Michael Stewart: Yes we do. We don't draw fiber but we buy fiber and
then -- and make all of the disposable delivery
systems that we utilize ourselves.
Eric Petersen: Okay, thanks.
Jeff O'Donnell: Thanks Eric.
Operator: And just a reminder, it is star one for a question or
a comment. Next we'll go to John Gibbons with Odin
Partners.
John Gibbons: Hi, could you just tell me -- I'm not that familiar
with this STLI -- could you just tell me a little bit
about the balance sheet, what the company looks like
financially since, you know, PhotoMedex is not the
world's most financially secure company?
Jeff O'Donnell: Yeah, Mike, do you want to take care of that?
Michael Stewart: Sure. This is Mike Stewart. The balance sheet of the
company is actually, for the stage that we're in, I
think, fairly strong. We have a 2 million dollar cash
balance, but that cash balance is pledged to the bank
in return for a 3 million dollar line of credit.
We're at about 2.7 million dollars borrowed against
that line.
We have a receivable position of about 1.8 million
dollars, inventories of about 3.2, current
liabilities of about 2 million and then that 2.7
million dollars in debt, and are operating at about a
cash flow break even.
John Gibbons: When does that line of credit expire?
Michael Stewart: June 2004.
John Gibbons: Great, thank you very much.
Jeff O'Donnell: Next question.
Operator: We'll take a question from Greg Berlacher with
Emerging Growth Equities.
Jeff O'Donnell: Hi Greg.
Michael Stewart: Good afternoon Greg.
Greg Berlacher: Hi guys, how are you doing?
Jeff O'Donnell: Great.
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Greg Berlacher: Can you give me a little sense for distribution and
sales and how the two organizations, assuming the
merger does take place, how many sales people are
going to be involved and is it going to be one guy
and/or gal having numerous products and services to
offer? Just give me a sense for that.
Jeff O'Donnell: Sure Greg. This is Jeff. Right now, SLT has a direct
organization. They created the template down in the
southeastern part of the United States where they
tried this services business. Their goal was to try
it, grow it and then obviously duplicate it
throughout the country.
The company has a direct organization down there with
about 50 people from Atlanta down to Florida and in
that section, and so we're real excited about having
the ability to leverage that kind of an
infrastructure.
Secondarily, they have a rep organization like a
hybrid rep organization to sell their lasers. And as
you know, we have one sales rep down there. So we
look at the distribution network as with the new
company being much more efficient, much larger and
really one person calling on the customers.
Greg Berlacher: Great, thank you.
Operator: And once again star one for questions at this time.
We have a follow up question from John Gibbons with
Odin Partners.
John Gibbons: This is a question for Dennis. Dennis, you alluded to
integration savings exclusive of the plant
consolidations. Have you put some tentative numbers
on it?
Dennis McGrath: The only thing I can report, we need to be limited in
the amount of disclosure at this point until that
process is fully completed, but it exceeds 1 million
dollars.
John Gibbons: Great, thank you very much.
Jeff O'Donnell: Next question.
Operator: Next question from Wilson Jaeggli with Southwell
Partners.
Jeff O'Donnell: Hi Wilson.
Wilson Jaeggli: Hey guys, how have you been?
Jeff O'Donnell: Great.
Wilson Jaeggli: Congratulations here. This is intriguing. S-4, when
do you think that will be filed please?
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Jeff O'Donnell: We're hopeful that we will file it within the next
two weeks. There are some additional processes and
procedures that we need to go through and we're
hopeful that we can file it as quickly as possible.
Wilson Jaeggli: You've reached a definitive agreement. Have both
boards agreed to this definitive agreement, the
merger?
Jeff O'Donnell: Yes they have.
Wilson Jaeggli: And what kind of tie up do we have on SLTs
stockholders?
Dennis McGrath: Fifteen percent of their shareholders have signed an
agreement voting for this transaction.
Wilson Jaeggli: Okay.
Wilson Jaeggli: All right, thank you very much.
Jeff O'Donnell: Thanks Wilson.
Operator: And a follow up question from Eric Petersen with UCP
Research.
Eric Petersen: Yeah, I just want to clarify one thing. This 2
million dollar cash deposit, you said it was -- did I
mishear that it's a 2 million dollar bank line? I
thought it was five million. I'm not sure.
Michael Stewart: Yeah, the bank line is for three million.
Eric Petersen: Three million, okay.
Michael Stewart: Two million of cash collateralizing that line.
Eric Petersen: Okay, I got you. Thanks a lot.
Jeff O'Donnell: You're welcome.
Operator: And once again, star one for question or comment. We
have a follow up question from Greg Berlacher.
Greg Berlacher: Sorry guys, I meant to ask this too. I noticed on a
quarterly basis, it looked to me like you were more
than cash -- this is SLTI now -- they were more than
cash flow break even and actually they looked fairly
cash flow positive to the tune of 100 to 150,000 per
quarter. Could I get you guys to kind of address
that?
Michael Stewart: Sure, that's true. We are cash flow positive. EBITDA
is positive, cash flow is positive. That's just my
conservatism looking at, you know, 100 to 150,000 not
being tremendously cash flow positive at this point.
I think that will change with this combination
because of the consolidation effects and we will
become more significantly cash flow positive.
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Greg Berlacher: Right. Okay, I just wanted to make sure my -- what I
was looking at was correct. Thank you.
Michael Stewart: You're welcome.
Jeff O'Donnell: Thanks Greg.
Michael Stewart: Thank you.
Operator: Steve Emerson with the Emerson Investment Group.
Steve Emerson: Yes, congratulations.
Jeff O'Donnell: Thank you Steve.
Steve Emerson: Could you perhaps give us a better, if you can,
flavor of what would be what you'd call the immediate
cash flow savings and what might be available as an
objective, let's say over six months?
Dennis McGrath: We're really limited in the amount of disclosure that
we can provide at this point in time, Steve, and
consequently, the discussion that I outlined in my
opening remarks is about the extent that I can
provide at this point in time. There are further
layers of analysis we need to go forward on before a
plan is laid out. We'll give greater guidance as to
what the upcoming quarters for the combined entities
will be in our normal quarterly conference call
that'll be scheduled probably the first week of
November.
Steve Emerson: Okay. And you did mention you had I believe two
million of cash, which is securing a 3 million dollar
line. What free cash do you have other than the 300
grand on your bank line, do you have available or do
you have that might be used immediately for the
combined company?
Michael Stewart: Just the cash flow that we generate from operations.
Steve Emerson: Okay.
Dennis McGrath: That and approximately 1.6 million in receivables
that are always in terms and turn over rather
quickly.
Michael Stewart: Yes.
Steve Emerson: What's the DSO's on those receivables?
Mike Stewart: About 45 days.
Steve Emerson: Excellent. Thank you very much.
Jeff O'Donnell: Thanks Steve.
Dennis McGrath: Thanks Steve.
Operator: We'll take a question from Calvin Hori with Hori
Capital.
Calvin Hori: Hi guys.
Jeff O'Donnell: Hi Calvin.
Calvin Hori: Can you realize any manufacturing synergies for the
lasers between the two companies?
Jeff O'Donnell: Calvin, this is Jeff. I'm going to reiterate what
Dennis said. We've really been cautioned by our
attorneys not to get into the specifics. There are
obvious synergies and overlap from having two public
companies.
Calvin Hori: Well your excimer laser, does Surgical Laser also
have excimer lasers?
Jeff O'Donnell: Surgical Laser Technologies has been manufacturing
many different lasers for the last 20 years and has
the capabilities of manufacturing any laser but -- of
any wavelength -- but we at PhotoMedex have been
focused and focused like a bullet in flight in
crystallizing the design of an excimer laser.
I do not believe that that excimer laser should have
a technology transfer at this time but obviously it
could at some time. So right now the synergies and
the savings are all focused on public company overlap
and the fact that we'll have one big and efficient
sales force pushing these products to the market.
Calvin Hori: Okay, great. Thanks.
Jeff O'Donnell: Thanks.
Operator: And as a reminder it is star one for a question. It
appears we have no more questions at this time so
I'll turn the call back over to Mr. O'Donnell for any
closing remarks.
Jeff O'Donnell: Okay, thank you very much. Well we wanted to give
everyone an opportunity to hear of our exciting news
and ask questions and I'm sure there'll be more
questions as we move forward.
I will summarize in saying that the XTRAC is ready
and ready for launch and that we believe that the
economic environment for reimbursement is being put
in place at this time for us to launch it in the
first quarter of 03.
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With that, it's obvious for the executives to look
for other services that fit our model, other medical
products and other medical services that fit our
model. I said before that SLT fits and I said before
it fits like a glove and it really does.
The infrastructure that SLT brings to PhotoMedex is
fantastic. Not only do they have infrastructure and
facilities and talent to manufacture lasers, but
they've got a sales organization that it would take a
long time to build and would cost us a lot of money.
Their revenues, as Dennis said, we almost quadruple
our revenues right away, we will cut our burn
significantly and stay in the fee for service
business, which again, as we said in the previous
remarks, that we believe it's the business model for
the future and we believe that people will realize
this and mimic it but it does provide an excellent
service to all healthcare organizations providing
better efficiencies, allowing them to outsource the
products and the human resources to provide those
surgical procedures to their patients.
Thanks for listening. If you need to get in touch
with Mike Stewart or Dave Woodward, you can call them
at Surgical Laser Technologies. If you need to get in
touch with Dennis McGrath or myself, you can call us
at PhotoMedex. Thank you.
Michael Stewart: Thank you.
Operator: This does conclude today's conference call. You may
now disconnect.
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