<PAGE>
As filed with the Securities and Exchange Commission on March , 1999
Registration No. 333-69729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GEN TRAK, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 23-2437580 2835
- ------------------------------- --------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification No.) (Primary Standard Industrial
Incorporation or organization) Classification Code Number)
</TABLE>
Gen Trak, Inc.
5100 Campus Drive
Plymouth Meeting, PA 19462-1123
610/825-5115
Telecopier: 610/941-9498
(Address including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
Arthur V. Boyce, Jr.
Gen Trak, Inc.
5100 Campus Drive
Plymouth Meeting, PA 19462-1123
610/825-5115
Telecopier: 610/941-9498
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES OF ALL COMMUNICATIONS TO:
---------------------
Gary A. Miller, Esquire Bert Gusrae, Esquire
Connolly Epstein Chicco David A. Carter, P.A
Foxman Oxholm & Ewing 2300 Glades Road, Suite 210
1515 Market Street - 9th Floor West Tower
Philadelphia, PA 19102 Boca Raton, FL 33431
215/851-8472 561/750-6999
215/851-8383 (fax) 561/367-0960 (fax)
Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after effective date.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities To be Offering Price Per Offering Registration
to be Registered Registered Share (1) Price (1) Fee
--------------------------------- ---------- ------------------ ---------------- -------------
<S> <C> <C> <C> <C>
units Consisting of Two Shares
and Two warrants .................... 747,500 units $ 10.00 $ 7,475,000 $ 2,078.05
Common Stock $.01 Par Value,
Contained in units .................. 1,495,000(2) Shares $ -0-(4) $ -0- $ -0-(4)
warrants to Purchase Shares of
Common Stock, Contained in
units ............................... 1,495,000(3) warrants $ -0-(4) $ -0- $ -0-(4)
Common Stock, Underlying
warrants to Purchase
Common Stock (5) .................... 1,495,000 Shares $ 6.00 $ 8,970,000 $ 2,493.66
Underwriter's Unit warrants .......... 65,000 warrants $ -0- $ -0- $ -0-
units Issuable Upon Exercise of
Underwriter's warrants .............. 65,000 units $ 14.50 $ 942,500 $ 262.02
Common Stock Underlying
Underwriter's units warrants ........ 130,000 Shares $ -0- $ -0-(4) $ -0-
warrants Underlying
Underwriter's Warrant ............... 130,000 warrants $ -0- $ -0- $ -0-
Common Stock Issuable Upon
Exercise of warrants Issuable
On Exercise of Underwriters'
Unit warrants ....................... 130,000 Shares $ 6.00 $ 780,000 $ 216.84
----------- -----------
TOTALS: ............................. $18,167,500 $ 5,050.57
=========== ===========
</TABLE>
- ------------
(1) Estimated solely for calculation of the amount of the registration fee
calculated pursuant to Rule 457.
(2) Includes 195,000 shares to cover over-allotments, if any.
(3) Includes 195,000 warrants to cover over-allotments, if any.
(4) For purposes of computing the registration fee, the units purchase price has
been allocated 100% to the units.
Pursuant to Rule 416, there are also being registered such additional
shares as may become issuable pursuant to the anti-dilution provisions of the
warrants.
The Exhibit Index appears on page II-7 of the sequentially numbered pages
of this Registration Statement. This Registration Statement, including exhibits
contains 294 pages.
ii
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NO. SECTIONS IN PROSPECTUS
- ---- ----------------------
<S> <C> <C>
1. Front of the Registration Statement and Outside
Front Cover of Prospectus ............................... Cover Page
2. Inside Front and Outside Back Cover Pages Of Inside Front Cover Pages; Table of
Prospectus .............................................. Contents
3. Summary Information and Risk Factors .................... Prospectus Summary, Risk Factors
4. Use of Proceeds ......................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price ......................... Cover Page; Risk Factors
6. Dilution ................................................ Dilution
7. Selling Security Holders ................................ Not Applicable
8. Plan of Distribution .................................... Prospectus Summary; Underwriting
9. Legal Proceedings ....................................... Business - Litigation
10. Directors, Executive Officers, Promoters and Control Directors, Executive Officers, Promoters
Persons ................................................. and Control Persons
11. Security Ownership of Certain Beneficial Owners
and Management .......................................... Principal Shareholders
12. Description of Securities ............................... Description of Securities; Dividend
Policy
13. Interest of Named Experts and Counsel ................... Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities .......................... Statement as to Indemnification
15. Organization within Last Five Years ..................... Not Applicable
16. Description of Business ................................. Prospectus Summary; Risk Factors;
The Company
17. Management's Discussion and Analysis or Plan of
Operation ............................................... Management's Discussion and Analysis
18. Description of Property ................................. Business
19. Certain Relationships and Related Transactions .......... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters ................................................. Risk Factors
21. Executive Compensation .................................. Compensation of Executive Officers
And Directors
22. Financial Statements .................................... Index to Financial Statements
23. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure .................. Not Applicable
</TABLE>
iii
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Initial Public Offering Prospectus
GEN TRAK, INC.
650,000 Units
Each Unit Containing 2 Shares and 2 Warrants
$10.00 Per Unit
Gen Trak, Inc. develops and sells diagnostic test kits used by hospital
and other health care laboratories. These kits are used to determine
compatibility between the donor and recipient of transplanted organs, for
diagnosis of disease and for paternity testing.
Barron Chase Securities, Inc. will underwrite this offering on a firm
commitment basis.
This is our initial public offering and no market currently exists for
our shares. We have applied for listing on the NASDAQ Small Cap (SM) Market and
the Boston Stock Exchange. These listing applications have not yet been
approved. We cannot guarantee that there will be a trading market in the units,
common stock or warrants will develop.
Gen Trak is offering units of Securities. Each Unit consists of 2 shares
and 2 warrants. The shares and warrants are not offered separately.
Each warrant allows the investor to purchase one share of common stock at
a price of $6.00 after the separation of the warrants from the units, until five
years after the date of this Prospectus.
Gen Trak may repurchase the warrants at $.10 per warrant subject to
certain conditions.
================================================================================
Price to Underwriting Proceeds to
Public Discount Company
- --------------------------------------------------------------------------------
Per Unit ......... $ 10.00 $ 1.00 $ 9.00
- --------------------------------------------------------------------------------
Total ............ $6,500,000 $650,000 $5,850,000
================================================================================
---------------------
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss. See "Risk Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
[GRAPHIC OMITTED]
The date of this Prospectus is __________, 1999.
<PAGE>
PROSPECTUS SUMMARY
The following is only a summary of detailed information and financial
statements and notes to financial statements appearing elsewhere in this
Prospectus.
Gen Trak and its Products
Gen Trak sells health care test kits used for various genetic tests. Gen
Trak sells its products primarily to hospitals and private laboratories
performing tests for organ and bone marrow transplants. Gen Trak's test kits use
very specific genetic markers. These genetic markers are known as HLA (Human
Leukocyte Antigen) antigens. They are found on the surface of a person's cells.
These tests use two different technologies. One of these technologies is
serology and the other technology is based on DNA. Tests using serology look at
human cells contained in blood serum.
The HLA Diagnostic Market. Gen Trak believes that the annual HLA
diagnostics market place is approximately $90 million, with the U.S.
representing approximately 65% of the market.
Gen Trak's Current Technology. Gen Trak sells tissue typing trays. The main
use of these trays is to determine the compatibility of a donor organ or bone
marrow with the tissue type of the potential transplant recipient of the organ
or bone marrow. These tests are necessary to determine whether a donor's organ
or bone marrow transplant may be rejected by the recipient's immune system.
Gen Trak's antibody screening trays monitor the antibodies of potential
transplant recipients and patients who have received transplants, to predict the
possibility of organ or bone marrow rejection.
Gen Trak also sells monoclonal antibodies, derived from animals, used to
screen a patient's blood for certain abnormalities.
Since HLA testing is done on white blood cells, these cells must be
separated from patient and donor blood samples prior to testing. Gen Trak has
recently developed products that use magnetic beads to separate white blood
cells from red blood cells. Gen Trak believes that this technology can increase
laboratory productivity and reduce laboratory costs.
New Technology for Identifying Diseases and Blood Chemistries from Small
Samples. Gen Trak is also developing a detection and measurement system that
could allow a physician to diagnose infectious disease in the physician's office
during the patient visit. When the human body is invaded by bacteria or viruses,
the immune system generates antibodies to combat the infection. A unique set of
antibodies is generated for each virus or bacteria. To determine whether a
patient has a particular infectious disease, the physician or laboratory
technician seeks to determine whether a patient's blood or saliva contains the
unique antibodies generated by that infectious disease. Gen Trak's new
technology (the "AMPRO Technology") may simplify this analysis by amplifying or
increasing the signal associated with the unique antibodies. This will allow the
laboratory technician or physician to more quickly and easily identify the
infectious agent and diagnos and treat the illness. Gen Trak has three patents
for this new technology.
Distribution. Gen Trak distributes its products worldwide with
approximately 80% of its sales in the U.S.
Gen Trak was incorporated in Pennsylvania in November 1986. Gen Trak's
corporate offices are located at 5100 Campus Drive, Plymouth Meeting, PA
19462-1123. Gen Trak's telephone number is 610/825-5115.
3
<PAGE>
The Offering and Gen Trak's Securities
Securities Offered....... 650,000 units of securities.
o Each unit consists of two shares and two
warrants.
o The shares and warrants are not being offered
separately and cannot be transferred separately
for a period of 180 days from the date of this
Prospectus. The shares and warrants can be
transferred separately sooner than 180 days with
the consent of the underwriter.
Terms of warrants........ o Each warrant entitles the holder to purchase one
share at a price of $6.00. The warrant holders may
purchase shares beginning on the day the warrants
may be separated from the units. The warrants
expire five years from the date of this
Prospectus.
o Gen Trak may repurchase the warrants at $.10 per
Warrant on 30 days' prior written notice. There
are restrictions on Gen Trak's ability to
repurchase the warrants. See "Description of
Securities."
o The warrants may not be exercised if there is no
current prospectus covering the exercise of the
warrants. Gen Trak is required to keep this
prospectus current for that purpose.
Offering Price........... $10.00 per Unit
Shares of Common Stock
Outstanding:
Prior to the Offering... 1,300,000 shares of Common Stock
After the Offering...... 2,715,000 shares of Common Stock
In addition to the 2,715,000 shares that will be outstanding after the
Offering, Gen Trak will have the following securities outstanding:
o 1,300,000 warrants
o Options for 60,000 shares
o Underwriter's warrants for 65,000 units
Also, the underwriter has an option to purchase and sell an additional
97,500 units in the Offering.
Use of Proceeds.......... Gen Trak will use some of the proceeds of this
offering to repay debt owed to stockholders,
investors and banks, and pay accrued salaries and
fees. Most of the proceeds will be used for working
capital, expansion of Gen Trak's product lines and
general corporate purposes. See "Use of Proceeds".
4
<PAGE>
Market for Gen Trak's Securities
Before this Offering, there was no market for any of Gen Trak's securities.
Gen Trak cannot guarantee that a trading market will develop for the units. Gen
Trak has applied for listing on the NASDAQ SmallCap(SM) Market and the Boston
Stock Exchange. These listing applications have not yet been approved. Gen
Trak's applications contain the following listing symbols:
Unit
Proposed Nasdaq Symbols ................... GTRK
Unit
Proposed Boston Exchange Symbols .......... GTRK
Summary Financial Data
The following summary financial data summarizes the financial statements
included at the end of this Prospectus. Those financial statements include notes
which the investor should read. The financial statements at the end of this
Prospectus for the years ended December 31, 1998, and 1997 have been audited by
Ernst & Young LLP, independent auditors.
The "Pro Forma Basic and Diluted Loss Per Share" presented in the
Statements of Operations data below take into account certain effects from the
use of proceeds of the Offering as if they had occurred on January 1, 1998. The
"As Adjusted" column in the Balance Sheet Data assumes the sale of units in this
Offering and the use of proceeds from that sale had taken place on December 31,
1998.
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
December 31, December 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Net Sales ..................................................... $2,710,485 $ 2,149,285
Gross Profit .................................................. $1,219,557 $ 36,081
Net Loss ...................................................... ($ 138,083) ($ 1,661,846)
Basic and Diluted Loss Per Share .............................. ($ .11) ($ 1.28)
Pro Forma Basic and Diluted Loss Per Share .................... ($ 1.03)
Weighted Average Shares Outstanding Used in Computing Basic and
Diluted Loss Per Share ...................................... 1,300,000 1,300,000
Pro Forma Weighted Average Shares Outstanding Used in Computing
Pro Forma Basic and Diluted Loss Per Share .................. 1,555,000
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS ADJUSTED
December 31, December 31, December 31,
1997 1998 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Cash ................................... $ 45,757 $ 230,104 $4,205,104
Current Assets ......................... $ 1,840,430 $1,097,311 $5,072,311
Total Assets ........................... $ 2,288,888 $1,741,214 $5,716,214
Current Liabilities .................... $ 722,144 $1,761,764 $ 486,764
Long-Term Liabilities .................. $ 980,937 $ 948,785 $ 948,785
Stockholders' Equity (Deficit) ......... $ 585,807 ($ 969,335) $4,280,665
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The trading price of our securities could decline due to
any of these risks, and you could lose all or a part of your investment. You
also should review the other information in this Prospectus.
We Are Not Profitable and May Continue to Incur Losses. Gen Trak was
incorporated in 1986 and we have experienced significant operating losses since
that date. Despite changes initiated by our management, you cannot be certain
that we will become profitable. Our sales have declined steadily, from $6.9
million in 1992 to approximately $2.1 million for the year ended December 31,
1998. For the year ended December 31, 1998, we had a net loss of $1,661,846
including a one-time inventory write-down of $791,378. For these reasons and
others, our auditor's opinion contains an explanatory paragraph regarding the
Company's ability to continue as a going concern. We believe that if this
offering is completed, we will have the ability to continue as a going concern.
Our management believes that recent poor operating results were the result
of manufacturing and other operating inefficiencies. These inefficiencies not
only hurt the bottom line, but adversely affected sales because we lacked the
pricing flexibility to meet competition. We also were hurt by the lack of
competitive products, from a technical standpoint, in a number of important
areas. We have taken steps to address the inefficiencies and lack of technical
competitiveness.
We Need to Develop New Products to Grow. To achieve our strategic goals, we
must, alone or with others, successfully develop, obtain regulatory approval
for, introduce and market new products. If we do not develop new products, our
growth will be limited. Our AMPRO Technology has not yet been developed into
specific products. We may not be able to develop new products, or obtain
regulatory approval for any new products. Any new products which are developed
and approved may not be successfully marketed.
Government Regulation Burdens our Business. Extensive regulation puts a
burden on our operations and makes us less flexible. These regulations apply to
all competitors in our industry. However, other industries in which you may be
considering an investment are not as heavily regulated. Our research and
development activities, preclinical studies, clinical trials and marketing of
our products are subject to extensive regulation by the Food and Drug
Administration and foreign regulatory authorities. All of these regulations
reduce our ability to respond to business opportunities and to introduce new
products. We face other regulatory burdens. Failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals needed to sell our products, product recalls, operating
restrictions and criminal prosecution. Additional government regulation may be
established that could prevent or delay regulatory approval of our product
candidates. See "Business -- Government Regulation."
The New Product Approval Process is Lengthy and Uncertain. To market
products which use the new AMPRO technology, we, or any development partners,
must undergo an extensive regulatory approval process. The regulatory process
takes many years and requires the expenditure of substantial resources.
Regulatory review may not be conducted quickly and regulatory approval may not
be obtained for AMPRO products we develop.
We Depend on Third Party Manufacturers. We are now dependent and will
likely continue to depend on third-parties to manufacture our products
effectively and on a timely basis. The failure of these third parties to perform
adequately could have a material adverse effect on our business.
The Raw Materials We Need May Become Difficult to Obtain. Complications or
delays in obtaining raw materials could materially impair our business. The raw
materials, particularly sera, required for the majority of our products and
product candidates are currently available from several suppliers in quantities
sufficient to conduct our business. However, we cannot be certain that the raw
materials necessary for the manufacture of our products and product candidates
will continue to be available in sufficient quantities or at a reasonable cost.
Much of the sera used by us is obtained from overseas sources who draw sera from
human subjects. Foreign regulations do not now impair our ability to obtain
sera. However, because the sera is drawn from human subjects, foreign
regulations may change in a way that makes it more difficult for us to get these
materials.
Our Marketing Ability is Limited. Our ability to market our products is
limited due to our size and limited product line. Some of our competitors do
not have these limitations.
6
<PAGE>
Our Patents and Other Proprietary Rights May Not Provide Protection. Our
success will depend in part upon protecting our proprietary technology from
infringement, misappropriation, duplication and discovery. Patent rights, trade
secrets and other methods may not be sufficient to stop competitors from
developing competing technologies.
Our patent rights, and the patent rights of medical products in general are
highly uncertain and involve complex legal and factual questions. We cannot be
sure that the scope of any claims granted in our patents will provide us
protection or a competitive advantage. The validity or enforceability of patents
issued or licensed to us may be challenged by others and, if challenged, a court
might not find the patents to be valid and enforceable. In addition, competitors
may be able to develop products based on technology similar to the technology in
our patents without violating the patents. Trade secret protection does not
prevent others from independently developing the same or similar technologies.
Our Management has Discretion to Determine How to Use the Proceeds of this
Offering. A substantial portion of the proceeds of this Offering will be
available for working capital or other general corporate purposes. It may be
more difficult for the investor to judge the likelihood of Gen Trak's success if
the investor does not know the use of all investment funds.
Some Offering Proceeds will be Paid to Our Officers and Existing
Shareholders. $380,000 of the offering proceeds will be used to repay a debt
owed to one of our existing shareholders and salaries and other amounts owed to
officers. The likelihood we will accomplish our goals through use of your
investment funds is reduced by using some of the funds to repay these debts.
We May Need Additional Financing to Meet Our Goals. Although we believe the
net proceeds of this Offering will be sufficient to meet our working capital
requirements for the next 24 months, we may need additional cash. Additional
financing may not be available on commercially reasonable terms. If future
financing is not available when needed, we may be forced to curtail or
discontinue our expansion strategy.
We will Depend on Collaborative Arrangements With Other Companies to
Develop New Technology. We currently do not have the resources necessary to
develop or bring products to market which use our new technology. The proceeds
of this Offering will not provide us with sufficient resources to bring these
products to market. Our ability to develop products from this technology will
depend upon our ability to establish and maintain collaborative arrangements. We
may not be able to enter into any collaborations. Collaborations with others may
place a great deal of control over products developed from our technology in the
hands of others.
Control by Officers and Directors. After completion of this Offering, our
Officers and Directors will continue to own approximately 16% of our common
stock. As a result, our Officers and Directors will continue to have a
significant impact on all shareholder votes.
We are Not Likely to Pay Dividends. You cannot expect to receive cash flow
from this investment. We have no present intention of paying cash dividends in
the foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for growth. Payment of dividends is currently
restricted by our bank lending agreements. See "Dividends."
You will Suffer Substantial Dilution in the Book Value of Your Investment.
The net tangible book value per share of the shares after the offering will be
substantially less than the price paid by the investors. See "Dilution."
We Cannot Guarantee There Will be a Trading Market for Our Securities.
There has been no prior public market for our units, common shares or warrants.
You cannot be certain that a market will develop or be sustained.
The Market Price of Our Securities May not be as High as the Offering
Price. The offering price for the units has been arbitrarily determined by
negotiation between Gen Trak and the Underwriter. The offering price is not
related to our assets or book value or other accepted methods of valuing a
business. Since the price has been determined in this manner and not by the
market, the price at which the units trade after the offering may decrease.
7
<PAGE>
Possible Volatility of Price of Shares, Units and Warrants. If a trading
market does develop for our units, shares and warrants, there may be wide
fluctuations in the price of our securities.
These flutuations may be caused by several factors including:
o variations in operating results
o changes in market valuation of companies in our industry generally
o announcements of technological innovations by our competitors
o other announcements by us, our competitors or third parties.
Risk of Delisting from NASDAQ. If our shares, warrants and units are not
listed on the NASDAQ SmallCap Market, there will be less interest in the market
place for our securities. This may result in lower prices for our securities and
make it more difficult for you to sell the shares, warrants or units. We have
applied for initial listing on the Nasdaq Small-Cap Market upon the date of this
Prospectus. We cannot guarantee that our listing application will be approved.
Even if our securities are approved for initial listing, we must continue to
meet certain maintenance requirements in order for our securities to continue to
be listed on Nasdaq. We may not be able to continue to meet such requirements.
Investors May Face Additional Risks Related to Low Priced Securities. If
our securities are delisted from Nasdaq, and if certain other conditions apply,
units, warrants and shares would be considered "penny stocks" under federal
securities law. Additional regulatory requirements apply to trading by
broker-dealers of penny stocks which could result in the loss of effective
trading markets for our securities.
Restrictions on Exercise of Warrants May Deny Investors Full Benefit of the
Warrants. Investors purchasing warrants in this Offering will not be able to
exercise the warrants unless at the time of exercise this Registration Statement
is current, or a new registration statement covering exercise of the warrants is
effective. In addition, such shares must be registered under the securities laws
of the warrant holder's state of residence, if they are not exempt from such
laws. The value of the warrants may be greatly reduced if a current registration
statement covering the exercise of the warrants is not available or if the
shares are not registered or exempt from registration in the states in which the
investor lives.
We May Repurchase the Warrants. After the warrants become separately
transferable, we may repurchase them on 30 days prior written notice if certain
conditions are met. We are likely to repurchase the warrants at a time when this
is favorable to our company and not the warrant holders. If the warrants are
repurchased, warrant holders will lose their right to exercise the warrants
except during the 30 day notice period. We may not repurchase the warrants for
one year after the date of this prospectus without the consent of the
underwriter. See "Description of Securities -- Warrants."
Possible Negative Effect of Underwriter's Warrants on Market for Company's
Stock and Ability to Obtain Additional Financing. We will issue to the
Underwriter, for a very small payment, Underwriter's warrants to purchase 65,000
units, at $14.50 per Unit. Exercise of the Underwriter's warrants and subsequent
sale of the shares and warrants could adversely affect the market price of the
shares and warrants. The potential for exercise of these Underwriter's warrants
may adversely affect the terms Gen Trak can negotiate for new financings.
FORWARD LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expessed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
8
<PAGE>
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
DILUTION
Gen Trak's net tangible book value (deficiency) at December 31, 1998, was
($1,244,480) or ($.96) per share. "Net tangible book value (deficiency) per
share" means Gen Trak's total tangible assets less its total liabilities,
divided by the number of shares of common stock outstanding.
Assuming the units had been sold on December 31, 1998 and 115,000 shares
were issued to the holders of certain private placement notes (See "Use of
Proceeds") on December 31, 1998, the adjusted net tangible book value of Gen
Trak at December 31, 1998 would have been approximately $4,005,250 or $1.48 per
share. This represents an immediate increase in net tangible book value per
share of $2.44 to existing shareholders and an immediate decrease of $3.52 per
share to the investors purchasing the units. The following table illustrates the
per share dilution in net tangible book value to investors in this offering. In
this table, the entire price paid by investors for the units is considered as
having been paid for the shares contained in the units. Since the units contain
2 shares each, each share is considered to be sold for $5.00.
<TABLE>
<S> <C> <C>
Public offering price per share ............................. $ 5.00
Net tangible book value (deficiency) per share before
Offering ................................................ ($ .96)
Increase per share attributable to sale of units ......... $ 2.44
------
Adjusted net tangible book value per share after Offering . $ 1.48
------
Dilution per share to investors in this Offering ............ $ 3.52
======
</TABLE>
The following table compares
o the number of shares held by existing shareholders as of December 31, 1998
and to be held by new shareholders after the offering
o The total amount paid for shares by existing shareholders and to be paid by
new shareholders
o The average price per share paid by existing shareholders and to be paid by
new shareholders.
This table does not take into account any shares or warrants contained in units
which may be issued if the Underwriter exercises its over-allotment option. This
table also does not include the shares which may be issued on exercise of the
underwriter's warrant. In this table, no amount is considered to have been paid
for the shares being issued to the private placement noteholders. See "Use of
Proceeds."
<TABLE>
<CAPTION>
Consideration
Shares of ------------------------------
Common Stock Average Price
Acquired Amount Percent Per Share
-------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Existing Shareholders .................. 1,300,000 $1,538,781 19% $ 1.18
Private Placement Note Holders ......... 115,000 $ 0 0% $ 0
Investors in this Offering ............. 1,300,000 $6,500,000 81% $ 5.00
Totals .............................. 2,715,000 $8,038,781 100% --
</TABLE>
9
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the units will be approximately
$5,250,000 after deducting the Underwriter's discounts and expenses, and all of
the other expenses of the offering. If the Underwriter exercises the
Underwriter's over-allotment option, Gen Trak will receive additional funds. The
following table summarizes Gen Trak's intended use of these proceeds.
<TABLE>
<CAPTION>
PERCENT OF
APPLICATION OF PROCEEDS AMOUNT PROCEEDS
----------------------- ------ ----------
<S> <C> <C>
Strategic Product Line Expansion ................ $2,000,000 38.1%
Repayment of Private Placement Notes ............ $ 575,000 11.0%
Repayment of Stockholder Line of Credit ......... $ 300,000 5.7%
Repayment of Bank Line of Credit ................ $ 400,000 7.6%
Repayment of Accrued Salary and Fees ............ $ 90,000 1.5%
Working Capital ................................. $1,885,000 36.1%
---------- -----
Total ........................................ $5,250,000 100.0%
========== =====
</TABLE>
Strategic Product Line Expansion. These funds will be used by Gen Trak for
strategic expansion of its product line by development or acquisition. From time
to time in the ordinary course of business, Gen Trak evaluates the potential
acquisition of businesses and technologies that complement Gen Trak's business.
Currently, Gen Trak does not have any commitments to acquire any business or
technology.
Repayment of Private Placement Notes. These funds will be used by Gen Trak
to repay the outstanding balance of $575,000 of Unsecured Promissory Notes (the
"Private Placement Notes") issued in a November and December 1998 private
placement. The proceeds of these Private Placement Notes were used for working
capital and for legal, accounting, printing and other expenses incurred in
connection with this Offering. The Private Placement Notes must be paid in full
at closing of this Offering. In addition, the Private Placement Note Holders are
entitled to receive at closing of this offering, for no additional cost, 115,000
shares of common stock. If this Offering closes and the Private Placement Note
holders receive their shares, no cash interest will be payable on the Private
Placement Notes.
Repayment of Stockholder Line of Credit. These funds will be used by Gen
Trak to repay the balance of $300,000 it owes on an unsecured line of credit
with Susquehana Holdings Corp. See "Certain Transactions."
Repayment of Bank Line of Credit. These funds will be used by Gen Trak to
repay the outstanding balance of $400,000 on its bank line of credit. The line
of credit is subject to a fluctuating interest rate per annum equal to the
bank's "national commercial rate" plus 2.5%. As of December 31, 1998, the
interest rate was 10.25%. This line of credit is secured by substantially all of
Gen Trak's assets, and life insurance policies on the Chairman of the Board and
the President. The line of credit is personally guaranteed by the Chairman of
the Board of Gen Trak.
Repayment of Accrued Salary and Fees. Gen Trak will pay salary and
consulting payments owed to Gen Trak's President and its Chairman. See
"Executive Compensation -- Employment Arrangements."
Working Capital. These funds will be used by Gen Trak for general corporate
purposes and to support expansion into other strategically compatible product
lines.
The amounts in the above table are estimates developed by management based
upon Gen Trak's current plans and current economic and industry conditions. Gen
Trak's proposed use of proceeds may be changed if industry or economic
conditions change or if Gen Trak's financial condition changes. Management also
will have the discretion to change the amount of funds used for each purpose.
While Gen Trak cannot be certain, Gen Trak believes the proceeds from the
offering and internally generated funds will satisfy Gen Trak's working capital
needs for the next twenty-four months. Gen Trak may require additional debt or
equity financing for future internal growth or acquisitions. Gen Trak cannot be
certain that additional financing on acceptable terms will be available to Gen
Trak when needed.
10
<PAGE>
Gen Trak may make temporary investments in bank certificates of deposit,
interest bearing, insured savings accounts, United States government notes,
bills or bonds and insured money market funds, until it is time to use the funds
for the purposes outlined above. Any income derived from these short-term
investments will be used for working capital. Any additional proceeds received
from the exercise of the Underwriter's over-allotment option will be used for
working capital.
DIVIDEND POLICY
The Board of Directors does not anticipate paying cash dividends in the
foreseeable future as it intends to retain future earnings to finance the growth
of the business. Currently, the terms of Gen Trak's bank line of credit and term
loan restrict the payment of dividends without the consent of the lending bank.
The Pennsylvania Business Corporation Law provides that dividends may be paid
unless, after the dividend, a corporation would be unable to pay its debts as
they become due in the usual course of its business, or the total assets of a
corporation would be less than the sum of its total liabilities. The payment of
future cash dividends will depend on such factors as earnings levels,
anticipated capital requirements, the operating and financial conditions of Gen
Trak and other factors deemed relevant by the Board of Directors.
11
<PAGE>
CAPITALIZATION
The following table presents the capitalization of Gen Trak as of December
31, 1998. The "As Adjusted" column in the table presents the capitalization
taking into account the following as if they had occurred on December 31, 1998:
o The receipt of the net proceeds from the sale of the 650,000 units at a
price of $10/unit
o The estimated use of proceeds from the sale of these units;
o The issuance of 115,000 shares of common stock to private placement
noteholders, together with a charge to interest expense for the value of
such shares at $5.00/share.
The table does not take into account:
o The issuance of additional units if the underwriter exercises its
over-allotment option;
o Any shares which may be issued on exercise of the warrants; or
o Any shares which may be issued on exercise of the warrants to purchase
units which will be held by the underwriter.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------
Actual As adjusted
--------------- ---------------
<S> <C> <C>
Short-term debt:
Bank line of credit .............................. $ 400,000 $ 0
Stockholder line of credit ....................... 300,000 0
Private placement notes .......................... 575,000 0
Current portion of long-term debt ................ 33,544 33,544
------------ ------------
Total short-term debt ............................... $ 1,308,544 $ 33,544
============ ============
Long-term debt:
Long-term debt ................................... $ 883,138 $ 883,138
Notes payable to shareholders .................... 58,737 58,737
Obligations under capital leases ................. 6,910 6,910
------------ ------------
Total long term debt ................................ $ 948,785 $ 948,785
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares
authorized, 1,300,000 and 2,715,000 shares issued
and outstanding ................................. $ 13,000 $ 27,150
Additional paid-in capital ....................... 1,663,951 7,474,801
Retained deficit ................................. (2,646,286) (3,221,286)
------------ ------------
Total stockholders' (deficit) equity ................ $ (969,335) $ 4,280,665
------------ ------------
Total capitalization ................................ $ (20,550) $ 5,229,450
============ ============
</TABLE>
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data summarizes the financial statements
included at the end of this Prospectus. Those financial statements include notes
which the investor should read. The financial statements at the end of this
Prospectus for the years ended December 31, 1998 and 1997 have been audited by
Ernst & Young LLP, independent auditors.
Statement of Operations Data
YEAR ENDED
--------------------------------
December 31, December 31,
1997 1998
-------------- ---------------
Net sales ................................... $2,710,485 $ 2,149,285
Cost of sales ............................... $1,490,928 $ 1,321,826
Write-down of inventory ..................... -- $ 791,378
Gross profit ................................ $1,219,557 $ 36,081
Marketing and selling ....................... $ 864,144 $ 1,017,310
General and administrative .................. $ 313,888 $ 452,294
Research and development .................... $ 56,746 $ 57,268
Total operating expenses .................... $1,234,778 $ 1,526,872
Interest expense ............................ $ 122,862 $ 171,055
Net loss .................................... ($ 138,083) ($ 1,661,846)
Basic and diluted loss per share ............ ($ .11) ($ 1.28)
Weighted average shares outstanding ......... 1,300,000 1,300,000
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is a review of Gen Trak's financial condition and results of
operations for the years ended December 31, 1998 and 1997. This review should be
read together with the financial statements and notes included at the end of
this Prospectus. When used in this Prospectus, the words "anticipate,"
"estimate," "expect," "project," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions including Gen Trak failing to generate
projected revenues. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected.
Introduction
Since its peak of $6.9 million in net sales in 1992, Gen Trak's sales have
declined steadily to $2.1 million in the year ended December 1998. The Company
has had net losses in the last three years. In December of 1996, Gen Trak hired
a new CEO to identify, develop and implement a turn-around program. A major
first step in that turn-around program was the move of Gen Trak's manufacturing
operations from its facility in Pennsylvania to an exclusive contract
manufacturer in North Carolina in September 1998. Gen Trak expects the move will
improve quality and reduce costs in its core business. The change in
manufacturing will allow Gen Trak to add strategically compatible business lines
to broaden Gen Trak's market. Gen Trak also intends to reduce costs by
subleasing the portion of its Pennsylvania headquarters previously devoted to
manufacturing, or subleasing the entire facility and moving to more appropriate
space. Gen Trak reduced costs in the first quarter of 1999 by eliminating some
of its manufacturing workforce. Gen Trak was able to do this because it
subcontracted manufacturing.
Results of Operations
The following table presents selected financial information for the periods
indicated expressed as a percentage of net sales:
Year Ended
--------------------------
12/31/97 12/31/98
------------ -----------
Net sales ........................... 100.0% 100.0%
Cost of sales ....................... 55.0 61.5
Inventory write-down ................ 0.0 36.8
----- -----
Gross profit ..................... 45.0 1.7
Operating Expenses:
Marketing and selling. .............. 31.9 47.3
General and administrative .......... 11.6 21.0
Research and development ............ 2.1 2.7
----- -----
Total operating expenses ......... 45.6 71.0
Loss from operations ................ (0.6) (69.3)
Interest expense .................... 4.5 8.0
----- -----
Net loss ............................ (5.1)% (77.3)%
===== =====
Sales Overview
Gen Trak's net sales are primarily derived from:
o Tissue Typing Serology Products
o SeraScreen Antibody Typing Trays
o Monoclonal Antibody Products
o DNA Products
Net sales decreased in 1998 from the prior year by 21%. The decline is
attributed to lower unit sales volume and lower average unit prices. The
following table presents sales by product category in 1997 and 1998.
14
<PAGE>
Year Ended
-----------------------------
12/31/97 12/31/98
Tissue Typing Serology products ............. $1,685,000 $1,100,000
SeraScreen antibody screening trays ......... 530,000 663,000
Monoclonal antibodies ....................... 267,000 214,000
DNA products ................................ 116,000 16,000
Other ....................................... 112,000 156,000
---------- ----------
Total .................................... $2,710,000 $2,149,000
========== ==========
1998 Compared to 1997
Net Sales and Gross Profit
The following table compares net sales and gross profit for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended
----------------------------- Percentage Decrease
12/31/97 12/31/98 from 1997 to 1998
------------- ------------- --------------------
<S> <C> <C> <C>
Net Sales ........................................ $2,710,485 $2,149,285 (20.7%)
Gross Profit Before Inventory Write Down ......... $1,219,557 $ 827,459 (32.2%)
Gross Profit After Inventory Write Down .......... $1,219,557 $ 36,081 (97.0%)
</TABLE>
Net sales decreased by 20.7% from $2,710,485 in 1997 to $2,149,285 in 1998.
Most of this decrease is attributable to net sales of tissue typing products
which declined $585,000. DNA products also decreased $100,000, and monoclonal
antibodies declined $53,000. The declines were partially offset by a $133,000
increase in sales of SeraScreen antibody screening trays. Unit sales volume
decreased in all product lines (except SeraScreen) primarily due to the lack of
technically competitive products. Gen Trak introduced new contract manufactured
serology products late in the third quarter of 1998 to improve product
performance and competitiveness, and reduce costs.
Expressed as a percentage of sales, gross profit decreased from 45.0% in
1997 to 38.5% in 1998 before an inventory write-down, and to 1.7% after the
inventory write-down in 1998. The inventory write-down occurred in connection
with Gen Trak's decision to subcontract its manufacturing operations to SFP. The
agreement with SFP increased Gen Trak's access to unique raw materials that
allowed Gen Trak to improve the quality and breadth of its product offerings. As
a result of the release of these new products, Gen Trak determined that
approximately $791,000 of inventory on hand at September 30, 1998 was unusable.
The drop in gross margin prior to the inventory write-down is a result of
lower unit sales volume and a change in the sales mix. Before the inventory
write-down, gross profit decreased $392,098 from $1,219,557 in 1997 to $827,459
in 1998, and after the inventory write-down gross profit decreased $1,183,476 to
$36,081 in 1998. As discussed above, this decline in gross profit is the result
of lower sales, the change in the sales mix and the inventory write down.
Operating Expenses
The following table compares operating expenses for the year ended December
31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------
December 31, December 31,
1997 1998
------------------------ -------------------------
% % Percentage Increase
Amount of Sales Amount of Sales from 1997 to 1998
------------ ---------- ------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Marketing & Selling Expense .......... $ 864,144 31.9% $1,017,310 47.3% 17.7%
General & Administrative Expense ..... $ 313,888 11.6% $ 452,294 21.0% 44.1%
Research & Development Expense ....... $ 56,746 2.1% $ 57,268 2.7% 0.9%
---------- ---- ---------- ---- ----
Total Operating Expenses .......... $1,234,778 45.6% $1,526,872 71.0% 23.7%
========== ==== ========== ==== ====
</TABLE>
Operating expenses increased $292,094 or 23.7% from $1,234,778 in 1997 to
$1,526,872 in 1998, and increased as a percentage of sales from 45.6% in 1997 to
71.0% in 1998.
15
<PAGE>
Marketing and selling expense increased 17.7% from $864,144 in 1997 to
$1,017,310 in 1998, and increased as a percentage of sales from 31.9% in 1997 to
47.3% in 1998. The aggregate increase in marketing and selling expense is
primarily attributed to compensation expense related to the issuance of stock
options and an increase in samples shipped, salaries, wages and benefits and
convention and promotion expense in 1998. Compensation expense related to stock
options issued in 1998 was $66,320 for four employees and a consultant. The cost
of samples shipped increased $17,146 or 105.1% from $16,314 in 1997 to $33,460
in 1998. The aggregate increase in samples shipped is attributed to the new SSP
DNA line introduced at the end of 1997 and the sampling of the new manufactured
product in the third quarter of 1998. Salaries, wages and benefits expense
increased $59,639 or 14.5% from $410,576 in 1997 to $470,215 in 1998. The
aggregate increase in salaries, wages and benefits expense is primarily related
to an increase in the compensation of the president in 1998. The expense for
conventions and promotions increased $13,662 from $17,893 in 1997 to $31,555 in
1998. The aggregate increase in conventions and promotions is primarily related
to the increase in costs to attend the annual trade convention. These expenses
were partially offset by a decrease in commission expense of $20,795 from
$21,320 in 1997 to $525 in 1998, due primarily to the expiration of an
international sales commission contract.
General and administrative expense increased 44.1% from $313,888 in 1997 to
$452,294 in 1998 and increased as a percentage of sales from 11.6% in 1997 to
21.0% in 1998. The aggregate increase is largely attributed to compensation
expense related to the issuance of stock options and higher salaries, wages and
benefits and bad debt write-offs. Compensation expense related to stock options
issued in 1998 was $71,850 for one employee, one director and three consultants.
Salaries, wages and benefits increased $40,964 or 29.8% from $137,554 in 1997 to
$178,518 in 1998. The aggregate increase in salaries, wages and benefits expense
is attributed to the hiring of a new controller at the end of June, 1997,
replacing the one that left at the end of February, 1997. Bad debt expense
increased $17,984 from $6,607 in 1997 to $24,591 in 1998 and was due to a
decision that there was a small likelihood to collect $21,000 of an
international account and a $3,591 account which filed for bankruptcy.
Interest Expense
Interest expense increased 39.2% from $122,862 in 1997 to $171,055 in 1998
as a result of interest on the new credit lines and higher interest rates on
bank debt due to the amended business loan agreements. See "Liquidity and
Capital Resources".
Net Loss
Before an inventory write-down, Gen Trak's net loss increased $732,385 from
($138,083) in 1997 to ($870,468) in 1998. After the inventory write-down, the
net loss increased $1,523,763 to ($1,661,846) in 1998. The increased loss is
primarily attributable to the factors discussed above under "Net Sales and Gross
Profit" and "Operating Expenses".
Liquidity and Capital Resources
Gen Trak has financed its operations primarily from bank debt, private
equity financings and cash flow generated from operations. Most recently, Gen
Trak obtained a line of credit from a private investor and obtained financing
from a private placement of unsecured promissory notes.
At December 31, 1998, Gen Trak had a working capital deficit of $664,453.
After the initial use of the proceeds from this Offering to pay debts, Gen Trak
expects to have working capital of approximately $4,586,000. In addition,
liquidity will improve due to the reduction in debt. The reduction in debt
service will increase cash flow by approximately $50,000 per year.
In the fourth quarter of 1998, Gen Trak sold $575,000 principal amount of
unsecured promissory notes to a limited number of "accredited investors" under a
private placement memorandum. The proceeds of that private offering are being
used for working capital and legal, accounting, printing and other expenses in
connection with this Offering. These notes are due and payable in full, without
cash interest, at the closing of this offering. At the closing of this offering,
purchasers of these notes will receive shares of Gen Trak's
16
<PAGE>
common stock with a total value, at the Offering price ($5.00 per share), equal
to the purchaser's investment in these notes. If this offering is not completed
on or prior to September 28, 1999, the notes will be due and payable at that
time, unless extended at the option of the underwriter to no later than December
31, 1999. At that time, interest will be payable in cash, calculated at 12% per
year from the date of issuance to the date of payment.
Gen Trak entered into a $300,000 unsecured line of credit agreement with a
shareholder in September, 1998. See "Certain Transactions." The line of credit
bears interest on the outstanding amount of all advances at 10% per annum,
payable quarterly in arrears, beginning in December, 1998. The line of credit is
subordinate to the bank debt. As of the date of this Prospectus, Gen Trak owed
$300,000 under this line of credit. Advances under the line of credit are due
upon the earlier to occur of the sale of any debt or equity security from which
the Company receives at least $1,000,000 of net proceeds or September 30, 1999.
The debt will be repaid with the proceeds of this Offering.
Gen Trak has a line of credit with a bank in the maximum amount of
$400,000. The loan bears interest at a fluctuating rate equal to the bank's
"National Commercial Rate" plus 2.5%. On March 1, 1999, the interest rate was
10.25%. On March 1, 1999 Gen Trak owed $400,000 on this line of credit. The line
of credit is secured by substantially all of Gen Trak's assets and life
insurance policies on the Chairman of the Board and President. Gen Trak intends
to use the proceeds of this Offering to repay the amount owed on its line of
credit with the bank. The line of credit will still be available after
repayment.
In 1995, Gen Trak obtained a bank term loan of $1,300,000. The balance at
December 31, 1998 was $912,145. This loan bears interest at 11% per annum and is
being repaid over 15 years. This loan is secured by substantially all of Gen
Trak's assets, and life insurance policies on the Chairman of the Board and the
President. The loan is payable in monthly installments through December 2012.
Gen Trak began to outsource its manufacturing operations in September 1998
and expects this change will improve the quality and reduce the cost of its
products. Gen Trak also anticipates improved cash flow as a result of the
ability to better manage inventory levels. Gen Trak believes the anticipated
improved operating cash flow resulting from outsourcing the manufacturing
operations, together with the proceeds of this Offering, will be adequate to
fund its current and anticipated levels of operations for approximately 24
months. Events in Gen Trak's operations may, however, result in accelerated or
unexpected expenditures. Gen Trak is pursuing additional research and
development of new technology to allow a physician to diagnose and treat
infectious disease in the physician's office during a patient's visit. Gen Trak
will require additional financing to expand and complete that research and
development. This financing may not be available on acceptable terms or any
terms. To the extent that Gen Trak raises additional capital by issuing equity
securities, existing stockholders may be diluted. Future investors may be
granted rights superior to those of existing stockholders.
Impact of the Year 2000 Issue
Gen Trak's State of Readiness
Gen Trak has reviewed its critical information systems for Year 2000
compliance. The compliance review revealed that Gen Trak's critical accounting
information systems are Year 2000 compliant because Gen Trak's network hardware
and operating system are "off-the-shelf" products from third parties with Year
2000 compliant versions. Gen Trak has not yet fully addressed the Year 2000
compliance with all of its critical product databases.
Gen Trak is currently engaged in addressing the appropriate modifications
to three date-sensitive analysis programs contained in some of its products. All
of Gen Trak's product which uses these programs now in inventory or in the hands
of customers expires prior to December 31, 1999, and therefore there are no Year
2000 issues with respect to current inventory or products in the hands of
customers.
As part of Gen Trak's Year 2000 compliance review, Gen Trak is in the
process of contacting its primary vendors and large customers to determine the
extent to which Gen Trak is vulnerable to those third parties'
17
<PAGE>
failure to remediate their Year 2000 compliance issues. There can be no
guarantee that the systems of other companies on which Gen Trak's business
relies will be timely converted. Failure to convert by another company could
have a material adverse effect on Gen Trak and its operations.
The Cost to Address Gen Trak's Year 2000 Issues
Gen Trak estimates that the cost of its Year 2000 compliance issues will be
less than $10,000 and is not expected to be material to Gen Trak's financial
position, cash flow or results of operations.
The Risks Associated with Gen Trak's Year 2000 Issues
Gen Trak believes that the risks associated with Year 2000 issues primarily
relate to the failure of third parties upon whom Gen Trak's business relies to
timely remediate their Year 2000 issues. Failure by third parties to timely
remediate their Year 2000 issues could result in disruptions in Gen Trak's
supply of parts and materials, late, missed, or unapplied payments, temporary
disruptions in order processing and other general problems related to Gen Trak's
daily operations. While Gen Trak believes its Year 2000 compliance review
procedures will adequately address Gen Trak's internal Year 2000 issues, until
Gen Trak receives responses from its significant vendors and customers, the
overall risks associated with the Year 2000 issue will remain difficult to
accurately describe and quantify, and there can be no guarantee that the Year
2000 issue will not have a material adverse effect on Gen Trak's business,
operating results and financial position.
Gen Trak's Contingency Plan
Gen Trak has not, to date, implemented a Year 2000 contingency plan. It is
Gen Trak's intention to devote whatever resources are necessary to assure Year
2000 compliance issues are resolved. However, Gen Trak will develop and
implement a contingency plan by the end of the first half of 1999 in the event
Gen Trak's Year 2000 compliance initiatives, particularly those that relate to
third parties, fall behind schedule.
18
<PAGE>
GEN TRAK'S BUSINESS
Background
Gen Trak designs, develops and sells test kits for genetic tests. The main
use of these test kits is to determine compatibility between potential
transplant recipients and donor organs or bone marrow. They are also used for
paternity testing and assessment of an individual's susceptibility to disease.
Gen Trak's products use very specific genetic markers known as HLA (Human
Leukocyte Antigen) antigens found on the surface of human cells. Gen Trak's
current products are subject to regulation by the Food and Drug Administration.
Gen Trak's strategy is to continue to develop diagnostic tools useful in
testing for compatability between patients and donor organs and bone marrow. The
strategy also incudes development of tools useful in other areas of medicine
which use similar technology. Gen Trak also intends to exploit its new AMPRO
Technology. AMPRO Technology is a detection and measurement system that could
allow a physician to diagnose and treat infectious disease in the physician's
office during the patient visit. Gen Trak plans to use this technology to
develop new diagnostic products that may help physicians detect and treat
infectious disease and monitor patient compliance with drug regimens within the
hospital, clinic or office setting during patient visits. Gen Trak plans to
develop this broad product line by establishing relationships with collaborative
partners.
Industry Overview
Overview of HLA Diagnostics Industry. Gen Trak's current products are sold
in the HLA diagnostic products market. Products in this market include test
kits, raw materials, equipment and supplies necessary for various tests. The
primary use of the products in this market is to determine the compatibility
between potential transplant patients and donor organs. These tests are critical
to determine whether a donor's organ or bone marrow transplant may be rejected
by the recipient's immune system or may attack the recipient's immune system.
Similar tests, raw materials, equipment and supplies are used for identity
testing, family studies to predict the likelihood of developing certain diseases
and paternity testing. Most of the products in this market are the test kits and
the raw materials used within the test kits.
There are two major markets for transplant testing. The first is screening
of potential donors before transplant. This consists of high volume testing to
classify and record each potential donor's HLA antigens which may cause a
transplant recipient to reject the organ. The other is testing at transplant
centers to confirm donor/recipient compatibility and to diagnose and manage
organ rejection and other health issues faced by transplant recipients.
Based on Gen Trak's compilation of publicly available information, Gen Trak
believes that the annual HLA diagnostics market place is approximately $90
million, with the U.S. representing approximately 65% of the market. Most HLA
testing is currently serology based. Serology involves evaluating human cells in
blood serum. Serology based typing is now used to obtain a general description
of an individual's antigens, while a more precise examination is provided by DNA
based typing. Approximately 75% of the market is in serology and 25% is in
DNA-based typing.
Commercial suppliers like Gen Trak represent about 70% of the HLA testing
product market. Approximately 30% of the market is represented by individual
testing laboratories that make their own HLA tests. These estimates have been
prepared by Gen Trak based on publicly available information. Gen Trak believes
that there are growth opportunities in the U.S. and European markets. Despite
some cultural biases against transplants in some Asian and Pacific Rim
countries, Gen Trak believes these markets have not been fully penetrated and
the market for its products will grow in those areas. Japan's first heart
transplant in thirty years was recently performed. Gen Trak believes that this
will lead to significant increases in transplant procedures in Japan.
Currently there are approximately 80,000 transplant candidates registered
on waiting lists in approximately 500 transplant centers throughout North
America and Europe. At any given time, approximately 70% of these patients are
waiting for kidney transplants. The others are waiting for liver, heart,
heart-lung, bowel or pancreas transplants. Each year, approximately 50,000 new
patients receive donated organs. In order
19
<PAGE>
to prevent rejection of transplanted organs, recipients must begin a life-long
therapy regimen of rejection preventing drugs immediately upon receiving a
donated organ. They also begin an on-going program of tests to monitor for the
formation of new antibodies which could indicate the beginning of organ
rejection.
A more recent addition to the transplant industry is bone marrow transplant
procedures, which are used in cases of leukemia and certain cancers and other
diseases. Bone marrow transplants require physicians to manage not only the risk
of donated bone marrow being rejected, but also the risk that donated bone
marrow may attack the immune system of the recipient. Nearly 30,000 bone marrow
transplants are performed annually in the U.S. alone. However, because the
sensitivity requirements for matching are even more rigorous than for solid
organs such as kidneys, a National Marrow Donor Program has been developed to
build an extensive database of prospective donors. Each year this program
registers between 200,000 and 250,000 new potential donors into the database. A
similar program exists in Europe.
New Trends in Clinical Diagnostics Industry. The industry of products used
to diagnose disease in the clinical setting is composed of two general
sub-markets, in vitro diagnostic (IVD) and the electromedical diagnostic
markets. In vitro diagnostic procedures are generally any diagnostic procedures
performed by placing the patient's blood, saliva or other specimen in a test
tube or other environment outside of the patient's body.
Each sub-market utilizes a different method of diagnosis. Electromedical
diagnoses usually involves the use of equipment, such as electro cardiograms,
thermometers and X-rays. This equipment is typically manipulated directly by the
physician or technician on the patient during a patient visit and requires
physician or technician analysis of test results. By contrast, the IVD sector
performs diagnostic procedures with patient blood and saliva in the laboratory.
IVD testing requires laboratories and technicians to manipulate patient blood
and saliva specimens and develop reactions. Electromedical diagnostic products
deliver quick test results. IVD diagnostic products are considered more labor
intensive and normally deliver test results only after a patient has left the
hospital, clinic, physician's office or laboratory. Gen Trak's current products
are used by laboratories in the IVD process.
Recently, the in vitro diagnostic methods have become more automated. As a
result, there is now an emphasis on the use of diagnostic equipment within the
IVD sector. The technologies and methods of the IVD and electromedical
diagnostic markets are becoming similar. The industry has shifted its focus
towards developing diagnostic technology for tests done during a patient visit
to a physician's office. In the industry this is known as the near-to-patient
market. Gen Trak anticipates developing its new AMPRO Technology into products
useful in the near-to-patient market.
In the near-to-patient market, diagnostic technologies allow physicians to
take and analyze patient specimens of blood or saliva, detect the presence or
absence of infectious disease, and prescribe appropriate drug regimens during
the patient's visit to the hospital, clinic or physician office. Traditional
methods of diagnosing infectious disease required that a medical laboratory or
physician draw a patient specimen. The laboratory could then test the specimen
and generate a diagnostic report. This report was typically generated only after
the patient departed from the physician's office or the laboratory. The
near-to-patient technology renders certain medical laboratory technology
obsolete by bringing diagnostic tools to the hospital or physician's office.
The near-to-patient market is changing the marketing focus of the industry.
The diagnostics industry traditionally marketed the bulk of IVD diagnostic
products to laboratory directors. In the near-to-patient market, laboratory
directors are no longer considered the customers. This emerging customer base
includes physicians motivated to maintain control over their medical practices
and stop relying on outside sources for diagnostic procuedures. The new customer
base also includes patients demanding quick and accurate test results at a
reduced cost. As this new customer base flourishes, the diagnostics industry has
been forced to review its current marketing strategy, shift its focus towards
the new customer base and develop diagnostic products to be marketed in the
near-to-patient market. Gen Trak has developed its new AMPRO technology to serve
the near-to-patient market. While no products have yet been developed from AMPRO
technology, Gen Trak believes this technology can be developed into products
which will enable physicians to make diagnoses in their offices during a patient
visit.
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<PAGE>
Description of the Company's Products and Their Uses
Gen Trak currently has four types of products:
o Serology Products
o Cell Separation Products
o DNA Typing Products
o Monoclonal Antibodies
Serology is the science of identifying cells or antibodies in a patient's
blood. Antibodies are molecules formed in a patient's blood as a reaction to
foreign matter in the person's body systems. Gen Trak's products are used by
laboratories in the serology process. DNA testing looks at the DNA within a cell
and provides a more precise examination of the cell structure. Cell
separation/preparation products are used to separate white cells from whole
blood before the serology or DNA testing can be performed. Monoclonal antibodies
are used to screen blood for certain abnormalities. The following describes the
process of organ transplantation, which is the primary circumstance in which Gen
Trak's current products are used.
Organ Transplantation. Organ transplantation can save or improve the lives
of patients with organ failures for whom there are few alternative treatments.
Transplantation involves surgically replacing the failed organ of a transplant
recipient with a good organ from a donor. Because the success of a transplant
depends on the degree of compatibility between the organ donor and the
recipient, a typical transplant candidate must wait on a national computerized
waiting list until a compatible organ can be found. HLA testing is used in the
transplant market to match potential bone marrow and organ donors to recipients.
In addition to being a life-saving and life-enhancing procedure,
transplantation can be cost-effective as well. For example, over a ten year
period the cost of a kidney transplant is generally less than the cost of
dialysis. However, transplantation is still very costly, due in substantial part
to the costs of lifetime therapy to suppress the immune system's attack on the
transplant, and the side effects from that therapy, as well as the costs of
treating rejection and infection episodes. Use of HLA testing may result in
substantial cost savings to hospitals and insurance plans by increasing the
chance of a proper transplant match and therefore reducing the probability of
the need for additional transplants or expensive drug therapies to prevent
rejection.
The Transplant Immune System Response. The immune system functions to
defend the body from invading bacteria, viruses and other foreign matter,
including donor organs or bone marrow. When the body is invaded by foreign
matter, certain components of the immune system recognize the foreign materials
and generate antibodies that identify, target and eliminate the foreign matter.
The immune system of the transplant recipient identifies antigens (HLA
molecules) present on the surface of the white blood cells contained in the
donor organ or bone marrow, as foreign matter which must be destroyed. This can
result in organ rejection.
The degree of rejection is largely dependent upon the degree of
compatibility between the transplant recipient and donor antigens. Antigen
matching between donor and transplant recipient can be determined by examination
and comparison of genetic markers contained in the antigens of both the
transplant recipient and donor. Even with the use of drugs that prevent
rejection by suppressing the immune system's response, organ or bone marrow
rejection occurs quite frequently, and the chronic use of these drugs can lead
to serious side effects. To increase the likelihood of successful organ or bone
marrow transplantation, it is critical to conduct accurate genetic testing and
create an antigen profile of the potential transplant recipient and donor prior
to transplantation to confirm compatibility.
It is also necessary to continuously monitor transplant patients for
newly-formed antibodies that attack donor antigens and cause organ or bone
marrow rejection.
Serology-based typing products. Gen Trak sells a broad line of serology
based tissue typing trays. These products are used to determine the
compatibility between potential transplant recipients and donor organs or bone
marrow. This compatibility will help predict the likelihood that the recipient's
immune system will recognize the donor organ or bone marrow as foreign and seek
to destroy it. Laboratories must use multiple trays for accurate results. The
process must be repeated with each potential donor and donor organ.
21
<PAGE>
Each serology based tissue typing tray contains antibodies placed in small
quantities (approximately one microliter) in separate wells, each tray holding
from 60 to 72 different antibodies. A small sample of a patient's blood is drawn
and sent to an HLA laboratory. An HLA laboratory technician extracts white blood
cells from the patient's blood sample, and places the cells in each well of Gen
Trak's trays. Other materials are added to this mixture, and the reaction
created by the interaction of the individual's white blood cells and the
materials (anti-sera) already contained in the wells is analyzed by the
technician.
Gen Trak also sells antibody screening trays primarily used to monitor the
antibodies of potential transplant recipients for change and the antibodies of
patients who have received transplants to determine the degree of rejection.
These products are also used to determine whether blood transfusion patients
have antibodies which will reject the new blood.
DNA typing products. DNA typing trays can provide a more exact definition
of a person's antigens than serology. While serology based methods examine
antigens present on the surface of a person's white blood cells, DNA testing
examines DNA extracted from the person's white blood cells. The more exact
definition resolves ambiguities which can be left by serology based testing.
This can lead to more accurate compatibility determinations
Each of Gen Trak's DNA typing trays is made of plastic, with a varying
number of wells based upon the technician's needs. The HLA laboratory technician
first extracts DNA from white blood cells in a patient's blood and places a
portion of the DNA sample in each of the wells. The wells are preloaded with
substances called primer pairs that cause the patient's DNA sample to rapidly
multiply. The HLA laboratory technician compares the patient's DNA sample to the
DNA control to confirm the patient's genetic profile.
The DNA can be tested using two formats, known in the industry as SSO and
SSP. Gen Trak markets a tray compatible with the SSO format under the CQuentials
brand name. Gen Trak also markets a tray compatible with the SSP format under
the GenYsys brand name. The CQuentials products are manufactured using Gen
Trak's own technology. The GenYsys products are obtained from a third party.
Cell separation/preparation products. White cells carrying HLA antigens
must first be separated from whole blood before the processes described above
can begin. Gen Trak has recently developed magnetic beads that make the
separation process faster.
Use of these magnetic beads is a fairly recent innovation over older, more
tedious separation techniques. Many HLA labs, however, continue to use the older
separation techniques due to perceived cost savings. Gen Trak believes, however,
that demand for these magnetic bead separation products will increase because
their use will increase laboratories' productivity and reduce laboratories'
overall costs.
Development of AMPRO -- Gen Trak's New Technology
Gen Trak has developed the basic technology for a detection and measurement
system that could allow a physician to diagnose infectious disease in the
physician's office during the patient visit. When the human body is invaded by
bacteria or viruses, the immune system generates antibodies to combat the
infection. Each virus or infection triggers the generation of a unique set of
antibodies. To diagnose infectious disease, the physician or laboratory
technician seeks to confirm the presence or absence of these unique antibodies
in a sample of a patient's blood or saliva. Gen Trak's new technology (the
"AMPRO Technology") may simplify the analysis of patient blood or saliva samples
by amplifying or increasing the signal from the unique antibodies. Amplification
will allow the laboratory technician or physician to more quickly and easily
identify the virus or bacteria and diagnose and treat the illness. Gen Trak
expects that AMPRO Technology could reduce costs and produce accurate and
quantifiable results by isolating patient samples immediately after taking the
samples from the patients. Using patient samples in this manner will allow tests
to be performed with pure and uncontaminated reagents This process will allow
the physician to detect a very small number of molecules in a sample.
Gen Trak is currently pursuing potential development partners to reduce
this technology to practice. Gen Trak currently has no agreements or
understandings with potential partners. Gen Trak has completed internal plans
for licensing AMPRO technology to other companies for use in products they
produce. A third patent for AMPRO was issued on February 9, 1999, and Gen Trak
began aggressively seeking partners at that point.
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<PAGE>
Commercialization Strategy
Gen Trak is evaluating potential collaborative relationships with corporate
and other partners where such relationships may complement and expand Gen Trak's
research, development, sales and marketing capabilities. Gen Trak's business
strategy includes the formation of marketing alliances to market Gen Trak's
products. Gen Trak also plans to maintain a long-term contract manufacturing
agreement for its product supply with SFP Research Inc., and possibly enter into
other contract manufacturing agreements as it nears completion of its
development of other potential products.
Marketing. Gen Trak distributes its products worldwide with about 80% of
sales in the U.S. In the U.S., Gen Trak uses a small direct sales organization
to target high-volume transplant hospitals. Gen Trak uses local distributors in
foreign countries. These distributors generally have healthcare market expertise
and contacts within their country's health systems.
Gen Trak's marketing strategy for AMPRO Technology will include developing
products with different menus of tests for different areas of medicine, such as
hematology, respiratory infections, gastrointestinal infections, diseases of
aging, genetics and cancer. The users of the products in each of these areas of
medicine will select from menus for different diagnostic technologies, such as
chemistry, microbiology, immunology and cytology. Gen Trak does not license
rights to its current technology. However, because of the cost of developing new
products, Gen Trak plans on marketing Ampro products with marketing partners who
have market presence in various testing areas.
Gen Trak is not dependent on any one customer or any small group of
customers. No customer accounted for more than 5% of sales in 1998.
Manufacturing. Before September, 1998, Gen Trak's manufacturing for
serology products was carried out in its Plymouth Meeting, Pennsylvania
facility. In September, 1998, Gen Trak entered into an exclusive contract
manufacturing agreement with SFP Research Inc. of Liberty, North Carolina for
its serology-based products. Gen Trak's GenYsys DNA products are made by
BioSynthesis, Inc. of Lewisville, Texas. Gen Trak's magnetic bead cell
separation product line will be manufactured by Gen Trak in-house. The agreement
with SFP will provide opportunities to broaden access to unique raw materials,
reduce costs and enhance product development efforts.
Gen Trak's raw materials are the plastic trays and the sera which is put in
the tray wells. The trays are standard laboratory equipment and can be obtained
from several commercial suppliers. Sera comes from hospitals and laboratories
that draw blood from people. Gen Trak obtains the sera directly from hospitals
or laboratories and indirectly through distributors. Most of the sera required
can be obained from several sources, but some are more unique and is available
from a limited number of sources.
Gen Trak will likely rely on partners who have manufacturing capabilities
to manufacture any new products. Gen Trak is now dependent on and will depend
upon third-parties to perform their obligations effectively and on a timely
basis. Failure of other parties to perform may delay development or submission
of products for regulatory approval, or otherwise impair Gen Trak's competitive
position. In addition, the manufacturing of product candidates involves a number
of technical steps and requires meeting stringent quality control specifications
imposed by government regulatory bodies and by Gen Trak itself. Such products
can only be manufactured in facilities approved by the applicable regulatory
authorities. Because of these and other factors, Gen Trak may not be able to
quickly and efficiently replace its manufacturing capacity in the event that its
manufacturers are unable to manufacture their products.
Competition
The principal markets for Gen Trak's existing and proposed products are
very broad and competitive. Gen Trak is in direct competition with many
companies having far greater financial and other resources. Among Gen Trak's
major competitors are One Lambda, Inc., PelFreez, Inc., Dynal, Inc., BioTest
Diagnostics Corp., Murex Diagnostics, Inc. and Sangstadt Medical Corp. Of the
competitiors listed, all are privately-held with the exception of Sangstadt
Medical Corp. Murex Diagnostics, Inc. became a subsidiary of Abbott
Laboratories in March, 1998.
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<PAGE>
Government Regulation
All aspects of Gen Trak's business are subject to extensive regulation by
the Food and Drug Administration and other domestic and foreign regulatory
authorities. Gen Trak is also subject to various federal, state and local laws
and regulations relating to safe working conditions, and the use and disposal of
hazardous or potentially hazardous substances used in Gen Trak's operations.
Federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising, promotion, import and export of Gen Trak's products. The
studies and trials required before Gen Trak can even ask the Food and Drug
Administration for approval and the regulatory approval process typically take
years and require considerable expense. Additional government regulation may be
established that could prevent or delay regulatory approval of Gen Trak's
product candidates. Delays or rejections in obtaining regulatory approvals would
adversely affect Gen Trak's ability to receive product revenues or royalties. If
regulatory approval of a product candidate is granted, the approval may include
significant limitations on the indicated uses for which the product may be
marketed.
The Food and Drug Administration and other regulatory authorities require
that the safety and effectiveness of certain of Gen Trak's products be supported
through adequate and well-controlled clinical trials. If the results of pivotal
clinical trials do not establish the safety and effectiveness of Gen Trak's
produce candidates to the satisfaction of the regulatory authorities, Gen Trak
will not receive the approvals necessary to market its proposed products.
In addition, Gen Trak's products must meet performance requirements of the
American Society of Histocompatibility and Immunogenetics as well as labeling
laws.
Gen Trak has received pre-market approvals from the Food and Drug
Administration, as described below, for its current products. The United States
Department of Health and Human Services has issued a renewal Certificate to
Foreign Government that allows Gen Trak to export certain of its serology and
DNA products to foreign countries.
Food and Drug Administration Regulation -- Approval of Diagnostic and
Monitoring Products. Gen Trak's current products and product candidates are
regulated as medical devices by the Food and Drug Administration. The products
must be cleared by the Food and Drug Administration prior to commercial
distribution. New medical devices are generally introduced to the market based
on a pre-market notification or "510(k)"submission to the Food and Drug
Administration. In this process, the sponsor establishes that the proposed
device is "substantially equivalent" to certain devices already legally
marketed. The claim of substantial equivalence will generally have to be
supported by various types of data and materials including, in some instances,
preclinical and/or clinical test results.
The sponsor may not commercially distribute the device in the U.S. until
the Food and Drug Administration issues an order stating that the product has
met the substantial equivalence test. The order may be sent within 90 days of
submission but could take significantly longer. The Food and Drug Administration
may, however, determine that the proposed device is not substantially
equivalent, or may require further information, such as additional test data.
Such determination or request for additional information could delay Gen Trak's
market introduction of its products and product candidates by several quarters.
This could have a material adverse effect on Gen Trak's business, financial
condition and results of operations.
If the sponsor of a pre-market notification cannot obtain a Food and Drug
Administration order declaring substantial equivalence, the sponsor will have to
submit a pre-market approval application. A pre-market approval application will
generally have to be supported by extensive data, including preclinical and
clinical trial data, to prove the safety and efficacy of the device. Although,
by statute, the Food and Drug Administration has 180 days to review a pre-market
approval application once it has been accepted for filing, pre-market approval
application reviews more often involve a significantly longer time period,
usually 12 to 24 months or longer from the date of filing.
Each clinical trial must be approved by and conducted under the oversight
of an independent review board and with patient informed consent. The process
can cause further delays in bringing a product to market. There can be no
assurance that any of Gen Trak's product candidates will receive regulatory
approvals for commercial distribution.
Prior to any approval of Gen Trak's products for marketing, all
manufacturing facilities must pass the Food and Drug Administration preapproval
inspections.
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<PAGE>
Food and Drug Administration Regulation -- Post-Approval Requirements. Gen
Trak, its products and the facilities manufacturing Gen Trak's products are
subject to continual review and periodic inspection. Each U.S. device
manufacturing facility must be registered with the Food and Drug Administration.
Domestic manufacturing plants are subject to biennial inspections by the Food
and Drug Administration. Domestic facilities must comply with the Food and Drug
Administration's good manufacturing procedures regulations. Foreign
manufacturing establishments must comply with the Food and Drug Administration's
good manufacturing procedures regulations and are subject to period inspection
by the Food and Drug Administration or by regulatory authorities in those
countries under reciprocal agreements with the Food and Drug Administration. In
complying with good manufacturing procedures regulations, manufacturers must
expend funds, time and effort in the area of product and quality control to
ensure full technical compliance. The Food and Drug Administration stringently
applies regulatory standards to manufacturing.
Gen Trak's labeling and promotional activities are regulated by the Food
and Drug Administration. In certain instances these activities may be regulated
by the Federal Trade Commission. Gen Trak must also report certain adverse
events involving its drugs and devices to the Food and Drug Administration under
regulations issued by the Food and Drug Administration. The Food and Drug
Administration can impose other post-marketing controls on Gen Trak and its
products, and has expanded authority in this regard for certain products.
Failure to comply with applicable regulatory requirements can have
significant negative effects for Gen Trak. These could include warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant approvals,
pre-market clearance or pre-market approval, withdrawal of approvals and
criminal prosecution of Gen Trak and its employees.
Environmental Regulation
In addition to laws and regulations faced by most manufacturing busineses,
Gen Trak must comply with strict regulations regarding handling and disposal of
biological specimens. Gen Trak believes that it has complied with these laws and
regulations. Gen Trak has never been required to take any action to correct
noncompliance. Gen Trak believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations. However, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident, Gen
Trak could be held liable for any damages that result and any such liability
could exceed the resources of Gen Trak.
Patents and Proprietary Technology
Gen Trak's ability to profitably commercialize its potential products will
depend, in part, upon its ability to obtain patents, enforce those patents,
preserve trade secrets, and operate without infringing upon the proprietary
rights of third parties. Gen Trak has been granted four patents:
<TABLE>
<CAPTION>
Patent No. Issued Name and Use
- ----------------------- ----------- --------------------------------------------------------
<S> <C> <C>
a. 5,573,914 .......... 11/12/96 DNA/RNA target and signal Amplification for use with
Gen Trak's AMPRO technology.
b. 5,645,990 .......... 07/08/97 Identification and Paternity Determination by Detecting
Presence or Absence of Multiple Nucleic Acid Sequences,
used in paternity testing.
c. 5,723,297 .......... 03/03/98 Process for Determining an Antibody Using a Nucleic
Acid Amplification Probe for use with
Gen Trak's AMPRO technology.
d. 5,869,260 .......... 02/09/99 Nucleic Acid-Antibody Constructs and Their Use in
Antigen Detection for use with Gen Trak's AMPRO
technology.
</TABLE>
Until Gen Trak's AMPRO Technology has been fully developed, Gen Trak cannot
be certain if it can manufacture or commercialize any products based on this
technology without infringing patent or other proprietary rights of third
parties.
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<PAGE>
Gen Trak believes patent protection is important. However, patents may not
necessarily provide protection that has commercial significance. Portions of
these patents may be found invalid or unenforceable by a court. In addition, by
reviewing Gen Trak's publicly available patents, a competitor could potentially
devise a way to achieve the same result with modifications to the technology
which would not infringe on Gen Trak's patents.
Gen Trak also relies on trade secrets and proprietary know-how which its
seeks to protect, in part, by confidentiality agreements with its employees and
consultants. These agreements may be breached, and Gen Trak may not have
adequate remedies for any breach. Gen Trak's trade secrets may become known or
independently developed by competitors. Trade secrets do not protect against a
competitor's independent development of the same technology. Gen Trak intends to
register the names of its products on the federal trademark register. However,
there can be no assurance that any trademark registration will be granted or not
challenged by competitors.
Employees
As of March 1, 1999, Gen Trak has 9 full-time employees and 2 part-time
employees. Of these, five are employed in executive and administrative
positions, four are employed in marketing and sales and 2 are employed in
manufacturing.
Facilities
Gen Trak's headquarters are located in Plymouth Meeting, Pennsylvania.
Floor space in that facility is approximately 12,832 square feet, including
offices, manufacturing space, storage areas and laboratories. The Plymouth
Meeting facility serves as the principal site for process development, quality
assurance and control, and regulatory affairs. The lease for this building space
expires on March 1, 2000 and may be renewed for subsequent years. Since Gen Trak
has out-sourced most of its manufacturing, Gen Trak intends to reduce costs by
either subletting the manufacturing space at the current facility or subletting
the entire facility and moving to more appropriate space. Gen Trak does not
anticipate any difficulty in finding appropriate space now or as it expands.
Additional Information about Gen Trak
Gen Trak has filed a Registration Statement under the Securities Act of
1933, covering the securities offered by this Prospectus, with the United States
Securities and Exchange Commission (SEC), 450 Fifth Street, N.W., Washington,
D.C. 20549. This Prospectus, which is a part of the Registration Statement, does
not contain all of the information contained in the Registration Statement and
the exhibits and schedules to the Registration Statement. For further
information with respect to Gen Trak and the securities offered by this
Prospectus, reference is made to the Registration Statement.
After the effective date of the registration statement, Gen Trak is
required to file periodic reports with the Securities and Exchange Commission.
Copies of materials filed by Gen Trak with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet Site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the
SEC's Internet Site is http://www.sec.gov. Gen Trak expects to file its required
reports and other information electronically with the SEC.
After the completion of this Offering, Gen Trak will provide its
stockholders with annual reports containing financial statements audited and
reported on by independent auditors and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
Stockholders can obtain the most recent copies of these reports by sending a
written request to Gen Trak's shareholder relations officer at Gen Trak's
principal executive offices located at 5100 Campus Drive, Plymouth Meeting,
Pennsylvania 19462.
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MANAGEMENT
Directors and Executive Officers
The following table lists the names and positions of the Directors,
Executive Officers and key employees of Gen Trak:
<TABLE>
<CAPTION>
Name Age Position
---- ---- --------
<S> <C> <C>
Arthur V. Boyce, Jr. ............... 50 President, Chief Executive Officer and Director
George L. Bird, Jr. ................ 68 Chairman of the Board of Directors, Secretary and
Director
Harry A. Arena ..................... 49 Director
Gerald Hamburg ..................... 62 Director
Dr. Gerhard Ertingshausen .......... 62 Director
Donald O. Nichols .................. 43 Vice President, Treasurer, Controller and Chief
Financial Officer
Patricia C. McGrath ................ 48 Director of Marketing and Technical Services
</TABLE>
All Directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of Gen Trak are appointed by and serve at the discretion of the Board of
Directors. Gen Trak's Board will consist of at least five (5) directors, at
least two (2) of whom shall be "independent." The Underwriter will also be
entitled to have an observer at all Board meetings.
The following sets forth biographical information concerning Gen Trak's
Directors and Executive Officers for at least the past five years. The
President, Controller and Director of Marketing are full time employees of Gen
Trak. Mr. Bird, Gen Trak's Chairman of the Board, is not employed full time by
Gen Trak but does dedicate all of his working time to Gen Trak's affairs. Prior
to June, 1990, Mr. Bird was a full time employee of Gen Trak.
Arthur V. Boyce, Jr. has served as President, Chief Executive Officer and
director of Gen Trak since December, 1996. Previously, he was Vice President of
Marketing and Sales for ActiMed Laboratories, Inc. in Burlington, New Jersey.
ActiMed is a privately held start-up medical products company with venture
capital backing. Prior to that, Mr. Boyce was Vice President of Marketing for
Kendall-Futuro Company in Cincinnati, Ohio, a consumer home health care product
manufacturing and marketing company owned by Colgate Palmolive. Mr. Boyce
earned a Bachelor of Arts from the University of Connecticut in 1970.
George L. Bird, Jr. has served as Chairman of the Board and director since
November, 1986. He has served as Acting Secretary since December, 1996.
Previously, he was Chief Executive Officer from November, 1986 until July, 1992
and President from November, 1986 until June, 1990. He has been actively
involved in the AMPRO project from 1992 through the present. Prior to the
founding of Gen Trak, he was a division president at Smith Kline Beacham
Corporation. Mr. Bird earned a Bachelor of Science in Electrical Engineering
from the Milwaukee School of Engineering in 1957.
Harry A. Arena has served as a director since November, 1986. Prior to
January, 1999, he also served as the Company's Treasurer. He is currently the
Managing Partner of Arena, Snyder, Rothschild and Theis, an accounting and
financial consulting firm in Exton, Pennsylvania. Mr. Arena earned a Bachelor of
Arts from Holy Cross College in 1971 and an MBA from Stanford University
Graduate School of Business in 1974.
Gerald Hamburg has served as director since March, 1992. He is currently
the Senior Attorney of Hamburg, Rubin, Mullin, Maxwell & Lupin, a law firm in
Lansdale, Pennsylvania. Mr. Hamburg earned a Bachelor of Science from the
Wharton School of the University of Pennsylvania in 1957 and his J.D. from
Stanford University Law School in 1960.
Dr. Gerhard Ertingshausen joined the Company's Board of Directors at the
end of December, 1998. He is currently Vice President at Molloy Associates, a
consulting company in Princeton NJ. He founded Actimed
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Laboratories in 1991 and was that Company's CEO through 1996. Prior to starting
Actimed, Dr. Ertingshausen was the CEO of EM Diagnostic Systems, a clinical
laboratory diagnostic and reagent company which is a subsidiary of E. Merck
Darmstadt. Dr. Ertingshausen holds a Ph.D. in chemistry from the Technical
University in Berlin and an MBA from Fordham University.
Donald O. Nichols has been Controller of Gen Trak since June, 1997, Vice
President since September, 1998 and Treasurer and Chief Financial Officer since
January, 1999. Previously, he was Controller of MEECO, Inc., a privately held
instrument manufacturer in Warrington, Pennsylvania from February 1995 to June
1997. Prior to that, he was the Accounting Manager for Phoenix Technologies,
Inc. a privately held multi-subsidiary manufacturing, sales and service company
in Valley Forge, Pennsylvania. Mr. Nichols is a CPA and earned a Bachelor of
Arts from Glassboro State College in 1978.
Patricia C. McGrath has been with Gen Trak since November, 1990. She served
as HLA Product manager, Director of Technical Services and Director of DNA
Operations prior to her current position as Director of Marketing and Technical
Services with Gen Trak. Ms. McGrath earned an AAS from Maria College in 1965 and
a Bachelors of Arts in Biology from the College of Saint Rose in 1972.
Limited Liability and Indemnification of Directors
In accordance with the Pennsylvania Business Corporation Law, Gen Trak has
included a provision in its By-Laws to limit the personal liability of its
directors for violations of their fiduciary duty. The provision eliminates
directors liability to Gen Trak or its stockholders for monetary damages, except
(i) for any breach of the director's duty of loyalty to Gen Trak or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which a director derived an improper personal benefit.
Under Gen Trak's By Laws, Gen Trak will pay any liability, attorney's fees
or other costs incurred by a director if he becomes involved in any lawsuit or
other proceeding because he was a director of Gen Trak or served Gen Trak in
another capacity. Gen Trak will not pay these liabilities and expenses, however,
if the Director did not act in good faith in any manner he reasonably believed
to be in the best interest of Gen Trak.
EXECUTIVE COMPENSATION
Compensation of Executive Officers and Consultants
The following table presents all compensation paid or accrued by Gen Trak
for services of Arthur V. Boyce, Jr., Gen Trak's President and Chief Executive
Officer, and Donald O. Nichols, Gen Trak's Vice President, Controller and
Treasurer for the fiscal years ended December 31, 1997 and 1998. Mr. Nichols
began his employment with Gen Trak in June, 1997, and the table presents his
actual compensation for the portion of 1997 for which he was with Gen Trak.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation All Other Compensation
-------------------------------------- -----------------------
Other Annual
Name and Principal Compensation
Position Year Salary ($) Bonus ($)
- ---------------------------- ------ ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Arthur Boyce, Jr. .......... 1998 $166,000 -0- -0- -0-
President and CEO .......... 1997 $130,000 -0- -0- -0-
Donald O. Nichols,
Vice President and ......... 1998 $ 75,000 -0- -0- -0-
Controller ................ 1997 $ 33,758 -0- -0- -0-
</TABLE>
Mr. Bird, Gen Trak's Chairman, has a Consulting Agreement with Gen Trak.
Under this Consulting Agreement, Mr. Bird receives a $2,000 monthly fee. In
1997, 1998 and through the date of this Prospectus, the fee was not paid but
was accrued. On the date of this Prospectus, approximately $60,000 was owed to
Mr. Bird for consulting fees.
28
<PAGE>
Compensation of Directors
Directors are reimbursed for expenses incurred in connection with each
board meeting attended. Board members have a right to a "success fee" if
certain transactions occur. See "Transactional Success Fee Arrangements",
below.
Employment Arrangements
Gen Trak entered into an employment agreement with Arthur V. Boyce, Jr.,
its President and Chief Executive Officer, on November 26, 1996. The Agreement
originally provided that Mr. Boyce would receive initial base compensation of
$130,000, to be reviewed annually by the Board of Directors which may make
appropriate adjustments. Mr. Boyce was entitled to a first year bonus in the
amount of up to 30% of his base compensation if certain performance milestones
were achieved. These milestones were not achieved in 1997. Under an addendum to
Mr. Boyce's Employment Agreement, his salary was increased to $166,000 as of
January 1, 1998. Through the date of this Prospectus, $30,000 of his salary has
been be deferred. Amounts may be deferred until the earlier of (1) December 31,
1999, (2) Mr. Boyce's termination of employment with Gen Trak for any reason,
(3) Gen Trak becoming "public." Gen Trak intends to pay Mr. Boyce all deferred
salary upon closing of this Offering.
The addendum also provides that Mr. Boyce will be entitled to a success
fee in the event of certain transactions. See "Transactional Success Fee
Arrangements" below.
1998 Stock Option Plan
On September 30, 1998, Gen Trak's Board of Directors approved the 1998
Stock Option Plan (the "Plan"), and reserved 100,000 shares of Common Stock for
issuance upon exercise of options granted under the Plan. In the fourth quarter
of 1998, the Board issued options for a total of 60,000 shares to ten people.
This total included fully vested options for 10,000 shares issued to Mr.
Nichols, Gen Trak's Vice President and Controller, and fully vested options for
5,000 shares to Dr. Ertingshausen, the Company's new director. The exercise
price of these options is $3.00 per share. These options are exercisable for
five years after grant.
The purposes of the Plan are
o to provide incentives and rewards to those employees who are in a
position to contribute to the long-term growth and profitability of Gen
Trak;
o to attract, retain and motivate personnel with experience and ability;
o to make Gen Trak's compensation program competitive with those of other
employers.
Gen Trak anticipates it will benefit from the added interest which such
personnel will have in the success of Gen Trak as a result of their proprietary
interest.
The Plan presently is administered by the Board of Directors. The Board may
establish a Stock Option Committee (the "Committee") consisting of at least two
directors, to administer the Plan.
The Board or Committee is authorized to select the employees, directors,
advisors and consultants who will receive options. The Board or Committee will
also determine the number of shares each person may acquire, and the terms and
conditions of the options. Generally, the interpretation and construction of any
provision of the Plan or any option granted thereunder is within the discretion
of the Board or Committee.
The Plan provides that options may or may not be Incentive Stock Options
within the meaning of Section 422 of the Internal Revenue Code. Only employees
of Gen Trak are eligible to receive Incentive Stock Options. Employees and
non-employee directors, advisors and consultants are eligible to receive options
which are not Incentive Stock Options." Incentive Stock Options receive
favorable treatment under federal tax laws. The options granted by the Board in
the fourth quarter of 1998 are not Incentive Stock Options, but are
Non-Qualified Stock Options.
29
<PAGE>
An option may not be transferred by the optionee, other than to his heirs.
Options are exercisable only by the optionee during his lifetime or, in the
event of his death, by his heirs.
Transactional Success Fee Arrangements
Gen Trak has arrangements to pay the following individuals a "success" fee
if Gen Trak completes certain transactions:
o Arthur Boyce, in connection with his Employment Agreement;
o All of the members of Gen Trak's Board of Directors;
o Norbert Zeelander, in connection with his Consulting Agreement with Gen
Trak.
These "success" fees are payable in the following events:
o Gen Trak's acquisition of assets from another business, other than in the
ordinary course of business;
o Gen Trak's sale of all or a material part of its assets other than the
ordinary course of business; or
o Sale by Gen Trak's shareholders of more than 50% of the outstanding stock
of Gen Trak.
The "success" fees are a percentage of the total amount of the transaction.
The success fees begin at 5% of the first of $5,000,000 and are smaller
percentages of additional amounts over $5,000,000. These fees are payable only
if the other party to a transaction was introduced to Gen Trak by the individual
claiming the success fee.
Gen Trak does not currently have any plans, arrangements, agreements or
understandings relating to the sale of Gen Trak or any of its assets, nor is it
seeking a merger partner. In no case are activities relating to identifying a
transaction which would trigger the right to a success fee the primary component
of the individual's relationship with Gen Trak. These agreements were entered
into primarily as an incentive for individuals otherwise involved with Gen Trak
to recognize and bring opportunities to Gen Trak's attention. In the event Gen
Trak does seek a merger partner after the date of this Prospectus, it is
expected that the underwriter would have a substantial role in identifying and
negotiating with any potential merger partner. Gen Trak also has an agreement
with the underwriter regarding fees to be paid in connection with a merger or
acquisition. See "Underwriting."
PRINCIPAL SHAREHOLDERS
The following table lists certain information regarding the beneficial
ownership of shares of Gen Trak's Common Stock. The "Before Offering" column
lists the ownership percentages of certain persons before closing of this
Offering. The "After Offering" column lists the percentage of the common stock
owned by these persons taking into account:
o The issuance of the common stock in this Offering, assuming the
underwriter exercises the over-allotment option;
o The issuance of 115,000 shares to the holders of Gen Trak's private
placement notes.
The table lists shareholdings by:
o Each person known by Gen Trak to own beneficially more than 5% of the
outstanding shares of Gen Trak's common stock;
o Each Director of Gen Trak;
o Each Officer of Gen Trak;
o All Directors and Officers of Gen Trak as a group
30
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
After Offering
-------------------------
Ownership
Beneficial Ownership Assuming the Sale
Before Offering (1) of All Shares
------------------------- -------------------------
Name and Address of Number of Percent No. of
Beneficial Owner Shares (1) Of Class Shares(1) Percentage
- -------------------------------------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
(i) Directors and Executive Officers
George L. Bird, Jr
13 Crestview Road
Phoenixville, PA 19460 ..................... 148,310 11.41% 148,310 5.10%
Arthur V. Boyce, Jr. (2)
1763 Ashbourne Drive
Yardley, PA 19067 .......................... 122,987 9.46% 122,987 4.23%
Harry A. Arena
1 Jorrocks Lane
Malvern, PA 19355 .......................... 89,795 6.91% 89,795 3.09%
Deborah M. Hamburg Irrevocable Trust III (3)
204 Wood Spring Road
(P.O. Box 325)
Gwynedd Valley, PA 19437 ................... 141,039 10.85% 141,039 4.85%
Donald O. Nichols (4)
335 Willowbrooke Avenue
Harleysville, PA 19438 ..................... 25,000 * 25,000 *
Dr. Gerhard Ertingshausen (5)
35 Sayre Drive
Princeton, NJ 08540 ........................ 5,000 * 5,000 *
All Officers and Directors as
a Group ................................... 457,131 35.16% 457,131 15.71%
(ii) Other Beneficial Owners
Mathers Associates (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 23.36% 313,526 10.77%
Susquehana Holdings Corp. (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 23.36% 313,526 10.77%
Skippack Partners (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 23.36% 313,526 10.77%
Belle Group Ltd., LLC
2251 N. Rampart Blvd.
#428
Summertin, NV 89128 ........................ 193,276 14.87% 193,276 6.64%
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
After Offering
-------------------------
Ownership
Beneficial Ownership Assuming the Sale
Before Offering (1) of All Shares
------------------------- -------------------------
Name and Address of Number of Percent No. of
Beneficial Owner Shares (1) Of Class Shares(1) Percentage
- -------------------------------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Edward and Judith Rubin
1201 Evans Road
Lower Gwynedd, PA 19002-1702 ......... 83,671 6.44% 83,671 2.88%
J. Edmund and Bernadette A. Mullin
110 Brittany Way
Blue Bell, PA 19422 .................. 75,133 5.78% 75,133 2.58%
</TABLE>
- ------------
* Less than 5%
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934.
Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the number and
percentage owned by each other person listed.
(2) Includes 60,000 shares held by Mr. Boyce's wife as custodian for their two
minor children.
(3) Deborah M. Hamburg is the wife of Gen Trak's director, Gerald Hamburg. These
shares have been included in the holdings of "All Officers and Directors as
a Group."
(4) Includes 10,000 shares which Mr. Nichols could receive upon exercise of
options.
(5) Consists of 5,000 shares which Dr. Ertinghausen could receive upon exercise
of options.
(6) Mathers Associates is the record owner of 190,000 shares, Susquehana
Holdings Corp. is the record owner of 113,526 shares and Skippack Partners
is the record holder of 10,000 shares. Norbert Zeelander is the President of
Susquehana Holdings Corp. and the General Partner of Mathers Associates. Mr.
Zeelander is also the General Partner of Skippack Partners. Because of these
relationships, each of these organizations is considered to own beneficially
the shares owned by all three.
There is no arrangement or understanding known to Gen Trak, including any
pledge by any person of securities of Gen Trak, the operation of which may at a
subsequent date result in a change in control of Gen Trak. Under an agreement
among Gen Trak, Susquehana Holdings Corp. ("Susquehana") and certain
shareholders of Gen Trak, if Gen Trak defaults under its line of credit with
Susquehana, Susquehana will have the right to elect at least 75% of Gen Trak's
directors. Gen Trak intends to repay the line of credit in full with the
proceeds of this offering.
32
<PAGE>
CERTAIN TRANSACTIONS
In September, 1998, Gen Trak obtained a line of credit from Susquehana
Holdings Corp. ("Susquehana") in the maximum amount of $300,000. The line of
credit bears interest at 10% per annum, with interest payable quarterly. Under
the terms of the agreement, the principal balance of the line of credit will be
repaid in full with the proceeds of this Offering. At the same time, Susquehana
purchased 390,000 shares of Gen Trak's Common Stock from existing shareholders
for an aggregate $2,500. Gen Trak at that time also entered into a Consulting
Agreement with Norbert Zeelander, the President of Susquehana.
The consulting agreement provides that Mr. Zeelander will be a
non-exclusive consultant. Mr. Zeelander will consult with Gen Trak regarding
its business activities, marketing, strategic planning and corporate
development, and other activities specified in the agreement. He will receive a
fee of $7,500 per month, through September 2001. The fee accrues but is not
payable until the principal of the line of credit becomes due. In addition, Mr.
Zeelander is entitled to a "Success Fee" in the event of certain asset
acquisitions by Gen Trak or the sale of Gen Trak. See "Executive Compensation
- -- Transactional Success Fee Arrangements."
In August 1998, Gen Trak borrowed $115,000 from Gerald Hamburg pursuant to
a demand note bearing interest at 11% per annum. This loan has been repaid.
Gen Trak has additional notes outstanding to five of its shareholders and
its former President, in the aggregate amount of $58,737. The notes bear
interest at a rate equal to Gen Trak's primary bank's "national commercial rate"
plus 1%. These notes are due June 29, 2002.
Affiliates of Mr. Hamburg and Mr. Arena, directors of Gen Trak, perform
legal and accounting services for Gen Trak. Fees related to these services in
1998 were approximately $10,000.
Gen Trak advanced $31,466 to certain stockholders. In September 1998, Gen
Trak agreed that these advances would not be repaid but would be considered
distributions to these stockholders.
33
<PAGE>
DESCRIPTION OF SECURITIES
As of the date of this Prospectus, Gen Trak had the authority to issue
25,000,000 shares of Common Stock, $.01 par value per share. On that date,
1,300,000 shares were outstanding.
Common Stock
o Holders of Common Stock are entitled to receive dividends only if Gen
Trak has funds legally available and the Board of Directors declares a
dividend. o Holders of Common Stock do not have any rights to purchase
additional shares.
o Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders.
o Since the Common Stock does not have cumulative voting rights in electing
directors, the holders of more than a majority of the outstanding shares
of Common Stock can elect all of the directors whose terms expire that
year, if they choose to do so.
o There is no public market for Gen Trak's Common Stock at the present
time.
Voting Requirements
Gen Trak's By-Laws require the approval of the holders of a majority of Gen
Trak's voting securities for most actions requiring shareholder approval. These
actions include the election of directors, and certain fundamental corporate
actions, such as mergers and sales of substantial assets, and amendment of the
Articles of Incorporation. There are no provisions in Gen Trak's Articles of
Incorporation or Bylaws that would delay, defer or prevent a change in control
of the Company.
Transfer Agent
The transfer agent and registrar for Gen Trak's Common Stock and the
Warrant Agent is Stocktrans, Inc., 7 East Lancaster Avenue, Ardmore PA 19003.
The telephone number of Stocktrans is 610-649-7300.
Warrants
The following is a brief summary of certain provisions of the warrants.
For the complete terms, the investor should review the actual text of the
warrants and the Warrant Agreement between Gen Trak and Stocktrans, Inc. The
text is contained in the registration statement filed with the SEC. See Gen
Trak's Business--"Additional Information About Gen Trak."
Exercise Price and Terms. Each Warrant entitles the holder to purchase one
share of Common Stock for $6.00 per share. The price is subject to adjustment in
accordance with certain provisions described below.
The warrants cannot be exercised until they are separated from the units.
The warrants will be separated from the units 180 days after the date of this
Prospectus, unless the Underwriter permits earlier separation. After separation
from the units, the warrants can be exercised until the fifth anniversary of the
date of this Prospectus. If the units are approved for listing on NASDAQ, they
will be delisted from NASADQ after the warrants may be separated from the units.
NASDAQ rules require that the units be listed for at least 30 days. It is the
current intention of Gen Trak and the Underwiter that the units not be delisted
until 180 days after the date of this Prospectus.
The warrants are exercised by surrender to the Warrant Agent, with the
subscription form on the reverse side of such certificate properly completed and
signed, together with payment of the exercise price. The warrants may be
exercised at any time for all shares or only some shares.
After the warrants become separately transferable, Gen Trak may purchase
(or redeem) the warrants at $.10 per warrant on 30 days' written notice. Gen
Trak may only redeem the warrants if the average closing bid or trading price of
Gen Trak's Common Stock, is at least $10.00. This average will be measured over
30 consecutive trading days. Gen Trak cannot redeem the warrants unless it has
an effective registration
34
<PAGE>
statement with respect to the exercise of the warrants at the time of redemption
of the warrants. In the event Gen Trak exercises the right to redeem the
warrants, such warrants may still be exercised until the close of business on
the redemption date. If a warrant is not exercised before the close of business
on the redemption date it will no longer be exercisable and the holder will be
entitled only to $.10 per warrant. Redemption of the warrants could force
warrant holders either to (1) exercise the warrants and pay the exercise price
at a time when it may be less advantageous economically to do so, or (2) accept
the $.10 per warrant in consideration for cancellation of the warrant, which
could be substantially less than the market value of the warrant. Prior to the
first anniversary of the Effective Date, Gen Trak may not redeem the warrants
without the written consent of the underwriter.
The exercise price of the warrants bears no relation to any objective
criteria of value. Investors should not consider the exercise price as an
indication of the future market price of the shares.
Gen Trak has reserved a sufficient number of shares of common stock to
accommodate the exercise of all warrants.
Adjustments. The exercise price and the number of shares of common stock
which may be purchased under a warrant are subject to adjustment upon the
occurrence of certain events. The events include
o stock dividends
o stock splits
o stock combinations
o reclassification of the common stock.
Also, in the event of a
o consolidation or merger of Gen Trak
o sale of all or substantially all of the assets of Gen Trak,
the warrants will be excerisable for the kind and number of shares of stock or
other securities or property which the warrant holder would have received had he
exercised the warrant before the consolidation, merger or sale. No adjustment to
the exercise price of the shares subject to the warrants will be made for
dividends (other than stock dividends), if any, paid on the common stock.
Transfer, Exchange and Exercise. The warrants will be registered in the
names of the investors and may be presented to the warrant agent for transfer,
exchange or exercise at any time prior to the expiration date. If a market for
the warrants develops, the holder may sell the warrants instead of exercising
them. An investor cannot be certain, however, that a market for the warrants
will develop or continue. If Gen Trak is unable to qualify the shares underlying
the warrants for sale in particular states, holders of the warrants residing in
such states and desiring to exercise the warrants will have no choice but to
sell such warrants or allow them to expire.
Warrant Holder Not a Shareholder. The warrants do not give the holders any
voting or any other rights as shareholders of Gen Trak.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Barron
Chase Securities, Inc. (the "Underwriter") has agreed to purchase from Gen Trak,
Inc. (the "Company") an aggregate of 650,000 units (the "Securities"). The
Securities are offered by the Underwriter, subject to prior sale, when, as and
if delivered to and accepted by the Underwriter, and subject to approval of
certain legal matters by counsel and certain other conditions. The Underwriter
is committed to purchase all Securities offered by this Prospectus, if any are
purchased (other than those covered by the Over-Allotment Option described
below).
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Securities to the public at the offering price set forth
on the cover page of this Prospectus. The Underwriter has advised the Company
that the Underwriter may also offer the Securities through members of the
National Association
35
<PAGE>
of Securities Dealers, Inc. ("NASD"), and may allow concessions, in its
discretion, to certain selected dealers who are members of the NASD and who
agree to sell the Securities in conformity with the NASD's Conduct Rules. Such
concessions will not exceed the amount of the underwriting discount that the
Underwriter is to receive.
The Company has granted to the Underwriter an Over-Allotment Option,
exercisable for 45 days from the Effective Date, to purchase up to an additional
97,500 units at the public offering price less the Underwriting Commission set
forth on the cover page of this Prospectus. The Underwriter may exercise this
option to cover over-allotments in the sale of the Securities being offered by
this Prospectus.
Officers and directors of the Company may introduce the Underwriter to
persons to consider this Offering and to purchase Securities either through the
Underwriter or through participating dealers. In this connection, no Securities
have been reserved for those purchases and officers and directors will not
receive any commissions or any other compensation.
The Company has agreed to pay to the Underwriter a commission of ten
percent (10%) of the gross proceeds of this Offering (the "Underwriting
Discount"), including the gross proceeds from the sale of the Over-Allotment
Option, if exercised. In addition, the Company has agreed to pay to the
Underwriter a Non-Accountable Expense Allowance of three percent (3%) of the
gross proceeds of this Offering, including proceeds from any Securities
purchased pursuant to the Over-Allotment Option. The Company has paid to the
Underwriter a $50,000 advance with respect of the Non-Accountable Expense
Allowance. The Underwriter's expenses in excess of the Non-Accountable Expense
Allowance will be paid by the Underwriter. To the extent that the expenses of
the Underwriter are less than the amount of the Non-Accountable Expense
Allowance received, such excess shall be deemed to be additional compensation to
the Underwriter. The Underwriter has informed the Company that it does not
expect sales to discretionary accounts to exceed five percent (5%) of the total
number of Securities offered by the Company hereby.
The Company has agreed to engage the Underwriter as a financial advisor at
a fee of $108,000, which is payable to the Underwriter on the Closing Date.
Pursuant to the terms of a financial advisory agreement, the Underwriter has
agreed to provide, at the Company's request, advice to the Company concerning
potential merger and acquisition and financing proposals, whether by public
financing or otherwise. The Company has also agreed that if the Company
participates in any transaction which the Underwriter has introduced to the
Company during a period of five years after the Closing (including mergers,
acquisitions, joint ventures and any other business transaction for the Company
introduced by the Underwriter), and which is consummated after the Closing
(including an acquisition of assets or stock for which it pays, in whole or in
part, with shares or other securities of the Company), or if the Company retains
the services of the Underwriter in connection with any such transaction (an
"Introducted Consummated Transaction"), then the Company will pay for the
Underwriter's services an amount equal to 5% of up to one million dollars of
value paid or received in the transaction, 4% of the next million of such value,
3% of the next million of such value, 2% of the next million of such value, and
1% of the next million dollars of such value and of all such value over
$4,000,000.
Prior to this Offering, there has been no public market for the units,
shares of common stock or the warrants. Consequently, the initial public
offering prices for the Securities, and the terms of the warrants (including the
exercise price of the warrants), have been determined by negotiation between the
Company and the Underwriter. Among the factors considered in determining the
public offering prices were the history of, and the prospects for, the Company's
business, an assessment of the Company's management, the Company's past and
present operations, its development and the general condition of the securities
market at the time of this Offering. The initial public offering prices do not
necessarily bear any relationship to the Company's assets, book value, earnings,
or other established criteria of value. Such prices are subject to change as a
result of market conditions and other factors, and no assurance can be given
that a public market for the units, the shares or the warrants will develop
after the Closing, or if a public market if fact develops, that such public
market will be sustained, or that the units, the shares or the warrants can be
resold at any time at the offering or any other price. See "Risk Factors."
At the Closing, the Company will issue to the Underwriter and/or persons
related to the Underwriter (the "holder"), for nominal consideration,
Underwriter warrants to purchase up to 65,000 units (the "Underwriter
36
<PAGE>
warrants"). The Underwriter warrants and the underlying securities are
registered pursuant to this Registration Statement. The Underwriter warrants
will be exercisable for a five-year period commencing on the Effective Date. The
initial exercise price of each Underwriter warrant shall be $14.50 per
Underwriter warrant (145% of the public offering price). The Underwriter
warrants will be restricted from sale, transfer, assignment or hypothecation for
a period of twelve months from the Effective Date by the holder, except (i) to
officers of the Underwriter and members of the selling group and officers and
partners thereof; (ii) by will; or (iii) by operation of law.
The Underwriter warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Underwriter warrants contain net issuance provisions permitting the holders
thereof to elect to exercise the Underwriter warrants in whole or in part and
instruct the Company to withhold from the securities issuable upon exercise, a
number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. Such net exercise provision has the effect
of requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Underwriter warrants will have the
same dilutive effect on the interests of the Company's shareholders as will a
cash exercise. The Underwriter warrants do not entitle the holders thereof to
any rights as a shareholder of the Company until such Underwriter warrants are
exercised and shares of common stock are purchased thereunder.
The Underwriter warrants and the securities issuable thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that if it shall cause a post-effective
amendment, a new registration statement, or similar offering document to be
filed with the Commission, the holders shall have the right, for seven (7) years
from the Effective Date, to include in such registration statement or offering
statement the Underwriter warrants and/or the securities issuable upon their
exercise at no expense to the holders. Additionally, the Company has agreed
that, upon request by the holders of 50% or more of the Underwriter warrants
during the period commencing one year from the Effective Date and expiring four
years thereafter, the Company will, under certain circumstances, register the
Underwriter warrants and/or any of the securities issuable upon their exercise.
In order to facilitate the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
units. Specifically, the Underwriter may sell, or allot, more units than the
650,000 units the Company has agreed to sell to the Underwriter. This
over-allotment would create a short position in the units for the account of the
Underwriter. To cover any over-allotments or to stabilize the price of the
units, the Underwriter may bid for, and purchase units in the open market.
Finally, the Underwriter may reclaim selling concessions allowed to dealers for
distributing the units in the offering, if the Underwriter repurchases
previously distributed units in transactions to cover short positions, in
stabilization transactions or otherwise. The Underwriter has reserved the right
to reclaim selling concessions in order to encourage dealers to distribute the
units for investment, rather than for short-term profit taking. Increasing the
proportion of the Offering held for investment may reduce the supply of units
available for short-term trading. Any of these activities may stabilize or
maintain the market price of the units above independent market levels. The
Underwriter is not required to engage in these activities, and may end any of
these activities at any time.
The Company has agreed to indemnify the Underwriter against any costs or
liabilities incurred by the Underwriter by reason of misstatements or omissions
to state material facts in connection with the statements made in the
Registration Statement filed by the Company with the Commission under the
Securities Act (together with all amendments and exhibits thereto, the
"Registration Statement") and this Prospectus. The Underwriter has in turn
agreed to indemnify the Company against any costs and liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the Registration Statement and this Prospectus, based on
information relating to the Underwriter and furnished in writing by the
Underwriter. To the extent that these provisions may purport to provide
exculpation from possible liabilities arising under the federal securities laws,
in the opinion of the Commission, such indemnification is contrary to public
policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Gen Trak will have 2,715,000 shares of
Common Stock outstanding, assuming the Underwriter's over-allotment option is
not exercised. The holders of all shares outstanding prior to this offering
(1,300,000 shares) have agreed not to sell, or transfer any shares or options
beneficially held by them for twenty four months (24) from the date of this
Prospectus without the prior written consent of the Underwriter. The 115,000
shares of Gen Trak's common stock to be issued to the holders of the private
placement notes upon Closing of this Offering will be "restricted securities."
These Shares may not be sold or transferred for two years from the date of this
Prospectus under the terms of the purchase of the private placement notes. All
shares of Common Stock purchased in this offering will be freely transferable
without restriction or registration under the Securities Act unless purchased or
owned by "affiliates" of Gen Trak as defined for purposes of the Securities Act.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned "restricted" securities for at least one year, including
persons who may be deemed to be "affiliates" of Gen Trak, may sell publicly
without registration under the Securities Act, within any three-month period,
assuming compliance with other provisions of the Rule, a number of shares that
does not exceed the greater of (A) one percent of the Common Stock then
outstanding, or (B) the average weekly trading volume in the common stock during
the four calendar weeks preceding such sale. A person who is not an "affiliate"
of Gen Trak and who has beneficially owned shares for at least two years would
be entitled to sell such shares under Rule 144 without regard to the volume and
other limitations described above. Approximately 580,000 of Gen Trak's
outstanding shares of common stock would have been eligible for sale under Rule
144 on the date hereof but for the agreement with the Underwriter not to sell
for a twenty-four month period.
Gen Trak cannot predict the effect, if any, that future public sales of
"restricted" shares or the availability of "restricted" shares for sale may have
on the market price of Gen Trak's securities. Sales of substantial amounts of
Gen Trak's "restricted" shares in any public market that may develop could
adversely affect prevailing market prices.
LEGAL PROCEEDINGS
Gen Trak is not a party to, nor is it aware of, any threatened litigation
of a material nature.
LEGAL MATTERS
Connolly Epstein Chicco Foxman Oxholm & Ewing, 1515 Market Street, 9th
Floor, Philadelphia, PA 19102 has given an opinion that the securities offered
by the Prospectus will be validly issued in accordance with Pennsylvania law.
Certain legal matters will be passed upon for the Underwriter by David A.
Carter, P.A., 2300 Glades Road, Suite 210, West Tower, Boca Raton, Florida
33431.
EXPERTS
The financial statements of Gen Trak at December 31, 1997 and 1998 and for
each of the two years in the period ended December 31, 1997 and 1998 appearing
at the end of this Prospectus and in the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
on the financial statements included in this Prospectus. These financial
statements are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
38
<PAGE>
Gen Trak, Inc.
Financial Statements
Index to Financial Statements
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Audited Financial Statements
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Stockholders' Equity (Deficit)............................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Gen Trak, Inc.
We have audited the accompanying balance sheets of Gen Trak, Inc. as of December
31, 1997 and 1998, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gen Trak, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Gen Trak,
Inc. will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred recurring operating losses and has a
working capital and stockholders' equity deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 12, 1999
F-2
<PAGE>
Gen Trak, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1998
-------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash ............................................................ $ 45,757 $ 230,104
Accounts receivable, less allowance of $6,600 in 1997 and $31,200
in 1998 ....................................................... 355,231 267,963
Inventory ....................................................... 1,358,568 543,582
Prepaid expenses ................................................ 80,874 55,662
---------- ------------
Total current assets ............................................. 1,840,430 1,097,311
Property and equipment, net ...................................... 119,073 90,249
Advances to stockholders ......................................... 31,466 --
Patents, net ..................................................... 282,033 273,272
Other assets ..................................................... 15,886 280,382
---------- ------------
Total assets ..................................................... $2,288,888 $ 1,741,214
========== ============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Bank line of credit ............................................. $ 375,000 $ 400,000
Stockholder line of credit ...................................... -- 300,000
Notes payable ................................................... -- 575,000
Accounts payable ................................................ 208,854 211,117
Accrued expenses ................................................ 70,908 138,969
Stockholder accrued expenses .................................... 37,492 103,134
Current portion of long-term debt and capital lease ............. 29,890 33,544
---------- ------------
Total current liabilities ........................................ 722,144 1,761,764
Long-term debt and capital lease, less current portion ........... 922,200 890,048
Notes payable to stockholders .................................... 58,737 58,737
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares -- 25,000,000
Issued and outstanding shares -- 1,300,000 .................... 13,000 13,000
Additional paid-in capital ...................................... 1,557,247 1,663,951
Accumulated deficit ............................................. (984,440) (2,646,286)
---------- ------------
Total stockholders' equity (deficit) ............................. 585,807 (969,335)
---------- ------------
Total liabilities and stockholders' equity (deficit) ............. $2,288,888 $ 1,741,214
========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Gen Trak, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1997 1998
-------------- -----------------
<S> <C> <C>
Net sales ............................................. $ 2,710,485 $ 2,149,285
Cost of sales ......................................... 1,490,928 1,321,826
Write-down of inventory ............................... -- 791,378
----------- -------------
1,219,557 36,081
Operating expenses:
Marketing and selling .............................. 864,144 1,017,310
General and administrative ......................... 313,888 452,294
Research and development ........................... 56,746 57,268
----------- -------------
1,234,778 1,526,872
----------- -------------
Loss from operations .................................. (15,221) (1,490,791)
Interest expense ...................................... 122,862 171,055
----------- -------------
Loss before income taxes .............................. (138,083) (1,661,846)
Income taxes .......................................... -- --
----------- -------------
Net loss .............................................. $ (138,083) $ (1,661,846)
=========== =============
Basic and diluted loss per share ...................... $ (.11) $ (1.28)
=========== =============
Weighted average shares outstanding ................... 1,300,000 1,300,000
=========== =============
Pro forma basic and diluted loss per share ............ $ (1.03)
=============
Pro forma weighted average shares outstanding ......... 1,555,000
=============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Gen Trak, Inc.
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ............... $ 13,000 $ 1,557,247 $ (846,357) $ 723,890
Net loss .............................. (138,083) (138,083)
-------- ----------- ------------- ------------
Balance, December 31, 1997 ............... 13,000 1,557,247 (984,440) 585,807
Distributions to stockholders ......... (31,466) (31,466)
Compensation expense related
to stock options ..................... 138,170 138,170
Net loss .............................. (1,661,846) (1,661,846)
-------- ----------- ------------- ------------
Balance, December 31, 1998 ............... $ 13,000 $ 1,663,951 $ (2,646,286) $ (969,335)
======== =========== ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Gen Trak, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1997 1998
--------------- -----------------
<S> <C> <C>
Operating activities
Net loss .................................................... $ (138,083) $ (1,661,846)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ............................................. 71,966 46,540
Amortization ............................................. 25,105 16,796
Compensation expense related to stock options ............ -- 138,170
Write-down of inventory .................................. -- 791,378
Changes in operating assets and liabilities:
Accounts receivable ................................... (45,312) 87,268
Inventory ............................................. 100,716 23,608
Prepaid expenses ...................................... 9,297 25,212
Accounts payable and accrued expenses ................. 17,629 135,966
----------- -------------
Net cash provided by (used in) operating activities ......... 41,318 (396,908)
----------- -------------
Investing activities
Refund of lease deposit ..................................... 13,682 --
Purchases of property and equipment ......................... (43,941) (17,716)
Additions to other assets ................................... (9,665) (6,642)
----------- -------------
Net cash used in investing activities ....................... (39,924) (24,358)
----------- -------------
Financing activities
(Payments) borrowings on bank line of credit ................ (5,000) 25,000
Borrowings on stockholder line of credit .................... -- 300,000
Proceeds from notes payable ................................. -- 575,000
Payments on term loan ....................................... -- (24,277)
Payments on capital lease ................................... (2,283) (4,221)
Increase in deferred offering costs ......................... -- (189,954)
Increase in deferred financing fees ......................... -- (75,935)
----------- -------------
Net cash (used in) provided by financing activities ......... (7,283) 605,613
----------- -------------
(Decrease) increase in cash ................................. (5,889) 184,347
Cash at beginning of year ................................... 51,646 45,757
----------- -------------
Cash at end of year ......................................... $ 45,757 $ 230,104
=========== =============
Supplemental disclosure of cash flow information
Cash paid for interest ...................................... $ 123,732 $ 168,038
=========== =============
Lease obligation incurred ................................... $ 17,951 $ --
=========== =============
Distribution of stockholder advances ........................ $ -- $ 31,466
=========== =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements
December 31, 1998
1. Business
Gen Trak, Inc. is a distributor of health care test kits for cellular
diagnostics, paternity and genetic testing. The Company sells its products to
companies in the healthcare industry, primarily hospital based and private
laboratories performing cellular diagnostics, organ and bone marrow
transplantation, disease association studies, basic research and flow cytometry.
2. Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, the
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence. The Company incurred
losses in its last three years and has an accumulated deficit of $2,646,286 and
a stockholder's deficit of $969,335 at December 31, 1998. Further, the Company
has a working capital deficit of $664,453 at December 31, 1998. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management believes that actions presently being taken will provide for
the Company to continue as a going concern. Such actions include an initial
public offering of the Company's common stock. Further, as discussed in Note 20,
the Company began to outsource the manufacturing of its core products in the
fourth quarter of 1998. The Company believes this change will improve the
quality and reduce the cost of its products. The Company also anticipates
improved cash flow as a result of the ability to better manage inventory.
Revenue Recognition
Sales revenue is recognized upon shipment of products.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts of accounts receivable and accounts payable
approximate fair value because of their short-term nature. The carrying amounts
of long-term debt, the bank line of credit, the stockholder line of credit and
the notes payable approximate fair value because the interest rates are
reflective of rates that the Company would be able to obtain on debt with
similar terms and conditions.
Inventory
Inventory is valued at the lower of cost, determined by the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are recorded at cost and are being depreciated over
the estimated useful lives of the assets, which range from three to ten years,
using the straight-line method. Leasehold improvements are being amortized over
the term of the lease.
F-7
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
2. Accounting Policies -- (Continued)
Patent Costs
The Company amortizes patent costs using the straight-line method over the
patent's estimated useful life of 17 years. In 1998, the U.S. Patent Office
granted the Company its "Identification and Paternity Determination by Detecting
Presence or Absence of Multiple Nucleic Acid Sequences" patent and, therefore,
the Company began amortizing this patent. Accumulated amortization was $17,357
and $32,760 at December 31, 1997 and 1998, respectively.
Long-Lived Assets
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," requires recording impairment
losses on long-lived assets when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
The Company's estimate of undiscounted cash flows related to its capitalized
patent costs indicate that such costs are expected to be recovered through
product sales and licensing revenue. Cash flows from product sales utilizing the
patented technologies are dependent upon the Company generating the estimated
financial resources necessary to further develop the patented technologies into
marketable products. Should the Company be unable to generate such financing or
locate suitable licensees, it is reasonably possible that the estimate of
undiscounted cash flows may change, resulting in the need to write down these
assets to fair value.
Clinical Trial Costs
The Company has received approval of applications filed with the United
States Food and Drug Administration (FDA) upgrading certain products of its
monoclonal product line to an invitro diagnostic classification. The costs
incurred in filing such applications are being amortized by the straight-line
method over the estimated useful lives of the products.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") provides companies with a choice to
follow the provisions of SFAS 123 in determination of stock-based compensation
expenses or to continue with the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company continues to follow APB 25 and provides pro
forma disclosures as required by SFAS 123.
Income Taxes
The Company, with the consent of its stockholders, had elected
S-corporation status for federal and state purposes for all periods prior to
September 23, 1998. As of that date, the Company terminated its status as an
S-corporation and federal and state income tax rates now apply to all taxable
years beginning after that date.
3. Inventory
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
------------ ------------
<S> <C> <C>
Work-in-process ..................................... $ 783,440 $ 675,248
Finished product .................................... 627,283 541,080
Dry stores .......................................... 68,309 44,703
Allowance for excess and obsolete inventory ......... (120,464) (717,449)
----------- ----------
$ 1,358,568 $ 543,582
=========== ==========
</TABLE>
F-8
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
------------ ----------
<S> <C> <C>
Laboratory and manufacturing equipment ............ $ 904,248 $ 917,314
Furniture and fixtures ............................ 93,517 93,517
Leasehold improvements ............................ 116,393 121,043
---------- ---------
1,114,158 1,131,874
Accumulated depreciation and amortization ......... 995,085 1,041,625
---------- ---------
$ 119,073 $ 90,249
========== =========
</TABLE>
Laboratory and manufacturing equipment include approximately $18,000 under
capital leases as of December 31, 1998. Accumulated depreciation related to
these assets was approximately $7,000 as of December 31, 1998.
5. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
---------- -----------
<S> <C> <C>
Deferred offering costs ................................ $ -- $189,954
Deferred financing fees ................................ -- 75,935
Clinical trial costs, net of accumulated amortization of
$111,085 in 1997 and $112,478 in 1998 ................ 3,266 1,873
Deposits and other assets .............................. 12,620 12,620
------- --------
$15,886 $280,382
======= ========
</TABLE>
Deferred offering costs relate to professional fees and other costs
associated with the Company's initial public offering. These costs will be
offset against the proceeds from the offering when the offering closes. Deferred
financing fees relate to costs associated with the issuance of $575,000 of
unsecured promissory notes in the fourth quarter of 1998. The fees will be
amortized over the term of the related notes. The fees will be fully amortized
at the closing of the initial public offering when the notes are repaid.
6. Accrued Expenses
Accrued expenses consisted of the following:
December 31
1997 1998
----------- -----------
Accrued compensation ........... $ 17,904 $ 54,594
Accrued interest ............... 10,194 22,901
Other accrued expenses ......... 42,810 61,474
-------- ---------
$ 70,908 $ 138,969
======== =========
7. Stockholder Line of Credit
The Company entered into a $300,000 line of credit agreement with a
stockholder in September 1998. The line of credit bears interest at 10% and is
subordinate to the bank debt. Advances under the line of credit
F-9
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
7. Stockholder Line of Credit -- (Continued)
are due upon the earlier to occur of the sale of any debt or equity securities
from which the Company receives at least $1,000,000 of net proceeds or September
30, 1999. At December 31, 1998, borrowings of $300,000 were outstanding under
the line of credit. Concurrent with the line of credit agreement, the Company
entered into a consulting agreement with the same stockholder. Pursuant to the
consulting agreement, the stockholder will provide general business consulting
for a term of three years, commencing October 1, 1998 at a monthly fee of
$7,500. Monthly consulting fees shall accrue and will not be payable until the
principal on the line of credit becomes due.
8. Bank Line of Credit
The Company has a $400,000 revolving line of credit with a bank which is
payable on demand and bears interest at the bank's "national commercial rate,"
as defined (7.75% at December 31, 1998) plus 2.5%. The line of credit commitment
is subject to periodic review by the bank. The line of credit is secured by
substantially all the Company's assets and life insurance policies on the
Chairman of the Board and the Company's president. In addition, the line of
credit is personally guaranteed by the Chairman of the Board of the Company.
9. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
----------- -----------
<S> <C> <C>
Term loan payable to a bank; interest at 11% per year,
secured by substantially all the assets of the Company
and life insurance policies on the Chairman of the Board
and the Company's president; the loan is personally
guaranteed by the Chairman of the Board of the Company;
due in monthly installments of principal and interest
of $11,000 through December 2012 ........................ $936,422 $912,145
Capital lease obligation .................................. 15,668 11,447
-------- --------
952,090 923,592
Less current portion ...................................... 29,890 33,544
-------- --------
$922,200 $890,048
======== ========
</TABLE>
The term loan was originally to be repaid over five years, however, the
loan was amended in 1997 to provide for interest only during 1997 and the loan
was further amended in January 1998 providing for a fifteen-year repayment
period commencing in January 1998. Aggregate maturities of long-term debt for
each of the five years subsequent to December 31, 1998 are as follows:
1999 ............................................. $ 33,544
2000 ............................................. 37,653
2001 ............................................. 38,060
2002 ............................................. 40,287
2003 ............................................. 44,949
Thereafter ....................................... 729,099
--------
$923,592
========
F-10
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
10. Notes Payable to Stockholders
The Company has outstanding notes payable to certain stockholders of
$58,737 at December 31, 1998. The principal on these notes is due on June 29,
2002. Interest accrues at a rate equivalent to the primary bank's "national
commercial rate" (7.75% at December 31, 1998) plus 1%.
11. Notes Payable
In the fourth quarter of 1998, the Company issued $575,000 of unsecured
promissory notes (the "Notes") to certain unaffiliated investors. The Notes are
due and payable at the closing of the proposed initial public offering. At the
closing of the proposed initial public offering, the holders of the Notes will
also receive the number of shares of common stock which, valued at the proposed
initial public offering price, equal the holders' investment in the Notes
(115,000 shares). The value of such shares will be reflected as interest
expense. If the proposed initial public offering is not completed on or prior to
September 28, 1999, the Notes will be due and payable at that time with interest
from the date of the issuance of the Notes at 12% per year.
12. Commitments
The Company leases certain equipment and its operating facility under
noncancelable operating leases with terms expiring over the next four years.
Rental expense under operating leases for each of the years ended December 31,
1997 and 1998 was approximately $170,000. Future minimum lease payments under
noncancelable operating leases at December 31, 1998 are $134,000 in 1999,
$27,000 in 2000, $5,000 in 2001, and $3,000 in 2002.
In September 1998, the Company entered into a financial advisory agreement
with Barron Chase Securities, Inc. (BCS) to receive advice involving potential
mergers and acquisitions and public or other financing proposals for a fee of
$108,000, payable at the closing of the initial public offering. The Company
also agreed that if the Company participates in certain transactions which BCS
introduces to the Company during a period of five years after the closing of the
initial public offering, the Company will pay a fee to BCS equal to a percentage
of the consideration paid or received in the transaction.
13. Income Taxes
Prior to September 24, 1998, the Company elected to be treated as an
S-corporation under the Internal Revenue Code and, as such, the federal and
state income tax liabilities or benefits flowed through directly to the
stockholders. Accordingly, no provision for income taxes is reflected during the
year ended December 31, 1997 or for the period from January 1, 1998 to September
23, 1998.
Effective September 24, 1998, the Company terminated its election to be
treated as an S-corporation under the Internal Revenue Code. Accordingly, income
tax obligations and benefits resulting from operations no longer flow through to
the stockholders and federal and state income tax rates apply. There was no
effect of this change in status because a valuation allowance was provided for
the net deferred tax asset at that date.
The provision for income taxes differs from the federal statutory rate of
34% as follows:
<TABLE>
<CAPTION>
1998
---------------
<S> <C>
Income tax benefit at federal statutory rate of 34% .......... $ (565,020)
Permanent differences ........................................ 19,707
State income taxes (net of federal taxes) .................... (99,710)
Tax benefit related to S-corporation status .................. 192,497
Increase in valuation allowance .............................. 452,526
-----------
Net income tax expense/(benefit) ............................. $ --
===========
</TABLE>
F-11
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
13. Income Taxes -- (Continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance
equal to the net deferred tax asset has been recorded on the basis of the
uncertainty with respect to the ultimate realization of the net deferred tax
assets. Significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 are as follows:
Deferred tax asset
Reserves on accounts receivable ..................... $ 12,479
Inventory reserve and capitalization ................ 293,208
Book over tax depreciation .......................... 38,145
Stock option compensation ........................... 55,268
Other compensation accruals ......................... 54,119
Net operating loss carryforwards .................... 117,488
----------
Total deferred tax assets .............................. $ 570,707
----------
Deferred tax liability
Capitalized clinical trial and patent costs ......... (118,181)
----------
Total deferred tax liability ........................... (118,181)
----------
Valuation allowance for net deferred tax asset ......... (452,526)
----------
Net deferred tax asset (liability) ..................... $ --
==========
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $294,000, which expire in 2018 for federal tax purposes.
14. Related Party Transactions
Certain stockholders of the Company also perform accounting, legal and
consulting services on behalf of the Company. Fees incurred related to these
services were approximately $33,000 and $55,000 for the years ended December 31,
1997 and 1998, respectively. Amounts due for these services are included in
stockholder accrued expenses.
The Company borrowed $115,000 from a stockholder in August 1998. The note,
with interest at 11%, was repaid in December 1998.
15. Common Stock
The Board of Directors declared a 1 for 17.184035 reverse stock split in
September 1998. Further, the authorized shares of the Company were reduced from
100,000,000 to 25,000,000. All references to common stock in the accompanying
financial statements have been retroactively restated to reflect these actions.
In September 1998, the Board of Directors authorized the filing of a
Registration Statement on Form SB-2 with the Securities and Exchange Commission
for a proposed initial public offering of the Company's common stock.
16. Profit-Sharing Plan
The Company has a 401(k) profit-sharing plan which is available to all
employees who have completed one year of service. The Plan permits employee
contributions up to 15% of compensation. The Company is required to contribute
the lesser of 3% of compensation or 50% of the first 6% of compensation
contributed by the employee. Company contributions were approximately $7,800 and
$15,900 for the years ended December 31, 1997 and 1998, respectively.
F-12
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
17. Stock Option Plans
At December 31, 1997, the Company had stock option plans for certain key
employees and members of the Company's Scientific Advisory Board ("SAB"). The
stock option plans were administered by the Board of Directors and stock options
were granted at the fair market value of the underlying stock as determined by
the Board of Directors. The Company granted 1,746 options to members of the SAB
in July 1997 at an exercise price of $6.01 per share. The options vested ratably
over the member's two-year term on the SAB and were to expire 5 years from the
grant date. During 1998, prior to the exercise of any options, the SAB was
eliminated and, in accordance with the stock option plan, all outstanding
options were canceled. No options were outstanding under the employee plan.
These stock option plans were terminated in 1998.
In September 1998, the Company's Board of Directors approved the 1998 Stock
Option Plan (the "Plan"). Pursuant to the Plan, 100,000 shares of common stock
were reserved for issuance upon exercise of options to be granted under the
Plan. In December 1998, the Company granted 32,000 options to employees, 23,000
options to consultants and 5,000 options to a member of the Company's Board of
Directors. The options vested at the date of grant and have an exercise price of
$3.00 per share. The Company recorded a charge of $2.00 per share at the grant
date for the employee and director options, representing the difference between
the fair value of the common stock based on the initial public offering price
and the exercise price of the options. The Company recorded a charge of $2.79
per share for the consultant options, representing the fair value of the stock
options as determined using the Black-Scholes option pricing model, in
accordance with SFAS 123.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee and directors stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS 123
requires the use of option valuation models that were not developed for valuing
employee stock options.
Pro forma information regarding net income as if the Company had accounted
for its employee stock options under the fair value method is required by SFAS
123. The fair value of the options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998: risk free interest rate of 5%; a dividend yield of 0.0%;
volatility factors of the expected market price of the Company's common stock of
30%; and a weighted average expected life of the options of 5 years.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had 1998
compensation costs for the Company's stock option plan been determined in
accordance with the method of SFAS 123, the impact on the Company's financial
results would have been an increase to the net loss by approximately $29,000 and
an increase in the basic and diluted loss per share by $.02 for the year ended
December 31, 1998. The impact of 1997 options is not presented because it is not
materially different from amounts reported.
18. Employment Agreement
The Company has an employment agreement with its President. In addition to
an annual salary, the agreement provides for a success fee in the event that the
President during the term of his employment or for
F-13
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
18. Employment Agreement -- (Continued)
18 months thereafter, introduces the Company or its stockholders to any entity
which acquires all or a material part of the Company's assets or more than 50%
of the Company's stock, or whose assets or stock the Company acquires. The
success fee will be equal to a percentage of the consideration paid or received
in the transaction. Each member of the Company's Board of Directors has a
similar right to a success fee in connection with introductions they may make.
19. Segment Information
The Company sells health care tests kits and related products used for
various genetic tests. The Company's tissue typing trays are primarily used to
determine the compatibility between organ and bone marrow donors and recipients.
The Company's antibody screening trays monitor the antibodies of potential
transplant recipients and those who have received transplants to predict the
possibility of organ or bone marrow rejection. The monoclonal antibody product
is used to screen blood for certain abnormalities. Sales by major product were
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998
-------------- --------------
<S> <C> <C>
Tissue typing serology products ............. $ 1,685,000 $ 1,100,000
SeraScreen antibody screening trays ......... 530,000 663,000
Monoclonal antibodies ....................... 267,000 214,000
DNA products ................................ 116,000 16,000
Other ....................................... 112,000 156,000
----------- -----------
$ 2,710,000 $ 2,149,000
=========== ===========
</TABLE>
The following is a summary of sales by geographic region:
Year ended December 31
1997 1998
-------- --------
North America ......... 80% 87%
Europe ................ 16 7
Other ................. 4 6
-- --
100% 100%
=== ===
20. Manufacturing and Distribution Agreements
The Company entered into a Contract Manufacturing Agreement (the Agreement)
with SFP Research, Inc. (SFP) in September 1998. Pursuant to the Agreement, SFP
will manufacture the Company's products. The price paid by the Company will be
SFP's direct manufacturing cost plus a monthly fee of $7,500. The Company has
also been granted the option, at its sole discretion, to acquire SFP for an
amount not to exceed $700,000 during the term of the Agreement subject to
appropriate due diligence. The Agreement has an original term of two years and
may be extended by the Company for three additional consecutive one-year
periods.
The Agreement with SFP increased the Company's access to unique
immunogenetic products and reagents which allowed the Company to improve the
quality and breadth of its product offerings. As a result of the release of
these new products, the Company determined that approximately $791,000 of
inventory on hand at September 30, 1998 was unusable and as such, a charge for
that amount has been reflected in the December 31, 1998 Statement of Operations.
In June 1998, the Company entered into an exclusive distribution agreement
with BioSynthesis, Inc. (BSI). Pursuant to the agreement, the Company has been
named the exclusive distributor in the United States
F-14
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
December 31, 1998
20. Manufacturing and Distribution Agreements -- (Continued)
and Canada for certain molecular products manufactured by BSI. The agreement has
an initial term of three years and may be extended by the Company for three
additional consecutive one-year periods. The Company has agreed to certain
minimum annual purchase requirements.
21. Pro Forma Adjustments (Unaudited)
Pro forma net loss per share is calculated based upon net loss adjusted for
the reduction in after-tax interest expense of approximately $54,000 that would
have taken place had the outstanding balances of the bank line of credit
($400,000), the stockholder line of credit ($300,000) and the notes payable
($575,000) at December 31, 1998 been retired at the beginning of 1998 and
1,300,000 shares outstanding plus the estimated number of shares (255,000) which
would have to be sold by the Company at the initial public offering price of
$5.00 per share to retire this debt.
F-15
<PAGE>
================================================================================
A prospective investor should rely only on the information contained in
this Prospectus or in the Company's registration statement filed with the SEC.
The Company and the Underwriter have not authorized any other person to provide
you with any other information. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities by any person in any
jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any date after the date of this Prospectus.
-----------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Summary ............................ 3
Gen Trak and its Products .................. 3
The Offering ............................... 4
Summary Financial Data ..................... 5
Statements of Operations Data ................. 6
Risk Factors .................................. 7
Dilution ...................................... 10
Use of Proceeds ............................... 11
Dividend Policy ............................... 12
Capitalization ................................ 13
Selected Financial Data ....................... 14
Statement of Operations Data ............... 14
Management's Discussion and Analysis .......... 15
Gen Trak's Business ........................... 20
Management .................................... 28
Executive Compensation ........................ 29
Principal Shareholders ........................ 31
Certain Transactions .......................... 34
Description of Securities ..................... 35
Underwriting .................................. 36
Shares Eligible for Future Sale ............... 39
Legal Proceedings ............................. 39
Legal Matters ................................. 39
Experts ....................................... 39
-----------------------------------
Until , 1999 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
offering, may be required to deliver a Prospectus. This is in addition to the of
dealers' obligation to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
650,000 Units
Each Unit Consisting of
Two Shares of Common Stock
Two Redeemable Common Stock
Purchase warrants
GEN TRAK, INC.
---------------
PROSPECTUS
---------------
[GRAPHIC OMITTED]
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boston, Massachusetts
Brooklyn, New York
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Duluth, Georgia
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrook Heights, New Jersey
La Jolla, California
Naples, Florida
New York, New York
Orlando, Florida
Sarasota Florida
Tampa, Florida
West Boca Raton, Florida
, 1999
================================================================================
<PAGE>
PART II
---------------------
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide that the Company shall indemnify each person
who is or was a director, officer or employee of the Company to the fullest
extent permitted under Section 1741 of the Pennsylvania Business Corporation Act
(the "PBCA"). Section 1741 of the PBCA empowers a Pennsylvania corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation) by reason of the fact that such person is or was
a director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including attorneys'
fees) incurred by any officer or director in defending such action, provided
that the director or officer undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Pennsylvania corporation may indemnify officers and directors in an
action by or in the right of the corporation to procure a judgment in its favor
under the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he actually
and reasonably incurred in connection therewith. The indemnification provided is
not deemed to be exclusive of any other rights to which an officer or director
may be entitled under any corporation's bylaw, agreement, vote or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is therefore unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimates of fees and expenses incurred or to be incurred in connection
with the issuance and distribution of securities being registered, all of which
are being paid exclusively by the Company, other than underwriting discounts and
commissions are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission filing fee ................. $ 5,050
National Association of Securities Dealers filing fee ......... 2,317
Nasdaq and Exchange filing fees ............................... 12,000
Underwriter's Non-Accountable Expense Allowance ............... 195,000
Underwriter's Financial Advisory Fee .......................... 108,000
State Securities Laws (Blue Sky) fees and expenses ............ 20,000*
Printing and mailing costs and fees ........................... 35,000*
Legal fees and costs .......................................... 100,000
Accounting fees and costs ..................................... 75,000*
Transfer Agent fees ........................................... 5,000*
Miscellaneous expenses ........................................ 42,633
--------
TOTAL ......................................................... $600,000
</TABLE>
- ------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. On September 23, 1998, the Company issued its 10% Promissory Note to
Susquehana Holdings Corp. in the principal amount of $300,000. Simultaneously,
stockholders of the Company sold 390,000 shares of its Common Stock to
Susquehana Holdings Corp., for aggregate consideration of $2,500. No underwriter
participated in this transaction. These shareholders were: Arthur V. Boyce, Jr.,
George L. Bird, Jr., Harry A. Arena, Gerald Hamburg, Edward Rubin, J. Edmond
Mullin, J. Scott Maxwell and Steven H. Lupin. The issuance by the Company of its
10% Promissory Note was exempt from registration under Section 4(2) of the Act.
The Company relied on Section 4(2) based upon its knowledge of the
sophistication of the single purchaser. The transfers by the shareholders were
exempt under Section 4(1) of the Act. Section 4(1) was applicable as all of the
shareholders other than Mr. Boyce had held these shares for at least five years,
and Mr. Boyce held these shares for approximately two years. Based on the
factors relied upon by the Company in issuing its Promissory Note to Susquehana,
the Company could have issued these shares to Susquehana directly. No public
solicitation was employed in these transactions, and the purchaser provided the
Company and the stockholders with representations regarding his investment
intent.
2. In the fourth quarter of 1998, the Company issued options exercisable
for a total of 60,000 shares of common stock to ten people. The options are
exercisable at a price of $3.00 per share. One issuance, to Dr. Ertingshausen,
was exempt from registration under Section 4(2) of the Act, as Dr. Ertinghausen
received these options as consideration for his joining the board of directors.
The remaining option issuances were exempt from registration pursuant to Rule
701. The Company relied on Rule 701 as (i) all of these options were issued
pursuant to the Company's 1998 Stock Option Plan, a written compensatory benefit
plan within the meaning of Rule 701, (ii) five of these individuals were
employees of the Company, and four individuals were consultants not engaged in
the offer or sale of securities in connection with capital raising and (iii) the
aggregate value of the shares issuable under these options did not exceed
$500,000.
3. In November, 1998, the Company issued $575,000 in principal amount of
its unsecured Promissory Notes due September 28, 1999 to sixteen purchasers.
These notes were sold for 100% of their face value. Barron Chase Securities,
Inc. acted as Selling Agent for the Company in that offering, Barron Chase
received a selling commission equal to 10% of the purchase price of the Notes
sold, and a non-accountable expense allowance equal to 3% of the purchase price
of the Notes. Upon closing of the initial public offering which is the subject
of this registration statement, the holders of the Notes will be issued an
aggregate of 115,000 shares of the Company's common stock. This sale of the
Notes was, and the issuance of the shares will be, exempt from registration
pursuant to Rule 506 of Regulation D. The Company relied on Rule 506 as the
investors were all "accredited investors" as defined in Regulation D, no public
solicitation was employed, the purchasers bought the securities with investment
intent and the shares may not be transferred for 24 months after issuance.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and Barron Chase Securities, Inc.
1.2 Form of Selected Dealers Agreement
1.3 Form of Underwriter's Warrant Agreement and Form of Warrant Certificate
3.1 Articles of Incorporation and Amendments thereto
3.2 Bylaws
3.3 Form of Specimen Common Stock Certificate*
3.4 Form of Specimen Warrant Certificate
3.5 1998 Stock Option Plan
3.6 Form Unit Certificate*
3.7 Amendments to Bylaws
4.0 Agreement between the Company and Stocktrans, Inc. (Warrant Agent)
5.0 Form of Opinion of Connolly Epstein Chicco Foxman Oxholm & Ewing
10.1 Addendum to Employment Agreement between the Company and Arthur Boyce
10.2 Form of Financial Advisory Agreement with Underwriter
10.3 Form of Merger and Acquisition Agreement with Underwriter
10.4 Consulting Agreement between the Company and George Bird
10.5 Promissory Note from the Company to Susquehana Holdings Corp.
10.6 Purchase Agreement between the Company and Susquehana Holdings Corp.
10.7 Consulting Agreement between the Company and Norbert Zeelander
10.8 Manufacturing Agreement between the Company and SFP Research, Inc.
10.9 Distribution Agreement between the Company and Biosynthesis, Inc.
24.1 Consent of Ernst & Young LLP
24.2 Consent of Connolly Epstein Chicco Foxman Oxholm & Ewing (continued in Exhibit 5.0)
27.0 Financial Data Schedule (Electronic Filing only)
</TABLE>
* To be filed by Amendment
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or event which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(a)(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(a)(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(d) Will provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
II-3
<PAGE>
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(f)(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, in Plymouth Meeting,
Pennsylvania, on March 26, 1999.
GEN TRAK, INC.
By: /s/ Arthur V. Boyce, Jr
----------------------------------
Arthur V. Boyce, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arthur V. Boyce, Jr. President, Director and Chief Executive March 26, 1999
---------------------------- Officer
Arthur V. Boyce, Jr.
/s/ George L. Bird, Jr. Chairman of the Board, Secretary and March 26, 1999
---------------------------- Director
George L. Bird, Jr.
/s/ Harry A. Arena Treasurer, Principal Financial Officer and March 26, 1999
---------------------------- Director
Harry A. Arena
/s/ Gerald Hamburg Director March 26, 1999
----------------------------
Gerald Hamburg
/s/ Donald O. Nichols Vice-President, Controller and Principal March 26, 1999
---------------------------- Accounting Officer
Donald O. Nichols
/s/ Gerhard Ertingshausen Director March 26, 1999
----------------------------
Gerhard Ertingshausen
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and Barron Chase
Securities, Inc.
1.2 Form of Selected Dealers Agreement
1.3 Form of Underwriter's Warrant Agreement and Form of Warrant Certificate
3.1 Articles of Incorporation and Amendments thereto
3.2 Bylaws
3.3 Form of Specimen Common Stock Certificate+
3.4 Form of Specimen Warrant Certificate
3.5 1998 Stock Option Plan
3.6 Form Unit certificate+
3.7 Amendments to Bylaws*
4.0 Agreement between the Company and Stocktrans, Inc. (Warrant Agent)*
5.0 Form of Opinion of Connolly Epstein Chicco Foxman Oxholm & Ewing*
10.1 Addendum to Employment Agreement between the Company and Arthur Boyce
10.2 Form of Financial Advisory Agreement with Underwriter
10.3 Form of Merger and Acquisition Agreement with Underwriter
10.4 Consulting Agreement between the Company and George Bird
10.5 Promissory Note from the Company to Susquehana Holdings Corp.
10.6 Purchase Agreement between the Company and Susquehana Holdings Corp.
10.7 Consulting Agreement between the Company and Norbert Zeelander
10.8 Manufacturing Agreement between the Company and SFP Research, Inc.
10.9 Distribution Agreement between the Company and Biosynthesis, Inc.
24.1 Consent of Ernst & Young LLP*
24.2 Consent of Connolly Epstein Chicco Foxman Oxholm & Ewing (contained in
Exhibit 5.0)*
27.0 Financial Data Schedule (Electronic Filing only)*
</TABLE>
* Filed with Amendment No. 1
+ To be filed by further Amendment
II-6
<PAGE>
Gen Trak, Inc.
Amendments to Bylaws
RESOLVED, that Section 3.17 of the Corporation's Bylaws is hereby deleted.
RESOLVED, that paragraph (a) of Section 4.03 of the Corporation's Bylaws is
hereby amended and restated to provide in its entirety as follows:
(a) The business of this Corporation shall be managed under the
direction of the Board of Directors. Subject to the provisions of application
law and the Articles of Incorporation, the Board of Directors shall have the
authority to (i) determine the number of directors to constitute the Board and
(ii) classify the directors with respect to the time for which they shall
severally hold office.
FURTHER RESOLVED, that Section 4.04 of the Corporation's Bylaws is hereby
amended and restated in its entirety to provide as follows:
Section 4.04. Vacancies. If any office of any director shall become
vacant by reason of death, resignation, disqualification or other cause, or if a
vacancy or vacancies shall result from an increase in the number of directors,
such vacancy or vacancies shall be filled by a majority vote of the remaining
members of the Board, even though less than a quorum, and each person so
selected shall be a director to serve the balance of the unexpired term.
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of _________, 1999, between GEN TRAK, INC.,
a Pennsylvania corporation (the "Company"), and STOCKTRANS, INC., as Warrant
Agent (the "Warrant Agent").
WHEREAS, the Company proposes to issue up to 1,495,000 Warrants, each
such Warrant entitling the holder thereof to purchase one share of the Company's
Common Stock, $.01 par value per share (the shares of Common Stock issuable on
exercise of the Warrants or other securities which may hereafter be issuable
upon such exercise being referred to herein as the "Warrant Shares"), in
connection with a public offering (the "Offering") by the Company pursuant to a
Registration Statement (the "Registration Statement") on Form SB-2 (File No.
333-69724), filed with the Securities and Exchange Commission and effective at
10:00 a.m. this date (the "Effective Date);
WHEREAS, the Company proposes to issue certificates evidencing the
Warrants (such certificates when issued being hereinafter called the "Warrant
Certificates") promptly following the Effective Date;
WHEREAS, the Company desires the Warrant Agent, and the Warrant Agent
agrees, to act on behalf of the Company in connection with the issuance,
exercise, division, transfer, exchange, replacement, redemption and surrender of
the Warrants;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the Company and the Warrant Agent hereby agree as
follows:
ARTICLE I
DISTRIBUTION OF WARRANT CERTIFICATES
Section 1.1 Appointment of Warrant Agent. The Company hereby appoints
the Warrant Agent to act on behalf of the Company in accordance with the
instructions hereinafter set forth, and the Warrant Agent hereby accepts such
appointment.
Section 1.2 Form of Warrant Certificates. The Warrant Certificates
shall be issued in registered form only and, together with the purchase and
assignment forms to be printed on the reverse thereof, shall be substantially in
the form of Exhibit A hereto. In addition, the Warrant Certificates may have
such letters, numbers or other marks of identification or designations and such
legends, summaries or endorsements stamped, printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as, in any particular case, may be required in
the opinion of counsel for the Company to comply with any law or with any rule
or regulation of any regulatory authority or agency, or to conform to customary
usage.
<PAGE>
Section 1.3 Execution of Warrant Certificates. The Warrant Certificates
shall be executed on behalf of the Company by its Chairman of the Board,
President, Chief Executive Officer or any Vice President and by its Secretary or
Assistant Secretary, either manually or by facsimile signature printed thereon.
The Warrant Certificates shall be countersigned and dated the date of
countersignature by the Warrant Agent and shall not be valid for any purpose
unless so countersigned and dated. In case any authorized officer of the Company
who shall have signed any of the Warrant Certificates shall cease to be such
officer of the Company either before or after delivery thereof by the Company to
the Warrant Agent, the signature of such person on such Warrant Certificates,
nevertheless, shall be valid and such Warrant Certificates may be countersigned
by the Warrant Agent and issued and delivered to those persons entitled to
receive the Warrants represented thereby with the same force and effect as
though the person who signed such Warrant Certificates had not ceased to be such
officer of the Company.
Section 1.4 Registration. Upon consummation of the Offering, the
Company shall deliver to the Warrant Agent an adequate supply of Warrant
Certificates executed on behalf of the Company as provided in Section 1.3
hereof.
The Warrant Agent shall maintain books for the transfer and
registration of the Warrant Certificates. The Warrant Certificates shall be
numbered and shall be registered in a warrant register (the "Warrant Register")
as they are issued. Each of the Company and the Warrant Agent shall be entitled
to treat the registered owners (therein called "Holders") of the Warrant
Certificates as the owners in fact thereof for all purposes and shall not be
bound to recognize any equitable or other claim to or interest in such Warrant
Certificates on the part of any other person, and shall not be liable for any
registration or transfer of Warrant Certificates which are registered or to be
registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration of transfer, or with the knowledge of such
facts that the Company's or the Warrant Agent's (as the case may be)
participation therein amounts to bad faith.
Section 1.5 Transfer of Warrants. The Warrants shall be separately
transferable beginning on the 180th day after the Effective Date or such earlier
date as may be designated by the Underwriter of the offering of the Warrants
pursuant to the Registration Statement, Barron Chase Securities, Inc., in
writing to the Warrant Agent. The Warrant Certificates shall be transferable
only on the books of the Company maintained at the office of the Warrant Agent
in Ardmore, Pennsylvania (or such other office as the Warrant Agent may
designate by Notice to the Company), upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney-in-fact or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, which endorsement shall be guaranteed by a commercial bank (not
savings bank or a savings and loan association) or trust company located in the
United States or by a broker or dealer which is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc. (the "NASD") (herein "Guaranteed"). In all cases of transfer by an
attorney-in-fact, the original power of attorney, duly approved, or a copy
thereof, duly certified, shall be deposited and remain with the Warrant Agent.
In case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Warrant Agent
in its discretion. The Company and the Warrant Agent shall have the sole
discretion to determine the validity and appropriateness of all documentation
related to any such transfer, and in the event of a dispute between them, the
Company's decision shall prevail.
<PAGE>
ARTICLE II
WARRANT EXERCISE PRICE AND EXERCISE OF WARRANTS
Section 2.1 Exercise Price. Each Warrant shall, when duly signed on
behalf of the Company and countersigned by the Warrant Agent, each as set forth
in Section 1.3 hereof, entitle the registered holder thereof, subject to the
provisions of Article III hereof, to purchase from the Company on or before 5:00
p.m., New York City, New York Time, on or prior to ________ 2004, or such other
date as may be determined pursuant to Section 2.2(a) hereof, one share of Common
Stock for each Warrant evidenced thereby, at the purchase price of $6.00 per
share or such adjusted number of shares at such adjusted purchase price as may
be established from time to time pursuant to the provisions of Article IV hereof
(the "Warrant Exercise Price"), in each case payable in full in good funds at
the time of exercise of such Warrant.
Section 2.2 Exercisability of Warrants and Registration of Warrant
Shares. Each Warrant may be exercised at any time after the warrants became
separately transferrable in accordance with Section 1.5 hereof, provided that
the Warrant Shares issuable upon exercise are, on the date of exercise,
effectively registered under the Securities Act of 1933, as amended (the
"Securities Act"), and such other action as may be required by Federal or state
law relating to the issuance or distribution of securities shall have been
taken, until 5:00 p.m., New York City, New York Time, on the earlier of (x)
________, 2004, or (y) the Redemption Date (as defined in Section 3.3) with
respect to such Warrant. The term "Warrant Exercise Deadline" as used in this
Agreement shall mean the latest time and date at which the Warrants may be
exercised. After the Warrant Exercise Deadline, any unexercised Warrants will be
void and all rights of the Holders of such unexercised Warrants shall cease. The
Company agrees, from and after the effective date of the Registration Statement,
to use its best efforts to file and have declared effective such post-effective
amendments to the Registration Statement as may be necessary to make available a
prospectus meeting the requirements of Section 10(a)(3) of the Securities Act,
until the earlier of the date by which all Warrants are exercised or the Warrant
Exercise Deadline, and the Company shall deliver copies of such prospectuses to
the Warrant Agent with instructions to deliver a copy thereof to each person
effecting the exercise of a Warrant with or prior to delivery of the Warrant
Shares issuable upon such exercise. In addition, the Company shall notify the
Warrant Agent of the filing of any post-effective amendment required by this
Section 2.2 and the Warrant Agent shall promptly notify each Holder of such
filing. In the event that the effectiveness of the Registration Statement or any
post-effective amendments thereto should lapse during the thirty day period
prior to the Warrant Exercise Deadline, the Warrant Exercise Deadline shall be
extended until the thirtieth day following the effectiveness of a Registration
Statement applicable to the Warrant Shares issuable upon the exercise of such
Warrants. The Company shall notify the Warrant Agent of any extension of the
Warrant Exercise Deadline.
<PAGE>
Section 2.3 Procedure for Exercise of Warrants. During the period
specified in and subject to the provisions of Section 2.2 hereof, Warrants may
be exercised by surrendering the Warrant Certificates representing such Warrants
to the Warrant Agent at 7 E. Lancaster Avenue, Ardmore, Pennsylvania 19003, or
such other office as may be designated from time to time by the Warrant Agent
(its "Principal Office"), with the election to purchase form set forth on the
reverse of the appropriate Warrant Certificate duly completed and executed, with
signatures Guaranteed, accompanied by payment in full for the account of the
Company of the Warrant Exercise Price, in effect at the time of such exercise,
together with payment in full of such taxes as are specified in Section 7.1
hereof, for each share of Common Stock with respect to which such Warrants are
being exercised. Such amounts shall be paid in full by check or money order
payable in United States currency to the order of the Company and such payment
shall be received and accepted by the Company subject to collection. The date on
which Warrants are exercised in accordance with this Section 2.3 subject to
collection of the Exercise Price is sometimes referred to herein as the Date of
Exercise of such Warrants.
Section 2.4 Issuance of Warrant Shares. As soon as practicable after
the Date of Exercise of any Warrants, the Company shall issue a certificate or
certificates for the number of full Warrant Shares to which the Holder of such
exercised Warrants is entitled, registered in accordance with the instructions
set forth in the election to purchase. All Warrant Shares shall be validly
authorized and issued, fully paid and nonassessable, and free from all taxes,
liens and charges created by the Company in respect of the issue thereof.
Certificates representing such Warrant Shares shall be delivered by the Warrant
Agent in such names and denominations as are required for delivery to, or in
accordance with the instructions of, the Holder of such exercised Warrants and
the Warrant Agent shall deliver such certificate to such Holder. Each person in
whose name any such certificate for Warrant Shares is issued shall for all
purposes be deemed to have become the holder of record of the Warrant Shares
represented thereby on the Date of Exercise of the Warrants resulting in the
issuance of such Warrant Shares, irrespective of the date of issuance or
delivery of such certificate for Warrant Shares; provided, however, that if, at
the date of the surrender of such Warrants and payment of the Exercise Price,
the transfer books for the Warrant Shares or other class of securities issuable
upon the exercise of the Warrants shall be closed, the certificates for the
Warrant Shares or of such other class of securities shall be issuable as of the
date on which such books shall next be opened (whether before or after the
Expiration Date) and until such date the Company shall be under no duty to
deliver any certificate for such Warrant Shares or for such other class of
securities.
Section 2.5 Certificates for Unexercised Warrants. In the event that
less than all of the Warrants represented by a Warrant Certificate are
exercised, the Warrant Agent shall countersign and mail, by first-class mail,
within thirty (30) days of the Date of Exercise, to the Holder of such Warrant
Certificate, or such other person as shall be designated in the election to
purchase, a new Warrant Certificate representing the number of full Warrants not
exercised. In no event shall a fraction of a Warrant be exercised, and in no
event shall the Warrant Agent distribute Warrant Certificates representing
fractions of Warrants under this or any other section of this Agreement.
<PAGE>
Section 2.6 Reservation of Shares. The Company shall at all times
reserve and keep available for issuance upon the exercise of Warrants a number
of authorized but unissued shares of its Common Stock, or such other securities
for which the warrants may become exercisable pursuant to paragraph 4.1(a)
hereof, that will be sufficient to permit the exercise in full of all
outstanding Warrants. The transfer agent for the Company's Common Stock or such
other securities, and every subsequent transfer agent for any shares of the
Company's securities issuable upon the exercise of the Warrants, shall be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be requisite for such purpose. The Company shall keep
a copy of this Agreement on file with the transfer agent for the Company's
Common Stock or such other securities and with every subsequent transfer agent
for any securities issuable upon the exercise of the Warrants. The Warrant Agent
is hereby authorized to requisition from time to time from such transfer agent
the stock certificates required to honor outstanding Warrants upon exercise
thereof in accordance with the terms of this Agreement and the Company shall
instruct such transfer agent to honor such requisitions. The Company will supply
such transfer agent with duly executed stock certificates for such purposes and
will provide or otherwise make available any cash which may be payable as
provided in Section 4.3 hereof. All Warrant Certificates surrendered shall be
canceled by the Warrant Agent and shall thereafter be delivered to the Company.
After the Date of Exercise of any Warrants, no shares shall be subject to
reservation in respect of such Warrants.
Section 2.7 Disposition of Proceeds. The Warrant Agent shall, no later
than the next business day after receipt, send to the Company all checks, money
orders and other forms of payment received in respect of the exercise of
Warrants.
ARTICLE III
REDEMPTION OF WARRANTS
Section 3.1 Redemption Price. The Company may, at its option, under the
conditions and upon notice specified in Section 3.3 hereof, at any time
beginning on the date on which the Warrants become separately transferable in
accordance with Section 1.5 hereof, redeem all, or from time to time any portion
of, the outstanding Warrants of either or both classes at a redemption price of
$.10 per Warrant (such price being hereinafter referred to as the "Redemption
Price"), at any time or from time to time before the Warrant Exercise Deadline.
Section 3.2 Payment of Redemption Price. On or prior to the opening of
business on each Redemption Date (as defined in Section 3.3 hereof), the
Company shall deposit with the Warrant Agent funds in form reasonably
satisfactory to the Warrant Agent sufficient to purchase all the Warrants which
are to be redeemed on such Redemption Date. Payment of the Redemption Price
shall be made by the Warrant Agent upon presentation and surrender of the
Warrant Certificates representing such Warrants to the Warrant Agent at its
Principal Office.
Section 3.3 Notice of Redemption.
(a) Notice of Redemption shall be given by the Company or the
Warrant Agent to all holders of the Warrants to be redeemed not less than thirty
(30) days prior to the date established by the Company for such redemption (the
"Redemption Date"). Such notice shall be given by first class mail. If notice is
to be given by the Warrant Agent, the Company shall notify the Warrant Agent at
least one business day prior to the date which would be thirty (30) days from
the Redemption Date. Each such notice of redemption shall specify the Redemption
Date and the Redemption Price.
(b) The notice shall state that payment of the Redemption
Price will be made by the Warrant Agent upon presentation and surrender of the
Warrant Certificates representing such Warrants to the Warrant Agent at its
Principal Office, and shall also state that the right to exercise the Warrants
will terminate at 5:00 p.m., New York City, New York time, on the Redemption
Date. Notwithstanding the foregoing, failure to mail the notice of redemption to
any Holder, or any defect therein, shall not affect the validity of the
redemption of the remaining Warrants but shall invalidate such call for
redemption with respect to such Holder, to the extent Warrants owned by such
Holder have been so called for redemption, unless it can be demonstrated that
such Holder received actual notice of such redemption. The Company will also
make prompt public announcement of such redemption by news release.
<PAGE>
(c) Notwithstanding the foregoing, Notice of Redemption may
only be given if, during the thirty (30) trading days ending within ten (10)
calendar days before the date of the Notice of Redemption, the closing sale
price for the Common Stock (if the Common Stock is listed on a national or
regional exchange or the NASDAQ National Market System) or the closing high bid
price for the Common Stock as quoted by NASDAQ (if the Common Stock is not
listed on a national or regional exchange or NASDAQ National Market System) is
an average of at least ten dollars ($10.00). The average price required by the
previous sentence shall be adjusted as and when, and in proportion to, any
adjustments in the exercise price of the Warrants made pursuant to Article VI
below.
ARTICLE IV
ADJUSTMENTS AND NOTICE PROVISIONS
Section 4.1 Adjustments of Exercise Price and Number of Warrant Shares.
The Exercise Price and the number and kind of securities issuable upon exercise
of each Warrant shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(a) In case the Company shall (i) issue any shares of its
Common Stock, or make any other distribution of securities, to holders of shares
of its Common Stock in respect of such shares, (ii) subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock or (iv) reclassify its Common Stock so that shares thereof which
were theretofore outstanding are changed or converted into other securities of
the Company (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation), the
number (and, as appropriate, the nature) of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so that the
Holder of each Warrant shall be entitled to receive the kind and number of
shares or other securities of the Company which he would have owned or have been
entitled to receive after the happening of any of the events described above,
had such Warrant been exercised immediately prior to the happening of such event
or any record date with respect thereof. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective date of
such event retroactive to immediately after the record date, if any, for such
event.
<PAGE>
(b) No adjustment in the number of Warrant Shares purchasable
shall be required pursuant to this Article IV unless such adjustment would
require an increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided, however,
that any adjustments which by reason of this paragraph (b) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment but not later than three years after the happening of the specified
event or events. All calculations shall be made to the nearest tenth of a share.
Anything in this Section 4.1 to the contrary notwithstanding, the Company shall
be entitled, but shall not be required, to make such changes in the number of
Warrant Shares purchasable upon the exercise of each Warrant, in addition to
those required by this Section 4.1, as it in its discretion shall determine to
be advisable in order that any dividend or distribution in shares of Common
Stock, subdivision, reclassification or combination of shares of Common Stock,
shall not result in any tax to the holders of its Common Stock or securities
convertible into Common Stock.
(c) Whenever the number of Warrant Shares purchasable upon the
exercise of Warrants is adjusted, as herein provided, the Warrant Exercise Price
shall be adjusted by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by a fraction, of which the numerator shall
be the number or Warrant Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares so purchasable immediately thereafter.
(d) For the purpose of this Section 4.1, the term "shares of
Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassification of such shares consisting
solely of changes in par value, or from no par value to par value, or from par
value to no par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraph (a) above, the Holders shall become
entitled to purchase any shares of capital stock of the Company other than
shares of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant, and the Warrant Exercise Price of
such shares shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
shares of Common Stock contained in this Section 4.1, and the provisions of
Article II hereof, with respect to the Shares, shall apply on like terms to any
such other shares.
(e) The Company may, at its option, at any time during the
term of the Warrants, reduce the then current Warrant Exercise Price to any
amount deemed appropriate by the Board of Directors of the Company.
(f) Whenever the number of Warrant Shares issuable upon the
exercise of each Warrant or the Warrant Exercise Price is adjusted, as herein
provided, the Company shall promptly notify the Warrant Agent of such adjustment
or adjustments and the Warrant Agent shall promptly cause notice of such
adjustment to be mailed by first class mail to the Holders of Warrants. The
Company shall forthwith file in the custody of its Secretary at its principal
office, and with the Warrant Agent, an Officer's Certificate showing the
adjustments to the Warrant Exercise Price and the adjustment to the number of
Warrant Shares issuable upon the exercise of such Warrants, setting forth in
reasonable detail the facts requiring such adjustment, and such other facts as
may be necessary to show the reason for and the manner of computing such
adjustment. Each such Officer's Certificate shall be made available at all
reasonable times for inspection by Holders of the Warrants. The Company may, at
its option, mail, or direct the Warrant Agent to mail, a copy of such Officer's
Certificate to each Holder of Warrants, and thereafter said Officer's
Certificate shall be conclusive and shall be binding on each Holder of Warrants
unless contested by such Holder by written notice to the Company within ten days
after receipt of the Officer's Certificate by such Holder.
<PAGE>
(g) Except as provided in this Section 4.1, no adjustment in
respect of any dividends shall be made during the term of a Warrant or upon the
exercise of a Warrant.
(h) In case of any consolidation of the Company with or merger
of the Company with or into another corporation or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, the Company or such successor or purchasing
corporation (or an affiliate of such successor or purchasing corporation), as
the case may be, shall agree that each Holder shall have the right thereafter,
upon payment of the Warrant Exercise Price in effect immediately prior to such
action, to purchase upon exercise of each Warrant the kind and amount of shares
and other securities and property (including cash) which he would have owned or
have been entitled to receive after the happening of such consolidation, merger,
sale or conveyance had such Warrant been exercised immediately prior to such
action. The provisions of this paragraph (h) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(i) Notwithstanding any adjustment in the Warrant Exercise
Price or the number or kind of shares purchasable upon the exercise of the
Warrants pursuant to this Agreement, certificates for Warrants issued prior or
subsequent to such adjustment may continue to express the same price and number
and kind of Warrant Shares as are initially issuable pursuant to this Agreement.
Section 4.2 Exercise Price Not Less Than Par Value. In no event shall
the Warrant Exercise Price be adjusted below the par value per share of the
Common Stock.
Section 4.3 Fractional Shares. The Company shall not be required upon
the exercise of any Warrant to issue fractional shares of Common Stock which may
result from adjustments in accordance with this Article IV to the Warrant
Exercise Price or number of shares of Common Stock purchasable under each
Warrant. The number of full shares of Common Stock which shall be deliverable
upon exercise shall be computed based on the number of shares deliverable in
exchange for the aggregate number of Warrants exercised. The Holder of each
Warrant Certificate, by such Holder's acceptance of the Warrant Certificate,
expressly waives any right to receive any fractional share of Common Stock upon
exercise of the Warrants. The Company shall pay a cash adjustment in lieu of
fractional shares based upon the market value of a share of Common Stock on the
business day next preceding the date of such exercise. For the purposes of this
Section 4.3, the market value per share of Common Stock at any date shall mean
the closing high bid price for the Common Stock reported on NASDAQ on the
preceding trading day, or closing sale price of the Common Stock if it is then
listed on an exchange or traded on the NASDAQ National Market System. If no such
closing bid or sales price for the Common Stock is available, market value shall
be an amount determined in good faith by the Board of Directors of the Company.
<PAGE>
ARTICLE V
OTHER PROVISIONS RELATING TO RIGHTS
OF HOLDERS OF WARRANT CERTIFICATES
Section 5.1 Rights of Warrant Holders. No Warrant Certificate shall
entitle the registered holder thereof to any of the rights of a stockholder of
the Company, including, without limitation, the right to vote, to receive
dividends and other distributions, to receive any notice of, or to attend,
meetings of stockholders or any other proceedings of the Company.
Section 5.2 Lost, Stolen, Mutilated or Destroyed Warrant Certificates.
If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the
Company in its discretion may direct the Warrant Agent to execute and deliver,
in exchange and substitution for and upon cancellation of a mutilated Warrant
Certificate, or in lieu of or in substitution for a lost, stolen or destroyed
Warrant Certificate, a new Warrant Certificate for the number of Warrants
represented by the Warrant Certificate so mutilated, lost, stolen or destroyed,
but only upon receipt of evidence of such loss, theft or destruction of such
Warrant Certificate, and of the ownership thereof, and indemnity and other
documentation, if requested, all satisfactory to the Company and the Warrant
Agent. Applicants for such substitute Warrant Certificates shall also comply
with such other reasonable regulations and pay such other reasonable charges
incidental thereto as the Company or Warrant Agent may prescribe. Any such new
Warrant Certificate shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant Certificate shall be at any time enforceable by anyone.
ARTICLE VI
SPLIT UP, COMBINATION, EXCHANGE, TRANSFER
AND CANCELLATION OF WARRANT CERTIFICATES
Section 6.1 Split Up, Combination, Exchange and Transfer of Warrant
Certificates. After the Warrant Certificates become separately transferable and
prior to the Exercise Deadline, Warrant Certificates, subject to the provisions
of Section 6.2, may be split up, combined or exchanged for other Warrant
Certificates representing a like aggregate number of Warrants or may be
transferred in whole or in part. Any Holder desiring to split up, combine or
exchange a Warrant Certificate or Warrant Certificates shall make such request
in writing delivered to the Warrant Agent at its Principal Office and shall
surrender the Warrant Certificate or Warrant Certificates so to be split up,
combined or exchanged at said office. Subject to any applicable laws, rules or
regulations restricting transferability, any restriction on transferability that
may appear on a Warrant Certificate in accordance with the terms hereof, or any
"stop-transfer" instructions the Company may give to the Warrant Agent to
implement any such restriction (which instructions the Company is expressly
authorized to give), transfer of outstanding Warrant Certificates may be
effected by the Warrant Agent from time to time upon the books of the Company to
be maintained by the Warrant Agent for that purpose, upon a surrender of the
Warrant Certificate to the Warrant Agent at its Principal Office, with the
assignment form set forth in the Warrant Certificate duly executed and with the
signatures set forth on such assignment form Guaranteed. Upon any such surrender
<PAGE>
for split up, combination, exchange or transfer, the Warrant Agent shall execute
and deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested. The Warrant Agent shall not
be required to effect any split up, combination, exchange or transfer which will
result in the issuance of a Warrant Certificate evidencing a fraction of a
Warrant. The Warrant Agent shall not be required (i) to issue, register the
transfer of or exchange any Warrant during a period beginning at the opening of
business 5 days before the day of the mailing by the Warrant Agent of a Notice
of Redemption of Warrants selected for redemption under Section 3.1 and ending
at the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Warrant so selected for redemption in whole or in
part, except, in the case of any Warrant Certificate to be redeemed in part, the
portion thereof not to be redeemed. The Warrant Agent may require the holder to
pay a sum sufficient to cover any tax, governmental charge, or other reasonable
charges incidental thereto, that may be imposed as prescribed in connection with
any split up, combination, exchange or transfer of Warrant Certificates prior to
the issuance of any new Warrant Certificate.
Section 6.2 Cancellation of Warrant Certificates. Any Warrant
Certificate surrendered upon the exercise of Warrants or for split up,
combination, exchange or transfer, or purchased or otherwise acquired by the
Company, shall be canceled and shall not be reissued by the Company; and except
as provided in Sections 2.5 and/or 2.6 in case of the exercise of less than all
of the Warrants evidenced by a Warrant Certificate or as set forth in Section
6.l in case of a split up, combination, exchange or transfer, no Warrant
Certificate shall be issued hereunder in lieu of such canceled Warrant
Certificate. Any Warrant Certificate so canceled shall be destroyed by the
Warrant Agent unless otherwise directed by the Company.
ARTICLE VII
PROVISIONS CONCERNING THE WARRANT
AGENT AND OTHER MATTERS
Section 7.1 Payment of Taxes and Charges. The Company will from time to
time promptly pay to the Warrant Agent, or make provisions satisfactory to the
Warrant Agent for the payment of, all taxes and charges that may be imposed by
the United States or any state upon the Company or the Warrant Agent in
connection with the issuance or delivery of shares of Common Stock upon the
exercise of any Warrants. Any transfer taxes in connection with the issuance of
Warrant Certificates or certificates for shares of Common Stock in any name
other than that of the Holder of the Warrant Certificate surrendered shall be
paid by such Holder; and, in such case, the Company shall not be required to
issue or deliver any Warrant Certificate or certificate for shares of Common
Stock until such taxes shall have been paid or it has been established to the
Company's satisfaction that no tax is due.
Section 7.2 Resignation or Removal of Warrant Agent. The Warrant Agent
may resign its duties and be discharged from all further duties and liabilities
hereunder after giving at least 30 days' notice in writing to the Company,
except that such shorter notice may be given as the Company shall, in writing,
accept as sufficient. Upon comparable notice to the Warrant Agent, the Company
may remove the Warrant Agent; provided, however, that in such event the Company
shall appoint a new Warrant Agent, as hereinafter provided, and the removal of
the Warrant Agent shall not be effective until a new Warrant Agent has been
appointed and has accepted such appointment. If the office of Warrant Agent
becomes vacant by resignation or incapacity to act or otherwise, the Company
shall appoint in writing a new Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or by the Holder of any Warrant Certificate, then the Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new Warrant Agent. Any new Warrant Agent, whether appointed by
the Company or by such a court, must have full legal right and authority to act
as warrant agent and shall be reasonably acceptable to the Company. Any new
Warrant Agent appointed hereunder shall execute, acknowledge and deliver to the
former Warrant Agent last in office, and to the Company, an instrument accepting
such appointment under substantially the same terms and conditions as are
contained herein, and thereupon such new Warrant Agent without any further act
or deed shall become vested with the rights, powers, duties and responsibilities
of the Warrant Agent and the former Warrant Agent shall cease to be the Warrant
Agent; but if, for any reason, it becomes necessary or expedient to have the
former Warrant Agent execute and deliver any further assurance, conveyance, act
or deed, the same shall be done at the reasonable expense of the Company and
shall be legally and validly executed and delivered by the former Warrant Agent.
<PAGE>
Section 7.3 Notice of Appointment. Not later than the effective date of
the appointment of a new Warrant Agent the Company shall cause notice thereof to
be mailed to the former Warrant Agent and the transfer agent for the Company's
Common Stock, and shall forthwith cause a copy of such notice to be mailed to
each Holder of a Warrant Certificate. Failure to mail such notice, or any defect
contained herein, shall not affect the legality or validity of the appointment
of the successor Warrant Agent.
Section 7.4 Merger of Warrant Agent. Any entity into which the Warrant
Agent may be merged or with which it may be consolidated or any entity resulting
from any merger or consolidation to which the Warrant Agent shall be a party,
shall be the successor Warrant Agent under this Agreement without further act,
provided that such entity would be eligible for appointment as a successor
Warrant Agent under the provisions of Section 7.2 hereof. Any such successor
Warrant Agent may adopt the prior countersignature of any predecessor Warrant
Agent and distribute Warrant Certificates countersigned but not distributed by
such predecessor Warrant Agent, or may countersign the Warrant Certificates in
its own name.
Section 7.5 Company Responsibilities. The Company agrees that it shall
(i) pay the Warrant Agent remuneration for its services as Warrant Agent
hereunder as set forth in a separate agreement or pursuant to Schedules adopted
by the Warrant Agent and the Company from time to time, (ii) reimburse the
Warrant Agent upon demand for all expenses, advances, and expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder;
(iii) provide the Warrant Agent, upon request, with sufficient funds to pay any
cash due pursuant to Section 4.3 upon exercise of Warrants; and (iv) perform,
execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all further and other acts, instruments and
assurances as may reasonably be required by the Warrant Agent for the carrying
out or performing by the Warrant Agent of the provisions of this Agreement.
Section 7.6 Purchase of Warrants by the Company. The Company shall have
the right, except as limited by law, other agreement or herein, to purchase or
otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate and as is acceptable to the seller of
such Warrants.
Section 7.7 Certificate for the Benefit of Warrant Agent. Whenever in
the performance of its duties under this Agreement the Warrant Agent shall deem
it necessary or desirable that any matter be proved or established or that any
instructions with respect to the performance of its duties hereunder be given by
the Company prior to taking or suffering any action hereunder, such matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established, or such instructions may be
given, by a certificate or instrument signed by the Chairman of the Board, the
President or the Chief Executive Officer of the Company and delivered to the
Warrant Agent. Such certificate or instrument may be relied upon by the Warrant
Agent for any action taken or suffered in good faith by it under the provisions
of this Agreement; provided, however, that in its discretion the Warrant Agent
may in lieu thereof accept other evidence of such matter or may require such
further or additional evidence as it may deem reasonable.
<PAGE>
Section 7.8 Liability of Warrant Agent. The Warrant Agent shall act
hereunder solely as an agent for the Company and its duties shall be determined
solely by the provisions hereof. The Warrant Agent shall be liable hereunder for
its own negligence, recklessness, willful misconduct or bad faith. The Warrant
Agent shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Agreement or in the Warrant Certificates (except its
countersignature thereof) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the Company
only. The Warrant Agent will not incur any liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken, or any
failure to take action, in reliance on any notice, resolution, waiver, consent,
order, certificate, or other paper, document or instrument reasonably believed
by the Warrant Agent to be genuine and to have been signed, sent or presented by
the proper party or parties. The Warrant Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof by the Company or in respect of the validity or execution of any
Warrant Certificate (except its countersignature thereof); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Warrant Certificate; nor shall it be responsible for
the making of any adjustment required under the provisions of Article IV hereof
or responsible for the manner, method or amount of any such adjustment or the
facts that would require any such adjustment; nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock or other securities to be issued
pursuant to this Agreement or any Warrant Certificate or as to whether any
shares of Common Stock or other securities will when issued be validly
authorized and issued and fully paid and nonassessable.
Section 7.9 Use of Attorneys, Agents and Employees. The Warrant Agent
may execute and exercise any of the rights or powers hereby vested in it or
perform any duty hereunder either itself or by or through its attorneys, agents
or employees.
Section 7.10 Indemnification. The Company agrees to indemnify the
Warrant Agent and save it harmless against any and all losses, expenses or
liabilities, including judgments, costs and reasonable counsel fees arising out
of or in connection with its agency under this Agreement, except as a result of
the negligence, recklessness, willful misconduct or bad faith of the Warrant
Agent.
Section 7.11 Acceptance of Agency. The Warrant Agent hereby accepts the
agency established by this Agreement and agrees to perform the same upon the
terms and conditions herein set forth.
<PAGE>
Section 7.12 Instructions from the Company. The Warrant Agent is hereby
authorized and directed to accept instructions with respect to the performance
of its duties hereunder from the Chairman of the Board, the President, the Chief
Executive Officer any authorized Vice President, the Secretary or the Treasurer
of the Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with instructions of any
such officer or officers.
Section 7.13 Changes to Agreement. The Warrant Agent may without the
consent or concurrence of any Holder, by supplemental agreement or otherwise,
join with the Company in making any changes or corrections in this Agreement
that the Company and the Warrant Agent shall have been advised by counsel to the
Company (i) are required to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, (ii) add to the covenants and agreements of the Company or the
Warrant Agent in this Agreement, and such further covenants and agreements
thereafter to be observed, or (iii) result in the surrender of any right or
power reserved to or conferred upon the Company or the Warrant Agent in this
Agreement, but which changes or corrects do not or will not adversely affect,
alter or change the rights, privileges or immunities of the Holders of Warrant
Certificates.
Section 7.14 Assignment. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns.
Section 7.15 Successor to Company. For so long as any Warrants are
outstanding the Company will not merge or consolidate with or into any other
corporation or sell or otherwise transfer its property, assets and business
substantially as an entirety to a successor corporation, unless the corporation
resulting from such merger, consolidation, sale or transfer (if not the Company)
shall expressly assume, by supplemental agreement reasonably satisfactory in
form and substance to the Warrant Agent and delivered to the Warrant Agent, the
due and punctual performance and observance of each and every covenant and
condition of this Agreement to be performed and observed by the Company.
<PAGE>
Section 7.16 Notices. Any notice or demand required by this Agreement
to be given or made by the Warrant Agent or by the Holder to or on the Company
shall be sufficiently given or made if sent by hand delivery, overnight mail or
service, courier service or certified mail (return receipt requested) addressed
(until another address is specified by notice given by the Company to the
Warrant Agent) as follows:
GEN TRAK, INC.
5100 Campus Drive
Plymouth Meeting, PA 19462-1123
Attn: Arthur V. Boyce, Jr., President
with a copy to:
Gary A. Miller, Esquire
Connolly Epstein Chicco
Foxman Oxholm & Ewing
1515 Market Street, 9th Floor
Philadelphia, PA 19102
Any notice or demand required by this Agreement to be given or made by the
registered holder of any Warrant Certificate or by the Company to or on the
Warrant Agent shall be sufficiently given or made if sent by hand delivery,
overnight mail or service, courier service or certified mail (return receipt
requested) postage prepaid, addressed (until another address is specified by
notice given by the Warrant Agent to the Company), as follows:
STOCKTRANS, INC.
7 E. Lancaster Avenue
Ardmore, Pennsylvania 19003
Attn: Jonathan Miller, President
Any notice or demand required by this Agreement to be given or made by the
Company or the Warrant Agent to or on the Holder of any Warrant Certificate
shall be sufficiently given or made, whether or not such Holder receives the
notice, if sent by hand delivery, overnight mail or service, courier service, or
first-class or registered mail, postage prepaid, addressed to such Holder at his
last address as shown on the books of the Company maintained by the Warrant
Agent.
Section 7.17 Defects in Notice. Subject to the provisions of Section
3.3 hereof with respect to notices of redemption, failure to file any
certificate or notice or to mail any notice, or any defect in any certificate or
notice pursuant to this Agreement shall not affect in any way the rights of any
Holder or the legality or validity of any adjustment made pursuant to Article IV
hereof, or any transaction giving rise to any such adjustment, or the legality
or validity of any action taken or to be taken by the Company.
<PAGE>
Section 7.18 Governing Law. The validity, interpretation and
performance of this Agreement, of such Warrant Certificate issued hereunder and
of the respective terms and provisions hereof and thereof shall be governed by
the law the Commonwealth of Pennsylvania.
Section 7.19 Standing. Nothing in this Agreement expressed and nothing
that may be implied from any of the provisions hereof is intended, or shall be
construed, to confer upon, or give to, any person or corporation other than the
Company, the Warrant Agent, and the Holders any right, remedy or claim under or
by reason of this Agreement or of any covenant, condition, stipulation, promise
or agreement contained in this Agreement. This Agreement shall be for the sole
and exclusive benefit of the Company and the Warrant Agent and their respective
successors, and the Holders.
Section 7.20 Headings. The descriptive headings of the articles and
sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 7.21 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original; but such counterparts shall together constitute but one and the same
instrument.
Section 7.22 Conflict of Interest. Except as otherwise prohibited by
law, the Warrant Agent and any shareholder, director, officer or employee of the
Warrant Agent may buy, sell or deal in any of the Warrant Certificates or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though the Warrant Agent were
not Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any other
legal entity.
Section 7.23 Availability of the Agreement. The Warrant Agent shall
keep copies of this Agreement available for inspection by Holders of Warrants
during normal business hours at its Principal Office. Copies of this Agreement
may be obtained upon written request addressed to:
GEN TRAK, INC.
5100 Campus Drive
Plymouth Meeting, PA 19462-1123
Attn: Arthur V. Boyce, Jr., President
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
GEN TRAK, INC.
By:________________________________
Arthur V. Boyce, Jr., President
[Corporate Seal]
Attest:
Title:
STOCKTRANS, INC., as Warrant Agent
By:________________________________
Jonathan Miller, President
[Corporate Seal]
Attest:
Title:
<PAGE>
CONNOLLY EPSTEIN CHICCO FOXMAN OXHOLM & EWING
A PENNSYLVANIA PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
NEIL G. EPSTEIN JOSEPH G. J. CONNOLLY 1515 MARKET STREET
WILLIAM H. EWING JOSEPH CHICCO NINTH FLOOR
STEPHEN M. FOXMAN STEVEN P. HERSHEY* PHILADELPHIA, PA 19102-1909
NANCY K. BARON-BAER KAREN LEE TURNER (215) 851-8400
CARL OXHOLM III CHARLES F. FORER*+ FAX (215) 851-8383
LESLIE A. HAYES* VALERIE J. MUNSON http://www.philalaw.com
MICHAEL S. JACKSON ALBERT G. BIXLER ----------
GARY A. ROSEN* GARY S. LEWIS 36 TANNER STREET
MARK T. CARLIDGE* CAROL L. PRESS SECOND FLOOR
GARY A. MILLER DANIEL N. REISMAN HADDONFIELD, NJ 08033-2420
JOHN F. O'RIORDAN* DEBORAH WEINSTEIN* (609)427-6240
RANDY KARAFIN HUBERT* LEWIS ROSMAN ----------
JANET F. GINZBERG* MANDANA SHAHVARI BETH OLANOFF
DIRECT DIAL
OF COUNSEL March 25, 1999 (215) 851-8472
FAX (609) 427-0611 E-MAIL: [email protected]
HOWARD L. GLEIT
*ATTORNEYS WITHOUT * NOT ADMITTED
IN NEW JERSEY
+NEW JERSEY RESIDENT PRINCIPAL
Gen Trak, Inc.
5100 Campus Drive
Plymouth Meeting, PA 19462-1123
Re: Registration Statement on Form SB-2
File No. 333-69729
-----------------------------------
Gentlemen/Ladies:
We have acted as counsel to Gen Trak, Inc. (the "Company") in connection
with the preparation and filing of the above captioned Registration Statement
(the "Registration Statement") relating to the public offering of up 747,500
Units which are proposed to be sold by the Company pursuant to the Registration
Statement (including Units subject to the underwriter's over-allotment option).
The Units contain an aggregate 1,495,000 shares of the Company's Common Stock,
par value $.01 (the "Shares") and common stock purchase warrants (the
"Warrants) exercisable for an aggregate 1,495,000 shares of Common Stock (the
"Warrant Shares").
We are familiar with the Registration Statement. We have reviewed the
Company's Articles of Incorporation and By-laws, each as amended to date. We
also have examined such public and private corporate documents, certificates,
instruments and corporate records, and such questions of law, as we have deemed
necessary for the purpose of expressing an opinion on the matters set forth
below. In all examinations of documents we have assumed the genuineness of all
signatures appearing on such documents, and the genuineness and authenticity of
all copies submitted to us conformed, photostatic or other copies as true
copies of the original document.
On the basis of the foregoing, we are of the opinion that the Units,
Shares and Warrants, when issues in accordance with the terms set forth in the
Registration Statement, and the Warrant Shares, when issued upon exercise of
the Warrants in accordance with their terms, will be validly issued, fully paid
and non-assessable.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement, and consent to the reference to us under the caption "Legal Matters"
in the Prospectus included in the Registration Statement.
Very truly yours,
CONNOLLY EPSTEIN CHICCO
FOXMAN OXHOLM & EWING
By: /s/ Gary A. Miller
----------------------
<PAGE>
Exhibit 24.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts", "Selected
Financial Data" and "Summary Financial Data" and to the use of our report dated
February 12, 1999 in Amendment No. 1 to the Registration Statement (Form SB-2
No. 333-69729) and related Prospectus of Gen Trak, Inc. filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
------------------------------
Philadelphia, PA
March 25, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 230,104
<SECURITIES> 0
<RECEIVABLES> 299,163
<ALLOWANCES> 31,200
<INVENTORY> 543,582
<CURRENT-ASSETS> 1,097,311
<PP&E> 90,249
<DEPRECIATION> 1,041,625
<TOTAL-ASSETS> 1,741,214
<CURRENT-LIABILITIES> 1,761,764
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> (982,335)
<TOTAL-LIABILITY-AND-EQUITY> 1,741,214
<SALES> 2,149,285
<TOTAL-REVENUES> 2,149,285
<CGS> 1,330,826
<TOTAL-COSTS> 2,122,204
<OTHER-EXPENSES> 1,515,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,349
<INCOME-PRETAX> (1,661,846)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,661,846)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,661,846)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
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