<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
Registration No. 333-69729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
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
Eckert Seamans David A. Carter, P.A
Cherin & Mellott, LLC 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 .................... 862,500(2) Units $ 10.00 $ 8,625,000 $ 2,397.75
Common Stock $.01 Par Value,
Contained in units .................. 1,725,000(3) Shares $ -0-(5) $ -0- $ -0-(5)
Warrants to Purchase Shares of
Common Stock, Contained in
units ............................... 1,725,000(4) Warrants $ -0-(5) $ -0- $ -0-(5)
Common Stock, Underlying
warrants to Purchase
Common Stock ........................ 1,725,000 Shares $ 6.00 $10,350,000 $ 2,877.30
Underwriter's Unit Warrants .......... 75,000 Warrants $ -0- $ -0- $ -0-
Units Issuable Upon Exercise of
Underwriter's warrants .............. 75,000 Units $ 16.50 $ 1,237,500 $ 334.03
Common Stock Underlying
Underwriter's units warrants ........ 150,000 Shares (5) $ -0- $ -0- $ -0-
Warrants Underlying
Underwriter's Warrant ............... 150,000 Warrants (5) $ -0- $ -0- $ -0-
Common Stock Issuable Upon
Exercise of warrants Issuable
On Exercise of Underwriters'
Unit warrants ....................... 150,000 Shares $ 9.90 $ 1,485,000 $ 412.83
----------- -----------
TOTALS: ............................. $21,697,500 $ 6,021.91
=========== ===========
</TABLE>
- ------------
(1) Estimated solely for calculation of the amount of the registration fee
calculated pursuant to Rule 457.
(2) Includes 112,500 units to cover over-allotments, if any.
(3) Includes 225,000 shares to cover over-allotments, if any.
(4) Includes 225,000 warrants to cover over-allotments, if any.
(5) 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-6 of the sequentially numbered pages
of this Registration Statement. This Registration Statement, including exhibits
contains 66 pages.
ii
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM SECTIONS IN PROSPECTUS
NO. ----------------------
- ----
<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
Prospectus .............................................. Inside Front Cover Pages; Table of
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>
PROSPECTUS
[GRAPHIC OMITTED]
750,000 Units
Each Unit Consists of 2 Shares and 2 Warrants
$10.00 Per Unit
The shares and warrants are not offered separately.
The warrants are redeemable at $.10 per warrant.
Barron Chase Securities, Inc. will underwrite this offering on a firm
commitment basis.
================================================================================
Price to Underwriting Proceeds to
Public Discount Company
- --------------------------------------------------------------------------------
Per Unit ......... $ 10.00 $ 1.00 $ 9.00
- --------------------------------------------------------------------------------
Total ............ $7,500,000 $750,000 $6,750,000
- --------------------------------------------------------------------------------
Barron Chase Securities, Inc. has an option to purchase and sell an additional
112,500 units.
---------------------
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 5.
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. We
sell our products primarily to hospitals and private laboratories performing
tests for organ and bone marrow transplants. We are developing new technology
which could allow physicians to diagnose infectious disease in their offices
during patient visits. We have three patents for this new technology.
Gen Trak was incorporated in Pennsylvania in November 1986. Our corporate
offices are located at 5100 Campus Drive, Plymouth Meeting, PA 19462-1123. Our
telephone number is 610/825-5115.
The Offering and Gen Trak's Securities
Securities Offered....... 750,000 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 We may repurchase the warrants at $.10 per warrant
on 30 days' prior written notice.
o The warrants may not be exercised if there is no
current prospectus covering the exercise of the
warrants. We are 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...... 2,915,000 shares of common stock
In addition to the 2,915,000 shares that will be outstanding after the
offering, Gen Trak will have the following securities outstanding:
o 1,500,000 warrants
o Options for 60,000 shares
o Underwriter's warrants for 75,000 units
Also, the underwriter has an option to purchase and sell an additional
112,500 units.
2
<PAGE>
Use of Proceeds.......... We will use some of the proceeds of this offering
to repay debt owed to stockholders, investors and
banks. Most of the proceeds will be used for working
capital, expansion of our product lines and general
corporate purposes.
Market for Gen Trak's Securities
Before this offering, there was no market for any of Gen Trak's securities.
We cannot guarantee that a trading market will develop for the units. We have
applied for listing on the NASDAQ SmallCap(SM) Market and the Boston Stock
Exchange. These listing applications have not yet been approved. Our
applications contain the following listing symbols:
Unit
Proposed Nasdaq Symbols ................... GENT
Unit
Proposed Boston Exchange Symbols .......... GEK
Summary Financial Data
The following summary financial data summarizes the financial statements 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, 1997 and 1998 have been audited by Ernst & Young
LLP, independent auditors. The financial statements for the three months ended
March 31, 1998 and 1999 are unaudited. The results of operations for the three
months ended March 31, 1998 and 1999 do not necessarily indicate the results to
be expected for the full year.
The "Pro Forma Basic and Diluted Loss Per Share" presented in the
Statements of Operation 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 3 Months Ended
------------------------------- ----------------------------
12/31/97 12/31/98 03/31/98 03/31/99
------------- --------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales ................................ $2,710,485 $ 2,149,285 $ 530,501 $ 459,819
Gross Profit ............................. 1,219,557 36,081 253,974 105,753
Net Loss ................................. (138,083) (1,661,846) (114,543) (294,946)
Basic and Diluted Loss Per Share ......... $ (.11) $ (1.28) $ (.09) $ (.23)
Pro Forma Basic and Diluted Loss Per
Share .................................. $ (1.03) $ (.17)
Weighted Average Shares Outstanding
Used in Computing Basic and Diluted
Loss Per Share ......................... 1,300,000 1,300,000 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 1,555,000
</TABLE>
3
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
March 31, 1999
December 31, -------------------------------
1998 Unaudited As adjusted
-------------- ---------------- ------------
<S> <C> <C> <C>
Cash ................................... $ 230,104 $ 39,453 $4,764,453
Current Assets ......................... $ 1,097,311 $ 916,544 $5,641,544
Total Assets ........................... $ 1,741,214 $ 1,588,834 $6,313,834
Current Liabilities .................... $ 1,761,764 $ 1,837,136 $ 562,136
Long-term Liabilities .................. $ 948,785 $ 944,783 $ 944,783
Shareholders' Equity (Deficit) ......... $ (969,335) ($ 1,193,085) $4,806,915
</TABLE>
Attention California Residents:
Offers and sales of the units made to California residents pursuant to this
prospectus are restricted to individuals who meet suitability standards of not
less than $250,000 of liquid net worth (net worth exclusive of home, home
furnishings and automobiles) plus $65,000 annual gross income, or $500,000 of
liquid net worth (net worth exclusive of home, home furnishings and
automobiles).
For New Jersey Residents:
Offers and sales in this offering in New Jersey may only be made to
accredited investors as defined in Rule 501 under the Securities Act of 1933, as
amended. Under Rule 501, to be an accredited investor an individual must have
either (i) a net worth or joint net worth with such individual's spouse of more
than $1,000,000 or (ii) income of more than $200,000 in each of the two most
recent years or joint income with such individual's spouse of more than $300,000
in each of those years and a reasonable expectation of reaching the same income
level in the current year. Other standards apply to investors who are not
individuals. There will be no secondary sales of the securities to persons in
New Jersey who are not accredited investors for 90 days after the date of this
offering.
4
<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
which included a one-time inventory write-down of $791,378. In the first quarter
of 1999, we had a net loss of $294,946. For these reasons and others, our
auditor's opinion contains an explanatory paragraph regarding our 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.
Our Growth Will be Limited if We do not Develop New Products 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.
Our Ability to Respond to Business Opportunities and Introduce New Products
is Impaired by Extensive Government Regulation of 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.
The Cost and Length of the Regulatory Process May Prevent us from Bringing
New Products to Market on a Timely Basis. 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.
Our Business May be Materially Adversely Affected if Our Third-Party
Manufacturers Fail to Perform. 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.
Our Ability to Operate May be Impaired Because 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.
5
<PAGE>
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.
Our Use of Some of the Offering Proceeds to Pay Debts to Existing
Shareholders will Reduce Our Ability to Meet Our Goals. Approximately $300,000
of the offering proceeds will be used to repay a debt owed to one of our
existing shareholders. Approximately $45,000 will be used to pay accrued
consulting fees to a consultant affiliated with that shareholder. 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 Curtail or Discontinue Our Expansion Strategy if Additional
Financing is Not Available When Required. 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 May Not be Able to Develop New Products Because Our Development
Activities will Depend on the Performance of Third Parties. 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.
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.
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.
You May Lose Some of the Value of the Warrants if We 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.
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.
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.
6
<PAGE>
DILUTION
Gen Trak's net tangible book value (deficiency) at March 31, 1999, was
($1,466,689) or ($1.13) per share. "Net tangible book value (deficiency) per
share" means our total tangible assets less our total liabilities, divided by
the number of shares of common stock outstanding.
Assuming the units had been sold on March 31, 1999 and 115,000 shares were
issued to the holders of certain private placement notes on March 31, 1999, our
adjusted net tangible book value at March 31, 1999 would have been approximately
$4,533,311 or $1.56 per share. This represents an immediate increase in net
tangible book value per share of $2.69 to existing shareholders and an immediate
decrease of $3.44 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 .................................................. ($ 1.13)
Increase per share attributable to sale of units ........... $ 2.69
-------
Adjusted net tangible book value per share after offering ..... $ 1.56
------
Dilution per share to investors in this offering .............. $ 3.44
======
</TABLE>
The following table compares
o the number of shares held by existing shareholders as of March 31, 1999 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
o does not take into account any shares or warrants contained in units which
may be issued if the underwriter exercises its over-allotment option
o 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 holders of certain private placement notes who are entitled
to receive 115,000 shares on closing of this offering.
<TABLE>
<CAPTION>
Consideration
Shares of ------------------------------
Common Stock Average Price
Acquired Amount Percent Per Share
-------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Existing Shareholders .................. 1,300,000 $1,748,147 19% $ 1.34
Private Placement Note Holders ......... 115,000 $ 0 0% $ 0
Investors in this offering ............. 1,500,000 $7,500,000 81% $ 5.00
--------- ---------- -- -------
Totals .............................. 2,915,000 $9,248,147 100% --
</TABLE>
7
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the units will be approximately
$6,000,000 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, we will receive additional funds. The
following table summarizes our intended use of these proceeds.
<TABLE>
<CAPTION>
PERCENT OF
APPLICATION OF PROCEEDS AMOUNT PROCEEDS
----------------------- ------ ----------
<S> <C> <C>
Strategic Product Line Expansion ................ $2,900,000 48.3%
Repayment of Private Placement Notes ............ $ 575,000 9.6%
Repayment of Stockholder Line of Credit ......... $ 300,000 5.0%
Repayment of Bank Line of Credit ................ $ 400,000 6.7%
Working Capital ................................. $1,825,000 30.4%
---------- -----
Total ........................................ $6,000,000 100.0%
========== =====
</TABLE>
Strategic Product Line Expansion. We will use these funds for strategic
expansion of our product line by development or acquisition. From time to time
in the ordinary course of business, we evaluate the potential acquisition of
businesses and technologies that complement our business. Currently, we do not
have any commitments to acquire any business or technology.
Repayment of Private Placement Notes. We will use these funds to repay the
outstanding balance of $575,000 of 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 the closing of this offering. In addition, the
private placement note holders are entitled to receive at the closing of this
offering, for no additional cost, 115,000 shares of our 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. We will use these funds to repay
the balance of $300,000 we owe on an unsecured line of credit with Susquehanna
Holdings Corp., one of our principal Shareholders.
Repayment of Bank Line of Credit. We will use these funds to repay the
outstanding balance of $400,000 on our 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 March 31, 1999, the interest rate
was 10.25%. This line of credit is secured by substantially all of our assets,
and life insurance policies on the Chairman of the Board and the President. The
line of credit is personally guaranteed by our Chairman of the Board.
Working Capital. We will use these funds for general corporate purposes and
to support expansion into other strategically compatible product lines. The
general corporate purposes include payment of accrued payables. Approximately
$45,000 of these accrued payables are consulting fees we owe to a consultant
affiliated with Susquehana Holdings Corp.
The amounts in the above table are estimates developed by management based
upon our current plans and current economic and industry conditions. Our
proposed use of proceeds may be changed if industry or economic conditions
change or if our financial condition changes. Management also will have the
discretion to change the amount of funds used for each purpose.
While we cannot be certain, we believe the proceeds from the offering and
internally generated funds will satisfy our working capital needs for the next
twenty-four months. We may require additional debt or equity financing for
future internal growth or acquisitions. We cannot be certain that additional
financing on acceptable terms will be available when needed.
We expect we will use any funds received from exercise of the warrants to
expand our product line into related technology markets. Our use of the funds
provided by exercise of warrants may be different if different opportunities are
available when the warrants are exercised.
8
<PAGE>
A substantial portion of the proceeds of this offering will be available
for general working capital. It may be more difficult for you to judge the
likelihood of our success if you do not know the specific use of your investment
funds.
We 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
You cannot expect to receive cash flow from this investment. We do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
future earnings to finance the growth of our business. Currently, the terms of
our 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.
9
<PAGE>
CAPITALIZATION
The following table presents the capitalization of Gen Trak as of March 31,
1999. The "As Adjusted" column in the table presents the capitalization taking
into account the following as if they had occurred on March 31, 1999:
o The receipt of the net proceeds from the sale of the 750,000 units at a
price of $10 per 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, reduced by $20,778 of interest expense
accrued at March 31, 1999, which will not be payable if this offering
closes.
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>
March 31, 1999
-----------------------------------
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 ................ 32,117 32,117
------------- ------------
Total short-term debt ............................... $ 1,307,117 $ 32,117
============= ============
Long-term debt:
Long-term debt ................................... $ 879,136 $ 879,136
Notes payable to shareholders .................... 58,737 58,737
Obligations under capital leases ................. 6,910 6,910
------------- ------------
Total long term debt ................................ $ 944,783 $ 944,783
------------- ------------
Stockholders' (deficit) equity:
Common stock, $.01 par value, 25,000,000 shares
authorized, 1,300,000 and 2,915,000 shares issued
and outstanding ................................. $ 13,000 $ 29,150
Additional paid-in capital ....................... 1,735,147 8,293,997
Retained deficit ................................. (2,941,232) (3,495,454)
------------- ------------
Total stockholders' (deficit) equity ................ $ (1,193,085) $ 4,827,693
------------- ------------
Total capitalization ................................ $ (248,302) $ 5,772,476
============= ============
</TABLE>
10
<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, 1997 and 1998 have been audited by
Ernst & Young LLP, independent auditors. The financial statements for the three
months ended March 31, 1998 and 1999 are unaudited. The results of operations
for the three months ended March 31, 1998 and 1999 are not necessarily
indicative of the results to be expected for the full year.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended 3 Months Ended
---------------------------------- --------------------------------
12/31/97 12/31/98 03/31/98 03/31/99
--------------- ---------------- --------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ................................... $ 2,710,485 $ 2,149,285 $ 530,501 $ 459,819
Cost of sales. .............................. $ 1,490,928 $ 1,321,826 $ 276,527 $ 354,066
Write-down of inventory ..................... -- $ 791,378 -- --
Gross profit ................................ $ 1,219,557 $ 36,081 $ 253,974 $ 105,753
Marketing and selling ....................... $ 864,144 $ 1,017,310 $ 229,460 $ 165,401
General and administrative .................. $ 313,888 $ 452,294 $ 83,641 $ 129,719
Research and development. ................... $ 56,746 $ 57,268 $ 18,474 $ 16,401
Total operating expenses .................... $ 1,234,778 $ 1,526,872 $ 331,575 $ 311,521
Interest expense ............................ $ 122,862 $ 171,055 $ 36,942 $ 89,178
Net loss .................................... $ (138,083) $ (1,661,846) $ (114,543) $ (294,946)
Basic and diluted loss per share ............ $ (.11) $ (1.28) $ (.09) $ (.23)
Weighted average shares outstanding ......... 1,300,000 1,300,000 1,300,000 1,300,000
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a review of Gen Trak's financial condition and results of
operations for the years ended December 31, 1997 and 1998 and the three months
ended March 31, 1998 and 1999. This review should be read together with the
financial statements and notes included at the end of this prospectus.
Introduction
Since its peak of $6.9 million in net sales in 1992, our sales have
declined steadily to $2.1 million in the year ended December 1998. We have had
net losses in the last three years. In December of 1996, we 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 most of our manufacturing operations
from Pennsylvania to an exclusive contract manufacturer in North Carolina in
September 1998. We expect the move will improve quality and reduce costs in our
core business. The change in manufacturing will allow us to add strategically
compatible business lines to broaden our market. We also intend to reduce costs
by subleasing the portion of our Pennsylvania headquarters previously devoted to
manufacturing, or subleasing the entire facility and moving to more appropriate
space. We reduced costs in the first quarter of 1999 by eliminating some of our
manufacturing workforce. We were able to do this because we subcontracted
manufacturing.
Results of Operations
The following table presents selected financial information for the periods
indicated expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Year Ended 3 Months Ended
--------------------------- --------------------------
12/31/97 12/31/98 03/31/98 03/31/99
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 55.0 61.5 52.1 77.0
Inventory write-down ................ 0.0 36.8 0.0 0.0
----- ----- ----- -----
Gross profit ..................... 45.0 1.7 47.9 23.0
Operating Expenses:
Marketing and selling ............... 31.9 47.3 43.2 36.0
General and administrative .......... 11.6 21.0 15.8 28.2
Research and development ............ 2.1 2.7 3.5 3.5
----- ----- ----- -----
Total operating expenses ......... 45.6 71.0 62.5 67.7
Loss from operations ................ (0.6) (69.3) (14.6) (44.7)
Interest expense .................... 4.5 8.0 7.0 19.4
----- ----- ----- -----
Net loss ............................ (5.1)% (77.3)% (21.6)% (64.1)%
===== ===== ===== =====
</TABLE>
Sales Overview
Our net sales are primarily derived from:
o Tissue Typing Serology Products
o SeraScreen Antibody Typing Trays
o Monoclonal Antibody Products
o DNA Products
12
<PAGE>
Net sales decreased in 1998 from the prior year by 21%, and for the first
three months of 1999 by 13% from the first three months of 1998. 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 and for the
first three months of 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended 3 Months Ended
------------------------- ----------------------
12/31/97 12/31/98 03/31/98 03/31/99
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Tissue typing serology products ............. 1,685,000 1,100,000 267,000 226,000
SeraScreen antibody screening trays ......... 530,000 663,000 160,000 166,000
Monoclonal antibodies ....................... 267,000 214,000 69,000 34,000
DNA products ................................ 116,000 16,000 7,000 ----
Other ....................................... 112,000 156,000 28,000 34,000
--------- --------- ------- -------
Total .................................... 2,710,000 2,149,000 531,000 460,000
========= ========= ======= =======
</TABLE>
First three months of 1999 compared to first three months of 1998
Net Sales and Gross Profit
The following table compares net sales and gross profit for the three
months ended March 31, 1999 and 1998.
3 Months Ended
----------------------- Percentage Decrease
03/31/98 03/31/99 from 1998 to 1999
---------- ---------- --------------------
Net Sales ............ 530,501 459,819 (13.3%)
Gross Profit ......... 253,974 105,753 (58.4%)
Net sales decreased by 13.3% from $530,501 for the first three months in
1998 to $459,819 for the first three months in 1999. Most of this decrease is
attributable to net sales of tissue typing serology products, which declined
$41,000, and monoclonal antibodies, which declined $35,000. DNA products also
decreased $7,000. The declines were partially offset by a $6,000 increase in the
SeraScreen antibody screening trays, and a $6,000 increase in other products.
Unit sales volume decreased in most product lines primarily due to the lack of
technically competitive products as we introduced the new contract manufactured
serology products late in the third quarter of 1998. We had not realized the
full impact of our new products by the end of the first quarter of 1999.
Expressed as a percentage of sales, gross profit for the first three months
in 1999 decreased from 47.9% for the first three months in 1998 to 23.0% for the
first three months in 1999. This is a result of lower sales volume and a change
in the sales mix, whereby serology products, which average a higher gross profit
than the other product lines, declined. Aggregate gross profit decreased
$148,221 from $253,974 for the first three months in 1998 to $105,753 for the
first three months in 1999 primarily as a result of lower sales and the change
in sales mix.
Operating Expenses
The following table compares operating expenses for the three months ended
March 31, 1998 and 1999.
<TABLE>
<CAPTION>
3 Months Ended
---------------------------------------------------
03/31/98 03/31/99 Percentage Increase
------------------------ ------------------------ (Decrease) from
Amount of Sales Amount of Sales 1998 to 1999
----------- ---------- ----------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Marketing & Selling Expense ......... $229,460 43.2% $165,401 36.0% (27.9%)
General & Administrative Expense. $ 83,641 15.8% $129,719 28.2% 55.1%
Research & Development Expense. $ 18,474 3.5% $ 16,401 3.5% (11.2%)
-------- ---- -------- ---- -----
Total Operating Expense .......... $331,575 62.5% $311,521 67.7% (6.0%)
</TABLE>
Operating expenses decreased $20,054 or 6.0% from $331,575 for the first
three months in 1998 to $311,521 for the first three months in 1999, and
increased as a percentage of sales from 62.5% for the first three months in 1998
to 67.7% in 1999.
13
<PAGE>
Marketing and selling expense decreased $64,059 or 27.9% from $229,460 for
the first three months in 1998 to $165,401 for the first three months in 1999,
and decreased as a percentage of sales from 43.3% for the first three months in
1998 to 36.0% for the first three months in 1999. The aggregate decrease in
marketing and selling expense is primarily attributed to our president's
forgiveness of deferred compensation and a decrease in supplies and samples
shipped for the first three months in 1999. The forgiveness of deferred
compensation by our president relates to the deferred salary owed to him as of
March 31, 1999 of $41,200 which he agreed to forego. Supplies expense decreased
$10,175 or 93.4% from $10,895 for the first three months in 1998 to $720 for the
first three months in 1999, due primarily to the cost and redesign of new sales
brochures and product literature incurred in the first three months of 1998. The
cost of samples shipped decreased $8,767 or 77.5% from $11,316 for the first
three months in 1998 to $2,549 for the first three months in 1999. The aggregate
decrease in samples shipped is primarily attributed to not incurring as high a
level of sampling in the first three months of 1999 of a new product line. This
line was introduced at the end of 1997 and sampled in the beginning of 1998.
General and administrative expense increased $46,078 or 55.1% from $83,641
for the first three months in 1998 to $129,719 for the first three months in
1999 and increased as a percentage of sales from 15.8% for the first three
months in 1998 to 28.2% for the first three months in 1999. The aggregate
increase is attributed to higher professional fees and additional consulting
fees. Professional fees increased $20,991 or 183.2% from $11,455 for the first
three months of 1998 to $32,446 for the first three months of 1999. The
aggregate increase in professional fees is attributed to additional professional
services provided in the first three months of 1999. Consulting fees increased
$25,200 or 420.0% from $6,000 for the first three months of 1998 to $31,200 for
the first three months of 1999. The increase in consulting fees is attributed to
the consulting agreement with a stockholder of $22,500 for the first three
months of 1999.
Research and development expense decreased $2,073 or 11.2% from $18,474 for
the first three months in 1998 to $16,401 for the first three months in 1999 and
remained constant as a percentage of sales.
Interest Expense
Interest expense increased $52,236 or 141.4% from $36,942 for the first
three months in 1998 to $89,178 for the first three months in 1999 as a result
of $20,778 of interest accrued on the notes payable, the amortization of the
deferred financing fees of $25,075 on those notes and $7,397 of interest on the
stockholder line of credit, all of which were obtained in the last quarter of
1998.
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. We 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
14
<PAGE>
occurred in connection with our decision to subcontract our manufacturing
operations to our new contract manufacturer. The agreement with our new contract
manufacturer, increased our access to unique raw materials that allowed us to
improve the quality and breadth of our product offerings. As a result of the
release of these new products, we 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.
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 a new
product 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.
15
<PAGE>
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
We have financed our operations primarily from bank debt, private equity
financings and cash flow generated from operations. Most recently, we obtained a
line of credit from a private investor and obtained financing from a private
placement of unsecured promissory notes.
At March 31, 1999, we had a working capital deficit of $920,592. After the
initial use of the proceeds from this offering to pay debts, we expect to have
working capital of $4,679,408. 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, we 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 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.
We entered into a $300,000 unsecured line of credit agreement with a
shareholder in September 1998. 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, we 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 we receive at least
$1,000,000 of net proceeds or September 30, 1999. The debt will be repaid with
the proceeds of this offering.
We have a line of credit with a bank in the maximum amount of $400,000. The
line of credit bears interest at a fluctuating rate equal to the bank's
"National Commercial Rate" plus 2.5%. On March 31, 1999, the interest rate was
10.25%. On March 31, 1999 we owed $400,000 on this line of credit. The line of
credit is secured by substantially all of our assets and life insurance policies
on the Chairman of the Board and President. We intend to use the proceeds of
this offering to repay the amount owed on our line of credit with the bank. The
line of credit will still be available after repayment.
In 1995, we obtained a bank term loan of $1,300,000. The balance at March
31, 1999 was $908,143. This loan bears interest at 11% per annum and is being
repaid over 15 years. This loan is secured by substantially all of our assets,
and life insurance policies on the Chairman of the Board and the President. The
loan is payable in monthly installments through December 2012.
We began to outsource our manufacturing operations in September 1998 and
expect this change will improve the quality and reduce the cost of our products.
We also anticipate improved cash flow as a result of the ability to better
manage inventory levels. We believe the anticipated improved operating cash flow
16
<PAGE>
resulting from outsourcing the manufacturing operations, together with the
proceeds of this offering, will be adequate to fund our current and anticipated
levels of operations for approximately 24 months. Events in our operations may,
however, result in accelerated or unexpected expenditures. We are 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. We 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 we raise 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
We have reviewed our critical information systems for Year 2000 compliance.
The compliance review revealed that Gen Trak's critical accounting information
systems are Year 2000 compliant because our network hardware and operating
system are "off-the-shelf" products from third parties with Year 2000 compliant
versions. We have not yet fully addressed the Year 2000 compliance with all of
our critical product databases.
We are currently engaged in addressing the appropriate modifications to
three date-sensitive analysis programs contained in some of our products. All of
our 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, we are in the process of
contacting our primary vendors and large customers to determine the extent to
which we are vulnerable to those third parties' failure to remediate their Year
2000 compliance issues. There can be no guarantee that the systems of other
companies on which our business relies will be timely converted. Failure to
convert by another company could have a material adverse effect on our
operations.
The Cost to Address Gen Trak's Year 2000 Issues
We estimate that the cost of our Year 2000 compliance issues will be less
than $10,000 and is not expected to be material to our financial position, cash
flow or results of operations.
The Risks Associated with Gen Trak's Year 2000 Issues
We believe that the risks associated with Year 2000 issues primarily relate
to the failure of third parties upon whom our 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 our supply of parts and
materials, late, missed, or unapplied payments, temporary disruptions in order
processing and other general problems related to our daily operations. While we
believe our Year 2000 compliance review procedures will adequately address our
internal Year 2000 issues, until we receive responses from our 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
our business, operating results and financial position.
Gen Trak's Contingency Plan
We have not, to date, implemented a Year 2000 contingency plan. It is our
intention to devote whatever resources are necessary to assure Year 2000
compliance issues are resolved. However, we will develop and implement a
contingency plan by the end of the first half of 1999 in the event our Year 2000
compliance initiatives, particularly those that relate to third parties, fall
behind schedule.
17
<PAGE>
GEN TRAK'S BUSINESS
Background
We design, develop and sell 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. Our test kits 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. Our current
products are subject to regulation by the Food and Drug Administration.
Our 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. We also intend to exploit our 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. We plan to use this technology to develop new
diagnostic products that may
o help physicians detect and treat infectious disease and
o monitor patient compliance with drug regimens within the hospital, clinic
or office setting during patient visits.
We plan to develop this broad product line by establishing relationships
with collaborative partners.
Industry Overview
Overview of Our Primary Industry. Our current products are sold in the
market for diagnostic products which use the genetic markers known as HLA
antigens. 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
o identity testing
o family studies to predict the likelihood of developing certain diseases
and
o 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 our compilation of publicly available information, we believe that
the annual market for this type of diagnostic product is approximately $90
million, with the U.S. representing approximately 65% of the market. Our
information mostly comes from Dun & Bradstreet Reports on participants in our
industry. Most of this type of diagnostic 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 this market.
Approximately 30% of the market is represented by individual testing
laboratories that make their own test kits. We have prepared these estimates
based on publicly available information. Our information mostly comes from Dun &
Bradstreet Reports on participants in our industry. We believe that there are
growth opportunities in the U.S. and
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European markets. Despite some cultural biases against transplants in some Asian
and Pacific Rim countries, we believe these markets have not been fully
penetrated and the market for our products will grow in those areas. Japan's
first heart transplant in thirty years was recently performed. We believe 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 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 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 in vitro
diagnostic sector performs diagnostic procedures with patient blood and saliva
in the laboratory. In vitro diagnostic testing requires laboratories and
technicians to manipulate patient blood and saliva specimens and develop
reactions. Electromedical diagnostic products deliver quick test results. In
vitro 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. Our current products are used by laboratories
in the in vitro diagnostic 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 that
sector. The technologies and methods of the in vitro diagnostic 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. We anticipate developing our 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 in vitro 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
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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. We have
developed our new AMPRO technology to serve the near-to-patient market. While no
products have yet been developed from AMPRO technology, we believe this
technology can be developed into products which will enable physicians to make
diagnoses in their offices during a patient visit.
Description of Our Products and their Uses
Gen Trak currently has four types of products:
o Serology Products
o DNA Typing Products
o Cell Separation 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. Our 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 our
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. Diagnostic tests which use
HLA antigens are 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 testing systems like the
systems we produce 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.
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<PAGE>
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. We sell 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.
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 a laboratory. The laboratory technician extracts white blood cells
from the patient's blood sample, and places the cells in each well of our 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.
We also sell antibody screening trays. These products are used to monitor
the antibodies of potential transplant recipients for change. These products are
also used to monitor the antibodies of patients who have received transplants to
determine the degree of rejection. In addition, antibody screening trays are
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 our DNA typing trays is made of plastic, with a varying number of
wells based upon the technician's needs. The 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
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. We market a tray compatible with
one format under the CQuentials brand name. We market a tray compatible with the
other format under the GenYsys brand name. The CQuentials products are
manufactured using our own technology. The GenYsys products are obtained from a
third party.
Cell separation/preparation products. White cells carrying human leukocyte
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 labs, however, continue to use the older
separation techniques due to perceived cost savings. We believe that demand for
these magnetic bead separation products will increase because these products
will increase laboratories' productivity and reduce laboratories' overall costs.
Development of AMPRO -- Gen Trak's New Technology
We have developed the basic technology for a detection and measurement
system that could allow a physician to diagnose infectious disease in his or her
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. Our new technology which we have named "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. We expect
that AMPRO Technology could reduce costs and
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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.
We are currently pursuing potential development partners to reduce this
technology to practice. We currently have no agreements or understandings with
potential partners. We have 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 we began aggressively seeking
partners at that point.
Commercialization Strategy
We are evaluating potential relationships with corporate and other partners
to identify relationships which would complement and expand our research,
development, sales and marketing capabilities. Our business strategy includes
the formation of marketing alliances to market our products. We also plan to
maintain a long-term contract manufacturing agreement with SFP Research, Inc.
for our serology product supply. We also may enter into other contract
manufacturing agreements as we near completion of our development of other
potential products.
Marketing. We distribute our products worldwide with about 80% of sales in
the U.S. In the U.S., we use a small direct sales organization to target
high-volume transplant hospitals. We use local distributors in foreign
countries. These distributors generally have healthcare market expertise and
contacts within their country's health systems.
Our marketing strategy for AMPRO Technology will include developing
products with different menus of tests for different areas of medicine, such as
o hematology
o respiratory infections
o gastrointestinal infections
o diseases of aging
o genetics
o 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. We do not license rights to our current
technology. However, because of the cost of developing new products, we plan on
marketing AMPRO products with marketing partners who have market presence in
various testing areas.
We are 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, our manufacturing for serology
products was carried out in our Plymouth Meeting, Pennsylvania facility. In
September, 1998, we entered into an exclusive contract manufacturing agreement
with SFP Research Inc. of Liberty, North Carolina for our serology-based
products. Our GenYsys DNA products are made by BioSynthesis, Inc. of Lewisville,
Texas. We manufacture our new magnetic bead cell separation product line
in-house. The agreement with SFP will provide opportunities to broaden access to
unique raw materials, reduce costs and enhance product development efforts.
Our 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. We obtain the sera directly from hospitals or
laboratories and indirectly through distributors or brokers. Most of the sera
required can be obained from several hospitals,
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laboratories, distributors and brokers but some are more unique and are
available from a limited number of sources. We and our manufacturing partners
continuously seek to identify sources of alternative supplies and higher quality
supplies. We currently have relationships with more than one source of supply
for all of our raw materials.
We will likely rely on partners who have manufacturing capabilities to
manufacture any new products. We are 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 our 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 ourselves. Such products can only
be manufactured in facilities approved by the applicable regulatory authorities.
Because of these and other factors, we may not be able to quickly and
efficiently replace our manufacturing capacity in the event that our
manufacturers are unable to manufacture their products.
Competition
The principal markets for our existing and proposed products are very
broad and competitive. We are 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.
Government Regulation
All aspects of our business are subject to extensive regulation by the Food
and Drug Administration and other domestic and foreign regulatory authorities.
We are 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 our operations. Federal and state
statutes and regulations govern, among other things
o testing
o manufacture
o safety
o effectiveness
o labeling
o storage, record keeping
o approval
o advertising
o promotion
o import and export.
The studies and trials required before we 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 our product
candidates. Delays or rejections in obtaining regulatory approvals would
adversely affect our 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.
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The Food and Drug Administration and other regulatory authorities require
that the safety and effectiveness of certain of our 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 our product
candidates to the satisfaction of the regulatory authorities, we will not
receive the approvals necessary to market our proposed products.
In addition, our products must meet performance requirements of the
American Society of Histocompatibility and Immunogenetics as well as labeling
laws.
We have received pre-market approvals from the Food and Drug
Administration, as described below, for our current products. The United States
Department of Health and Human Services has issued a renewal Certificate to
Foreign Government that allows us to export certain of our serology and DNA
products to foreign countries.
Food and Drug Administration Regulation -- Approval of Diagnostic and
Monitoring Products. Our 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 our market
introduction of our products and product candidates by several quarters. This
could have a material adverse effect on our 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 our product candidates will receive regulatory approvals
for commercial distribution.
Prior to any approval of our products for marketing, all manufacturing
facilities must pass the Food and Drug Administration preapproval inspections.
Food and Drug Administration Regulation -- Post-Approval Requirements. Gen
Trak, our products and the facilities manufacturing our 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 periodic 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.
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Our 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. We must also report certain adverse events involving
our drugs and devices to the Food and Drug Administration. The Food and Drug
Administration can impose other post-marketing controls on us and our products,
and has expanded authority in this regard for certain products.
Failure to comply with applicable regulatory requirements can have
significant negative effects for us. 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 businesses,
we must comply with strict regulations regarding handling and disposal of
biological specimens. We believe that we have complied with these laws and
regulations. We have never been required to take any action to correct
noncompliance. We believe that our 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, we could be
held liable for any damages that result and any such liability could exceed our
resources.
Patents and Proprietary Technology
Our ability to profitably commercialize our potential products will depend,
in part, upon our 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
our 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 our AMPRO
technology.
d. 5,869,260 .......... 02/09/99 Nucleic Acid-Antibody Constructs and Their Use in
Antigen Detection for use with our AMPRO technology.
</TABLE>
Until the AMPRO Technology has been fully developed, we cannot be certain
if we can manufacture or commercialize any products based on this technology
without infringing patent or other proprietary rights of third parties.
We believe patent protection is important. However, patents may not
necessarily provide protection that has commercial significance. We cannot be
sure that the scope of any claims granted in our patents will provide
protection. Our patent rights, and the patent rights of medical products in
general, are highly uncertain and include complex legal and factual issues.
Portions of our patents may be found invalid or unenforceable by a court. In
addition, by reviewing our 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 our patents.
We also rely on trade secrets and proprietary know-how which we seek to
protect, in part, by confidentiality agreements with our employees and
consultants. These agreements may be breached, and we
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may not have adequate remedies for any breach. Our 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. We intend
to register the names of our 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, we have 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
Our 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 we have
out-sourced most of our manufacturing, we intend to reduce costs by either
subletting the manufacturing space at the current facility or subletting the
entire facility and moving to more appropriate space. We do not anticipate any
difficulty in finding appropriate space now or as we expand.
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, 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 we file 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. We expect to file our required
reports and other information electronically with the SEC.
After the completion of this Offering, we will provide our 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 our shareholder relations officer at our 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 our Directors,
Executive Officers and key employees:
<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. Our 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 our 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, our Chairman of the Board, is not employed full time by us but does
dedicate all of his working time to our 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 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 Laboratories, Inc. 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.
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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. 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, we have
included a provision in our By-Laws to limit the personal liability of our
directors for violations of their fiduciary duty. The provision eliminates
directors liability to Gen Trak or its stockholders for monetary damages, except
for
o any breach of the director's duty of loyalty to Gen Trak or its
stockholders,
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o unlawful payment of dividends or unlawful stock purchases or redemptions,
or
o any transaction from which a director derived an improper personal
benefit.
Under our By-Laws, we 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. We will not pay these liabilities and expenses, however, if the
Director did not act in good faith in a 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 us for
services of Arthur V. Boyce, Jr., our President and Chief Executive Officer, and
Donald O. Nichols, our Vice President, Controller and Treasurer for the fiscal
years ended December 31, 1997 and 1998. Mr. Nichols began his employment with us
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, our Chairman, has a Consulting Agreement with us. 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. As
of March 31, 1999, Mr. Bird agreed to waive approximately $71,000 in consulting
fees which we owed to him. This amount was recorded as a capital contribution
on that date.
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. These are described in more detail under the heading
"Transactional Success Fee Arrangements", below.
Employment Arrangements
Gen Trak entered into an employment agreement with Arthur V. Boyce, Jr.,
our 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. As of March 31, 1999, Mr. Boyce agreed to waive approximately
$41,200 of his salary which we owed to him. This amount was credited to income
as of that date.
The addendum also provides that Mr. Boyce will be entitled to a success fee
in the event of certain transactions. The success fee is described in more
detail under the heading "Transactional Success Fee Arrangements.".
1998 Stock Option Plan
On September 30, 1998, our board of directors approved the 1998 Stock
Option Plan and reserved 100,000 shares of common stock for issuance upon
exercise of options granted under the Stock Option 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, our Vice President and Controller, and fully vested options for 5,000
shares to Dr. Ertingshausen, our 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 Stock Option Plan are
o to provide incentives and rewards to those employees who are in a
position to contribute to our long-term growth and profitability;
o to attract, retain and motivate personnel with experience and ability;
o to make our compensation program competitive with those of other
employers.
We anticipate we 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 Stock Option Plan presently is administered by the board of directors.
The board may establish a stock option committee consisting of at least two
directors, to administer the Stock Option Plan.
The board or stock option committee is authorized to select the employees,
directors, advisors and consultants who will receive options. The board or stock
option 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 Stock Option Plan or any
option granted thereunder is within the discretion of the board or stock option
committee.
The Stock Option Plan provides that options may or may not be incentive
stock options within the meaning of Section 422 of the Internal Revenue Code.
Only our employees 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
We have 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 our 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 Our acquisition of assets from another business, other than in the
ordinary course of our business;
o Our sale of all or a material part of our assets other than in the
ordinary course of our business; or
o Sale by our 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.
We do not currently have any plans, arrangements, agreements or
understandings relating to the sale of Gen Trak or any of its assets, nor are we
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 us. These agreements were entered into
primarily as an incentive for individuals otherwise involved with us to
recognize and bring opportunities to our attention. In the event we 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. We have an agreement with the underwriter
regarding fees to be paid in connection with a merger or acquisition.
PRINCIPAL SHAREHOLDERS
The following table lists certain information regarding the beneficial
ownership of shares of our 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 our private placement
notes at the closing of this offering.
The table lists shareholdings by:
o Each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
o Each of our Directors;
o Each of our Officers;
o All of our Directors and Officers as a group
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<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 4.72%
Arthur V. Boyce, Jr. (2)
1763 Ashbourne Drive
Yardley, PA 19067 .......................... 122,987 9.46% 122,987 3.92%
Harry A. Arena
1 Jorrocks Lane
Malvern, PA 19355 .......................... 89,795 6.91% 89,795 2.86%
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 4.49%
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 ................................... 532,131 40.47% 532,131 16.87%
(ii) Other Beneficial Owners
Mathers Associates (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 24.12% 313,526 9.98%
Susquehana Holdings Corp. (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 24.12% 313,526 9.98%
Skippack Partners (6)
230 Mathers Road
Ambler, PA 19002 ........................... 313,526 24.12% 313,526 9.98%
Belle Group Ltd., LLC
2251 N. Rampart Blvd.
#428
Summertin, NV 89128 ........................ 193,276 14.87% 193,276 6.16%
</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 2.66%
J. Edmund and Bernadette A. Mullin
110 Brittany Way
Blue Bell, PA 19422 .................. 75,133 5.78% 75,133 2.39%
</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 our 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 us, including any pledge
by any person of our securities, 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. and certain of our shareholders, if we default under
our line of credit with Susquehana, Susquehana will have the right to elect at
least 75% of our directors. We intend to repay the line of credit in full with
the proceeds of this offering.
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<PAGE>
CERTAIN TRANSACTIONS
In September, 1998, we 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 our common stock from existing shareholders for an aggregate
$2,500. At that time we entered into a consulting agreement with Norbert
Zeelander, the President of Susquehana. In June, 1999 we borrowed an additional
$50,000 from Susquehana, which must be repaid on November 29, 1999.
The consulting agreement provides that Mr. Zeelander will be a
non-exclusive consultant. Mr. Zeelander will consult with us regarding our
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 we make certain asset acquisitions or
in the event of a sale of Gen Trak. The success fees are described in more
detail under the heading "Transactional Success Fee Arrangements" in the
Executive Compensation section of this prospectus.
In August 1998, we borrowed $115,000 from Gerald Hamburg pursuant to a
demand note bearing interest at 11% per annum. This loan has been repaid.
We have additional notes outstanding to five of our shareholders and our
former President, in the aggregate amount of $58,737. The notes bear interest at
a rate equal to our primary bank's "national commercial rate" plus 1%. These
notes are due June 29, 2002.
Affiliates of Mr. Hamburg and Mr. Arena, our directors, perform legal and
accounting services for Gen Trak. Fees related to these services in 1998 were
approximately $10,000.
We advanced $31,466 to certain stockholders. In September 1998, we agreed
that these advances would not be repaid but would be considered distributions to
these stockholders.
All future transactions between Gen Trak and any of its officers, directors
or 5% shareholders, or any affiliates of any of those people, will be on terms
no less favorable than could be obtained from unaffiliated third parties. Any
transactions between Gen Trak and its officers, directors, 5% shareholders, or
any affiliates of any of those people will be approved by a majority of our
independent, disinterested directors.
33
<PAGE>
DESCRIPTION OF SECURITIES
As of the date of this Prospectus, we have the authority to issue
25,000,000 shares of common stock, $.01 par value per share. There are currently
1,300,000 shares of common stock 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
Our By-Laws require the approval of the holders of a majority of our voting
securities for most actions requiring shareholder approval. These actions
include
o election of directors
o mergers
o sales of substantially all of our assets
o amendment to our Articles of Incorporation.
There are no provisions in our Articles of Incorporation or By-Laws that
would delay, defer or prevent a change in control of Gen Trak.
Transfer Agent
The transfer agent and registrar for the common stock and our 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 our registration statement filed with the SEC.
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 NASDAQ 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.
34
<PAGE>
After the warrants become separately transferable, we may redeem the
warrants at $.10 per warrant on 30 days' written notice. We may only redeem the
warrants if the average closing bid or trading price of our common stock is at
least $10.00. This average will be measured over 30 consecutive trading days. We
cannot redeem the warrants unless we have an effective registration statement
with respect to the exercise of the warrants at the time of redemption of the
warrants. In the event we exercise 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
o exercise the warrants and pay the exercise price at a time when it may be
less advantageous economically to do so, or
o 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 of the
registration statement, we 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.
We have 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 our assets.
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 we are 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.
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.
35
<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.
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 75,000
units, at $16.50 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.
UNDERWRITING
Pursuant to an underwriting agreement with us, Barron Chase Securities,
Inc., the underwriter for this offering, has agreed to purchase from us, and we
have agreed to sell to the underwriter, 750,000 units.
The underwriting agreement provides that the obligations of the underwriter
to purchase the units is subject to approval of legal matters by the
underwriter's counsel. The underwriter does not have to purchase the units if
there has been any material adverse change in our business. The underwriter is
also entitled to receive certain certificates, opinions and letters from our
counsel and independent auditors. The nature of the underwriter's obligations is
such that it is committed to purchase and pay for all of the 750,000 units if
any are purchased.
We have granted an option to the underwriter, exercisable for forty-five
(45) days after the date of this prospectus, to purchase up to an additional
112,500 units at the public offering price shown on the cover page of this
prospectus, less the underwriting discounts. The underwriter may exercise this
option only to cover over-allotments. If the underwriter exercises this option,
the underwriter must purchase the additional units.
We have been advised that the underwriter proposes to offer units directly
to the public at the public offering price shown on the cover of this
prospectus. The underwriter may also offer units to certain securities dealers
who are members of the NASD, at the public offering price less concessions from
the underwriter to the dealer. These concessions will not to exceed the amount
of the underwriting discount. These selected dealers may re-allow concessions or
discounts to certain other brokers and dealers. All dealers participating in
this manner must agree to sell the units in conformity with the NASD's conduct
rules. The underwriter's allowance of concessions to other dealers will not
affect the amount of proceeds we are to receive in the offering.
36
<PAGE>
Our officers and directors may introduce potential purchasers of units in
this offering to the underwriter or participating dealers. No securities have
been reserved for any purchases by our officers and directors or potential
purchasers introduced by our officers and directors. Our officers and directors
will not receive any compensation for introducing prospective purchasers.
The compensation we will pay to Barron Chase Securities, Inc. for being
the underwriter in this offering consists of the following.
o A commission of $1.00 per unit sold in the offering.
o A non-accountable expense allowance equal to 3% of the gross proceeds
of the offering. If the underwriter's expenses are less than 3% of the gross
proceeds, the excess will be considered additional compensation to the
underwriter. If the underwriter's expenses exceed 3% of the gross proceeds,
the underwriter will pay the excess without any additional reimbursement from
us.
o Warrants to purchase up to 75,000 units. We will sell these underwriter
warrants to the underwriter and/or persons related to the underwriter for a
nominal price. These underwriter warrants will have a term of five (5) years
and will be exercisable at a price of $16.50 per unit, which is 165% of the
public offering price of the units. Each of the underwriter's warrants is
exercisable for units consisting of two shares and two underlying warrants.
The underlying warrants are exercisable at a price of $9.90 per share. The
$9.90 exercise price represents 165% of the exercise price of the warrants
contained in the units being sold to the public. The underwriter's warrants
cannot be sold or transferred for a period of twelve (12) months from the
date of this prospectus except to certain persons related to the underwriter
and members of the selling group, or by will or operation of law.
The holders of the underwriter warrants may exercise those warrants without
paying any cash by requiring us to withhold from the units to be issued on
exercise of the underwriter warrants a number of units with a fair market value
equal to the exercise price for all of the units. This will result in our
issuing shares of common stock without a corresponding increase in our capital
The underwriter warrants and the units purchased upon exercise of the
underwriter warrants, and all other warrants and shares which ultimately may be
received through such units, are covered by this registration statement. We have
also given the holders of the underwriter warrants certain other rights to
include their securities in any registration statement we file and to demand
that we file a separate registration statement for their securities.
We also have engaged the underwriter as our financial advisor for a fee of
$108,000 payable on the closing date of this offering. The underwriter will
provide, at our request, advice regarding mergers, acquisitions and financing
proposals. If we participate in any transaction which the underwriter has
introduced to us during a period of five (5) years of the closing of this
offering, or specifically retain the services of the underwriter in connection
with any such transaction, even if not introduced to us by the underwriter, we
will pay the underwriter additional compensation which is based upon a
percentage of the value of the transaction. In addition to mergers and
acquisitions, we will also pay this percentage fee to the underwriter in the
case of joint ventures and other business transactions.
There was no market for any of our securities prior to this offering. The
initial public offering price for the units and the exercise price and other
terms of the warrants have been determined by negotiation between us and the
underwriter. These prices and terms are not necessarily based on any accepted
methods for valuing businesses or securities. The factors that were considered
in determining the initial public offering price include
o An assessment of our management;
o The history of, and the prospects for, our business and our industry;
o Our past and present operations
o Our development;
37
<PAGE>
o The general condition of securities markets at the time of this offering.
You cannot be sure that a public market for any of our securities will develop
and continue. Because the price for our securities was negotiated between us and
the underwriter, you cannot be sure that our units can be resold at the public
offering price or any other price, or that the common stock will ever trade at a
price at or higher than the exercise price of the warrants.
We have agreed to indemnify the underwriter and its controlling persons
against certain liabilities under the Securities Act of 1933 and to contribute
to payments the underwriter and their controlling persons may be required to
make because of such liabilities. If those provisions permit the underwriter or
its controlling persons to escape liability under federal securities laws, we
have been advised that in the opinion of the SEC, that provisions are contrary
to public policy and unenforceable.
In order to facilitate this offering, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
units. Specifically, the underwriter may sell more units than the number of
units we have agreed to sell to the underwriter, creating a short position for
the underwriter. The underwriter may bid for and purchase units in the open
markets to cover this short position or to stabilize the market price of the
units. The underwriter may also reclaim selling concessions allowed to dealers
in this offering if the underwriter repurchases the units distributed by those
dealers to cover short position or stabilize the price of the units. The
underwriter may take steps to encourage dealers to distribute the units for
investment rather than short term profit-taking. This may reduce the supply of
units available for short term trading. Any of these activities may stabilize or
maintain the price of the units above the market price which would otherwise
occur. The underwriter may end the stabilization activities at any time, which
could end any artificial maintenance of the market price.
This description of the underwriting arrangements is a summary of the
principal terms of the Underwriting Agreement and other agreements we have
signed with the underwriter. For more detail, you should read the copies of the
Agreement which are filed as exhibits to our Registration Statement.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 2,915,000 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 eighteen months (18) from the date of this
prospectus without the prior written consent of the underwriter. The 115,000
shares of our 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 of 1933 unless
purchased or owned by "affiliates" of Gen Trak as defined for purposes of the
Securities Act of 1933.
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 our "affiliates", may sell publicly without
registration under the Securities Act of 1933, 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 our "affiliate"
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 our 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.
We 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 our securities. Sales of substantial amounts of our
"restricted" shares in any public market that may develop could adversely affect
prevailing market prices.
38
<PAGE>
LEGAL PROCEEDINGS
Gen Trak is not a party to, nor is it aware of, any threatened litigation
of a material nature.
LEGAL MATTERS
Eckert Seamans Cherin & Mellot, LLC, 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., Boca Raton, Florida 33431.
EXPERTS
The financial statements of Gen Trak, Inc. at December 31, 1998 and for
each of the two years in the period ended December 31, 1998 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report on the financial statements
(which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 2 to the financial statements) appearing elsewhere herein. The
financial statements are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
39
<PAGE>
Gen Trak, Inc.
Financial Statements
Index to Financial Statements
Report of Independent Auditors ......................................... F-2
Audited Financial Statements
Balance Sheets ......................................................... F-3
Statements of Operations ............................................... F-4
Statements of Stockholders' Deficit .................................... F-5
Statements of Cash Flows ............................................... F-6
Notes to Financial Statements .......................................... F-7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Gen Trak, Inc.
We have audited the accompanying balance sheet of Gen Trak, Inc. as of December
31, 1998, and the related statements of operations, stockholders' deficit, and
cash flows for each of the two years in the period ended December 31, 1998.
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,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998, 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 March 31
1998 1999
--------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash .................................................................. $ 230,104 $ 39,453
Accounts receivable, less allowance of $31,200 in 1998 and 1999 ....... 267,963 299,465
Inventory ............................................................. 543,582 519,678
Prepaid expenses ...................................................... 55,662 57,948
------------ ------------
Total current assets ..................................................... 1,097,311 916,544
Property and equipment, net .............................................. 90,249 80,570
Patents, net ............................................................. 273,272 272,077
Other assets ............................................................. 280,382 319,643
------------ ------------
Total assets ............................................................. $ 1,741,214 $ 1,588,834
============ ============
Liabilities and stockholders' deficit Current liabilities:
Bank line of credit ................................................... $ 400,000 $ 400,000
Stockholder line of credit ............................................ 300,000 300,000
Notes payable ......................................................... 575,000 575,000
Accounts payable ...................................................... 211,117 294,107
Accrued expenses ...................................................... 138,969 172,984
Stockholder accrued expenses .......................................... 103,134 62,928
Current portion of long-term debt and capital lease ................... 33,544 32,117
------------ ------------
Total current liabilities ................................................ 1,761,764 1,837,136
Long-term debt and capital lease, less current portion ................... 890,048 886,046
Notes payable to stockholders ............................................ 58,737 58,737
Stockholders' 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 ............................................ 1,663,951 1,735,147
Accumulated deficit ................................................... (2,646,286) (2,941,232)
------------ ------------
Total stockholders' deficit .............................................. (969,335) (1,193,085)
------------ ------------
Total liabilities and stockholders' deficit .............................. $ 1,741,214 $ 1,588,834
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Gen Trak, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three months ended
Year ended December 31 March 31
1997 1998 1998 1999
-------------- ----------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales ................................ $ 2,710,485 $ 2,149,285 $ 530,501 $ 459,819
Cost of sales ............................ 1,490,928 1,321,826 276,527 354,066
Write-down of inventory .................. -- 791,378 -- --
----------- ------------- ----------- -----------
1,219,557 36,081 253,974 105,753
Operating expenses:
Marketing and selling ................... 864,144 1,017,310 229,460 165,401
General and administrative .............. 313,888 452,294 83,641 129,719
Research and development ................ 56,746 57,268 18,474 16,401
----------- ------------- ----------- -----------
1,234,778 1,526,872 331,575 311,521
----------- ------------- ----------- -----------
Loss from operations ..................... (15,221) (1,490,791) (77,601) (205,768)
Interest expense ......................... 122,862 171,055 36,942 89,178
----------- ------------- ----------- -----------
Loss before income taxes ................. (138,083) (1,661,846) (114,543) (294,946)
Income taxes ............................. -- -- -- --
----------- ------------- ----------- -----------
Net loss ................................. $ (138,083) $ (1,661,846) $ (114,543) $ (294,946)
=========== ============= =========== ===========
Basic and diluted loss per share ......... $ (.11) $ (1.28) $ (.09) $ (.23)
=========== ============= =========== ===========
Weighted average shares
outstanding ............................. 1,300,000 1,300,000 1,300,000 1,300,000
=========== ============= =========== ===========
Pro forma basic and diluted
loss per share .......................... $ (1.03) $ (.17)
============= ===========
Pro forma weighted average
shares outstanding ...................... 1,555,000 1,555,000
============= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Gen Trak, Inc.
Statements of Stockholders' 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)
Contribution of accrued
consulting services
(unaudited) ......................... -- 71,196 -- 71,196
Net loss (unaudited) .................. -- -- (294,946) (294,946)
-------- ----------- ------------- -------------
Balance, March 31, 1999
(unaudited) ........................... $ 13,000 $ 1,735,147 $ (2,941,232) $ (1,193,085)
======== =========== ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Gen Trak, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
Year ended December 31 March 31
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss .................................... $ (138,083) $ (1,661,846) $ (114,543) $ (294,946)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation ............................. 71,966 46,540 10,847 12,596
Amortization ............................. 25,105 16,796 4,198 29,974
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 36,720 (31,502)
Inventory .............................. 100,716 23,608 (84,373) 23,904
Prepaid expenses ....................... 9,297 25,212 4,589 (2,286)
Accounts payable and accrued
expenses ............................. 17,629 135,966 92,018 147,995
----------- ------------- ----------- -----------
Net cash provided by (used in)
operating activities ....................... 41,318 (396,908) (50,544) (114,265)
----------- ------------- ----------- -----------
Investing activities
Refund of lease deposit ..................... 13,682 -- -- --
Purchases of property and
equipment .................................. (43,941) (17,716) -- (2,917)
Additions to other assets ................... (9,665) (6,642) -- (2,658)
----------- ------------- ----------- -----------
Net cash used in investing
activities ................................. (39,924) (24,358) -- (5,575)
----------- ------------- ----------- -----------
Financing activities
(Payments) borrowings on bank
line of credit ............................. (5,000) 25,000 25,000 --
Borrowings on stockholder
line of credit ............................. -- 300,000 -- --
Proceeds from notes payable ................. -- 575,000 -- --
Payments on term loan ....................... -- (24,277) (5,725) (4,002)
Payments on capital lease ................... (2,283) (4,221) (1,579) (1,427)
Increase in deferred offering costs ......... -- (189,954) -- (65,382)
Increase in deferred financing fees ......... -- (75,935) -- --
----------- ------------- ----------- -----------
Net cash (used in) provided by
financing activities ....................... (7,283) 605,613 17,696 (70,811)
----------- ------------- ----------- -----------
(Decrease) increase in cash ................. (5,889) 184,347 (32,848) (190,651)
Cash at beginning of period ................. 51,646 45,757 45,757 230,104
----------- ------------- ----------- -----------
Cash at end of period ....................... $ 45,757 $ 230,104 $ 12,909 $ 39,453
=========== ============= =========== ===========
Supplemental disclosure of cash
flow information
Cash paid for interest ...................... $ 123,732 $ 168,038 $ 37,024 $ 32,331
=========== ============= =========== ===========
Lease obligation incurred ................... $ 17,951 $ -- $ -- $ --
=========== ============= =========== ===========
Distribution of stockholder
advances ................................... $ -- $ 31,466 $ -- $ --
=========== ============= =========== ===========
Contribution of accrued consulting
services ................................... $ -- $ -- $ -- $ 71,196
=========== ============= =========== ===========
</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
Interim Financial Information
The financial statements and disclosures included herein for the three
months ended March 31, 1998 and 1999 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a fiscal year.
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.
F-7
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
2. Accounting Policies -- (Continued)
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.
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 $32,670
and $36,611 at December 31, 1998 and March 31, 1999 (unaudited), 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 in vitro 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 24, 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.
F-8
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
3. Inventory
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Work-in-process ................................. $ 675,248 $ 678,442
Finished product ................................ 541,080 498,078
Dry stores ...................................... 44,703 44,963
Allowance for excess and obsolete inventory ..... (717,449) (701,805)
---------- ----------
$ 543,582 $ 519,678
========== ==========
</TABLE>
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Laboratory and manufacturing equipment ............ $ 917,314 $ 920,231
Furniture and fixtures ............................ 93,517 93,517
Leasehold improvements ............................ 121,043 121,043
---------- ---------
1,131,874 1,134,791
Accumulated depreciation and amortization ......... 1,041,625 1,054,221
---------- ---------
$ 90,249 $ 80,570
========== =========
</TABLE>
Laboratory and manufacturing equipment include approximately $18,000 under
capital leases as of December 31, 1998 and March 31, 1999 (unaudited).
Accumulated depreciation related to these assets was approximately $10,000 as of
December 31, 1998 and $11,000 as of March 31, 1999 (unaudited).
5. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Deferred offering costs ........................ $ 189,954 $ 255,336
Deferred financing fees, net of accumulated
amortization of $25,775 at March 31, 1999
(unaudited) ................................... 75,935 50,160
Clinical trial costs, net of accumulated amorti-
zation of $112,478 in 1998 and $112,824 in
1999 (unaudited) .............................. 1,873 1,527
Deposits and other assets ...................... 12,620 12,620
--------- ---------
$ 280,382 $ 319,643
========= =========
</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 are being
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.
F-9
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
6. Accrued Expenses
Accrued expenses consisted of the following:
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
Accrued compensation ................... $ 54,594 $ 29,920
Accrued interest ....................... 22,901 54,601
Accrued contract manufacturing ......... 22,167 30,596
Other accrued expenses ................. 39,307 57,867
--------- ---------
$ 138,969 $ 172,984
========= =========
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 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 and March 31, 1999 (unaudited), 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 of 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:
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
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 ............. $ 912,145 $ 908,143
Capital lease obligation .................... 11,447 10,020
--------- ---------
923,592 918,163
Less current portion ........................ 33,544 32,117
--------- ---------
$ 890,048 $ 886,046
========= =========
F-10
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
9. Long-Term Debt -- (Continued)
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
=========
10. Notes Payable to Stockholders
The Company has outstanding notes payable to certain stockholders of
$58,737 at December 31, 1998 and March 31, 1999 (unaudited). 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. 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. The Company accrued interest on
these notes of $20,778 as of March 31, 1999 (unaudited). 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, less the interest expense previously recognized, will be
reflected as additional interest expense.
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. Rental expense under operating leases
for the three months ended March 31, 1998 and 1999 was approximately $44,633 and
$45,018 (unaudited), respectively. 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.
F-11
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
13. Income Taxes -- (Continued)
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 from this change in tax 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>
Year ended Three months
December 31 ended March 31
1998 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Income tax benefit at federal statutory rate of 34% ......... $ (565,020) $ (100,282)
Permanent differences ....................................... 19,707 2,007
State income taxes (net of federal taxes) ................... (99,710) (17,697)
Tax benefit related to S-corporation status ................. 192,497 --
Increase in valuation allowance ............................. 452,526 115,972
----------- -----------
Net income tax expense/(benefit) ............................ $ -- $ --
=========== ===========
</TABLE>
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 and March 31, 1999 (unaudited) are as follows:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Deferred tax asset:
Reserves on accounts receivable ....................... $ 12,479 $ 12,479
Inventory reserve and capitalization .................. 293,208 286,950
Book over tax depreciation ............................ 38,145 39,345
Stock option compensation ............................. 55,268 55,268
Other compensation accruals ........................... 54,119 26,968
Net operating loss carryforwards ...................... 117,488 265,052
---------- ----------
Total deferred tax assets .............................. 570,707 686,062
---------- ----------
Deferred tax liability:
Capitalized clinical trial and patent costs ........... (118,181) (117,564)
---------- ----------
Total deferred tax liability ........................... (118,181) (117,564)
---------- ----------
Valuation allowance for net deferred tax asset ......... (452,526) (568,498)
---------- ----------
Net deferred tax asset (liability) ..................... $ -- $ --
========== ==========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $294,000, which expire in 2018 for federal tax purposes. At March
31, 1999, the Company has net operating loss carryforwards of approximately
$663,000, which expire in 2019 for federal tax purposes (unaudited).
F-12
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
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, and $6,000 and $34,000 for the three months ended
March 31, 1998 and 1999 (unaudited), respectively. Amounts due for these
services are included in stockholder accrued expenses.
The Chairman of the Board of the Company agreed to forgo accrued consulting
fees due to him from the Company of approximately $71,000 in March 1999
(unaudited). This amount has been reflected as a contribution to capital in the
accompanying March 31, 1999 unaudited balance sheet.
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 and $3,700
and $3,600 for the three months ended March 31, 1998 and 1999 (unaudited),
respectively.
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.
F-13
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
17. Stock Option Plans -- (Continued)
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. Through March
1999, $41,200 (unaudited) of the President's salary was accrued and unpaid. In
March 1999, the President agreed to forgo his accrued salary and the amount was
credited to income in the accompanying statement of operations for the three
months ended March 31, 1999.
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 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
approximately as follows:
<TABLE>
<CAPTION>
Three months ended
Year ended December 31 March 31
1997 1998 1998 1999
-------------- -------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Tissue typing serology products ............. $ 1,685,000 $ 1,100,000 $ 267,000 $ 226,000
SeraScreen antibody screening trays ......... 530,000 663,000 160,000 166,000
Monoclonal antibodies ....................... 267,000 214,000 69,000 34,000
Other ....................................... 228,000 172,000 35,000 34,000
----------- ----------- --------- ---------
$ 2,710,000 $ 2,149,000 $ 531,000 $ 460,000
=========== =========== ========= =========
</TABLE>
F-14
<PAGE>
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
19. Segment Information -- (Continued)
The following is a summary of sales by geographic region:
Three months ended
Year ended December 31 March 31
1997 1998 1998 1999
-------- -------- -------- --------
(Unaudited)
North America ......... 80% 87% 92% 83%
Europe ................ 16 7 7 10
Other ................. 4 6 1 7
-- -- -- --
100% 100% 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 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 basic and diluted loss per share is calculated based upon net
loss adjusted for the reduction in after-tax interest expense (approximately
$54,000 for the year ended December 31, 1998 and $38,000 for the three months
ended March 31, 1999) that would have taken place had the outstanding
indebtedness discussed below been retired at the beginning of each period 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 the outstanding balances on the notes payable
($575,000), the bank line of credit ($400,000) and the stockholder line of
credit ($300,000).
F-15
<PAGE>
================================================================================
A prospective investor should rely only on the information contained in
this prospectus or in our registration statement filed with the SEC. Gen Trak
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 ............................ 2
Gen Trak and its Products .................. 2
The Offering ............................... 2
Summary Financial Data ..................... 3
Statements of Operations Data ................. 3
Risk Factors .................................. 5
Dilution ...................................... 7
Use of Proceeds ............................... 8
Dividend Policy ............................... 9
Capitalization ................................ 10
Selected Financial Data ....................... 11
Statement of Operations Data ............... 11
Management's Discussion and Analysis .......... 12
Gen Trak's Business ........................... 18
Management .................................... 27
Executive Compensation ........................ 28
Principal Shareholders ........................ 30
Certain Transactions .......................... 33
Description of Securities ..................... 34
Underwriting .................................. 36
Shares Eligible for Future Sale ............... 38
Legal Proceedings ............................. 39
Legal Matters ................................. 39
Experts ....................................... 39
Index to Financial Statements ................. F-1
-----------------------------------
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>
================================================================================
750,000 Units
Each Unit Consisting of
Two Shares of Common Stock
Two Redeemable Common Stock
Purchase Warrants
[GRAPHIC OMITTED]
----------
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>
<S> <C>
Securities and Exchange Commission filing fee ................. $ 6,022
National Association of Securities Dealers filing fee ......... 2,427
Nasdaq and Exchange filing fees ............................... 12,000
Underwriter's Non-Accountable Expense Allowance ............... 225,000
Underwriter's Financial Advisory Fee .......................... 108,000
State Securities Laws (Blue Sky) fees and expenses ............ 25,000*
Printing and mailing costs and fees ........................... 45,000*
Legal fees and costs .......................................... 105,000
Accounting fees and costs ..................................... 125,000*
Transfer Agent fees ........................................... 5,000*
Miscellaneous expenses ........................................ 91,551
---------
TOTAL ......................................................... $ 750,000
</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 Intentionally Omitted
3.4 Form of Specimen Warrant Certificate
3.5 1998 Stock Option Plan
3.6 Form of Unit Certificate
3.7 Amendments to Bylaws adopted as of December 30, 1998
3.7.1 Amendments to Bylaws adopted in June, 1999
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>
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.
(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.
II-3
<PAGE>
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 July 16, 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 July 16, 1999
---------------------------- Officer
Arthur V. Boyce, Jr.
/s/ George L. Bird, Jr. Chairman of the Board, Secretary and July 16, 1999
---------------------------- Director
George L. Bird, Jr.
/s/ Harry A. Arena Director July 16, 1999
----------------------------
Harry A. Arena
/s/ Gerald Hamburg Director July 16, 1999
----------------------------
Gerald Hamburg
/s/ Donald O. Nichols Vice-President, Treasurer and Principal July 16, 1999
---------------------------- Financial Officer
Donald O. Nichols
/s/ Gerhard Ertingshausen Director July 16, 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 Intentionally Omitted
3.4 Form of Specimen Warrant Certificate
3.5 1998 Stock Option Plan
3.6 Form of Unit certificate*
3.7 Amendments to Bylaws adopted as of December 30, 1998
3.7.1 Amendments to Bylaws adopted June, 1999*
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. 3
II-6
<PAGE>
Number [Logo] Units
- -------- ----------
GEN TRAK, INC.
See Reverse Side For CUSIP 36867 A 20 2
Certain Definitions
UNITS CONSISTING OF TWO SHARES AND TWO REDEEMABLE WARRANTS EACH
TO PURCHASE ONE SHARE OF COMMON STOCK.
Authorized Capitalization: 25,000,000 Shares of Common Stock
This certifies that __________________________________________________ is the
owner of _____________________ Units as described above, transferrable only on
the books of the Corporation by the holder hereof in person or by his or her
duly authorized attorney, on surrender of this Certificate properly endorsed.
Each unit ("Unit") consists of two (2) shares of the common stock, par value
$.01 per share ("Common Stock"), of Gen Trak, Inc., a Pennsylvania corporation
(the "Corporation") and two (2) Redeemable Common Stock Purchase Warrants
("Warrants"), each to purchase one (1) share of common stock for $6.00 per share
at any time on or after (i) ________________, 1999 or (ii) such earlier time as
shall be determined by Barron Chase Securities Inc. and before 5:00 o'clock p.m.
Eastern Daylight Time on June ________________ , 2004 (or such earlier date as
the Warrants are redeemed ) (the "Expiration Date"). The Common Stock and
Warrants included in each Unit will not be detachable or separately
transferrable from each other until the earlier of ____________, 1999 or such
earlier date as shall be determined by Barron Chase Securities Inc. (the
"Separation Date"). After the Separation Date, holders of Units must submit
their certificates to the Transfer Agent and Registrar of the Corporation (which
firm is also the Warrant Agent as defined below) to be exchanged for Common
Stock and Warrant certificates. The terms, rights and privileges of the Warrants
are set forth in the Warrant Agreement dated June __, 1999 by and between the
corporation and StockTrans, Inc. (the "Warrant Agent"), and are subject to the
terms and provisions contained therein, to all of which terms and provisions the
holder of this Unit Certificate consents by acceptance hereof. Copies of the
Warrant Agreement are on file at the office of Warrant Agent at 7 E. Lancaster
Avenue, Ardmore, PA 19003, and are available to any warrant holder on written
request and without cost. The Warrants shall be void unless exercised before
5:00 p.m. New York City time on the Expiration Date.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar of the corporation.
<PAGE>
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
his duly authorized officers
Dated:______________________ GEN TRAK, INC.
-------------- --------------
Secretary President
Countersigned and registered
StockTrans, Inc.
Transfer Agent and
Registrar
By:___________________________
Authorized Signature
<PAGE>
[REVERSE OF UNIT CERTIFICATE]
GEN TRAK, INC.
The Company will furnish without charge a statement of the powers,
designations, preferences and relative participating, optional or other special
rights of each class of shares or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT_________ Custodian _________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right of
survivorship and not as tenants Act _______________________
in common (State)
Additional abbreviations may also be Used though
not in the above list
For Value Received ____________________________ hereby sell, assign and transfer unto
Please insert Social Security or Other
Identifying Number of Assignee
_______________________________________
_____________________________________________________________________________________________
Please print or typewrite name and address, including the zip code of assignee
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_________________________________________________________________________________________Units
represented by the within Certificate, and do hereby irrevocably constitute and apppoint
_____________________________________________________________________________________Attorney
to transfer the said Units on the books of the within named Company with full
power of substitution in the _________________.
NOTICE:__________________________________________________
The signatures to this Assignment must correspond
with the name(s) upon the face of this Certificate
in every particular without alteration
or enlargement or any change whatsoever.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNATURES GUARANTEED:__________________________________________
The signature must be guaranteed by an eligible
Guarantor institution banks, stockbrokers, savings
And loan associations and credit unions with
Membership in an approved signature guarantee
medallion program pursuant to SEC Rule 17Ad-15
</TABLE>
KEEP THIS CERTIFICATE IN A SAFE PLACE IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE BANK WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.-
<PAGE>
EXHIBIT 3.7.1
Gen Trak, Inc.
Amendments to Bylaws
Adopted June 16, 1999
1. Subparagraph 3.03(a)(3) of the Corporation's Bylaws is hereby amended and
restated to provide in its entirety as follows:
(3) by shareholders entitled to cast at least ten percent (10%) of the
votes that all shareholders are entitled to cast at a particular
meeting.
2. Paragraph 3.05(a) of the Corporation's Bylaws is hereby amended to
provide in its entirety as follows:
(a) General Rule. Except as otherwise provided in the Business
Corporation Law, the Articles of Incorporation of these Bylaws,
whenever any corporate action is to be taken by vote of the
shareholders of the Corporation, it shall be authorized by a majority
of the votes cast at a duly organized meeting of shareholders by the
holders of shares entitled to vote thereon.
3. A new Section 4.12 of the Corporation's Bylaws is hereby adopted to
provide in its entirety as follows:
Section 4.12. Removal of Directors. In furtherance of the provisions
of the Business Corporation Law, any director may be removed from
office with or without cause by the affirmative vote of a majority of
the votes cast at a duly organized meeting of the shareholders, unless
some greater vote is required by the Business Corporation Law.
<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. 3 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
July 12, 1999
