As filed with the Securities and Exchange Commission on November 10, 1999
Registration No. 333-69729
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 6
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GEN TRAK, INC.
(Exact name of registrant as specified in charter)
Pennsylvania 23-2437580 2835
- ------------------------------- --------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification No.) (Primary Standard Industrial
Incorporation or organization) Classification Code Number)
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)
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COPIES OF ALL COMMUNICATIONS TO:
---------------------
Gary A. Miller, Esquire
Eckert Seamans
Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
215/851-8472
215/851-8383 (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.
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Maximum
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
- ----------------------------------- ------------------ -------------------- ------------------ -----------------
Units Consisting of One Share
and One warrant .................. 800,000 Units $5.00 $ 4,000,000 $ 1,112.00
Common Stock $.01 Par Value,
Contained in units ............... 800,000 Shares $ -0-(2) $ -0- $ -0-(2)
Warrants to Purchase Shares of
Common Stock, Contained in
units ............................ 800,000 Warrants $ -0-(2) $ -0- $ -0-(2)
Common Stock, Underlying
Warrants to Purchase
Common Stock ..................... 800,000 Shares $6.00 $ 4,800,000 $ 1,334.40
Warrants to Purchase
Common Stock(3) .................. 25,000 Warrants $ -0- $ -0- $ -0-
Common Stock Issuable Upon
Exercise of Warrants ............. 25,000 Shares $6.00 $ 150,000 $ 41.70
Common Stock(4) ................... 871,722 Shares $5.00 $ 4,358,610 $ 1,211.69
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TOTALS: .......................... $13,308,610 $ 3,699.79
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(1) Estimated solely for calculation of the amount of the registration fee
calculated pursuant to Rule 457.
(2) For purposes of computing the registration fee, the units purchase price
has been allocated 100% to the units.
(3) Issuable to holders of certain promissory notes.
(4) Shares of Gen Trak, Inc. common stock being offered by selling security
holders pursuant to the alternate prospectus.
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
EXPLANATORY NOTE
This registration statement covers the primary offering of shares of our
common stock by Gen Trak, Inc. and the offering of shares of our common stock
by certain selling security holders. Gen Trak is registering, under the primary
prospectus, up to 800,000 units, each unit consisting of one share of common
stock and one warrant to purchase a share of common stock. Gen Trak is
registering, on behalf of the selling security holders, under an alternate
prospectus, 871,722 shares of common stock including 25,000 shares of common
stock issuable upon exercise of warrants. The alternate prospectus pages, which
follow the primary prospectus, contain certain sections which are to be
combined with all of the sections contained in the primary prospectus, with the
following exceptions: the front and back cover pages, and the sections entitled
"The Offering" and "Selling Securityholders." In addition, the sections
entitled "Concurrent Offering" and "Plan of Distribution" will be added to the
alternate prospectus. Furthermore, all references contained in the alternate
prospectus to the "offering" shall refer to offering under the primary
prospectus.
iii
CROSS REFERENCE SHEET
ITEM SECTIONS IN PROSPECTUS
NO. ---------------------------------------
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, High Risk Factors
4. Use of Proceeds ......................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price ......................... Cover Page; High Risk Factors
6. Dilution ................................................ Dilution
7. Selling Security Holders ................................ Alternate Prospectus; Selling Security
Holders
8. Plan of Distribution .................................... Prospectus Summary; Plan of
Distribution
9. Legal Proceedings ....................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons ................................................. Management
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 .......................... Not Applicable
15. Organization within Last Five Years ..................... Not Applicable
16. Description of Business ................................. Prospectus Summary; High Risk Factors;
Gen Trak's Business
17. Management's Discussion and Analysis or Plan of
Operation ............................................... Management's Discussion and Analysis
18. Description of Property ................................. Gen Trak's Business
19. Certain Relationships and Related Transactions .......... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters ................................................. High 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
iv
[GRAPHIC OMITTED]
Minimum 400,000 Units
Maximum 800,000 Units
Each Unit Consists of One Share and One Warrant
$5.00 Per Unit
The shares and warrants are not offered separately.
The warrants are redeemable at $.10 per warrant.
The units are being offered on a "best efforts" basis through officers and
directors of Gen Trak, Inc.
================================================================================
Price to Proceeds to
Public Commissions Company
Per Unit ......... $ 5.00 $0 $ 5.00
Minimum .......... $2,000,000 $0 $2,000,000
Maximum .......... $4,000,000 $0 $4,000,000
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This investment involves a high degree of risk. You should purchase these
securities only if you can afford a complete loss. See "High Risk Factors"
beginning on page 5. These are speculative securities.
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.
---------------------
The date of this prospectus is __________, 1999.
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PROSPECTUS SUMMARY
Gen Trak and its Products
Gen Trak is developing DNA-based testing technology which will allow
physicians to diagnose infectious disease in their offices during patient
visits. We have three patents for this new technology. In addition, Gen Trak
sells health care test kits used for various genetic tests. We sell primarily
to hospitals and private laboratories performing tests for solid organ and bone
marrow transplants.
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....... A minimum of 400,000 units of securities
A maximum of 800,000 units of securities
o Each unit consists of one share and one warrant.
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.
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........... $5.00 per unit
Shares of Common Stock
Outstanding:
Prior to the Offering... 1,750,000 shares of common stock
After the Offering...... 2,328,196 shares of common stock (if minimum
number of units is sold; 2,728,196 if maximum number
of units is sold)
In addition to the shares that will be outstanding after the offering, Gen
Trak will have outstanding a minimum of 425,000 warrants and a maximum of
825,000 warrants.
Use of Proceeds.......... We will use a significant portion of the proceeds
of this offering to repay debt owed to stockholders,
investors and banks. The balance of the proceeds
will be used for working capital, expansion of our
product lines and general corporate purposes.
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2
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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. Initially, we anticipate that our units will be quoted on the NASD's
Electronic Bulletin Board. After closing of this offering we intend to apply
for listing of our securities on the Boston Stock Exchange if we meet the
criteria for listing on that Exchange. We cannot guarantee that we will meet
the criteria for listing or will be accepted even if we meet the criteria.
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 six
months ended June 30, 1998 and 1999 are unaudited. The results of operations
for the six months ended June 30, 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 Operations data below take into account certain effects from the
use of proceeds of the offering as if they had occurred on January 1, 1998. The
"As Adjusted" column in the Balance Sheet Data assumes the sale of the minimum
number and the maximum number of units in this offering and the use of proceeds
as if that sale had taken place on June 30, 1999.
STATEMENTS OF OPERATIONS DATA
Years Ended 6 Months Ended
------------------------------- -----------------------------
12/31/97 12/31/98 06/30/98 06/30/99
------------- --------------- ------------- -------------
Net Sales ........................ $2,710,485 $ 2,149,285 $1,143,787 $ 900,917
Gross Profit ..................... 1,219,557 36,081 555,501 265,661
Net Loss ......................... (138,083) (1,661,846) (186,323) (582,371)
Basic and Diluted Loss Per Share . $ (.11) $ (1.28) $ (.14) $ (.45)
Pro Forma Basic & Diluted Loss
Per Share ...................... $ (1.16) $ (.38)
Weighted Average Shares Out-
standing 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 &
Diluted Loss Per Share ......... 1,420,000 1,420,000
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3
BALANCE SHEET DATA
JUNE 30, 1999
---------------------------------------------------
As adjusted As adjusted
DECEMBER 31, for sale of for sale of
1998 UNAUDITED 400,000 Units 800,000 Units
-------------- ---------------- --------------- --------------
Cash ................................... $ 230,104 $ 48,217 $ 898,217 $2,498,217
Current Assets ......................... $1,097,311 $ 874,112 $1,724,112 $3,324,112
Total Assets ........................... $1,741,214 $ 1,575,577 $2,425,577 $4,025,577
Current Liabilities .................... $1,761,764 $ 2,111,304 $1,249,554 $ 849,554
Long-term Liabilities .................. $ 948,785 $ 944,783 $1,206,533 $1,206,533
Shareholders' Equity (Deficit) ......... $ (969,335) $ (1,480,510) $ (30,510) $1,969,490
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.
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4
HIGH 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 Will Require Near Term Additional Financing if Only the Minimum Number
of Units is Sold. If only the minimum number of units is sold (400,000 units)
and, if we are required to pay all of our indebtedness which will become due in
1999, there will be little cash remaining out of the net proceeds of the
offering to support our ongoing operations. We are attempting to negotiate with
our lenders extensions of our loans so that we will be able to devote more of
the proceeds of the sale of the units to support our business. We also are
seeking to negotiate an extension of time to pay certain of the expenses of
this offering. If only the minimum number of units is sold it may be necessary
for us to obtain additional financing by mid-2000 in order for us to be sure of
adequate cash to support our business and to allow us to take any initiatives
to grow our business. We may not be able to obtain any of the required
financings.
If this Offering is not Completed We Will Not Have Sufficient Cash to
Conduct Our Operations. Our cash flow from our present sale of products is not
sufficient to pay for all of our expenses on a current basis. We have sought
and received the cooperation of certain of our suppliers in continuing to
supply materials and services to us even though we are in arrears on our
payments to suppliers. We are relying upon the completion of this offering for
at least the minimum number of units to bring our accounts current.
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 six
months of 1999, we had a net loss of $582,371. For these reasons and others,
our auditor's opinion contains an explanatory paragraph expressing doubt as to
our ability to continue as a going concern.
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.
5
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.
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 $350,000
of the offering proceeds will be used to repay a debt owed to one of our
existing shareholders if the maximum number of units is sold. In addition,
approximately $90,000 will be used to pay accrued consulting fees to a
consultant affiliated with that shareholder. Our ability to accomplish our
goals through use of your investment funds is reduced by using some of the
funds to repay these debts.
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.
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 under certain conditions on 30 days' prior written notice for a price of
$.10 per warrant. We are likely to repurchase the warrants at a time when this
is favorable to our company and not the warrant holders. If we give notice of
our intention to repurchase the warrants, warrant holders will lose their right
to exercise the warrants unless they exercise the warrants and pay for the
shares during the 30 day notice period.
You May Not be able to Sell Your Shares and Warrants Because There May Be
No Market For Our Securities After this Offering. There can be no assurance
that a trading market will develop or be sustained after completion of the
offering or that the market price of the units, common stock and warrants will
remain at or above the public offering price. The offering price of the
securities has been arbitrarily determined by Gen Trak and bears no
relationship to our current operating results, book value, net worth or
financial criteria of value.
You May have Difficulty Selling Your Shares and Warrants Because We Will
Not Qualify For NASDAQ and Our Securities Will Be Classified as Penny Stocks.
If there is a market for our securities after this offering, trading in our
securities will take place only in the over-the-counter market in what are
commonly known as the "pink sheets" or on the NASD Electronic Bulletin Board.
Because our securities may be subject to the SEC's penny stock rules,
broker-dealers will be restricted in their ability to sell the securities in
the open market. For these reasons, you may have difficulty in selling your
shares and warrants and may have difficulty in obtaining accurate quotations of
the market price of the shares and warrants.
6
Sales of Substantial Amounts of Common Stock in the Public Market
Following the Offering Could Adversely Affect the Market Price for the Common
Stock. Under the Alternate Prospectus under the present registration statement,
we have registered for sale by security holders 871,722 shares of common stock
which may be sold at any time. In addition, upon completion of this offering,
approximately 500,000 restricted shares of Common Stock held by our existing
stockholders will be eligible for sale, subject to the volume limitations and
other requirements of Rule 144 under the Securities Act.
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 expressed 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.
DILUTION
You May Suffer Dilution of the Entire 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. The net tangible book
value per share will not be a positive number if only the minimum number of
units is sold.
Gen Trak's net tangible book value (deficiency) at June 30, 1999, was
($1,752,754) or ($1.35) 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 minimum 400,000 units had been sold on June 30, 1999, our
adjusted net tangible book value (deficiency) at June 30, 1999 would have been
approximately ($302,754) or ($.13) per share; this calculation also assumes
that the 450,000 shares of common stock issued without payment in August 1999,
the 70,000 shares of common stock issuable to our President and our Chief
Financial Officer at the closing of the offering, and the 108,196 shares
issuable without payment to holders of private placement notes had been issued
on June 30, 1999. This represents an immediate increase in net tangible book
value per share of $1.22 to existing shareholders and an immediate decrease of
$5.13 per share to the investors purchasing the units. If more than the minimum
number of units is sold, dilution to new investors will be less. The following
table illustrates the per share dilution in net tangible book value to
investors in this offering assuming the minimum and maximum number of units is
sold. 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.
7
Minimum Maximum
----------- -----------
Public offering price per share .......... $ 5.00 $ 5.00
Net tangible book value (deficiency)
per share before offering ............... ($ 1.35) ($ 1.35)
Increase per share attributable to sale
of units ................................ $ 1.22 $ 1.97
------- -------
Adjusted net tangible book value per
share after offering .................... ($ .13) $ .62
------- -------
Dilution per share to investors in this
offering ................................ $ 5.13 $ 4.38
======= =======
The following table compares
o The number of shares held by existing shareholders as of June 30, 1999
and to be held by new shareholders after the minimum 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.
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 to
receive 108,196 shares on closing of this offering.
Consideration
Shares of ------------------------------
Common Stock Average Price
Acquired Amount Percent Per Share
-------------- ------------- -------------- ----------
Existing Shareholders ................. 1,300,000 $1,748,147 47% $1.34
Shares Issued in August 1999 .......... 450,000 $ 0 0% $ 0
Private Placement Noteholders ......... 108,196 $ 0 0% $ 0
Officers New Shares ................... 70,000 $ 0 0% $ 0
Investors in this offering ............ 400,000 $2,000,000 53% $5.00
--------- ---------- --
Totals .............................. 2,328,196 $3,748,147 100%
========= ========== ===
USE OF PROCEEDS
The net proceeds from the sale of the units after deducting the expenses
of the offering will be approximately $1,450,000 if the minimum number of units
is sold and approximately $3,450,000 if the maximum number of units is sold. The
following table summarizes our intended use of these proceeds.
MINIMUM MAXIMUM
----------------------------- ----------------------------
PERCENT OF PERCENT OF
APPLICATION OF PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS
- ---------------------------------------------- -------------- ------------ -------------- -----------
Repayment of Private Placement Notes ......... $ 250,000 17.2% $ 250,000 7.2%
Repayment of Stockholder Line of Credit $ 250,000 17.2% $ 350,000 10.1%
Repayment of Bank Indebtedness
(including deferred interest) ............... $ 200,000 13.8% $ 500,000 14.5%
Working Capital and Product Line
Expansion ................................... $ 750,000 51.8% $2,350,000 68.2%
----------- ---- ---------- ----
Total ..................................... $ 1,450,000 100% $3,450,000 100%
=========== ==== ========== ====
Repayment of Private Placement Notes. We will use these funds to repay up
to $250,000 of an issue of $575,000 of promissory notes sold in a November and
December 1998 private placement. These promissory notes are payable not later
than December 31, 1999. The holders are entitled to cash interest at the rate
of 12% per annum. In order to preserve more of the proceeds of this offering
for use in the operations and
8
expansion of our business, we are negotiating with the holders of these notes
to obtain extensions of the time for payment of principal. We have reached oral
agreements for extension with the holders of $325,000 in principal amount of
these notes. Under these agreements approximately $200,000 in principal amount
is required to be paid in 12 monthly installments beginning one month from
closing of this offering, and the remainder is payable in 24 quarterly
installments beginning January 1, 2000. As an inducement to noteholders to
accept deferred payment and in lieu of cash interest to certain noteholders, we
have agreed to issue 108,196 shares and warrants for 25,000 shares exercisable
at $6.00 per share, to the holders of the $325,000 in principal amount of notes
with whom we have reached agreement. There is no assurance that we can obtain
any such agreements with additional noteholders.
Repayment of Stockholder Line of Credit. We will use these funds to repay
all or a portion of an unsecured line of credit from Susquehana Holdings Corp.,
one of our shareholders, in the presently outstanding amount of $350,000.
Amounts which are not repaid at the completion of the offering will be due in
installments commencing on January 2, 2000.
Repayment of Bank Indebtedness. We will use these funds to reduce the
outstanding balance of our bank line of credit and to bring to current certain
payments of interest and principal on our term loan which we have deferred with
the consent of the bank. 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 June 30, 1999, the interest rate was 10.25%. We intend to reduce
our line of credit by $100,000 if the minimum number of units is sold and by
$400,000 if the maximum number of units is sold; the amount required to make up
deferred payments on our term loan and interest on our line of credit is
approximately $100,000. Our bank borrowings are secured by substantially all of
our assets and life insurance policies on the Chairman of the Board and the
President and are personally guaranteed by the Chairman of the Board. Our bank
line of credit is evidenced by a demand note as to which the bank can demand
payment at any time. The bank has not advised us whether it will keep the line
of credit in effect after the completion of this offering if only a portion of
the loan is repaid.
Working Capital and Product Line Expansion. 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 $90,000 of accrued payables are consulting fees
we owe to a consultant affiliated with Susquehana Holdings Corp. To the extent
that we are in a position to do so financially, we will look to expand our
product lines by development of products, including efforts to commercialize
our AMPRO technology, or by acquisition. Currently we do not have any
commitments to acquire any business or technology. It may be more difficult for
you to estimate the likelihood of our success if you do not know the specific
use of your investment funds.
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.
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.
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.
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
CAPITALIZATION
The following table presents the capitalization of Gen Trak as of June 30
1999. The "As Adjusted" columns in the table presents the capitalization taking
into account the following as if they had occurred on June 30, 1999:
o The receipt of the net proceeds from the sale of the minimum 400,000
units and the maximum 800,000 units at a price of $5 per unit;
o The estimated use of proceeds from the sale of these units;
o The issuance of 108,196 shares of common stock to private placement
noteholders, together with a charge to interest expense for the value of
such shares at $5.00 per share, reduced by $21,279 of interest expense
accrued at June 30, 1999 which will not be payable;
o The issuance of 450,000 shares of common stock without payment to three
entities in connection with this offering;
o The amendment of an aggregate of $325,000 of private placement notes to
extend the maturity of those obligations, as described under the heading
"Use of Proceeds;"
o The issuance of a total of 70,000 shares to our President and Chief
Financial Officer upon closing of this offering.
The table does not take into account any shares which may be issued on
exercise of the warrants.
June 30, 1999
---------------------------------------------------------------
As adjusted for the As adjusted for the
Actual sale of 400,000 units sale of 800,000 units
-------------- ----------------------- ----------------------
Short-term debt:
Bank line of credit .................................. $ 400,000 $ 300,000 $ 0
Stockholder line of credit ........................... 350,000 100,000 0
Private placement notes -- current portion ........... 575,000 63,250 63,250
Current portion of long-term debt .................... 31,006 31,006 31,006
----------- ----------- -----------
Total short-term debt ................................. $ 1,356,006 $ 494,256 $ 94,256
=========== =========== ===========
Long-term debt:
Long-term debt ....................................... $ 879,136 $ 879,136 $ 879,136
Private placement notes -- long term ................. 0 261,750 261,750
Notes payable to shareholders ........................ 58,737 58,737 58,737
Obligations under capital leases ..................... 6,910 6,910 6,910
----------- ----------- -----------
Total long-term debt .................................. $ 944,783 $ 1,206,533 $ 1,206,533
=========== =========== ===========
Stockholders' equity (deficit)
Common stock, $.01 par value, 25,000,000 shares
authorized, 1,300,000 and 2,328,196 (Minimum) or
2,728,196 (Maximum) issued and outstanding ......... $ 13,000 $ 23,282 $ 27,282
Additional paid-in capital ........................... 1,735,147 4,065,845 6,061,845
Retained deficit ..................................... (3,228,657) (4,090,770) (4,090,770)
----------- ----------- -----------
Total stockholders' equity (deficit) .................. (1,480,510) (1,643) 1,998,357
----------- ----------- -----------
Total capitalization .................................. $ (535,727) $ 1,204,890 $ 3,204,890
=========== =========== ===========
10
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 six months ended June 30, 1998 and 1999 are unaudited. The results of
operations for the three months ended June 30, 1998 and 1999 are not
necessarily indicative of the results to be expected for the full year.
Year Ended 6 Months Ended
--------------------------------- --------------------------------
12/31/97 12/31/98 06/30/98 06/30/99
-------------- ---------------- -------------- ---------------
Statement of Operations Data:
Net sales ................................... $2,710,485 $ 2,149,285 $1,143,787 $ 900,917
Cost of sales ............................... $1,490,928 $ 1,321,826 $ 588,286 $ 635,256
Write-down of inventory ..................... -- $ 791,378 -- --
---------- ----------- ---------- ----------
Gross profit ............................. $1,219,557 $ 36,081 $ 555,501 $ 265,661
Marketing and selling ....................... $ 864,144 $ 1,017,310 $ 466,801 $ 395,417
General and administrative .................. $ 313,888 $ 452,294 $ 167,685 $ 242,456
Research and development .................... $ 56,746 $ 57,268 $ 31,538 $ 34,326
---------- ----------- ---------- ----------
Total operating expenses ................. $1,234,778 $ 1,526,872 $ 666,024 $ 672,199
Interest expense ............................ $ 122,862 $ 171,055 $ 75,800 $ 175,833
Net loss .................................... $ (138,083) $(1,661,846) $ (186,323) $ (582,371)
Basic and diluted loss per share ............ $ (.11) $ (1.28) $ (.14) $ (.45)
Weighted average shares outstanding ......... 1,300,000 1,300,000 1,300,000 1,300,000
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 six months
ended June 30, 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 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 two quarters of 1999 by
eliminating some of our manufacturing workforce. We were able to do this
because we subcontracted manufacturing.
11
Results of Operations
The following table presents selected financial information for the
periods indicated expressed as a percentage of net sales:
Year Ended 6 Months Ended
--------------------------- --------------------------
12/31/97 12/31/98 06/30/98 06/30/99
------------ ------------ ------------ -----------
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 55.0 61.5 51.4 70.5
Inventory adjustments ............... 0.0 36.8 0.0 0.0
----- ----- ----- -----
Gross profit ..................... 45.0 1.7 48.6 29.5
Operating Expenses:
Marketing and selling ............... 31.9 47.3 40.8 43.9
General and administrative .......... 11.6 21.0 14.7 26.9
Research and development ............ 2.1 2.7 2.8 3.8
----- ----- ----- -----
Total operating expenses ......... 45.6 71.0 58.3 74.6
Loss from operations ................ ( 0.6)% (69.3)% ( 9.7)% (45.1)%
Interest expense .................... 4.5 8.0 6.6 19.5
----- ----- ----- -----
Net loss ............................ ( 5.1)% (77.3)% (16.3)% (64.6)%
===== ===== ===== =====
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
Net sales decreased in 1998 from the prior year by 21%, and for the first
six months of 1999 by 21% from the first six 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 six months of 1998 and 1999.
Year Ended 6 Months Ended
----------------------------- --------------------------
12/31/97 12/31/98 06/30/98 06/30/99
------------- ------------- ------------ -----------
Tissue typing serology products ............. $1,685,000 $1,100,000 $ 589,000 $453,000
SeraScreen antibody screening trays ......... 530,000 663,000 333,000 303,000
Monoclonal antibodies ....................... 267,000 214,000 125,000 73,000
DNA products ................................ 116,000 16,000 16,000 --
Other ....................................... 112,000 156,000 81,000 72,000
---------- ---------- ---------- --------
Total .................................... $2,710,000 $2,149,000 $1,144,000 $901,000
========== ========== ========== ========
12
First six months 1999 compared to first six months 1998
Net Sales and Gross Profit
The following table compares net sales and gross profit for the six months
ended June 30, 1998 and 1999.
6 Months Ended
--------------------------- Percentage Decrease
6/30/98 6/30/99 From 1998 to 1999
------------- ----------- --------------------
Net Sales ............ $1,143,787 $900,917 (21.2%)
Gross Profit ......... $ 555,501 $265,661 (52.2%)
Net sales decreased by 21.2% from $1,143,787 for the first six months in
1998 to $900,917 for the first six months in 1999. Most of this decrease is
attributable to net sales of tissue typing products, which declined $136,000,
monoclonal antibodies, which declined $52,000, and SeraScreen antibody
screening trays, which declined $30,000. DNA products also decreased $16,000.
Unit sales volume decreased in all product lines primarily due to the lack of
technically competitive products as we introduced the new contract-manufactured
serology products late in third quarter of 1998. We had not realized the full
impact of our new products by the end of the second quarter of 1999.
Expressed as a percentage of sales, gross profit decreased from 48.6% for
the first six months in 1998 to 29.5% for the first six 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 $289,840 from $555,501 for the first
six months in 1998 to $265,661 for the first six months in 1999 as a result of
lower sales and the decrease in the gross profit percentage.
Operating Expenses
The following table compares operating expenses for the six months ended
June 30, 1999 and 1998.
Percentage
Increase
6 Months Ended
-------------------------------------------------------
06/30/98 06/30/99
-------------------------- -------------------------- (Decrease)
Percent of Percent of From
Amount Sales Amount Sales 1998 to 1999
----------- ------------ ----------- ------------ -------------
Marketing & Selling Expense .............. $466,801 40.8% $395,417 43.9% (15.3%)
General & Administrative Expense ......... 167,685 14.7% 242,456 26.9% 44.6%
Research & Development Expense ........... 31,538 2.8% 34,326 3.8% 8.8%
-------- ---- -------- ----
Total Operating Expense ............... $666,024 58.3% $672,199 74.6% 0.9%
Operating expenses increased $6,175 or 0.9% from $666,024 for the first
six months in 1998 to $672,199 for the first six months in 1999, and increased
as a percentage of sales from 58.3% for the first six months in 1998 to 74.6%
in 1999.
Marketing and selling expense decreased $71,384 or 15.3% from $466,801 for
the six months in 1998 to $395,417 for the first six months in 1999, and
increased as a percentage of sales from 40.8% for the first six months in 1998
to 43.9% for the first six months in 1999. The aggregate decrease in marketing
and selling expense is primarily attributed to forgiveness of the deferred
compensation by the president and a decrease in supplies and samples shipped
for the first three months in 1999. The forgiveness of deferred compensation by
the president refers to the deferred salary owed to him as of June 30, 1999 of
$41,200. Supplies expense decreased $13,974 or 88.0% from $15,880 for the first
six months in 1998 to $1,906 for the first six months in 1999, due primarily to
the cost and redesign of new sales brochures and product literature incurred in
the first six months of 1998. The cost of samples shipped decreased $8,768 or
57.3% from $15,309 for the first six months in 1998 to $6,541 for the first six
months in 1999. The aggregate decrease in samples shipped is primarily
attributed to not incurring as high a level of sampling in the first six months
of 1999 of a new product line. This line was introduced at the end of 1997 and
sampled in the beginning of 1998.
13
General and administrative expense increased $74,771 or 44.6% from
$167,685 for the first six months in 1998 to $242,456 for the first six months
in 1999 and increased as a percentage of sales from 14.7% for the first six
months in 1998 to 26.9% for the first six months in 1999. The aggregate
increase is attributed to higher professional fees and additional consulting
fees. Professional fees increased $16,114 or 60.4% from $26,672 for the first
six months of 1998 to $42,786 for the first six months of 1999. The aggregate
increase in professional fees is attributed to additional professional services
provided in the first six months of 1999. Consulting fees increased $56,950 or
711.9% from $8,000 for the first six months of 1998 to $64,950 for the first
six months of 1999. The increase in consulting fees is primarily attributed to
the consulting agreement with a stockholder of $45,000 for the first six months
of 1999.
Research and development expense increased $2,788 or 8.8% from $31,538 for
the first six months in 1998 to $34,326 for the first six months in 1999 and
increased as a percentage of sales from 2.8% for the first six months in 1998
to 3.8% for the first six months in 1999.
Interest Expense
Interest expense increased $100,033 or 132.0% from $75,800 for the first
six months in 1998 to $175,833 for the first six months in 1999 as a result of
$37,981 of interest accrued on the notes payable, the amortization of the
deferred financing fees of $50,155 on those notes and $14,959 of interest on
the stockholder line of credit, all 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, 1997 and 1998.
Year Ended
------------------------------- Percentage Decrease
12/31/97 12/31/98 from 1997 to 1998
-------------- -------------- --------------------
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%)
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 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.
14
Operating Expenses
The following table compares operating expenses for the year ended
December 31, 1998 and 1997.
YEAR ENDED
-------------------------------------------------------
December 31, 1997 December 31, 1998 Percentage
-------------------------- --------------------------- Increase
Percent of Percent of from
Amount Sales Amount Sales 1997 to 1998
------------ ------------ ------------- ------------ -------------
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%
========== ==== ========== ==== ====
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.
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".
15
Liquidity and Capital Resources
We historically have financed our operations primarily from bank debt,
private equity financings and cash flow generated from operations. In the
second half of 1998, we obtained a line of credit from a shareholder and
obtained financing from a private placement of unsecured promissory notes.
At June 30, 1999, we had a working capital deficit of $1,237,192. After
the initial use of the minimum proceeds from this offering to pay debts, we
expect to have working capital of $174,558. In addition, liquidity will improve
due to the reduction in debt. The reduction in debt service will increase cash
flow by approximately $71,000 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" in a
private placement. The proceeds of that private offering have been used for
working capital and legal, accounting, printing and other expenses in
connection with this offering. These notes are due and payable on December 31,
1999. We are attempting to negotiate agreements with the holders of these notes
to extend the time for payment of principal. Holders of $325,000 principal
amount of these notes have agreed to accept repayment in installments after
closing of this offering.
We entered into a $300,000 unsecured line of credit agreement with a
shareholder, Susquehana Holdings Corp., 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. This line of credit was increased by $50,000 in
May 1999. As of the date of this Prospectus, we owed $350,000 under this line
of credit. Under revised terms of this line of credit borrowing, $250,000 will
be repaid from the proceeds of this offering if the minimum number of Units is
sold, and all outstanding borrowings will be repaid if the maximum is sold. Any
amounts which are not paid from proceeds of the offering will be paid in six
monthly installments commencing in January 2000 and ending in June 2000.
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 June 30, 1999, the interest rate was
10.25%. On June 30, 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 and has been personally
guaranteed by the Chairman of the Board. We intend to repay $100,000 of this
line of credit out of the proceeds of this offering if only the minimum number
of units is sold. Our line of credit from the bank is evidenced by a demand
promissory note, and the bank has not given us assurance that it will not
demand payment of the entire outstanding line of credit. If the bank demands
payment of the entire outstanding balance, it will be necessary for us to
obtain other working capital financing in the first half of 2000, and there is
no guarantee that we will be able to do so. If the maximum number of units is
sold, we intend to repay the entire line of credit, and there is no assurance
that the bank will extend a line of credit facility to us in the future.
In 1995, we obtained a bank term loan of $1,300,000. The balance at June
30, 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 and
has been guaranteed by the Chairman. 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 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 six months if only the
Minimum number of units is sold and at least through the Year 2000 if the
Maximum number of units is sold. We will require additional financing in the
Year 2000. We are pursuing additional research and development of our new AMPRO
technology to develop products which will allow a physician to diagnose
infectious disease in the physician's office during a patient's visit. We will
require further additional financing to expand and complete that research and
development. The financings which we require in the addition to the present
offering may not be available on acceptable terms or any terms. To the extent
that we raise additional capital by issuing equity securities, existing
stockholders, including investors in this offering, may be diluted. Future
investors may be granted rights superior to those of existing stockholders.
16
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.
17
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 1999 in the event our Year 2000 compliance
initiatives, particularly those that relate to third parties, fall behind
schedule.
GEN TRAK'S BUSINESS
Background
We have developed and patented a new DNA detection and amplification
technology called AMPRO. This technology can discriminate and amplify multiple
analytes (targets) in a single sample, simultaneously. We plan to apply this
technology in markets such as
o diagnosing disease from patient blood, saliva and other specimens in a
physician's office
o detecting disease-causing viruses and bacteria in food and water
o high-throughput drug screening.
No products employing AMPRO technology have yet been developed. Our
strategy is to develop the AMPRO technology and to continue our current
business to provide a base for the launch of the AMPRO technology.
We currently 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.
Industry Overview
Genetic Test Products. 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. Such products also are used for
identity testing, family studies to predict the likelihood of developing
certain diseases, and paternity testing.
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, while the balance
consists of individual testing laboratories that make their own test kits.
We believe that there are growth opportunities in the U.S. and European
markets. Despite some cultural biases against transplants in some Asian and
Pacific Rim countries, we believe these markets have not been fully penetrated
and the market for our products will grow in those areas.
18
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.
A more recent development is bone marrow transplant procedures, which are
used in cases of leukemia and certain cancers and other diseases. Bone marrow
transplants present the additional 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. 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 Diagnostics -- Near-to-Patient Testing. Diagnosis of disease
in the clinical setting comprises 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. Until recently, in vitro diagnostic testing had required
technicians to manipulate patient blood and saliva specimens and develop
reactions in a laboratory remote from the patient. 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 or physician's office. 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 employing
technology that permits tests to be completed during a patient visit to a
physician's office. 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, 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. 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. The emerging
customer base includes physicians motivated to maintain control over their
practices and to be responsible to patient demands for quick and accurate test
results at a reduced cost. As this new customer base flourishes, the
diagnostics industry is being forced to shift its focus 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.
Development of AMPRO - Gen Trak's New Technology
We have developed and patented the basic technology for detection and
amplification of multiple targets in a single sample, simultaneously. Multiple
target detection is important for its ability to discriminate multiple diseases
in a single patient sample. This 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 AMPRO technology
19
may simplify the analysis of patient blood or saliva samples by amplifying or
increasing the signal from the unique antibodies. Amplification will allow the
physician or technical assistant 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 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.
Multiple target detection is also important to the biochip industry, which
has pioneered the use of DNA tests for pharmaceutical compound discovery.
Increasingly, the pharmaceutical industry has turned to the use of
high-throughput screening technologies to reduce the time and costs associated
with the discovery and development of new drugs. Since AMPRO's multi-target
amplification capability is compatible with many existing biochip
architectures, it will be offered as a tool of enhancement, rather than a
competing technology.
Although we believe that the Ampro technology has value, no products
employing the technology have been designed or tested. Because of our small
capitalization, we do not have the resources to design and test any such
products ourselves. We currently have no agreements or understandings with
potential partners, on whom we will rely for expertise and financial resources
to develop products, and there can be no assurance that any such arrangements
can be made. 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.
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.
20
The Transplant Immune System Response. The immune system functions to
defend the body from invading bacteria, viruses and other foreign matter,
including donor organs or bone marrow. When the body is invaded by foreign
matter, certain components of the immune system recognize the foreign materials
and generate antibodies that identify, target and eliminate the foreign matter.
The immune system of the transplant recipient identifies antigens (HLA
molecules) present on the surface of the white blood cells contained in the
donor organ or bone marrow, as foreign matter which must be destroyed. This can
result in organ rejection.
The degree of rejection is largely dependent upon the degree of
compatibility between the transplant recipient and donor antigens. Antigen
matching between donor and transplant recipient can be determined by
examination and comparison of genetic markers contained in the antigens of both
the transplant recipient and donor. Even with the use of drugs that prevent
rejection by suppressing the immune system's response, organ or bone marrow
rejection occurs quite frequently, and the chronic use of these drugs can lead
to serious side effects. To increase the likelihood of successful organ or bone
marrow transplantation, it is critical to conduct accurate genetic testing and
create an antigen profile of the potential transplant recipient and donor prior
to transplantation to confirm compatibility.
It is also necessary to continuously monitor transplant patients for
newly-formed antibodies that attack donor antigens and cause organ or bone
marrow rejection.
Serology-based typing products. 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.
21
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.
Commercialization Strategy
We are seeking potential relationships with corporate and other partners
to license AMPRO and 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.
We are not dependent on any one customer or small group of customers. No
customer accounted for more than 5% of sales in 1998.
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.
Partnering Opportunities. Several in-vitro diagnostic and biochip industry
partners will be pursued, including, but not limited to:
Diagnostic Companies Biochip Companies
-------------------- ----------------------
Abbott Affymetrix
Bayer (Chiron) Caliper Technologies
Bio-Rad Cepheid
J&J/Ortho Genometrix
Meridian Nanogen Technologies
Organon Orchid Biocomputers
Roche/BMC PE Applied Biosystems
Vysis
We cannot guaranty that we will be successful in establishing any business
relationship with any of the companies named, or with any other company.
Patents and Proprietary Technology
Our ability to 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:
22
Patent No. Issued Name and Use
- ---------------------- -------- ------------------------------------------------------------
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.
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 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.
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 obtained from several hospitals, 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
23
major competitors are One Lambda, Inc., PelFreez, Inc., Dynal, Inc., BioTest
Diagnostics Corp., Murex Diagnostics, Inc. and Sangstadt Medical Corp. Of the
competitors 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.
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
24
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.
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
25
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.
Employees
As of June 30, 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.
26
MANAGEMENT
Directors and Executive Officers
The following table lists the names and positions of our Directors,
Executive Officers and key employees:
Name Age Position
- ---- ----- --------
Arthur V. Boyce, Jr. ............... 50 President, Chief Executive Officer
and Director
George L. Bird, Jr. ................ 69 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 .................. 44 Vice President, Treasurer, Controller and
Chief Financial Officer
Patricia C. McGrath ................ 49 Director of Marketing and Technical Services
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 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.
27
Ertingshausen was the CEO of EM Diagnostic Systems, a clinical laboratory
diagnostic and reagent company which is a subsidiary of E. Merck Darmstadt. Dr.
Ertingshausen holds a Ph.D. in chemistry from the Technical University in
Berlin and an MBA from Fordham University.
Donald O. Nichols has been Controller of Gen Trak since June, 1997, Vice
President since September, 1998 and Treasurer and Chief Financial Officer since
January, 1999. Previously, he was Controller of MEECO, Inc., a privately held
instrument manufacturer in Warrington, Pennsylvania from February 1995 to June
1997. Prior to that, he was the Accounting Manager for Phoenix Technologies,
Inc. a privately held multi-subsidiary manufacturing, sales and service company
in Valley Forge, Pennsylvania. Mr. Nichols is a CPA and earned a Bachelor of
Arts from Glassboro State College in 1978.
Patricia C. McGrath has been with Gen Trak since November, 1990. She
served as HLA Product manager, Director of Technical Services and Director of
DNA Operations prior to her current position as Director of Marketing and
Technical Services. 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.
28
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, currently our Chief Financial Officer, 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
Annual Compensation
---------------------------------------
Other Annual
Name and Principal Compensation All Other
Position Year Salary ($) Bonus ($) Compensation
- ----------------------- ------ ------------ ------- -------------- -------------
Arthur V. Boyce, Jr., 1998 $166,000 -0- -0- -0-
President and CEO 1997 $130,000 -0- -0- -0-
Donald O. Nichols,
Chief Financial 1998 $ 75,000 -0- -0- -0-
Officer 1997 $ 33,758 -0- -0- -0-
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.
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".
The Board of Directors of Gen Trak has approved the issuance of 50,000
shares of common stock to Arthur V. Boyce, Jr. and 20,000 shares of common
stock to Donald O. Nichols upon the completion of this offering.
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
29
included fully vested options for 10,000 shares issued to Mr. Nichols, our
Chief Financial Officer, and fully vested options for 5,000 shares to Dr.
Ertingshausen, our 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.
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
30
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.
PRINCIPAL SHAREHOLDERS
The following table lists certain information regarding the beneficial
ownership of shares of our common stock. The "Before Offering" column lists
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;
o The issuance of 108,196 shares to the holders of our private placement
notes at the closing of this offering;
o The issuance of 50,000 shares to Arthur V. Boyce, Jr., our President, and
20,000 shares to Donald O. Nichols, our Chief Financial Officer, 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
Percent of Common Stock
Beneficially Owned
After Offering
------------------------------------
Number of
Shares of
Common Stock Minimum Maximum
Name and Address Beneficially Before Offering Offering
of Beneficial Owner Owned Offering (400,000 Units) (800,000 Units)
- -------------------------------------------- -------------- ---------- ----------------- ----------------
(i) Directors and Executive Officers
George L. Bird, Jr.
13 Crestview Road
Phoenixville, PA 19460 ..................... 148,310 8.40% 6.33% 5.41%
Arthur V. Boyce, Jr. (2)
1763 Ashbourne Drive
Yardley, PA 19067 .......................... 122,987 6.97% 7.38% 6.31%
Harry A. Arena
1 Jorrocks Lane
Malvern, PA 19355 .......................... 89,795 5.09% 3.83% 3.27%
Deborah M. Hamburg Irrevocable Trust III (3)
204 Wood Spring Road
(P.O. Box 325)
Gwynedd Valley, PA 19437 ................... 141,039 8.00% 6.02% 5.14%
Donald O. Nichols (4)
335 Willowbrooke Avenue
Harleysville, PA 19438 ..................... 25,000 * * *
Dr. Gerhard Ertingshausen (5)
31
Percent of Common Stock
Beneficially Owned
After Offering
------------------------------------
Number of
Shares of
Common Stock Minimum Maximum
Name and Address Beneficially Before Offering Offering
of Beneficial Owner Owned Offering (400,000 Units) (800,000 Units)
- ----------------------------------------------- -------------- ---------- ----------------- ----------------
35 Sayre Drive
Princeton, NJ 08540 ........................... 5,000 * * *
All Officers and Directors as a Group ......... 532,131 30.15% 25.70% 21.95%
(ii) Other Beneficial Owners
Mathers Associates (6)(7)
230 Mathers Road
Ambler, PA 19002 .............................. 220,000 12.57% 10.23% 8.63%
Susquehana Holdings Corp. (6)(7)
230 Mathers Road
Ambler, PA 19002 .............................. 220,000 12.57% 10.23% 8.63%
Skippack Partners (6)(7)
230 Mathers Road
Ambler, PA 19002 .............................. 220,000 12.57% 10.23% 8.63%
Belle Group Ltd., LLC (8)
2251 N. Rampart Blvd., #428
Summertin, NV 89128-7640 ...................... 193,276 11.04% 8.56% 7.27%
Hampstead Equities, Inc. (7)(8)
381 Park Avenue South
New York, NY 10016 ............................ 100,000 5.71% * *
A.J. Acquisition Corp. (7)(8)
315 Linden Place
Westbury, NY 11590 ............................ 200,000 11.43% 8.86% 7.52%
Buckingham Investments, Ltd. (7)(8)
215 East 68th Street
New York, NY 10021 ............................ 150,000 8.57% 6.64% 5.64%
SPAND, Inc. (7)(8)
4601 Sheridan Street
Hollywood, FL 33021 ........................... 93,526 5.34% * *
- ------------
* 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."
32
(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 20,000 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.
(7) All of these shares may be sold pursuant to an alternate prospectus.
(8) Yale Farar is the sole Manager, and Beth Farar is the sole Member, of Belle
Group, Ltd., LLC. The principal of Hampstead Equities, Inc. is Martin C.
Licht. The principal of A.J. Acquisition Corp. is Charles Pinto. The
principal of Buckingham Investments, Ltd. is Stanley Wolfsen. The
principal of SPAND, Inc. is Sidney Workman.
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, except the following. Under an
agreement among Gen Trak, Susquehana Holdings Corp. ("Susquehana") and certain
of our shareholders, if we default under our line of credit with Susquehana (of
which the aggregate balance outstanding on June 30, 1999 was $350,000),
Susquehana will have the right to elect at least 75% of our directors. Our
repayment obligations for this debt are described in the next Section.
CERTAIN TRANSACTIONS
In September, 1998, we obtained a line of credit from Susquehana bearing
interest at 10% per annum, with interest payable quarterly. Under the amended
terms of the line of credit, the amount outstanding ($350,000 at the date of
this prospectus) must be reduced to $100,000 in the event the minimum number of
units is sold; in the event the maximum number of units is sold, all amounts
must be repaid. In the event that the line of credit is not repaid entirely
from the proceeds of this offering, the entire remaining balance of the line of
credit is payable by June 30, 2000. Also in September, 1998, 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. 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.
In August 1999 the Company issued an aggregate of 450,000 shares to
Hampstead Equities, Inc., AJ Acquisition Corp. and Buckingham Investments, Ltd.
in consideration for services in connection with the structuring of this
offering.
33
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 1,750,000 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. After separation from the units, the warrants can be exercised
until the fifth anniversary of the date of this prospectus.
The warrants are exercised by surrender to the warrant agent, with the
subscription form on the reverse side of the warrant 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 covered by the
certificate.
After the warrants become separately transferable, we may redeem the
warrants at $.10 per warrant on 30 days' written notice. We may redeem the
warrants only 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
34
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.
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 exercisable 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 Gen
Trak. 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.
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.
35
These fluctuations 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.
Risks Related to Low Priced Securities. Our shares, warrants and units do
not qualify for listing on the NASDAQ SmallCap Market. Because of this, there
may be less interest in the market place for our securities, which would result
in lower prices for our securities and make it more difficult for you to sell
the shares, warrants or units.' If our common stock is traded in the
over-the-counter market, it will be subject to the "penny stock" trading rules
of the Securities and Exchange Commission if the bid price of our shares is
less than $5.00, unless certain exemptions are applicable. The "penny stock"
trading rules impose additional duties and responsibilities upon broker-dealers
and salespersons in recommending and effecting purchase of our stock, including
determination of the purchaser's investment suitability, delivery of certain
information and disclosures to the purchaser, and receipt of a specific
purchase agreement from the purchaser prior to effecting the purchase
transaction. The "penny stock" trading rules would adversely affect the ability
of a holder of our common stock to resell his or her shares because they have
the effect of reducing the number of potential purchasers. Many broker-dealers
will not effect transaction in penny stocks except on an unsolicited basis in
order to avoid compliance with the "penny stock" trading rules.
PLAN OF DISTRIBUTION
This is a "Best Efforts" Offering. We will not receive any proceeds of the
offering unless we sell units equal to the minimum offering amount. If the
minimum offering is not sold, subscribers will lose the use of their funds for
the offering period of up to 60 days; the funds invested by them will be
returned without interest.
The units will be sold through the efforts of the officers and directors
of Gen Trak. No officer or director of Gen Trak will receive any compensation
in connection with the sale of units. This is a "best efforts" offering, and we
can give no assurance that the minimum number of units will be sold. The
maximum number of units which will be sold is 800,000, if subscriptions are
received for fewer than 400,000 units, no units will be sold.
We plan to continue the offering of units for a period of 30 days after
the date of this prospectus, and we may extend the offering for an additional
30 days in our discretion. We also may terminate the offering at any time,
whether or not the minimum has been subscribed for. We reserve the right to
refuse any, or all, subscriptions.
All proceeds from subscriptions with respect to the units will be
deposited promptly with Summit Bank as escrow agent pursuant to an escrow
agreement with Gen Trak. In the event 400,000 units are not sold within the
30-day period (subject to the 30-day extension), funds will be refunded
promptly to subscribers in full without deduction for any charges and without
interest. During the offering period or any extension, no subscriber will be
entitled to any refund of any subscription.
There was no market for any of our securities prior to this offering. The
public offering price for the units and the exercise price and other terms of
the warrants have been determined by Gen Trak. These prices and terms are not
necessarily based on any accepted methods for valuing businesses or securities.
You cannot be sure that a public market for any of our securities will develop
and continue or that the securities will ever trade at a price at or higher
than the offering price in this offering.
36
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 2,328,196 shares of common
stock outstanding assuming only the minimum number of units are sold. Of the
1,750,000 shares outstanding prior to the offering, 763,526 shares are
registered for sale under an alternate prospectus and will be freely saleable
without restriction under the Securities Act. In addition, 108,196 shares to be
issued to the holders of our private placement notes will be registered under
the alternate prospectus. The holders of 80,000 of those shares have agreed not
to sell their shares for six months after this offering closes, and the holders
of 28,196 of those shares have agreed not to sell their shares for twelve
months after this offering closes. The remaining presently outstanding shares
are or will be saleable by the holders under Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned "restricted" securities for at least one year, including
persons who may be deemed to be our "affiliates", may sell publicly without
registration under the Securities Act of 1933, within any three-month period 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.
In addition to the shares which may be sold by certain of our shareholders
under the alternate prospectus, approximately 685,000 of our shares have been
outstanding for more than two years. Of these, approximately 500,000 are held
by affiliates and may be sold subject to the volume limitations of Rule 144,
and the remainder may be sold without any volume limitations. Approximately
193,000 shares will become tradeable subject to the volume limitations in
March, 2000.
Any shares issued on exercise of the warrants will also be freely saleable
without restriction under the Securities Act. We will have warrants exercisable
for a minimum of 400,000 shares and a maximum of 800,000 shares after this
offering.
The availability for sale of substantial amounts of common stock
subsequent to this Offering could adversely affect the prevailing market price
of the common stock and could impair our ability to raise additional capital
through the sale of its equity securities. Prospective investors should be
aware that the possibility of such sales may, in the future, have a depressive
effect on the price of our common stock in any market which may develop and,
therefore, the ability of any investor to market his shares may be dependent
directly upon the number of shares that are offered and sold.
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 & Mellott, LLC, Philadelphia, PA 19102 has given an
opinion that the securities offered by the prospectus will be validly issued in
accordance with Pennsylvania law. Eckert Seamans Cherin & Mellott, LLC, renders
legal services to Susquehana Holdings Corp., a principal shareholder of Gen
Trak and the affiliates of such shareholder.
37
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.
38
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
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
Gen Trak, Inc.
Balance Sheets
December 31, June 30,
1998 1999
-------------- --------------
(Unaudited)
Assets
Current assets:
Cash .................................................................. $ 230,104 $ 48,217
Accounts receivable, less allowance of $31,200 in 1998 and 1999 ....... 267,963 275,703
Inventory ............................................................. 543,582 498,878
Prepaid expenses ...................................................... 55,662 51,314
----------- -----------
Total current assets ..................................................... 1,097,311 874,112
Property and equipment, net .............................................. 90,249 75,397
Patents, net ............................................................. 273,272 271,066
Other assets ............................................................. 280,382 355,002
----------- -----------
Total assets ............................................................. $ 1,741,214 $ 1,575,577
=========== ===========
Liabilities and stockholders' deficit
Current liabilities:
Bank line of credit ................................................... $ 400,000 $ 400,000
Stockholder line of credit ............................................ 300,000 350,000
Notes payable ......................................................... 575,000 575,000
Accounts payable ...................................................... 211,117 465,985
Accrued expenses ...................................................... 138,969 186,680
Stockholder accrued expenses .......................................... 103,134 102,633
Current portion of long-term debt and capital lease ................... 33,544 31,006
----------- -----------
Total current liabilities ................................................ 1,761,764 2,111,304
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) (3,228,657)
----------- -----------
Total stockholders' deficit .............................................. (969,335) (1,480,510)
----------- -----------
Total liabilities and stockholders' deficit .............................. $ 1,741,214 $ 1,575,577
=========== ===========
See accompanying notes.
F-3
Gen Trak, Inc.
Statements of Operations
Year ended December 31, Six months ended June 30,
1997 1998 1998 1999
-------------- ----------------- -------------- ---------------
(Unaudited)
Net sales ............................................. $2,710,485 $ 2,149,285 $1,143,787 $ 900,917
Cost of sales ......................................... 1,490,928 1,321,826 588,286 635,256
Write-down of inventory ............................... -- 791,378 -- --
---------- ----------- ---------- ----------
1,219,557 36,081 555,501 265,661
Operating expenses:
Marketing and selling ................................ 864,144 1,017,310 466,801 395,417
General and administrative ........................... 313,888 452,294 167,685 242,456
Research and development ............................. 56,746 57,268 31,538 34,326
---------- ----------- ---------- ----------
1,234,778 1,526,872 666,024 672,199
---------- ----------- ---------- ----------
Loss from operations .................................. (15,221) (1,490,791) (110,523) (406,538)
Interest expense ...................................... 122,862 171,055 75,800 175,833
---------- ----------- ---------- ----------
Loss before income taxes .............................. (138,083) (1,661,846) (186,323) (582,371)
Income taxes .......................................... -- -- -- --
========== =========== ========== ==========
Net loss .............................................. $ (138,083) $(1,661,846) $ (186,323) $ (582,371)
========== =========== ========== ==========
Basic and diluted loss per share ...................... $ (.11) $ (1.28) $ (.14) $ (.45)
========== =========== ========== ==========
Weighted average shares outstanding ................... 1,300,000 1,300,000 1,300,000 1,300,000
========== =========== ========== ==========
Pro forma basic and diluted loss per share ............ $ (1.16) $ (.38)
=========== ==========
Pro forma weighted average shares outstanding ......... 1,420,000 1,420,000
=========== ==========
See accompanying notes.
F-4
Gen Trak, Inc.
Statements of Stockholders' Deficit
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----------- -------------- ----------------- -----------------
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) .................................. -- -- (582,371) (582,371)
------- ---------- ----------- -----------
Balance, June 30, 1999 (unaudited) ..................... $13,000 $1,735,147 $(3,228,657) $(1,480,510)
======= ========== =========== ===========
See accompanying notes.
F-5
Gen Trak, Inc.
Statements of Cash Flows
Six months ended
Year ended December 31, June 30,
1997 1998 1998 1999
--------------- ----------------- --------------- ---------------
(Unaudited)
Operating activities
Net loss ................................................ $138,083) $(1,661,846) $(186,323) $(582,371)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ........................................... 71,966 46,540 22,046 22,275
Amortization ........................................... 25,105 16,796 8,397 59,342
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 (3,671) (7,740)
Inventory ............................................ 100,716 23,608 (133,286) 44,704
Prepaid expenses ..................................... 9,297 25,212 21,645 4,348
Accounts payable and accrued expenses ................ 17,629 135,966 186,229 373,274
-------- ----------- --------- ---------
Net cash provided by (used in) operating activities ..... 41,318 (396,908) (84,963) (86,168)
-------- ----------- --------- ---------
Investing activities
Refund of lease deposit ................................. 13,682 -- -- --
Purchases of property and equipment ..................... (43,941) (17,716) (6,366) (7,423)
Additions to other assets ............................... (9,665) (6,642) (3,528) (5,586)
-------- ----------- --------- ---------
Net cash used in investing activities ................... (39,924) (24,358) (9,894) (13,009)
-------- ----------- --------- ---------
Financing activities
(Payments) borrowings on bank line of credit ............ (5,000) 25,000 75,000 --
Borrowings on stockholder line of credit ................ -- 300,000 -- 50,000
Proceeds from notes payable ............................. -- 575,000 -- --
Payments on term loan ................................... -- (24,277) (11,624) (4,002)
Payments on capital lease ............................... (2,283) (4,221) (3,194) (2,538)
Increase in deferred offering costs ..................... -- (189,954) -- (126,170)
Increase in deferred financing fees ..................... -- (75,935) -- --
-------- ----------- --------- ---------
Net cash (used in) provided by financing activities ..... (7,283) 605,613 60,182 (82,710)
-------- ----------- --------- ---------
(Decrease) increase in cash ............................. (5,889) 184,347 (34,675) (181,887)
Cash at beginning of period ............................. 51,646 45,757 45,757 230,104
-------- ----------- --------- ---------
Cash at end of period ................................... $ 45,757 $ 230,104 $ 11,082 $ 48,217
======== =========== ========= =========
Supplemental disclosure of cash
flow information
Cash paid for interest .................................. $123,732 $ 168,038 $ 73,606 $ 83,294
======== =========== ========= =========
Lease obligation incurred ............................... $ 17,951 $ -- $ -- $ --
======== =========== ========= =========
Distribution of stockholder advances .................... $ -- $ 31,466 $ -- $ --
======== =========== ========= =========
Contribution of accrued consulting services ............. $ -- $ -- $ -- $ 71,196
======== =========== ========= =========
See accompanying notes.
F-6
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 six
months ended June 30, 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
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 $40,462 at December 31, 1998 and June 30, 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
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
3. Inventory
Inventory consisted of the following:
December 31, June 30,
1998 1999
-------------- ------------
(Unaudited)
Work-in-process ................................. $ 675,248 $681,112
Finished product ................................ 541,080 418,928
Dry stores ...................................... 44,703 36,149
Allowance for excess and obsolete inventory ..... (717,449) 637,311)
--------- --------
$ 543,582 $498,878
========= ========
4. Property and Equipment
Property and equipment consisted of the following:
December 31, June 30,
1998 1999
-------------- ------------
(Unaudited)
Laboratory and manufacturing equipment ............ $ 917,314 $ 920,231
Furniture and fixtures ............................ 93,517 93,517
Leasehold improvements ............................ 121,043 125,549
---------- ----------
1,131,874 1,139,297
Accumulated depreciation and amortization ......... 1,041,625 1,063,900
---------- ----------
$ 90,249 $ 75,397
========== ==========
Laboratory and manufacturing equipment include approximately $18,000 under
capital leases as of December 31, 1998 and June 30, 1999 (unaudited).
Accumulated depreciation related to these assets was approximately $10,000 as
of December 31, 1998 and $12,000 as of June 30, 1999 (unaudited).
5. Other Assets
Other assets consisted of the following:
December 31, June 30,
1998 1999
-------------- ------------
(Unaudited)
Deferred offering costs ........................ $ 189,954 $316,124
Deferred financing fees, net of accumulated
amortization of $50,855 at June 30, 1999
(unaudited) ................................... 75,935 25,080
Clinical trial costs, net of accumulated amorti-
zation of $112,478 in 1998 and $113,173 in
1999 (unaudited) .............................. 1,873 1,178
Deposits and other assets ...................... 12,620 12,620
--------- --------
$ 280,382 $355,002
========= ========
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. If the
Company does not complete its initial public offering, the costs will be
charged to income. 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.
F-9
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
6. Accrued Expenses
Accrued expenses consisted of the following:
December 31, June 30,
1998 1999
-------------- -----------
(Unaudited)
Accrued compensation ................... $ 54,594 $ 41,227
Accrued interest ....................... 22,901 115,440
Accrued contract manufacturing ......... 22,167 12,030
Other accrued expenses ................. 39,307 17,983
-------- --------
$138,969 $186,680
======== ========
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 was increased to $350,000 in
June 1999 (unaudited). The line of credit bears interest at 10% and is
subordinate to the bank debt. The repayment terms of the line of credit were
revised in 1999. Either all or a portion of the line of credit must be repaid
from the proceeds of the Company's proposed initial public offering, depending
on the amount raised in the initial public offering. Anything not repaid from
the proceeds of the initial public offering will be repaid in six monthly
installments commencing in January 2000 (unaudited). At December 31, 1998 and
June 30, 1999 borrowings of $300,000 and $350,000 (unaudited), respectively,
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.
F-10
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
9. Long-Term Debt
Long-term debt consisted of the following:
December 31, June 30,
1998 1999
-------------- ------------
(Unaudited)
Termloan payable to a bank; interest at 11% per year,
secured by substantially all the assets of the Com-
pany 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 install-
ments of principal and interest of $11,000 through
December 2012 ...................................... $912,145 $908,143
Capital lease obligation ............................ 11,447 8,909
-------- --------
923,592 917,052
Less current portion ................................ 33,544 31,006
-------- --------
$890,048 $886,046
======== ========
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. During the second quarter of 1999, the bank
verbally agreed to postpone principal and interest payments for the remainder
of 1999 (unaudited). 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 June 30, 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
were originally to be repaid from the proceeds of the initial public offering.
If the proposed initial public offering is not completed, the Notes are due and
payable on December 31, 1999 with interest at 12% from the date of issuance.
Interest accrued on these Notes totaled $37,981 as of June 30, 1999
(unaudited). During the third quarter of 1999, the Company came to agreement
with several of the Note holders to amend the repayment period on the notes
contingent upon the completion of the initial public offering (unaudited). The
Company agreed to issue to certain Note holders, an aggregate of 105,000 shares
of common stock and 25,000 warrants to purchase common stock at $6.00 per share
at the closing of the initial public offering as consideration for amending the
period of repayment (unaudited). Certain Note holders also agreed to accept
shares as payment for 1999 interest on the Notes (unaudited). Based on the
proposed initial public offering price of $5.00 per share, upon the issuance of
the aforementioned shares, the Company will record additional interest expense
of approximately $512,000 (unaudited).
F-11
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
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 six months ended June 30, 1998 and 1999 was approximately $84,000 and
$87,000 (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.
13. Income Taxes
Prior to September 24, 1998, the Company elected to be treated as an
S-corporation under the Internal Revenue Code and, as such, the federal and
state income tax liabilities or benefits flowed through directly to the
stockholders. Accordingly, no provision for income taxes is reflected during
the year ended December 31, 1997 or for the period from January 1, 1998 to
September 23, 1998.
Effective September 24, 1998, the Company terminated its election to be
treated as an S-corporation under the Internal Revenue Code. Accordingly,
income tax obligations and benefits resulting from operations no longer flow
through to the stockholders and federal and state income tax rates apply. There
was no effect 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:
Year ended Six months ended
December 31, June 30,
1998 1999
-------------- -----------------
(Unaudited)
Income tax benefit at federal statutory
rate of 34% .............................. $(565,020) $(198,006)
Permanent differences ..................... 19,707 3,557
State income taxes (net of federal taxes) . (99,710) (34,942)
Tax benefit related to S-corporation status 192,497 --
Increase in valuation allowance ........... 452,526 229,391
--------- ---------
Net income tax expense/(benefit) .......... $ -- $ --
========= =========
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 June 30, 1999 (unaudited) are as follows:
F-12
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
13. Income Taxes -- (Continued)
December 31, June 30,
1998 1999
-------------- ------------
(Unaudited)
Deferred tax asset:
Reserves on accounts receivable .................... $ 12,479 $ 12,479
Inventory reserve and capitalization ............... 293,208 261,152
Book over tax depreciation ......................... 38,145 40,545
Stock option compensation .......................... 55,268 55,268
Other compensation accruals ........................ 54,119 40,568
Net operating loss carryforwards ................... 117,488 388,926
--------- ---------
Total deferred tax assets ............................ 570,707 798,938
--------- ---------
Deferred tax liability:
Capitalized clinical trial and patent costs ........ (118,181) (117,021)
--------- ---------
Total deferred tax liability ......................... (118,181) (117,021)
--------- ---------
Valuation allowance for net deferred tax asset ....... (452,526) (681,917)
========= =========
Net deferred tax asset (liability) ................... $ -- $ --
========= =========
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $294,000, which expire in 2018 for federal tax purposes. At June
30, 1999, the Company has net operating loss carryforwards of approximately
$678,000, which expire in 2019 for federal tax purposes (unaudited).
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 $16,000 and $70,000 for the six months
ended June 30, 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 June 30, 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
F-13
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
16. Profit-Sharing Plan -- (Continued)
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 $7,400 and $6,880 for the six months ended June 30,
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.
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.
F-14
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
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 six
months ended June 30, 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:
Six months ended
Year ended December 31, June 30,
1997 1998 1998 1999
-------------- -------------- -------------- ------------
(Unaudited)
Tissue typing serology products ............. $1,685,000 $1,100,000 $ 589,000 $453,000
SeraScreen antibody screening trays ......... 530,000 663,000 333,000 303,000
Monoclonal antibodies ....................... 267,000 214,000 125,000 73,000
Other ....................................... 228,000 172,000 97,000 72,000
---------- ---------- ---------- --------
$2,710,000 $2,149,000 $1,144,000 $901,000
========== ========== ========== ========
The following is a summary of sales by geographic region:
Six months ended
Year ended December 31, June 30,
1997 1998 1998 1999
-------- -------- -------- --------
(Unaudited)
North America ......... 80% 87% 85% 83%
Europe ................ 16 7 10 12
Other ................. 4 6 5 5
-- -- -- --
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.
F-15
Gen Trak, Inc.
Notes to Financial Statements -- (Continued)
20. Manufacturing and Distribution Agreements -- (Continued)
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 $74,000 for the six months
ended June 30, 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 (120,000)
which would have to be sold by the Company at the initial public offering price
of $5.00 per share to repay $250,000 of the notes payable, $100,000 of the bank
line of credit and $250,000 of the stockholder line of credit at June 30, 1999.
22. Common Stock Issued for Services (Unaudited)
During the third quarter of 1999, the Company issued 450,000 shares of
common stock to three entities assisting the Company with its initial public
offering. The value of such shares will be reflected as deferred offering costs
(Note 5). The costs will be offset against the proceeds of the proposed initial
public offering upon closing. If the Company does not complete its initial
public offering, the costs will be charged to income.
The Company agreed to issue a total of 70,000 shares of common stock to
certain officers of the Company upon the closing of the initial public
offering. The value of such shares at the initial public offering price of
$5.00 will be reflected as compensation expense upon the closing of the initial
public offering.
F-16
================================================================================
A prospective investor should rely only on the information contained in
this prospectus or in our registration statement filed with the SEC. Gen Trak
has 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
High Risk Factors ................................................. 5
Dilution .......................................................... 7
Use of Proceeds ................................................... 8
Dividend Policy ................................................... 9
Capitalization .................................................... 10
Selected Financial Data ........................................... 11
Management's Discussion and Analysis .............................. 11
Gen Trak's Business ............................................... 18
Management ........................................................ 27
Executive Compensation ............................................ 29
Principal Shareholders ............................................ 31
Certain Transactions .............................................. 33
Description of Securities ......................................... 33
Plan of Distribution .............................................. 36
Shares Eligible for Future Sale ................................... 36
Legal Proceedings ................................................. 37
Legal Matters ..................................................... 37
Experts ........................................................... 37
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.
================================================================================
================================================================================
Up to 800,000 Units
Each Unit Consisting of
One Share of Common Stock
One Redeemable Common Stock
Purchase Warrant
[GRAPHIC OMITTED]
----------------------------------------
PROSPECTUS
----------------------------------------
, 1999
================================================================================
PROSPECTUS (ALTERNATE)
GEN TRAK, INC.
871,722 Shares of Common Stock
This is an offering of 871,722 shares of common stock of Gen Trak, Inc., a
Pennsylvania corporation, held by certain of our shareholders. Gen Trak, Inc.
will not receive any proceeds from the sale of these shares.
This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss of your investment. See "High Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ___________, 1999
A-1
THE OFFERING
Shares of our common stock offered by the
selling security holders ........................ 871,722 shares of common stock
Use of proceeds from the sale of the shares
offered by the selling security holders ......... We will not receive any proceeds
Common stock outstanding:
Prior to the offering(1) ....................... 1,750,000 shares
After the offering(2) .......................... 2,328,196 shares minimum; 2,728,196 shares maximum;
Risk Factors ..................................... The offering involves a high degree of risk and immediate
substantial dilution. See "High Risk Factors" beginning
on page 5.
- ------------
(1) Includes the 871,722 shares being offered by the selling security holders;
does not include up to 800,000 Shares of common stock which are being
offered by Gen Trak in a concurrent "best efforts" offering.
(2) Includes the 871,722 shares being offered by the selling security holders
and up to 800,000 shares of common stock being offered in the concurrent
"best efforts" offering. Does not include shares of common stock issuable
upon the exercise of warrants to purchase shares of our common stock
(400,000 shares if the minimum number of units is sold; 800,000 shares if
the maximum number of units is sold).
CONCURRENT OFFERING
On the date of this prospectus, a registration statement with respect to a
"best efforts" public offering of up to 800,000 units of our securities (each
unit consisting of one share of common stock and one warrant to purchase a
share of common stock) was declared effective by the Securities and Exchange
Commission. Sales of securities under this prospectus by the selling security
holders, and in the "best efforts" public offering, or even the potential of
such sales may have an adverse effect on the market price of our common stock.
SELLING SECURITY HOLDERS
None of the selling security holders holds any office or position with us
or has a material relationship with us or our affiliates, except as a
shareholder.
Shares Of
Shares Of Common Stock
Common Stock That May Be
Beneficially Offered Common Stock
Owned Prior To Pursuant To This Owned After
Selling Security Holder This Offering Prospectus Offering
- ----------------------------------------- ---------------- ------------------ -------------
Mathers Associates ...................... 190,000 190,000 0
Zeelander Foundation .................... 20,000 20,000 0
Skippack Partners ....................... 10,000 10,000 0
Hampstead Equities, Inc. ................ 100,000 100,000 0
A.J. Acquisition Corp. .................. 200,000 200,000 0
Buckingham Investments Ltd. ............. 150,000 150,000 0
Harry Newton (1) ........................ 40,000 40,000 0
Gerry Friesen (1) ....................... 40,000 40,000 0
SPAND, Inc. ............................. 93,526 93,526 0
John Simonelli (2) ...................... 2,835 2,835 0
Larry Howell (2) ........................ 2,835 2,835 0
Ed and Kimberly Kenny (2) ............... 5,637 5,637 0
Berings International, Inc. (2) ......... 5,634 5,634 0
Eric Stein Revocable Trust (2) .......... 5,629 5,629 0
Pace Financial, Inc. (2) ................ 5,626 5,626 0
------- ------- -
Total .................................. 871,722 871,722
- ------------
(1) Subject to a six month restriction on transfer beginning on the date our
public offering closes.
(2) Subject to a one-year restriction on transfer beginning on the date our
public offering closes.
A-2
PLAN OF DISTRIBUTION
The selling security holders may offer their shares at various times in
one or more of the following transactions: in the over-the-counter market where
our common stock is listed; transactions other than in the over-the-counter
market; in connection with short sales of Gen Trak common stock; by pledges or
donees; or a combination of any of the above transactions.
The selling security holders may sell their shares at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices and at negotiated prices or at fixed prices.
We have advised the selling security holders that during such time as they
may be engaged in a distribution of the shares they are required to comply with
Regulation M under the Securities Exchange Act of 1934. Regulation M generaly
precludes any selling security holders, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or purchase made
in order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the
marketability of the common stock.
It is anticipated that the selling security holders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of Gen Trak common
stock.
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations other than those contained
in this prospectus and, if given or made, such information or representation
must not be relied upon as having been authorized by Gen Trak or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
871,722 SHARES OF COMMON STOCK
GEN TRAK, INC.
PROSPECTUS
__________, 1999
A-3
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
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:
Securities and Exchange Commission filing fee ............... $ 6,022
National Association of Securities Dealers filing fee ....... 2,427
Nasdaq and Exchange filing fees ............................. 1,250
Underwriter's Non-Accountable Expense Allowance ............. 50,000
State Securities Laws (Blue Sky) fees and expenses .......... 30,000
Printing and mailing costs and fees ......................... 60,000
Legal fees and costs ........................................ 175,000
Accounting fees and costs ................................... 175,000
Transfer Agent fees ......................................... 5,000
Miscellaneous expenses ...................................... 45,301
--------
TOTAL ....................................................... $550,000
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. This sale of the Notes was 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
4. In August 1999 the Company issued an aggregate of 450,000 shares to
three entities in consideration for services in connection with the structuring
of this offering. No cash consideration was paid for these shares. The issuance
of these shares was exempt from registration under Section 4(2) of the Act; no
public offer was made, the shares may not be transferred in the absence of
registration under the Act, and the purchasers were knowledgable in issues
regarding restricted securities and sophisticated in financial affairs
generally.
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------
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 Eckert, Seamans Cherin & Mellott
10.1 Addendum to Employment Agreement between the Company and Arthur Boyce
10.2 Consulting Agreement between the Company and George Bird
10.3 Promissory Note from the Company to Susquehana Holdings Corp.
10.4 Purchase Agreement between the Company and Susquehana Holdings Corp.
10.5 Consulting Agreement between the Company and Norbert Zeelander
10.6 Manufacturing Agreement between the Company and SFP Research, Inc.
10.7 Distribution Agreement between the Company and Biosynthesis, Inc.
24.1 Consent of Ernst & Young LLP
24.2 Consent of Eckert, Seamans Cherin & Mellott (continued in Exhibit 5.0)
27.0 Financial Data Schedule (Electronic Filing only)
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
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
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 November 9, 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.
Signature Title Date
- ------------------------------ ----------------------------------------- -----------------
/s/ Arthur V. Boyce, Jr. President, Director and Chief Executive November 9, 1999
----------------------------- Officer
Arthur V. Boyce, Jr.
/s/ George L. Bird, Jr. Chairman of the Board, Secretary and November 9, 1999
---------------------------- Director
George L. Bird, Jr.
/s/ Harry A. Arena Director November 9, 1999
----------------------------
Harry A. Arena
/s/ Gerald Hamburg Director November 9, 1999
----------------------------
Gerald Hamburg
/s/ Donald O. Nichols Vice-President, Treasurer and Principal November 9, 1999
---------------------------- Financial Officer
Donald O. Nichols
/s/ Gerhard Ertingshausen Director November 9, 1999
----------------------------
Gerhard Ertingshausen
II-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------
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 Eckert, Seamans, Cherin & Mellott
10.1 Addendum to Employment Agreement between the Company and Arthur Boyce
10.2 Consulting Agreement between the Company and George Bird
10.3 Promissory Note from the Company to Susquehana Holdings Corp.
10.4 Purchase Agreement between the Company and Susquehana Holdings Corp.
10.5 Consulting Agreement between the Company and Norbert Zeelander
10.6 Manufacturing Agreement between the Company and SFP Research, Inc.
10.7 Distribution Agreement between the Company and Biosynthesis, Inc.
24.1 Consent of Ernst & Young LLP*
24.2 Consent of Eckert, Seamans, Cherin & Mellott (contained in Exhibit 5.0)
27.0 Financial Data Schedule (Electronic Filing only)
* Filed with Amendment No. 6
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