U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31,1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-12183
AN-CON GENETICS INC.
(Name of small business issuer in its charter)
Delaware 11-2644611
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Huntington Quadrangle, Suite INll, Melville, N.Y. 11747
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 694-8470
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common
(Title of class)
Check whether the issuer (I) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[]
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year were $5,521,000
The aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of March 22, 1996 was $5,975,509.
(INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
N/A
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 4,405,340 .
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference.
An-Con Genetics, Inc.
1995 Form 10-KSB Annual Report
Table of Contents
Part I
Item 1. Description of Business . . . . . . . . . . .2
Item 2. Properties. . . . . . . . . . . . . . . . . .8
Item 3. Legal Proceedings . . . . . . . . . . . . . .9
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . .10
Part II
Item 5. Markets and Market Prices . . . . . . . . . .10
Item 6. Managements Discussion and Analysis . . . . .11
Item 7. Financial Statements (See Financial Section)
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . .15
Part III
Item 9. Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . .15
Item 10. Remuneration. . . . . . . . . . . . . . . . .18
Item 11. Security Ownership of Certain Beneficial Owners. . 21
Item 12. Certain Relationships and Related Transactions . . 22
Item 13. Exhibits and Reports on Form 8-k. . . . . . .26
Financial Data Schedule . . . . . . . . . . .28
<PAGE>
AN-CON GENETICS, INC.
Item 1. Description of Business.
Background
An-Con Genetics, Inc. (the "Company") was incorporated in 1982
under the laws of the State of Delaware to engage in research
and development relating to certain genetic devices. The
Company has changed its direction and operations from genetics
to the development and marketing of a line of tissue
fixatives, under the OmniFix tradename. In addition, the
Company has recently acquired (as of January 11, 1995) all of
the outstanding shares of Aaron Medical Industries, Inc., a
Florida Corporation, principally engaged in the business of
manufacturing and selling battery operated cauteries,
specialty medical and commercial lighting instruments and
electro-surgical devices to distributors that serve physicians
and hospitals. See "Significant Subsidiary - Aaron Medical
Industries, Inc.". An-Con maintains New York offices at One
Huntington Quadrangle, Melville, NY 11747 and a principal
executive office at 7100 30th Avenue North, St. Petersburg,
Florida 33710-2902, at which latter location Aaron Medical
Industries, Inc. also maintains its executive offices and
manufacturing facilities. (See "Properties").
Licensed Products
OmniFix II
The Company is the holder of a U.S. license to manufacture and
market OmniFix II which is formulated to replace formaldehyde
in hospital and clinical pathology laboratories.
The Company is currently marketing OmniFix II to clinical
laboratories, hospitals and pharmaceutical companies
nationwide. The present customer base covers many states,
including Hawaii.
New Company Products
Omnifix 2000. The Company intends to substantially replace
Omnifix II which, in addition to preserving thin tissue
specimens, also provides preservation of thicker/larger
tissues. Pathologists have a need for a safe fixative for use
in preserving large sections/tissue blocks specimens. To meet
this requirement, the Company has developed a new patent
pending formulation. The Company is presently initiating test
marketing of this new product. This formulation is comprised
of certain proprietary ingredients which includes trace
amounts of formaldehyde (well below OSHA safety standards and
not requiring special handling). The formulation is deemed by
management to be a safer alternative to formalin (a
formaldehyde based product requiring special handling under
OSHA guidelines), is non-flammable, provides sharp and clear
cellular detail, rapid staining, is compatible with all
processors and, unlike formalin, is routinely disposable.
Although no assurance can be given, Management believes, that
since Omnifix 2000 (like formalin) preserves both thin and
thick tissue, the product has reasonable expectation of
penetrating a percentage of formalin's market niche. (See
"Competition").
Battery Operated Cauteries
The Company's subsidiary, Aaron, is principally engaged in the
business of manufacturing and selling battery operated
cauteries, specialty medical and commercial lighting
instruments and electro-surgical devices. Aaron's largest
current product line is battery operated cauteries. Cauteries
were originally designed for precise hemostasis (to stop
bleeding) in ophthalmology. The current use of cauteries has
been substantially expanded to include sculpting woven grafts
in bypass surgery, vasectomies, evacuation of subungual
hematoma (smashed fingernail) and for stopping bleeding in many
types of surgery. Battery operated cauteries were originally
designed, and are still primarily delivered, as a sterile one
time use product in the USA. The Company manufactures more
types of cauteries than any other company in the world at its
facility in St. Petersburg. The Company also manufactures a
line of replaceable battery and tip cauteries. This design
allows the doctor to use one of many different sterile tips
which also includes a sterile drape cover for the handle and to
replace the batteries when they are depleted. This was
originally designed for use in international sales, but has
enjoyed growing success in the USA at the doctor's office and
clinic level. The sterile disposable cauteries are still far
more popular in the hospital operating room domestically.
Battery operated Medical and Industrial Lights
The Company, through its subsidiary Aaron, manufactures a
variety of specialty lighting instruments for use in
ophthalmology as well as patented flexible lighting instruments
for general surgery, hip replacement surgery and for the
placement of endotracheal tubes in emergency situations and
prior to surgery. The lighting instruments have also been
adapted for commercial and industrial use, such as for
automotive mechanics through Snap On Tools, Mac and Matco, for
the locksmiths through HPC and others. In 1995 the Company
enjoyed a first time opportunity for retail sales with Walmart
and Sears. This resulted in approximately $350,000 in
additional sales to make total sales through this distributor
$1,000,000. In the first quarter of 1996 sales through the
same distributor to this market sector were $125,000. The
Company is currently evaluating several markets and marketing
techniques to expand the sales of Benda-A-Lights both
domestically and internationally.
Electrosurgical Products
The Company's subsidiary, Aaron, over the past two years, has
continued to expand its product line of electrosurgical
products. Electrosurgical products are the electrodes (blade,
ball, needle and loop) used in conjunction with an
electrosurgical pencil(the handle that the electrode is
attached to) which plugs into a generator. The generator plugs
into a wall outlet and provides the radio frequency which when
combined with the electrode and pencil, cut and/or coagulate
during surgery.
The electrode has traditionally been made of stainless steel
and is supplied sterile for a one time use. Aaron has
evaluated the electrosurgical market by having electrodes
manufactured to its specifications domestically. The Company
has ordered parts off shore, built to the same specifications,
with cost savings of fifty percent and more. This will
increase the competitiveness of the Company and allow it to
expand its sales effort.
Multi-Function Cautery
The Multi-Function Cautery Pencil (MFC) was introduced at the
American College of Surgeons meeting in the fourth quarter of
1995 to receive feedback from surgeons before final release.
The product is now being manufactured for formal release in the
second quarter of 1996. The MFC is a patented device,
developed by a group of California surgeons, and acquired by
An-Con for Aaron. The device combines, in one instrument, the
ability for the surgeon to cut and or coagulate, while
simultaneously evacuating the smoke associated with
electrosurgery and to remove fluids from the surgical site, all
with one hand and without assistance.
Resistick
The patent pending Resistick, reduced stick electrodes, are a
coated blade, ball or needle, which is also used in
electrosurgery. The advantage of these electrodes over the
standard stainless steel electrode is that due to the
proprietary coating, they clean easier during surgery thus
speeding up the surgical procedure. All standard electrodes
develop a build up during surgery which insulates the
electrode making it cut and/or coagulate less efficiently.
Therefore, the surgeon must stop and scrape the electrode
before continuing. This stopping and starting wastes both time
and money. The Resistick electrode was designed to correct
this situation.
The reduced stick electrode market is dominated by MegaDyne
Medical Products, Inc. which is believed by management to
virtually control the entire existing market. Unlike the
MegaDyne product, which relies on essentially, exclusively by
capacity coupling to cause hemostasis during surgery, the
Company's products denominate characteristics that are
resistive in nature. MegaDyne has recently instituted an
action against Aaron for patent infringement. See "Legal
Proceedings".
Aaron 800
The Aaron 800 is a low powered office based generator designed
primarily for dermatology. The unit is a 30 watt high
frequency desiccator used mainly for removing small skin
lesions and growth in the doctor's office. This unit was
designed with sufficient base technology to move toward more
powerful office based generators without requiring the
additional time consuming expense of total redesign. The
Company signed a distribution agreement with Dermatology Lab
and Supply in the first quarter of 1996, which included a
purchase order for 1000 units plus accessories which totals in
excess of $700,000.
Nerve Locator Stimulators
The Company manufactures three different nerve locator
stimulators which are primarily used for identifying motor
nerves in hand and facial reconstructive surgery. These nerve
locator stimulators are self contained, battery operated units,
which are for one surgical procedure. The Company has a patent
on the Neuro Pulse III which has a pulsing variable design.
Other Products
The Company has patent rights for an auto-focusing bar code
reader, the "Intelliscan Reader", the development of which is
presently suspended. The Company has no present plans to
complete development for commercialization.
Manufacturing, Marketing and Distribution
The Company manufactures the majority of its products on its
premises in St. Petersburg, Florida. Labor intensive products
are out-sourced to the Company's specification offshore. The
Company markets its products through national trade journal
advertising and by attending approximately fifteen trade shows
per year. These shows are mainly aimed at the actual users of
the product (surgeons, doctors or nurses); however the Company
also attends distributor meetings. These are the distributors
who actually sell the product to the end users. The Company
sells under the Aaron label through general and specialty
distributors across the country and also private labels its
products for major distributors such as Baxter, General
Medical, and Durr Medical.
Competition
The medical industry is highly competitive and it is generally
known that it will become more so in the future. The industry
is characterized by the frequent introduction of new products
and services. The Company's competitors in this field are well
established, do a substantial amount of business, and have
greater financial resources and facilities than the Company.
One of the Company's major competitors is Xomed/Treace.
Xomed/Treace carries products that are similar to those of the
Company and has the advantage of early market entry. Over
time, Xomed's market share has decreased to approximately 50%
of the total market. Other line competitors are Alcon, Valley
Labs and Conmed. Aaron's products are competitively priced and
its new cautery line has a longer shelf life (four years) as
compared to a shelf life of one or two years for competing
products.
Aaron introduced eight new products for a variety of
specialties at the Health Industry Distributors Association
Annual Meeting in October, 1995. The products are two new
nerve locator stimulators for hand and face reconstructive
surgery. Two ophthalmic power handles for corneal rust ring
removal and two new diamond burrs for polishing the pterygium
bed after surgical removal and for lid margin lesions. The
last two products are for the emergency room or walk-in
clinic. The nail drill and replacement bits are for relief of
a subungual hematoma (smashed fingernail).
Seven of the Company's eight new products compete with
Xomed/Treace products. Management believes, based upon past
performance that the Company has the ability to aggressively
compete in this market.
Regulation
Since many of the products manufactured by the Company are
medical devices, it is necessary for the Company to obtain
Federal Food and Drug Administration ("FDA") permission prior
to their marketing. Applying for permission can sometimes
delay entry of certain products into the market place to the
detriment of the Company.
Patents and Trademarks
The Company has a patent pending with respect to its new
product, Omnifix 2000. No assurance can be given that a patent
will protect the Company from duplication or infringement.
The Company owns a total of ten patents and other patents
pending covering multiple products. Though some of these
products are protected by patents, no assurance that
competitors will not infringe the Company's patent rights or
otherwise create similar competing products that are
technically patentable in there own right.
Management believes that general and product liability
exposures are adequately covered by insurance.
Research and Development
The approximate amount expended by the Company on developing
Omnifix 2000 and Aaron products during the years 1995 and 1994
inclusive of travel, professional services and related general
and administrative expenses, total $121,900 and $47,200 on a
proforma bases, respectively. The Company has not incurred any
direct costs relating to environmental regulations or
requirements.
Employees
During most of 1994 An-Con had three employees, two officers
and one secretary. In the fourth quarter of 1994 the company
hired a chemist, and a laboratory technician, (now a consultant
to the Company) to develop and market its OmniFix products.
The Company also employs an unsalaried Vice-President for Far
Eastern affairs. In January 1995 the Company acquired Aaron
which presently has a total of 75 employees. These consist of
4 executives, 5 administrative, 5 sales, and 61 technical or
factory employees.
SIGNIFICANT SUBSIDIARY -
AARON MEDICAL INDUSTRIES, INC.
Pursuant to the Final Acquisition Agreement the shareholders of
Aaron Medical Industries, Inc., a Florida Corporation, agreed
to exchange all of the outstanding shares of Aaron for shares
of An-Con and upon issuance, the shares deliverable to Aaron
shareholders would constitute 49% of an agreed amount of
outstanding shares of An-Con Genetics, Inc. The Acquisition
was consummated as of January 11, 1995 (a) and the shares
issuable to Aaron shareholders are issued in Escrow pending
effectiveness of a Prospectus and (b) ratification of the Final
Acquisition Agreement. The transaction with Aaron is accounted
for as a purchase for financial accounting purposes and as of
the date hereof, Aaron is a 100% wholly owned subsidiary of An-
Con.
Background
Aaron Medical Industries, Inc., is a Florida Corporation with
offices and manufacturing facilities in St. Petersburg,
Florida. It is principally engaged in the business of
manufacturing and selling battery operated cauteries, specialty
medical and commercial lighting instruments and electro-
surgical devices through distributors to physicians and
hospitals. Aaron is the successor to Sun-Key Medical
Manufacturing, Inc., which filed a voluntary petition on March
10, 1989, under Chapter 11 of the Bankruptcy Act. The
predecessor and an affiliate thereof, which also filed a
petition on October 31, 1988, were consolidated into a single
bankruptcy case due to the intimate and intertwined affairs of
both corporations. On July 31, 1989, pursuant to a plan of
arrangement (the "Plan") Sun-Key Medical Manufacturing, Inc.
reorganized, acquired Key Technologies, Inc., and changed its
name to Aaron Medical Industries, Inc. The Plan called for
payment of secured creditors ($10,500), priority claims
($136,000) and unsecured creditors ($1,531,900). Secured
creditors and priority creditors were paid in full and
unsecured creditors received $.1156 for each dollar owed.
Payments were to be made from operations. As of December 31,
1995, all creditors were paid in full.
Through its subsidiary Aaron, the Company manufactures and
sells its products under its own label to more than 850
distributors worldwide. The Company has private label
arrangements with health care buying groups and hospital supply
companies.
Aaron Products
Due to An-Con's offer of an exchange of share with Aaron
shareholders prior to the filing and effectiveness of an
appropriate S-4 Registration Statement with the Securities and
Exchange Commission, An-Con is in the process of making a cash
rescission offer to all former Aaron shareholders at a price of
$.22 per share of their holdings in Aaron.
RECENT ACQUISITION BY AARON
Purchase - Suncoast Design
On November 16, 1995 the Company, through its subsidiary Aaron,
purchased the business of Suncoast Design Service for $96,500.
Suncoast is in the business of designing and maintaining
assembly line equipment for manufacturing companies (machine
shop).
Suncoast has moved its equipment onto the premises of the
Company and continues to bill its previous customers in the
Company's name in addition to support the Company's needs, such
as prototyping, production line and maintenance.
The Company paid $15,000 down and issued notes payable of
$81,500 payable at $823.11 per week over two years.
Purchase - ECU Technology
On December 15, 1995 the Company, through Aaron purchased the
design rights for the technology to manufacture a 30 watt
electrosurgical coagulation device (ECU) for $185,000; $100,000
was paid at closing and $85,000 payable in notes over eighteen
months with interest at 10% per annum. Monthly payments are
$5,105.85.
The device is to be made by a third party manufacturer with
which the Company has a one year contract to produce the unit
for a fixed price with a provision for a second year at an
agreed upon price.
Aaron has also hired the former director of physicians office
products of the market leader in this specialty field as a
salesman. As part of the arrangement this individual loaned
the Company $30,000 to be paid back at 10% interest over 2
years.
Item 2. Properties.
The Company has moved its executive offices to the Aaron
facility located at 7100 30th Avenue N., St. Petersburg,
Florida 33710-2902, during the first quarter of 1995. The
Company's New York office is being maintained until at least
January 31, 1997 when its current lease terminates. On
February 28, 1995, a new two-year lease agreement was signed
with the landlord of the Company's executive offices in
Melville, New York requiring an annual rental payment of
$24,000. Pursuant to the new lease, unpaid past rents of
$54,200 were forgiven.
On March 8, 1993, Aaron entered into a five year operating
lease agreement with minimum future rental payments for five
years beginning on May 1, 1993 with annual rental payments
increasing each year with appropriate increased square footage
rented. The lease agreement also provided for an option to
acquire the land and building under certain terms. The total
minimum rental under the lease was $347,400 over the five year
term.
On June 26, 1995 Aaron Medical Industries, Inc., exercised its
option to purchase the land and building it presently occupies
for $625,000. The purchase was financed as follows:
Cash $ 47,000
Purchase Money Mortgage 500,000(a)
An-Con Shares
(60,000 X 1.30 per share) 78,000(b)
Total purchase price $625,000
(a) Payment of principal and interest at 10% payable monthly at
$5,373.06 until July 1, 1998 when a balloon payment of
$439,074.27 is due.
(b) The An-Con shares were provided by An-Con and are
restricted for 2 years. The shares are being held in escrow
pursuant to an agreement. The agreement further restricts the
release of the shares until the seller takes such action as is
necessary to further investigate, define and remediate such
contamination that exists on the property and is referred to in
certain environmental reports pursuant to a Remedial Action
Plan approved by the State of Florida Department of
Environmental Protection (DEP) and any other appropriate
agencies.
In January 1996, the State of Florida approved a Remediation
Plan, and work should begin in the 2nd Quarter of 1996.
No assessment can be made at this time as to the cost to the
Company if the Seller does not complete the work required in
the plan approved by the State of Florida.
Two years from the date of Closing, if Seller and Guarantors
have not defaulted under or been in breach of any of their
obligations to Buyer, Buyer shall obtain and deliver to Escrow
Agent additional shares of Stock if based upon the "Closing
Market Price" of the Stock on the thirtieth day prior to such
date, the escrowed shares shall have a value of not less than
$78,000.00.
Item 3. Legal Proceedings
Speiser
On December 29, 1992, Robert Speiser, the then Chief Executive
Officer of An-Con, obtained a Confession of Judgment in the
Supreme Court, State of New York, Counties of Suffolk and
Westchester for amounts due on loans to the Company of $92,239
and $190,957 inclusive of interest at 12% to May 27, 1992 and
9% thereafter. These loans represent amounts claimed by Mr.
Speiser to have been expended on behalf of the Company and
funds loaned to the Company. As reported to the Board of
Directors, Mr. Speiser's actions were motivated solely to deter
threatened action by the landlord to file a judgment at that
time of $41,700 in rental arrears. Mr. Speiser has indicated
that he does not intend to enforce this judgment. On March 29,
1993 and in subsequent letters of instruction to the Sheriff of
Suffolk County, Mr. Speiser requested that the execution of the
above-mentioned judgments be held in abeyance for a 60 day
period, until August 30, 1993. On February 28, 1994, the
executive order expired. As of December 31, 1995, the Company
had repaid $235,100 of the principal amount upon which the
aforesaid judgments were based. See "Certain
Relationships and Related Transactions".
Scura
A lawsuit was commenced against the Company by Frank Scura, a
non-affiliated person in the Supreme Court of the State of New
York, Suffolk County, in December 1991 alleging breach of a
financial consulting agreement and seeking damages of
$3,000,000. In 1993, a settlement had been reached between the
parties whereby the Company had agreed to issue 100,000 (pre-
split) shares to the plaintiff in full settlement of any and
all claims. Mr. Scura subsequently refused to execute the
stipulation of settlement. Company counsel is of the opinion
that Mr. Scura's claim has no merit and does not present a
material contingent liability.
MegaDyne
On March 14, 1996 MegaDyne Medical Products, Inc. a Utah
Corporation filed a complaint for injunctive relief and damages
for patent infringement (35 USC.S. 271) in the U.S. District
Court, District of Utah, Central Division. MegaDyne asserts
that the Company has used its process for creating an Electro-
surgical knife coated with a non-stick material. MegaDyne
states that it is entitled to an accounting from the Company
and to recover the damages sustained by MegaDyne as a result of
infringing products. Such damages include, but are not limited
to, lost sales and profits due to sales of the infringing
products and a reasonable royalty for use of the patented
invention. MegaDyne claims it is presently unable to ascertain
the full extent of monetary damages it has suffered by reason
of Aaron's aforesaid acts of infringement.
As of March 31, 1996 the Company sold approximately $90,000 of
Resistick. The Company counsel claims that scientific testing
demonstrates that the Company's electro-surgical blade does
not infringe MegaDyne's patent in that it is resistive in
nature. Thus, there is no capacitive coupling of radio
frequency energy as recited in independent claims 1 and 5 of
MegaDyne's U.S. 4,785,807.
Accordingly, there appears to be no literal infringement of
the patent as alleged in suit. However, without benefit of the
prosecution history, an authoritative opinion as to
infringement under the doctrine of equivalents is not possible.
Furthermore, initial investigation suggests that the Company's
Electro-surgical blade does not include a second coat of non-
stick fluorinated hydrocarbon material as recited in
independent claims 1 and 5.
Item 4. Submission of Matters to a Vote of Security Holders
No Meeting of the Shareholders was held during 1995.
PART II
Item 5.
Markets and Market Prices
An-Con's common stock is traded in the over-the-counter market
on the National Associations of Securities Dealers, Inc.
Bulletin Board ("NASD Bulletin Board"). The table shows the
reported high and low bid prices for the common stock during
each quarter of the last eight quarters as reported by the NASD
Bulletin Board (symbol "AGNT"). These Prices do not represent
actual transactions and do not include retail mark-ups, mark-
downs or commissions.
High Low
1994
lst Quarter 3 2 3/4
2nd Quarter 3 1 1/2
3rd Quarter 3 3/8 1 5/8
4th Quarter 2 5/8 1
High Low
1995
1st Quarter 1 7/8 1
2nd Quarter 2 7/16 1 3/4
3rd Quarter 2 3/8 1 3/4
4th Quarter 2 1/8 1 1/2
On March 22, 1996, the Closing bid for An-Con's Common Stock as
reported by the NASD Bulletin Board was $1.38 per share. As of
March 22, 1996, the total number of shareholders of An-Con's
Common Stock was approximately 850 exclusive of shareholders
whose shares are held in the name of their broker or stock
depositories or the escrow agent holding shares for the benefit
of An-Con shareholders which are estimated to be 1,000
additional shareholders.
Item 6. Management's Discussion and Analysis.
Results of Operations
An-Con's net revenues for 1995 increased to $5.5 million from
$4.2 million in 1994 on a proforma basis. The purchase of
Aaron Medical accounted for $5.45 million of 1995 sales. For
1995 there was a 31% increase in sales. The increase in sales
of $1.3 million was attributable to a 5% increase in selling
prices, an increase of 50% in Bend-A-Light sales and 50%
increase in foreign sales of various company products. Gross
profit percentage on a proforma basis increased by 7% from 1994
to 1995 principally due to a reduction in material cost, new
designs to reduce waste and production efficiency.
Proforma cost of goods sold increased by 20% from 1994 to 1995
due to broad-level product volume growth. During 1995 and
1994, Aaron's family of cauteries accounted for 50% of sales
and 28% of cost of goods sold.
Research and development spending grew on a proforma basis by
476% from 1994 to 1995 as the Company continued to invest in
the development of OmniFix 2000, the MFC (multi-function
cautery) and other Aaron products.
The proforma increase in net interest of $34,000 was
attributable to the Aaron building purchased in June 1995 of
$25,000 and the interest on the Aaron shareholders' cash
rescission rights of $48,000. There was a decrease in interest
mainly attributed to bonds exchanged for shares and by the
payment of officers' loans.
The Company's effective income tax rate would have been 35.7%
except that both An-Con and Aaron have loss carryovers. For
1995 Aaron recognized $183,300 in tax benefit for the years
1996 and 1997. Aaron's past five years have been progressively
more profitable and it is the Company's belief that it will be
able to use the remaining carryover losses to offset gains in
1996 and 1997.
Other expenses for selling, general and administrative
increased on a proforma basis by 9% which is attributable to
the increase in sales.
Professional services increased by 11% on a proforma basis from
1994 to 1995. These services are mainly attributable to legal
and auditing associated with the Aaron acquisition and the
preparation of securities filings in 1994 and 1995.
Positive net income was achieved for the first time in 1995.
The Company's management expects this trend to continue.
The Company sells its products in a similar fashion in the
international market as it does in the USA, through
distributors. These distributors are found mainly through
response to company advertising in international medical
journals or contacts made at domestic or international trade
shows. The Company began attending trade shows in foreign
countries for the first time in 1993. Since that time,
international sales have more than doubled from the 1993 sales
figure of $553,000. The main focus for export sales has been
Western Europe. The Company has distributors in all major
markets there. The Company exhibited for the first time in
South America, Sao Paulo, Brazil in 1995. The Company intends
to continue marketing their products via this manner, targeting
different regions of the world, while returning to major
markets for increased market exposure and to introduce new
products. In 1996, the Company will exhibit for the first time
in the United Kingdom, the United Arab Emirates (Middle East)
and Bangkok, Thailand (Far East).
During 1995, international sales of the Aaron Medical product
line continued to increase. These sales were $1.25 million
which represented 22% of total sales. This compares favorably
to 1994 where total international sales on a proforma basis
were $775,000 representing 19% of total sales. The increase
from 1994 to 1995 represents a 62% increase in sales volume.
To minimize credit risk, new international distributors in most
instances pay cash in advance or by irrevocable letter of
credit. This form of credit policy is customary and is not
considered a detriment to further increased international
sales.
Fixed costs remained materially unchanged when comparing 1995
to 1994 on a proforma basis. However, in the first quarter of
1996, fixed costs increased to allow the introduction of new
products, new sales personnel, and to improve the Company's
quality control system to assure good manufacturing practices
as required by the Food and Drug Administration. At the same
time, variable costs were reduced by discontinuing commissions
paid to domestic sales representatives.
Variable material and labor costs were reduced through improved
purchasing strategies and product design. Additionally, the
Company has begun purchasing certain labor intensive items off
shore, effectively reducing cost of materials, and improving
margins.
New product development and improvements to the Company's
facility required by regulatory agencies in the fourth quarter
of 1995 and projected in 1996 in the amount of $550,000 were
and will be funded primarily through internal cash flow, thus
restricting the amount of working capital available in the
first quarter of 1996. The allocation of working capital to
these projects caused the company's normally prompt payment
record with trade vendors to decline slightly. In order to
provide additional working capital, the Company secured a three
month $100,000 credit facility with a local commercial bank in
the first quarter of 1996 and raised $180,000 through a private
placement of shares during the last quarter of 1995 and the
first quarter of 1996.
Financial Condition
With the acquisition of Aaron, the Company's financial
condition has stabilized. As of December 31, 1995, cash totaled
$165,800 down from $550,700 at December 31, 1994 on a proforma
basis. Cash generated from operating activities rose to
$12,500 in 1995 compared to cash applied on a proforma basis in
1994 of $222,000. Working capital of the company on December
31, 1995 was a negative $858,900 which is attributable to the
liability due Aaron shareholders of $1,331,800.
Investing activities contributed $381,100 in cash during 1995,
compared to $123,300 in 1994 on a proforma basis. Capital
expenditures increased substantially in 1995 as the Company
continued to invest in property, plant and equipment needed for
future business requirements, including manufacturing capacity.
The Company expects to spend approximately $375,000 for capital
additions in 1996 of which approximately $150,000 was committed
for the construction and renovation of the St. Petersburg
facility.
The Company's ten largest customers accounted for approximately
53% of net revenues for 1995. At December 31, 1995, the same
ten customers accounted for approximately 33% of outstanding
accounts receivables.
The Company used $16,300 and received $998,800 from financing
activities in 1995 and 1994 on a proforma basis, respectively.
The most significant items of financing activity in 1995 were
the reduction of officers' loans of $90,700 and the $75,000
cost of the underwriting associated with the Aaron purchase.
Sources of funds were the receipt of subscriptions receivable
of $64,900 and issuance of 80,000 common shares for $80,000.
The Company believes that it has the financial resources needed
to meet business requirements in the foreseeable future,
including capital expenditures for the expansion of its
manufacturing site, working capital requirements, and product
development programs.
Outlook
The statements contained in this Outlook are based on current
expectations. These statements are forward looking, and actual
results may differ materially.
The Company believes that the world market for disposable
medical products, such as the Company's battery-operated
cauteries, has significant growth potential because these type
of products have not been affordable or effectively marketed
outside the U.S. Because of these factors, the Company has
designed certain disposable products to be reusable. The
Company will expand its marketing thrust internationally by
attending more foreign shows than it did in 1995. The Company
presently has a significant portion of the U.S. cautery market
and does not expect a dramatic growth in sales of cautery-
related products domestically.
The Company, over the past two years has chosen to expand its
product line of electrosurgical products. Electrosurgical
products sold by the Company are the standard electrodes, the
patented Multi-Function Cautery, the patent pending Resistick
line of reduced stick electrodes and the Aaron 800 high
frequency desiccator.
In 1995, the Company had sales of $200,000 in the
electrosurgical product area. The electrosurgical product line
is a larger market than the Company has normally sold into and
is dominated by two main competitors, Valley Lab a division of
Pfizer and Conmed, based in Utica, New York. In the area of
reduced stick electrodes, the main competitor is MegaDyne. The
combined markets for the Company's electrosurgical products
exceeds $100 million annually. Management believes that
electrosurgical product sales will move from fifth place to
second in total Company sales by product line in 1996 and will
be the largest single product line by 1997.
Non-Medical Products
The Company for 1995 sold $1.2 million of its flexible lighting
products used primarily in the automotive and locksmith
industries. Approximately $1.0 million was sold to one
customer. The Company is intending to expand this market with
the addition of a higher quality flexible light unit. The
higher quality version of the Bend-A-Liter will be sold into
the same markets as the Company presently sells its less
expensive unit.
The Company intends to manufacture a fiber optic flexible scope
to compete in the automotive, aircraft and quality maintenance
markets. The product will compete with much more expensive
units built by companies such as Olympus. After the Company
has successfully marketed the industrial fiber optic flexible
scope, it intends to redesign, manufacture and market a medical
scope.
Liquidity and Future Plans
Since the acquisition of Aaron Medical Industries, Inc. the
Company has changed its direction from acquiring ownership
interest in companies to acquiring new product technology and
expanding manufacturing capabilities through Aaron. The Aaron
800 is a prime example of this new direction. Other products
and technologies are being evaluated for future development.
Continued strong international sales growth is expected by
management. The Company has authorized a private placement on
its behalf and intends to raise money in this manner. During
the first quarter of 1996, the Company raised $100,000 from the
sale of common stock. The Company has obtained a short-term
line of credit with a local commercial bank for $100,000.
The Company's future results of operations and the other
forward-looking statements contained in the Outlook, in
particular the statements regarding growth in the medical
products industry, capital spending, research and development,
and marketing and general and administrative expenses, involve
a number of risks and uncertainties. In addition to the
factors discussed above, among the other factors that could
cause actual results to differ materially are the following:
business conditions and the general economy; competitive
factors such as rival manufacturers availability of products
at reasonable prices; risk of nonpayment of accounts
receivable; risks associated with foreign operations; and
litigation involving intellectual property and consumer issues.
An-Con believes that it has the product mix, facilities,
personnel, and competitive and financial resources for
continued business success, but future revenues, costs,
margins, product mix and profits are all influenced by a number
of factors, as discussed above.
Item 7. Financial Statements.
(See Attached)
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There are no disagreements with or changes in
accountants.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Name Age Position Director since
J. Robert Saron* 43 Chairman of the Board
Chief Executive
Officer, Director August, 1994
Andrew Makrides 54 President, Director December, 1982
Joseph F. Valenti 79 Director October, 1995
George W. Kromer 55 Director October, 1995
Delton Cunningham 31 Secretary, Treasurer
Chief Financial Officer --
Tsang Yang Tseng 48 Vice-President --
Far East Affairs
Robert Speiser, the former Chairman of the Board, resigned as
an officer and director on March 20, 1995 and became a
consultant to the Company. See "Certain Relationships and
Related Transactions".
* Replaced Robert Speiser as Chairman and CEO on March 20,
1995.
J. Robert Saron,age 43, President and Chairman of the Board
holds a Bachelors degree in Social and Behavioral Science from
the University of South Florida. From 1971 through 1979 Mr.
Saron served in various capacities with Saron Pharmaceutical
Corporation and Home Breathing Care, Inc. In 1979 Saron
Pharmaceutical Corporation and Home Breathing Care, Inc. were
acquired by Key Energy Enterprises, Inc. and were renamed Key
Medical, Inc. Mr. Saron was named Vice President of Key
Medical, Inc. and served on the Board of Directors of Key
Energy Enterprises, Inc. In 1983 Mr. Saron became President
of Key Medical, Inc. In January 1984 Mr. Saron joined
Suncoast Medical Manufacturing, Inc. In 1985 Suncoast
acquired Key Technologies, Inc. and Mr. Saron became Vice
President of the Corporation. From 1988 to present Mr. Saron
has served as President and director of Aaron Medical
Industries, Inc. (formerly Suncoast Medical Manufacturing,
Inc.). In March, 1995 Mr. Saron was elected Chairman and
Chief Executive Officer of An-Con Genetics, Inc.
Andrew Makrides, age 54, President, member of the Board of
Directors, and former Chairman, received a Bachelor of Arts
degree in Psychology from Hofstra University and a JD Degree
from Brooklyn Law School. He is a member of the New York Bar
and has practiced law from 1968 until joining An-Con Genetics,
Inc. as Executive Vice President and director, in 1982. Mr.
Makrides became President of the Company in 1985 and served as
such to date.
Delton N. Cunningham, age 31, Vice President and Chief
Financial Officer holds a Bachelor of Science in Accounting
from the University of Florida. He is a Certified Public
Accountant and is a member of the American Institute of
Certified Public Accountants and the Florida Institute of
Certified Public Accountants. Mr. Cunningham began his career
with the Miami office of Arthur Andersen & Company. In June
of 1991 Mr. Cunningham joined Aaron Medical Industries, Inc.,
as the Company's Chief Financial Officer. In June of 1992 Mr.
Cunningham became Vice President of Aaron Medical Industries,
Inc. and in April of 1993 he was elected Corporate Secretary
of Aaron by the Board of Directors.
Tsang Yang Tseng, age 48, is a medical doctor and the owner of
several medical clinics in Taiwan and has other business
operations in Far East Asia. Currently he also serves as the
Vice President in charge of Far Eastern affairs for the
Company.
Robert Speiser, was initially an unpaid consultant to the
Company in June of 1989, and became Chief Executive Officer
("CEO") in 1990. He was appointed Chairman of the Board of
Directors ("Chairman") in May 1992. On March 20, 1995, Mr.
Speiser resigned as the Chairman and CEO and agreed to remain
as a consultant to the Company. He will concentrate his
efforts on product development as a paid consultant to the
Company until March, 1996.
Joseph F. Valenti, age 79 filled a vacancy on the Board of
Directors and became a member of the Board of Directors on
October 1, 1995. He is the former Vice-President of the
International Division of Aaron Medical Industries, Inc. and
retired as of January 1, 1995 from that position. He
continues to be the principal shareholder and chief executive
officer of Valpex International Corporation, a company which
is wholly owned by him, engaged in the import of products.
This import company is a major supplier of the Company's light
bulbs which are used in the Company's various manufactured
products. The prices paid by the company for the products are
competitive with those from other sources. He received a
Bachelor of Arts Degree in Languages from the College of the
City of New York in 1939. He has been associated with Aaron
Medical Industries, Inc. and its predecessor companies since
1980 and was charged with developing the international sales
department and increasing exports sales on behalf of Aaron.
George W. Kromer, Jr., age 55 filled a vacancy on the Board of
Directors and became a director on October 1, 1995. Mr.
Kromer is a Senior Financial Correspondent for "Today's
Investor" and is utilized as a consultant by a number of
companies whose shares are listed on the American Stock
Exchange and Over-the-Counter Exchange. An-Con has also
retained Mr. Kromer on a month-to-month basis as a consultant
in addition to his capacity as a director. He has been
writing for financial publications since 1980. He received a
Master's Degree in 1976 from Long Island University in Health
Administration. He was engaged as a Senior Hospital Care
Investigator for the City of New York Health & Hospital
Corporation from 1966 to 1986. He also holds a Bachelor of
Science Degree from Long Island University's Brooklyn Campus
and an Associate in Applied Science Degree from New York City
Community College, Brooklyn, New York.<PAGE>
REMUNERATION
Item 10.
The following table sets forth the compensation paid to the
executive officers of the registrant for the three years
ended December 31, 1995:
Annual Compensation
A B C D E
Name and Other(a)
Principal Annual
Position Year Salary Bonus Compensation
Robert Saron
CEO 1995$116,000 $39,600 $23,700
Andrew Makrides
President1995 77,000 11,800 8,000
1994 62,500 126,500(d) 14,000
1993 3,500 -- 14,000
Moshe Citronowicz
? 1995 97,000 11,800 8,000
Delton Cunningham
Treasurer1995 82,900 8,800 8,000
Robert Speiser
CEO(Former)1995 12,500(b)(c) -0- 8,000
1994 84,850(e)235,000(d)13,100
1993 6,500 -- 6,000
(continued on next page)
REMUNERATION (continued)
Annual Compensation Long Term Compensation
F G H I
Awards Payouts
Restricted Stock Options
LTIP All other (c)
Year Awards SAR'S Payouts Compensation
Name and
Principal
Position
Robert Saron
CEO 1995 $-- -- -- --
Andrew Makrides
President 1995 $-- -- -- --
1994 -- -- -- $2,700
1993 -- -- -- 2,700
Moshe Citronowicz
? 1995 -- -- -- --
Delton Cunningham
Treasurer 1995 -- -- -- --
Robert Speiser
CEO(Former) 1995 -- -- -- 47,000(c)
1994 -- -- -- 36,400
1993 -- -- -- 22,600
(a) Other compensation includes health insurance for
officers and the personal use of an auto by each of the
above named officers. The exact amount of personal use auto
benefit cannot be determined and was estimated to be less
than $10,000 in any one year.
(b) Includes $22,350 paid to Mr. Speiser in his capacity as
Chairman of the Board of Directors of Aaron.
(c) Mr. Speiser resigned on March 20, 1995, as an officer of
An-Con and Aaron and became a consultant to the Company at
$4,000 per month plus use of an auto, office space and
medical insurance. He received $47,000 in consulting,
medical and auto expenses. His contract was for
one year to end March 20, 1996.
There is no contract or arrangement for the Board of Directors
to be compensated in their capacities as Board members. The
Company Board of Directors presently consists of Robert Saron
the CEO and Andrew Makrides President, Joseph F. Valenti and
George W. Kromer, Jr. Mr. Saron is also CEO of Aaron. Mr.
Kromer has been retained on a month-to-month basis pursuant to
verbal agreement as a financial and public relations consultant
by An-Con for the past nine months at an average monthly fee of
$450.
There have been no changes in the pricing of any SAR's
previously or currently awarded, except as shown in "d" above.
On the 8th of September, 1995, the Company entered into an
employment agreement which (a) J. Robert Saron providing for
Mr. Saron to act as an executive employee of the Company. The
agreement was for a period of 5 years and provides for
compensation in the amount of $118,335 per year plus additional
amounts for automobile allowance ($600 per month) and a bonus
equal to 10% of the Company's pre-tax profits in excess of the
first $200,000 of profit in any given year. The agreement also
provides for annual cost of living percentage increases as to
salary and automobile allowance. In addition to the foregoing,
the agreement provides for a vacation of three weeks per year,
reimbursement of business expenses, group insurance and life
insurance. The agreement may be terminated (a) upon the death
of Mr. Saron, or (b) on thirty (30) days notice by Mr. Saron to
terminate, or (c) by the Company, (i) without cause, upon the
majority approval of the Board of Directors on thirty (30) days
written notice (wherein the Company shall be obligated to pay
the employee compensation under the agreement for the balance
term of the agreement) and (ii) the employee may elect, in lieu
of (i) above, to cancel his agreement and obtain severance
payments equal to three times the annual salary and bonus in
effect during the month preceding such termination; or (d) by
the Company for cause, if during the time of employment, the
employee violates the covenant not to compete provisions of the
agreement, or is found guilty of a felony or crime of moral
turpitude. The agreement provides for a covenant not to
compete directly or indirectly against the Company for a period
of one year. Such agreement also provides for indemnification
of Mr. Saron for any liability while acting as an officer and
director of the Company except in the instances where it is
determined by a court of competent jurisdiction that (a) he has
breached his duty of loyalty to the corporation or the
shareholders, or (b) acted not in good faith or intentionally
improperly, or (c) paid unlawful dividends or made unlawful
stock purchases or redemptions, or (c) otherwise engaged in a
transaction in which he received improper personal benefit
against the interests of the corporation or its shareholders.
On September 8, 1995, the Company also entered into a similar
employment agreement with Andrew Makrides, President, for a
period of 5 years and providing for annual compensation in the
amount of $78,500, a monthly automobile allowance of $500 per
month, and bonuses equal to 3% of the Company's pre-tax profits
in excess of the first $300,000 of profits in An-Con Genetics,
Inc. and annual cost of living percentage increases. In all
other respects the agreement is similar to that of Mr. Saron
set forth above.
Effective September 8, 1995 the Company entered into a similar
3-year executive employment agreement (the "Agreement") with
Delton N. Cunningham, as Vice-President and Secretary of the
Company. Mr. Cunningham has also been appointed Treasurer and
Chief Financial Officer of the Company. The Agreement provides
for one year extensions unless written notice of termination is
provided by the Company nine months prior to the termination
date and contains termination provisions similar to those of
Messrs. Saron and Makrides. The Agreement also provides for a
salary of $75,000 per year, a monthly automobile allowance of
$500, a bonus equal to 3% of the Company's pre-tax profits in
excess of $300,000, 3-weeks paid vacation, reimbursement of
expenses, group medical insurance and contains a one-year non-
compete covenant commencing upon termination of employment.
Item 11. Security Ownership of Certain Beneficial Owners
and Management of An-Con.
The following table sets forth certain information as of
December 31, 1995, with respect to the beneficial ownership of
the Company's common stock by all persons known by the Company
to be the beneficial owners of more than 5% of its outstanding
shares, by directors who own common stock and by all officers
and directors as a group.
Number of Nature Percentage of
Name and Title Shares of outstanding
Address of Class owned ownership(i) shares
Andrew Makrides Common Stock 421,667 Beneficial 5.5%
(v)
255 3rd St.
St. James, New York
Tsang Yang Tseng Common Stock 666,667 Beneficial 8.7%
(v)
190-1 Ming-Chun Road
Chi-Yi, Taiwan
Robert Speiser Common Stock 753,333 Beneficial 9.8%
(ii)(v)
1340 Boca Ciega
Isle Drive
St. Petersburg,
Florida 33706
Dr. Louis F. Powell Common Stock 422,587 Beneficial 5.5%
(vi)
202 Bluffview Drive
Belleair, FL 34640
J. Robert Saron Common Stock 457,385 Beneficial 5.9%
(iii)
Ashley Drive
Seminole, FL 34642
Delton Cunningham Common Stock 54,946 Beneficial .7%
(iii)(iv)
7500 Normandy Ct.
Seminole, FL 34642
All Officers Common Stock 1,600,665 Beneficial 20.8%
and Directors as a
Group (4 persons)
(ii)
(i) Based on 7,704,436 shares outstanding as of December 31,
1995, which is inclusive of the shares issued for the benefit
of Aaron shareholder's.
(ii) Mr. Robert Speiser resigned as the Company Chairman and
Chief Executive Officer on March 20, 1995.
(iii) Robert Saron, who replaced Mr. Speiser as Chairman, is
the President and a director of Aaron Medical Industries, Inc.
As a result of the exchange of shares pursuant to the
Acquisition Agreement, Mr. Saron will become the beneficial
owner of 432,385 additional shares of An-Con (in addition to
the 25,000 shares he had received prior to the merger.
(iv) Delton Cunningham is entitled to 44,946 shares of An-Con
as a result of the exchange of shares in addition to the
10,000 issued to him in connection with services rendered to
An-Con.
(v) During 1994, two transactions took place that materially
changed shareholders' control of the Company:
(a) Robert Speiser, a former officer and director of the
Company and Andrew Makrides, an officer and director of the
Company, received an aggregate of 1,205,000 shares of common
stock during the second quarter of 1994 effectively giving
them, at that time, 29.887% of the outstanding shares of the
Company.
(b) During the third quarter of 1994 the Company sold 666,667
shares of common stock to a foreign investor that gave him
16.5% of the outstanding shares of the Company, at the time of
issue.
(vi) Dr. Louis F. Powell is a director of Aaron and as a
result of the exchange of shares pursuant to the Acquisition
Agreement will become the beneficial owner of 422,587 of An-
Con shares.
See "Certain Relationships and Related Transactions".
Item 12. Certain Relationships and Related Transactions
Purchase of Aaron Medical Industries, Inc.
On June 10, 1993, a letter of intent was entered into whereby
100% of the outstanding shares of Aaron was to be exchanged
for 3,399,096 shares of An-Con resulting in Aaron shareholders
owning 49% of the outstanding shares of An-Con on a
fully-diluted basis as of the closing date (January 11, 1995).
The agreement further provides that Aaron shall operate as a
wholly-owned subsidiary having two directors; one designated
by the present An-Con management and one designated by the
present Aaron management. The An-Con shares issued for Aaron
shares shall be held by an Escrow Agent for the benefit of
Aaron shareholders for delivery upon effectiveness of a
registration statement.
The agreement was restated and further amended on April 14,
1995 and November 20, 1995 and the former Aaron shareholders
are being asked to ratify these changes. The Acquisition
Agreement as amended deleted the 80% condition that Aaron
shareholders would receive 80% of the combined company if An-
Con could not raise the required funds and merely contained
the provision whereby An-Con covenanted to provide up to a
total of $1,000,000 in funding for Aaron, now the wholly owned
subsidiary of An-Con. Due to possible adverse tax
consequences to former Aaron shareholders, this covenant was
later deleted in the November 20, 1995 restated and amended
agreement, (the "Final Acquisition Agreement") which is the
agreement that is being presented to the former shareholders
of Aaron and is the subject of a registration statement. The
Final Acquisition Agreement is being presented to the former
shareholders of Aaron for ratification or, in the alternative,
if they so choose, to dissent and request fair value at $.22
per Aaron share or $1,331,800 in lieu of An-Con shares
pursuant to the exchange.
As of December 31, 1995, An-Con had advanced $78,000 to Aaron.
The agreement as amended has deleted all references to the
$1,000,000. After consulting with tax counsel it was
determined that it was in the best interests of shareholders
and the Company to delete the aforementioned reference as part
of the acquisition.
Cash and Other Transactions
During 1993 there were no cash transactions directly between
the Companies. In 1994 a total of $226,000 was contributed in
cash by An-Con to Aaron. In addition in 1995 An-Con
contributed 60,000 shares valued at $78,000 to Aaron in
connection with its purchase of its present premises. During
1994 and 1995 Aaron advanced to An-Con for operating purposes
a total of $140,100. In addition to the foregoing Aaron paid
an aggregate of $47,200 of expenses of Robert Speiser of which
$24,900 was charged by An-Con to Mr. Speiser's loan account
and $22,300 was expended by An-Con as general and
administrative expenses.
Persons Interested in the Acquisition
Robert Speiser former officer and director of the Company and
an officer and director of Aaron during the year 1994 up to
March, 1995, owned 783,333 shares of An-Con and was granted
options by Aaron to purchase 250,000 shares of Aaron prior to
the closing of the Acquisition on January 11, 1995. Aaron has
advised Mr. Speiser that it intends to cancel the shares
issuable pursuant to exercise of the option by Mr. Speiser due
to the lack of authority from An-Con board of directors to
receive the shares. Robert Saron became a director of An-Con
Genetics, Inc. in August, 1994, and was awarded 25,000 shares
of An-Con. In addition Aaron has paid certain expenses
incurred by Mr. Speiser during the period of negotiation of
the Acquisition Agreement amounting to $47,200.
Messrs. F. Paul Butler and Louis F. Powell, directors of
Aaron, also owned significant amounts of shares of Aaron.
However, any benefits arising to such latter directors from
the acquisition were similar to those of other Aaron
shareholders from the exchange of shares pursuant to the
Acquisition Agreement.
Conversion of Debt
In January 1994, the Company issued 236,066 shares and the
equivalent number of warrants to convertible promissory
noteholders in redemption of $332,000 in promissory notes. The
warrants were called by the Company and 202,001 warrants were
exercised for a total of $290,880.
Consulting Compensation Plan
On June 24, 1994, An-Con filed a registration statement on
Form S-8 covering a total of 435,000 shares of Common Stock
issued and issuable pursuant to the Company's 1994 Services
and Consulting Compensation Plan (the "Plan"). A total of
350,000 of such shares underlie and relate to 350,000
restricted warrants to purchase a like number of shares of
Common Stock of the Company at $1.50 per share which warrants
were issued for management consulting and legal consulting
services pursuant to the Plan. The balance of 85,000 shares
issued under the Plan and registered were for corporate legal
and litigation services. Of the shares underlying the
warrants, 120,500 were issued and delivered pursuant to
exercise of the warrants. In October, 1994, the Company
rescinded its consulting arrangements with 2 of the
consultants that were issued restricted warrants and cancelled
214,500 of the restricted warrants in connection therewith. In
May, 1995, 214,500 shares underlying such warrants were
deregistered.
Purchase of Multi-Function Cautery Device
The Company purchased a multi-functional cautery device for
91,350 shares of restricted common stock valued by the Company
at $59,400. The Company has developed and test marketed the
device and will be shipping orders in the second quarter of
1996.
Sale of Common Stock
In connection with an offering of 666,667 shares of common
stock by the Company pursuant to Regulation S, an investor
purchased all the shares offered at a price equal to 75% of
the market value of the shares at the close of business on
August 26, 1994. The Company received $1,000,000 and paid
$150,000 in commissions. The investor agreed that the 666,667
shares of common stock of An-Con Genetics, Inc., subscribed
for pursuant to an agreement dated June 19, 1994, shall be
held for investment and not with a view to the unlawful
distribution thereof by the investor and shall not be sold for
a minimum period of 18 months.
The Company agreed to cooperate fully in the application and
petition of the investor for permanent U.S. status and the
issuance of a permanent green card pursuant to U.S.
Immigration and Naturalization Service ("INS") Regulation
Section 204.6 (the "Regulation") relating to the Fifth
Employment-Based Preference For Alien Investors In a New
Commercial Enterprise.
The Company is also obliged, over a period of two years, to
create ten full-time positions for qualified employees
pursuant to a business plan.
The Company is presently in compliance with the terms of the
agreement.
Transactions with Officers
Robert Speiser, the former Chief Executive Officer (CEO) and
Andrew Makrides the President made cash loans to the Company
during the period October 12, 1990 to December 31, 1993 of
$159,000 and $21,500, respectively. In addition to these
loans, Mr. Speiser advanced his own cash of $76,100 in the
form of loans for product development, travel and other
expenses. Interest on these loans has accrued at 9% to 12%
per annum from inception. During 1995 Mr. Speiser received
$90,700 in re-payment of principal on his loan. As of
December 31, 1995, the books of the Company reflected a
principal balance due of $-0- on loans to Mr. Speiser and Mr.
Makrides.
In 1992, in order to deter threatened action against the
Company by the landlord to file a judgment for rent arrears of
$41,700, Mr. Speiser obtained a judgment against the Company
in favor of himself in the Counties of Suffolk and Westchester
for $92,239 and $190,957 respectively, inclusive of interest
to December 31, 1992. On March 29, 1993 and in subsequent
letters of instruction to the Sheriff of Suffolk County, Mr.
Speiser requested that the execution of the above-mentioned
judgments be held in abeyance until August 30, 1993. As of
February 28, 1994, the execution order had expired.
Mr. Speiser has stated he does not intend to enforce this
judgment and will place it in trust for the benefit of the
Company. As of this date, the landlord has rescinded the
outstanding debt and entered into a new lease with the
Company. However, notwithstanding the removal of the threat
by the landlord and repayment of the principal amount loaned
to the Company in the past, Mr. Speiser has not yet issued
satisfactions on the judgments against the Company as of the
date hereof. The Company has requested that Mr. Speiser issue
and deliver the satisfactions in favor of the Company.
In January, 1992, the Company had entered into 5-year
employment agreements as amended February, 1993, wherein the
Company had accrued $310,000 in salaries to its Chief
Executive Officer and President for $175,000 and $135,000,
respectively. The agreements, as amended, also called for
incentive stock options of 8 million and 4 million, for
Messrs. Speiser and Makrides respectively, at $.001 per share,
pre reverse split of 1 for 15. The agreements were terminable
upon a lump-sum severance of an amount equal to three times
the executive's annual salary and bonus, in effect the month
preceding such termination.
In 1994, the aforesaid officers voluntarily rescinded their
employment contracts and incentive stock options. Mr.
Makrides was then awarded a new employment contract for 3
years and 421,667 (post-split) shares of the Company valued at
$126,500. (This agreement was later voluntarily cancelled by
Mr. Makrides on September 5, 1995). However, Mr. Makrides was
issued 421,667 shares in March, 1994 in consideration of his
waiver of prior accrued salaries due.) No other employment
agreement was signed with Mr. Speiser, but in March, 1994 he
had received 783,333 shares of the Company valued at $235,000
in consideration for his waiver of prior accrued salaries due.
(See Executive Compensation.)
On March 20, 1995 Mr. Speiser, at the request of the Board of
Directors, resigned his position as chairman and CEO. At the
time of resignation, Mr. Speiser signed a one-year consulting
agreement with Aaron and the Company, which provided for,
among other things, a monthly reduction of loan by the
Company, a $1,500 per week retainer (to be reduced to $1250
per week during last 6 months of the agreement), a commission
on funding introduced by him to the Company pursuant to
formula. The Company has requested receipts from Mr. Speiser
for expenses submitted which were made part of the Company's
outstanding loan indebtedness to Mr. Speiser.
Item 13. Exhibits and Reports on Form 8-k
No Form 8-k was filed in the fourth quarter of 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of St.
Petersburg, State of Florida, on April 23, 1996.
An-Con Genetics, Inc.
By:
Robert Saron
Chairman of the Board
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Robert Saron,
Andrew Makrides, Joseph Valenti, George W. Kromer and Delton
Cunningham and any one of them, as his true and lawful attorneys-in-fact and
agents with full power of substitution, for him and his name, in any and all
capacities, to sign any or all amendments to this report, and to file the same
with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signatures Title Date
Chairman of the Board,
Robert Saron Chief Executive Officer,
Director April 23, 1996
President, Director
Andrew Makrides April 23, 1996
Director
Joseph F. Valenti April 23, 1996
Director
George W. Kromer April 23, 1996
Secretary, Treasurer
Delton Cunningham Chief Financial Officer April 23, 1996
AN-CON GENETICS, INC.
APPENDIX A TO ITEM 601(c) OF REGULATION S-B
COMMERCIAL AND INDUSTRIAL COMPANIES
ARTICLE 5 OF REGULATION S-X
FINANCIAL DATA SCHEDULE FOR THE YEAR
ENDED DECEMBER 31, 1995
<PAGE>
EXHIBIT 27
AN-CON GENETICS, INC.
APPENDIX A TO ITEM 601(c) OF REGULATION S-B
COMMERCIAL AND INDUSTRIAL COMPANIES
ARTICLE 5 OF REGULATION S-X
FINANCIAL DATA SCHEDULE FOR THE NINE
MONTHS ENDED DECEMBER 31, 1995
December 31,
ITEM NUMBER ITEM DESCRIPTION 1995
5-02 (1) Cash and cash items 165,800
5-02 (2) Marketable securities --
5-02 (3) (a) (1) Notes and accounts receivable-trade 652,300
5-02 (4) Allowances for doubtful accounts --
5-02 (6) Inventory 606,200
5-02 (9) Total current assets 1,681,500
5-02 (13) Property, plant and equipment 2,038,300
5-02 (14) Accumulated depreciation 768,800
5-02 (18) Total assets 3,600,500
5-02 (21) Total current liabilities 2,540,,400
5-02 (22) Bonds, mortgages and similar debt 647,800
5-02 (28) Preferred stock-mandatory redemption --
5-02 (29) Preferred stock-no mandatory redemption --
5-02 (30) Common stock 18,400
5-02 (31) Other stockholders' equity 393,900
5-02 (32) Total liabilities and stockholders' equity3,600,500
5-03 (b) (a) Net sales of tangible products 5,521,000
5-03 (b) 1 Total revenues 5,578,300
5-03 (b) 2 (a) Cost of tangible goods sold 3,215,300
5-03 (b) 2 Total costs and expenses applicable to
sales and revenue 3,215,300
5-03 (b) 3 Other costs and expenses 2,525,200
5-03 (b) 5 Provision for doubtful accounts and notes --
5-03 (b) (8) Interest and amortization of debt discount 68,700
5-03 (b) (10) Income before taxes and other items( 230,900)
5-03 (b) (11) Income tax expense 183,300
5-03 (b) (14) Income/loss continuing operations (47,600)
5-03 (b) (15) Discontinued operations --
5-03 (b) (17) Extraordinary items 76,800
5-03 (b) (18) Cumulative effect-changes in accounting
principles --
5-03 (b) (19) Net income or loss 29,200
5-03 (b) (20) Earnings per share - primary .007
5-03 (b) (20) Earnings per share - fully diluted .006
CONSENT OF CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation by reference in this Annual
Report on Form 10-KSB of An-Con Genetics, Inc. of our report
dated April 15, 1996 included in the 1995 Annual Report to
Stockholders of An-Con Genetics, Inc.
Bloom and Company
Hempstead, New York
April 15, 1996
PART II
ITEM 7. FINANCIAL STATEMENTS
AN-CON GENETICS, INC.
INDEX TO FINANCIAL STATEMENTS
Contents Page
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1995 F-3
Consolidated Statements of Operations for the years
ended December 31, 1995 and 1994 F-5
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1995 and 1994 F-10
Notes to Financial Statements F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
An-Con Genetics, Inc.
We have audited the accompanying consolidated balance sheet of
An-Con Genetics, Inc. and subsidiary as of December 31, 1995
and the related statements of operations and shareholders'
equity, and cash flows for the years ended December 31, 1995
and 1994. 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 audit provides a reasonable
basis for our opinion.
In our opinion the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of An-Con Genetics, Inc. and subsidiary as
of December 31, 1995 and the related results of its
operations, and its cash flows for the years ended December
31, 1995 and 1994 in conformity with generally accepted
accounting principles.
BLOOM AND COMPANY
April 15, 1996
<PAGE>
AN-CON GENETICS, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Current assets:
Cash $ 165,800
Trade accounts receivable 652,300
Inventories 606,200
Prepaid expenses 73,900
Deferred tax asset 183,300
Total current assets 1,681,500
Property and equipment, net 1,269,500
Other assets:
Goodwill, net 283,600
Deferred charges 95,000
Patent rights, net 259,500
Unamortized debt issue costs, net 3,700
Deposits 7,700
649,500
$3,600,500
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
BALANCE SHEET
DECEMBER 31, 1995
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Accounts payable $ 887,300
Accrued interest 157,900
Notes payable - current portion 132,000
Due to Aaron shareholders 1,331,800
Current portion of obligations
under capital leases 31,400
Total current liabilities 2,540,400
Long-term debt, net 643,100
Obligations under capital leases 4,700
Stockholders' equity
Common stock par value $.015;
15,000,000 shares authorized,
issued and outstanding 4,305,340
shares, on December 31, 1995 64,700
Additional paid in capital 11,541,100
Accumulated deficit (11,182,900)
422,900
Subscriptions receivable ( 10,600)
Total stockholders' equity 412,300
$ 3,600,500
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
Sales $5,521,000 $ 85,500
Costs and expenses:
Cost of sales 3,215,300 56,700
Research and development 121,900 11,300
Professional services 368,400 265,200
Salaries and related costs 850,000 405,200
Selling, general and administration 1,184,900 378,600
5,740,500 1,117,000
(Loss) from operations (219,500) (1,031,500)
Other income and (expense):
Interest expense (net of income) (68,700) (26,400)
Miscellaneous 57,300 1,500
( 11,400) (24,900)
Income (loss) before extraordinary item (230,900) (1,056,400)
Extraordinary item:
Gain from settlement of debt 76,800 54,200
Income (loss) before income tax (154,100) (1,002,200)
Income tax benefit 183,300 --
Net income (loss) $ 29,200 $(1,002,200)
Per share
Net loss before extraordinary item$( .054)
Net income (loss) $ .007$( .39)
Primary Earnings $ .006
Earnings fully diluted $ .006
Weighted average number of shares
outstanding 4,201,016 2,586,688
Weighted average number of shares
outstanding primary and fully diluted 4,354,349*
* Includes 153,333 An-Con shares to be issued to the
stockholders of the unconsolidated subsidiaries of An-Con,
Xenetics Biomedical Inc. and Automated Diagnostics, Inc. in
exchange for the shares they hold in the respective companies.
The accompanying notes are an integral part of
the financial statements.
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Common
number of Common Paid-in
shares Stock Capital Deficit
Balance
January 1,
1994 $ 987,695 $ 15,000$9,090,700$(10,209,900)
Shares
issued
in exchange
for
convertible
debt and
accrued
interest at
$1.00 per
share 236,066 3,500 355,400 358,900
Exercise
of warrants
received by
convertible
debt holders
at $1.50 per
warrant 202,001 3,000 288,100
Expired
warrants 16,900
Shares issued
in exchange
for cash less
commission of
$150,000 to a
foreign
investor at
$1.50 per
share 666,667 10,000 840,000
Shares issued
for the
purchase of
technology
at $.65 per
share 91,350 1,400 58,000
Warrants
issued for
services and
consulting
compensation
plan valued
at $.38 per
warrant
The accompanying notes are an integral part of the financial statements.
(continued on next page)
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Paid-in
Treasury Subscriptions Capital
Stock Receivable Warrants Total
Balance
January 1,
1994 $ (6,000) $ -- $ 136,900$ (973,300)
Shares
issued
in exchange
for
convertible
debt and
accrued
interest at
$1.00 per
share 358,900
Exercise
of warrants
received by
convertible
debt holders
at $1.50 per
warrant (44,000) 247,100
Expired
warrants (16,900) -0-
Shares issued
in exchange
for cash less
commission of
$150,000 to a
foreign
investor at
$1.50 per
share 850,000
Shares issued
for the
purchase of
technology
at $.65 per
share 59,400
Warrants
issued for
services and
consulting
compensation
plan valued
at $.38 per
warrant 133,000 133,000
The accompanying notes are an integral part of the financial statements.
(continued on next page)
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(continued)
Common
number of Common Paid-in
shares Stock Capital Deficit
Warrants
exercised at
$1.50 per
share as per
1994 service
and consulting
compensation
plan 120,500 1,800 149,300
Shares issued
for officers
bonus at
$.30 per
share in
conjunction
with the
rescission
of executive
warrants 1,205,000 18,100 343,400
Shares issued
for consulting
and legal
services at
$.30 per
share 516,061 7,700 147,200
Shares issued
for legal
services
at $.90
per share 85,000 1,300 74,700
Net (loss)
for 1994 (1,002,200)
Balance
December 31,
1994 $4,110,340 $61,800 $11,363,700 $(11,212,100)
The accompanying notes are an integral part of the financial statements.
(continued on next page)
<PAGE>
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
Paid-in
Treasury SubscriptionsCapital
Stock Receivable Warrants Total
Warrants
exercised at
$1.50 per
share as per
1994 service
and consulting
compensation
plan (44,300) (45,800) 61,000
Shares issued
for officers
bonus at
$.30 per
share in
conjunction
with the
rescission
of executive
warrants (120,000) 241,500
Shares issued
for consulting
and legal
services at
$.30 per
share 154,900
Shares issued
for legal
services
at $.90
per share 76,000
Net (loss)
for 1994 (1,002,200)
Balance
December 31,
1994 $( 6,000)$ (88,300) $ 87,200$ 206,300
The accompanying notes are an integral part of the financial statements.
(continued on next page)
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Common
number of Common Paid-in
shares stock Capital Deficit
Balance
December 31,
1994 $4,110,340 $61,800$11,363,700$(11,212,100)
Shares issued
for
consulting
and legal
services
at $.40
per share 27,500 400 10,600
Shares issued
in exchange
for outstanding
bonds at $.40
per share 35,000 500 13,500
Shares issued
as part of
purchase of
building
at $1.30 per
share 60,000 900 77,100
Shares issued
for cash
at $1.00 per
share 80,000 1,200 78,800
Shares issued
in escrow
for the
purchase of
Aaron Medical
Industries, Inc.
3,399,096 (memorandum only)
Shares held
in treasury
given in
exchange for
legal fees
at $.40 per
share
Warrants
cancelled 74,400
The accompanying notes are an integral part of the financial statements.
(continued on next page)
AN-CON GENETICS, INC.
STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(Continued)
Paid-in
Treasury Subscriptions capital
Stock Receivable Warrants Total
Balance
December 31,
1994 $ (6,000) $(88,300) $87,200 $206,300
Shares issued
for
consulting
and legal
services
at $.40
per share 11,000
Shares issued
in exchange
for outstanding
bonds at $.40
per share 14,000
Shares issued
as part of
purchase of
building
at $1.30 per
share 78,000
Shares issued
for cash
at $1.00 per
share 80,000
Shares issued
in escrow
for the
purchase of
Aaron Medical
Industries, Inc.
3,399,096 (memorandum only )
Shares held
in treasury
given in
exchange for
legal fees
at $.40 per
share 6,000 6,000
Warrants
cancelled 12,800 (87,200)
The accompanying notes are an integral part of the financial statements.
(continued on next page)
AN-CON GENETICS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Common
number of Common Paid-in
shares stock Capital Deficit
Cash received
to reduce
subscriptions
receivable
Shares canceled
previously
issued for
services (7,500) (100) (2,900)
Cash collection
of warrants
outstanding 900
Cost of
underwriting
for Aaron
acquisition (75,000)
Income for
year 1995 29,200
Balance
December 31,
1995 $ 4,305,340 $ 64,700$11,541,100 $(11,182,900)
(Table continued below)
Paid-in
Treasury Subscriptions Capital
Stock Receivable Warrants Total
Cash received
to reduce
subscriptions
receivable $64,900 $64,900
Shares canceled
previously
issued for
services (3,000)
Cash collection
of warrants
outstanding 900
Cost of
underwriting
for Aaron
acquisition (75,000)
Income for
year 1995 29,200
Balance
December 31,
1995 $ 0 $ (10,600) $ 0 $ 412,300
AN-CON GENETICS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
Cash flows from operating activities:
Net income (loss) $29,200 $(1,002,200)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 171,000 120,300
Shares issued for services 14,000 230,700
Warrants issued for services -- 57,800
(Gain) loss from settlement of debt(76,700) 26,900
Shares issued for officers bonus -- 241,500
Provision for tax benefit (183,300) --
Change in assets and liabilities:
Increase in receivables (151,200) (900)
(Increase) decrease in prepaid expenses 4,900 (10,100)
Increase in inventories (91,800) ( 7,500)
Increase (decrease) in accounts payable 335,900 (68,400)
Increase (decrease) in accrued interest 45,600 ( 2,500)
Decrease in customers deposits ( 85,100) --
Total adjustments ( 16,700) 587,800
Net cash provided by (used in)
operations $ 12,500 $(414,400)
The accompanying notes are an integral part of
the financial statements.
<PAGE>
AN-CON GENETICS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(Continued)
1995 1994
Net cash provided by (used in)
operating activities $12,500 $(414,400)
Cash flows from investing activities:
(Increase)decrease in fixed assets(236,300) 4,300
Increase in security deposits 1,800 (300)
Acquisition costs (20,000) (75,000)
Purchase of technology (126,600) --
Net cash applied to investing
activities (381,100) (71,000)
Cash flows from financing activities
Receipt of common stock subscription 64,900 --
Loans and advances to affiliate -- (190,600)
Common shares issued 80,900 850,000
Decrease in loans from officers (90,700) (165,900)
Common shares issued for warrants -- 383,400
Reduction in notes payable
and capital leases 3,600 --
Cost of underwriting (75,000) --
Net cash provided by (applied to)
financing activities (16,300) 876,900
Net increase (decrease) in cash (384,900) 391,500
Cash at beginning of year 550,700 20,300
Cash at end of year $ 165,800 $ 411,800
The accompanying notes are an integral part of
these financial statements.
AN-CON GENETICS, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994
Cash paid during the twelve months ended December 31:
1995 1994
Interest $ 27,700 $ -0-
Income Taxes -0- -0-
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
1.The Company issued 35,000 restricted post-split shares
to convertible note holders to redeem
$70,000 in notes payable and $26,900 of related accrued
interest. The shares were valued at
$14,000, 50% of the market price of the Company's
unrestricted shares at the time of issuance. The issuance
cost of the redeemed bonds, in the amount of $6,100 was
written off.
2.The Company issued 27,500 post-split shares for services
valued at $11,000, 50% of the market price of the
Company's unrestricted shares at the time of issuance.
3. On January 11, 1995, An-Con acquired all of
the outstanding capital stock of Aaron Medical
Industries, Inc. (Aaron), in exchange for issuing
3,399,096 shares of the Company to an escrow agent.
The total acquisition price of Aaron shares was
valued at $1,331,800. According to the agreement
An-Con will register the shares that are placed
in escrow. Aaron's former shareholders voted and
approved An-Con's acquisition of their Company,
and An-Con completed the acquisition, prior to
filing and effectiveness of a registration
statement, under the Securities Act of 1933.
Consequently, the former shareholders of Aaron
have been given the right to accept the registered
shares of An-Con or elect to receive the value of
their share in cash.
The former shareholders of Aaron have the right
to accept the registered shares of An-Con or elect
to receive the value of their shares in cash.
Since (a) the vote was previously taken by Aaron's
shareholders and shares were already delivered by
them, and (b) An-Con shares were already issued
prior to filing and effectiveness of a
registration statement under the Securities Act
of 1933, and (c) since the Company has already
been acquired since January, 1995, the shareholders
of Aaron are to be provided with an effective
registration statement by An-Con and are being
requested to choose either to accept delivery
of the An-Con shares pursuant to the acquisition
agreement, as amended, or, in the alternative, to
receive cash for their shares of Aaron. The amount of
$1,331,800, value of the consideration due to the
former Aaron shareholders, is recorded as a current
liability of An-Con, as of March 31, 1995.
AN-CON GENETICS, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES (continued):
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995:
The Acquisition of Aaron was accounted for using
the purchase method. Accordingly, $2,012,800 was
allocated to assets acquired based on their estimated
fair values. This treatment resulted in $335,800 of
cost in excess of net assets acquired. Such excess
(which has increased for additional acquisition costs)
is being amortized on a straight-line basis over
five years. In connection with the acquisition,
the Company assumed $681,600 net liabilities of Aaron.
4. On June 26, 1995 the Company's subsidiary, Aaron Medical,
purchased a building for $625,000 by issuing 60,000 An-Con
shares valued at $78,000 and a purchase money mortgage
of $500,000. A security deposit given to the seller of
$12,200 was applied to the purchase and
$34,800 was paid in cash.
5. On November 16, 1995 the Company purchased the
business of Suncoast Design Service for $96,500.
Suncoast is in the business of designing and
maintaining assembly line equipment for
manufacturing companies. The Company paid
$15,000 in cash and issued notes of $81,500.
The note is payable at $823.11 per week over a
period of two years.
6. On December 15, 1995 the Company purchased the
technology to manufacture a 30 watt electrosurgical
coagulation device (ECU) for $185,000. $100,000
of cash at closing and $85,000 in notes payable
over eighteen months at 10% with monthly payments
of $5,105.85.
7. An-Con shares being held by the Company were
issued for legal services valued at $6,000.
8. During the year subscriptions receivable for
shares issued for legal services were canceled
valued at $12,800. The Company
determined they were uncollectible.
FOR THE YEAR ENDED DECEMBER 31, 1994
1. The Company issued 236,066 shares and the
equivalent number of warrants to convertible
note holders in redemption of $332,000 in notes.
The warrants were called by the Company and
202,001 warrants were exercised for $290,880.
As at December 31, 1994, $44,000 of notes taken
by the Company for the exercise of the warrants had
not been paid. These notes bear annual interest rate of
nine percent.
AN-CON GENETICS, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES (continued):
FOR THE YEAR ENDED DECEMBER 31, 1994
2. The Company purchased a multifunctional cautery device
for 91,350 shares of unregistered common stock valued at
$59,400.
3. As a part of a services and consulting compensation
plan, filed as a registration statement on form S-8, the
Company issued 350,000 warrants to purchase 350,000
common shares of the Company at $1.50 per share. The
value assigned to these rights was $133,000. As of
December 31, 1994, 120,500 warrants were exercised for
$136,300 in cash and $44,300 as subscriptions receivable.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The preparation of 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.
Consolidation
The consolidated financial statements include the accounts
of An-Con and its wholly owned subsidiary Aaron Medical
Industries, Inc.. Significant intercompany accounts and
transactions have been eliminated.
Fair values of financial instruments
Fair values of cash and cash equivalents, securities with
original maturities of less than 90 days, short-term investments
and short-term debt approximate cost due to the short period of
time to maturity.
Inventories
Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which
approximates actual cost on a current average or first-in,
first-out basis). Inventories at fiscal year-ends were as
follows:
1995 1994
Raw materials $ 296,700 --
Work in process 239,900 --
Finished goods 69,600 17,900
Total $ 606,200 $17,900
Property, Plant and Equipment
Property and other equipment are stated at cost. Depreciation
is computed for financial reporting purposes principally by use
of the straight-line method over the following estimated
useful lives: machinery and equipment, 7-15 years; buildings,
30 years.
The Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," effective as of the beginning of fiscal 1995. This adoption
had no material effect on the Company's financial statements.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings per common and common equivalent share
Earnings per common and common equivalent share are computed
using the weighted average number of outstanding common and
dilutive common equivalent shares outstanding. The Company's
primary and fully diluted earnings per share are the same and
they are computed by dividing the Company earnings by the
weighted average number of common shares outstanding and common
stock equivalents. The only dilutive common stock equivalent or
other convertible securities were the common shares of Automated
Diagnostics, Inc. and Xenetics Biomedical, Inc, An-Con's
unconsolidated and discontinued subsidiaries, which were
convertible to 153,333 common shares of the Company. The
3,399,096 shares, issuable in exchange for $1,331,800
liability to Aaron shareholders were not included in
computing the fully diluted earnings per share, for the
reason of being anti-dilutive.
Cost of acquisition/Stock issue cost
As per APB 16 the Company policy is to capitalize professional
fees in connection with the acquisition of its wholly owned
subsidiary and deduct from capital in excess of par value the
costs associated with the underwriting to register the shares to
be given to the shareholders of the subsidiary.
Investments
The equity method is used to account for investments in
corporate joint ventures and other investments in common stock
if the Company has the ability to exercise significant influence
over operating and financial policies of the investee
enterprise. That ability is presumed to exist for investments
of 20% or more and is presumed not to exist for investments of
less than 20%; both presumptions may be overcome by predominant
evidence to the contrary.
The Company initially records an investment at cost.
Subsequently, the carrying amount of the investment is increased
to reflect the Company's share of income of the investee and is
reduced to reflect the Company's share of losses of the investee
or dividends received from the investee. The Company's share of
the income or losses of the investee is included in the
Company's net income as the investee reports them. Adjustments
similar to those made in preparing consolidated financial
statements, such as elimination of intercompany gains and losses
and amortization of the difference between cost and underlying
equity in net assets, also are applicable to the equity method.
Under the equity method, an investment in common stock is shown
on the balance sheet of the Company as a single amount.
Likewise, an investor's share of earnings or losses from its
investment is ordinarily shown in its income statement as a
single amount.
The cost method is used when ownership of securities in an
affiliated company represents less than 20% of the total
outstanding shares of that Company. Under this method the
Company records an investment in the stock of an investee at
cost, and recognizes as income dividends received that are
distributed from net accumulated earnings of the investee since
the date of acquisition by the Company. The net accumulated
earnings of an investee subsequent to the date of investment are
recognized by the Company only to the extent distributed by the
investee as dividends. Dividends received in excess of earnings
subsequent to the date of investment are considered a return of
investment.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments (continued)
A loss in value of an investment that is other than a temporary
decline shall be recognized the same as a loss in value of other
long-term assets. Evidence of a loss in value might include,
but would not necessarily be limited to, absence of the
ability to recover the carrying amount of the investment or
inability of the investee to sustain an earnings capacity that
would justify the carrying amount of the investment. A current
fair market value of an investment that is less than its
carrying amount may indicate a loss in the value of the
investment.
Research and Development Costs
Research and development costs are charged to expense when
incurred. Disclosure in the financial statements is made for
the total research and development costs charged to expense in
each period for which an income statement is presented.
Only the development costs that are purchased from another
enterprise and have alternative future use are capitalized and
are amortized over five years.
Research and Development arrangements
Company accounts for its obligations under an arrangement for
the funding or research and development by others by determining
whether the Company is contractually obligated to pay for
research not yet performed. If so determined, to the extent
that the Company is obligated to pay, the Company records a
liability and charges research and development costs to expense.
Intangible assets
Intangible assets consist of the excess of the cost of acquired
companies and assets over the values assigned to net tangible
assets. These intangibles are being amortized by the straight-
line method over a 5-year period. Accumulated amortization
totaled $144,100 at December 30, 1995,
after taking into account the impairment discussed below.
At each balance sheet date, the Company assesses whether there
has been an impairment in the
value of such intangibles by determining whether projected
undiscounted future cash flow from operations for each Company,
as defined in Statement of Financial
Accounting Standards No. 121, " Accounting for the impairment of
Long -Lived Assets to be Disposed of," exceeds its net book
value as of the assessment date. At December 30, 1995,
$250,000 of intangible assets were written
down to their fair value due to an impairment recognized in the
first quarter of 1995 (see note 7).
Income Recognition
Income is recognized on the accrual basis, i.e., revenues are
recognized and reported in the income statement when the
amount and timing of revenues are reasonably determinable and
the earning process is complete or virtually complete.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting for Income Taxes
In February 1992, the FASB issued Statement No. 109, Accounting
for Income Taxes. FASB 109 requires an asset and liability
approach for financial accounting and reporting for income
taxes. It requires recognition of (1) current tax liabilities
or assets for the estimated taxes payable or refundable on tax
returns for the current year, and (2) deferred tax liabilities
or assets for the estimated future tax effects attributable to
temporary differences and carryforwards.
The Company has adopted the policy of preparing its financial
statements in accordance with FASB 109.
Nonmonetary Transactions
The accounting for non-monetary assets is based on the fair
values of the assets involved. Cost of a non-monetary asset
acquired in exchange for another non-monetary asset is recorded
at the fair value of the asset surrendered to obtain it. The
difference in the costs of the assets exchanged is recognized as
a gain or loss. The fair value of the asset received is used to
measure the cost if it is more clearly evident than the fair
value of asset surrendered.
Stock-Based Compensation
The Company has adopted Accounting Principles Board Opinion 25
for its accounting for stock based compensation. Under this
policy:
1. . Compensation costs are recognized as an expense over the
period of employment attributable to the employee
stock options.
2. Stocks issued in accordance with a plan for past or future
services of an employee is allocated between the expired
costs and future costs. Future costs are charged to the
periods in which the services are performed. The proforma
amounts of the difference between compensation cost included
in net income and related cost measured by the fair value
based method, including tax effects are disclosed.
NOTE 2. DESCRIPTION OF BUSINESS
An-Con Genetics, Inc. ("the Company") was incorporated in 1982,
under the laws of the State of Delaware and has its principal
executive office at 1 Huntington Quadrangle, Melville, New York
11747.
Currently, the Company is actively engaged in the business of
acquiring ownership interests in medical products and related
technologies. Also, An-Con has devoted its resources to
marketing a product called OmniFix II, an alcohol based tissue
fixative which is sold to hospital and clinical laboratories.
On January 11, 1995 the Company acquired a 100% ownership
interest in Aaron Medical Industries, Inc. a St. Petersburg,
Florida based Company engaged in the manufacturing and
distributing of medical products.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. DESCRIPTION OF BUSINESS (continued)
Aaron's largest current product line is battery operated
cauteries. Cauteries were originally designed for precise
hemostasis in ophthalmology. Today they have a variety of uses
including sculpting woven grafts in bypass surgery, vasectomies,
evacuation of subungual hematoma (smashed fingernail) and for
stopping bleeding in many types of surgery. Aaron manufactures
many types of cauteries.
Aaron additionally manufactures a variety of specialty lighting
instruments for use in ophthalmology, as well as a patented
flexible lighting instrument for general surgery, hip
replacement surgery, and for the placement of endotracheal
tubes. An industrial version of this light is distributed
through a large automotive tool distributor, and various retail
outlets and stores.
Aaron Medical Industries, Inc. manufactures and sells its
products under the Aaron label to over eight hundred fifty
distributors worldwide and has private label arrangements with
several large hospital supply Companies. Additionally, private
label arrangements have been made with large buying groups.
These private label arrangements, combined with the Aaron label
allows the Company to gain a greater market share for the
distribution of its products.
Purchase - Aaron Medical Industries, Inc.
On January 11, 1995, the Company acquired Aaron Medical
Industries, Inc. which was accounted for by the purchase method.
Total assets acquired were valued at $2,012,800 and liabilities
assumed were valued at $681,000. In order to properly transfer
the shares agreed upon to the Aaron shareholders the arrangement
called for the shares to be registered so they could be freely
traded. The assets were valued at $335,800 more than their cost
basis which created goodwill.
Purchase - Aaron Medical Industries, Inc.
The goodwill is being written off over 5 years using the
straight-line method. Because the registration statement was
not timely filed the Aaron shareholders have been given the
choice of accepting cash at 22 cents per share for their Aaron
shares, $1,331,800, or taking the An-Con shares in exchange.
The Aaron shareholders have 30 days from the effective day of
the registration statement to accept the cash offer or they will
receive the An-Con shares.
The $.22 cents per share valuation for the Aaron shares
exchanged was determined by (a) a separate fair valuation of
current assets, which included (i) discounted value of
receivables (ii) market value of inventory at estimated selling
price, less cost of disposal and reasonable profit allowance,
(iii) pre-paid expenses and security deposits at present value;
(b) non-current assets of plant, property and equipment at
current replacement cost; (c) intangible assets at present value
of future benefits; (d) present value of liabilities, accounts
and note payable and long term debt. The amount of goodwill
was determined by comparing the financial position of Aaron at
December 31, 1994 with the financial position of similar
companies in the same industry.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. DESCRIPTION OF BUSINESS (continued)
Purchase - Suncoast Design
On November 16, 1995 the Company purchased the business of
Suncoast Design Service for $96,500. Suncoast is in the
business of designing and maintaining assembly line equipment
for manufacturing companies (machine shop).
Suncoast has moved its equipment onto the premises of the
Company and continues to bill its previous customers in the
Company's name.
Purchase - ECU Technology
On December 15, 1995 the Company purchased the technology to
manufacturer, a 30 watt electrosurgical coagulation device (ECU)
for $185,000; $100,000 at closing and $85,000 in notes payable
over eighteen months at 10% with monthly payments of $5,105.85.
The device is to be made by a third party manufacturer that the
Company has a one year contract with to produce the unit for a
fixed price. As part of the agreement the Company hired the
individual that brought the technology to the Company as a
salesman. This individual lent the Company $30,000 to be paid
back at 10% interest over 2 years.
NOTE 3. PROPERTY AND EQUIPMENT
As of December 31, 1995, property and equipment consisted
of the following:
Equipment $ 1,173,100
Property held under capital leases 55,000
Building 637,500
Furniture and Fixtures 111,200
Leasehold Improvements 24,400
2,001,200
Less: Accumulated Depreciation( 768,800)
1,232,400
Machinery under construction 37,100
$ 1,269,500
NOTE 4. LEASE AGREEMENTS
On February 28, 1995 an agreement was entered into with the
landlord of one Huntington Quadrangle, Melville, New York for a
new lease on the same premises beginning February 1, 1995 and
extending to January 31, 1997. The annual rental is $24,000
payable $24,000 upon signing the lease, and $1,000 per month for
24 months. The landlord and the Company have signed general
releases absolving each of any past due debts or damages. The
Company has written off prior rents charged to operations in the
amount of $54,200. Annual rental expense was $24,000, for the
year ended December 31, 1995 and 1994 for the parent Company,
An-Con.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. LEASE AGREEMENTS (continued)
The following is a schedule of future minimum rental
payments as of December 31, 1995:
Amount
1996 $ 24,000
1997 2,000
$ 26,000
Aaron had rent expense of $23,400 for the period January 1,
1995 to June 26, 1995 when Aaron purchased the building.
Total consolidated rent expense for the Company was $47,400
in 1995 and $24,000 in 1994, unconsolidated.
Capital leases
The Company is the lessee of transportation and telephone
equipment under capital leases expiring in various years through
May, 1997. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair value of the assets. The assets are
amortized over their estimated productive lives. Amortization
of assets under capital leases is included in depreciation
expense for 1995 and 1994. This amortization amounted to
$10,000 and $0 for 1995 and 1994 respectively.
The following is a summary of property held under capital
leases:
1995 1994
Transportation $ 38,800 $ 38,800
Telephone equipment 16,200 16,200
55,000 55,000
Less: Accumulated
depreciation (25,500) (10,000)
$ 29,500 $ 45,000
Minimum future lease payments under capital leases as of
December 31, 1995 for each of the next four years and in the
aggregate are:
Amount
1996 $ 34,400
1997 3,200
1998 --
1999 --
Total minimum lease payments 37,600
Less: Amount representing interest6,000
Present value of net minimum lease
payments $ 31,600
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. LEASE AGREEMENTS (continued)
The interest rates on the capitalized leases range between
9.73% and 15.10% and are imputed based on the lower of the
Company's incremental borrowing rate at the inception of the
lease or the lessor's implicit rate of return.
The capital leases provide for purchase options. Generally,
purchase options are at prices representing the expected fair
value of the property at the expiration of the lease term.
NOTE 5. ACCRUED BONUS
For the year 1995 accrued bonuses earned by the officers and
employees of the Company amounted to $72,000. The bonus
arrangement based on employment contracts calls for 10% of the
profits of Aaron over $200,000 to 1% of the profits of Aaron
over $300,000 to be paid to certain employees.
NOTE 6. NOTES PAYABLE-OFFICERS
The Chief Executive Officer (CEO) and the President made cash
loans to the Company during the period October 12, 1990 to
December 31, 1993 of $159,000 and $21,500, respectively. In
addition to these loans, the CEO advanced his own cash of
$76,100 in the form of loans for product development, travel
and other expenses. Interest on these loans were at 9% to 12%
and has been accrued from inception. This interest is shown as
part of accrued interest payable. During 1995 Mr. Speiser
received $99,400 in payment of principal and interest on his
loan. His loan balance at December 31, 1995 was $ -0- and
accrued interest was $73,800.
NOTE 7. INTANGIBLE ASSETS
At December 31, 1995, the intangible assets consisted of
the following:
Balance Balance
Beginning Additions, at end ofAccumulated
of Period at cost Write-Offs Period Amortization
Classification:
Patents,
trademarks,
and copyrights
Patent rights $ 250,000 $ (250,000) $ -0-$-0-
(Bar code reader)
Patent rights 59,400 59,400 8,900
(Multifunction
Cautery)
Patent rights 59,900 $ 11,600 -0- 71,500 44,400
(cauteries)
Patent rights
(ECU) -0- 185,000 -0- 185,000 3,100
$ 369,300 $ 196,600 $(250,000) $ 315,900 $ 56,400
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. INTANGIBLE ASSETS (continued)
The cost of patents, trademarks, and copyrights acquired are
being amortized on the straight-line method over their
remaining lives, ranging from 2 to 5 years. Amortization
expense charged to operations in 1994 and 1995 was $3,000 and
$14,300 respectively.
Balance Balance
Beginning Additions, at end ofAccumulated
of Period at cost Write-Offs Period Amortization
Goodwill
Goodwill $ -0- $ 335,800 $ -0- $ 335,800$ 86,200
(Purchase
Aaron)
Goodwill -0- 15,500 -0- 15,500 300
(Purchase
Suncoast
Covenant not
to compete)
(Purchase
Suncoast) -0- 20,000 -0- 20,000 1,200
$ -0- $ 371,300 $ -0- $371,300 $ 87,700
Goodwill represents the excess of the cost of Companies
acquired over the fair value of their net assets at dates of
acquisition and is being amortized on the straight-line method
over 5 years. Amortization expense charges to operations for
1994 and 1995 and 1995 was $-0- and $87,700, respectively.
NOTE 8. LONG-TERM DEBT
The long term debt of the Company includes the convertible
debentures and notes payable of the Company. As of April 21,
1987, the Company had sold 1,711 convertible debentures units.
Each unit consisted of $1,000 subordinated debentures and 50
common stock warrants.
As of December 31, 1995, 1,633 units of debentures had been
converted into common shares of An-Con Genetics, Inc. The number
of outstanding debentures was 78 units. On October 7, 1994, the
Company made an offer to debenture holders to convert each
debenture and accrued interest into 500 restricted shares of
common stock. The offer was valid for 45 days. The Company
extended the offer and in 1995 seventy bonds were redeemed for
shares.
As of December 31, 1995 the Company had not paid the interest due
on the convertible debentures for the semiannual periods ending
in November, 1989 to November , 1995. The amount of unpaid
interest was $36,200.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. LONG-TERM DEBT (CONTINUED)
Events of Default are defined in the indenture as
being: (a) default for 30 days in payment of any interest
installment when due, and default in payment of principal
(or premium, if any) when due; (b) default for 60 days
after written notice to the Company by holders of 25% in
principal amount of the outstanding debentures in the
performance of any other covenant of the Company in the
indenture; and (c)certain events of bankruptcy, insolvency
and reorganization of the Company. If an Event of Default
shall occur and be continuing, the holders of not less
than 25% in principal amount of the outstanding debentures
may declare the principal of all debentures to be due and
payable. Under the terms of the indenture, no periodic
evidence is required to be furnished as to the absence of
default or compliance with the indenture.
The holders of a majority in principal amount of the outstanding
debentures may direct the time, method and place of conducting
any proceeding for any remedy available to the holders. The
right of a holder of any debenture to institute a proceeding with
respect to the indenture is subject to certain conditions
precedent, including the provision of notice of indemnification
to the debenture holders made by the Registrar. The holders of a
majority in principal amount of the outstanding debentures may on
behalf of the holders of all debentures waive any past default
and its consequences under the indenture, except a default in the
payment of the principal of, or interest on, any debenture or a
default in respect of the conversion right of the debenture
holders.
As of December 31, 1995, the bondholders had made no declaration
that the principal was due and payable.
<PAGE>
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. LONG-TERM DEBT (continued)
8% - Bonds payable due in 1997 interest
payable semi-annually in May and November
in default. 77,900
10% - Mortgage payable to former landlord
for purchase of property at 7100 30th Avenue
North, St. Petersburg, Florida on June 26,
1995 for $500,000 payable in monthly installments
of $5,673.06 inclusive interest until July 1,
1998 when a balloon payment of $ 442,733 is due. 493,900
10% - Note payable for the purchase of the
ECU technology at $5,104.85 per month self-
liquidating for 18 months beginning January 15,
1996 and extending until June 15, 1997. 85,000
10% - Note payable in connection with the
purchase of the ECU Technology at $1,384.35 per
month for 24 months self-liquidating beginning January
15, 1996 and extending until December 15, 1997. 30,000
6.5% - Note payable over 2 years in connection
with the purchase of Suncoast Machine Shop on
November 16, 1995 payable at $630.80 per week
self-liquidating with the last payment due
November 5, 1997. The original amount of the
note was $61,500.00. 58,200
0% - Loan payable over 2 years in connection
with the purchase of Suncoast Machine Shop on
November 16, 1995 payable at $192.31 per week
self-liquidating with the last payment due November
5, 1997. The original amount of the note was
$20,000.00. 18,800
9% - Note payable to insurance premium
finance Company at $5,661.00 per month
for 2 months. 11,300
775,100
Less: Current portion (132,000)
Long Term Debt $ 643,100
The following are maturities of long term debt for
each of the next 5 years:
1996 $ 132,000
1997 186,900
1998 456,200
1999 --
2000 --
$ 775,100
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. DISCONTINUED OPERATIONS
The Company's unconsolidated subsidiaries, Automated
Diagnostics and Xenetics Biomedical, discontinued operations in
1987 and 1989, respectively. In view of the above and the
Company's lack of finances, the previously agreed upon mergers
have not taken place. However, the Company has continued the
development of Omnifix. In consideration of the Company's
failure to consummate its agreement to merge, An-Con intends to
deliver 153,333 shares of its common stock to Automated and
Xenetic shareholders on an adjusted basis.
NOTE 10. WARRANTS
As of December 31, 1995, the Company had no outstanding warrants.
(a) Consulting Compensation Plan
On June 24, 1994, the Company filed a services and
consulting compensation plan on Form S-8 with the SEC.
Pursuant to the plan the Company issued 350,000 warrants with
the right to purchase shares at $1.50 for consulting and
legal costs of the filing. As part of the plan the Company
registered 85,000 shares for the payment of legal services.
To date 120,500 warrants have been exercised. Because the
exercise of certain warrants was not paid for promptly, the
Company rescinded the arrangement in October, 1994. As of
January 25, 1995, all remaining warrants have been canceled.
NOTE 11. NET OPERATING LOSS CARRYFORWARDS
The Company's accounting policies require the recognition of a
deferred tax asset for the operating loss carryforward as follows:
Year loss Loss Expiration Estimated
incurred Amount Date Tax Asset
1983 $ 376,000 1998 $ 132,000
1984880,000 1999 308,000
1985764,000 2000 267,000
1986301,000 2001 105,000
1987730,000 2002 255,000
1988757,000 2003 265,000
1989374,000 2004 131,000
1990382,000 2005 134,000
1991246,000 2006 86,000
1992 1,004,000 2007 352,000
1993465,000 2008 163,000
1994 1,197,000 2009 419,000
1995 637,200 (a) 2010 223,000
Total $8,113,200 2,840,000
Deferred tax
valuation allowance (2,840,000)
$ -0-
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 11. NET OPERATING LOSS CARRYFORWARDS (continued)
(a) An-Con's unconsolidated loss for the year ended December
31, 1995.
$8,113,200 of losses are available to offset future taxable
income and may have future benefits. Because of the history of
losses from operations, the management believes it is more
likely that the estimated tax asset of $2,840,000 (resulting
from the loss carry forward) will not be realized. Thus, a
valuation allowance of $2,840,000 (100%) is set up to reduce the
tax asset. However, if the Company achieves sufficient
profitably to utilize a portion of the deferred tax asset, the
valuation allowance will be reduced through a credit to income.
Where an ownership change has occurred, Section 382 operates to
limit the annual use of a corporation's NOL but does not
eliminate the carryforward. In each post-ownership change year,
the corporation can use its NOL carry forwards, up to the amount
of the "Section 382 Limitation," to offset annual income.
Pursuant to Section 382(b), the "Section 382 Limitation" equals
the value of the corporation (immediately before the ownership
change, Sec. 382(e), multiplied by the long term tax exempt rate
(the highest Long Term AFR in effect for any month in the three
calendar month period ending with the month of the change, Sec.
382(f)). If the corporation does not have income for the year at
least equal to Section 382 limitation, the unused portion of
the limitation is carried forward to the following year.
Pursuant to the Internal Revenue Code, IRC. Sec. 368(a), the
acquisition of Aaron by An-Con is a considered Type B
reorganization. The transaction should not limit the net
operating loss carryforward of Aaron.
At December 31, 1995, Aaron had the following net operating loss
carryforwards available:
Year of Expiration
Loss Date Amount
1988 2004 $ 131,434
1989 2005 371,386
1990 2006 16,198
Total $ 519,018
The amount of loss carryforward utilized to offset the
taxable income of Aaron in 1995 was $483,400, which resulted in
a tax saving of $175,100. Based on the profitable operations of
the five years ended December 31, 1995 and management's
assessment of Aaron's future prospects, it is more likely than
not that net deferred taxable assets will be realized through
the future taxable earnings. Based on an estimated tax rate of
35.5%, the tax benefit of the unutilized net operating loss
carryforward of Aaron is estimated to be $183,300.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 12. RETIREMENT PLANS
The Company provides a tax-qualified profit-sharing retirement
plan under sec. 401k of the IRC. (the "Qualified Plans") for the
benefit of eligible employees with an accumulation of funds for
retirement on a tax-deferred basis and provides for annual
discretionary contributions to individual trust funds. The
Company has made no contributions during 1994 and 1995 to the
plan.
NOTE 13. RELATED PARTY TRANSACTIONS
During 1995, A company that is controlled by a recently elected
board member sold to the Company materials that went into the
production of certain of the Company's products. The value
of these materials sold to the Company for 1995 was $158,600.
NOTE 14. PURCHASE OF BUILDING
On June 26, 1995 the Company, exercised its option to purchase
the building it occupied for $625,000. The purchase was
financed as follows:
Cash $ 47,000
Purchase money mortgage 500,000
An-Con shares
(60,000 x $1.30 per share) 78,000
Total purchase price $ 625,000
(a) Payment of principal and interest at 10% payable monthly at
$5,373.06 until July 1, 1998 when a balloon payment of
$439,074.27 is due.
(b) The An-Con shares are restricted for 2 years and are being
held pursuant to an escrow agreement. The agreement further
restricts the release of the shares until the seller takes such
action as is necessary to further investigate, define and
remediate such contamination that exists on the property and is
referred to in environmental reports pursuant to a Remedial
Action Plan approved by the State of Florida's appropriate
agencies.
Two years from the date of Closing, if Seller and Guarantors
have not defaulted under or been in breach of any of their
obligations to Buyer, Buyer shall obtain and deliver to Escrow
Agent additional shares of Stock if the Closing Market Price of
the Stock on the thirtieth day prior to such date shall be less
than $78,000.00.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Environmental conditions -Purchase of Building
As part of the purchase of 7100 30th Avenue North, St.
Petersburg, Florida (manufacturing facility) the seller
acknowledged it had previously conducted assessments to document
environmental conditions existing on the property, the results
of which are set forth in a June 23, 1994 Contamination
Assessment Report (Project No. 94170501) and a January 27, 1995
Contamination Assessment Addendum (Project No. 950111302) (the
"Environmental Reports"). As a result of the Environmental
Reports, a recommendation was made that a Remedial Action Plan
be developed for the property which would include removal of
contaminated soil in two locations on the property.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued)
Environmental conditions -Purchase of Building
The Seller guaranteed (the "Environmental Guaranty") at its sole
cost and expense to undertake through a qualified environmental
engineering firm such action as is necessary to further
investigate, define and remediate such contamination that exists
on the property and is referred to in the Environmental Reports
pursuant to a Remedial Action Plan approved by the State of
Florida Department of Environmental Protection (DEP) and any
other appropriate agencies (the "Environmental Work"). The
environmental work shall begin promptly upon State of Florida
approval of the intended environmental work, which approval and
remediation will be diligently pursued and accomplished.
Satisfaction of the Environmental Guaranty shall be evidenced
by delivery to Buyer of a Site Completion Rehabilitation Order
(SCRO) or its equivalent document from DEP approving completion
of the Environmental Work.
Environmental conditions -Purchase of Building (continued)
In January 1996, the State of Florida approved a Remediation
Plan and work should begin in the 2nd Quarter of 1996.
No assessment can be made at this time if there will be any cost
to the Company if the Seller does not complete the work required
in the plan approved by the State of Florida.
Leases
The Company leases a portion of its capital equipment and
certain of its administrative facilities under operating leases
that expire at various dates through 1997. Rental expense was
$47,400 in 1995 and $24,000 in 1994. Minimum rental commitments
under all non-cancelable leases with an initial term in excess
of one year are payable as follows: 1996 - $58,000; 1997 -
$5,200; 1998 - $ 0; 1999 - $0; 2001 and beyond $-0-.
Commitments for construction or purchase of property, plant, and
equipment approximated $200,000 at December 31, 1995.
Third Party Liability
In 1988, An-Con was the principal shareholder of Xenetics, Inc.
At that time, Xenetics had outstanding payroll tax liabilities
of approximately $15,000, a liability which may be considered an
obligation of the Company.
Employment Agreements
On September 8, 1995 the Company either executed new employment
agreements with key employees or revised old employment
agreements with its executives. These six agreements are for
terms from 2-5 years and call for salaries of $35,000 to
$118,335. Bonus arrangements call for 10% of the profits over
$200,000 for the Chairman to 1% of the profits over $300,000 for
the international sales representative for profits of Aaron
only.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued)
Employee Benefit Plans
Subsequent to December 31, 1995, the Company established a stock
option plan on February 15, 1996 (hereafter referred to as the
EOP plan) under which officers, key employees and non-employee
directors may be granted options to purchase shares of the
Company's authorized but unissued Common Stock. Under the plan,
the option purchase price is not less than fair market value at
the date of grant. The Company accounts for stock options in
accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In accordance with SFAS No. 123, Accounting for
Stock-Based Compensation," the Company intends to continue to
apply APB No. 25 for purposes of determining net income and to
adopt the proforma disclosure requirements for fiscal 1996.
Employee Benefit Plan
Options currently expire no later than five years from the
grant date. When proceeds are received by the Company from
exercises, they are credited to Common Stock and Capital in
excess of par value. Additional information with respect to EOP
Plan Activity was as follows:
Shares Outstanding Options
available Number Aggregate
for options of shares Price
December 31, 1995 $ -0- $ -0- $ -0-
February 15, 1996 337,000 337,000 379,000
Grants 337,000 337,000 379,000
Exercise -0- -0- -0-
Cancellations -0- -0- -0-
The exercise price for options outstanding under the EOP Plan at
February 15, 1995 was $1.125. These options will expire if not
exercised on February 15, 2001.
Legal Proceeding
Scura
A lawsuit was brought against the Company by a former consultant
in the Supreme Court of the State of New York, Suffolk County,
in December 1991 alleging breach of a financial consulting
agreement and seeking damages of $3,000,000. In 1993, a
settlement had been reached between the parties whereby the
Company had agreed to, issue 100,000 (pre-split) shares to the
plaintiff in full settlement of any and all claims. Such right
being subject to the consent of the underwriter. Mr. Scura
subsequently refused to execute the stipulation of settlement.
Company counsel is of the opinion that Mr. Scura's claim has no
merit and does not present a material contingent liability.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 15. COMMITMENTS AND CONTINGENCIES (continued)
Speiser
On December 29, 1992, Robert Speiser, the then Chief
Executive Officer of An-Con, obtained a confession of judgement
in the Supreme Court, State of New York, counties of Suffolk
and Westchester for amounts due on loans to the Company of
$92,239 and $190,957 inclusive of interest at 12% to May 27,
1992 and 9% thereafter. These loans represent amounts claimed
by Mr. Speiser to have been expended on behalf of the Company
and funds loaned to the Company. As reported to the Board of
Directors, Mr. Speiser's actions were motivated solely to deter
threatened action by the landlord to file a judgement at that
time of $41,700 in rental arrears. Mr. Speiser has indicated
that he does not intend to enforce this judgement. On March
29, 1993 and in subsequent letters of instruction to the
Sheriff of Suffolk County, Mr. Speiser requested that the
execution of the above-mentioned judgements be held in abeyance
for a 60 day period, until August 30, 1993. On February 28,
1994, the executive order expired. As of December 13, 1995,
the Company had repaid $235,100 of the principal amount upon
which the aforesaid judgements were based.
MegaDyne
On March 14, 1996 MegaDyne Medical Products, Inc. a Utah
Corporation filed a complaint for injunctive relief and damages
for patent infringement (35 USC.S. 271) in the U.S. District
Court, District of Utah, Central Division. MegaDyne asserts
that Aaron has used its process for creating an Electro-
surgical knife coated with a non-stick material. MegaDyne
states in its suit it is entitled to an accounting from Aaron
and to recover the damages sustained by MegaDyne as a result of
infringing products. Such damages include, but are not limited
to, lost sales and profits due to sales of the infringing
products and a reasonable royalty for use of the patented
invention. MegaDyne is presently unable to ascertain the full
extent of monetary damages it has suffered by reason of Aaron's
aforesaid acts of infringement.
As of March 31, 1996 the Company sold approximately $90,000
of the Aaron Products called Resistick. Aaron counsel has
stated "that scientific testing has proven that the Aaron
Medical electro-surgical blade is resistive in nature. Thus,
there is no capacitive coupling of radio frequency energy as
recited in independent claims 1 and 5 of U.S. 4,785,807.
Accordingly, there appears to be no literal infringement of
the patent in suit. However, without benefit of the
prosecution history, an authoritative opinion as to
infringement under the doctrine of equivalents is not possible.
Initial investigation suggests that the Aaron Medical
electro-surgical blade does not include a second coat of non-
stick fluorinated hydrocarbon material as recited independent
claims 1 and 5." As claimed by MegaDyne.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. SUBSEQUENT EVENTS
OmniFix Formula
The Company entered into an agreement with certain parties
("developers") who had developed and were sole owners of a
histological, mercury and formaldehyde-free fixative
("fixative"), on February 20, 1988. The Company received the
sole and exclusive right to manufacture, market and distribute
the fixative throughout the world.
The agreement shall remain in full force and effect for a
period of five years and shall be renewed automatically for
periods of three years, unless otherwise terminated on consent
of the parties, or if less than 4,000 gallons of OmniFix are
sold in any given year and the licensor is not otherwise
compensated for the amount of royalty payable resulting from
the deficiency. The Company sold 4,028 gallons in 1995.
New Company Products
The Company intends to substantially replace OmniFix II with
OmniFix 2000, which, in addition to preserving thin tissue
specimens, also provides preservation of thicker/larger
tissues. The Company is presently initiating test marketing of
this new product and plans to file a new patent application
with the U.S. Patent office.
NOTE 16. SUBSEQUENT EVENTS
Bank Line of Credit
On March 16, 1996, the Company entered into a three month
agreement with a commercial bank for a line of credit of
$100,000. Interest is to be paid at 2.5% over the banks prime
rate.
Stock Option Plan
On February 15, 1996, the Company established an employee
stock option plan (EOP) by issuing 337,000 warrants to purchase
the Company's shares or $1.125 per share expiring February 15,
2001.
NOTE 17. INDUSTRY SEGMENT REPORTING
The Company operates predominantly in one industry segment.
The Company designs, develops, manufactures and markets battery
operated medical cauteries and related products at various
levels of integration. The Company sells its products directly
to distributors worldwide and also has private label
arrangements with hospital and healthcare companies.
The Company's principal markets are in the United States,
Europe, and South America, with the U.S. and Europe being the
largest based on revenues. The Company's major products
include cauteries, Benda-A-lights, nerve locators, and
reusable pen lights and electrodes. Cauteries disposable and
replaceable account for 50% of the Company's sales.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 17. INDUSTRY SEGMENT REPORTING
Geographic and segment information for the year ended
December 31, 1995 is presented in the following table.
Operating
Income Identifiable
Sales Loss(1)(3) Assets(2)
1995 - (in thousands)
Geographic Area
United States $ 4,226 $ 22 $ 3,601
Europe 1,245 6 -0-
Latin America 50 1 -0-
Other -0- -0- -0-
$ 5,521 $ 29 $ 3,601
Segment
Medical Products $ 4,325 $ 189 $ 2,831
Non medical products 1,196 (160) 770
$ 5,521 $ 29 $ 3,601
(1) Allocable operating income was determined by sales
percentage by geographic area.
(2) The Company had no assets or liabilities outside the
United States, in the two years ended December 31, 1995.
All assets were identified as United States source.
(3) Allocable operating expenses were determined by a percentage
of total sales by segment.
One significant customer accounted for 17% of revenues in 1995.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 17. INDUSTRY SEGMENT REPORTING (continued)
(4) Allocation of assets was done by sales percentage.
1994 - For 1994 the Company had sales of one product of $85,000,
all in the United States. However, Aaron the Company's
subsidiary which was acquired in January 1995 had domestic and
international sales of $3.3 million and $800,000 respectively.
Income for Aaron by segment was based on sales and is $264,000
and $54,000 for medical and non-medical respectively. Income
for Aaron by geographic area was $258,000 and $60,000 for
domestic and international sales respectively. All assets were
located in the United States.
During 1995, a substantial portion of the Company's
consolidated net sales and consolidated income from operations
was derived from foreign operations. Foreign operations are
subject to certain risks inherent in conducting business abroad,
including price and exchange controls, limitations on foreign
participation in local enterprises, possible nationalization or
expropriation, potential default on the payment of government
obligations with attendant impact on private enterprise,
political instability and health care regulation and other
restrictive governmental actions. Changes in the relative value
of currencies take place from time to time and could adversely
affected the Company's results of operations and financial
condition. The future effects of these fluctuations on the
operations of the Company's and its subsidiaries are not
predictable.
