U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
Form 10-KSB
(MarkOne)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31,1996
[ ] 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 (IRS Employer
of incorporation or organization) Identification No.)
One Huntington Quadrangle, Suite 1N11, Melville, NY 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
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 $7,485,900
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 12, 1997 was $8,252,367.
(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 8,288,368.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference.
An-Con Genetics, Inc.
1996 Form 10-KSB Annual Report
Table of Contents
Part I
Item 1. Description of Business . . . . . . . . . . .
Item 2. Properties. . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . .
Part II
Item 5. Markets and Market Prices . . . . . . . . . .
Item 6. Managements Discussion and Analysis . . . . .
Item 7. Financial Statements (See Financial Section)
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . .
Part III
Item 9. Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . .
Item 10. Remuneration. . . . . . . . . . . . . . . . .
Item 11. Security Ownership of Certain Beneficial Owners
and Management of An-Con. . . . . . . . . . .
Item 12. Certain Relationships and Related Transactions . .
Item 13. Exhibits and Reports on Form 8-k. . . . . . .
<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 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. ("Aaron") a St.
Petersburg, Florida based Company engaged in the manufacturing
and distributing of medical products.
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.
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. No significant sales have been generated by
the company's efforts.
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.
Battery Operated Cauteries
The Company's subsidiary, Aaron Medical Industries, Inc., 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. 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 tissue and/or
coagulate blood 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 significant cost savings. 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 1997. 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 Company has obtained pre-marketing
approval from the FDA for this device and the product is being
marketed.
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 essentially, exclusively on
capacity coupling to cause hemostasis during surgery, the
Company's products demonstrate 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 growths in the doctor's office. This unit was
designed with sufficient base technology to move towards
manufacturing more powerful office based generators without
requiring the additional time consuming expense of total
redesign. The Company completed the first year of a
distribution agreement with Dermatology Lab and Supply,
which included a purchase order for 1000 units plus
accessories. Sales in 1996 totaled in excess of $800,000.
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.
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 Allegiance, General
Medical, and Bergin 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.
Many medical products are subject to guidelines, regulations
and testing requirements by federal and state authorities
including the Food and Drug Administration ("the FDA"), the
Department of Agriculture and the National Institute of Health.
In the United States, the FDA imposes standards which may
affect the clinical testing, manufacture and marketing of
certain products. Compliance with the standards and
requirements involving product safety, efficacy and labeling
may prove to be very expensive and time consuming. No
assurance can be given that the regulatory authorities will
render the requisite approval of the marketing of some of the
products that the Company hopes to sell. In addition, in the
manufacture of certain products, the FDA requires compliance
with good manufacturing practices before the marketing of the
product can be undertaken; these requirements could delay or
prevent such products from reaching the market place. Other
countries usually impose regulatory requirements concerning
the development, testing, marketing and manufacture of certain
products which influence the overseas sales potential of these
products.
In June, 1995 pursuant to an inspection of the facilities of
the Company's subsidiary Aaron, the FDA issued a warning letter
advising of federal good manufacturing practices ("GMP")
deficiencies. The letter cited, among other things, the
Company's failure (a) to follow its own complaint handling
procedure to immediately review, evaluate, investigate and
document complaint; (b) to evaluate significant equipment
changes in manufacturing processes and quality assurance tests;
(c) to have and implement documented formal change control
procedures for changes made to devices or manufacturing
processes; (d) to have, follow and document conformance with
appropriate written finished device test procedures assuring
devices meet all finished specifications prior to distribution;
(e) to have, follow and document conformance with written
procedures for acceptance of components; (f) to conduct plan in
periodic orders of the quality assurance and good manufacturing
practice programs in accordance with written procedures; (g) to
establish and implement adequate record keeping procedures.
Until such deficiencies were removed the FDA indicated it was
in no position to restore GMP standing to the Company or permit
approval of any pending pre-market submissions by the Company.
On July 12, 1995, the FDA indicated that while the Company's
response appeared adequate, further verification was needed
before the FDA would be in a position to support the approval
of any pending pre-market submissions, or related Export
Certificates for the Company's's products. After follow-up
correspondence, on December 15, 1995, the FDA acknowledged that
the Company's corrective action plan dated November 27, 1995,
appeared adequate. However, the FDA determined that it was
necessary to set another evaluation date for May, 1996 to
ascertain whether the Company was meeting GMP guidelines. This
date was extended to March, 1997 when the FDA made its
inspection. The Company is waiting for the written results of
that inspection. The FDA inspector stated that the Company now
meets required federal guidelines. Until now all product
development has been done on products which have not required
FDA approval.
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 research and
development of Omnifix 2000 and Aaron products during the years
1996 and 1995 totaled $105,700 and $121,900, respectively.
The Company has not incurred any direct costs relating to
environmental regulations or requirements.
Employees
In January 1995 the Company acquired Aaron which then gave the
Company approximately 60 employees. Presently the Company has
a total of 75 employees. These consist of 4 executives, 5
administrative, 5 sales, and 61 technical or factory employees.
The Company employs an unsalaried Vice-President for Far
Eastern affairs.
SIGNIFICANT SUBSIDIARY - AARON MEDICAL INDUSTRIES, INC.
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 and 99%
of Aaron shareholders, in the 4th quarter of 1996, rejected a
cash offer for their Aaron shares and accepted the An-Con
shares. 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.
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.
RECENT ACQUISITIONS 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 was in the business of designing and maintaining
assembly line equipment for manufacturing companies (machine
shop). The Company paid $15,000 down and issued notes payable
of $81,500 payable at $823.11 per week over two years.
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 of existing
equipment. Other than completing work begun in 1996 for
outside customers, Suncoast is now only doing internal work for
Aaron. This helps the Company develop prototype products in a
more expeditious manner and allows it to set up manufacturing
operations sooner.
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 being made by a third party manufacturer with
which the Company had a one year contract to produce the unit
for a fixed price with a provision for a second year at an
agreed upon price. The Company has hired an electrical
engineer to head up the project of moving production into the
St. Petersburg facility by the second quarter of 1997.
Aaron has also hired the former sales director for 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.
The Company has developed a 120 watt electro surgical
coagulation device (ECU) to be marketed in the second half of
1997. Through December 31, 1996 the Company spent $93,000 in
the development.
During 1996, the Company had spent $118,400 to further develop
the 30 watt version of the device.
Probe Scope Technology
In October 1996, the Company purchased a non-medical fiberoptic
devise for use in the maintenance and automotive industries.
The purchase price for the Technology was $37,400 payable in 48
equal monthly installments.
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 leased on a month to month
basis because its lease expired on January 31, 1997, the
Company is presently negotiating a new lease with the same
landlord. In February, 1995, a 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 this 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. Annual rental payments
increased each year as the requirement for additional space
increased. 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
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 two 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 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.
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.
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 to develop a Remedial Action
Plan and remove the contaminated soil from the property.
The Seller guaranteed to remediate the contamination that
exists on the property, at its sole cost and expense, through
a qualified environmental engineering firm. The Environmental
work had to commence promptly pursuant to a Remedial Action
Plan submitted by the seller and approved by the state of
Florida Department of Environmental protection (DEP) and any
other appropriate agencies (the "Environmental Work").
In January 1996, the seller obtained the approval of the
remediation plan from the State of Florida. The environment
work has not yet commenced.
The purchase agreement requires that the seller complete the
environmental work within two years from the date of approval
by the State of Florida. The satisfaction of the
Environmental Guaranty will 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.
In order to indemnify itself against any future costs of
environmental work and any unreasonable delay, the Company
may:
1. Attach the escrowed 60,000 shares of An-Con Genetics, Inc.
valued at $78,000, received by the seller as a part of the
selling price.
2. Offset any future cost of environmental work, including
attorney's fees, against the scheduled balloon payment on the
purchase money note and mortgage.
Based on the nature and the amount of work involved in the
remediation plan, the management of An-Con has estimated the
present value of the cost of environmental work to be less
than $100,000. Since the cost of the environmental work will
be paid by the seller, no expense or liability has been
accrued for such work. The outstanding balance of purchase
money note, $460,610, and the market value of the 60,000
shares of An-Con that are in escrow provide security interest
against any contingent liability.
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 on the Melville, NY lease.
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, 1996, 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 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 6,667
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 February 28, 1997 the Company has sold approximately
$550,000 of Resistick. The Company's counsel has advised
"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, it does not function
essentially, exclusively by capacitive coupling of radio
frequency energy as recited in independent claims 1 and 5 of
MegaDyne's U.S. patent number 4,785,807.
Accordingly, the Company believes there to be no literal
infringement of the MegaDyne 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.
On August 27, 1996 the district court for the district of
Utah ruled "that the plaintiff (Megadyne) failed to establish
a reasonable likelihood of success on the merits in the
action for infringement" and has denied MegaDyne's motion for
a preliminary injunction.
Item 4. Submission of Matters to a Vote of Security Holders
No Meeting of the Shareholders was held during 1996.
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
1996
1st Quarter 1 3/16 1 1/8
2nd Quarter 1 7/16 1
3rd Quarter 1 1/4 1 1/16
4th Quarter 1 15/16 1 1/16
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 12, 1997, the Closing bid for An-Con's Common Stock as
reported by the NASD Bulletin Board was $1.16 per share. As of
March 12, 1997, the total number of shareholders of An-Con's
Common Stock was approximately 1,000 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 1996 increased to $7.5 million from
$5.5 million in 1995. The purchase of Aaron Medical accounted
for $7.5 million of 1996 sales. For 1996 there was a 36%
increase in sales, 61% of the increase in sales of $2.0 million
was attributable to new company products. Gross profit
percentage increased from 42% in 1995 to 45% in 1996
principally due to a reduction in labor cost attributable to
outsourcing more finished goods.
Cost of goods sold increased by 29% from $3.2 million to $4.1
million in 1995 to 1996 respectively, due to increased sales
volume. During 1996 and 1995, Aaron's family of cauteries
accounted for 39% and 49% of sales, respectively, and 33% and
36% of cost of goods sold for 1996 and 1995, respectively.
Although, research and development expenses decreased by 13%
from $121,900 to $105,700 from 1995 to 1996, respectively. The
Company continued to invest in the development of ECU devices,
a flexible scope, OmniFix 2000, the MFC (multi-function
cautery) and other Aaron products which is evidenced by
acquisition cost in 1996 of $156,600.
The increase in net interest of 10% amounting to $7,100 was
mainly attributable to the purchase of technology at the end of
1995.
The Company's effective income tax rate would have been 35%
except that both An-Con and Aaron have loss carryforwards. For
1995 Aaron recognized $183,300 in tax benefit for future years.
Aaron's past five years have been progressively more profitable
and it is the Company's belief that it will be able to use An-
Con's remaining carryover losses to offset future consolidated
gains.
Other expenses for selling, general and administrative
increased by 13% from $1.2 million in 1995 to $1.3 million in
1996 which is attributable to the increase in sales.
operating expenses as a percentage of sales were 37% in 1996 as
compared to 44% in 1995. The actual operating expenses went up
from $2.4 million to $2.7 million from 1995 to 1996 which is
mainly attributable to administrative salaries.
Income from operations increased to $480,400 in 1996, from a
loss of $219,500 in 1995. Income from operations increased by
318% or from a loss of 3.9% of sales to a gain of 6.4% of
sales.
Net income of the Company in 1996 was $407,300, as compared to
a loss in 1995 of $154,100. Income improved by $561,400 from
1995 to 1996 which included an extraordinary item of $76,800
(gain from settlement of debt in 1995).
Income taxes were offset in 1996 by an operating loss
carryforward benefit of $158,300.
Professional services decreased by 30% from 1995 to 1996.
These services decreased because 1995 services were mainly
attributable to legal and auditing associated with the Aaron
acquisition and the preparation of securities filings.
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 intends to continue marketing its
products, targeting different regions of the world, while
returning to major markets for increased market exposure and to
introduce new products. In 1996, the Company exhibited for
the first time in the United Kingdom, the United Arab Emirates
(Middle East) and in February 1997, Bangkok, Thailand (Far
East).
During 1996, international sales of the Aaron Medical product
line continued to increase. These sales were $1.51 million
which represented 20% of total sales. This compares favorably
to 1995 where total international sales were $1.30 million
representing 22% of total sales. The increase from 1995 to
1996 represents a 21% 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.
New product development and improvements to the Company's
facility required by regulatory agencies in 1996 and projected
into 1997 amounted to $550,000. These expenditures will be
funded primarily through internal cash flow and bank financing.
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 has secured a fourteen month $400,000
credit facility with a local commercial bank in the first
quarter of 1997 and a $150,000 four year note to purchase fixed
assets with interest at 1% over prime.
Financial Condition
With the acquisition of Aaron, the Company's financial
condition has begun to improve. As of December 31, 1996, cash
totaled $120,900 down from $165,800 at December 31, 1995. Cash
generated from operating activities rose to $425,300 in 1996
compared to $12,500 in 1995. Net working capital of the
company on December 31, 1996 was $666,600.
Investing activities contributed $456,200 in cash during 1996,
compared to $381,100 in 1995. Capital expenditures increased
substantially in 1996 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 $426,000 for capital additions
in 1997 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
51% of net revenues for 1996. At December 31, 1996, the same
ten customers accounted for approximately 10.7% of outstanding
accounts receivables.
The Company used $14,000 and $16,300 from financing activities
in 1996 and 1995, respectively. The most significant items of
financing activity in 1996 were the reduction of notes payable
of $125,900 and the $79,700 in professional fees associated
with the Aaron purchase. Sources of funds were the receipt of
subscriptions receivable of $10,600 and issuance of 427,778
common shares for $181,000.
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 1996. 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 unless an OEM arrangement can be
obtained with a co-leader in this market.
The Company, over the past two years has chosen to expand its
line of electrosurgical products. Electrosurgical products
sold by the Company are the standard stainless steel
electrodes, the patented Multi-Function Cautery, the patent
pending Resistick line of reduced stick electrodes and the
Aaron 800 high frequency desiccator and the Aaron 1200 to be
introduced in the second half of 1997.
From 1995 to 1996, the Company's electrosurgical sales
increased by more than 600% from $200,000 to $1,332,000.
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. Electrosurgical product sales moved from fifth place
to second in total Company sales by product line in 1996 and is
expected to be the largest single product line by the end of
1997.
Non-Medical Products
The Company for 1996 sold $1.3 million of its flexible lighting
products used primarily in the automotive and locksmith
industries. Approximately $1.1 million was sold to one
customer. The Company is expanding this market with the
addition of a higher quality flexible light unit. The higher
quality version of the Bend-A-Lite 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
fiber optic flexible scope.
Liquidity and Future Plans
Since the acquisition of Aaron Medical Industries, Inc. the
Company has partially changed its direction from acquiring
ownership interest in companies to acquiring new product
technology and expanding manufacturing capabilities through
Aaron. The Aaron 800 and 1200 are prime examples 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 obtained a
line of credit with a local commercial bank for $400,000 and a
$150,000 loan for capital improvements. Interest on these
loans is to be paid at 1% over prime.
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 subject to the
influence of 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* 44 Chairman of the Board
Chief Executive
Officer, Director August, 1994
Andrew Makrides 55 President, Director December, 1982
Joseph F. Valenti 80 Director October, 1995
George W. Kromer 55 Director October, 1995
Delton Cunningham 32 Secretary, Treasurer
Vice President/CFO --
Tsang Yang Tseng 50 Vice-President --
Far East Affairs
Moshe Citronowitcz 44 Vice President
Operations
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 44, 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, Esq. age 55, 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 32, 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 50, 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.
Joseph F. Valenti, age 80 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.
Moshe Citronowicz (44), is a graduate of the University of
Be'er Sheva, Be'er Sheva, Israel, with a Bachelor of Science
degree in electrical engineering. He has also received
certificates from Worcester Polytech, Lowell University and
the American Management Association for completion of seminars
in MRP, master scheduling, purchasing SPC, JIT, accounting and
plant management. Since coming to the United States in 1978,
Mr. Citronowicz has worked in a variety of manufacturing and
high tech industries. In October 1993, Mr. Citronowicz
joined the Company as Vice President of Operations. He is
responsible for all areas of manufacturing, purchasing,
product re-design, as well as new product design.<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, 1996:
Summary Compensation Table
Annual Compensation
Name and Other(a)
Principal Annual
Position Year Salary Bonus Compensation
J.Robert Saron
CEO/Chairman 1996$ 143,000$ 42,600 $ 8,100
1995 116,000 39,600 23,700
1994 (b) -- -- --
Andrew Makrides
President 1996 90,000 8,400 9,700
1995 77,000 11,800 8,000
1994 62,500 126,500 14,000
Moshe
Citronowicz
Vice President
Operations 1996 104,600 11,200 8,100
1995 97,000 11,800 8,000
1994 (b) -- -- --
Delton Cunningham
Secretary, Treasurer,
Vice President/CFO1996 86,000 8,400 7,400
1995 82,900 8,800 8,000
1994 (b) -- -- --
(continued on next page)
REMUNERATION (continued)
Summary Compensation Table
Long Term Compensation
Awards Payouts
Securities
Restrictedunderlying
Stock Options/ LTIP All other
Year Awards SARs(#) PayoutsCompensation
Name and
Principal Position
J.Robert Saron
CEO 1996 -- 90,000 -- --
1995 -- -- -- --
1994 -- -- -- --
Andrew Makrides
President 1996 -- 70,000 -- --
1995 -- -- -- --
1994 -- -- -- --
Moshe Citronowicz
Vice President1996 -- 125,000 -- --
Operations 1995 -- -- -- --
1994 -- -- -- --
Delton Cunningham
Secretary,
Treasurer, Vice
President/CFO 1996 -- 55,000 -- --
1995 -- -- -- --
1994 -- -- -- --
(a) Other compensation includes health insurance.
(b) For 1994 compensation was paid to these individuals by
Aaron Medical Inc. A non-affiliate at that time.
Option/SAR Grants Table
Number of Percent of
SecuritiesTotal Options/
UnderlyingSARs GrantedExercise or
Options/SARsto employeesBase PriceExpir.
Year Grantedin Fiscal Year($/ Share)Date
Name and
Principal Position
J. Robert Saron
CEO 1996 90,000 10 $ 1.125 12/31/00
1995 -- -- -- --
1994 -- -- -- --
Andrew Makrides
President 1996 70,000 8 1.125 12/31/00
1995 -- -- -- --
1994 -- -- -- --
Moshe Citronowicz 1996125,000 14 1.125 12/31/00
Vice President 1995 -- -- -- --
Operations 1994 -- -- -- --
Delton Cunningham
Secretary,
Treasurer, Vice
President/CFO 1996 55,000 6 1.125 12/31/00
1995 -- -- -- --
1994 -- -- -- --
Option/SAR Exercise and Year-end Value Table
Number of
Securities Value of
UnderlyingUnexercised
UnexercisedIn-the-money
Options/SARsOptions/SARs
Shares at FY-END(#)at FY-END(#)
Acquired onValue Exercisable/Exercisable/
Year ExerciseRealizedUnexercisableUnexercisable
Name and
Principal Position
J. Robert Saron
CEO 1996 -- -- 90,000 --
1995 -- -- -- --
1994 -- -- -- --
Andrew Makrides 1996 -- -- 70,000 --
President 1995 -- -- -- --
1994 -- -- -- --
Moshe Citronowicz
Vice President
Operations 1996 -- -- 125,000 --
1995 -- -- -- --
1994 -- -- -- --
Delton Cunningham
Secretary, Treasurer, Vice
President/CFO 1996 -- -- 55,000 --
1995 -- -- -- --
1994 -- -- -- --
Directors are not compensated in their capacities as Board
members. The Company's Board of Directors presently consists
of J.Robert Saron, the CEO, 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 year at an average
monthly fee of $450.
On December 5, 1996 George Kromer and Joseph Valenti were
awarded 35,000 options each for five years to purchase An-Con
stock at $1.125 per share.
There have been no changes in the pricing of any options
previously or currently awarded.
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 $90,000, 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.
On September 8, 1995 the Company entered into a 5-year
executive employment agreement (the "Agreement") with Moshe
Citronowicz, as Vice-President of Operations. The Agreement
provides for a salary of $95,000 per year, a monthly
automobile allowance of $500, a bonus equal to 4% 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. In all other respects the
agreement is similar to that of Mr. Cunningham set forth
above.
Item 11. Security Ownership of Certain Beneficial Owners
and Management of An-Con.
The following table sets forth certain information as of
December 31, 1996, 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(i)
Andrew Makrides Common Stock 448,334 Beneficial 5.3%
255 3rd St.(iv)
St. James, New York
Tsang Yang Tseng Common Stock 666,667 Beneficial 7.8%
190-1 Ming-Chun Road
Chi-Yi, Taiwan
Robert Speiser Common Stock 753,333 Beneficial 8.8%
(ii)
1340 Boca Ciega
Isle Drive
St. Petersburg,
Florida 33706
J. Robert Saron Common Stock 522,976 Beneficial 6.1%
(iii)(V)
Ashley Drive
Seminole, FL 34642
All Officers(i) Common Stock 2,072,811 Beneficial 24.3%
and Directors as a
Group (6 persons)
(i) Based on 8,110,648 shares outstanding and 410,000 options
to acquire shares by officers and directors as of December 31,
1996.
(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 is the beneficial owner of
407,976 additional shares of An-Con (in addition to the 25,000
shares he had received prior to the merger). Mr. Saron also
has the option to acquire an additional 90,000 shares.
(iv) Mr. Makrides has the option to acquire 70,000 shares in
addition to his shares of 378,334.
(v) During 1996, one transaction took place that materially
changed shareholders' control of the Company:
Aaron shareholders received their shares on November 25, 1996
which gave them 37.7% of the outstanding shares of the Company
at that time.
See "Certain Relationships and Related Transactions".
Item 12. Certain Relationships and Related Transactions
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.
Valpex International Corporation ("Valpex"), a Company owned
and operated by Mr.Joseph Valenti, was a supplier of vacuum
and Krypton bulbs and vinyl pouches to Aaron for several
years. In 1996, Mr. Valenti joined An-Con as a director. On
May 10, 1996, Valpex and Aaron entered a three year agreement
that allows Aaron to purchase products directly from the
Valpex's manufacturers and suppliers. In exchange, Aaron
agreed to pay a commission to Valpex on purchases from the
agreed upon list of Valpex's suppliers. In 1996, until the
date of agreement, the sales of Valpex to Aaron were $126,000.
The commissions earned by Valpex were $14,300, over the period
from May to December 1996.
In November, 1995 and February, 1996, pursuant to a private
placement memorandum, the Company sold 200,000 shares of
common stock and 200,000 warrants for $200,000. The warrants
are exercisable within 30 months of the date of issuance, and
give the warrant holder the right to purchase An-Con's shares
at a price of $3 per share.
In August and November 1996, the Company sold 307,778 shares
to three investors for $61,000 in cash and a $64,000 note
receivable, bearing interest at 6% per annum, with a maturity
date of August 1997.
Item 13. Exhibits and Reports on Form 8-k
No Form 8-k was filed in the fourth quarter of 1996.
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 March 29, 1997.
An-Con Genetics, Inc.
By:S/J.Robert Sa ron
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 and Date
S/J. Robert Saron Chairman of the Board,
J.Robert Saron Chief Executive Officer,
Director
March 29, 1997
S/Andrew Makrides President, Director
Andrew Makrides March 29, 1997
S/Joseph F. Valenti Director
Joseph F. Valenti March 29, 1997
S/George W. Kromer Director
George W. Kromer March 29, 1997
S/Delton N. Cunningham Secretary, Treasurer
Delton N. Cunningham Chief Financial Officer
March 29, 1997
PART II
ITEM 7. FINANCIAL STATEMENTS
AN-CON GENETICS, INC.
INDEX TO FINANCIAL STATEMENTS
Contents Page
Independent Auditors' Report
Consolidated Balance Sheet at December 31, 1996
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements
<PAGE>
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current assets:
Cash $ 120,900
Trade accounts receivable, net 856,400
Inventories 854,000
Prepaid expenses 56,100
Deferred tax asset 175,000
Total current assets 2,062,400
Property and equipment, net 1,418,200
Other assets:
Goodwill, net 62,700
Patent rights, net 348,300
Deposits 7,100
418,100
Total Assets $3,898,700
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Accounts payable $ 787,500
Accrued expenses 309,300
Notes payable - current portion 198,000
Due to shareholders 96,400
Current portion of obligations
under capital leases 4,600
Total current liabilities 1,395,800
Long-term debt, net 482,700
Stockholders' equity
Common stock par value $.015;
15,000,000 shares authorized,
issued and outstanding 8,110,648
shares, on December 31, 1996 121,700
Additional paid in capital 12,921,400
Accumulated deficit (10,958,900)
2,084,200
Subscriptions receivable ( 64,000)
Total stockholders' equity 2,020,200
Total liabilities and Stockholders'equity $ 3,898,700
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Sales $ 7,485,900$ 5,521,000
Costs and expenses:
Cost of sales 4,134,400 3,215,300
Research and development 105,700 121,900
Professional services 259,400 368,400
Salaries and related costs 1,168,000 850,000
Selling, general and administration 1,338,000 1,184,900
7,005,500 5,740,500
Income (Loss) from operations 480,400 ( 219,500)
Other income and (expense):
Interest expense (net of income) ( 75,800) ( 68,700)
Miscellaneous 11,000 57,300
( 64,800) ( 11,400)
Income (loss) before extraordinary item 415,600 ( 230,900)
Extraordinary item:
Gain from settlement of debt -- 76,800
Income (loss) before income tax 415,600 ( 154,100)
Income taxes
Current (158,300) --
Deferred ( 8,300) --
Tax benefit 158,300 --
Net income (loss) $ 407,300$ ( 154,100)
Per share - Primary and fully diluted
Net income (loss) before
extraordinary item $ .05 $ ( .05)
Net income (loss) $ .05 $ ( .04)
Weighted average number of shares
outstanding primary and fully diluted 7,663,872 4,354,349
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Common
number of Common Paid-in
shares stock Capital Deficit
Balance
January 1,
1995 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 plus one
warrant per share 80,000 1,200 78,800
Treasury stock
exchanged 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.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
Paid-in
WarrantsTreasurySubscriptions capital
OutstandingStock Receivable Warrants Total
Balance
January 1,
1995 $ (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 plus one
warrant per share 80,000 80,000
Treasury
stock
exchanged 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.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Common
number of Common Paid-in
shares stock Capital Deficit
Collection
of stock
subscriptions
receivable
Shares canceled
previously
issued for
services (7,500) (100) (2,900)
Cash collection
of warrants
outstanding 900
Stock Issue Cost (75,000)
Loss for
year 1995 ( 154,100)
Balance December 31,
1995 4,305,340 $ 64,700$11,541,100 $(11,366,200)
(continued on next page)
The accompanying notes are an integral
part of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Paid-in
Warrants TreasurySubscriptionsCapital
Outstanding Stock Receivable Warrants Total
Collection
of stock
subscriptions
receivable $64,900 $64,900
Shares canceled
previously
issued for
services (3,000)
Cash collection
of warrants
outstanding 900
Stock Issue Costs (75,000)
Loss for
year 1995 (154,100)
Balance
December 31,1995 80,000 $ -- $( 10,600)$ -- $ 229,000
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Common
Warrants number of Common Paid-in
Outstanding shares stock Capital
Balance
January 1, 1996 80,0004,305,340 $64,700$11,541,100
Private placement
of shares at $1 per
share plus 1 warrant
per share 120,000 120,000 1,800 118,200
Shares issued for
cash at $.45 per
share 57,778 900 19,100
Shares issued for
cash and notes at
$.42 per share 200,000 3,000 81,000
Shares issued for
cash at $.42 per
share 50,000 600 20,400
Shares issued to
Aaron shareholders 3,352,530 50,300 1,306,800
Stock Issue Costs ( 174,800)
Shares issued for
services at $.40 per
share 25,000 400 9,600
Collection of stock
subscriptions
receivable
Employee warrants 921,000
Income for
year 1996
Balance as of
December 31,
1996 1,121,000 8,110,648 $121,700$12,921,400
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Employee Subscriptions
Deficit Warrants Receivable Total
Balance
January 1, 1996 $ (11,366,200) $ (10,600) $ 229,000
Private placement
of shares at $1 per
share plus 1 warrant
per share for cash 120,000
Shares issued for
cash at $.45 per
share 20,000
Shares issued for
cash and notes at
$.42 per share (64,000) 20,000
Shares issued for
cash at $.42 per
share 21,000
Shares issued in
exchange for Aaron
shareholders at
$.39 per share 1,357,100
Stock Issue Cost ( 174,800)
Shares issued for
services at $.40 per
share 10,000
Collection of stock
subscription
receivable 10,600 10,600
Employee warrants
Income for
year 1996 407,300 407,300
Balance as of
December 31, 1996 $ (10,958,900) --$ (64,000) $ 2,020,200
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Cash flows from operating activities:
Net income (loss) $ 407,300 $( 154,100)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 260,600 171,000
Shares issued for services 10,000 14,000
Gain on settlement of debt (76,700)
Deferred income taxes 8,300
Change in assets and liabilities:
Increase in receivables ( 204,100)( 151,200)
Decrease in prepaid expenses 17,700 4,900
Increase in inventories ( 247,800)( 91,800)
Increase in accounts payable 112,400 335,900
Increase in accrued expense 60,900 45,600
Decrease in customers deposits --( 85,100)
Total adjustments 18,000 166,600
Net cash provided by
operations $ 425,300 $ 12,500
The accompanying notes are an integral part of
the financial statements.
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
1996 1995
Net cash provided by (used in)
operating activities $ 425,300 $ 12,500
Cash flows from investing activities:
Increase in fixed assets ( 300,200) ( 236,300)
Increase in security deposits 600 1,800
Acquisition costs -- ( 20,000)
Purchase of technology ( 156,600) ( 126,600)
Net cash used in investing activities ( 456,200) ( 381,100)
Cash flows from financing activities
Receipt of common stock subscription 10,600 64,900
Common shares issued 181,000 80,900
Decrease in loans from officers ( 90,700)
Increase (decrease) in notes payable
and obligations under capital leases ( 125,900) 3,600
Cost of issuing common stock -
Purchase of Aaron ( 79,700) ( 75,000)
Net cash used in financing activities ( 14,000) ( 16,300)
Net increase (decrease) in cash ( 44,900) ( 384,900)
Cash at beginning of year 165,800 550,700
Cash at end of year $ 120,900 $ 165,800
The accompanying notes are an integral part of
these financial statements.
AN-CON GENETICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995
Cash paid during the twelve months ended December 31:
1996 1995
Interest $ 70,000 $ 27,700
Income Taxes -0- -0-
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
1. During 1996, the Company sold 200,000 common shares, at
$.42 per share for $64,000 of subscription receivables and
$20,000 cash. The subscription is due in August, 1997 and
bears interest at 6% per annum.
2. The Company issued 25,000 restricted shares for sales
services valued at $.40 per share or $10,000 which was 50% of
the market value of the Company's unrestricted shares at the
time of issuance.
3. In November, 1996, 99% of Aaron's shareholders accepted
3,352,530 shares of An-Con's common stock and rejected the
cash recission offer of $1,357,100 made by the Company. The
common stock issue costs of $95,000, associated with the
purchase of Aaron, were charged to capital in excess of par
value when An-Con shares were released to the Aaron
shareholders in December, 1996.
4. The registration statement related to 3,399,096 of shares
issued to the previous shareholders of Aaron became effective
on November 8, 1996, as amended on November 27, 1996. As of
January 11, 1997, the previous shareholders of Aaron may seek
to remove restrictions pursuant to Rule 144.
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
1.The Company issued 35,000 restricted 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 shares for services valued at
$11,000, 50% of the market price of the Company's unrestricted
shares at the time of issuance.
The accompanying notes are an integral part
of the financial statements.
AN-CON GENETICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 (continued)
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 undertook to register the
shares that were 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 were given the option either to accept the registered
shares of An-Con or receive the value of their share in cash,
at $.22 per share.
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. In 1995, the Company
reduced good will for the tax benefits recognized by Aaron as
a result of its net operating loss carryover of $183,300 as
per FASB 109 paragraph 30.
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.
The accompanying notes are an integral part of the financial
statements.
AN-CON GENETICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 (continued)
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. Cash in the amount of $100,000 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 cancelled at $12,800. The Company
determined they were uncollectible.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
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.
Basis of Financial Statement Presentation - Consolidation
The consolidated financial statements include the accounts of
An-Con and its wholly owned subsidiary Aaron Medical
Industries, Inc. Intercompany transaction accounts have been
eliminated.
Fair Values of financial instruments
Cash and cash equivalents. Holdings of highly liquid
investments with maturities of three months or less when
purchased are considered to be cash equivalents. The carrying
amount reported in the balance sheet for cash and cash
equivalents approximates its fair values.
Accounts receivable and accounts payable. The carrying amount
of accounts receivable and accounts payable on the balance
sheet approximates fair value.
Short term and long term debt. The carrying amount of the
bonds and notes payable, and amounts due to shareholders
approximates fair value.
Warrants
The fair values of the Company's warrants were estimated using
the Black-Scholes model.
Inventories
Inventories are stated at the lower of cost or market. Cost
is determined principally on the average cost method.
Inventories at fiscal year-ends were as follows:
1996
Raw materials $ 402,700
Work in process 237,700
Finished goods 213,600
Total $ 854,000
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less
depreciation and amortization. Depreciation and amortization
are primarily accounted for on the straight line method based
on estimated useful lives. The amortization of leasehold
improvements is based on the shorter of the lease term or the
life of the improvement. Betterments and large renewals which
extend the life of the asset are capitalized whereas
maintenance and repairs and small renewals are expensed as
incurred. The estimated useful lives are: machinery and
equipment, 7-15 years; buildings, 30 years; and leasehold
improvements 10-20 years.
Revenue Recognition and Product Warranty
Revenue from sales of products is generally recognized upon
shipment to customers. The Company warrants its products
generally for one year. Based on the Company's experience the
estimated future costs relating to warranty are not material.
Income is recognized in the financial statements (and the
customer billed)when products are shipped from stock. Net
sales are arrived at by deducting discounts and freight from
gross sales.
Environmental Remediation
The Company accrues environmental remediation costs if it is
probable that an asset has been impaired or a liability
incurred at the financial statement date and the amount can
be reasonably estimated. Environmental compliance costs are
expensed as incurred. Certain environmental costs are
capitalized based on estimates and depreciated over their
useful lives.
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 and warrants outstanding.
The Company's primary and fully diluted earnings per share
were substantially the same and they were computed by dividing
the Company earnings by the weighted average number of common
shares and warrants outstanding and common stock equivalents.
The only dilutive common stock equivalent or other convertible
securities were the common shares attributable to the minority
shareholders 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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
CONSOLIDATED 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 of 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.
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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
If a valuation allowance is recognized for the deferred tax
asset for an acquired entity's deductible temporary
differences or operating loss or tax credit carryforwards at
the acquisition date, the tax benefits for those items that
are first recognized (that is, by elimination of that
valuation allowance) in financial statements after the
acquisition date shall be applied (a) first to reduce to zero
any goodwill related to the acquisition, (b) second to reduce
to zero other noncurrent intangible assets related to the
acquisition, and (c) third to reduce income tax expense. 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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation (continued)
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.
Purchase of Aaron Medical Industries, Inc.
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. Total assets acquired were
valued at $2,012,800 and liabilities assumed were valued at
$681,000. The assets were valued at $335,800 more than their
cost basis which created goodwill.
The goodwill is being written off over 5 years using the
straight-line method. Because a 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 had 30 days from the
effective day of the registration statement (November 8, 1996)
to accept the shares offered or receive cash.
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.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(continued)
NOTE 2. DESCRIPTION OF BUSINESS (continued)
Purchase of Aaron Medical Industries, Inc. (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 - ECU Technology
On December 15, 1995 the Company's subsidiary, Aaron,
purchased design rights for the technology to manufacture a
30 watt electrosurgical coagulation device (ECU) for $185,000.
The purchase price was paid with $100,000 in cash and $85,000
in notes. The notes are payable over eighteen months and bear
10% interest per annum. Monthly payment on the note is
$5,105.85.
The ECU is being made by a third party manufacturer. The
Company had a one year contract with the manufacturer to
produce the unit at a fixed price with a provision for a
second year extension at an agreed upon price. The Company
has hired an electrical engineer to head up the project of
relocating the production to the St. Petersburg facility by
the second quarter of 1997.
Aaron has also hired the former sales director, of the market
leader, in this field of physicians office products 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.
The Company has developed a 120 watt electrosurgical
coagulation device (ECU) to be marketed in the second half of
1997. Through December 31, 1996 the Company spent $93,000 in
the development.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. TRADE ACCOUNTS RECEIVABLE
As of December 31, 1996 the trade accounts receivable were as
follows:
Trade accounts receivable $ 872,500
Less: allow. for doubtful accounts ( 16,100)
Trade accounts receivable, net $ 856,400
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1996 property, plant and equipment
consisted of the following:
Equipment $ 1,375,700
Property held under
capital leases 16,200
Building 637,500
Furniture & Fixtures 134,800
Leasehold Improvements 143,200
Molds 31,000
2,338,400
Less: Accumulated depreciation( 920,200)
Net property, plant, and equipment$ 1,418,200
Depreciation expenses for the years ended December 31, 1996
and 1995 were $166,400 and $78,700, respectively.
Plant, property and equipment includes the capitalized lease
of the Company's telephone equipment. The lease agreement
expires in 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 1996 and 1995. This
amortization amounted to $3,200 and $10,000 for 1996 and 1995
respectively.
The following is a summary of property held under the capital
lease:
1996
Equipment $ 16,200
16,200
Less: Accumulated
depreciation (12,000)
$ 4,200
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. RENTAL 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 following is a schedule of future minimum rental payments
as of December 31, 1996:
Amount
1997 $ 2,000
Total consolidated rent expense for the Company was $24,000
in 1996 and $47,400 in 1995.
NOTE 6. ACCRUED BONUS
For the year 1996 accrued bonuses earned by the officers and
employees of the Company amounted to $65,600. The bonus
arrangement based on employment contracts calls for the
payment to certain employees of 10% of the profits of An-Con
over $200,000 and 1% of the profits over $300,000.
NOTE 7. DUE TO SHAREHOLDERS
A former Chief Executive Officer (CEO) and past 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 past 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. His loan
balance at December 31, 1996 was $ -0- and accrued interest
amounted to $73,800.
In response to the recission offer made by An-Con to Aaron's
former shareholders, certain shareholders owning 46,800 shares
have not contacted the Company. The recission price owed to
these shareholders, including $4,400 of accrued interest is
$22,600.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. INTANGIBLE ASSETS
At December 31, 1996, the intangible assets consisted of
the following:
Balance Balance
BeginningAdditions, at end ofAccumulated
of period at cost Write-Offs Period Amortization
Classification:
Patents,
trademarks,
patent rights
(ECU Aaron 1200) -- 93,000 -- 93,000 --
Patent rights
(Multifunction
Cautery) 59,400 -- -- 59,400 20,800
Patent rights
(cauteries) 71,500 -- -- 71,500 58,700
Patent rights
(ECU Aaron 800) 185,000 25,900 -- 210,900 43,600
Borascope
Technology -- 37,700 -- 37,700 1,100
$ 315,900 $ 156,600$ --$ 472,500 $ 124,200
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 1996 and 1995 was $67,700 and
$14,300 respectively.
Balance Tax benefit Balance
BeginningAdditions, NOL at end ofAccumulated
of Period at costCarryforward Period Amortization
Goodwill
Goodwill
(Purchase
Aaron) $ 335,800$ -- $ ( 183,300)* $ 152,500 $ 116,700
Goodwill
(Purchase
Suncoast
Covenant
not to
compete) 15,500 -- -- 15,500 3,400
(Purchase
Suncoast) 20,000 -- -- 20,000 5,200
$ 371,300 $ --$ ( 183,300)$ 188,000 $ 125,300
*Elimination of valuation allowance. See notes 1 and 8.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. INTANGIBLE ASSETS (continued)
Aaron, the Company's subsidiary had recognized a tax asset for
carryover losses of $366,600 on January 11, 1995 (the date of
purchase) and a corresponding valuation allowance.
The tax benefit of $183,300 associated with the elimination
of the valuation allowance was charged by the Company to
goodwill in 1996.
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 charged to operations for
1996 and 1995 were $37,600 and $87,700, respectively.
NOTE 9. LONG-TERM DEBT
The long term debt of the Company includes the mortgages,
convertible debentures and notes payable of the Company. As
of April 21, 1987, the Company had sold 1,711 convertible
debenture units. Each unit consisted of $1,000 subordinated
debentures and 50 common stock warrants.
As of December 31, 1996, 1,633 units of debentures had been
converted into common shares of An-Con Genetics, Inc. The
remaining number of outstanding debentures was 78 units.
As of December 31, 1996 the Company had not paid the interest
due on the debentures for the semiannual periods beginning in
November, 1989 and ending in November, 1996. The amount of
unpaid interest was $42,400. The bonds are in default and no
action was taken by the bondholders under the terms of the
indenture.
In February of 1997 the 10 year notes came due and the Company
offered each bond holder 2,200 shares of common stock for their
$1,000 bond and accrued interest of $550. Nineteen bondholders
accepted the offer and forty-three bondholders received cash for
their bonds and accrued interest. The balance of the bondholders
have not redeemed their bonds or accepted the share offer.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. LONG-TERM DEBT (continued)
8% - Bonds payable due in 1997 interest
payable semi-annually in May and November
in default. $ 78,000
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. 478,100
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. 29,800
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. 15,700
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. 28,200
7% - 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. 8,600
7% - Loan payable in connection with the purchase
of a probe scope technology payable $779.14 per month
for 48 months self-liquidating beginning November 1996
with the last payment due October, 2000. 31,000
9% - Note payable to insurance premium
finance Company at $5,661.00 per month
for 2 months. 11,300
680,700
Less: Current portion (198,000)
Long Term Debt $ 482,700
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. LONG-TERM DEBT (continued)
The following are maturities of long term debt for each of the
next 5 years:
1997 $ 198,000
1998 468,900
1999 7,700
2000 6,100
2001 --
$ 680,700
NOTE 10. 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 at the required time, 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 11. WARRANTS
As of December 31, 1996, the Company had issued warrants to
purchase 1,121,000 shares of the Company's common stock at
prices ranging from $1.125 to $3.00 per share. As of December
31, 1996, the warrants were as follows:
Number Exercise
of Warrants Price
921,000 $1.125
200,000 $3.000
The weighted average price of the warrants is $1.46 and the
weighted average remaining life of 3.9 years.
The warrants became exercisable in 1995 and 1996 and expire
at various dates through December, 2002. At December 31, 1996
1,121,000 shares of stock were reserved for that purpose.
The Company used the Black-Scholes Model to determine the
value of the warrants with the following weighted average
assumptions, zero dividend yield; expected volatility of 50%;
and risk free interest rate of 5%. (See Note 16 - Employee
Benefit Plans)
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 12. NET OPERATING LOSS CARRYFORWARDS
The tax effects of temporary differences that gave rise to
the deferred tax assets are as follows:
1996
Deferred tax assets - current:
Net operating loss carryforwards $ 175,000
Deferred tax assets - noncurrent:
Net operating loss carryforwards 2,506,700
Patent rights,
primarily due to amortization 62,200
Total gross deferred tax assets2,568,900
Less: Valuation allowance (2,568,900)
Net deferred tax assets -
noncurrent $ --
The Company had NOLs of approximately $7,628,000 at
December 31, 1996, primarily because of the past operating
losses associated with discontinued businesses. These NOLs
and corresponding estimated tax assets, computed at 35% tax
rate, expire as follows:
Year loss Expiration Loss Estimated
incurred Date Amount Tax Asset
1984 1999 $ 771,000 $ 281,700
1985 2000 764,000 267,000
1986 2001 301,000 105,000
1987 2002 730,000 255,000
1988 2003 757,000 265,000
1989 2004 374,000 131,000
1990 2005 382,000 134,000
1991 2006 246,000 86,000
1992 2007 1,004,000 352,000
1993 2008 465,000 163,000
1994 2009 1,197,000 419,000
1995 2010 637,000 223,000
Total $ 7,628,000 2,681,700
Current 500,000 175,000
$ 7,128,000 $ 2,506,700
Under the provisions of SFAS 109, NOLs represent temporary
differences that enter into calculation of deferred tax assets.
Realization of deferred tax assets associated with the NOL is
dependent upon generating sufficient taxable income prior to
their expiration. Management believes that there is a risk that
certain of these NOLs may expire unused and, accordingly, has
established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax
assets, based on the historical trend in sales and
profitability, sales backlog, and budgeted sales of the
Company's wholly owned and consolidated subsidiary, Aaron
Medical Industries, Inc., management believes it is more
likely than not they will be realized through future taxable
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 12. NET OPERATING LOSS CARRYFORWARDS
earnings. However, the net deferred tax assets could be
reduced in the near term if management's estimates of taxable
income during the carryforward period are significantly
reduced.
The valuation allowance of $2,877,600, as of January 1, 1996
was reduced as a consequence of recognizing deferred tax
assets of $175,000 and NOL carryforward benefit of $158,300.
Additional allowance of $24,600 was set up for the deferred
tax assets - patent rights. If an ownership change occurs in
the future, Internal Revenue Code, Section 382 limits 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 An-Con.
NOTE 13. RETIREMENT PLANS
The Company and or its subsidiary 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 contribution to
individual trust funds. The Company has made a contribution
during 1996 of $14,000 for the benefit of its employees.
NOTE 14. RELATED PARTY TRANSACTIONS
During 1996, 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 1996 was
$126,000. In May of 1996 the Company, signed a termination
agreement with the supplier of these products which allows the
Company to purchase these products directly from the
manufacturer. In exchange, the Company will pay commissions
to the board member for a period of 3 years based on the
amount of material purchased from certain vendors.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 15. PURCHASE OF BUILDING
On June 26, 1995 the Company, exercised its option to purchase
the building it occupies 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 certain environmental reports pursuant to
a Remedial Action Plan approved by the State of Florida's
Department of Environment Protection (DEP) and any other
appropriate agencies.
In January 1996, the State of Florida approved a Remediation
Plan, and work should have begun in the second Quarter of
1996. Work on this project has been delayed due to a dispute
between a contract and the former owner of the property. The
former owner has agreed to allow the Company to hire a
consultant to evaluate the problem and make recommendations.
The Company will then hire a contractor, with the former
owners approval, to complete the work.
No assessment can be made at this time as to the cost to the
Company if the work required in the plan, approved by the
State of Florida, is more costly than funds the Company will
spend against the mortgage it holds.
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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. 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 to
develop a Remedial Action Plan and remove the contaminated
soil from the property.
The Seller guaranteed to remediate the contamination that
exists on the property, at its sole cost and expense, through
a qualified environmental engineering firm. The Environmental
work had to commence promptly pursuant to a Remedial Action
Plan submitted by the seller and approved by the state of
Florida Department of Environmental protection (DEP) and any
other appropriate agencies (the "Environmental Work").
In January 1996, the seller obtained the approval of the
remediation plan from the State of Florida. The environment
work has not yet commenced.
The purchase agreement requires that the seller complete the
environmental work within two years from the date of approval
by the State of Florida. The satisfaction of the
Environmental Guaranty will 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.
In order to indemnify itself against any future costs of
environmental work and any unreasonable delay, the Company
may:
1. Attach the escrowed 60,000 shares of An-Con Genetics, Inc.
valued at $78,000, received by the seller as a part of the
selling price.
2. Offset any future cost of environmental work, including
attorney's fees, against the scheduled balloon payment on the
purchase money note and mortgage.
Based on the nature and the amount of work involved in the
remediation plan, the management of An-Con has estimated the
present value of the cost of environmental work to be less
than $100,000. Since the cost of the environmental work will
be paid by the seller, no expense or liability has been
accrued for such work. The outstanding balance of purchase
money note, $460,610, and the market value of the 60,000
shares of An-Con that are in escrow to provide security
interest against any contingent liability.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)
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 $24,000 in 1996 and $47,400 in 1995. Minimum
rental commitments under all non-cancelable leases with an
initial term in excess of one year are payable as follows:
1997 - $24,000; 1998 - $-0-; 1999 - $0; 2001 and beyond $-0-.
Commitments for construction or purchase of property, plant,
and equipment approximated $426,000 at December 31, 1996.
Employment Agreements
On September 8, 1995 the Company 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 the
Company.
Employee Benefit Plans
In February, 1996, the Company established a stock option plan
(hereafter referred to as the ESOP 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 Employee Stock Warrant Plans,
the Company issued warrants for the purchase of 921,000 shares
of restricted common stock at an exercise price of $1.125, in
February and December, 1996. The Company has adopted the
disclosure-only provision of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been
recognized for the common stock option plans. Had the
compensation cost for the Company's two stock option issuances
been determined based on the fair value at the grant date for
awards in 1996 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
Net earnings-as reported $407,300
Net earnings-pro forma 347,300
Earnings per share-as reported .053
Earnings per share-pro forma .045
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)
Employee Benefit Plans
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions, zero dividend yield;
expected volatility of 50%; risk-free interest rate of 5%; and
expected lives of 2 1/2 years.
Options currently expire no later than five years from the
grant date. When proceeds are received by the Company from
exercises, they are credited to Common Stock and Capital in
excess of par value. Additional information with respect to
EOP Plan Activity was as follows:
Shares Outstanding Options
available Number Aggregate
for options of shares Price
December 31, 1995 -0- -0-$ -0-
Grants
February 15, 1996 337,000 337,000 379,000
December 5, 1996 584,000 584,000 657,000
921,000 921,000 1,036,000
Exercised -0- -0- -0-
Cancellations -0- -0- -0-
December 31, 1996 921,000 921,000$ 1,036,000
The exercise price for options outstanding under the EOP Plan
at December 31, 1996 was $1.125. These options will expire
if not exercised on February 15, 2001 and December 5, 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 6,667
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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. 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 a landlord to file a judgement at
that time of $41,700 in rental arrears on the Melville, NY
lease.
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, 1996, 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 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 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 February 28, 1997 the Company has sold approximately
$550,000 of Resistick. The Company's 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, it does not function
essentially, exclusively by capacitive coupling of radio
frequency energy as recited in independent claims 1 and 5 of
Megadyne's U.S. 4,785,807.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)
MegaDyne (continued)
Accordingly, there appears to be no literal infringement of
the patent as alledged in suit. However, without benefit of
the prosecution history, an authoritative opinion as to
infringement under the doctrine of equivalents is not
possible.
On August 27, 1996 the district court for the district of Utah
ruled "that the plaintiff (Megadyne) failed to establish a
reasonable likelihood of success on the issue of infringement"
and has denied the motion for a preliminary injunction.
Product Liability
The Company currently has product liability insurance which
it believes to be adequate for its business. The Company's
existing policy expires in May, 1997.
Regulation
In June, 1995 pursuant to an inspection of the facilities of the
Company's subsidiary Aaron, the FDA issued a warning letter
advising of federal good manufacturing practices ("GMP")
deficiencies. The letter cited, among other things, the
Company's failure (a) to follow its own complaint handling
procedure to immediately review, evaluate, investigate and
document complaint; (b) to evaluate significant equipment
changes in manufacturing processes and quality assurance tests;
(c) to have and implement documented formal change control
procedures for changes made to devices or manufacturing
processes; (d) to have, follow and document conformance with
appropriate written finished device test procedures assuring
devices meet all finished specifications prior to distribution;
(e) to have, follow and document conformance with written
procedures for acceptance of components; (f) to conduct plan in
periodic orders of the quality assurance and good manufacturing
practice programs in accordance with written procedures; (g) to
establish and implement adequate record keeping procedures.
Until such deficiencies were removed the FDA indicated it was
in no position to restore GMP standing to the Company or permit
approval of any pending pre-market submissions by the Company.
On July 12, 1995, the FDA indicated that while the Company's
response appeared adequate, further verification was needed
before the FDA would be in a position to support the approval of
any pending pre-market submissions, or related Export
Certificates for the Company's's products. After follow-up
correspondence, on December 15, 1995, the FDA acknowledged that
the Company's corrective action plan dated November 27, 1995,
appeared adequate. However, the FDA determined that it was
necessary to set another evaluation date for May, 1996 to
ascertain whether the Company was meeting GMP guidelines.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 16. COMMITMENTS AND CONTINGENCIES (continued)
Regulation (continued)
This date was extended to March, 1997 when the FDA made its
inspection. The Company is waiting for the written results of
that inspection. The FDA inspector stated that the Company now
meets required federal guidelines. Until now all product
development has been done on products which have not required
FDA approval.
NOTE 17. SUBSEQUENT EVENTS
Bank Line of Credit
On January 29, 1997 the Company signed notes which effectively
set up a credit line with a commercial bank for $550,000. The
interest rate of the loan is 1% over the banks prime rate.
The line of credit terminates on April 30, 1998 unless renewed
or extended by the bank in writing. The bank has taken a
security interest in accounts receivable, inventories and
equipment.
Redemption of Bonds
On January 29, 1997, bondholders were given the option of
redeeming their bonds and accrued interest totaling $1,550 for
cash or 2,200 shares of the companies common stock as of March
10, 1997 nineteen bonds and accrued interest have been
redeemed for stock and forty-three bonds and accrued interest
have been redeemed for cash.
NOTE 18. INDUSTRY SEGMENT REPORTING
The Company's principal markets are the United States,
Europe, and Latin America, with the U.S. and Europe being the
largest markets based on revenues. The Company's major
products include cauteries, Benda-A-lights, nerve locators,
reusable pen lights and electrodes. Cauteries, disposable
and replaceable, account for 40% and 50% of Company's sales
for 1996 and 1995, respectively.
One significant customer accounted for 14% and 17% of
revenues in 1996 and 1995, respectively. In 1996 that
customer accounted for $1.1 million of non-medical sales
which is 85% of that segments sales. The Company's ten
largest customers accounted for approximately 51% of net
revenues for 1996. At December 31, 1996, the same ten
customers accounted for approximately 10.7% of outstanding
accounts receivable.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 18. INDUSTRY SEGMENT REPORTING (continued)
Summary information by geographic area and significant
industry segment for years ended December 31,1996 and 1995
were as follows:
OperatingIdentifiable
Sales Income Assets
1996 - (in thousands)
Geographic Area
United States $ 5,980 $ 729 $ 3,803
Europe 1,406 166 96
Latin America 100 13 --
$ 7,486 $ 908 $ 3,899
Segment
Medical Products$ 6,181 $ 850 $ 3,236
Non medical products 1,305 58 663
$ 7,486 $ 908 $ 3,899
OperatingIdentifiable
Sales Income Assets
1995 - (in thousands)
Geographic Area
United States $ 4,226 $ 22 $ 3,531
Europe 1,245 6 70
Latin America 50 1 -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
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 18. INDUSTRY SEGMENT REPORTING (continued)
1996 1995
Total assets $ 96 $ 70
Total liabilities -0- -0-
Net property, plant
and equipment -0- -0-
The Company had no assets (other than certain trade
receivables) or liabilities outside the United States, in the
two years ended December 31, 1996.
During 1996, 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.
BLOOM AND COMPANY
50 CLINTON STREET
HEMPSTEAD, NY 11550
TEL. 516 486-5900
FAX 516 486-5476
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 March 29, 1997, included in the Annual
Report to Stockholders of An-Con Genetics, Inc.
Bloom and Company
Hempstead, New York
March 29, 1997
BLOOM AND COMPANY
50 CLINTON STREET
HEMPSTEAD, NY 11550
TEL. 516 486-5900
FAX 516 486-5476
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, 1996 and
the related consolidated statements of operations and
shareholders' equity, and cash flows for the years ended
December 31, 1996 and 1995. These consolidated 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 financial position
of An-Con Genetics, Inc. and subsidiary as of December 31, 1996
and the results of their operations, and their cash flows for
the years ended December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
BLOOM AND COMPANY
Hempstead, New York
March 29, 1997
c:10k96sec
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<PERIOD-END> DEC-31-1996
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<RECEIVABLES> 856,400
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