U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-12183
AN-CON GENETICS, INC.
(Exact name of small business issuer as
specified in its charter)
Delaware 11-2644611
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
734 Walt Whitman Rd., Melville, New York 11747
(Address of principal executive offices)
(516) 421-5452
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12,13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers's
class of common equity, as of the latest practicable date:
13,629,693.
AN-CON GENETICS, INC.
FORM 10-QSB
QUARTERLY REPORT
JUNE 30, 1998
<PAGE>
AN-CON GENETICS, INC.
INDEX TO FORM 10-QSB
Part I. Financial Information
Item 1: Consolidated Financial Statements:
Consolidated Balance Sheet -
June 30, 1998
Consolidated Statements of Operations
for the six Months Ended June 30,
1998 and 1997
Consolidated Statements of Cash Flows
for the six Months Ended June 30,
1998 and 1997
Notes to Financial Statements
Item 2: Management's Discussion and
Analysis of Financial and Results of
Operations
Part II. Other Information
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to Vote
of Security Holders
Item 5: Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
Assets
Current assets:
Cash $ 164,755
Trade accounts receivable 997,250
Inventories 2,056,259
Prepaid expenses 80,702
Deferred tax asset 175,010
Other receivables 36,624
Total current assets 3,510,600
Property and equipment, net 3,451,202
Other assets:
Trade name 1,850,039
License and manufacturing rights 1,820,832
Goodwill, net 28,275
Patent rights, net 255,346
Deposits 4,905
3,959,397
$ 10,921,199
The accompanying notes are an integral part of the
financial statements.
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,1998
(CONTINUED)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 518,691
Accrued expense 142,332
Notes payable - current portion 810,901
Due to shareholders 100,845
Total current liabilities 1,572,769
Long-term debt, net 3,044,217
Stockholders' equity:
Common stock par value $.015; 15,000,000
shares authorized, issued and outstanding
13,629,693 shares on June 30, 1998 204,363
Additional paid in capital 17,951,409
Accumulated deficit (11,101,559)
7,054,213
Subscription receivable ( 750,000)
Total stockholders' equity 6,304,213
$ 10,921,199
The accompanying notes are an integral part of the
financial statements.
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
Sales $ 3,949,455 $ 3,694,018
Cost of sales 2,249,221 2,071,504
Gross Profit 1,700,234 1,622,514
Operating expenses:
Research and development 87,296 41,144
Professional services279,144 167,810
Salaries and related costs 757,959 690,662
Selling, general and administrative 659,901 626,927
1,784,300 1,526,543
Gain (Loss) from operations ( 84,066) 95,971
Other income (expense):
Interest ( 98,820)( 36,365)
Miscellaneous 11,662 12,793
( 87,158) ( 23,572)
Income (loss) ( 171,224) 72,399
Provision for income tax -- ( 21,719)
Realized benefit of loss
carryforward -- 21,719
Net income (loss) $( 171,224) $ 72,399
Earnings (Loss) per share
Income (loss) before extraordinary item:
Basic ( .02) .01
Diluted ( .02) .01
Weighted average number of shares
outstanding 10,914,6018,199,508
Weighted average of shares assuming
conversion of securities 10,914,601 8,457,224
The accompanying notes are an integral part of the financial
statements.<PAGE>
AN-CON GENETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE SIX MONTHS ENDED June 30, 1998 AND 1997
1998 1997
Cash Flows from operating activities
Net income (loss) $(171,224)$ 72,399
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 331,683 161,486
Common stock for services 110,668 --
Changes in current assets and liabilities:
(Increase) in receivables ( 205,425) ( 96,222)
(Increase) decrease in inventories 19,567 (139,781)
(Increase) decrease in prepaid expenses (12,772) 4,243
Increase (decrease) in accounts payable 119,601 ( 16,103)
(Decrease) in accrued expense (91,767) (193,909)
Decrease in other receivables 20,639 --
Total adjustments 292,194 (280,286)
Net cash provided by (used in)
operating activities 120,970 (207,887)
Cash flows from investing activities
(Increase)in fixed assets ( 206,807) (169,582)
(Increase)in intangibles ( 8,388) ( 10,986)
(Increase) in deposits 2,245 --
Net cash used in investing activities ( 212,950) (180,568)
Cash flows from financing activities
Decrease in obligations under capital lease -- ( 4,628)
(Decrease) increase in notes payable (23,751) 266,176
Issuance of shares 170,000 --
Exercise of stock options 62,240 50,000
Net cash provided by financing activities 208,489 311,548
Net increase (decrease) in cash and
cash equivalents 116,509 ( 76,907)
Cash and cash equivalents,
beginning of period 48,246 120,900
Cash and cash equivalents, end of period $ 164,755 $ 43,993
The accompanying notes are an integral part of the financial
statements.
AN-CON GENETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Cash paid during the Six months ended June 30
1998 1997
Interest $61,320 $39,837
Income Taxes -0- -0-
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FOR THE SIX MONTHS ENDED JUNE 30, 1998
During the six months ended June 30, 1998 the Company issued 276,667
restricted shares for an officers bonus and consulting fees valued at
$.40 per share for an aggregate of $110,668
The Company also issued 19,578 shares valued at $.40 per share to
satisfy part of its obligation to the Xenetics Shareholders for the
purchase of OmniFix $783,100.
On February 9, 1998 the Company issued 5,000,000 shares to purchase the
outstanding shares of BSD Beta Development Corp. (BSD). The company
valued this transaction at $.98 per share. (See Note 6 to the financial
statements).
On May 8, 1998 the Company purchased the "Bovie" Tradename for
$18,772,299 and Bovie inventory of materials and work in progress for
$1,122,701 by giving the seller, Maxxim medical, a convertible note for
$3,000,000. (see not 4)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
In February of 1997, 10 year notes came due and the Company offered
each bond holder 2,200 shares of common stock for each $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 total amounts of principal and the accrued interest of
the converted bonds were $19,000 and $10,450 respectively. The balance
of the bondholders have not redeemed their bonds or accepted the share
offer.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of An-Con and
its wholly owned subsidiary Aaron Medical Industries, Inc. In the
opinion of management, the interim financial statements reflect all
adjustments, consisting of only normal recurring items, which are
necessary for a fair presentation of the results for the interim periods
presented.
The results for interim periods are not necessarily indicative of results
for the full year. These financial statements should be read in
conjunction with the significant accounting policies and the other notes
to the financial statements included in the Corporation's 1997 Annual
Report to the SEC on Form 10-KSB.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Fair Values of financial instruments
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally on the average cost method. Inventories at June
30, 1998 were as follows:
Raw materials $ 1,187,102
Work in process 682,473
Finished goods 186,684
Total $ 2,056,259
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Long-Lived Assets
Long-lived and assets consist of property plant and equipment, intangible
assets.
Property, plant and equipment are recorded at cost less depreciation and
amortization. Depreciation and amortization are 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. Betterment and large renewals which extend
the life of the asset are capitalized whereas maintenance and repairs and
small renewals are expenses as incurred. The estimated useful lives are:
machinery and equipment, 7-15 years; buildings, 30 years; and leasehold
improvements 10-20 years.
Intangible assets consist of patent rights and goodwill. Goodwill
represents the excess of the cost of assets of the acquired companies
over the values assigned to net tangible assets. These intangibles are
being amortized by the straight-line method over a 5 to 20 year period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No.121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In
accordance with SFAS No.121, the Company reviews long-lived assets for
impairment whenever events or changes in business circumstances occur
that indicate that the carrying amount of the assets may not be
recovered.
The Company assesses the recoverability of long-lived assets held and to
be used based on undiscounted cash flows and measures the impairment, if
any, using discounted cash flows. Adoption of SFAS No.121 did not have a
material impact on the Company's consolidated financial position,
operating results or cash flows.
Revenue Recognition and Product Warranty
Revenue from sales of products is generally recognized upon shipment to
customers. The Company warrants its products for one year. The
estimated future costs of warranties 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 expenses as incurred. Certain environmental costs
are capitalized based on estimates and depreciated over their useful
lives.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Earnings Per Common and Common Equivalent Share
In February 1997, the Financial Accounting Standards Board issued SFAS
128. "Earnings Per Share." SFAS 128 establishes new standards for
computing and presenting earnings per share ("EPS"). Specifically, SFAS
128 replaces the previously required presentation of primary EPS with a
presentation of basis EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures, and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the financial
statements issued for periods ending after December 15, 1997. In 1997,
the Company adopted SFAS 128.
Research and Development Costs
Only the development costs that are purchased from another enterprise and
have alternative future use are capitalized and are amortized over five
years.
Income Taxes
The Company and its wholly-owned subsidiary file a consolidated federal
income tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
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.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Stock-Based Compensation (Continued)
. 2. Shares issued in accordance with a plan for past or future
services of an employee are 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.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general purpose
financial statements. Specifically, SFAS 130 requires that all items
that meet the definition of components of comprehensive income be
reported in a financial statement for the period in which they are
recognized. However, SFAS 130 does not specify when to recognize or how
to measure the items that make up comprehensive income. SFAS 130 is
effective for fiscal years beginning after December 15, 1997, and early
application is permitted.
Management believes the application of SFAS 130 will not have a material
effect on the Company's future financial statements.
NOTE 3. ACQUISITION OF BSD BETA DEVELOPMENT CORP.
On February 9, 1998 the Company exchanged 5,000,000 of its shares valued
at $4,900,000 or $.98 per share for all outstanding common shares and
preferred shares of BSD Development Beta Corporation(the BSD), a
development stage enterprise, and a subscription note receivable of
$750,000.
The acquisition has been accounted for as a purchase, and accordingly,
the total purchase price has been allocated to the acquired assets at
their estimated fair values in accordance with the provisions of
Accounting Principles Board Opinion No. 16. At the time of acquisition,
the BSD did not have any liabilities and had not yet commenced its
operating activities.
The estimated excess of the purchase price over the net assets acquired
of $1,900,000 is being carried as license and manufacturing rights and
will be amortized over its estimated life of 20 years.
AN-CON GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. ACQUISITION OF BSD BETA DEVELOPMENT CORP.(CONTINUED)
A summary of the BSD acquisition cost and the allocation of the purchase
price to the assets acquired is as follows:
Total acquisition cost:
Market value of
An-Con shares issued $4,900,000
Subscription note receivable( 750,000)
$4,150,000
Allocated as follows:
Cash $ 250,000
Equipment 2,000,000
License and manufacturing rights 1,900,000
$4,150,000
According to the acquisition agreement, the Company is holding 2,250,000 of
the shares issued in escrow. These shares will be released upon collection
of the $750,000 subscription note receivable, on or before August 9, 1998.
In the case of default, the Company may take action against the issuer of
the note or reclaim the shares issued.
Also, as a part of the agreement, the Company has pledged to issue
2,000,000 preferred shares to the seller of BSD and reacquire 2,000,000
common shares initially issued. If the Company fails to deliver the
preferred shares by September 15, 1998, then the Company has to issue
additional shares equal to $500,000 divided by the fair market value of An-
con shares as determined no more than 10 business days prior to the
delivery date.
NOTE 4. SUBSEQUENT EVENT
Purchase of "Bovie"
On May 8, 1998 the company entered into an agreement with Maxxim Medical,
Inc. (Maxxim) to purchase all rights, title and interest of Maxxims'
electrosurgical product line associated with the name "Bovie". The Company
has issued a secured convertible promissory note for $3,000,000 to Maxxim.
The note is automatically convertible into 3,000,000 common shares of the
Company upon filing an amendment to the Certificate of Incorporation in the
state of Delaware. The amendment will increase the number of authorized
share and make possible the issuance of 3,000,000 additional shares. The
term of the note is ten years and it bears interest at the rate of 1% in
excess of the prime lending rate.
The allocation of the purchase price to the assets acquired is as follows:
Accounts receivable, inventory,
equipment fixtures, and
Tradename $1,272,701
Goodwill 1,727,299
Total assets $3,000,000
<PAGE>
AN-CON GENETICS, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This Report on Form 10-QSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including statements regarding the
Company's expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are
not limited to, the Company's anticipated expense levels for research and
development, and selling general and administrative; anticipated capital
expenditures; and expectations regarding inventory balances, liquidity
and adequacy of cash resources under the sub-headings "Results of
Operations" and "Liquidity and Capital Resources". Actual results could
differ materially from those projected in any forward-looking statements
for the reasons detailed below and in other sections of this Report on
Form 10-QSB.
All forward-looking statements included in this Form 10-QSB are based on
information available to the Company on the date of this Report. The
Company assumes no obligation to update the forward-looking statements.
Investors should also consult the risks factors listed from time to time
in the Company's Reports on Form 10-K and Annual Report to Stockholders.
Results of Operations
The results of operations over the six months ended June 30, 1998 show
reduced and profitability, as compared to the first six months of 1997.
The Company's sales revenues increased by 7%, from $3,694,018 to
$3,949,455. Gross profit percentage of 43% was down from 44% for the same
period in 1997. Gross profit increased from $1,622,514 to $1,700,234.
Increased sales revenues were mainly attributable to purchase of the
business of Bovie, which accounted for $180,000 in sales in the latter
part of June. For the first half of 1998 and 1997 cauteries accounted
for 43% and 41% of sales respectively.
Operating salaries and related expenses increased by 10%, from $690,662
to $757,959, in the six months ended June 30, 1998 as compared to the
same period in 1997. The increase in salaries was largely attributable
to a stock bonus to an officer which was valued at $40,000 and cost of
living increases.
Research and development costs increased by 112% from $41,144 to $87,296
from the six months ended June 30, 1997 to 1998. This was attributable
to depreciation expense on the Company's reactors used to develop new
products.
Expenses for professional services increased by 66% to $279,144 in the
six months ended June 30, 1998, as compared to $167,810 in the same
period of the previous year. The main reason for this increase was
consulting fees associated with the settlement of various transactions
and the installation of computer software.
Selling, General and Administrative expenses decreased by 5%. These
expenses were $659,901 in the six month period ended June 30, 1998 as
compared to $626,927 for the six months ended June 30, 1997.
AN-CON GENETICS, INC.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations (continued)
Interest expense increased from $36,365 in the six months ended June 30,
1997 to $98,820 in 1998. The $62,455 (171%) increase in interest expense
was mainly attributable to the Company's three million note to Maxxim for
the purchase of Bovie.
Additional amortization of goodwill for the first six months of 1998 on
Bovie and BSD transactions amounted to $94,810.
The operating loss was $84,066 in the first half of 1998 as compared to
an operating income $95,971 in the same period in 1997.
The Company had a net loss of $171,224 for the six months ended June 30,
1998 as compared to net income of $72,399 in 1997 for the same period.
The reasons for the decrease of $180,037 (188%) in the operating income
and $243,623 (337%)in net income include: $33,150 reduction in gross
profit; attributable to a low margin on Bovie product sales $76,667 one
time consulting fees; $40,000 bonus to an officer; additional $43,835 in
depreciation charges on the reactors purchased; $62,455 of interest
expense on bank loans and new notes; and the expense of $40,017 paid for
legal fees to settle a lawsuit.
The Company sells its products through distributors both in the
international market and in the USA. The distributors are contacted
through response to company advertising in international medical journals
or at domestic or international trade shows. 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.
During the first six months of 1998, international sales of the Aaron
Medical product line declined by 5%. These sales were $858,024 which
represented 21% of total sales, while in 1997 total international sales
were $899,861 and 24% of total sales. The Company expects sales to
increase when it receives its ISO9000 certification in the third quarter
of 1998.
Financial Condition
As of June 30, 1998, the amount of cash was $164,755 as compared to
$48,246 at December 31, 1997. Cash provided by operating activities was
$120,970 in the first half of 1998 as compared to ($207,887) cash used by
operations in 1997. Net working capital of the company on June 30, 1998
was $1,937,831 as compared to $1,008,545 in 1997.
Investing activities utilized $212,950 in cash during the first six
months of 1998, compared to $180,568 in the first six months of 1997. In
1998, the Company continued its policy of investing in property, plant
and equipment needed for future business requirements, including
manufacturing capacity.
The Company's ten largest customers accounted for approximately 57% of
net revenues for the first six months of 1998. At June 30, 1998, the
same ten customers accounted for approximately 57% of outstanding
accounts receivable.
AN-CON GENETICS, INC.
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Financial Condition(continued)
Cash flows from financing provided $208,489 and $311,548 in the first six
months of 1998 and 1997, respectively. The most significant financing
activities in the six months ended June 30, 1998 were the receipt of
$250,000 from the purchase of BSD. The amounts of the term and the line of
credit loans repaid were $11,250 and $12,501, in the first half of 1998.
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, which includes its
recent acquisition and transition of the Bovie product line manufacturing
operation to its facility in St. Petersburg, Florida.
Outlook
The Company, believes that the world market for disposal medical
products, such as the Company's battery-operated cauteries, has
significant growth potential because these types 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 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, has focused on expanding its line of electrosurgical
products. Electrosurgical products sold by the Company are the standard
stainless steel electrodes, the patented Multi-Function Cautery, and the
Aaron 800 high frequency desiccator. The Aaron 1200 will be introduced in
the second quarter of 1998 as well as the Bovie product line of
generators and accessories.
In the first quarter of 1998 sales of Resistick, the Company's line of
reduced stick electrodes, ceased due to the settlement of the MegaDyne
lawsuit. Except for the possible introduction of new electrosurgical
products and the Bovie product line of generators and accessories, the
Company does not expect electrosurgical sales to increase in 1998
significantly.
Aaron through its private label capacity sees unique opportunities in the
domestic market as its competitors do not private label. The
electrosurgical product line is a larger market than the company has
normally sold into and is dominated by two main competitors, VallyeLab
and Conmed. Electrosurgical product sales moved from fifth place to
second in total Company sales by product line in 1997.
Non-Medical Products
The Company is expanding its line of flexible lighting products 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 units. Sales for the first
half of 1998 have been lower than expected due to competition from
foreign imports.
AN-CON GENETICS, INC.
PART I. FINANCIAL INFORMATION (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 is an example of this new
direction. Other products and technologies are being evaluated for
future development by the Company through its manufacturing and licensing
agreement with Advanced Refractory Technologies and by its recent
acquisition of the Bovie product line and technologies.
In order to continue its strong international sales growth and maintain
its ability to sell in Europe, management has implemented an
ISO9000/EN46001 quality system and expects to be certified and have its
CE mark (International Quality control) by the third quarter of 1998.
The Company had obtained a one year line of credit with a local
commercial bank for $400,000 and a three year $150,000 loan for capital
improvements. Interest on these loans is to be paid at 1% over prime.
Balances on these loans were $245,000 and $91,395 as of May 15, 1998,
respectively.
The company's credit line with its commercial bank terminated on April 1,
1998 without the Company paying off its outstanding balance. The
company, which is in technical default, has applied for a renewal in its
line of credit and is awaiting a decision by the bank.
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.
<PAGE>
AN-CON GENETICS, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Form 10-KSB for the year ended December 31, 1997. Part I, Item 3.
ITEM 2. CHANGES IN SECURITIES
There have been no changes in the instruments defining the rights or rights
evidenced by any class of registered securities.
There have been no dividends declared.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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 shares offered.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There has not been a meeting of shareholders and therefore, no matters have
been submitted to a vote of security holders.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
28 None
SIGNATURES:
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
An-Con Genetics, Inc.
(Registrant)
Date: _________________
_________________________
President Andrew Makrides,
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