U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSBA-2
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31,1997
[ ] 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 (IRS Employer
jurisdiction) of incorporation
or organization)
Identification No.)
734 Walt Whitman Road, Melville, NY 11747
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 421-5452
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
$7,371,281
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 April 3,1998 was $17,396,732.
(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:
13,279,948.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference.
An-Con Genetics, Inc.
1997 Form 10-KSB Annual Report
Table of Contents
Part I
Page
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. Management's 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 734 Walt Whitman Road, Melville, New York
11747.
Currently, the Company is actively engaged in the business of
manufacturing and marketing medical products and developing
related technologies.
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.
Although, Aaron's largest current product line is battery
operated cauteries, the Company has shifted its focus to the
manufacture and marketing of electrosurgical generators and
electrosurgical disposables. This new focus is evident in the
development of the Aaron 800 and 1200 electrosurgical generators
(see below).
Aaron also manufactures a variety of specialty lighting
instruments for use in ophthalmology, 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 manufactures and sells its products under the Aaron label
to distributors worldwide and also private labels. Additionally,
Aaron has many Original Equipment Manufacturing (OEM) agreements
with other medical device manufacturers. These OEM arrangements
combined with private label and the Aaron label allow the Company
to gain greater market share for the distribution of its
products.
An-Con is a non-operating company while Aaron as a 100% owned
subsidiary which accounts for 100% of operations.
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 seeking a joint venture partner or
sublicensee to market and sell this product and is engaged in
minimal marketing efforts.
New Company Products
Aaron 1200
Aaron has developed a 120 watts full-featured electrosurgical
generator for outpatient surgical procedures for use in a variety
of fields including dermatology, gynecology, and plastic surgery.
Aaron 800
The Aaron 800 is a low powered office based generator designed
primarily for dermatology. The unit is a 30 watts 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. Sales in 1997 totaled
in excess of $650,000.
Electrosurgical Products
The Company's subsidiary, Aaron, continues to expand its line of
Electrosurgical products. Electrosurgical products include
electrodes, electrosurgical pencils, and various ancillary
disposable products. Electrosurgical products are used in
surgery for the cutting and coagulation of tissues. Aaron's
electrosurgical products are compatible with all major
manufacturers' electrosurgical generator products.
Battery Operated Cauteries
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,
which are popular in overseas markets.
Battery Operated Medical and Industrial Lights
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. The industrial
lighting instruments are sold to automotive mechanics through
Companies such as Snap-On Tools, MAC and Matco.
Nerve Locator Stimulator
Aaron 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
used for a single surgical procedure. The Company has a patent
on the Neuro Pulse II, which has a pulsing variable design.
Multi-Function Cautery
The Multi-Function Cautery (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 capability
for the surgeon to cut and/or coagulate, while simultaneously
evacuating the smoke associated with electrosurgery and to remove
fluids from the surgical site. The procedure is accomplished
with one hand and without assistance.
Resistick
The Company has discontinued its Resistick line of reduced stick
electrodes used in electrosurgery.
The reduced stick electrode market is dominated by MegaDyne
Medical Products, Inc. which is believed by management to
virtually control the entire existing market.
The discontinuance of Resistick sales is a result of the
settlement by Aaron with MegaDyne in a suit against Aaron for
patent infringement. See legal proceedings and subsequent events
in the financial statement.
Manufacturing, Marketing and Distribution
The Company manufactures the majority of its products on its
premises in St. Petersburg, Florida. Labor intensive sub-
assemblies and labor intensive products may be out-sourced to the
Company's specification offshore. The Company markets its
products through national trade journal advertising, direct mail,
distributor sales representatives and trade shows. Aaron markets
its products through general and specialty distributors across
the country under both the Aaron name and private label. Some of
Aaron's major distributors are Allegiance, Bergen Brunswig
Medical, Burrows, McKesson, General Medical, Owens & Minor, and
Physician Sales & Service.
Competition
The medical device industry is highly competitive. 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.
Aaron's main competitors are Conmed in the electrosurgery market
and Xomed in the battery operated cautery market. Management
believes based upon recent developments that the Company has the
ability to aggressively compete in these markets.
Regulation
Many medical products are subject to guidelines, regulations and
testing requirements by federal and state authorities including
the Food and Drug Administration ("the FDA"). 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 plans to market. 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. 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 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 FDA determined in its March 1997 inspection that the Company
was in compliance with GMP guidelines and was now clear to submit
new product applications.
Patents and Trademarks
The Company owns a total of fourteen patents. No assurance can be
given that competitors will not infringe the Company's patent
rights or otherwise create similar competing products that are
technically patentable in there own right. (See competition)
Liability Insurance.
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
Aaron products during the years 1997 and 1996, totaled $96,738
and $105,681, 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 approximately 80 employees. These consist of 5
executives, 6 administrative, 5 sales, and 64 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 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
marketing medical products. Aaron manufactures and sells its
products under its own label to distributors worldwide.
Additionally, Aaron has contracts with hospital groups purchasing
organizations such as Amerinet, Medecon, Magnet, and Purchase
Connection.
RECENT ACQUISITIONS BY THE COMPANY
Item 2. Properties.
The Company had 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 has additional executive office space at 734 Walt
Whitman Road, Melville, which it leases for $1,226.83 per month.
The lease runs through the year 2000.
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 (CAR) and a January 27, 1995 Contamination Assessment
Addendum (CARA). The Florida Department of Environmental
Protection (FDEP)stated in a letter, dated March 31, 1995, that
based on their review of the CARA, the CAR could not be approved
and that additional work was needed to be performed.
In February of 1998, the environmental engineering firm Geo-
Ambient conducted a second addendum to the CAR, (CAR Addendum II)
to complete the additional work requested by the FDEP. Based on
the results of CAR Addendum II, Geo-Ambient recommended to the
FDEP that a "no further action" status be granted for the site.
However, as of the date of filing the FDEP has not yet issued a
Site Completion Rehabilitation Order (SCRO).
Based on the "no further action" finding by Geo-Ambient and the
anticipated issuance of an SCRO by the FDEP management of An-Con
has estimated the present value of the cost of environmental work
to be zero.
At the request of the FDEP, GEO-Ambient will conduct an
additional water test in July of 1998.
The nature and extent of the environmental work or even if any is
required has not yet been determined by the FDEP. Therefore, no
work has been completed by the seller.
Advanced Refractory Technologies, Inc. ("ART") and BSD
Development Beta Corporation ("BSD") Asset and Corporate
Acquisitions.
On February 9, 1998 the Company entered into a series of
contemporaneous agreements ("Contemporaneous") and transactions
involving two non-affiliated companies, Advanced Refractory
Technologies, Inc. ("ART") a privately held New York corporation
engaged in research and development of a certain patented
diamond-like nanocomposite technology for the coating of products
("DYLYN" Technology"), and BSD Development Beta Corporation, a
privately held Delaware corporation, As a result of the
aforesaid transactions, the registrant acquired certain job-
coating equipment valued at $2,000,000 and consisting of two
DYLYN deposition reactors inclusive of components and two
electro-blade surgical mounting fixtures (the "Equipment") for
coating electro-surgical blades and other specified medical
devices utilizing the DYLYN Technology. The aforesaid, in
addition to the acquisition by the Company of the Equipment,
resulted in the acquisition by it of an exclusive 10-year license
to use the DYLYN Technology to jobcoat specified medical products
together with a manufacturing arrangement with ART whereby ART
will operate and maintain the equipment for the use of the DYLYN
Technology under the License Agreement at Art's location in
Buffalo, New York. The company acquired all of the outstanding
securities of BSD which is now a wholly owned subsidiary of
registrant.
The license is an exclusive 10-year license to use the DYLYN
technology to job-coat specified medical products for marketing
anywhere in the world. It provides essentially for payment of a
royalty to ART based upon net revenues derived by the registrant
directly or indirectly from the sale of products or fees from
sub-licensees utilizing the DYLYN Technology. The exclusivity of
the license is contingent upon ART receiving minimum job-coating
fees of $200,000 in the first contract year (estimated to
commence August 1, 1998) and increasing by $100,000 per year for
each succeeding contract year up to a minimum of $500,000 in the
fourth contract year and each succeeding year thereafter.
The 10-year license is renewable for an additional 10-year period
upon notice prior to 180 days of expiration, plus the payment by
the registrant of $2 Million in cash or in shares of common stock
of registrant having a fair market value aggregating $2 Million.
The license may be terminated by ART in the event of (a)
registrant's failure to pay any fee due, (b) breach or default by
registrant of any material term of the License Agreement or other
related agreements between ART, BSD and or registrant; (c) breach
or default of the Manufacturing Agreement; (d) registrant files
a petition in bankruptcy or for an arrangement under any federal
or state bankruptcy laws or is adjudicated insolvent; or (e) a
petition is filed proposing adjudication of registrant as
bankruptcy or insolvent, and such petition is not dismissed
within 90 days after filing thereof.
Manufacturing Agreement
Pursuant to the Contemporaneous Agreements, the Company was
assigned a Manufacturing Agreement dated February 9, 1998, which
provides that ART will job-coat products pursuant to the
registrant's specifications for a fee based upon its base cost as
defined plus a percentage thereof, unless otherwise agreed. The
manufacturing Agreement which is for a term of 5-years and
renewable for an additional 5-years at the option of the
registrant also provides for minimum annual job-coating fees
which are to be offset against fees payable by the registrant to
maintain exclusivity under the License Agreement. Maintenance of
exclusivity of the License will satisfy and obviate the minimum
annual job-coating fees payable under the Manufacturing
Agreement.
Exchange of Shares
Pursuant to the Contemporaneous Agreements, the Company issued
2,000,000 shares of its stock to ART and acquired all of the
outstanding shares of common stock of BSD and an 8% convertible
Debenture of BSD in the principal amount of $750,000 in exchange
for 3,000,000 shares of common stock of the company. Upon
completion of such transactions, the Company issued a total of
5,000,000 shares and owned all of the outstanding securities of
BSD which had licensing and manufacturing rights to operate the
Equipment (which rights have been assigned to the Company),
$250,000 in cash and a $750,000 secured note receivable.
Future Obligation of the Company
Pursuant to the contemporaneous Agreements, ART is entitled to
exchange the 2,000,000 common shares of the Company for 2,000,000
shares of the Company's A Preferred Stock to be designated by
management to have the specified rights and preferences
(Preferred Stock) agreed upon in the contemporaneous agreements,
on or before September 6, 1998. Subject to the approval of
shareholders of a Certificate of Amendment of registrant's
Certificate of Incorporation authorizing the shares of Preferred
Stock, management shall immediately authorize and issue 2,000,000
shares which shall have the right and designations agreed to in
the contemporaneous agreements. Among other things the Preferred
Stock to be issued to ART is to be convertible into 2,000,000
shares of common stock of An-Con and shall have certain
preferences on liquidation and anti-dilution aspects. In the
event the Company is unable, for any reason, to deliver the
Preferred Stock to ART on or before September 6, 1998, then,
prior to September 15, 1998, An-con is to issue and deliver,
without payment of any additional consideration by ART, an
additional number of shares of An-Con's common stock having an
aggregate fair market value of $500,000. Furthermore, in the
event An-Con should issue any shares of any series or class of
its preferred stock having substantially the same rights and
preferences as the Preferred Stock without the prior consent of
ART (which shall not be unreasonably withheld), then An-Con is to
issue and deliver to ART, without payment of any additional
consideration by ART, an additional number of shares of An-Con's
common stock having an aggregate fair market value equal to
$500,000.
Item 3. Legal Proceedings
In February 1998 the Company settled its patent infringement
lawsuit with MegaDyne by payment of $150,000 and a pledge not to
sell coated blades in the electrosurgical market for six months.
Item 4. Submission of Matters to a Vote of Security Holders
No Meeting of the Shareholders was held during 1997.
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 markups, markdowns or
commissions.
High Low
1997
1st Quarter 1 5/16 1
2nd Quarter 1 1/8 11/16
3rd Quarter 2 1/32 9/16
4th Quarter 13/16 9/16
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
On March 31, 1998, the Closing bid for An-Con's Common Stock as
reported by the NASD Bulletin Board was $1.31 per share. As of
March 31, 1998, 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 1997 were approximately $7.3 million as
compared to $7.5 million for 1996, respectively. Sales of Aaron
Medical accounted for substantially all of 1997 and 1996 sales.
The decrease in sales of $114,619 (1.5%) was the net result of
$194,770 (3%) increase in revenues from sale of medical products
and $309,389 (24%) decrease in sales of non-medical products.
The sales for medical products represented approximately 87% of
total sales in 1997 as compared to 83% in 1996. This was due to
a decrease in non-medical lighting products of $309,517 which is
directly attributable to one customer decreasing purchases from
the Company. The Company believes this trend by this customer
will continue in 1998 but at a lower rate. Percentage of gross
profit from sales decreased from 45% in 1996 to 44% in 1997
principally due to slightly higher cost of materials.
Because the Company's sales volume and gross profit percentage ,
for the two years was approximately the same, cost of goods sold
did not materially change from 1996 to 1997. During 1997 and
1996, Aaron's family of cauteries accounted for 43% and 39% of
sales, and 39% and 33% of cost of goods sold, respectively.
In early 1998 the Company increased pricing on certain medical
products by 10%. This should cause sales and margins to increase
slightly in 1998.
Research and development expenses decreased by 8.5% from $105,700
to $96,738 from 1996 to 1997, respectively. The Company
continued to invest in the development of ECU devices, and other
Aaron products which is evidenced by acquisition costs in 1997 of
$11,925. Research and development costs are made up of materials
costs, engineering costs and payroll.
Research and development costs of the Company will increase in
1998 by the depreciation expense on the reactors the Company
purchased from BSD (see note 18 to the financial statements
subsequent events ( acquisition of BSD development Beta
Corporation ). The Company is developing DYLYN coated products
with these reactors. When the products being developed are
marketed and the reactors are used for manufacturing,
depreciation will be charged to operations. The Company
estimated the lives of the reactors to be 10 years.
The increase in net interest of 16% amounting to $11,896 was
mainly attributable to the Company's decision to utilize a bank
line of credit and a term loan to finance its working capital
needs.
The trend in interest costs should remain at 1997 levels or
higher because the Company intends to maintain its credit line
and refinance the first mortgage on its building.
The Company's effective income tax rate would have been 30%
except that An-Con has loss carryforwards. For 1997 the Company
recognized $8,577 in tax benefit for the current year.
General and administrative expenses of the Company increased by
$141,249 (10.5%) from $1.3 million in 1996 to $1.5 million in
1997. This was mainly attributable to the settlement of the
Megadyne lawsuit of $261,585.
Salaries increased by 9.6% from $1.1 million in 1996 to $1.2
million in 1997. The increase in salaries were in part because
of hiring additional engineering and quality control personnel.
Total other costs as a percentage of sales were 38% in 1996 as
compared to 43% in 1997. Total other costs increased due to the
Megadyne lawsuit. For 1998 the Company believes total other
costs should not be significantly higher than they were in 1997.
Income from operations decreased to $77,994 in 1997, from
$480,360 in 1996, a 84% decrease. Income from operations as
measured by a percentage of sales was 6.4% in 1996 and 1.1% in
1997. The decrease of $402,366 from 1996 to 1997 was mainly
attributable to a decrease in sales and gross profit of $309,517
and $183,441, respectively, on non-medical lighting sales and the
Megadyne lawsuit.
Net income of the Company in 1997 was $28,591 as compared to
$407,243 in 1996. Income decreased by $378,652 from 1996 to
1997. The primary reason for reduction of the net income was a
$261,585 loss due to the settlement of a patent infringement
lawsuit.
Cost of professional services increased by 15% from $259,400 in
1996 to $298,156 in 1997. Additional professional fees were
related to the consulting and legal costs of acquiring new
technologies and products. Legal fees in 1998 will increase
because the Company has completed the BSD transaction and is
negotiating to purchase the Bovie brand-name from Maxxim.
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 Company began attending trade shows in foreign
countries in 1993. Since that time, international sales have
more than doubled from the 1993 sales 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.
During 1997, international sales of the Aaron Medical product
line continued to increase. These sales were $1.78 million,
which represented 24% of total sales. This compares favorably to
1996 where total international sales were $1.51 million,
representing 20% of total sales. The increase from 1996 to 1997
represents a 19%($281,867) increase in international sales
volume.
Though consolidation in U.S. distribution continued in 1997,
Aaron retained all distributor relationships and acquired
preferred vendor status with industry leaders such as McKesson,
General Medical, Owens & Minor, and Physician Sales & Service.
Preferred vendor status denotes participation in a variety of
sales and marketing programs whereby the Company grants preferred
pricing and/or rebates to a customer and the customer provides a
variety of benefits such as preferred marketing advertising, and
distribution of the Company's products. Aaron entered into a
vendor focus agreement with Owens & Minor and an exclusive U.S.
sales agreement with Physician Sales & Services for the Aaron
800. Additional sales were generated by electrosurgical product
OEM agreements.
An adequate supply of raw materials is available from both
domestic and international suppliers. The relationship between
the Company and its suppliers is generally limited to individual
purchase order agreements, supplemented by contractual
arrangements with key vendors to ensure availability of certain
products. The Company has developed multiple sources of supply
where possible.
New product development and improvements to the Company's
facility required by regulatory agencies in 1997 amounted to
$86,909. These expenditures were funded primarily through
internal cash flow and bank financing. 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 three year note to
purchase fixed assets with interest at 1% over prime.
Discontinued Operations
As part of a lawsuit settlement with a competitor of the company,
the company agreed to discontinue sales of its coated blade
products. Sales and gross profits from this product for 1996 and
1997 were $370,677 - $489,582 and $203,131 - $332,916,
respectively. The company is developing a new line of coated
blade products, that the Company believes is proprietary, which
the Company believes will be marketed in the second half of 1998.
The cost of the discontinued operations in 1997 was $261,585.
Financial Condition
As of December 31, 1997, cash totaled $48,246 down from $120,900
at December 31, 1996. Cash used by operating activities was
$98,793 in 1997 compared to $425,300 cash generated from
operating activities in 1996. Net working capital of the Company
on December 31, 1997 was $557,237 as compared to $666,600 in
1996.
The amount of cash used in investing activities was $257,733 in
1997, compared to $456,200 in 1996. The Company continued to
invest in property, plant and equipment needed for future
business requirements, including manufacturing capacity.
The Company's ten largest customers accounted for approximately
51% of net revenues for 1997. At December 31, 1997, the same ten
customers accounted for approximately 47% of outstanding accounts
receivables.
The net cash inflow from financing was $283,868 in 1997 as
compared to $14,000 in 1996. 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 services valued
at $181,000.
In 1997, the major sources of financing were $485,000 gross,
borrowing from the bank line of credit and $150,000 term loan
from the bank. The cash used in financing activities were
principally to repay the line of credit and long term debt,
$225,000 and $41,936 respectively.
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.
heretofore. 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 and the as
Aaron 1200. The Aaron 1200 will be introduced in the second
quarter of 1998.
From 1996 to 1997, the Company's electrosurgical sales increased
by more than 3% from $1,331,523 to $1,377,029.
This increase was attributable to a 50% increase in Resistick
sales and a 22% decrease in sales of generators. In 1998
Resistick sales ceased due to the settlement of the Company
lawsuit with MegaDyne. Except for the possible introduction of
new electrosurgical products the Company does not expect
electrosurgical sales to increase in 1998. Aaron through its
private label capability 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,
ValleyLab and Conmed. The combined markets for the Company's
electrosurgical products exceed $100 million annually.
Electrosurgical product sales moved from fifth place to second in
total Company sales by product line in 1997.
Non-Medical Products
The Company for 1997, sold $.962 million of its flexible lighting
products used primarily in the automotive and locksmith
industries. Approximately $.627 million was sold to one
customer. The Company is expanding this market line 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 no longer intends to manufacture a fiber optic
flexible scope to compete in the automotive, aircraft and quality
maintenance markets. The Company sold its rights in this product
to a customer.
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.
In order to continue its strong international sales growth and
maintain its ability to sell in Europe, management is
implementing 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 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
There are no disagreements with or changes in accountants.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons
Name Age Position Director Since
J. Robert Saron 45 Chairman of the Board August, 1994
Chief Executive
Officer, Director
Andrew Makrides 56 President, Director December,1982
Joseph F. Valenti 81 Director October, 1995
George W. Kromer 56 Director October, 1995
Delton Cunningham 33 Secretary, Treasurer
Vice President/CFO
Tsang Yang Tseng 51 Vice-President
Far East Affairs
Moshe Citronowicz 45 Executive Vice President
Chief Operating Officer
J. Robert Saron, age 45, 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 56, 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 33, 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 Anderson & 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 51, 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. In
the first quarter of 1998 Dr. Tseng resigned as an officer of the
Company citing personal time restraints.
Joseph F. Valenti, age 81 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 56 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 (45), 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. In September 1997, Mr. Citronowicz was
appointed by the board of directors to the position Executive
Vice President and Chief Operating Officer.
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, 1997:
Summary Compensation Table
Annual Compensation
Name and
Principal Annual
Position Year Salary Bonus(a)
J. Robert Saron
CEO/Chairman 1997 $155,865 $ 2,460
1996 143,000 42,600
1995 116,000 39,600
Andrew Makrides
President 1997 103,382 1,784
1996 90,000 8,400
1995 77,000 11,800
Moshe Citronowicz
Executive
Vice President-
Chief Operating 1997 107,044 1,921
Officer 1996 104,600 11,200
1995 97,000 11,800
Delton Cunningham
Secretary, Treasurer,
Vice President/CFO 1997 90,325 1,516
1996 86,000 8,400
1995 82,900 8,800
(a) In 1997, the officers waived their right to 1996
bonuses and the bonuses were cancelled.
<PAGE>
REMUNERATION(CONTINUED)
Long Term Compensation
Awards Pay-outs
Securities
Restricted Underlying
Other (b) Stock Option/
Year Compensation Awards SARS(#) Pay-outs
J. Robert Saron
CEO/Chairman 1997 $ 9,352 -- -- --
1996 8,100 -- 90,000 --
1995 23,700 -- -- --
Andrew Makrides 1997 9,598 -- -- --
1996 9,700 -- 70,000 --
1995 8,000 -- -- --
Moshe Citronowics
Executive Vice
President-Chief
Operating 1997 9,352 -- -- --
1996 8,100 -- 25,000 --
1995 8,000 -- -- --
Delton Cunningham
Secretary, Treasurer,
Vice President/
CFO 1997 9,262 -- -- --
1996 7,400 -- 55,000 --
1995 8,000 -- -- --
(b) Other compensation consists of medical insurance, life
insurance and automobile allowance.
<PAGE>
Option/SAR Grants Table
Values of
securities
Number of underlying
shares unexercised
Acquired options
Name and on Value FY-END(#) sar/s at
Principal
Position Year Exerciseable Realized Exercisable
J. Robert Saron
CEO 1997 -- -- --
1996 -- -- 101,250
1995 -- -- --
Andrew Makrides
President 1997 -- -- --
1996 -- -- 78,750
1995 -- -- --
Moshe Citronowicz
Vice President
Operations 1997 -- -- --
1996 -- -- 28,125
1995 -- -- --
Delton Cunningham
President/ Secretary,
Treasurer, Vice,
CFO 1997 -- -- --
1996 -- -- 61,875
1995 -- -- --
(b) Other compensation consists of medical insurance and auto.
Outside Directors are compensated in their capacities as Board
members through option grants. 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 $1,000.
In 1996 and 1997 George Kromer and Joseph Valenti were awarded
105,000 and 120,000 options, respectively, each for five to ten
years to purchase An-Con stock from .75% to $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 provided 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.
In May of 1997 the officers as a group waived their right to the
bonuses and set forth in their contracts. The board of directors
will determine future bonuses.
Item 11. Security Ownership of Certain Beneficial Owners and
Management of An-Con.
The following table sets forth certain information as of December
31, 1997, 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 Percent.
Name and Title Shares of of
Address of Class owned ownership(i) shares(i)
5% Beneficial
Owners
Tsang Yang
Tseng Common Stock 666,666 Includes 7.14%
190-1 Ming-Chun Shares only
Road
Chi-Yi, Taiwan
Robert Speiser
(ii) Common Stock 753,333 Includes 8.07%
1340 Boca Ciega Shares only
Isle Drive
St. Petersburg,
Florida 33706
Directors
J. Robert Saron
(iii)(V) Common Stock 522,976 Includes 5.60%
Ashley Drive 90,000 shares
Seminole, FL 34642 reserved for
options
J.Valenti Common Stock 177,205 Includes 1.90%
5700 mariner drive 120,000 shares
Tampa, Florida 33609 reserved for
options
G. Kromer Common Stock 105,000 Includes 1.12%
P.O. Box 188 105,000 shares
Farmingdale, NY 11738 reserved for
options
A.Makrides Common Stock 420,667 Includes 4.50%
20 Damin Circle 70,000 shares
St. James, NY 11780 reserved for
options
Officers and
Directors
as a Group Common Stock 1,528,497 Includes 16.37%
465,000 shares
reserved for
options
(i) Based on 8,279,948 shares and 1,064,000 options outstanding
to acquire shares. Officers and directors have 465,000 options
to acquire shares at December 31, 1997.
(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 350,667.
(v) During 1996, one transaction took place that materially
changed shareholders' control of the Company:
Aaron shareholders received their shares on November 25, 1996
from the escrow agent, which gave them 37.7% of the outstanding
shares of the Company at that time.
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 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 1997 and 1996, respectively, the equivalent sales
of Valpex to Aaron were $117,700 and $126,000, respectively.
The related party transaction between the Company and Valpex
International Corporation were on terms that were no less
favorable than could have been obtained in an arms' length
transaction with an unrelated third party. At the time the
Company entered into its agreement with Valpex International
Corporation the agreed upon pricing was substantially better than
other pricing available in the market.
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, of
which Mr. Speiser was Chairman, 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
then 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 execution order expired. As of December
31, 1997, the Company had repaid $235,100 of the principal amount
upon which the aforesaid judgments were based. The Company has
accrued a liability for $73,800 to Mr. Speiser, which was the
balance of his loan to the Company and accrued interest on that
loan. Mr. Speiser is disputing this amount because he feels he
is due additional interest and back wages he estimated to be an
additional $80,000.
See ?certain Relationships and related Transactions. Presently
there is no lawsuit between the Company and Mr. Speiser.
See "Certain Relationships and Related Transactions". The
Company is presently trying to settle Mr. Speiser's claim.
Item 13. Exhibits and Reports on Form 8-k
No Form 8-k was filed in the fourth quarter of 1996.<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of St. Petersburg, State
of Florida, on March 29, 1997.
An-Con Genetics, Inc.
By: S/J.Robert Saron
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.
s/ J.Robert Saron Chairman of the Board
J. Robert Saron Chief Executive Officer, Director
April 14, 1998
S/Andrew Makrides President, Director
Andrew Makrides April 14, 1998
S/Joseph F. Valenti Director
Joseph F. Valenti April 14, 1998
S/George W. Kromer Director
George W. Kromer April 14, 1998
S/Delton N. Cunningham Secretary, Treasurer
Delton N. Cunningham Principal Accounting Officer
April 14, 1998
PART II
ITEM 7. FINANCIAL STATEMENT
AN-CON GENETICS, INC.
INDEX TO FINANCIAL STATEMENTS
Contents
Consolidated Balance Sheet at December 31, 1997
Consolidated Statements of Operations for
the years ended December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for
the years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Consent of Certified Public Accountant
Independent Auditors' Report <PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets:
Cash $ 48,246
Trade accounts
receivable, net 791,825
Inventories 953,125
Prepaid expenses 67,930
Deferred tax asset 175,010
Other Assets 57,263
Total current assets 2,093,399
Property and equipment, net 1,439,500
Other assets:
Goodwill, net 40,000
Patent rights, net 257,552
Deposits 7,150
304,702
Total Assets $ 3,837,601
The accompanying notes are an integral part of the
financial statements.
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current liabilities:
Accounts payable $ 399,090
Accrued expenses 235,790
Notes payable - current
portion 804,762
Due to shareholders 99,154
Total current liabilities 1,538,796
Long-term debt 74,107
Stockholders' equity:
Common stock par value $.015;
15,000,000 shares authorized,
issued and outstanding 8,279,948
Shares, on December 31, 1997 124,071
Additional paid in capital 13,030,962
Accumulated deficit (10,930,335)
Total stockholders' equity 2,224,698
Total liabilities and
Stockholders' equity $ 3,837,601
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, 1997 AND 1996
1997 1996
Sales $ 7,371,281 $ 7,485,900
Cost of sales 4,138,774 4,134,434
Gross Profit 3,232,507 3,351,466
Other costs:
Research and development 96,738 105,681
Professional services 298,156 259,406
Salaries and related
costs 1,280,370 1,168,019
Selling, general and
administration 1,479,249 1,338,000
Total other costs 3,154,513 2,871,106
Income from operations 77,994 480,360
Other income and (expense):
Interest income 4,005 --
Interest expense ( 87,696) ( 75,820)
Miscellaneous 34,288 11,003
( 49,403) 64,817
Income before income tax 28,591 415,543
Income taxes:
Current ( 8,577) ( 158,300)
Deferred -- ( 8,300)
Tax benefit 8,577 158,300
Net income (loss) $ 28,591 $ 407,243
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(CONTINUED)
Earnings per share 1997 1996
Net income:
Basic N/S $ .0531
Diluted N/S $ .0521
Weighted average number
of shares outstanding 8,186,256 7,663,872
Weighted average number
of share assuming
conversion of securities 8,443,972 7,817,205
N/S - Not Significant
The accompanying notes are an integral part of the
inancial statements.
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
Common
Warrants number of Common Paid-in
Outstanding shares stock Capital
Balance January 1,
1996 80,000 4,305,340 $64,591 $11,541,144
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 -- 57,778 867 19,133
Shares issued for
cash and notes
at $.42
per share -- 200,000 3,000 81,000
Shares issued
for cash at $.42
per share -- 50,000 750 20,250
Shares issued in
exchange for Aaron
shareholders at
$.39 per share -- 3,352,530 50,288 1,306,812
Stock issue costs -- -- -- ( 174,800)
Shares issued for
services at $.40
per share -- 25,000 375 9,625
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 $121,671 $12,921,364
The accompanying notes are an integral part of the financial
statements. (Continued on next page)
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(CONTINUED)
Subscriptions
Deficit Receivable Total
Balance January 1,
1996 $(11,366,169) $ ( 10,600) $228,966
Private
placement of
Shares at $1
per share plus
1 warrant
per share -- -- 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 costs -- -- ( 174,800)
Shares issued
for services
at $.40 per share -- -- 10,000
Collection of
stock
subscriptions
receivable -- 10,600 10,600
Employee
warrants -- -- --
Income for
year 1996 -- -- --
Balance as of
December 31,
1996 $( 10,958,926) $( 64,000) $ 2,020,109
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 1997
(Continued)
Common
Warrants number of Common Paid in
Outstanding Shares Stock Capital
Balance
January 1,
1997 $1,121,000 $8,110,648 $121,671 $12,921,364
Shares
exchanged
for warrants (200,000) 100,000 1,500 ( 1,500)
Shares issued
to retire
debts -- 51,800 637 33,761
Shares
issued for
services -- 17,500 263 6,737
Warrants
issued 143,000 -- -- --
Collection of
subscriptions
receivable -- -- -- --
Employee
contribution
of Bonus -- -- -- 70,600
Net Income -- -- -- --
Balance as of
December 31,
1997 $1,064,000 $8,279,948 $124,071 $13,030,962
The accompanying notes are an integral part of the financial
statements. (Continued on next page)
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Continued)
Subscriptions
Deficit Receivable Total
Balance
January 1,
1997 ( 10,958,926) $ (64,000) $2,020,109
Shares
exchanged
for warrants -- -- --
Shares issued
to retire debts -- -- 34,398
Shares issued
for services -- -- 7,000
Warrants issued -- -- --
Collection of
subscriptions
receivable -- 64,000 64,000
Employee
contribution
of Bonus -- -- 70,600
Net income 28,591 -- 28,591
Balance as
of December 31,
1997 $(10,930,335) $ -- $2,224,698
The accompanying notes are an integral part of the financial
statements. (Continued on next page)
<PAGE>
AN-CON GENETICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
Cash flows from operating
activities:
Net income $ 28,591 $ 407,249
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and amortization 311,138 260,600
Shares issued for services 7,000 10,000
Deferred income taxes -- 8,300
Change in assets and liabilities:
(Increase) decrease in
receivables 64,565 ( 204,100)
(Increase) decrease in
prepaid expenses ( 11,876) 17,724
Increase in inventories ( 109,925) ( 247,769)
Increase in other
receivables ( 7,738) --
Increase (decrease) in
accounts payable ( 388,126) 112,400
Increase in accrued
expense 7,578 60,900
Total adjustments ( 127,384) 18,055
Net cash provided by
(used in)operations $( 98,793) $ 425,304
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, 1997 AND 1996
(Continued)
1997 1996
Net cash provided by
(used in)
operating activities $ ( 98,793) $ 425,304
Cash flows from investing
activities:
Increase in fixed assets (244,352) (300,200)
Increase in security
deposits ( 10) 600
Acquisition of patent
rights ( 13,371) --
Purchase of Technology -- (156,600)
Net cash used in investing
activities (257,733) (456,200)
Cash flows from financing
activities
Receipt of common stock
subscription 64,000 10,600
Common shares issued -- 181,000
Loans from shareholders 2,736 --
Cost of issuing common
stock - Purchase of Aaron -- ( 79,700)
Increase in long term
borrowing 69,534 --
Payment of long term
borrowing (220,466) (125,900)
Term loan 150,000 --
Repayment of term loan ( 41,936) --
Borrowing - line of credit 485,000 --
Repayment - line of credit (225,000) --
Net cash used in financing
activities 283,868 ( 14,000)
Net increase (decrease)
in cash (72,658) ( 44,896)
Cash at beginning of year 120,904 165,800
Cash at end of year $ 48,246 $ 120,904
Cash paid during the twelve months ended December 31:
1997 1996
Interest $ 71,651 $ 70,000
Income Taxes -0- -0-
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, 1997 AND 1996
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
1. In February of 1997, 10 year convertible subordinated
debentures of the Company 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 accrued
interest on the converted bonds were $19,000 and $10,826
respectively. The balance of the bondholders have not redeemed
their bonds or accepted the share offer.
2. The Company issued 10,000 shares of common stock in exchange
for $4,572 of accounts payable.
3. The Company issued 100,000 shares of common stock and
cancelled 200,000 warrants that were issued in conjunction with
a private placement of the Company's securities.
The Company exchanged its patent for Baroscope Technology and
related equipment and inventories for notes receivable in the
amount of $49,525. The costs of the patent (net of amortization)
equipment, and inventories were $31,735, $7,000, and $10,790
respectively.
The Company accepted $70,600 from management as a contribution to
capital for an outstanding liability for bonuses earned in 1996.
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.
AN-CON GENETICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (continued)
3. In November 1996, 99% of Aaron's shareholders accepted
3,352,530 shares of An-Con's common stock and rejected the cash
recession 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.
The accompanying notes are an integral part of the financial
statements.
<PAGE>
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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.
Consolidated Financial Statements
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally on the average actual cost method.
Inventory at fiscal year-end was as follows:
1997
Raw materials $ 528,547
Work in process 244,772
Finished goods 179,806
Total $ 953,125
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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. Betterments 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-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.
AN-CON GENETICS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition and Product Warranty (Continued)
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.
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.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
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.
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.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, "Financial Reporting for Segments of Business
Enterprise." SFAS 131 supersedes the "industry segment"
concept of SFAS 14 with a "management approach" concept as the
basis for identifying reportable segments. SFAS 131 is
effective for fiscal years beginning after December 15, 1997
and early application is permitted. Management believes the
application of SFAS 131 will not have a material effect on the
Company's future financial statements.
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
manufacturing and marketing medical products and developing
related technologies.
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
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. DESCRIPTION OF BUSINESS (Continued)
Aaron Medical Industries, Inc.(Continued)
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.
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.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. DESCRIPTION OF BUSINESS (Continued)
Aaron Medical Industries, Inc.(Continued)
Aaron Medical Industries, Inc. manufactures and sells its
products under the Aaron label worldwide and has private label
arrangements.
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 were payable over eighteen months and bear
10% interest per annum. Monthly payment on the note was
$5,105.85. The notes were paid and retired in 1997.
The ECU was 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 and has relocated
the production to the St. Petersburg facility.
Aaron has also hired a former director of sales for a
physicians office products Company. As part of his arrangement
he has loaned the Company $30,000 to be paid back over 2 years
at 10% interest. The note was retired in 1997.
The Company has developed a 120 watt electrosurgical
coagulation device (ECU) to be marketed in 1998. Through
December 31, 1997 the Company has spent $94,372 in its
development.
NOTE 3. TRADE ACCOUNTS RECEIVABLE
As of December 31, 1997 the trade accounts receivable were as
follows:
Trade accounts receivable $ 805,755
Less: allow for doubtful
accounts ( 13,930)
Trade accounts receivable,
net $ 791,825
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1997 property, plant and equipment consisted
of the following:
Equipment $ 1,422,180
Building 637,485
Furniture & Fixtures 229,189
Leasehold Improvements 230,109
Molds 56,742
2,575,705
Less: Accumulated
depreciation (1,136,205)
Net property, plant,
and equipment $ 1,439,500
Depreciation expenses for the years ended December 31, 1997 and
1996 were $216,000 and $166,400 respectively.
Plant, property and equipment, includes the capitalized lease
of the Company's telephone equipment. The lease agreement
expired in May 1997, and the assets were retired. 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 1997 and 1996. This amortization
amounted to $0 and $3,200 for 1997 and 1996 respectively.
NOTE 5. RENTAL AGREEMENTS
On May 6, 1997, an agreement was entered into with the landlord
of 734 Walt Whitman Rd., Melville, New York for a new lease on
premises beginning May 6, 1997 and extending for three years to
May 5, 2000. The annual rental is $14,722 payable $1,226.83
per month.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. RENTAL AGREEMENTS (CONTINUED)
The following is a schedule of future minimum rental payments as
of December 31, 1997:
Amount
1998 $ 14,722
1999 14,722
2000 4,907
$ 34,351
Total consolidated rent expense for the Company was $19,294 in
1997 and $24,000 in 1996.
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 called for the
payment to certain employees of 10% of the profits in excess of
$200,000 and 1% of the profits over $300,000.
During 1997, the Board of Directors of the Company requested
officers of the Company to waive their rights to contract
bonuses. All officers agreed and waived their contract
bonuses.
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 $180,500. 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 had been accrued from
inception. His loan balance at December 31, 1996 was $ -0- and
accrued interest amounted to $73,800. Accrued interest has not
been paid and the Company has been negotiating to settle this
matter.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DUE TO SHAREHOLDERS(CONTINUED)
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 recession price owed to
these shareholders, including $6,566 of accrued interest is
$25,353.
NOTE 8. INTANGIBLE ASSETS
At December 31, 1997, the intangible assets consisted of the
following:
Classification:
Patents, Trademarks, Patent Rights, Technologies and Copyrights
Balance Balance Accum.
Beginning Additions Dispos. at end ulated
Period at costs itions of Period Amort.
ization
ECU Aaron
1200 $ 93,000 $ 1,372 $ -- $ 94,372 $ --
Multifunction
Cautery 59,400 -- -- 59,400 32,637
Patent rights
(Cauteries) 71,500 -- -- 71,500 71,213
ECU Aaron
800 210,900 11,923 -- 222,823 86,693
Boroscope
Technology 37,700 -- 37,700 -- --
$472,500 $13,295 (37,700) $448,095 $190,543
During 1996 the Company purchased the technology for two
electro-surgical products from a non-affiliated third party
manufacturer, the Aaron 800 for $25,900 and the Aaron 1200 for
$93,000. The Company also purchased the rights to a product
called the BoroScope for $37,700, which the Company
subsequently sold in 1997 for $49,525, the above costs have
been capitalized.
The cost of patents, trademarks, patent rights, technologies
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 1997 and
1996 was $60,1570 and $67,700 respectively.
Balance
Beginning and Accumulated
End of Period Amortization
Goodwill (Purchase Aaron) $152,500 $132,000
Goodwill (Purchase Suncoast
Covenant not to compete) 15,500 6,800
(Purchase Suncoast) 20,000 9,200
$188,000 $148,000
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INTANGIBLE ASSETS (CONTINUED)
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 1997 and 1996 were
$22,700 and $37,600, respectively.
NOTE 9. LONG-TERM DEBT
The long-term debt of the Company includes the mortgages,
convertible debentures and notes payable of the Company.
Bonds payable $ 20,000
Mortgage payable 460,610
Term loan 108,064
Borrowing-line of credit 260,000
7% Note payable 23,966
9% Note payable 6,229
878,869
Less: Current portion 804,762
Long-term debt $ 74,107
Convertible Debenture
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, 1997, 1,691 units of debentures had been
converted into common shares of An-Con Genetics, Inc. or have
been redeemed. The remaining number of outstanding debentures was
20 units.
In February of 1997, the 10-year notes of $78,000 and accrued
interest of $42,580 turned over to New York State 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LONG-TERM DEBT
Mortgage Payable
10% - Mortgage payable to former landlord for purchase of
property at 7100 30th Avenue North, St. Petersburg, Florida
secured on June 26, 1995 for $500,000 payable in monthly
installments of $5,673.06 inclusive of interest until July 1,1998
when a balloon payment of $ 442,733 is due.
Notes Payable to a Commercial Bank
The notes payable is for a term loan of $150,000. The interest
on the term loan is the bank's prime rate plus 1%. The loan is
repaid in equal monthly payments plus accrued interest based on
a three year amortization. The bank has a security interest in
inventory, accounts receivable and equipment of the Company
(the collaterals).
Line of Credit - Commercial Bank
The advances under-line of credit is limited to the lesser of
$400,000 or 65% of accounts receivable from non affiliated
parties. The annual interest rate on the loan is the bank's
prime rate plus one percent. The line expires March 31, 1998.
The bank has a security interest in inventory, accounts
receivable and equipment of the Company (the collateral).
7% Note Payable
7% - Note 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.
9% Note Payable
9% - Note payable to insurance premium finance Company at
$5,661.00 per month for 2 months.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LONG-TERM DEBT(Continued)
The following are maturities of long term debt for each of the
next 5 years:
1998 $ 804,762
1999 59,235
2000 14,872
$ 878,869
NOTE 10. DISCONTINUED OPERATIONS
The Company's unconsolidated subsidiaries, Automated
Diagnostics and Xenetics Biomedical, discontinued operations in
1987 and 1989, respectively. Automated and Xenetics were
majority owned subsidiaries of the Company, the minority shares
of which were owned by supportive private investors, many of
whom also owned shares of the Company. Automated was formed to
fund development of technologies owned by the Company which
proved to be not commercially viable and Automated discontinued
operations, Xenetics acquired Omnifix, a technology for a
biodegradable tissue fixative, which was assigned to An-Con as
part of a repayment of indebtedness in connection with
Xenetics? discontinuance of operations. On information and
belief, prior to the discontinuance of each of the operations
of Automated and Xenetics, the Company agreed to merge with
them and consolidate operations. 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, the
board of directors of the Company has resolved to deliver
153,333 shares of its common stock to Automated and Xenetic
shareholders on an adjusted basis, having given effect to the
one-for-fifteen reverse stock split declared in 1994. When the
Company issues the 153,333 restricted shares the Company will
dilute present shareholders by .0115% due to its obligation to
Automated Diagnostics and Xenetics shareholders)
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. OPTIONS
As of December 31, 1997, outstanding options were as follows:
Number of Options Exercise
Currently Exercisable Price
677,000 $ 0.750 up to $1.15
387,000 $ 1.125
1,064,000 $ 0.8064 weighted
In 1996 the Company issued 921,000 10year non-statutory stock
options to employees exercisable at from $.75 to $1.15 a share.
In 1997, the Company issued 100,000 shares of common stock in
exchange for 200,000 options. Also, 143,000 warrants were issued
to the Company's employees as a part of the employee benefit plan
(Note 16).
The options became exercisable in 1996 and 1997 and expire at
various dates through December, 2007. At December 31, 1997,
1,064,000 shares of stock were reserved for that purpose.
1,064,000 options are currently exercisable with a weighted
average life of 9.6-years and a weighted average exercise price
of $.8064.
The Company used the Black-Scholes Model to determine the
value of the options with the following weighted average
assumptions, zero dividend yield; expected volatility of
26%; and risk free interest rate of 6%. (See Note 16 -
Employee Benefit Plans)
NOTE 12. NET OPERATING LOSS CARRYFORWARDS
The tax effects of temporary differences that gave rise to the
deferred tax assets are as follows:
1997
Deferred tax assets - current:
Net operating loss carry-forwards $ 175,000
Deferred tax assets - non-current:
Net operating loss carry-forwards 2,460,115
Patent rights, primarily due to
amortization ( 63,200)
Total gross deferred tax assets 2,523,315
Less: Valuation allowance (2,523,315)
Net deferred tax assets - non-current $ --
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. NET OPERATING LOSS CARRYFORWARDS
The Company had NOLs of approximately $7,028,900 at December
31, 1997, 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 $ 671,900 $ 235,165
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 7,528,900 2,635,115
Current 500,000 175,000
$ 7,028,900 $ 2,460,115
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 earnings. However, the net deferred tax assets could
be reduced in the near term if management's estimates of
taxable
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. NET OPERATING LOSS CARRYFORWARDS (CONTINUED)
income during the carryforward period are significantly
reduced.
The valuation allowance of $2,506,700, as of January 1, 1997
was reduced as a consequence of recognizing deferred tax assets
of $8,577 and NOL carry-forward benefit of $28,591. 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 carry-forward. 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. The amount of tax assets expired in 1997 was $8,577.
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 carry-forward of An-Con.
Income before taxes and provisions for income tax expense
(benefit) from continuing operations at December 31, are:
Current Federal income tax 6,262
Current State income tax 2,315
Total 8,577
The actual income tax expense attributable to earnings from
continuing operations for the year ended December 31, 1997
differed from the amounts computed by applying the US Federal
tax rate of 30% to pretax earnings from continuing operations
as a result of the following:
Benefit of operating loss carryforwards (8,577)
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
All employees are eligible to participate if they have one year
of service to the Company. The employees may make voluntary
contribution to the plan up to 15% of their annual
compensation. The Company's contributions to the plan are
discretionary but may not exceed 25% of the first 4% of the
annual compensation that an employee contributes to the plan.
Vesting is graded and depends on the years of service. After
six years of service the employees are 100% vested.
The Company has made a contribution during 1997 and 1996 of
$10,557 and $14,000 respectively, for the benefit of its
employees.
The Company also maintains a group health and dental insurance
plan. The employees are eligible to participate in the plan
after three months of full-time service to the Company.
NOTE 14. RELATED PARTY TRANSACTIONS
During 1997, a company that was controlled by a board member
received commissions from the purchase of materials the Company
used in the production of certain of the Company's products.
The value of these materials sold to the Company for 1997 and
1996 was $117,700 and $126,000, respectively. 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.
NOTE 15. PROPERTIES
The Company had 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.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. PROPERTIES (CONTINUED)
The Company has additional executive office space at 734 Walt
Whitman Road, Melville, which it leases for $1,226.83 per
month.
The lease runs through the year 2000.
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 (CAR) and a January 27, 1995 Contamination
Assessment Addendum (CARA). The Florida Department of
Environmental Protection (FDEP) stated in a letter, dated March
31, 1995, that based on their review of the CARA, the CAR could
not be approved and that additional work was needed to be
performed.
In February of 1998, the environmental engineering firm Geo-
Ambient conducted a second addendum to the CAR, (CAR Addendum
II) to complete the additional work requested by the FDEP.
Based on the results of CAR Addendum II, Geo-Ambient
recommended to the FDEP that a "no further action" status be
granted for the site. However, as of the date of filing the
FDEP has not yet issued a Site Completion Rehabilitation Order
(SCRO).
The Company has received a report and recommendations on the
results of the water tests performed. As a result of previous
sampling that showed that one on-site monitoring well still had
groundwater exceedances for vinyl chloride and total xylene,
the state Department of Environmental Protection has placed the
site on a "monitoring-only" plan. The plan includes 4 quarters
of sampling, concluding in May, 1999. The first quarter report
was issued this past July. Because the exceedances were very
slight, the mortgagee has requested a "no further action".
DEP disagreed, instead requiring the monitoring plan. At the
end of the period, DEP will likely approve a "no further
action" unless the well concentrations have not declined. In
that case, DEP could ask for further monitoring or some type of
groundwater treatment. The SCRO is on hold and the Company
believes it will not be issued for more than a year pending
action on the above issue.
Based on the above paragraph and the "no further action"
finding by Geo-Ambient and the future issuance of an SCRO by
the FDEP management of An-Con has estimated the present value
of the cost of environmental work to be zero.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES
Environmental conditions -Purchase of Building
(See Note 15 - properties)
Leases
The Company leases administrative facilities under an operating
lease that expires in 2000. Rental expense was $19,294 in 1997
and $24,400 in 1996. Minimum rental commitments under all non-
cancelable leases with an initial term in excess of one year are
payable as follows: 1998 - $14,722; 1999 - $14,722; 2001 and
beyond $4,907. Commitments for construction or purchase of
property, plant, and equipment approximated $50,000 at December
31, 1997.
Employment Agreements
The Company has employment agreements with six key employees.
These 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.
During 1997 officers waived their right to 1996 bonuses and
allowed the board of directors to determine future bonuses.
These bonuses valued at $70,600 were shown as a contribution to
paid in capital.
Employee Benefit Plans
In 1996, the Company established stock option plans 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 1,064,000 shares of
restricted common stock at exercise prices ranging from $.75 to
$1.125, in 1997, 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,
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES(Continued)
the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
1997 1996
Net earnings-as reported $ 99,191 $407,300
Net earnings-pro forma 65,151 347,300
Earnings per share before
extraordinary
items-as reported .0352 .053
Earnings per share before
extraordinary items-pro forma .008 .045
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 .26%; risk-free interest rate of 6%; and
expected lives of 3 years.
Options currently expire no later than ten 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.
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.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 28, 1994, the executive order expired. As of
December 31, 1997, the Company had repaid $235,100 of the
principal amount upon which the aforesaid judgements were
based. The Company has accrued a liability for $73,800 to Mr.
Speiser which was the balance of his loan to the Company and
accrued interest on that loan. Mr. Speiser is disputing this
amount because he feels he is due additional interest and back
wages he estimated to be an additional $80,000. See "certain
Relationships and Related Transactions". Presently there is no
lawsuit between the Company and Mr. Speiser .
The Company is pursuing a settlement of this matter.
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 1998.
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 the complaint; (b) to evaluate significant equipment
changes in manufacturing processes and the 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 and meet all finished specifications prior to
distribution; (e) to have, follow and document conformance with
written procedures for acceptance of components; (f) to conduct
a 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.
<PAGE>
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Regulation (Continued)
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 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 FDA has cleared the
Company and the Company is presently submitting applications for
new products to the FDA.
Bank Line of Credit and Term Loan
The bank line of credit and term loan require the Company:
1. To maintain a current ratio of not less than 1.10 to one,
senior debt to net worth ratio of not more than 1.5 to one, and
an interest coverage ratio of not less than eight to one.
2. Not to expend more than $400,000 for acquisition of fixed
assets, in the course of the year.
3. To submit its audited financial statements, forms C, and 10Q,
and accounts payable and receivable aging schedules.
4. Maintain its depository and cash management accounts with the
bank.
5. Not to guarantee obligations of any other person or encumber
its assets with any mortgage, security deed, or lien other than
security interests required by the bank loan agreement.
6. Not to default in any material contract with third parties.
<PAGE>
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. EARNING PER SHARE
The earnings per share were as follows:
For the Year Ended 1997
Income Share Per Share
Basic Earning Per Share
Income before extraordinary
items $ 28,591 8,186,256 N/S
Effect of Dillutive securities
Convertible shares of Xenetics
Biomedical, Inc. and Automated
Diagnostics, Inc. 153,333
Warrants 104,383
Diluted Earnings per Share
Income before extraordinary
items assuming conversion of
securities $28,591 8,443,972 N/S
For the Year Ended 1996
Income Share Per Share
Basic Earning Per Share
Income before extraordinary
items $415,543 7,663,872 $.0531
Effect of Dillutive securities
Convertible shares of Xenetices
Biomedical, Inc. and Automated
Diagnostics, Inc. 153,333
Diluted Earnings per Share
Income before extraordinary
items assuming conversion of
securities $415,543 7,817,205 $ .0521
Warrants to purchase 387,000 shares of common stock at $11/8
during 1997 and 921,000 to purchase shares of common stock at
various prices in 1996 were not included in the computation of
diluted earnings per share because warrants' exercise prices were
greater than the average price of common shares in 1997 and 1996,
respectively.
N/S - Not Significant
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. SUBSEQUENT EVENTS
Bank Line of Credit
On January 29, 1997 the Company signed notes which effectively
set up a term loan credit line with a commercial bank for
$550,000. The line of credit terminates on April 30, 1998 unless
renewed or extended by the bank in writing. The agreement
required the Company pay-off the $260,000 outstanding balance of
the loan by April 1, 1998 and subsequently apply for the renewal
of the line of credit. However, since the repayment of the loan
has been delayed the Company is in technical default. The
management plans to renew the loan. The bank has taken a
security interest in accounts receivable, inventories and
equipment.
Acquisition of BSD Development Beta Corporation
On February 9, 1998, the Company exchanged 5,000,000 shares of
its common stock for all preferred and common shares of BSD
Development Beta Corporation (BSD)and assumed an 8% Convertible
Debenture of BSD, in principal amount of $750,000. As a part of
the agreement with the sellers, the Company acquired through BSD
$250,000 cash, a secured note receivable of $750,000, due in May
1998, and certain equipment valued at $2,000,000. The equipment
will be used for coating electro-surgical blades and other
medical devices using DYLYN technology under a management
agreement with Advance Refractory Technologies (ART), the seller
of the equipment which has agreed to operate and maintain the
equipment.
As a part of the agreement with ART, the Company obtained an
exclusive ten-year renewable license to use the DYLYN Technology
for coating specified medical products.
2,000,000 of the 5,000,000 shares exchanged were with ART for the
shares they held in BSD. As part of the agreement An-con
contracted to exchange ARTs 2,000,000 shares for 2,000,000 shares
of preferred An-con stock yet to be authorized. An-con has until
September 9, 1998 to deliver the preferred stock or they will
have to issue to ART an additional $500,000 worth of shares of
common stock as a late penalty.
Patent Infringement Lawsuit
On January 22, 1998, Aaron and MegaDyne Medical Products,
Inc.(MMP), a Utah Corporation, entered an agreement to settle
an action that MMP had brought against the Company, in District
court of Utah, for infringing a patent for an electro-surgical
product.
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. SUBSEQUENT EVENTS
(the Patent). Aaron agreed to pay $150,000 for damages
resulting from the patent infringement, for a period, of six
months not to manufacture or sell any electro-surgical
instrument that infringes the Patent, and to provide MMP with a
list of customers who had purchased the infringing product.
Additional costs associated with the settlement were legal fees
of $92,038, write down or inventory of $12,047 and estimated
future sales refunds of $7,500. Total costs charged as Selling,
General and Administrative, were $261,585.
Restated Statement of Operations
The Company's financial statements were restated to capitalize
$70,600 of forgiveness of debt, by the Company's managers, and
to include $261,585 paid for the settlement of a patent
infringement lawsuit in selling, general, administration
expenses. The forgiveness of debt and the loss from a lawsuit
were previously presented as extraordinary items.
NOTE 19. 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 1996,
respectively.
One significant customer accounted for 9% and 14% of revenues
in 1997 and 1996, respectively. In 1997 that customer
accounted for $.6 million of non-medical sales which is 65% of
that segments sales. The Company's ten largest customers
accounted for approximately 51% of net revenues for 1997. At
December 31, 1997, the same ten customers accounted for
approximately 47% of outstanding accounts receivable.
Summary information by geographic area and significant industry
segment for years ended December 31,1997 and 1996 were as
follows:
<PAGE>
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating
Identifiable Sales Income Assets
1997 - (in thousands)
Geographic Area
United States $ 5,602 $ 259 $ 3,731
Europe 1,769 81 107
$ 7,371 $ 340 $ 3,838
Segment
Medical
Products $ 6,409 $ 302 $ 3,282
Non medical
Products 962 38 556
$ 7,371 $ 340 $ 3,838
<PAGE>
AN-CON GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. INDUSTRY SEGMENT REPORTING
Operating
Identifiable sales Income Assets
1996-(in thousands)
Geographic Area
United States $ 5,980 $ 384 $ 3,803
Europe 1,406 86 96
Latin America 100 10 --
$ 7,486 $ 480 $ 3,899
Segment
Medical Products $ 6,181 $ 451 $ 3,236
Non medical
Products 1,305 29 663
$ 7,486 $ 480 $ 3,899
1997 1996
Total assets $ 102 $ 96
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, 1997.
During 1997, 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.
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 August 20, 1998 , included in the Annual Report to
Stockholders of An-Con Genetics, Inc.
Bloom and Company
Hempstead, New York
August 20, 1998
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, 1997 and
the related consolidated statements of operations and
shareholders' equity, and cash flows for the years ended December
31, 1997 and 1996. 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 audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present
fairly, in all material respects, the financial position of An-
Con Genetics, Inc. and subsidiary as of December 31, 1997 and the
results of their operations, and their cash flows for the years
ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
BLOOM AND COMPANY
Hempstead, New York
April 10, 1998
Except for the notes 8,10, 12, 16, 17 and 18 to
to the Financial Statements for which the date is
August 20, 1998 and all other notes April 23, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 48,246
<SECURITIES> 0
<RECEIVABLES> 791,825
<ALLOWANCES> 0
<INVENTORY> 953,125
<CURRENT-ASSETS> 2,093,399
<PP&E> 2,575,705
<DEPRECIATION> 1,136,205
<TOTAL-ASSETS> 3,837,601
<CURRENT-LIABILITIES> 1,538,796
<BONDS> 0
0
0
<COMMON> 124,071
<OTHER-SE> 2,100,627
<TOTAL-LIABILITY-AND-EQUITY> 3,837,601
<SALES> 7,371,281
<TOTAL-REVENUES> 7,371,281
<CGS> 4,138,774
<TOTAL-COSTS> 4,138,774
<OTHER-EXPENSES> 3,154,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,696
<INCOME-PRETAX> 28,591
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,591
<DISCONTINUED> 0
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