U.S. Securities and Exchange Commission Washington D.C. 20549 Form 10-QSB (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission file number 0-12183 AN-CON GENETICS, INC. (Exact name of small business issuer as specified in its charter) Delaware 11-2644611 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 734 Walt Whitman Rd., Melville, New York 11747 (Address of principal executive offices) (516) 694-8470 (Issuer's telephone number) N/A (Former name, former address and former fiscal year, if changes since last report) Check whether the issuer (1) filed all reports required to be filed by Section or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuers's class of common equity, as of the latest practicable date: 8,405,868. AN-CON GENETICS, INC. FORM 10-QSB QUARTERLY REPORT SEPTEMBER 30, 1997
AN-CON GENETICS, INC. INDEX TO FORM 10-QSB Page Part I. Financial Information Item 1: Consolidated Financial Statements: Consolidated Balance Sheet - September 30, 1997 F1 Consolidated Statements of Operations for the Nine Months Ended September 30, 1997 and 1996 F3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 F4 Notes to Financial Statements F6 Item 2: Management's Discussion and Analysis of Financial and Results of Operations 1 Part II. Other Information 5 Item 1: Legal Proceedings 5 Item 2: Changes in Securities 5 Item 3: Defaults Upon Senior Securities 5 Item 4: Submission of Matters to Vote of Security Holders 5 Item 5: Exhibits and Reports on Form 8-K 5
PART I. FINANCIAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 Assets Current assets: Cash $ 124,456 Trade accounts receivable 869,413 Inventories 969,654 Prepaid expenses 78,093 Deferred tax asset 175,010 Other receivables 56,125 Total current assets 2,272,751 Property and equipment, net 1,441,436 Other assets: Goodwill, net 45,937 Patent rights, net 274,285 Deposits 7,150 327,372 $ 4,041,559 The accompanying notes are an integral part of the financial statements.
AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 30,1997 (CONTINUED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 476,593 Accrued expense 96,511 Notes payable - current portion 892,578 Due to shareholders 92,040 Total current liabilities 1,557,722 Long-term debt, net 93,070 Stockholders' equity: Common stock par value $.015; 15,000,000 shares authorized, issued and outstanding $8,405,868 shares on September 30, 1997 122,711 Additional paid in capital 12,964,325 Accumulated deficit (10,696,269) Total stockholders' equity 2,390,767 $ 4,041,559 The accompanying notes are an integral part of the financial statements.
AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 1997 1996 Sales $ 5,518,558 $ 5,254,200 Costs and expenses: Cost of sales 3,095,287 2,767,200 Research and development 60,290 31,000 Professional services 262,645 221,700 Salaries and related costs 1,055,795 824,200 Selling, general and administrative 811,183 902,600 5,285,200 4,746,700 Gain from operations 233,358 507,500 Other income (expense): Interest, net ( 59,468)( 104,700) Miscellaneous 18,140 -- ( 41,328)( 104,700) Income 192,030 402,800 Extraordinary item - waiver of bonus payments due officers 70,600 -- 262,630 402,800 Provision for income tax ( 91,920) (132,300) Realized benefit of loss carryforward 91,920 -- Net income $ 262,630 $ 270,500 Per share, Primary and fully diluted: Net income (loss) $ .03 $ .04 Weighted average number of shares outstanding 8,307,951 6,980,718 The accompanying notes are an integral part of the financial statements.
AN-CON GENETICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 1997 1996 Cash Flows from operating activities Net Income $262,631 $270,500 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 234,828 198,900 Employee stock option granted -- 16,900 Common stock for professional fees 7,000 5,700 Waiver of bonus payments to officers (70,600) -- Changes in current assets and liabilities: (Increase) in receivables ( 19,623)(140,500) (Increase) in inventories (114,776) (177,100) (Increase) decrease in prepaid expenses ( 22,027) 49,600 (Decrease) in accounts payable (310,907)( 73,600) Increase (decrease)in accrued expense(131,363) 43,800 Decrease in deferred tax -- 133,200 (Increase) in other receivables ( 11,678) -- Total adjustments (439,146) 56,900 Net cash provided by (used in) operating activities: (176,515) 327,400 Cash flows from investing activities (Increase)in deferred cost --( 79,700) (Increase)in fixed assets (192,241)(314,700) (Increase)in patents ( 13,780)(111,000) (Increase) in deposits ( 10) -- Net cash used in investing activities (206,031) (505,400) Cash flows from financing activities Decrease in obligations under capital lease ( 4,600) ( 5,900) (Decrease) in due to Shareholder ( 4,360) -- (Decrease) in long term debt (136,478) (104,200) Bank term loan 150,000 -- Repayment of bank term loan (25,002) -- Loan-Bank line of credit 425,000 -- Repayment of loan-line of credit (85,000) -- Common shares issued for cash 2,538 166,000 Decrease in subscriptions receivable 64,000 10,600 Net cash provided by financing activities 386,098 66,500 Net increase (decrease) in cash and cash equivalents 3,552 (111,500) Cash and cash equivalents, beginning of period 120,904 165,800 Cash and cash equivalents, end of period $ 124,456 $ 54,300 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Cash paid during the nine months ended September 30: 1997 1996 Interest $ -- $12,500 Income Taxes -0- -0- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1- In February of 1997, 10 year notes came due and the Company offered each bond holder 2,200 shares of common stock for each $1,000 bond and accrued interest of $550. Nineteen bondholders accepted the offer and forty-three bondholders received cash for their bonds and accrued interest. The total amounts of principal and the accrued interest of the converted bonds were $19,000 and $10,450 respectively. The balance of the bondholders have not redeemed their bonds or accepted the share offer. 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. 4- The Company exchanged its patent for Borascope 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. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 On February 15, 1996 the Company set up an employee stock option plan issuing 337,000 warrants to key employees valued at $.05 per share. The Company utilized a loss carryforward of $240,600 as an offset against its estimated taxable income of equal amount. For the nine months ended September 30, 1996 the Company wrote off warrants previously issued for $5,700. NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the interim financial statements reflect all adjustments, consisting of only normal recurring items, which are necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of results for AN-CON GENETICS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) interim periods are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the significant accounting policies and the other notes to the financial statements included in the Corporation's 1996 Annual Report to the SEC on Form 10-KSB. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of An-Con Genetics, Inc. and its wholly owned subsidiary Aaron Medical Industries, Inc. All intercompany accounts and transactions are eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Inventories Inventories are stated at the lower of cost or market. Cost is determined principally on the average cost method. Inventories at September 30, 1997 were as follows: Raw materials $ 541,552 Work in process 258,404 Finished goods 169,698 Total $ 969,654 Property, Plant and Equipment Property, plant and equipment are recorded at cost less depreciation and amortization. Depreciation and amortization are primarily accounted for on the straight line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and large renewals which extend the life of the asset are capitalized whereas maintenance and repairs and small renewals are expended as incurred. The estimated useful lives are: machinery and equipment, 7-15 years; buildings, 30 years; and leasehold improvements 10-20 years. Revenue Recognition and Product Warranty Income is recognized on the accrual basis, i.e., revenues are recognized and reported in the income statement when the amount and timing of revenues are reasonably determinable and the earning process is complete or virtually complete. Revenue from sales of products is generally recognized upon shipment to customers. The Company warrants its products generally for one year. Based on the Company's experience the estimated future costs relating to warranties are not material. Income is recognized in the financial statements (and the customer billed)when products are shipped from stock. Net sales are arrived at by deducting discounts and freight from gross sales. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition and Product Warranty (continued) 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 expended as incurred. Certain environmental costs are capitalized based on estimates and depreciated over their useful lives. Earnings per common and common equivalent share Earnings per common and common equivalent share are computed using the weighted average number of outstanding common and dilutive common equivalent shares and warrants outstanding. The Company's primary and fully diluted earnings per share were substantially the same and they were computed by dividing the Company earnings by the weighted average number of common shares and warrants outstanding and common stock equivalents. The only dilutive common stock equivalent or other convertible securities were the common shares attributable to the minority shareholders of Automated Diagnostics, Inc. and Xenetics Biomedical, Inc, An-Con's unconsolidated and discontinued subsidiaries, which were convertible to 153,333 common shares of the Company. Research and Development Costs Research and development costs are charged to expense when incurred. Disclosure in the financial statements is made for the total research and development costs charged to expense in each period for which an income statement is presented. Only the development costs that are purchased from another enterprise and have alternative future use are capitalized and are amortized over five years. Research and Development Arrangements The Company accounts for its obligations under an arrangement for the funding of research and development by others by determining whether the Company is contractually obligated to pay for research not yet performed. If so determined, to the extent that the Company is obligated to pay, the Company records a liability and charges research and development costs to expense. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets Intangible assets consist of the excess of the cost of acquired companies and assets over the values assigned to net tangible assets. These intangibles are being amortized by the straight-line method over a 5-year period. At each balance sheet date, the Company assesses whether there has been an impairment in the value of such intangibles by determining whether projected undiscounted future cash flow from operations for each Company, as defined in Statement of Financial Accounting Standards No. 121, " Accounting for the impairment of Long -Lived Assets to be Disposed of," exceeds its net book value as of the assessment date. Accounting for Income Taxes In February 1992, the FASB issued Statement No. 109, Accounting for Income Taxes. FASB 109 requires an asset and liability approach for financial accounting and reporting for income taxes. It requires recognition of (1) current tax liabilities or assets for the estimated taxes payable or refundable on tax returns for the current year, and (2) deferred tax liabilities or assets for the estimated future tax effects attributable to temporary differences and carryforwards. 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: Compensation costs are recognized as an expense over the period of employment attributable to the employee stock Options. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Stock-Based Compensation (continued) Stocks issued in accordance with a plan for past or future services of an employee are allocated between the expired costs and future costs. Future costs are charged to the periods in which the services are performed. The proforma amounts of the difference between compensation cost included in net income and related cost measured by the fair value based method, including tax effects are disclosed. NOTE 3. 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 734 Walt Whitman Road, Melville, New York 11747. Currently, the Company is actively engaged in the business of marketing and sale of medical products, acquiring ownership interests in medical products and related technologies. NOTE 4. EARNINGS PER SHARE Primary earnings per share is equal to net income divided by the weighted average number of shares outstanding including dilutive convertible securities. In the second quarter of 1997, the dilutive securities included the outstanding shares of Xenetics Biomedical, Inc. and Automated Diagnostics Inc., the two inactive subsidiaries of the Company. The shares of these companies were convertible to 153,333 shares of An-Con common stock. NOTE 5. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129") and SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and 128 specify guidelines as to the method of computation as well as AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 5. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD (CONTINUED) presentation and disclosure requirements for earnings per share ("EPS"). The objective of these statements is to simplify the calculation and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. These statements are effective for fiscal years ending after December 15, 1997 and earlier application is not permitted. The Company does not expect that the adoption of SFAS No. 129 and 128 will have a material effect on the Company's consolidated financial statements. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking Statements. This Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the company's expectations, hopes, intentions, beliefs or strategies regarding the future. Such forward-looking statements include, but are not limited to, the Company's anticipated expense levels for research and development, and selling general and administrative; anticipated capital expenditures; and expectations regarding inventory balances, liquidity and adequacy of cash resources under the sub-headings "Results of Operations" and "Liquidity and Capital Resources". Actual results could differ materially from those projected in any forward-looking statements for the reasons detailed below and in other sections of this Report on Form 10-QSB. All forward-looking statements included in this Form 10-QSB are based on information available to the Company on the date of this Report on Form 10-QSB, and the Company assumes no obligation to update the forward-looking statements. Investors should also consult the risks factors listed from time to time in the Company's Reports on Form 10-K and Annual Report to Stockholders. Results of Operations The results of operations over the nine months ended September 30, 1997 show steady sales and profitability, as compared to the first nine months of 1996. The Company's sales revenues increased by 5%, from $5,254,200 to $5,518,558. Gross profit percentage of 44% was down from 47% for the same period in 1996. Gross profit went down from $2,487,000 to $2,423,271. Increased revenues sales were mainly attributable increases in Bend-a-light, electro-surgical devices, and cauteries sales. The sales of cauteries accounted for 42% of all sales in the nine months ended September 30, 1997. Operating salaries and related expenses increased by 28% from $824,200 to $1,055,795, in the nine months ended September 30, 1997 as compared to the same period in 1996. The increase in salaries was largely attributable to the employment of a new quality control manager staffing of a new research and development department, and increased salaries for sales personnel. Research and development costs increased from $31,000 to $60,290 (by 94%) in the three quarters ended September 30, 1996 in 1997. In 1997, the Company set up a staffed research and AN-CON GENETICS, INC. PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) development department which is improving the existing products and developing new products. Expenses for professional services increased by 18% to $262,645 in the nine months ended September 30, 1997, as compared to $221,700 in the same period of the previous year. The main reason for this increase was the fees associated with the Megadyne lawsuit and SEC filings. Selling, General and Administrative expenses decreased by 11%. These expenses were $811,183, in the nine month period ended September 30, 1997 as compared to $902,600 for the nine months ended September 30, 1996. Interest expense decreased from $104,700 in the nine months ended September 30, 1996 to $59,468 in 1997. The $45,232 (76%) decrease in interest expense was mainly attributable to the conversion of the Aaron shareholders' debt to shares as per An-Con's recission offer in the fourth quarter of 1996 which had accrued interest of $13,000 per quarter. The Company had net income of $262,630 for the nine months ended September 30, 1997 as compared to $270,500 in 1996 for the same period. The decrease of $274,142 in the operating income (54%) and net income of $7,870 (3%) were mainly because of the increase in cost of goods sold and additional salaries for quality control, research and development, and sales personnel. Operating income was $233,358 in the nine months of 1997 as compared to $507,500 in the same period in 1996. The extraordinary revenue of $70,600 from a voluntary waiver of bonuses by the officers of the Company for the year 1996 contributed additional 1% to the revenues, in 1997. The Company sells its products through distributors both nationally and internationally. These distributors are found mainly through response to company advertising in medical journals or contacts made at domestic or international trade shows. The Company began attending trade shows in foreign countries for the first time in 1993. Since that time, international sales have more than doubled from the 1993 sales figure of $553,000. The main focus for export sales has been Western Europe where the Company has distributors in all major markets. During the first nine months of 1997, international sales of the Aaron Medical product line continued to increase. These sales were $1,297,454 which represented 23% of total sales. This compares favorably to the first nine months of 1996 where total international sales were $1,031,623 representing 20% of total AN-CON GENETICS, INC. PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) sales. The increase from the first nine months of 1997 to the first nine months of 1996 represents a 26% increase in sales volume. To minimize credit risk, new international distributors in most instances pay cash in advance or by irrevocable letter of credit. New product development and improvements to the Company's facility required by regulatory agencies in 1996 and projected into 1997 will amount to $550,000. These expenditures will be and have been 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. The amount outstanding on the bank loans was $424,998 as of September 30, 1997. Financial Condition As of September 30, 1997, the amount of cash was $124,456 as compared to $120,904 at December 31, 1996. Cash provided by (applied to) operating activities was $176,515 in the first nine months of 1997 as compared to $327,400 in the first nine months of 1996. Net working capital of the company on September 30, 1997 was $715,029 as compared to ($859,100) in 1996. Investing activities utilized $206,031 in cash during the first nine months of 1997, compared to $505,400 in the first nine months of 1996. In 1997, the Company continued its policy of investing in property, plant and equipment needed for future business requirements, including manufacturing capacity. The Company's ten largest customers accounted for approximately 51% of net revenues for the first nine months of 1997. At September 30, 1997, the same ten customers accounted for approximately 53% of outstanding accounts receivable. Cash flow provided $386,098 and $66,500 from financing activities in the first nine months of 1997 and 1996, respectively. The most significant items of financing activity in the first nine months ended September 30, 1997 were the reduction of notes payable and bonds payable by $141,018 and the use of bank term loan of $150,000 and a line of credit of $425,000. The repayments of the term and the line of credit loans were $25,002 and $85,000, over the first three quarters of 1997. AN-CON GENETICS, INC. PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Financial Condition(Continued) 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 Electrosurgery Electrosurgery will be the area of growth for the Company in the next few years. The Company, over the past two years has chosen to expand its line of electrosurgical products and believes this will be the area of growth for the Company over the next few years. Electrosurgical products sold by the Company are the standard stainless steel electrodes, the patented Multi-Function Cautery, the patent pending Resistick line of reduced stick electrodes and the Aaron 800 high frequency desiccator. The Company plans to continue expanding its electrosurgical product line in 1997 and 1998 and believes this area will allow the most significant growth. From the first half of 1996 to the first half of 1997, the Company's electrosurgical sales increased by more than 26%. The electrosurgical product line is a larger market than the Company has normally sold into and is dominated by two main competitors, Valley Lab a division of Pfizer and Conmed. In the area of reduced stick electrodes, the main competitor is MegaDyne. The combined markets for the Company's electrosurgical products exceeds $100 million annually. Electrosurgical product sales moved from fifth place to second in total Company sales by product line in 1996. The Company anticipates continued sales growth in its electrosurgical products. The Company believes that the world market for disposable medical products, such as the Company's battery-operated cauteries, has significant growth potential because heretofore these type of products have not been affordable or effectively marketed outside the U.S. Because of these factors, the Company has designed certain disposable products to be reusable. AN-CON GENETICS, INC. PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Outlook (Continued) Electrosurgery (Continued) The Company presently has a significant portion of the U.S. disposable 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. Other Medical Projects The Company has been approved by at least two major medical device companies to manufacture certain medical products under a private label agreement. There can be no guarantee that these negotiations will result in actual purchase orders or that they would have a material impact. Non-Medical Products The Company during the first half 1997 sold $547,000 of its non medical products to one customer. The Company is expanding this market with its flexible lighting products for use primarily in the automotive and locksmith industries. Approximately $350,000 of sales of non medical products was from the addition of a higher quality flexible light unit. The higher quality version of the Bend-A-Light will be sold in the same markets as the Company presently sells its less expensive unit. Liquidity and Future Plans Since the acquisition of Aaron Medical Industries, Inc. the Company has partially changed its direction from acquiring ownership interest in companies to acquiring new product technology and expanding manufacturing capabilities through Aaron. The Aaron 800 is an example of this new direction. Other products and technologies are being evaluated for future development. Continued strong international sales growth is expected by management. The Company has obtained a line of credit with a local commercial bank for $400,000 and a $150,000 loan for capital improvements. Interest on these loans is to be paid at 1% over prime. On September 30, 1997 the Company had $464,998 outstanding on its bank loans. AN-CON GENETICS, INC. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Form 10-KSB for the year ended December 31, 1996. Part I, Item 3. ITEM 2. CHANGES IN SECURITIES There have been no changes in the instruments defining the rights or rights evidenced by any class of registered securities. There have been no dividends declared. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In February of 1997, the 10 year notes came due and the Company offered each bond holder 2,200 shares of common stock for their $1,000 bond and accrued interest of $550. Nineteen bondholders accepted the offer and forty-three bondholders received cash for their bonds and accrued interest. The balance of the bondholders have not redeemed their bonds or accepted the share offers. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS There has not been a meeting of shareholders and therefore, no matters have been submitted to a vote of security holders. ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K A) Exhibits 28 None SIGNATURES: In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. An-Con Genetics, Inc. (Registrant) Date: _________________ _________________________ President Andrew Makrides,