-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jr7f1VDQKuDhNydQMlbalYnRHM/jkVJ+b94lfDZjEp36OruSPelnnEJNs3zLBSTk rgpnnAkJQPjqzy74aVtBMA== 0000719135-96-000016.txt : 19961204 0000719135-96-000016.hdr.sgml : 19961204 ACCESSION NUMBER: 0000719135-96-000016 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960919 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AN CON GENETICS INC CENTRAL INDEX KEY: 0000719135 STANDARD INDUSTRIAL CLASSIFICATION: 2860 IRS NUMBER: 112644611 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-80763 FILM NUMBER: 96632216 BUSINESS ADDRESS: STREET 1: ONE HUNTINGTON QUADRANGLE STREET 2: STE 1N11 CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5166948470 MAIL ADDRESS: STREET 1: ONE HUNTINGTON QUADDRANGLE CITY: MELVILLE STATE: NY ZIP: 11747 SB-2/A 1 ALFRED V. GRECO, P.C. A Professional Corporation 666 Fifth Avenue (14th Floor) New York, N.Y. 10103 Alfred V. Greco Tel. 212-246-6550 Attorney At Law Fax 212-582-0176 September 19, 1996 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Attn: Division of Corporation Finance David S. Lyon - Mail Stop 3-11 Re: An-Con Genetics, Inc. Amendment No. 2 Form SB-2 SEC File No. 33-80763 Gentlemen: There follows Amendment No. 2 on Form SB-2 Registration Statement of An-Con Genetics, Inc., inclusive of cover letter and other exhibits, which contains changes implementing comments in the staff's letter dated August 8, 1996. There follows a recitation of the Company's responses and comments regarding the numbered comments of the staff in its letter of August 8, 1996. The numbered responses correspond to the numbered comments of the staff. 1. We have complied. See Exhibit I. 2. The solicitation clearly does request a response. However, the terms of the solicitation are such that a "failure to respond" is deemed a "rejection" of the offer, not an "acceptance". 3. The Company prefers and is prepared to deliver the shares now, but is concerned that it will technically exacerbate the alleged existing violation. In the alternative the shares will definitely be delivered simultaneously with, and upon effectiveness of, the Registration Statement. 4. We have complied. 5. We have complied and have deleted the shares from the facing page of the registration statement. 6. We have complied (P. 1). 7. We have complied (P. 1 and 2). 8. We have complied (P. 1). 9. We have complied (P. 1). 10. We have complied (P. 1). 11. We have complied (P. 1). 12. We have complied (P. 1). 13. We have complied (P. 2). 14. Subject to compliance with state statutes regarding rescission offer, and due to the Company's belief that what is offered per share is what the Company's legal obligation will be if determined in a court of law (if a violation is proven), the Company believes that no further redress "may" be available to shareholders who accept rescission. 15. We have complied (P. 3). 16. We have complied (P. 5). 17. We have complied (P. 5). 18. We have complied (P. 5). 19. We have complied (P. 4). 20. We have complied (P. 4). 21. We have complied (P. 4 and 16). 22. We have complied (P. 4). 23. We have complied (P. 13). The cautery market involves battery operated cauteries (direct current) and the electrosurgical market (to which the Multi Function cautery belongs) operates on alternating current. 24. We have complied (P. 14). 25. We have complied (P. 6). 26. We have complied (P. 6). 27. We have complied (P. 6). 28. We have complied (P. 6). 29. We have complied (P. 7). The agreement has always provided that the shares were to be acquired for investment and the Final Acquisition Agreement (filed initially with the S-4 as Exhibit 2) also provides the same at Paragraph 7.15. 30. We have complied (P. 8) 31. We have complied (P. 15). The cover letter Exhibit IV was never to be part of filing and was included mistakenly due to computer error. 32. We have complied (P.16-18) 33. We have complied (P. 18) 34. We have complied (P. 18) 35. We have complied (P. 22). We have set out as much detail as we know concerning the staff's request which is contained under caption "Material Contacts etc" and subheadings. We feel that to create a separate section outlining what key individuals did for each company would be redundant and confusing. 36. We have complied (P. 22). 37. We have complied (P. 22). 38. We have complied (P. 22). 39. We have complied (P. 22 and 23). 40. We have complied (P.4 and 22). 41. We have complied (P. 23 and 24). 42. We have complied (P. 23). 43. We have complied (P. 24) 44. We have complied (P. 24). 45. Open 46. We have complied (P. 24). 47. We have complied (P.25). 48. We have complied (P. 24). 49. We have complied (P. 24). 50. We have complied (P. ). 51. We have complied (P. 26). 52. We have complied (P. 26). 53. We have complied (P. 26). 54. We have complied (P. 26). 55. We have complied (P. 26). 56. We have complied (P. 26). 57. We have complied (P. 26). 58. We have complied (P. 27). 59. We have complied. We have deleted that section and replaced it with Item (B) on page 27. 60. We have complied (Pgs 27-29). 61. We have complied (P. 27 second full paragraph). 62. We have complied. We have deleted the language on former page 28 and have included a schedule showing the fair value of the assets on page 27. 63. We have complied (P. 33). 64. We have complied (P. 33). 65. We have complied. After each state discussion we have added commentary as to the status in each state. 66. We have complied (P. 33 and 42 - See "Possible Uncertainty as to State Blue Sky Law Liability." 67. The former owners of approximately 67% of the outstanding shares of Aaron (pre-closing) were as follows: Number of Name Aaron Shares Paul Butler - 544,768 Robert Saron and Fam. - 1,183,458 Louis Powell - 719,886 Maurice P. O'Connell - 517,682 Delton Cunningham - 75,500 Joseph Valenti - 98,308 Gallian Enterprises - 80,000 Doris Graham - 136,000 Barbara Bottone - 90,000 Walter Loebenberg - 88,935 Fitzpatrick Equipment Corp.- 121,500 Lee Rombeau - 61,000 Peter Sklar - 81,000 68. We have complied (P. 41 and 42). 69. We have complied (P. 46). 70. We have complied (48). 71. We have corrected and complied (P. 47). 72. We have complied (P. 52). 73. We have amended section and deleted inappropriate disclosures. 74. We have complied (P. 54). 75. Form 10K has been amended to reflect a reduction of goodwill for the tax benefit of Aaron's valuation account of $183,300. (P. F-3, Note 7) 76. We have complied (P. F-5). 77. We have complied (P. F-8). 78. We have complied (P. F-6). 79. We have complied (Pgs F-42-F-56). 80. Final Acquisition Agreement, as amended was filed as Exhibit 2 to Form S-4 (initial filing herein). We have noted the filing of such exhibit in Item 27 of Part II. 81. We have complied (Signature Page). 82. We have complied. 83. Duly noted. 84. We have complied. 85. We have complied. 86. Not Applicable. If you have any further questions or comments concerning the filing or documents included herein, please do not hesitate to contact the undersigned. Very truly yours, S/Alfred V. Greco Alfred V. Greco AN-CON GENETICS, INC. 7100 30th Avenue North St. Petersburg, FL 33710 PROPOSAL TO AARON SHAREHOLDERS SHAREHOLDERS MUST COMPLETE THE ENCLOSED FORM OF NOTICE OF REJECTION MEANS YOU KEEP YOUR AN-CON SHARES ACCEPTANCE OR REJECTION OF RESCISSION OFFER ACCEPTANCE MEANS YOU MUST RE-SELL TO THE COMPANY ALL YOUR AN-CON SHARES RECEIVED ON THE EXCHANGE To Former Shareholders of Aaron Medical Industries, Inc. As you recall, in January, 1995, you submitted your shares of Aaron Medical Industries, Inc. ("Aaron") in exchange for shares of An-Con Genetics, Inc. ("An-Con" or the "Company"). Your shares of An-Con were placed in escrow subject to An-Con filing and making effective a registration statement with the Securities and Exchange Commission pertaining to your An-Con shares pursuant to the requirements of the Securities Act of 1933, as amended, (the "Act") and the rules and regulations promulgated thereunder. The enclosed prospectus represents the Company's registration of the shares to satisfy that requirement. However, due to An-Con's premature offer of its shares to Aaron shareholders, a technical violation of the Act may have occurred. In this connection, the Company has included in this prospectus a voluntary offer by An-Con to give each former Aaron shareholder an option to either accept the Company's offer and sell his(her) An-Con shares back to the Company at a price of $.392 per share, or reject such offer and keep the An-Con shares acquired pursuant to the Acquisition. Accordingly, the Company is voluntarily undertaking this Rescission Offer to all former Aaron shareholders to pay the sum of $.392 per share for each share of An-Con received, plus interest from January 11, 1995, the date of closing of the Company's acquisition of Aaron Medical Industries, Inc. This offer is open for a 30-day period commencing with the date of delivery to you of the prospectus and Rescission Offer documents. As of the close of business on September 4, 1996, the closing price for the Company's shares on the Bulletin Board was $1.125 per share. If a shareholder accepts the Rescission Offer, such shareholder must sell all his shares back to the Company for $.392 per share plus interest by following the procedures outlined below. If a shareholder fills out the annexed form and rejects the Rescission Offer such shareholder retains his (her) An-Con shares and needs to do nothing further. The federal securities laws and most state laws provide for rights of redress (in the form of rescission, or damages if the security has been sold) for purchasers of securities sold in violation of the applicable registration provisions of such laws. In certain instances a rejection of, or failure to accept or reject the Rescission Offer as set forth below may not terminate your rights of rescission, or damages (if you no longer own the security) under applicable federal or state laws. (See "Rescission Offer" and "State Statutes of Limitation" in prospectus.) IF A SHAREHOLDER FAILS TO RESPOND TO THE RESCISSION OFFER, FOR PURPOSES HEREOF THE COMPANY SHALL CONSTRUE SUCH FAILURE TO RESPOND AS THE SHAREHOLDER'S CHOICE TO REJECT THE RESCISSION OFFER AND TO KEEP HIS AN-CON SHARES. Procedure for Accepting or Rejecting this Rescission Offer: After you have reviewed the enclosure, kindly review the annexed form which relates to your shares. Kindly (a) fill in your name as it appears on your stock certificate, (b) indicate your choice as to "rejection" or "acceptance" of the Company's Rescission Offer and (c) execute and return the executed form to the Company within the 30-day period specified together with your stock certificate duly endorsed designating it "For Rescission" on the back. You must make sure that you endorse the certificate and have your signature guaranteed by your bank. COVER LETTER EXHIBIT I PAGE 1 If you fill in the form and choose to reject the Company's offer, you keep your An-Con shares and need to do nothing further. If the Company has sufficient funds on hand at the termination of the offering by the Company, stockholders who have accepted Rescission will be contacted and promptly paid inclusive of interest. No cash will be paid until the rescinded certificates have been received by the Company. However, if sufficient funds are not readily available, the procedure to effectuate Rescission of shares of those accepting the Rescission Offer will not begin immediately. Unless other funds are obtained privately, the Company will immediately file a new offering of 500,000 shares of Common Stock for sale by the Company (which, if necessary, shall commence as soon as practicable following the Rescission Offer). Notwithstanding the foregoing, if the Company does not have or otherwise cannot obtain sufficient funds to repurchase the rescinded shares within 180 days of the date of this prospectus, rescinded certificates will be returned to each rescinding shareholder by the Company and each shall be instructed to hold such certificates until the Company has the necessary cash for the repurchase of such shares to be tendered. Those stockholders may have to wait an undetermined period of time before receiving payment. See "Rescission Offer" in the Prospectus for information concerning options available to shareholders who elect to rescind but do not receive payment within 180 days. In addition, offerees who accept rescission will receive accumulated interest from the date of purchase to the date of actual payment by the Company for the rescinded shares. The mandated annual interest rate varies between 6% and 12% depending upon the respective state of residence of each rescinding shareholder. We have indicated below the rate of interest the Company will pay. If you choose to rescind, the precise amount of interest at the rate required will be added to the amount paid to you, computed from January 11, 1995. Since you are a resident, interest is mandated at the rate of % per annum. By order of the Board J. Robert Saron COVER LETTER EXHIBIT I PAGE 2 NOTICE OF ACCEPTANCE OR REJECTION OF RESCISSION OFFER TO BE FILLED IN BY FORMER AARON SHAREHOLDERS 1. I (we), as stockholders of the Company, have been provided with a Prospectus dated , 1996. 2. I (we), (Joint Ownership Please Print Both Names) (Address) (Please indicate your selection of one of the following options) [ ] REJECT THE RESCISSION OFFER AND WILL KEEP THE AN-CON GENETICS, INC. SHARES. [ ] ACCEPT THE RESCISSION OFFER AND HEREBY RE- SELL ALL OF THE AN-CON GENETICS, INC. SHARES ISSUED TO ME (US) IN THE EXCHANGE PURSUANT TO THE ACQUISITION AGREEMENT WITH AARON MEDICAL INDUSTRIES, INC. I HEREBY RETURN THE AN-CON SHARES, DULY COUNTERSIGNED WITH SIGNATURE GUARANTY (MEDALLION) FROM MY BANK, AND MARKED "FOR RESCISSION" IN EXCHANGE FOR THE PAYMENT OF $.392 PER SHARE TOGETHER WITH APPLICABLE INTEREST THEREON. Signature(s) Date COVER LETTER EXHIBIT II An-Con Genetics, Inc. ACKNOWLEDGMENT OF INDEBTEDNESS Whereas An-Con Genetics Inc. (the "Company") has offered to repurchase certain shares of its common Stock from investors pursuant to Rescission Offer by prospectus dated , 1996; and Whereas has accepted the Rescission Offer of the Company but has not yet been paid by the Company due to lack of availability of sufficient funds; NOW THEREFORE An-Con Genetics, Inc. does hereby acknowledge indebtedness to of $ plus interest at the rate of % per annum from , 199 . In the event you, as a rescinding shareholder, are not paid in full by the Company within 180 days of , 1996, the Company will return your shares and you may choose to cancel your Acceptance of Rescission and keep the shares (a) utilize any exemption under the federal securities law, if available, to sell the shares you are holding as a form of security (or balance of shares remaining) and if the proceeds thereof are less than the amount payable pursuant to the Rescission Offer, you shall remain a creditor of the Company and will receive a replacement Acknowledgment of Indebtedness for the balance remaining; and/or (b) you may choose to commence suit for the amount of indebtedness in order to hasten payment and to preserve rights before the expiration of any relevant statute of limitations. Upon sale of any shares pursuant to (a) above, you will be required to deliver this Acknowledgment of Indebtedness pending such sale, and, if the proceeds of sale are less than full payment of the amount due under the Rescission Offer, a new Acknowledgment of Indebtedness will be issued for the balance and delivered to you. In addition, as a condition to payment in full by the Company, the Acknowledgment of Indebtedness must be relinquished to the Company prior to such payment in full. This acknowledgement is not transferable or negotiable but constitutes a valid and binding obligation of the company enforceable in a court of law. By order of the Board of Directors. An-Con Genetics, Inc. by J. Robert Saron, CEO COVER LETTER EXHIBIT III SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 AMENDMENT NO. 2 on FORM SB-2 Registration Statement Under the Securities Act of 1933 AN-CON GENETICS, INC. (Name of Small Business Issuer in Its Charter) Delaware 3841 112644611 (State or other (Primary (I.R.S.Employer Jurisdiction of Standard Identification No.) Incorporation or Industrial organization) classification code Number) 7100 30th Avenue North, St. Petersburg, FL 33710 1-800-537-2790 (Address and Telephone Number of Principal Executive Offices) 7100 30th Avenue North, St. Petersburg, FL 33710 (Address of Principal Place of Business or Intended Principal Place of Business) Andrew Makrides 1 Huntington Quadrangle (1N11) Melville, NY 11747 516-694-8470 (Name, Address and Telephone Number of Agent for Service) Approximate Date of Proposed Sale to the Public As Soon As Practicable If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit(1) Proposed Maximum Aggregate Offering Price Amount of Registra- tion Fee(2) Common Stock 3,399,096 $.392(3) $1,331,800 $459.25 (1)Estimated to calculate fee. (2)The original fee for this filing was calculated to be $1,785.15 which has already been paid with the original filing on Form S-4. (3)This represents the price per share to be paid for the shares by An-Con Genetics, Inc. if all shareholder offerees accept Rescission. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Page Prospectus Cover Page. . . . . . . . . . . . . . . . .1 Available Information. . . . . . . . . . . . . . . . .3 Prospectus Summary . . . . . . . . . . . . . . . . . .4 Risk Factors . . . . . . . . . . . . . . . . . . . .9 Management's Discussion and Analysis . . . . . . . . 10 Business . . . . . . . . . . . . . . . . . . . . . . 19 The Company . . . . . . . . . . . . . . . . . . . 19 Battery Operated Cauteries. . . . . . . . . . . . 20 Battery Operated Medical and Industrial Lights. . 20 Electro-Surgical Products . . . . . . . . . . . . 20 Multi-Function Cautery. . . . . . . . . . . . . . 21 Resistick . . . . . . . . . . . . . . . . . . . . 21 Aaron 800 . . . . . . . . . . . . . . . . . . . . 21 Nerve Locator Stimulators . . . . . . . . . . . . 22 OmniFix II. . . . . . . . . . . . . . . . . . . . 22 OmniFix 2000. . . . . . . . . . . . . . . . . . . 22 Other Products. . . . . . . . . . . . . . . . . . 22 Manufacturing, Marketing and Distribution . . . . 23 Competition . . . . . . . . . . . . . . . . . . . 23 Regulation. . . . . . . . . . . . . . . . . . . . 24 Patents and Trademarks. . . . . . . . . . . . . . 24 Research and Development. . . . . . . . . . . . . 25 Employees . . . . . . . . . . . . . . . . . . . . 25 Significant Subsidiary - Aaron Medical Industries, Inc. . .25 Property . . . . . . . . . . . . . . . . . . . . . . 26 Material Contacts Between An-Con and Aaron During Acquisition. . . . . . . . . . . . . . . . . . . . . 28 The Rescission Offer . . . . . . . . . . . . . . . . 31 Valuation of Aaron For Rescission Purposes. . . . 33 State Blue Sky Laws . . . . . . . . . . . . . . . 37 California. . . . . . . . . . . . . . . . . . 39 Connecticut . . . . . . . . . . . . . . . . . 40 Florida . . . . . . . . . . . . . . . . . . . 40 Hawaii. . . . . . . . . . . . . . . . . . . . 41 Illinois. . . . . . . . . . . . . . . . . . . 41 Indiana . . . . . . . . . . . . . . . . . . . 42 Massachusetts . . . . . . . . . . . . . . . . 43 Nevada. . . . . . . . . . . . . . . . . . . . 44 New Jersey. . . . . . . . . . . . . . . . . . 45 New York. . . . . . . . . . . . . . . . . . . 46 North Carolina. . . . . . . . . . . . . . . . 46 Pennsylvania. . . . . . . . . . . . . . . . . 47 South Carolina. . . . . . . . . . . . . . . . 47 State Statutes of Limitation. . . . . . . . . . . 49 Method of Rescission. . . . . . . . . . . . . . . 51 Rescission Tender Procedure . . . . . . . . . . . 53 Federal Income Tax Consequences . . . . . . . . . 55 Management . . . . . . . . . . . . . . . . . . . . . 57 Remuneration . . . . . . . . . . . . . . . . . . . . 59 Security Ownership of Certain Beneficial Owners and Management of An-Con . . . . . . . . . . 62 Certain Transactions . . . . . . . . . . . . . . . . 64 Legal Proceedings. . . . . . . . . . . . . . . . . . 67 Description of An-Con Securities . . . . . . . . . . 68 Transfer Agent . . . . . . . . . . . . . . . . . . . 70 Legal Matters. . . . . . . . . . . . . . . . . . . . 70 Experts. . . . . . . . . . . . . . . . . . . . . . . 71 Information as to Unaudited Interim Financial Statements . . . . . . . . . . . . . . . 71 Other Matters. . . . . . . . . . . . . . . . . . . . 71 Preliminary Prospectus dated June 21, 1996 Subject to Completion An-Con Genetics, Inc. (Ticker Symbol: "AGNT") 3,399,096 Shares of Common Stock This prospectus relates to (a) a registration of 3,399,096 shares of An-Con Genetics, Inc. ("An-Con" or the "Company") issued in escrow in January 1995 to shareholders of Aaron Medical Industries, Inc. ("Aaron") in exchange for their Aaron shares, (the "Acquisition") and (b) an offer of rescission ("Rescission Offer") by An-Con to such shareholders to repurchase such An-Con shares from former Aaron shareholders due to the possible violation of the Securities Act of 1933 in connection with such Acquisition by An-Con. An-Con shall not receive any proceeds in connection with this offer or any subsequent sale of these shares. Each former Aaron shareholder ("Aaron Shareholder") has the right to either, reject An-Con's Rescission Offer and keep his (her) shares of An-Con issued and exchanged pursuant to the Acquisition, or accept the Rescission Offer whereby such shareholder must sell his (her) An-Con shares back to An-Con. The Company has valued the Aaron shares at a value of $.22 per share or a total of $1,331,800 as of January 11, 1995 (the date of closing of the "Acquisition"). The An-Con shares (which were exchanged for Aaron shares) have been valued by the Company and Aaron at $.392 per share as of that date and the Company is offering the sum of $.392 per share for each share of An-Con (presently held in escrow for their benefit pursuant to the exchange) deliverable to Aaron Shareholders. Upon effectiveness of this registration statement, these shares held in escrow shall be delivered to each respective former Aaron shareholder together with this Prospectus, inclusive of the Company's Rescission Offer. The foregoing amount aggregates approximately $1,331,800 (the value of Aaron on January 11, 1995) plus interest. Interest will be paid only to those who sell their An-Con shares by accepting the Rescission Offer. The amount of interest payable to each offeree who accepts the Company's offer is mandated by statute of the state of residence of each Rescission Offeree and estimated accrued interest totaled approximately $72,000 as of June 30, 1996 (computed at varying rates mandated by the respective states of residence of the Rescission Offerees). The estimated accrued interest payable on Rescission increases approximately $4,000 per month. Any shareholder who accepts this offer will be receiving $.392 per share (plus interest from January 11, 1995 at the statutory rate mandated by their respective state of residence) which amount is approximately $ less per share than current market value if they were to sell their shares in the public market. The shares deliverable pursuant to this prospectus become eligible for sale on January 11, 1997 pursuant and subject to the terms of Rule 144 promulgated under the Securities Act of 1933, amended. See "The Rescission Offer" and "The Rescission Offer - Valuation of Aaron For Rescission Purposes". See also "Risk Factors on page 9 of this Prospectus". THIS PROSPECTUS DEALS WITH A RESCISSION OFFER TO FORMER AARON SHAREHOLDERS (HEREINAFTER SOMETIMES REFERRED TO AS "RESCISSION OFFEREES"). RESCISSION OFFEREES WHO REJECT THE OFFER AND CHOOSE TO KEEP THEIR SHARES OF THE COMPANY MAY STILL HAVE RIGHTS AVAILABLE TO THEM UNDER FEDERAL LAW AND MAY CONTINUE TO HAVE RIGHTS UNDER STATE LAW. SEE "RESCISSION OFFER". THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMPANY IS OFFERING TO REPURCHASE AN AGGREGATE OF UP TO 3,399,096 SHARES OF COMMON STOCK OF THE COMPANY FROM THE FORMER SHAREHOLDERS OF AARON AT A PURCHASE PRICE OF $.392 PER SHARE AGGREGATING $1,331,800, PLUS THE PAYMENT OF ESTIMATED INTEREST AGGREGATING APPROXIMATELY $72,000 AS OF JUNE 30, 1996. DEPENDING UPON THE NUMBER OF RESCISSION OFFEREES WHO ACCEPT THE COMPANY'S RESCISSION OFFER, THE COMPANY MAY NOT POSSESS THE NECESSARY FUNDS TO REPURCHASE THE SHARES FOR CASH AND SHAREHOLDERS ACCEPTING THE COMPANY'S OFFER MAY HAVE TO WAIT AN UNDETERMINED AMOUNT OF TIME BEFORE RECEIVING PAYMENT. IF THE RESCISSION OFFER IS REJECTED BY AN AARON SHAREHOLDER, SUCH SHAREHOLDER SHALL KEEP THE AN-CON SHARES WHICH ARE THE SUBJECT OF AND DELIVERED PURSUANT TO THIS PROSPECTUS. IF THE RESCISSION OFFER IS ACCEPTED BY AN AARON SHAREHOLDER, THE COMPANY WILL BE OBLIGATED TO REPURCHASE SUCH SHAREHOLDER'S AN-CON SHARES AT $.392 PER SHARE. HOWEVER, IN THE EVENT THERE ARE INSUFFICIENT FUNDS, THE COMPANY MAY BE UNABLE TO MAKE THE REQUIRED PAYMENT WITHOUT SEEKING TO OBTAIN ADDITIONAL FUNDS FROM THE SALE OF OTHER AN-CON SHARES TO BE OFFERED TO THE PUBLIC ON A BEST-EFFORTS BASIS (WHICH, IF NECESSARY, WILL OCCUR PURSUANT TO A SEPARATE PROSPECTUS TO BE FILED AND MADE EFFECTIVE AS SOON AS PRACTICABLE. FOLLOWING THE 30-DAY RESCISSION OFFER PERIOD) OR OBTAINING FUNDS FROM OTHER SOURCES OR DERIVING ADDITIONAL FUNDS FROM OPERATIONS. IN THE EVENT SHAREHOLDERS WHO CHOOSE TO RESCIND ARE NOT PAID IN FULL BY THE COMPANY WITHIN 180 DAYS OF THE DATE OF THIS PROSPECTUS, THEN, SUCH SHAREHOLDERS MAY UTILIZE ANY EXEMPTION UNDER THE FEDERAL SECURITIES LAW, IF AVAILABLE, TO SELL THEIR SHARES (OR BALANCE OF SHARES REMAINING); AND TO THE EXTENT THE PROCEEDS FROM SUCH SALE ARE LESS THAN THE AMOUNT PAYABLE PURSUANT TO THE RESCISSION OFFER, SUCH SHAREHOLDERS SHALL REMAIN CREDITORS OF THE COMPANY. FURTHERMORE, IN THE EVENT OF NON-PAYMENT OR INSUFFICIENT PAYMENT BY THE COMPANY WITHIN 180 DAYS OF THE DATE HEREOF, A RESCISSION OFFEREE MAY THEN ALSO REVOKE HIS ACCEPTANCE OF THE RESCISSION OFFER AND MAY CHOOSE TO COMMENCE SUIT FOR THE BALANCE IN ORDER TO HASTEN PAYMENT AND/OR TO PRESERVE HIS RIGHTS BEFORE THE EXPIRATION OF ANY RELEVANT STATUTE OF LIMITATIONS. AS OF JUNE 30, 1996, THE COMPANY HAD $75,400 IN CASH. THE COMPANY IS VOLUNTARILY UNDERTAKING THIS RESCISSION OFFER IN AN ATTEMPT TO RECTIFY THE EFFECT OF POSSIBLE SECURITIES LAW VIOLATIONS RESULTING FROM CERTAIN PREMATURE OFFERS OF COMMON STOCK BY THE COMPANY TO THE FORMER SHAREHOLDERS OF AARON. MANAGEMENT BELIEVES THAT SHAREHOLDERS WHO ACCEPT THE RESCISSION OFFER MAY HAVE NO FURTHER REDRESS CONCERNING THEIR INITIAL EXCHANGE AND ACQUISITION OF THE COMPANY'S SECURITIES UPON THEIR RECEIPT OF PAYMENT BY THE COMPANY. See "Rescission Offer" and "State Statutes of Limitations". As of the close of business on September 4, 1996, the bid price for the Company's Common Stock (Ticker Symbol "AGNT") as reported by the National Quotation Bureau, Inc. "Bulletin Board" Price Report was $1.125 per share. The Date of this Prospectus is , 1996. AVAILABLE INFORMATION An-Con Genetics, Inc., the Company, is a reporting company and is registered under Section 12(g) of the Securities Exchange Act of 1934. Reports and other information filed by the company may be inspected and copied at the public reference facilities of the Securities and Exchange Commission in Washington, D.C. and at the New York Regional Office of the Securities and Exchange Commission in New York at 7 World Trade Center, Suite 1300, New York, NY 10048 and the Florida Regional Office of the Securities and Exchange Commission at 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. Copies of the material can also be obtained from the public reference section of the Securities and Exchange Commission Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company, and the address is (http//www.sec.gov). The company intends to furnish annual reports to shareholders which shall contain financial information, audited, and reported upon by an independent certified public accountant and shall file all other current information and quarterly reports with the Securities and Exchange Commission. Until , 199 all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters with respect to their unsold allotments or subscriptions. PROSPECTUS SUMMARY The Company An-Con Genetics, Inc. (the "Company") was incorporated in 1982 under the laws of the State of Delaware to engage in research and development relating to certain genetic devices. The Company had changed its direction and operations from genetic devices to the development and marketing of a line of tissue fixatives, under the OmniFix tradename. In addition, the Company has recently acquired (as of January 11, 1995) all of the outstanding shares of Aaron Medical Industries, Inc., a Florida Corporation, principally engaged in the business of manufacturing and selling battery operated cauteries, specialty medical and commercial lighting instruments and electro-surgical devices to distributors that serve physicians and hospitals. On June 30, 1993, the Aaron Board requested the resignation of M. P. O'Connell, its CEO and Chairman due to unresolvable differences between Board members and Mr. O'Connell over future compensation to Mr. O'Connell and general management policies. Mr. Speiser, CEO and Chairman of An-Con (who had recently entered into an agreement, which, as amended, provided for the exchange of An-Con shares for all of the shares of Aaron) then replaced Mr. O'Connell as Chairman of Aaron's Board in June of 1993. No value was assigned to Aaron shares during negotiations which mainly consisted of the percentage of shares to be allocated to Aaron shareholders. As of the date of this Prospectus, the acquisition by An-Con of Aaron has resulted in the two companies operating separately with respect to the manufacture and sale of their respective products. An-Con's Board of Directors is the controlling entity and is comprised of different directors than Aaron's Board (although two of An-Con's directors are also directors of Aaron). Each company maintains a separate set of books as well as its separate corporate identity. Each of the corporations is located at the same principal location but each continues to operate independently. An-Con caused Moshe Citronowicz, (among others) to join Aaron as its Director of Production. Mr. Cintronowicz, who is currently an officer and director of Aaron, is deemed to be a key employee of Aaron and Aaron maintains and is beneficiary of a policy insuring Mr. Cintronowicz's life. In addition, An- Con has provided, from time to time, funding utilized by Aaron to facilitate growth and expansion. (See "Material Contacts Between An-Con and Aaron"). Total consolidated Company sales for the year 1995 and the first six months of 1996 were $5,521,000 and $3,214,200 respectively, of which An-Con contributed $61,600 and $16,000 respectively and Aaron contributed $5,459,400 and $3,198,200 respectively. In 1995 and for the first six months of 1996, net loss of the company was $154,100 and $156,400 respectively. An-Con contributed losses of $637,200 and $111,800 for the respective periods and Aaron contributed income of $483,100 and $268,200 for the respective periods. Management believes that the figures indicated above do not adequately reflect the synergy represented by An-Con's financing, management and personnel procurement contributions to the Company as combined. See "Significant subsidiary - Aaron Medical Industries, Inc.". An-Con maintains New York offices at One Huntington Quadrangle, Melville, NY 11747 and principal executive offices at 7100 30th Avenue North, St. Petersburg, Florida 33710-2902, with telephone number (800) 537-2790. Aaron Medical Industries, Inc. also maintains its executive offices and manufacturing facilities at the same location. (See- "Business- The Company" and "Significant Subsidiary". Securities Outstanding As of June 30, 1996 there were 4,425,340 shares outstanding (excluding 3,399,096 shares held in escrow for the benefit of former Aaron Shareholders). If the escrowed shares are included, as of June 30, 1996, a total of 44% of the outstanding shares of An-Con would be owned by former Aaron shareholders. These shares will be released from escrow upon effectiveness of this Prospectus and become eligible for sale, subject and pursuant to Rule 144 after January 11, 1997. Rescission Offer In order to rectify the effects of possible securities law violations in connection with the offer and sale of the Company's shares in exchange for the shares of Aaron without an effective registration statement in possible violation of the registration provisions of the Securities Act of 1933, as amended, the Company has filed this Rescission Offer Prospectus and is offering to repurchase such shares at a price of $.392 per share. This value was determined by Aaron management's evaluation of the shares of Aaron which were exchanged on January 11, 1995 for shares of the Company. Such value was determined to be $1,331,800, plus accrued interest of $60,000 since January 11, 1995. Interest is mandated by State law of the state of residence of each Rescission Offeree (former Aaron shareholder). The total amount payable increases by a total of $4,000 per month as estimated additional interest. A rejection of the Rescission Offer means the Aaron shareholder has chosen to keep his shares of An-Con. An acceptance of the Rescission Offer means the former Aaron shareholder has chosen to sell the An-Con shares received in the exchange for $.392 per share. Unless the Company fails to make payment within a period of 180 days, when a shareholder executes his notice of election and makes his choice to accept or reject the Rescission Offer, and returns the form to the Company, such decision will be deemed effective and irrevocable after receipt and acceptance by the Company. See "Rescission Offer - Method of Rescission". The Company has been advised by former principal shareholders and management of Aaron, consisting of such principal shareholders, management and their families which represented approximately 67% of the outstanding shares of Aaron (prior to the acquisition), that such shareholders have no intention of accepting the Company's rescission offer. Prior to rescission, Aaron shareholders are presently deemed to be the owners of approximately 44% of the outstanding shares of the Company. Risk Factors The shareholders of Aaron should review the prospectus carefully because it sets forth the facts concerning the transactions between An-Con and Aaron. The history of An-Con Genetics, Inc. reflects certain risk factors which include, among other things, a history of unprofitable operations and non-payment of dividends. See "Risk Factors". RISK FACTORS The Company's securities to which the Rescission Offer pertains involve a high degree of risk due to, among other things, the Rescission Offer, certain new unproven technology, and intense competition in the industry in which the Company competes. See "Risk Factors". The Securities being offered by this Proxy Statement/Prospectus are subject to certain risks. In analyzing the Acquisition, stockholders should carefully consider, among other things, the following factors: 1. Company's Rescission Offer to Rectify Possible Violation of Securities Law. This prospectus relates to an offer of rescission ("Rescission Offer") by An-Con Genetics, Inc. (the "Company") pursuant to written notice for a period of 30-days from the date of receipt, to purchase an aggregate of 3,399,096 shares of common stock of the Company ("Common Stock") which was exchanged for 5,960,042 shares of Aaron Medical Industries, Inc ("Aaron") in connection with the Company's acquisition of Aaron on January 11, 1995. The Aaron shares (exchanged for Company shares) have been valued by the Company at $.22 per share and the Company is offering the former Aaron shareholders ("Aaron Shareholders") the sum of $.392 per share for each share of An-Con (presently held in escrow for the benefit of Aaron shareholders) pursuant to the exchange. The foregoing amount aggregates approximately $1,331,800 if all the former Aaron shareholders ("Rescission Offerees") elect to rescind and choose to sell their shares back to the company for the consideration paid, plus interest. Interest is mandated by statute of the state of residence of each Rescission Offeree and estimated accrued interest totaled approximately $72,000 as of June 30, 1996 (computed at varying rates mandated by the respective states of residence of the Rescission Offerees). The aggregate estimated accrued interest payable on Rescission increases approximately $4,000 per month. The Company may not possess the necessary funds to repurchase the shares for cash and shareholders accepting the Company's offer may have to wait an undetermined amount of time before receiving payment. 2. Company May Lack Sufficient Cash to Make Payment If Rescission Offer is Accepted. If the rescission offer is accepted by a significant number of rescission offerees, the Company may be unable to make payment therefor without additional funds derivable from sale of the Company's securities on a best-efforts basis pursuant to a separate registration statement, or obtain funds from other third party sources, or from operations. In the event shareholders who choose to rescind are not paid in full by the Company within 180 days of the date of this prospectus, then, such shareholders may utilize any exemption under the federal securities law, if available, to sell their shares (or balance of shares remaining); and to the extent the proceeds from such sale are less than the amount payable pursuant to the rescission offer, such shareholders shall remain creditors of the Company. Furthermore, in the event of non-payment or insufficient payment by the Company within 180 days of the date hereof, a rescission offeree may then also revoke his acceptance of the rescission offer and may choose to commence suit for the balance in order to hasten payment and to preserve his rights before the expiration of any relevant statute of limitations. As of June 30, 1996, the Company had $75,400 in cash. If any rescission offeree elects not to accept the Company's Rescission Offer, he may retain his shares of the Company. However, such shareholders who waive rescission will not lose whatever rights they may have before the expiration of applicable state and federal statutes of limitation. See "Rescission Offer- Method of Rescission", and "State Statutes of Limitation". 3. History of Unprofitable Operations of An-Con prior to Acquisition. The Company was formed in December, 1982 and it has had a history of unprofitable operations. Originally, the Company's operations consisted of research and development relating to the Company's genetic related products, none of which were commercially viable. In addition, prior to 1995, the Company's other non-genetic related products had not provided sufficient sales for the Company to operate profitably. Accordingly, prior to the implementation of the Acquisition in January, 1995, the Company had sustained losses since its inception aggregating $11,212,100 as of December 31, 1994 and its revenues to that date had not been substantial. For the year ended December 31, 1994, the Company had a loss from operations of $1,031,500 or $(.40) per share. For the year ended December 31, 1995, the Company had a consolidated loss from operations of $219,500 or ($.05) per share. (See "Business-Products"). 4. Recent Losses from Operations after Acquisition. Giving effect to the Acquisition on January 11, 1995, for the year ended December 31, 1995, the Company had consolidated revenues of $5,521,000 and a consolidated net loss of $154,100 or $.04 per share. Giving retroactive effect to the Acquisition, for the year ended December 31, 1994 the Company had Pro-Forma consolidated revenues of $4,155,100 and a Pro-Forma consolidated net loss of $673,900 ($.10 per share). No assurance can be given that the Company will be able to generate net income from operations in the near future. (See "Consolidated Statements of Operations", "Management's Discussion and Analysis of the Consolidated Statements of Operations", and "Business" and "Certain Transactions"). 5. Non-Payment of Cash Dividends. The Company has not paid any cash dividends on its common stock since inception, and for the foreseeable future, does not expect to pay any such dividends. (See "Description of Common Stock - Dividend Rights"). 6. Payment of Interest on Outstanding Debentures In Arrears. As of June 30, 1996, the Company had outstanding an aggregate of $78,000 principal amount of Debentures. The Debentures were not issued pursuant to the Federal Trust Indenture Act, and are unsecured and subordinate to senior debt (indebtedness for borrowed money to any bank or lending institution). There is no sinking fund provision provided for in the indenture and the Company is dependent upon revenues in order to pay interest as it accrues and for the ultimate repayment of principal. Interest has not been paid by the Company on such debentures since November, 1990, and amounted to $39,500 as of June 30, 1996. There is no assurance that the Company will achieve a level of business sufficient to generate such required cash flow and revenues. (See "Certain Relationships and Related Transactions".) 7. Lack of Research and Development Capabilities. In the past and currently An-Con conducts its research and development activities essentially through arrangements with university laboratories or hospitals. (Aaron conducts its principal research and development activities in its engineering department at its premises in St. Petersburg, Florida). 8. Potential Risk of Product Liability. The Company and Aaron maintain product liability insurance on all products being marketed for up to $3,000,000 each. Although management believes such insurance coverage to be sufficient for its needs, there can be no assurance that the Company may not, in the future, be subjected to a lawsuit and judgment in an amount exceeding the insurance coverage. 9. Current Prospectus Required. This Prospectus relates to the shares to be delivered to the Aaron shareholders. However, under the terms of the Acquisition Agreement, such shares shall bear a restrictive legend and are to be considered restricted securities upon the distribution to the Aaron shareholders. Future sales of the shares will require subsequent registration, or sale thereof after January 11, 1997, pursuant to Rule 144 or an exemption from registration. See Risk Factor No. 14. 10. High Degree of Competition. The Company and Aaron are not significant factors in the medical industry. The Company and Aaron are subject to competition from larger companies with greater financial and manufacturing resources, which manufacture devices and products that purport to perform functions similar to the functions of their respective products. Other companies which make medical products have a substantially greater sales volume, financial resources, facilities and organizations than the Company. No assurance can be given that the Company will be able to compete effectively against such companies. 11. Control of Company by Officers and Directors. As of June 30, 1996 (giving effect to the Acquisition) the officers and directors of the Company own and/or control approximately 22% of the presently outstanding shares through which they may be able to exercise effective control over the Company. 12. Government 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"), the Department of Agriculture and the National Institute of Health. In the United States, the FDA imposes standards which may affect the clinical testing, manufacture and marketing of certain products. Compliance with the standards and requirements involving product safety, efficacy and labeling may prove to be very expensive and time consuming. No assurance can be given that the regulatory authorities will render the requisite approval of the marketing of some of the products that the Company hopes to sell. In addition, in the manufacture of certain products, the FDA requires compliance with good manufacturing practices before the marketing of the product can be undertaken; these requirements could delay or prevent such products from reaching the market place. Other countries usually impose regulatory requirements concerning the development, testing, marketing and manufacture of certain products which influence the overseas sales potential of these products. (See "Business -Government Regulation"). 13. Possibility of Obsolescence and Unproven Technology. The medical industry has been characterized by the frequent introduction of new products and systems. Some of the Company's products incorporate new technologies, the commercial feasibility of which has not been proven and no assurance can be given that the Company's products can be continually marketed at a profit. Furthermore, the Company may be adversely effected by competitive technologies developed by others. (See "Business - Competition"). 14. Possible Rule 144 Sales. As of June 30, 1996, the Company estimates that there were outstanding approximately 5,900,000 "restricted shares" (giving effect to shares issued in Escrow and deliverable to Aaron shareholders pursuant to the Acquisition), as that term is defined under the Securities Act of 1933, as amended. A substantial portion of these securities may be sold in compliance with Rule 144 adopted under the Securities Act of 1933, as amended. Rule 144 provides, in essence, that, (a) provided the Company has filed all the required reports to be filed with the Securities and Exchange Commissions (quarterly and annual reports), (b) any person who is either an affiliate or non-affiliate, has owned restricted securities for a period of two years, may sell them every three months in an unsolicited brokerage transaction in an amount equal to l% of the Company's outstanding Common Stock or an amount equal to the average trading volume for the four week period immediately preceding the sale. Prior to any such sale, the seller must file a Form 144 with the Securities and Exchange Commission. Other persons, who are unaffiliated with the Company, may sell restricted shares after holding them for three years without any regard to the 1% or four week trading average limitation. Sales under Rule 144, in the future, may have an adverse effect on the price of the Company's Common Stock in the public market. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Quarterly Period Ended 6/30/96 as compared to 6/30/95 The results of operations over the six months ended June 30, 1996 show increased sales and profitability, as compared to the first six months of 1995. The Company's sales revenues increased by 24%, from $2,592,300 to $3,214,200. The smaller rise in the cost of goods sold (7%), relative to sales, changed the Company's gross profit from $1,091,000 to $1,614,600, raising the gross profit margin on sales from 42.1%, to 50.2%. The expanded marketing activities and shift in product sales mix of the Company and improved purchasing and manufacturing efficiency were the principal reasons for the change in gross profits. Salaries and related expenses increased by 69% from $291,100 to $493,100, in the six months ended June 30, 1996 as compared to the same period in 1995. The increase in cost of salaries was related to the new management of human resource utilization policies and a change in accounting for indirect labor. Expenses for professional services decreased by 42.8% to $125,600 in the six months ended June 30, 1996, as compared to $219,400 in the same period of the previous year. A substantial part of the professional fees in 1995 were related to financing activities which the Company did not have in 1996. The increased marketing activities was accompanied by a 5% increase in selling, general and administrative expenses. These expenses were $664,500, in the six month period ended June 30, 1996 as compared to $696,700 for the six months ended June 30, 1995. The Company had net income of $156,400 for the six months ended June 30, 1996 as compared to a loss of $(40,800) for the same period in 1995. The gain, in 1996, was due to 24% increase in revenues in contrast to 6% rise in cost of sales and 9% in operating expenses. The operating income was $305,100, in the first six months of 1996 as compared to a loss of $(116,200) in 1995. The 1995 operating loss was offset only by $76,800 in income from the settlement of debt. The Company sells its products in a similar fashion in the international market as it does in the USA, through distributors. These distributors are found mainly through responses to company advertising in international medical journals or contacts made at domestic or international trade shows. The Company began attending trade shows in foreign countries for the first time in 1993. Since that time, international sales have more than doubled. The main focus for export sales has been Western Europe. The Company has distributors in all major markets there. The Company exhibited for the first time in South America, Sao Paulo, Brazil in 1995. The Company intends to continue marketing their products via this manner, targeting different regions of the world, while returning to major markets for increased market exposure and to introduce new products. In 1996, the Company will exhibit for the first time in the United Kingdom. During the first six months of 1996, international sales of the Aaron Medical product line continued to increase. These sales were $678,900 which represented 21% of total sales. This compares favorably to 1995 when total international sales were $533,300 representing 20%- of total sales. The increase from 1995 to 1996 represents a 27% increase in sales volume. To minimize credit risk, new international distributors in most instances pay cash in advance or by irrevocable letter of credit. This form of credit policy is customary and is not considered a detriment to further increased international sales. In the first six months of 1996, fixed costs increased to allow the introduction of new products, new sales personnel, and to improve the Company's quality control system to assure good manufacturing practices as required by the Food and Drug Administration. At the same time, variable costs were reduced by discontinuing commissions paid to domestic sales representatives. Variable material and labor costs were reduced through improved purchasing strategies and product design. Additionally, the Company has begun purchasing certain labor intensive items off shore, effectively reducing cost of materials, and improving margins. The company began new product development and improvement of facilities, as required by regulatory agencies, in the fourth quarter of 1995. This activity has continued in 1996. The cost of the improvements is $150,000 and will be funded primarily through internal cash flow with the balance of $15,000 being paid in the third quarter of 1996. The allocation of working capital to these projects caused the company's normally prompt payment record with trade vendors to decline slightly, in the first six months of 1996. In order to provide additional working capital, in the first quarter of 1996 the Company secured a three month $100,000 credit facility with a local commercial bank and raised $100,000 through a private placement of shares, the loan was paid off in the second quarter of 1996. Subsequent to the close of the first quarter, the Company commenced production of its new Omnifix 2000 tissue fixative for purposes of marketing through specialty laboratory distributors. Management believes Omnifix 2000 is a safer alternative to formalin, a chemical which OSHA has identified to be carcenogenic. The product will be marketed to hospital and private pathology laboratories and research institutions in both the University and industrial sectors. A patent application has been filed for Omnifix 2000. Annual period ended 12/31/95 as compared to 12/31/94 An-Con's net revenues for 1995 increased to $5.5 million from $4.2 million in 1994 on a pro forma basis. The purchase of Aaron Medical accounted for $5.45 million of 1995 sales. For 1995 there was a 31% increase in sales. The increase in sales of $1.3 million was attributable to a 5% increase in selling prices, an increase of 50% in Bend-A-Light sales and 50% increase in foreign sales of various company products. Gross profit percentage on a proforma basis increased by 7% from 1994 to 1995 principally due to a reduction in material cost, new designs to reduce waste and production efficiency. Proforma cost of goods sold increased by 20% from 1994 to 1995 due to broad-level product volume growth. During 1995 and 1994, Aaron's family of cauteries accounted for 50% of sales and 28% of cost of goods sold. Research and development spending grew on a proforma basis by 476% from 1994 to 1995 as the Company continued to invest in the development of OmniFix 2000, the MFC (multi-function cautery) and other Aaron products. The proforma increase in net interest of $34,000 was attributable to the Aaron building purchased in June 1995 of $25,000 and the interest on the Aaron shareholders' cash rescission rights of $48,000. There was a decrease in interest mainly attributed to bonds exchanged for shares and by the payment of officers' loans. The Company's effective income tax rate would have been 35.7% except that both An-Con and Aaron have loss carryovers. For 1995 Aaron recognized $183,300 in tax benefit for the years 1996 and 1997 which was reduced from the amount of goodwill recognized by the purchase method. Aaron's past five years have been progressively more profitable and it is the Company's belief that it will be able to use the remaining carryover losses to offset gains in 1996 and 1997. Other expenses for selling, general and administrative increased on a proforma basis by 9% which is attributable to the increase in sales. Professional services increased by 11% on a proforma basis from 1994 to 1995. These services are mainly attributable to legal and auditing associated with the Aaron acquisition and the preparation of securities filings in 1994 and 1995. Positive net income is expected to be achieved for the first quarter in 1996. The Company's management expects this trend to continue. The Company sells its products in a similar fashion in the international market as it does in the USA, through distributors. These distributors are found mainly through response to company advertising in international medical journals or contacts made at domestic or international trade shows. The Company began attending trade shows in foreign countries for the first time in 1993. Since that time, international sales have more than doubled from the 1993 sales figure of $553,000. The main focus for export sales has been Western Europe. The Company has distributors in all major markets there. The Company exhibited for the first time in South America, Sao Paulo, Brazil in 1995. The Company intends to continue marketing their products via this manner, targeting different regions of the world, while returning to major markets for increased market exposure and to introduce new products. In 1996, the Company will exhibit for the first time in the United Kingdom, and is considering exhibits in the Middle East and Far East. During 1995, international sales of the Aaron Medical product line continued to increase. These sales were $1.25 million which represented 22% of total sales. This compares favorably to 1994 where total international sales on a proforma basis were $775,000 representing 19% of total sales. The increase from 1994 to 1995 represents a 62% increase in sales volume. To minimize credit risk, new international distributors in most instances pay cash in advance or by irrevocable letter of credit. This form of credit policy is customary and is not considered a detriment to further increased international sales. Fixed costs remained materially unchanged when comparing 1995 to 1994 on a proforma basis. However, in the first quarter of 1996, fixed costs increased to allow the introduction of new products, new sales personnel, and to improve the Company's quality control system to assure good manufacturing practices as required by the Food and Drug Administration. At the same time, variable costs were reduced by discontinuing commissions paid to domestic sales representatives. Variable material and labor costs were reduced through improved purchasing strategies and product design. Additionally, the Company has begun purchasing certain labor intensive items off shore, effectively reducing cost of materials, and improving margins. New product development and improvements to the Company's facility required by regulatory agencies in the fourth quarter of 1995 and projected in 1996 in the amount of $550,000 were and will be funded primarily through internal cash flow, thus restricting the amount of working capital available in the first quarter of 1996. The allocation of working capital to these projects caused the company's normally prompt payment record with trade vendors to decline slightly. In order to provide additional working capital, the Company secured a three month $100,000 credit facility with a local commercial bank in the first quarter of 1996 and raised $180,000 through a private placement of shares during the last quarter of 1995 and the first quarter of 1996. Financial Condition Quarterly Period Ended 6/30/96 as compared to 6/30/95 Financial Condition and Liquidity Working capital of the Company was $(933,800) on June 30, 1996 as compared to $632,900 on June 30, 1995 and $(858,900) as of December 31, 1995. The deficit in working capital is attributable to the current cash recession offer made to the former Aaron shareholders of $1,331,800. On June 30, 1996, total assets were $3,505,600 as compared to $2,716,000 on June 30, 1995 and $3,417,200 of December 31, 1995. The Company's cash decreased by $90,400 as compared to $(490,700) over the six months ended June 30, 1996 and 1995 respectively. The net cash provided by operations was $234,300 and $(251,500), (deficit) in the six months ended June 30, 1996 and 1995 respectively. In the first quarter of 1996 the Company received $49,600 from financing activities. The issuance of common shares provided $120,000 of the cash from financing. The amount of cash used in investing activities was $374,300. The expenditures for the acquisition of additional fixed assets was 55% of the total cash outflows for investing. In the six months ended June 30, 1995, the Company utilized $101,800 to reduce notes payable and $108,300 to acquire fixed assets. The Company has not paid interest on long term obligations which have been due since November, 1990. The total amount of interest payable on long term obligations was $39,700. As of June 30, 1996, the bondholders had made no declaration that the principal was due and payable. Additional interest has been accrued on the outstanding debt to the Aaron shareholders of $20,800, for the first six months of 1996. Annual Period Ended 12/31/95 as compared to 12/31/94 With the acquisition of Aaron, the Company's financial condition has stabilized. As of December 31, 1995, cash totaled $165,800 down from $550,700 at December 31, 1994 on a proforma basis. Cash generated from operating activities rose to $12,500 in 1995 compared to cash applied on a proforma basis in 1994 of $222,000. Working capital of the company on December 31, 1995 was a negative $858,900 which is attributable to the liability due Aaron shareholders of $1,331,800. Investing activities contributed $381,100 in cash during 1995, compared to $71,000 in 1994. Capital expenditures increased substantially in 1995 as the Company continued to invest in property, plant and equipment needed for future business requirements, including manufacturing capacity. The Company expects to spend approximately $375,000 for capital additions in 1996 of which approximately $150,000 was committed for the construction and renovation of the St. Petersburg facility. The Company's ten largest customers accounted for approximately 53% of net revenues for 1995. At December 31, 1995, the same ten customers accounted for approximately 33% of outstanding accounts receivable. The Company used $16,300 and received $998,800 from financing activities in 1995 and 1994 on a proforma basis, respectively. The most significant items of financing activity in 1995 were the reduction of officers' loans of $90,700 and the $75,000 cost of the underwriting associated with the Aaron purchase. Sources of funds were the receipt of subscriptions receivable of $64,900 and issuance of 80,000 common shares for $80,000. The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures for the expansion of its manufacturing site, working capital requirements, and product development programs. Outlook The statements contained herein are based on current expectations. These statements are forward looking and actual results may differ materially. The Company believes that the world market for disposable medical products, such as the Company's battery-operated cauteries, has significant growth potential because these type of products have not been affordable or effectively marketed outside the U.S. Because of these factors, the Company has designed certain disposable products to be reusable. The Company will expand its marketing thrust internationally by attending more foreign shows than it did in 1995. The Company presently has a significant portion of the U.S. battery operated cautery market and does not expect a dramatic growth in sales of battery operated cautery- related products domestically. However, the Company, over the past two years has chosen to expand its product line of electro-surgical products (as opposed to battery operated cautery products). Electro-surgical products sold by the Company consist of standard electrodes, the patented Multi-Function Cautery, the patent pending Resistick line of reduced stick electrodes and the Aaron 800 high frequency desiccator. These products are powered by electrical current (alternating) as opposed to batteries (which provide a direct current). In 1995, the Company had sales of $200,000 in the electro- surgical product area. The electro-surgical product line is a larger market than the Company has normally sold into and is dominated by two main competitors, Valley Lab a division of Pfizer and Conmed, based in Utica, New York. In the area of reduced stick electrodes, the main competitor is MegaDyne. The combined markets for the Company's electro-surgical products exceeds $100 million annually. Management believes that electro- surgical product sales will move from fifth place to second in total Company sales by product line in 1996 and will be the largest single product line by 1997. Non-Medical Products The Company for 1995 sold $1.2 million of its flexible lighting products used primarily in the automotive and locksmith industries. Approximately $1.0 million was sold to one customer. The Company is intending to expand this market with the addition of a higher quality flexible light unit. The higher quality version of the Bend-A-Light will be sold into the same markets as the Company presently sells its less expensive unit. The Company intends to manufacture a fiber optic flexible scope to compete in the automotive, aircraft and quality maintenance markets. The product will compete with much more expensive units built by companies such as Olympus. After the Company has successfully marketed the industrial fiber optic flexible scope, it intends to redesign, manufacture and market a medical scope. Liquidity and Future Plans Since the acquisition of Aaron Medical Industries, Inc. the Company has changed its direction from acquiring ownership interest in companies to acquiring new product technology and expanding manufacturing capabilities through Aaron. The Aaron 800 is a prime example of this new direction. Other products and technologies are being evaluated for future development. Continued strong international sales growth is expected by management. The Company's future results of operations and the other forward looking statements contained in the Outlook, in particular the statements regarding growth in the medical products industry, capital spending, research and development, and marketing and general and administrative expenses, involve a number of risks and uncertainties. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: business conditions and the general economy; competitive factors such as rival manufacturers availability of products at reasonable prices; risk of nonpayment of accounts receivable; risks associated with foreign operations; and litigation involving intellectual property and consumer issues. An-Con believes that it has the product mix, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix and profits are all influenced by a number of factors, as discussed above. The Company's effective income tax rate would have been 35% except that both An-Con and Aaron have loss carryovers. For the first six months of 1996 Aaron used $84,200 of its loss carryover. Aaron's past five years have been progressively more profitable and it is the Company's belief that it will be able to use the remaining carryover losses to offset gains in 1996 and 1997. The Company expects to spend approximately $375,000 for capital additions in 1996 of which $150,000 was committed for the construction and renovation of the St. Petersburg facility. The Company's ten largest customers accounted for approximately 44%of net revenues for the six months ended June 30, 1996. The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures for the expansion of its manufacturing site, working capital requirements, and product development programs. Outlook The statements contained in this Outlook are based on current expectations. These statements are forward looking, and actual results may differ materially. The Company believes that the world market for disposable medical products, such as the Company's battery-operated cauteries, has significant growth potential because these type of products have not been affordable or effectively marketed outside the U.S. Because of these factors, the Company has designed certain disposable products to be reusable. The Company will expand its marketing thrust internationally by attending more foreign shows than it did in 1995. The Company presently has a significant portion of the U.S. cautery market and does not expect a dramatic growth in sales of cautery-related products domestically. The Company, over the past two years has chosen to expand its product line of electrosurgical products. Electrosurgical products sold by the Company are the standard electrodes, the patented Multi-Function Cautery, the patent pending Resistick line of reduced stick electrodes and the Aaron 800 high frequency desiccator. The Company had sales of $608,300 and $205,300 in the electrosurgical product area for the first six months of 1996 and 1995 respectively. The electrosurgical product line is a larger market than the Company has normally sold into and is dominated by two main competitors, Valley Lab a division of Pfizer and Conmed, based in Utica, New York. In the area of reduced stick electrodes, the main competitor is MegaDyne. The combined markets for the Company's electrosurgical products exceeds $100 million annually. Management believes that electrosurgical product sales will move from fifth place to second in total Company sales by product line in 1996 and will be the largest single product line by 1997. Non-Medical Products The Company sold $397,600 and $563,200 of its flexible lighting products used primarily in the automotive and locksmith industries in the first six months of 1996 and 1995 respectively. The Company is intending to expand this market with the addition of a higher quality flexible light unit. The higher quality version of the Bend-A-Light will be sold into the same markets as the Company presently sells its less expensive unit. The Company is manufacturing a fiber optic flexible scope to compete in the automotive, aircraft and quality maintenance markets and shipped its first scopes at the end of the second quarter. The product will compete with much more expensive units built by companies such as Olympus. After the Company has successfully marketed the industrial fiber optic flexible scope, it intends to redesign, manufacture and market a medical scope. MARKETS AND MARKET PRICES An-Con's Common Stock is traded in the over-the-counter market on the National Associations of Securities Dealers, Inc. Bulletin Board ("NASD Bulletin Board"). The table shows the reported high and low bid prices for the Common Stock during each quarter of the last eight quarters as reported by the NASD Bulletin Board (symbol "AGNT"). These prices do not represent actual transactions and do not include retail mark-ups, mark-downs or commissions. High Low 1994 3rd Quarter 3 3/8 1 5/8 4th Quarter 2 5/8 1 High Low 1995 1st Quarter 1 7/8 1 2nd Quarter 2 7/16 1 3/4 3rd Quarter 2 3/8 1 3/4 4th Quarter 2 1/8 1 1/2 High Low 1996 1st Quarter 1 15/16 1 1/8 2nd Quarter 1 1/4 1 On September 4, 1996, the Closing bid for An-Con's Common Stock as reported by the NASD Bulletin Board was $ per share. As of September 4, 1996, the total number of shareholders of An- Con's Common Stock was approximately 850 exclusive of shareholders whose shares are held in the name of their broker or stock depositories or the escrow agent holding shares for the benefit of An-Con shareholders which are estimated to be 1,000 additional shareholders. Prior to the Acquisition, Aaron was a private company the shares of which were not traded in any public market. Private transactions in Aaron shares for the years 1992 and 1993 were all valued at $.11 per share on Aaron's books and records. No transactions in Aaron shares were recorded in 1994. BUSINESS The Company An-Con Genetics, Inc. (the "Company") was incorporated in 1982 under the laws of the State of Delaware to engage in research and development relating to certain genetic devices. The Company had changed its direction and operations from genetic devices to the development and marketing of a line of tissue fixatives, under the OmniFix tradename. In addition, the Company has recently acquired (as of January 11, 1995) all of the outstanding shares of Aaron Medical Industries, Inc., a Florida Corporation, principally engaged in the business of manufacturing and selling battery operated cauteries, specialty medical and commercial lighting instruments and electro-surgical devices to distributors that serve physicians and hospitals. On June 30, 1993, the Aaron Board requested the resignation of M. P. O'Connell, its CEO and Chairman due to essential differences between Board members and Mr. O'Connell. Mr. Speiser, CEO and Chairman of An-Con (who had recently entered into an agreement, which, as amended, provided for the exchange of An-Con shares for all of the shares of Aaron) then replaced Mr. O'Connell as Chairman of Aaron's Board in June of 1993. No value was assigned to Aaron shares during negotiations which mainly consisted of the percentage of shares to be allocated to Aaron shareholders. As of the date of this Prospectus, the acquisition by An-Con of Aaron has resulted in the two companies operating separately with respect to the manufacture and sale of their respective products. Although An- Con's Board of Directors is the controlling entity and is comprised of different directors, (two of which are also directors of Aaron) each maintains a separate set of books as well as its corporate identity. Each of the corporations is located at the same principal location but each continues to operate independently. An-Con caused Moshe Citronowicz, (among others) to join Aaron as its Director of Production. Mr. Cintronowicz, who is currently an officer and director of Aaron, is deemed to be a key employee of Aaron and Aaron maintains and is beneficiary of a policy insuring Mr. Cintronowicz's life. In addition, An-Con has provided, from time to time, funding utilized by Aaron to facilitate growth and expansion. (See "Material Contacts Between An-Con and Aaron"). Total consolidated Company sales for the year 1995 and the first six months of 1996 were $5,521,000 and $3,214,200 respectively, of which An-Con contributed $61,600 and $16,000 respectively and Aaron contributed $5,459,400 and $3,198,200 respectively. In 1995 and for the first six months of 1996, net loss of the company was $154,100 and $156,400 respectively. An-Con contributed losses of $637,200 and $111,800 for the respective periods and Aaron contributed income of $483,100 and $268,200 for the respective periods. Management believes that the figures indicated above do not adequately reflect the synergy represented by An-Con's financing, management and personnel procurement contributions to the Company as combined. See "Significant subsidiary - Aaron Medical Industries, Inc.". An-Con maintains New York offices at One Huntington Quadrangle, Melville, NY 11747 and principal executive offices at 7100 30th Avenue North, St. Petersburg, Florida 33710-2902, with telephone number (800) 537-2790. Aaron Medical Industries, Inc. also maintains its executive offices and manufacturing facilities at the same location. (See- "Business- The Company" and "Significant Subsidiary". Company Products Battery Operated Cauteries The Company's subsidiary, Aaron, is principally engaged in the business of manufacturing and selling battery operated cauteries, specialty medical and commercial lighting instruments and electro-surgical devices. Aaron's largest current product line is battery operated cauteries. Cauteries were originally designed for precise hemostasis (to stop bleeding) in ophthalmology. The current use of cauteries has been substantially expanded to include sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual hematoma (smashed fingernail) and for stopping bleeding in many types of surgery. Battery operated cauteries were originally designed, and are still primarily delivered, as a sterile one time use product in the USA. The Company manufactures more types of cauteries than any other company in the world at its facility in St. Petersburg. The Company also manufactures a line of replaceable battery and tip cauteries. This design allows the doctor to use one of many different sterile tips which also includes a sterile drape cover for the handle and to replace the batteries when they are depleted. This was originally designed for use in international sales, but has enjoyed growing success in the USA at the doctor's office and clinic level. The sterile disposable cauteries are still far more popular in the hospital operating room domestically. Battery operated Medical and Industrial Lights The Company, through its subsidiary Aaron, manufactures a variety of specialty lighting instruments for use in ophthalmology as well as patented flexible lighting instruments for general surgery, hip replacement surgery and for the placement of endotracheal tubes in emergency situations and prior to surgery. The lighting instruments have also been adapted for commercial and industrial use, such as for automotive mechanics through retail tool sellers such as Snap On Tools, Mac and Matco, for the locksmiths through retailers such as HPC and others. In 1995 the Company enjoyed a first time opportunity for retail sales with Walmart and Sears. This resulted in approximately $350,000 in additional sales to make total sales through this distributor $1,000,000. In the first half of 1996 sales through the same distributor and others to this market sector were $397,000. The Company is currently evaluating several markets and marketing techniques to expand the sales of Bend-A-Lights both domestically and internationally. Electro-surgical Products The Company's subsidiary, Aaron, over the past two years, has continued to expand its product line of electro-surgical products. Electro-surgical products are the electrodes (blade, ball, needle and loop) used in conjunction with an electro- surgical pencil(the handle that the electrode is attached to) which plugs into a generator. The generator plugs into a wall outlet and provides the radio frequency which when combined with the electrode and pencil, cut and/or coagulate during surgery. The electrode has traditionally been made of stainless steel and is supplied sterile for a one time use. Aaron has evaluated the electro-surgical market and has its electrodes manufactured to its specifications domestically and overseas. Multi-Function Cautery The Multi-Function Cautery Pencil (MFC) was introduced at the American College of Surgeons meeting in the fourth quarter of 1995 for comment from surgeons before final release. Pre- marketing approval has been obtained from the Food and Drug Administration ("FDA") and the product was scheduled for formal release in the 2nd quarter of 1996. However, due to continuing market and commercial study to determine degree of efficacy needed by end-users and required product size, the formal release has been postponed until the fourth quarter of 1996. The MFC is a patented device, developed by a group of California surgeons, and acquired by An-Con for Aaron. The device combines, in one instrument, the ability for the surgeon to cut and or coagulate, while simultaneously evacuating the smoke associated with electrosurgery and to remove fluids from the surgical site, all with one hand and without assistance. Resistick The patent pending Resistick, reduced stick electrodes, are a coated blade, ball or needle, which is also used in electrosurgery. The advantage of these electrodes over the standard stainless steel electrode is that due to the proprietary coating, they clean easier during surgery thus speeding up the surgical procedure. All standard electrodes develop a build-up of a residue of blood and tissue during surgery which insulates the electrode making it cut and/or coagulate less efficiently. Therefore, the surgeon must stop and scrape the electrode before continuing. This stopping and starting wastes both time and money. The Resistick electrode was designed to correct this situation. The reduced stick electrode market is dominated by MegaDyne Medical Products, Inc. which is believed by management to virtually control the entire existing market. Unlike the MegaDyne product, which relies essentially on capacitive coupling to cause hemostasis during surgery, the Company's product Resistick, relies entirely on the coating's resistive characteristics MegaDyne has recently instituted an action seeking a preliminary and permanent injunction against Aaron for patent infringement. On August 27, 1996, after a hearing a federal judge denied Megadyne's motion for a preliminary injunction based upon, among other things, that Megadyne failed to establish a likelihood of success in the lawsuit. See "Legal Proceedings". The Company has obtained pre-marketing approval from the FDA for this device. Aaron 800 The Aaron 800 is a low powered office based generator designed primarily for dermatology. The unit is a 30 watt high frequency desiccator used mainly for removing small skin lesions and growth in the doctor's office. This unit was designed with sufficient base technology to permit the manufacture of more powerful office based generators without requiring the additional time consuming expense of total redesign. The Company has obtained pre- marketing approval from the FDA for this device and has signed a distribution agreement with a non-affiliated distributor in the first quarter of 1996. The agreement included a significant purchase order for 1000 units plus accessories. Nerve Locator Stimulators The Company manufactures three different nerve locator stimulators which are primarily used for identifying motor nerves in hand and facial reconstructive surgery. These nerve locator stimulators are self contained, battery operated units, which are for one surgical procedure. The Company has a patent on the Neuro Pulse III which has a pulsing variable design. The Company has obtained pre-marketing approval for the aforesaid devices from the FDA and is presently marketing these and other similar new products in this line. 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. Management believes that FDA approval for this product is not required. Omnifix 2000. The Company intends to substantially replace Omnifix II with Omnifix 2000, which, in addition to preserving thin tissue specimens, also provides preservation of thicker/larger tissues. Pathologists have a need for a safe fixative for use in preserving large sections/tissue block specimens. To meet this requirement, the Company has developed a new patent pending formulation. The Company is presently initiating test marketing of this new product. This formulation is comprised of certain proprietary ingredients which includes trace amounts of formaldehyde (well below OSHA safety standards and not requiring special handling). The formulation is deemed by management to be a safer alternative to formalin (a formaldehyde based product requiring special handling under OSHA guidelines), is non- flammable, provides sharp and clear cellular detail, rapid staining, is compatible with all processors and, unlike formalin, is routinely disposable. Although no assurance can be given, Management believes, that since Omnifix 2000 (like formalin) preserves both thin and thick tissue, the product has reasonable expectation of penetrating a percentage of formalin's market niche. (See "Competition"). The Company is currently marketing OmniFix II to clinical laboratories, hospitals and pharmaceutical companies nationwide through distributors. The present customer base covers many states, including Hawaii. Management believes there is a market niche for a tissue fixative which is a safer alternative to formalin, and which, unlike formalin, does not require special handling for safety purposes. With adequate financing and marketing support, it is management's opinion that Omnifix 2,000 can be a profitable product for the Company. Other Products The Company has patent rights for an auto-focusing bar code reader, the "Intelliscan Reader", the development of which is presently suspended. The Company has no present plans to complete development for commercialization. Although there is no formal R&D program or R&D department, the Company has been creating developing products in-house, through the production and engineering departments of Aaron, and, on occasion, has developed products licensed from third parties. Manufacturing, Marketing and Distribution The Company manufactures the majority of its products on its premises in St. Petersburg, Florida. Some products are out- sourced to the Company's specification offshore. The Company markets its products through national trade journal advertising and by attending approximately fifteen trade shows per year. These shows are mainly aimed at the actual users of the product (surgeons, doctors or nurses); however the Company also attends distributor meetings. These are the distributors who actually sell the product to the end users. The Company sells under the Aaron label through general and specialty distributors across the country and also private labels its products for major distributors such as Baxter, General Medical, and Durr Medical. Competition The medical industry is highly competitive and it is generally known that it will become more so in the future. The industry is characterized by the frequent introduction of new products and services. The Company's competitors in this field are well established, do a substantial amount of business, and have greater financial resources and facilities than the Company. One of the Company's major competitors is Xomed/Treace. Xomed/Treace carries products that are similar to those of the Company and has the advantage of early market entry. Over time, Xomed's market share has decreased to approximately 50% of the total market. Other line competitors are Alcon, Valley Lab and Conmed. Aaron's products are competitively priced and its new cautery line has a longer shelf life (four years) as compared to a shelf life of one or two years for competing products. Aaron introduced eight new products for a variety of specialties at the Health Industry Distributors Association Annual Meeting in October, 1995. The products are two new nerve locator stimulators for hand and face reconstructive surgery. Two ophthalmic power handles for corneal rust ring removal and two new diamond burrs for polishing the pterygium bed after surgical removal and for lid margin lesions. The last two products are for the emergency room or walk-in clinic. The nail drill and replacement bits are for relief of a subungual hematoma (smashed fingernail) Seven of the Company's eight new products compete with Xomed/Treace products. Management believes, based upon past performance that the Company has the ability to aggressively compete in this market. Regulation Since many of the products manufactured by the Company are medical devices, it is necessary for the Company to obtain Federal Food and Drug Administration ("FDA") permission prior to their marketing. Applying for permission can sometimes delay entry of certain products into the market place to the detriment of the Company. In June, 1995, pursuant to an inspection of the facilities of the Company's subsidiary Aaron, the FDA issued a warning letter advising of federal good manufacturing practices ("GMP") deficiencies. The letter cited, among other things, the Company's failure (a) to follow its own complaint handling procedure to immediately review, evaluate investigate and document complaint; (b) to evaluate significant equipment changes in manufacturing processes and quality assurance tests; (c) to have and implement documented formal change control procedures for changes made to devices or manufacturing processes; (d) to have, follow and document conformance with appropriate written finished device test procedures assuring devices meet all finished specifications prior to distribution; (e) to have, follow and document conformance with written procedures for acceptance of components; (f) to conduct plan in periodic orders of the quality insurance and good manufacturing practice programs in accordance with written procedures; (g) to establish and implement adequate record keeping procedures. Until such deficiencies were removed the FDA indicated it was in no position to restore GMP standing to the Company or permit approval of any pending pre-market submissions by the Company. On July 12, 1995, the FDA indicated that while the Company's response appeared adequate, further verification was needed before the FDA would be in a position to support the approval of any pending pre-market submissions, or related Export Certificates for the Company's 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 has now been extended to August 30, 1996. Until the Company achieves GMP compliance, all new product development is being concentrated on products which do not require FDA approval. No assurance can be given that the Company will meet the federal GMP guidelines at the next evaluation date. If the Company fails to meet the guidelines, the Company may sustain adverse operational and business consequences in bringing existing and new products to market. Patents and Trademarks The Company has a patent pending with respect to its new product, Omnifix 2000. No assurance can be given that a patent will protect the Company from duplication or infringement. The Company owns a total of ten patents and other patents pending covering multiple products. Though some of these products are protected by patents, no assurance that competitors will not infringe the Company's patent rights or otherwise create similar competing products that are technically patentable in there own right. Management believes that general and product liability exposures are adequately covered by insurance. Research and Development The approximate amount expended by the Company on developing Omnifix 2000 and Aaron products during the years 1995 and 1994 inclusive of travel, professional services and related general and administrative expenses, total $121,900 and $47,200 on a pro forma bases, respectively. The Company has not incurred any direct costs relating to environmental regulations or requirements. Employees During most of 1994 An-Con had three employees, two officers and one secretary. In the fourth quarter of 1994 the company hired a chemist, and a laboratory technician, (now a consultant to the Company) to develop and market its OmniFix products. The Company also employs an unsalaried Vice-President for Far Eastern affairs. In January 1995 the Company acquired Aaron which presently has a total of 75 employees. These consist of 4 executives, 5 administrative, 5 sales, and 61 technical or factory employees. SIGNIFICANT SUBSIDIARY - AARON MEDICAL INDUSTRIES, INC. Pursuant to the Final Acquisition Agreement the shareholders of Aaron Medical Industries, Inc., a Florida corporation, agreed to exchange all of the outstanding shares of Aaron for shares of An- Con and upon issuance, the shares deliverable to Aaron shareholders would constitute 49% of an agreed amount of outstanding shares of An-Con Genetics, Inc. The Acquisition was consummated as of January 11, 1995 and the shares issuable to Aaron shareholders are issued in Escrow pending effectiveness of this Prospectus concerning the Company's offer of rescission as to the An-Con shares deliverable pursuant to the exchange of 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 of Aaron Aaron Medical Industries, Inc., is a Florida corporation with offices and manufacturing facilities in St. Petersburg, Florida. It is principally engaged in the business of manufacturing and selling battery operated cauteries, specialty medical and commercial lighting instruments and electro-surgical devices through distributors to physicians and hospitals. Aaron is the successor to Sun-Key Medical Manufacturing, Inc., which filed a voluntary petition on March 10, 1989, under Chapter 11 of the Bankruptcy Act. The predecessor and an affiliate thereof, which also filed a petition on October 31, 1988, were consolidated into a single bankruptcy case due to the intimate and intertwined affairs of both corporations. On July 31, 1989, pursuant to a plan of arrangement (the "Plan") Sun-Key Medical Manufacturing, Inc. reorganized, acquired Key Technologies, Inc., and changed its name to Aaron Medical Industries, Inc. The Plan called for payment of secured creditors ($10,500), priority claims ($136,000) and unsecured creditors ($1,531,900). Secured creditors and priority creditors were paid in full and unsecured creditors received $.1156 for each dollar owed. Payments were to be made from operations. As of December 31, 1995, all creditors were paid in full. The Company, through its subsidiary Aaron, manufactures and sells its products under its own label to more than 850 distributors worldwide. The Company has private label arrangements with health care buying groups and hospital supply companies. PROPERTY The Company has moved its executive offices to the Aaron facility located at 7100 30th Avenue N., St. Petersburg, Florida 33710-2902, during the first quarter of 1995. The Company's New York office is being maintained until at least January 31, 1997 when its current lease terminates. On February 28, 1995, a new two-year lease agreement was signed with the landlord of the Company's executive offices in Melville, New York requiring an annual rental payment of $24,000. Pursuant to the new lease, unpaid past rents of $54,200 were forgiven. On March 8, 1993, Aaron entered into a five year operating lease agreement with minimum future rental payments for five years beginning on May 1, 1993 with annual rental payments increasing each year with appropriate increased square footage rented. The lease agreement also provided for an option to acquire the land and building under certain terms. The total minimum rental under the lease was $347,400 over the five year term. On June 26, 1995 Aaron Medical Industries, Inc., exercised its option to purchase the land and building it presently occupies for $625,000. The purchase was financed as follows: Cash $ 47,000 Purchase Money Mortgage 500,000(a) An-Con Shares (60,000 X 1.30 per share) 78,000(b) Total purchase price $ 625,000 (a) Payment of principal and interest at 10% payable monthly at $5,373.06 until July 1, 1998 when a balloon payment of $439,074.27 is due. (b) The An-Con shares were provided by An-Con and are restricted for 2 years. The shares are being held in escrow pursuant to agreement. The agreement further restricts the release of the shares until the seller takes such action as is necessary to further investigate, define and remediate such contamination that exists on the property and is referred to in certain environmental reports pursuant to a Remedial Action Plan approved by the State of Florida Department of Environmental Protection (DEP) and any other appropriate agencies. In January 1996, the State of Florida approved a Remediation Plan and work should begin in the 2nd Quarter of 1996. Although no assessment can be made at this time as to the cost to the Company if the Seller does not complete the work required in the plan approved by the State of Florida, the Company has been advised that such cost will be approximately $125,000. Two years from the date of Closing, if Seller and Guarantors have not defaulted under or been in breach of any of their obligations to Buyer, Buyer shall obtain and deliver to Escrow Agent additional shares of Stock if based upon the "Closing Market Price" of the Stock on the thirtieth day prior to such date, the escrowed shares shall have a value of not less than $78,000.00. MATERIAL CONTACTS BETWEEN AN-CON AND AARON CONCERNING THE ACQUISITION Background Prior to the initial contacts resulting in the Acquisition, the Board of Directors of An-Con consisted of Robert Speiser (CEO and Chairman) and Andrew Makrides (President) and the Board of Directors of Aaron consisted of M.P. O'Connell (CEO and Chairman) J. Robert Saron (President), Louis Powell (director) and Paul Butler (director). On June 30, 1993, Mr. Speiser replaced Mr. O'Connell on Aaron's Board of Directors. Mr. Saron joined An- Con's Board in August, 1994. The following table sets forth the chronological status and changes to the respective management of both companies until the date of closing of the acquisition on January, 11, 1995. From June 23, 1993 to June 30, 1993 An-Con Aaron CEO - Director Robert Speiser Patrick O'Connell President-Director Andrew Makrides Robert Saron Director -- Louis Powell Director -- Paul Butler From June 30, 1993 to August 15, 1994 An-Con Aaron CEO - Director Robert Speiser Robert Speiser President Director Andrew Makrides Robert Saron Director -- Louis Powell Director -- Paul Butler From August 15, 1994 to January 11, 1995 An-Con Aaron CEO - Director Robert Speiser Robert Speiser President-Director Andrew Makrides Robert Saron Director Robert Saron Louis Powell Director -- Paul Butler As of January 11, 1995 the combined company (An-Con) Board was as follows: Robert Speiser 1990 CEO An-Con An-Con Officer Andrew Makrides 1982 President An-Con An-Con Officer Robert Saron 8/94 Director Aaron Aaron Officer See Management for status of current An-Con Board. The Board of Directors of Aaron was increased to 5 members on , 199 , with the addition of Andrew Makrides. Acquisition Negotiations During the first quarter of 1993, discussions took place between Robert Speiser, Chairman and CEO of An-Con and M. Patrick O'Connell, CEO and Chairman of Aaron concerning the feasibility of An-Con acquiring Aaron on an exchange of shares. Mr. O'Connell was a former business acquaintance of Andrew Makrides, President of the Company, and the acquisition discussions resulted from prior contacts between Messrs. O'Connell and Makrides, wherein the possibility of acquisition arose. The discussions concerning feasibility to combine centered on An- Con's ability to satisfy Aaron's need for capital and provide management for its operations and future growth and further provide future liquidity for Aaron's shares on the one hand, and Aaron's capacity to satisfy An-Con's need for products and operations. These discussions which ultimately resulted in the initial March 31, 1993 Agreement, as amended, June 10, 1993, were held exclusively between Messrs O'Connell and Speiser with concomitant further discussion with their respective Boards of Directors. Mr. O'Connell resigned his position as CEO and director of Aaron on June 30, 1993 and was replaced by Robert Speiser as CEO and Chairman of the Board of Aaron. Mr. Saron joined An-Con's Board in August, 1994. Mr. Speiser continued to negotiate (on behalf of An-Con) with Robert Saron, President of Aaron, thereafter until Mr. Speiser resignation in March, 1995. Mr. Makrides then continued negotiations on behalf of An-Con with Robert Saron as to the additional amendments of the Acquisition Agreement. Except as heretofore stated the company remained the same until execution of the Final Acquisition Agreement, as amended. No outside assistance was utilized with respect to determining the exchange terms. At the inception discussions focused upon Aaron's desire for an equal representation on the board of the combined entity; equal ownership of shares by the shareholders of each respective entity on a 50-50 basis (with the exception of shares issued by the Company for funding purposes which shares were not to be included in the 50-50 calculation); Aaron's name was to be retained on its products; any An-Con shares deliverable to Aaron shareholders were to be restricted for two years; An-Con would reverse split its shares to enable it to complete the acquisition and to privately raise capital to help fund Aaron. The discussions did not include the attribution of any particular value to Aaron or Company stock and usually involved the percentage to be allocable to Aaron shareholders. At the time of the initial negotiations An-Con's shares were trading at a price of approximately $.30 per share (without giving effect to the later 1 for 15 reverse stock split which occurred January 6, 1994) on the NASD Bulletin Board. Aaron was a private company and Aaron's shares were never traded in the marketplace. Unrelated transactions in Aaron's shares during 1993 were recorded on Aaron's books at $.11 per share. The Acquisition Agreement, as Amended Pursuant to the initial agreement dated March 31, 1993, Aaron and the Company agreed to the acquisition of Aaron by the Company. The agreement provided for: (a) An-Con's acquisition of 100% of the shares of Aaron pursuant to an exchange of shares resulting in, after the acquisition, a percentage ownership of An-Con (on a fully diluted basis) by Aaron shareholders of 49% which acquisition would require a registration of the shares deliverable to Aaron shareholders, plus a contemplated registration of additional An-Con shares for sale in order to derive $4-5 million of proceeds for Aaron and An-Con. An-Con was to reverse split its shares in order to facilitate funding and completion of the acquisition. Aaron would maintain its identity, operations and corporate structure as a wholly owned subsidiary of An-Con. The An-Con shares to be received by Aaron shareholders were to be acquired for investment and constituted restricted securities. The agreement was later amended on June 10, 1993 after discussions between Speiser and Robert Saron, President of Aaron, to provide that after the contemplated exchange, a total of 4% of the shares issuable to Aaron shareholders were to be placed in escrow subject to Aaron achieving in fiscal 1993 or 1994 a total of 10% net pre-tax earnings. Failure to achieve such would result in Aaron shareholders forfeiting the 4% of the shares exchanged. If An- Con failed to consummate the underwriting within 12 months from the closing of the acquisition Aaron shareholders would be entitled to receive additional shares of An-Con up to 80% of the outstanding shares of An-Con on a fully diluted basis, exclusive of shares issued by An-Con for funding purposes. Transactions Leading to Possible Violations and Rescission Offer At the time of the negotiations, Aaron had in excess of 100 shareholders. Pursuant to the federal securities laws and the Blue Sky Laws of most states, the exchange offer by An-Con should have been made only pursuant to and the subject of an effective registration statement filed with the Securities and Exchange Commission in addition to being registered or qualified under the Blue Sky Laws of the respective states of residence of the Aaron shareholders. Prior to An-Con filing and/or making effective a registration statement with the Securities and Exchange Commission, Aaron mailed a Notice of Special Meeting and amended proxy to Aaron shareholders for a Special Meeting to be held on June 21, 1993 seeking approval of the terms of Acquisition Agreement which were presented to the shareholders at the meeting. The members of the Aaron Board of Directors at the time of the execution of the agreement with An-Con were M.P. O'Connell, J. Robert Saron, Paul Butler and Louis F. Powell. Since An-Con was aware that the shareholders of Aaron were being solicited, such may be deemed tantamount to an offer by An-Con of its shares to Aaron shareholders without having effected a registration statement prior thereto and such act may have possibly violated the Securities Act of 1933. In June, 1993, officers, directors and affiliates owned and/or controlled a total of 2,298,368 shares of Aaron or 44% of the outstanding shares of Aaron. The shareholders solicited voted in favor of the acquisition as set forth in the agreement of March 31, 1993, as amended June 10, 1993. At such June meeting, 73.18% of the outstanding shares present in person and by proxy approved, and one dissenting shareholder representing 36,600 shares disapproved. The notice of special meeting, as amended, and proxy also failed to apprise the shareholders of their rights of appraisal under Florida law. Florida is the state of incorporation of Aaron. (See "Rescission Offer - State Blue Sky Laws"). On June 30, 1993 Robert Speiser, Chairman of the Board of An-Con was elected by the Board of Directors of Aaron to be a replacement director for M. Patrick O'Connell, the former chairman who resigned at the request of the Aaron Board. Mr. Speiser also filled Mr. O'Connell's position as Chairman of the Board of Directors and CEO of Aaron. Although Mr. Speiser was Chairman and CEO of Aaron, he was only one of four members of the Board of Aaron, which Board controlled Aaron until January 11, 1995. From June, 1993 onwards, Mr. Speiser represented An-Con in all acquisition discussions and Robert Saron represented Aaron. Each conferred with the respective boards of each Company (Mr. Speiser abstaining on all Aaron Board votes pertaining to the negotiations for the acquisition). Mr. Saron and his family together with Messrs. Butler and Powell (co-directors of Aaron) effectively controlled Aaron with respect to matters involving negotiations with An-Con after June, 1993 until closing in January, 1995. Except for Mr. Saron who went on the Board of An- Con and Mr. Makrides who is now on the Board of Aaron, there were never any plans to merge the management of both entities. On May 18, 1994, at a Special Meeting of Shareholders, a change of the terms of the proposed formal agreement were submitted to and approved by shareholders to provide a condition that if An- Con failed to provide one million dollars in cash or other funding to Aaron it would constitute a default under the agreement. A total of 77.2% of the outstanding shares of Aaron were voted, and all those voting in person or by proxy, approved, and no shares dissented. It was later determined by management of both companies that since An-Con could not provide the funding until completion of the acquisition, An-Con would have 12 months after completion of the acquisition to raise $1,000,000 for Aaron. If it failed to do so, such default would result in Aaron shareholders receiving a greater percentage of shares (up to 80% of the total outstanding shares of An-Con). If An-Con provided some but not all of the funds or funding, then the percentage of shares deliverable to Aaron shareholders would be reduced commensurately from the 80% figure. This condition was approved by shareholders of Aaron at a special meeting of shareholders on August 15, 1994 at which 83.25% of the outstanding shares of Aaron were voted, and all of such shares present in person or by proxy (100% of those voting), approved of the change in terms and affirmed the acquisition. On January 11, 1995, a formal agreement with Aaron, containing the aforementioned changes in terms, was executed and the exchange of shares was concluded IN ESCROW pending the filing and effectiveness of a registration statement covering the An-Con shares deliverable to Aaron shareholders (3,399,096 shares). On that date, the shares deliverable to Aaron shareholders were issued and delivered IN ESCROW to Delton Cunningham as Escrow Agent for the benefit of Aaron Shareholders and Aaron shareholders' shares were delivered to the Company. Pursuant to resolutions of the respective Boards of Directors of An-Con and Aaron, on April 15, 1995, the Acquisition Agreement was amended and restated to delete the condition that An-Con raise $1,000,000 for Aaron and was further amended to change the condition to a covenant by An-Con to provide funding of $1,000,000 to Aaron. In November, 1995, pursuant to the resolutions of the respective boards of directors of An-Con and Aaron and pursuant to the advice of counsel, the contingency requiring Aaron to make net income of 10% of its revenues in 1994 or 1995 in order to receive 49% equity (3,399,096 shares) was deleted. In addition An-Con's covenant to provide $1,000,000 in funding for Aaron was also deleted at that time. Accordingly, all conditions to the agreement were removed except the stipulation that the shares issuable to Aaron shareholders were to be registered with the Securities and Exchange Commission prior to delivery from escrow. In November, 1995, final amendment to the Acquisition Agreement was executed and constitutes the final Acquisition Agreement between the parties. Given the progress and growth of the combined companies, the respective Boards of Directors never considered unwinding the initial acquisition agreement. Even though each company has maintained separate books and records, due to the fact that the companies became so intertwined since the initial acquisition agreement, it was determined that to seek a vote of shareholders to ratify or unwind the transaction would be inappropriate. The combined companies had so materially changed that unwinding the transaction would not be fair and rescission (offering the value of the consideration paid by former Aaron shareholders) was deemed more appropriate to attempt to rectify any possible violations of law. Final Acquisition Agreement The Final Acquisition Agreement as amended, provides simply for an exchange of 3,399,096 shares of Common Stock of An-Con for all of the outstanding shares of Aaron. There are no conditions to the exchange except that the shares deliverable to former Aaron shareholders, which are presently held IN ESCROW by Delton Cunningham CFO of An-Con (and Aaron), are deliverable upon effectiveness of this prospectus. The Final Acquisition Agreement further provides that the An-Con shares deliverable to former Aaron shareholders are restricted shares and will become eligible for sale on January 11, 1997 pursuant and subject to the terms of Rule 144 promulgated under the Securities Act of 1933, as amended. See "Certain Transactions". THE RESCISSION OFFER The Company has undertaken this Rescission Offer voluntarily in order to attempt to rectify the effect of possible violations resulting from the offer and sale of the Company's shares in exchange for the shares of Aaron on January 11, 1995, without effectuating a registration statement with the Securities and Exchange Commission prior thereto. The Company had previously attempted to rectify the foregoing by placing the shares in escrow for the benefit of the Aaron shareholders until a registration statement could be effectuated. However, it has been determined by the Board of Directors and management of Aaron that it is in the best interest of former Aaron shareholders that the rescission offer to purchase all the An-Con shares (exchanged for the Aaron shares) be made by the Company at a price of $.392 per share (See "Valuation of Aaron for Rescission Purposes"). The Company is requesting that each shareholder offeree either accept or reject the rescission offer by executing a form which will be forwarded with this prospectus. Once a shareholder makes his choice to accept or reject the Rescission Offer and returns the form to the Company, such decision will be deemed effective and irrevocable upon receipt and acceptance by the Company for a period of 180 days from the date of this prospectus; after such period, if he is not yet paid in full, a rescission offeree may revoke his acceptance of the rescission offer and take such steps including commencing suit for the amount due in order to hasten payment and to preserve his rights before the expiration of any relevant statute of limitations. If a shareholder fails to exercise his choice and does not return the form within 30-days after receipt, the Company will deem it a non-acceptance of the Rescission Offer. In either event, rescission offeree shareholders may still have rights under federal and/or state laws to later sue for the consideration paid plus interest. As of March 31, 1996, the Company had cash of $80,400, which would not be sufficient if all shareholders were to exercise their right to rescind for their purchase price, plus interest (which is state mandated). Subject to availability of funds, rescinding shareholders are expected to be paid upon completion of the Company's offering pursuant to a Companion Prospectus intended to take place following the Rescission Offer. Should the number of shares rescinded be substantial and sufficient funds do not become available to the Company to pay rescinding shareholders in full from the sale of stock in the Companion Prospectus, the Company will make pro-rata payment to rescinding shareholders and may be forced to seek alternative forms of financing in the form of private financing or bank or institutional financing. If there are insufficient funds available, the rescinding shareholders will be reimbursed pro- rata to the extent of available funds, after funds required for operations, until additional funds become available. No assurance can be given that such alternative financing, if required, will be available, or if available, that it will be available on terms favorable to the Company. In the absence of financing the Company will utilize funds from operations, if any, to meet any remaining unfulfilled obligations to rescinding shareholders. Until paid in full by the Company, rescinding shareholders will be deemed to be general creditors and shall retain their interests in the shares of the Company as a form of security for payment; however they will otherwise maintain all rights as shareholders of the Company including voting rights until such time as they are paid in full and all such stock is redeemed. (The escrow agent will independently seek the votes of any former Aaron shareholder in the event of a special or annual meeting of shareholders of An-Con or annual meeting of shareholders of An- Con in the interim.) In addition, the Company intends to issue a non-negotiable "Acknowledgment of Indebtedness" acknowledging the principal amount owing to the rescinding shareholder plus statutory interest (as mandated by the state of residence of the rescinding shareholder) to any rescinding shareholder who is not paid within 30 days after completion of the Rescission Offer. This Acknowledgment of Indebtedness will then be surrendered with the stock certificate (or stock interest of the rescinding shareholder) at the time of payment by the Company. In the event rescinding shareholders are not paid in full by the Company within 180 days of the date of this prospectus, then such shareholders may (a) utilize any exemption under the federal securities law, if available, to sell their shares (or balance of shares remaining) and if the proceeds thereof are less than the amount payable pursuant to the Rescission Offer, such shareholders shall remain creditors of the Company and each will receive a replacement Acknowledgment of Indebtedness for the balance remaining; and/or (b) choose to commence suit for the amount of indebtedness in order to hasten payment and to preserve their rights before the expiration of any relevant statute of limitations. Upon sale of any shares pursuant to (a) above, each selling shareholder will be required to deliver the Acknowledgment of Indebtedness pending such sale, and, if the proceeds of sale are less than full payment of the amount due under the Rescission Offer, a new Acknowledgment of Indebtedness will be issued for the balance and delivered to the rescinding shareholder. In addition, as a condition to payment in full by the Company, the Acknowledgment of Indebtedness must be relinquished to the Company prior to such payment in full. See "Material Contacts Between An-Con and Aaron Concerning the Acquisition" for facts surrounding the Company's offering which culminated in the Company's decision to make the Rescission Offer. Valuation of Aaron for Rescission Purposes Former Aaron management was asked to determine for Rescission purposes the value of the Aaron shares acquired by the Company. Management of Aaron, in the person of Delton Cunningham CFO, who is also a former shareholder of Aaron (now also CFO and a shareholder of An-Con) in consultation with Bloom & Co., independent Certified Public Accountants, determined the valuation of Aaron for rescission purposes. Since the transaction closed on January 11, 1995, both companies agreed to utilize December 31, 1994 as the date for valuation purposes. No other outside source was used for valuation purposes. There has been no independent appraisal or fairness opinion sought or given with respect to valuation of Aaron shares. Although Mr. Cunningham was charged to make a fair appraisal, due to his capacity as an officer of An-Con and Aaron, an inherent conflict of interest existed. Management next determined that the market value of Aaron as a going concern would be a more viable approach to valuation than the value of the consideration offered in exchange by An-Con, i.e., the market price of An-Con shares. Multiplying the number of An-Con shares exchanged with their market price ($1.25 on January 11, 1995) would have provided a straight forward approach to valuing the assets of Aaron. However, historically, the volume of transactions in An-Con's shares has been very limited in relation to the number of outstanding shares, and the share prices highly volatile. An analysis was done of the volume and price of An-Con shares traded, for the period January, 1993 through the second quarter of 1995. The average volume of shares traded each month by investors was 8,863, 54,450 and 80,892 for the periods 1993, 1994 and for the first six months of 1995, respectively. The price of the shares fluctuated between 4 3/8 in the early part of 1993 (giving effect to the 1 for 15 reverse stock split in January, 1994) to 1 1/4 (the price on January 11, 1995. It is not clear what price or weighted average of historical prices would best represent the market price in the current transaction which involves an extremely large block of An-Con's shares (44% of total). The only large private placement transaction in An-Con's shares took place in 1994, under special circumstances. In this transaction 666,667 shares of An-Con were sold for $1 million (1.50 per share) to a foreign investor. Among other conditions, the contract included the provision that the Company should assist the foreign investor to secure U.S. residency. The value of the consideration received by the foreign investor, in addition to the ownership of An-Con shares, makes the actual price paid for An-Con share unclear. Thus, the price used in that transaction can not be used to value the purchase of Aaron's shares. According to Accounting Standards, Current Text, if the quoted market price is not the fair value of stock, the value of the consideration received shall be estimated even though measuring directly the fair values of assets received is difficult. (APB16,175), (CT B50.133). The present values of amounts to be received were determined at the appropriate current interest rate of 12%. The rate of 12% represents the cost of capital, the State of Florida's Legal interest rate from January 11, 1995 that former Aaron shareholders who are Florida residents will receive if they exercise their right in favor of rescission. The following table indicates the book values and present values assigned the assets and liabilities of Aaron on December 31, 1994. (The valuation date of the purchase.) Aaron Present Method Balance Value of Valuing Sheet Assigned (see note) Presentationto purchase Cash Present value $138,900 $138,900 Accounts Receivable (A) 498,400 491,000 Notes receivable Present value 63,900 63,900 Inventories Raw Materials (B) 327,200 327,200 Finished goods (B) 81,400 85,600 Work in progress (B) 81,600 83,700 Property plan and equipment (C) 452,200 452,200 Tax asset Present value 366,600 366,600 Valuation allowance Present value (366,600) (366,600) Patents (D) 16,500 16,500 Deposits Present value 18,000 18,000 Total assets 1,678,100 1,677,000 Current Liabilities (G) (461,000) (454,500) Loan - An-Con Present value (190,600) (190,600) Capital lease Present value ( 36,000) ( 36,000) Net asset value $ 990,500 $ 995,900 Goodwill determined(F) $335,800 Because of the relatively large size of Aaron's current assets and the recent replacement of a large portion of the Company's equipment, Aaron's management believes that the most straightforward approach to valuing Aaron is to utilize and adjust the information provided by the balance sheet of the Company. (A) The present value of accounts receivable of $498,400 was determined to be $491,000. The present value was computed using 12% annual interest rate (Florida's legal interest rate) and an average collection period of 45 days. The average collection period of 45 days represent the actual collection experience in 1994 and 1993. The allowance for uncollectibility and collection costs were determined to be not material. The accounts receivable of $498,400 was fully collected in 1995. (B) The average time required for the sale of inventories and the collection of sales proceeds is estimated to be 56 days. The present value assigned to finished goods was determined by adding a net profit margin of 7% to the cost of finished goods and discounting the amount obtained at an interest of 12%, over a period of 56 days. The net profit margin of 7% represents the difference with gross profit margin on cost of goods sold of 57% and the disposal cost of 50%. The gross profit margin and disposal cost ratios represent average percentages of gross profit and disposal costs for the years ended December 31, 1994 and 1993. The semi finished goods were approximately 50% complete and their values were obtained utilizing the same methods as used for finished goods. Raw materials were valued at current replacement cost. Because of the recent acquisition of these materials, the book value of raw materials was assumed to equal their replacement cost. (C) The $452,200 book value of the equipment includes $287,400, and $103,000 of equipment purchased in 1994 and 1993. Substantial recent acquisitions of equipment makes it possible to use the net book value of the equipment as an estimate of the replacement cost. (D) Since the Company patents are on average 9-10 years old and the cash flows from these patents are not expected to be substantial. The present value of the cash flows, over an economic life of 5 years, were estimated to be at least equal to the book value of $16,500. The present value of any additional cash flows is included in the computation of the goodwill. (E) The present value of accounts payable of $461,000 was determined to be $454,500. The present value was computed using 12% annual interest rate and an average collection period of 43 days. The average collection period of 43 days represents the actual payment experience in 1994 and 1993. (F) Management also determined that a fair valuation of Aaron had to include a value for goodwill. The value of goodwill is the difference between the market value of Aaron and the sum of the market values of individual assets. Since the market value of Aaron can only be approximated, the amount of goodwill is estimated indirectly, by comparison with public companies in the same industry. The value of goodwill is the equally weighted average of the estimates obtained using various methods. The amount of goodwill was estimated to be $335,800 which was computed as follows: Methods Market Value Asset Goodwill (i) Market to book value $ 2,103,800 $ 335,700 (ii) Capitalization of weighted earnings 2,003,800 325,700 (iii)Capitalization of 1994 earnings 1,989,400 311,300 (iv) Price/weighted earnings 2,036,100 358,000 (v) Price/1994 earnings 2,026,400 348,300 Average $ 2,012,800$ 335,800 (i) Market to book value. This method involves determining the market value of Aaron by multiplying the book value of Aaron assets by the ratio of market to book value of a similar public company. The market price to book value multiples were computed for several public companies in the same industry, including Biomet, Boston Scientific, Stryker, US Surgical, Bard, Becton and Maxxim, for 1994. The market to book value multiples ranged from 1 to 5. The ratio of 1.2 for Maxxim was selected for computing the market value of Aaron. The products of Aaron and Maxxim are most comparable and as a closely held small company, with a history of loss, Aaron's shares do not possess the liquidity and relatively lower risks of the high market to book value public companies. A market value of $2,103,700 was obtained by multiplying the ratio of 1.2 with the book value of Aaron's assets, $1,677,100. The goodwill of $335,700, which was computed utilizing this method, represents the difference of the market value of $2,013,800 and the value of specific assets of $1,678,100. (ii) Capitalization of weighted earnings. The method involves dividing weighted average of annual earnings, before interest and tax, by a capitalization rate that represents the weighted average of the cost of debt and return on equity. Weights of 40% 30%, 20% and 10% were assigned to the earnings of 1995, 1994, 1993, and 1992 respectively to place greater emphasis on more recent earnings. The weighted average of earnings before interest and tax of $320,000 was obtained. Assuming the continuation of the current target capital structure policy of 1/3 debt and 2/3 equity, 12% the cost of debt, and 18% cost of equity, a capitalization ratio of 16% was obtained. By capitalizing the weighted average earnings of $320,600 at 16%, the value of the assets and goodwill were determined to be $2,003,800 and $325,700, respectively. (iii) Capitalization of 1994 earnings. This method involves dividing the earnings, before interest and tax for 1994, by the capitalization rate, which represents the weighted average of the cost of debt and return on equity. The amount of goodwill was estimated by capitalizing 1994 earnings of $318,300, at the weighted average capitalization rate of 16% (see item (ii)). The value of assets and goodwill were estimated at $1,989,400 and $311,300, respectively. (iv) Price-earnings ratio and weighted average annual earnings. Price earnings ratio of a comparable company is multiplied with the weighted average annual after tax earnings of the Company to obtain an estimate of the market value of the stockholders' equity. The market value of the Company's liabilities are added to the stockholders' equity to obtain the total value of the assets. In 1994, the price earnings ratios for various public companies, in the same industry, ranged from those showing a loss to 21 times. Because of the past losses, greater risks, and lower liquidity of the shares of a closely held corporation, a price earning ratio of 6.5, approximately equal to 1/2 of the ratio for Becton, a public company with the relatively low price earning ratio of 12.9, and 40% of the 1994 industry average of 16, was selected. Assuming a long term tax rate of 35%, weighted average after tax earnings of $208,400, and a price earning ratio of 6.5, the market value of the stockholders equity, the Company assets, and the goodwill were determined to be $1,356,000, $2,036,100, and $358,000 respectively. (v) Price-earnings ratio and 1994 annual earnings. As determined in (iv) above the price earnings ratio of a comparable company was multiplied by the 1994 after tax earnings before interest of the Company. With after tax and before interest earning of $207,800, for 1994, and a price earnings ratio of 6.5, the market value of the stockholders' equity, assets and the goodwill of the Company are determined to be $1,345,200, $2,026,400 and $348,300 respectively. Accordingly, by adding the estimated market value of the assets as determined above $995,900 to the goodwill $335,800, the value assigned the Aaron purchase was determined to be $1,331,700. This value when divided by the total number of An-Con shares issued in the exchange 3,399,096 shares amounts to $.392 per share. State Blue Sky Laws The Company did not make any filings for qualification or for exemption from qualification of the shares exchanged in any states in which Aaron shareholders resided. Most states require that before securities are offered or sold to their residents, the securities must be either qualified for sale or exempt therefrom. For purposes hereof, no exemptions to the Blue Sky Laws have been assumed to have existed in the states of residence of the Aaron shareholders at the time of the exchange of shares. Accordingly, in addition to possible violation of the federal securities laws, State Blue Sky Laws of the states of residence of Aaron shareholders may have been violated. Management intends to remedy these possible violations through this Rescission Offer. An analysis of the shareholders list of the former shareholders of Aaron indicates that the former shareholders reside in a total of thirteen states: California, Connecticut, Florida, Hawaii, Illinois, Indiana, Massachusetts, Nevada, New York, New Jersey, North Carolina, South Carolina, Pennsylvania. There follows a recitation of the relevant statutes and laws of each of the states in which the offeree shareholders reside and the remedies to which they are entitled under the laws of their respective states, including the rate of interest mandated by statute of the state of residence of each rescission offeree. Counsel has advised the Company that generally, the state remedies available consist of a right to institute an action at law for an amount equal to the consideration paid plus interest. The various states have varying statutes concerning the period during which such an action may be instituted ("statute of limitations"). Unless otherwise specifically stated in the respective state statute, no assurance can be given that the statutes of limitations will permit additional actions by shareholders notwithstanding their refusal to accept the Rescission Offer. However, although no assurance can be given, if a shareholder accepts the Rescission Offer and receives payment by the Company, the accepting shareholder may have then received the full remedy available under both state and federal law insofar as it relates to their acquisition of the Company's shares. The Company currently intends to make this Rescission Offer to all applicable former Aaron shareholders. The requirements for this Rescission Offer vary from state to state, and the Company may not be able to comply or may find it is not practicable or advisable to comply with the requirements of each and every such state. The Company reserves the right not to make this Rescission Offer in any state where the Company in its sole discretion determines it is not legally possible or it is not practical or advisable for the Company to make this Rescission Offer in that state. In such eventuality such shareholder shall have the option to keep his shares of An-Con or seek redress in the courts of his respective state of residence. Although no assurance can be given, Management is not aware of any state of residence of any Aaron shareholder which offers redress to any former Aaron shareholder in an amount in excess of what is being offered pursuant to the Rescission Offer. California Sec. 25110 of the California Corporate Securities Law provides generally that it is unlawful for any person to offer or sell a security in the State of California in an issuer transaction unless such sale has been qualified . . . or unless such security or transaction is exempted under the Act. Sec. 25503 of the California Corporate Securities Law 25503 - states, in pertinent part: "Any person who violates 25110, . . . shall be liable to any person acquiring from him the security sold in violation of such section, who may sue to recover the consideration he paid for such security with interest thereon at the legal rate, less the amount of any income received therefrom, upon the tender of such security, or for damages, if the plaintiff no longer owns the security, or if the consideration given for the security is not capable of being returned. Damages, if he no longer owns the security shall be equal to the difference between (a) his purchase price plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received by plaintiff. Damages, if the consideration given for the security is not capable of being returned, shall be equal to the value of that consideration plus interest at the legal [7% per annum] rate from the date of purchase, provided the security is tendered; and if the plaintiff no longer owns the security, damages in such case shall be equal to the difference between (a) value of the consideration given for the security plus interest at the legal rate on the date of purchase; and (b) value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff. . ." Sec. 25507. Time limit on action- Qualification violations. Section 25507 states in pertinent part ... "(b) No buyer may commence an action under Section 25503 ... if, before suit is commenced, such buyer shall have received a written offer approved as to form by the commissioner (1) stating the respect in which liability under such section may have arisen, (2) offering to repurchase the security for a cash price payable upon delivery of the security or offering to pay the buyer an amount in cash equal in either case to the amount recoverable by the buyer in accordance with Section 25503, or, offering to rescind the transaction by putting the parties back in the same position as before the transaction, (3) providing that such offer may be accepted by the buyer at any time within a specified period of not less than 30 days after the date of receipt thereof unless rejected earlier during such period by the buyer, (4) setting forth the provisions of this subdivision (b), and (5) containing such other information as the commissioner may require by rule or order, and such buyer shall have failed to accept such offer in writing within the specified prior after receipt thereof." "(c) The commissioner may by rule or order impose as a condition to approval of an offer under subdivision (b) of this section, if the commissioner finds such action is necessary and appropriate for the protection of investors." The Company has filed an application with the Securities Division of the California Department of Corporations for approval of the Rescission Offer. Such application included a special form of letter (drafted to specifically comply with the terms and conditions of the statutes of the State of California). California residents may receive a different "form" of Rescission Offer but such offer will essentially contain the same terms and conditions as are being offered to all Aaron shareholders. No assurance can be given that the Company's application will be approved by that state. If the application is not approved, then the Company's Rescission Offer may not extinguish the rights of former Aaron shareholders who are residents of California (a total of 4 shareholders) regardless of whether they accept or reject the Company's Rescission Offer until the California Statute of Limitations expires. See "State Blue Sky Laws - Possible Uncertainty as to State Blue Sky Law Liability" and "State Statutes of Limitation". Connecticut The Connecticut Uniform Securities Act states in pertinent part: Sec. 36-b-16. Registration of security prior to offer or sale required-Exemption. No person shall offer or sell any security in this state unless (1) it is registered under sections 36b-2 to 36b-33, inclusive, or (2) the security or transaction is exempted under section 36b-21. Sec. 36-b-29. Buyer's Remedies. (a) Any person who: (1) Offers or sells a security in violation of ... section ... 36b-16 ... is liable to the person buying the security, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at eight per cent per year from the date of payment, costs and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. "(a) Any person who: Offers or sells a security in violation of 36-b-29. . . is liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at eight percent per year from the date of payment, . . .upon the tender of the security, or for damages if he no longer owns the security." (g) No person may bring an action under subsection (a) of this section: (1) If the buyer received a written offer, before suit and at a time when he owned the security, to refund the consideration paid together with interest at six per cent per year from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within thirty days of its receipt,... Upon effectiveness of the prospectus or immediately prior thereto, the Company will file a coordination application to coordinate the prospectus with the Blue Sky Law of the State of Connecticut. Florida The Florida Securities and Investor Protection Act states, in pertinent part: Sec. 517.07 generally provides that no securities except exempt securities or exempt transactions as defined under the Act shall be sold or offered for sale within the state of Florida unless such securities have been registered under the Act. Sec. 517.211. "Every sale made in violation of . . . 517.07 . . may be rescinded at the election of the purchaser; and the person making the sale and every director, officer, partner, or agent who personally participated or aided in making the sale, is jointly and severally liable to the purchaser in an action for rescission, if the purchaser still owns the security, or for damages if the purchaser has sold the security. No purchaser otherwise entitled will have the benefit of this subsection who has refused or failed, within 30 days of receipt, to accept an offer made in writing by the seller, if the purchaser has not sold the security, to take back the security in question and to refund the full amount paid by the purchaser; or, if the purchaser has sold the security, to pay the purchaser an amount equal to the difference between the amount paid for the security and the amount received by the purchaser on the sale of the security, together, in either case, with interest on the full amount paid for the security by the purchaser at the legal rate [12% per annum] . . . for the period from the date of payment by the purchaser to the date of repayment, less the amount of any income received by the purchaser on the security." The Blue Sky Law of the State of Florida does not require any independent filing by the Company with respect to its Rescission Offer covered by this prospectus. Hawaii The Hawaii Uniform Securities Act states in pertinent part, Sec. 485-8. Registration of Securities. It shall be unlawful for any person to sell or offer to sell any security ... unless sold or offered in any transaction exempt ... in the State unless the security has been registered by notification or by qualification.... Sec. 485-20. Remedies. (a) ... Every sale made in violation of this chapter shall be voidable at the election of the purchaser; and the person making the sale and every director, officer, or agent has personally participated or aided in any way in making the sale, shall be jointly and severally liable to the purchaser in an action at law in any court of competent jurisdiction upon tender of the securities sold or of the contract made for the full amount paid by the purchaser, with interest, together with all taxable court costs (and reasonable attorney's fees);... provided that no purchaser otherwise entitled shall claim or have the benefit of this section who has refused or failed within thirty days from the date thereof to accept an offer in writing of the seller to take back the security in question and to refund the full amount paid by the purchaser, together with interest (at the rate of 10% per annum) on the amount for the period from the date of payment by the purchaser down to the date of repayment.... The State of Hawaii requires notification in writing by the Company advising of the Rescission Offer together with a copy of the form of Rescission Offer. Upon effectiveness of this prospectus, the Company will file the foregoing with the Securities Commissioner of the State of Hawaii. Illinois The Illinois Securities Law states in pertinent part, the following: Sec. 5. Registration of Securities. "All securities except those exempt under Section 3 or those offered or sold in transactions exempt under Section 4 or this Act...shall be registered either by coordination or by qualification, as hereinafter in this section provided, prior to their offer or sale in this state." Sec. 13. Private and other Civil Remedies; Securities. A. Every sale of a security made in violation of the provisions of this Act shall be voidable at the election of the purchaser exercised as provided in subsection B of this Section; and the issuer...liable to such purchaser...for the full amount paid, together with interest from the date of payment for the securities sold at the rate of the interest or dividend stipulated in the securities sold (or if no rate is stipulated, then at the rate of 10% per annum) less any income or other amounts received by such purchaser on such securities, upon offer to tender to the seller or tender into court of the securities sold or, where the securities were not received, of any contract made in respect of such sale, or (2) if the purchaser no longer owns the securities, for the amounts set forth in clause (1) of this subsection A less any amounts received by the purchaser for or on account of the disposition of such securities. ... C. No purchaser shall have any right or remedy under this Section who shall fail, within 15 days from the date of receipt thereof, to accept an offer to repurchase the securities purchased by him or her for a price equal to the full amount paid therefor plus interest thereon and less any income thereon as set forth in subsection A of this Section. Every offer of repurchase provided for in this subsection shall be in writing, shall be delivered to the purchaser or sent by registered mail or certified mail, return receipt requested, addressed to the purchaser at his or her last known address, and shall offer to repurchase the securities sold for a price equal to the full amount paid therefor plus interest thereon and less any income thereon as set forth in subsection A of this Section. Such offer shall continue in force for 15 days from the date on which it was received by the purchaser, shall advise the purchaser of his or her rights and the period of time limited for acceptance thereof, and shall contain such further information , if any, as the Secretary of State may prescribe. Any agreement not to accept or refusing or waiving any offer made during or prior to said 15 days shall be void. Pursuant to the policy of the State of Illinois, the Company will forward a copy of its Rescission Offer herein to the Securities Director of the State of Illinois for their review and comment. Subject to the State of Illinois' approval of form, the Company will be required to furnish the Securities Director of Illinois with copies of materials provided to former Aaron shareholders who are residents of the State of Illinois (a total of 4 persons) together with copies of sworn statement by the Company indicating proof of receipt of documents by such persons. Indiana The Indiana Uniform Securities Law provides, in pertinent part: Sec. 23-2-1-3 provides that it is unlawful for any purchaser to offer or sell any security in the state of Indiana unless (1) it is registered under the Act or (2) the security or transaction is exempted under the Act. Sec. 23-2-1-19 of the Indiana Uniform Securities Act states, in pertinent part: "(a) A person who offers or sells a security in violation of this chapter ...is liable to any other party to the transaction, who did not knowingly participate in the violation, who may sue either at law or in equity to rescind the transaction or to recover the consideration paid together, in either case, with interest as computed in subsection (g) (1) [8% per annum], plus costs and reasonable attorney fees, less the amount of any cash or other property received on the security upon tender of the security by the person bringing the action or for damages if the person no longer owns the security. Damages are the amount that would be recoverable upon a tender less: (g) ...No person may sue under this section: (1)if that person received a written order, before suit and at a time when the person owned the security, to refund the consideration paid together with interest (at 8% on that amount from the date of payment to the date of repayment..... (1) the value of the security when the buyer disposed of the security; and (2) the interest as computed in subsection (g)(1) [8% per annum] on the value of the security from the date of disposition." The Company has submitted its Rescission Offer to the Securities Commission of the State of Indiana for approval. Due to Indiana requirement that a failure by an offeree to respond is deemed to be an acceptance of rescission (which is contrary to the terms of the Company's Rescission Offer - a non-response by a former Aaron shareholder within 30 days by the Company to be deemed will be a rejection of the Rescission Offer), the Company is not certain of the final outcome of the offer to Indiana residents (a total of 3 persons) in the event there is a non-response by any offeree. In such eventuality the Company will deem the non-response as a rejection of the Rescission Offer. Because of the Indiana Blue Sky requirements, such may not foreclose the non-responding shareholder's right of redress in the State of Indiana until the Indiana Statute of Limitations expires. See "State of Statutes of Limitation" and "State Blue Sky Laws - Possible Uncertainty as to State Blue Sky Law Liability". Massachusetts The Uniform Massachusetts Securities Act states, in pertinent part: Section 301. Registration Requirement. It is unlawful for any person to offer or sell any security in the Commonwealth unless (1) it is registered under this chapter or (2) the security or transaction is exempted under section 402. Sec. 410. Civil Liabilities. (a) Any person who (1) offers or sells a security in violation of section ... 301 ... is liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at six per cent per year from the date of payment, costs, and reasonable attorney's fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. Damages are the amount that would be recoverable upon a tender less the value of the security when the buyer disposed of it and interest at six per cent per year from the date of disposition.... No person may sue under this section (1) if the buyer received a written offer, before suit and at a time when he owned the security, to refund the consideration paid together with interest at six per cent per year from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within thirty day of its receipt.... There are no specific requirements under the Blue Sky Law of the State of Massachusetts for filing or submission of the Rescission Offer for approval. However, upon effectiveness of this prospectus, the Company intends to notify the Massachusetts Securities Division of the existence of the Rescission Offer. A total of two former Aaron shareholders are Massachusetts residents. Nevada The Nevada Uniform Securities Act states, in pertinent part: Sec. 90.460. Registration Requirement. It is unlawful for a person to offer to sell or sell any security in this state unless the security is registered or the security or transaction is exempt under this chapter. Sec. 90.660. Civil Liability. 1. A person who offers or sells a security in violation of any of the following provisions: ... (b) NRS 90.460;...is liable to the person purchasing the security. Upon tender of the security, the purchaser may recover the consideration paid for the security and interest at the legal rate of this state from the date of payment, costs and reasonable attorney's fees, less the amount of income received on the security... Sec. 90.680. Offer of Rescission and Settlement. 1. Relief may not be obtained under subsection 1 of NRS 90.660 if, before suit is commenced, the purchaser: (a) Receives a written offer: (1) Stating the respect in which liability under NRS 90.660 may have arisen and fairly advising the purchaser of his rights of rescission;... (3) Offering to repurchase the security for cash, payable on delivery of the security, equal to the consideration paid, plus interest at the legal rate of this state ( % per annum) from the date of payment, less income received thereon...; (4) Stating that the offer may be accepted by the purchaser at any time within a specified period of not less than 30 days after the date of its receipt by the purchaser.... (b) Fails to accept the offer in writing within the period specified under subparagraph (4) of paragraph (a). ... If, after acceptance, a rescission offer is not performed in accordance with either its terms or this section, the offeree may obtain relief under NRS 90.660 without regard to this section. The Company has been advised by an official of the State of Nevada, that since there is only one former Aaron shareholder who is a resident of the State of Nevada, no notice to the Securities Commissioner is required. New Jersey The New Jersey Uniform Securities Act states, in pertinent part: Sec. 49:3-60 Conditions for Sales of Securities. It is unlawful for any security to be offered or sold in this State unless: (a) The security or transaction is exempted under section 3[49:3-50] of this act; (b) The security or transaction is not subject to, or is exempted from, the registration requirements of the Securities Act of 1933 and the rules and regulations thereunder. Sec. 49:3-71. Civil Liability... (a) Any person who (1) Offers or sells a security in violation of section...[49:3-60] of this act, ... is liable to the person buying the security from him, who may sue to recover the consideration paid for the security, together with interest at 12% per year from the date of payment and costs, less the amount of any income received on the security, upon the tender of the security and any income received on it, or for damages if he no longer owns the security...; No person may sue under this section (1) if the buyer received a written offer, before suit and at a time when he owned the security, to refund the consideration paid together with interest at 12% per year from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within 30 days of its receipt,... There is only one former Aaron shareholder who is a resident of the State of New Jersey. New Jersey Blue Sky Law requires that the Company file an application to coordinate the Company's Rescission Offer pursuant to an effective registration statement with the State of New Jersey Blue Sky Law and pay a $1,000 filing fee to the state. Since the aggregate An-Con shares of the lone former Aaron shareholder resident of New Jersey have a value substantially less than the amount of filing fee required by New Jersey, the necessity of filing by coordination with the State of New Jersey may be deemed to be onerous and counterproductive. The Company plans to seek a no-action letter from the State of New Jersey. Accordingly, if no filing is made and the Company is not able to otherwise secure a no action position from the State of New Jersey, the Company's Rescission Offer to the New Jersey resident may not extinguish his right of redress under New Jersey Blue Sky Law until the expiration of the New Jersey Statute of Limitations. See "State Statutes of Limitation" and "State Blue Sky Laws- Possible Uncertainty as to State Blue Sky Law Liability. New York Although the New York Blue Sky Law ("Martin Act") does not designate civil penalties for failure to comply with the registration requirements in the State of New York with respect to an interstate offering, New York residents that purchased the securities of the Company are also being offered rescission and return of their purchase price in the form of cash plus interest at the rate of 9% per annum by virtue of the determination that the federal registration statute may have been violated with respect to the Company's private offering and sale of the securities. There is no specific requirement regarding Rescission Offers under the Martin Act. However, upon effectiveness of this prospectus, the Company will notify the Office of Attorney General of the State of New York, Bureau of Securities of the terms of the Rescission Offer including conditions and facts surrounding the Company's Rescission Offer and the identity of New York residents receiving the Rescission Offer. North Carolina The North Carolina Securities Act states, in pertinent part: Sec. 78A-24. Registration Requirement. It is unlawful for any person to offer or sell any security in this State unless (i) it is registered under this Chapter or (ii) the security or transaction is exempted under G.S. 78A-16 or 78A-17 and such exemption has not been denied or revoked under G.S. 78A-18.... Sec. 78A-56 Civil Liabilities. (a) Any person who: (1) Offers or sells a security in violation of ... Section 78A-24 is liable to the person purchasing the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at the legal rate 8% per annum from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. ... (g)(1) No purchaser may sue under this section if, before suit is commenced, the purchaser has received a written offer stating the respect in which liability under this section may have arisen and fairly advising the purchaser of his rights; offering to repurchase the security for cash payable on delivery of the security equal to the consideration paid, together with interest at the legal rate (8%) as provided by G.S. 24-1 from the date of payment, less the amount of any income received on the security or, if the purchaser no longer owns the security, offering to pay the purchaser upon acceptance of the offer an amount in cash equal to the damages computed in accordance with subsection (a); and stating that the offer may be accepted by the purchaser at any time within 30 days of its receipt; and the purchaser has failed to accept such offer in writing within the specified period.... Upon effectiveness of this prospectus, the Company will file 2 copies of its Rescission Offer with the Securities Division of the Secretary of State of the State of North Carolina. Pennsylvania The Pennsylvania Securities Act (the "Act") states, in pertinent part: Sec. 201 generally provides that it is unlawful for any person to offer or sell any security in the state of Pennsylvania unless the security is registered under the Act or the security or transaction is exempted under the Act. Sec. 502 of the Act states, in pertinent part: "(a) Any person who violates 201 . . . shall be liable to the person purchasing the security offered or sold in violation of 201 from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at the legal rate [6%] from the date of payment, less the amount of any income . . . received on the security, upon the tender of the security, or for damages if he no longer owns the security. Damages shall be the amount that would be recoverable upon a tender less the value of the security when the purchaser disposed of it and interest at the legal rate [6% per annum] from the date disposition." Sec. 504(d) under the Act states, in pertinent part: "No purchaser may commence an action under Section . . . 502, if, before suit is commenced, the purchaser has received a written offer: (i) stating the respect in which liability under such section may have arisen and fairly advising the purchaser of his rights; offering to repurchase the security for cash, payable on delivery of the security, equal to the consideration paid, together with interest at the legal rate from the date of payment, less the amount of any income ... received thereon, or, if the purchaser no longer owns the security, offering to pay the purchaser upon acceptance of the offer an amount in cash equal to the damages computed in accordance with 501(a); and (ii) stating that the offer may be accepted by the purchaser at any time within a specified period of no less than thirty days after the date of receipt thereof, or such shorter period as the commission may by rule prescribe; and the purchaser has failed to accept such offer in writing within the specified period." Since there are only 5 former Aaron shareholders who are residents of the State of Pennsylvania, a self-executing exemption from filing is available to the Company. Accordingly, no notification or filing will be necessary in the State of Pennsylvania. South Carolina The Uniform Securities Act of South Carolina states, in pertinent part: Sec. 35-1-810. Registration or Exemption Required. It is unlawful for any person to offer or sell any security in this State unless (a) it is registered under this chapter or (b) the security or transaction is exempted under Section 35-1-310 or 35-1-320. Sec. 35-1-1490. Liability to Buyers for Illegal or Fraudulent Sales or Offers. Any person who: (1) Offers or sells a security in violation of Section 35-1- 810,... Is liable to the person buying the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at six per cent per year from the date of payment, costs, and reasonable attorneys' fees, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. Sec. 35-1-1530. Limitation of Actions- Effect of Offer to Refund Consideration with Interest. ... No person may sue under ... section (35-1-1490) if the buyer received a written offer, before suit and at a time when he owned the security, to refund the consideration paid together with interest at six percent per year from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within thirty days of its receipt... The Company has filed a request for a limited offering exemption from the South Carolina requirement to qualify the An-Con shares to be repurchased from residents of South Carolina (a total of 3 former Aaron shareholders). In the event the application is not granted, the Company will take steps to qualify the shares under the Blue Sky Law of South Carolina. Possible Uncertainty as to State Blue Sky Law Liability The Company is attempting to comply with the requirements of each of the aforesaid states and, except as otherwise specifically indicated, is in the process of filing all the necessary papers and documents, including payment of the necessary filing fees. However, certain states' requirements may be deemed by the Company to be so rigorous, demanding or onerous for compliance under the circumstances, that in the light of the limited number of former Aaron shareholders residing in such states, the Company may ultimately forego completion of technical compliance with such states' regulations. With respect to any such state (wherein compliance is not obtained), management is of the belief that the amount of money per share which is being offered in the Company's Rescission Offer would be equal or at least equivalent to the amount that would be recoverable by residents of any state were they to sue and succeed under such State Blue Sky Laws. Accordingly, any such actions may prove counterproductive. However, notwithstanding the foregoing, if, for any reason, the Company fails is determined to have failed to comply with any particular state's procedure or requirements regarding rescission, the former Aaron shareholder who is resident of such state may still have rights to seek redress against the Company notwithstanding their acceptance or rejection of the Rescission Offer, until the statute of limitations of such state (whose procedures were not totally complied with by the Company) expire. Consequently, prior to the expiration of such statute of limitations (in a state where the Company fails to comply with Rescission requirements) this Rescission Offer may not cancel the shareholders right to seek redress under such state's laws regardless of whether the shareholder has accepted or rejected the Company's Rescission Offer pursuant to this prospectus. (See "Statutes of Limitations"). Statutes of Limitation The possible state violations which the Company is seeking to remedy are generally governed by specific limitations of time within which actions may be brought to seek redress for the violations ("Statutes of Limitation"). If one seeks to independently pursue his rights under state law by instituting suit for damages or rescission, suit must be brought within the specified period prescribed (within the Statute of Limitations). Although these state statutes grant rights in addition to the rights of Aaron shareholders pursuant to the Company's current Rescission Offer, most of the states have additional provisions which provide that if a purchaser of securities is sold shares in violation of statute and the purchaser is offered the return of his consideration paid, plus interest, he may be foreclosed from instituting suit under such statute. See "Rescission Offer - State Blue Sky Laws". There follows a brief summary of the statutes of limitation of the various states of residence of the Aaron shareholders which relate to the state remedies available. See "Rescission Offer- State Blue Sky Laws". State Statutes of Limitation California Sec. 25507. Time Limit on Action - Qualification Violations. (a) No action shall be maintained to enforce any liability created under Section 25503 (or Section 25504 or Section 25504.1) unless brought before the expiration of two years after the violation upon which it is based or the expiration of one year after the discovery by the plaintiff of the facts constituting the violations, whichever shall first expire. Connecticut Sec. 36b-29. Buyers Remedies. "(f) No person may bring an action under this Section more than two years after the date of the contract of sale... Florida Chapter 95 of the Florida Statutes- Sec. 95.11. Limitations other than for the Recovery of Real Property - Actions other than for the Recovery of Real Property shall be commenced as follows:...WITHIN TWO YEARS- ...(e) an action founded upon a violation of any provision of chapter 517, with the period running from the time the facts giving rights to the cause of action were discovered or should have been discovered with the exercise of due diligence, but not more than five years from the date such violation occurred. Hawaii Sec. 485.20. Remedies. "(a)...Every sale made in violation of this chapter shall be voidable at the election of the purchaser...provided that notwithstanding any law to the contrary, no action shall be brought for the recovery of the purchase price after five years from the date of sale or after two years from the discovery of facts constituting the violations, but in any event, after seven years from the date of the sale." Illinois Sec. 13. Private and Other Civil Remedies; Securities. "D. No action shall be brought for relief under this Section or upon or because of any of the matters for which relief is granted by this Section after 3 years from the date of sale; provided, that if the party bringing the action neither knew nor in the exercise of reasonable diligence should have known of any alleged violation of subsection E, F, G, H, I or J of Section 12 [5/12] of this Act which is the basis for the action, the 3 year period provided herein shall begin to run upon the earlier of : (1) the date upon which the party bringing such action has actual knowledge of the alleged violation of this Act; or (2) the date upon which the party bringing such action has notice of facts which in the exercise of reasonable diligence would lead to actual knowledge of the alleged violation of this Act; but in no event shall the period of limitation so extended be more than 2 years beyond the expiration of the 3 year period otherwise applicable." Indiana Sec. 23.2.1.19. Civil Penalty. "(g) Action under this Section shall be commenced within three (3) years after discovery by the person bringing the action of a violation of this chapter, and not afterwards..." Massachusetts Sec. 410. Civil Liabilities. "(e) No person may sue under this Section more than four years after the discovery by the person bringing the action of a violation of this chapter or any sale promulgated or order issued thereunder..." Nevada Sec. 90.670. Statute of Limitations. "A person may not sue under NRS 90.660 unless suit is brought within the earliest of 1 year after the discovery of the violation, 1 year after discovery should have been made by the exercise of reasonable care, or 5 years after the act, omission or transaction constituting the violation." New Jersey Sec. 49:3-71. Civil Liability. Time for bringing suit. "(e) No person may sue under this section more than two years after the contract of sale, or within two years of the time when the person aggrieved knew or should have known of the existence of his cause of action, whichever is later..." New York There are no civil remedy provisions under the New York Blue Sky Law ("Martin Act"). North Carolina Sec. 78A-56. Civil Liabilities. "(f) No person may sue under this Section more than two years after the sale or contract of sale." Pennsylvania Sec. 504. Time Limitations on Rights of Action. "(b) No action shall be maintained to enforce any liability created under section 502 (or section 503 in so far as it relates to that section) unless brought before the expiration of two years after the violation upon which it is based or the expiration of one year after the plaintiff receives actual notice or upon the exercise of reasonable diligence should have known of the facts constituting such violations, whichever shall first expire." South Carolina Sec. 35.1.1530. Limitation of Actions. "No person may sue under Section 35.1.1490 more than three years after the contract of sale." Method of Rescission The Company is now making an offer to repurchase the aforementioned securities for the value per share of An-Con at the time it was exchanged for Aaron shares ($.392), plus legal interest from the date of exchange, as well as offering additional securities on behalf of the Company, a portion of the proceeds of which may be used to reimburse rescinding shareholders (in the event the Rescission Offer is accepted by investors). The Company has been advised by former principal shareholders and management of Aaron, consisting of such principal shareholders, management and their families which represented approximately 67% of the outstanding shares of Aaron (prior to the acquisition), that such shareholders have no intention of accepting the Company's rescission offer. The Company has estimated that as of June 30, 1996 its liability for repurchases of the An-Con shares from former Aaron shareholders pursuant to the Rescission Offer is $1,331,800 plus estimated interest of approximately $72,000 as of June 30, 1996. As of June 30, 1996 the Company's cash position was $75,400. Accordingly, the Company does not possess the necessary funds to repurchase all of the shares with respect to this Rescission Offer. The Company intends to offer to the public up to 500,000 shares of Common Stock, a portion of the proceeds of which may be used to cover any obligation to shareholders that may accept the Rescission Offer. If the Rescission Offer is not accepted, as believed by management, the Company shall de-register and not offer its shares for sale pursuant to this Prospectus. Within five days after the effective date of this prospectus, the Company will distribute through the United States Registered Mail, Return Receipt Requested, this prospectus together with a written proposal offering a choice to Aaron shareholders to accept or reject the Company's Rescission Offer ("Proposal to Accept or Reject Rescission Offer") pursuant to the terms set forth in this prospectus. The proposal and prospectus will be accompanied by instructions indicating the purpose of the proposal, how much is being offered for their shares, and the interest rate payable until they are paid by the Company. The instructions accompanying the form and prospectus shall require that shareholders fill out and execute the form evidencing their choice to "accept" or "reject" the Rescission Offer and return it to the Company at its principal offices at 7100 30th Avenue North, St. Petersburg, FL 33710. It is essential that each shareholder receiving this prospectus fills in and executes the Notice of ACCEPTANCE OR REJECTION of Rescission Offer form provided with this prospectus and makes a choice to either "accept" or "reject" the Rescission Offer. Rejection of Rescission Offer Those stockholders who choose to reject the Rescission Offer should check the appropriate space and sign the form sent with the Proposal to Accept or Reject the Rescission Offer and return it to the Company. The decision by any offeree who rejects the offer and choose to keep the An-Con shares will be final and such offeree may be foreclosed from changing his mind, even if thereafter the price of An-Con stock falls below the Rescission Offer price. Because of the history of illiquidity and volatility in price of An-Con shares, Aaron shareholders' rejection the Rescission Offer may experience difficulty in sale of their shares in blocks of shares. To remedy possible the problem of illiquidity, management of An-Con intends to qualify for a national or regional stock exchange or NASDAQ. No assurance can be given that these efforts will be successful or if successful, will result in remedying the possible liquidity problem. All Rescission Offerees who reject the Rescission Offer will not lose whatever rights they may have before the expiration of the federal or applicable state statute of limitations. See "Statutes of Limitations" and "State Blue Sky Laws - Possible Continuing Liability for Violations". Acceptance of Rescission Offer All stockholders choosing to accept the Rescission Offer and rescind their purchase or acquisition of An-Con shares for the consideration paid valued herein at $.392 per share plus applicable interest thereon), must check the appropriate space on the application, sign it and return it to the Company. Upon termination of the thirty day rescission period (or any extension thereof) the Rescission Offer will be terminated. The Company may be required to make a public offering of its shares in order to provide additional funds necessary to pay Rescission Offerees. Upon the successful termination of such public offering, any Rescission Offerees that have accepted rescission and have not yet been paid, if any, will be contacted by the Company with a view to payment. The acceptance of the offer of rescission shall become effective against the Company upon its receipt of the form accompanying the "Proposal to Accept or Reject Rescission Offer" properly executed by the rescinding shareholder. Failure to Respond: All offerees who fail to respond within 30 days will be deemed by management to have rejected the Company's Rescission Offer and have decided to keep their An-Con shares. However, no assurance can be given that such shareholder will not be able to change this presumption in a court of law. If, for any reason, the present address of the former Aaron shareholder is unknown and incapable of being ascertained, such shares shall be held by the Company for their benefit. The current market price for An-Con shares on the Bulletin Board is $ per share which is $. greater than the Rescission Offer. Although no assurance can be given, acceptance of the Rescission Offer could result in a substantially lesser sum than could be obtained from the sale of shares in the open market. However, the shares of An-Con delivered to former Aaron shareholders pursuant to this prospectus will not be eligible for public sale before January 11, 1997 (pursuant and subject to Rule 144 promulgated under the Securities Act of 1933, as amended). See "Risk Factors", No. 14. Rescission Tender Procedure Upon effectiveness of this Prospectus, all former Aaron shareholders shall receive the An-Con shares presently held in escrow for their benefit. Those shareholders choosing to rescind shall then follow the procedures set forth above. At the conclusion of the Rescission Offer and subject to availability of cash, accepting shareholders will be contacted by the Company and instructed to tender the shares by signing the certificates (on the back and noting thereon that the same is for "rescission"), and sending it registered mail, return receipt requested, to the Company for payment, including applicable interest thereon. In the event the Company does not have sufficient funds to repurchase the rescinded shares, beneficial owners of such certificates will be contacted by the Company, and shall be instructed to hold such certificates until the Company has the necessary cash for the purchase of such tendered shares. Those stockholders may have to wait an undetermined period of time before receiving payment. However, rescinding shareholders will receive accumulated interest from the date of their purchase to the date of the actual payment by the Company for the rescinded shares in accordance with the state mandated interest rate of their state of residence. Since each rescinding shareholder owns restricted shares, until receipt of payment from the Company, he may not otherwise sell or transfer such shares in the open market or otherwise. The foregoing prohibition applies notwithstanding the Company's inability to pay the offered price at time of completion of the Rescission Offer. Until paid in full by the Company, rescinding shareholders will be deemed to be creditors of the Company and shall retain their stock certificates as security for payment; however they will maintain all rights as shareholders of the Company including voting rights until such time as they are paid in full and all such stock is redeemed. In addition, the Company intends to issue a non-negotiable "Acknowledgment of Indebtedness" acknowledging the principal amount owing to the rescinding shareholder plus statutory interest (as mandated by the state of residence of the rescinding shareholder) to any rescinding shareholder who is not paid within 30 days after completion of the Rescission Offer. This Acknowledgment of Indebtedness will then be surrendered by the rescinding shareholder together with the stock certificate at the time of actual payment by the Company. However, in the event any rescinding shareholder is not paid in full by the Company within 180 days of the date of this prospectus, then such shareholder may (a) utilize any exemption under the federal securities law, if available, to sell their shares (or balance of shares remaining) and if the proceeds thereof are less than the amount payable pursuant to the Rescission Offer, such shareholders shall remain creditors of the Company and each will receive a replacement Acknowledgment of Indebtedness for the balance remaining; and/or (b) choose to commence suit for the amount of indebtedness in order to hasten payment and to preserve their rights before the expiration of any relevant statute of limitations. Upon sale of any shares pursuant to (a) above, each selling shareholder will be required to deliver the Acknowledgment of Indebtedness pending such sale, and, if the proceeds of sale are less than full payment of the amount due under the Rescission Offer, upon providing evidence of the foregoing a new Acknowledgment of Indebtedness will be issued for the balance and delivered to the rescinding shareholder. In addition, as a condition to payment in full by the Company, the Acknowledgment of Indebtedness must be relinquished to the Company by the rescinding shareholder prior to such payment in full. All shareholders accepting rescission that are not paid by the Company will not be deprived of their rights by virtue of any state or federal statute of limitations and may pursue other causes of action against the Company, in any court of competent jurisdiction, for the value of the consideration paid plus appropriate interest thereon. All shareholders who reject this offer to rescind their shares will also not lose their rights to pursue recovery of their investment with applicable interest thereon before any appropriate statute of limitations expires and may have rights to pursue other causes of action against the Company, in any court of competent jurisdiction, for the amount paid plus applicable interest thereon. Under federal law, refusal or failure to accept or reject the offer of rescission will not terminate the stockholder's rights to seek rescission before the expiration of the applicable federal statute of limitations. Generally, the federal statute of limitations for enforcement of rights by a shareholder to rescind a purchase which may have been sold in violation of the registration requirements of the federal securities laws is within one year from the date of the purchase. In addition, the present stockholders may have the right to pursue other causes of action against the Company, either at law or in equity, in any court of competent jurisdiction on other grounds. These actions, if any, may be subject to different statutes of limitations. (See ("Statutes of Limitation" and "State Blue Sky Laws"). The Company believes that few, if any, shares will be tendered as a result of this Rescission Offer, because of the progress made by the Company and because the price per share in the public market is presently higher than the amount recoverable through rescission. However, no assurance can be given concerning the foregoing. If a majority of investors chooses to accept the Rescission Offer and have their shares reacquired by the Company at the designated price per share, together with applicable interest as mandated by the state of their residence, and a significant amount of the shares that will be offered by the Company in a companion prospectus are not sold, there could be a material adverse effect on the Company's cash position and operations. See "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Federal Income Tax Consequences of The Rescission Offer The following are the general tax consequences of acceptance of the Rescission Offer. We suggest that rescission offerees contact their tax advisors to determine their respective tax consequences. The Acquisition is Deemed to be a Tax Free Exchange Pursuant to IRC Section 368(a)(1)(B), an acquisition will be tax- free if it is the acquisition by one corporation, in exchange solely for its voting stock, of the stock of another corporation, if immediately after the acquisition, the acquiring corporation is in control of the acquired corporation. The statutory language provides that for this transaction to be tax-free, An- Con must use solely its voting stock to acquire the voting stock of Aaron and must be in control of Aaron after the acquisition. Based on the facts provided An-Con has acquired 100% of Aaron's stock solely in exchange for its voting stock and therefore the transaction would meet the statutory tests for tax-free treatment to both An-Con's and Aaron's shareholders. Application of other non-statutory requirements- continuity of proprietary interest, active business and business purpose are also satisfied by the facts of this transaction. Furthermore the Acquisition satisfies the additional "equity structure shift" test (a change of ownership percentages as a result of the tax free reorganization). Since the shareholders of An-Con retained more than 50% ownership in the reorganized entity, the reorganization's equity structure shift did not trigger an ownership change. Hence the conclusion that the transaction qualifies for tax free treatment. Tax Opinion The foregoing tax analysis is the result of a tax opinion rendered to the Company. The Company has received a formal tax opinion from Bloom and Company, its auditors, for filing with respect to this prospectus. Interested parties are urged to seek independent tax advice if deemed required. Tax Consequence of Acceptance of Rescission However, if the shareholders of Aaron elect to accept rescission from An-Con, then the tax-free nature of the transaction shall be destroyed for those shareholders. The additional payment could be treated as consideration and thereby cause the transaction to no longer be an exchange of solely voting stock of the acquiror. An acceptance of rescission by an Aaron shareholder involves the sale of his (her) An-Con shares back to An-Con. Generally, the sale of a security can result in a gain or loss measured by a comparison of the purchase price to the sales price. The difference between a shareholder's purchase price (tax basis) and the sales price yields a realized gain or loss. A capital gain or loss results if the security sold is a capital asset as defined in IRC Section 1221. The long or short term character of the gain or loss is dependent upon the length of time the stock was held. Stockholders accepting the Rescission Offer who paid cash for their stock will determine their gain or loss by a comparison of the proceeds received under the Rescission Offer to the tax basis of the stock. Any resulting gain or loss should be recognized by the shareholder for tax purposes. Aaron's shareholders are encouraged to have their own personal tax consultant review their investment in order to determine the particular tax consequences to them. MANAGEMENT The following table sets forth the present management of the Company, their respective ages, positions and period they have served as directors. Name Age Position Director since J. Robert Saron* 43 Chairman of the Board Chief Executive Officer, Director August, 1994 Andrew Makrides 54 President, Director December, 1982 Joseph F. Valenti 79 Director October, 1995 George W. Kromer 55 Director October, 1995 Delton Cunningham 31 Secretary, Treasurer Chief Financial Officer -- Tsang Yang Tseng 48 Vice-President -- Far East Affairs Robert Speiser, the former Chairman of the Board, resigned as an officer and director on March 20, 1995 and became a consultant to the Company. See "Certain Relationships and Related Transactions". * Replaced Robert Speiser as Chairman and CEO on March 20, 1995. J. Robert Saron, age 43, President and Chairman of the Board holds a Bachelors degree in Social and Behavioral Science from the University of South Florida. From 1971 through 1979 Mr. Saron served in various capacities with Saron Pharmaceutical Corporation and Home Breathing Care, Inc. In 1979 Saron Pharmaceutical Corporation and Home Breathing Care, Inc. were acquired by Key Energy Enterprises, Inc. and were renamed Key Medical, Inc. Mr. Saron was named Vice President of Key Medical, Inc. and served on the Board of Directors of Key Energy Enterprises, Inc. In 1983 Mr. Saron became President of Key Medical, Inc. In January 1984 Mr. Saron joined Suncoast Medical Manufacturing, Inc. In 1985 Suncoast acquired Key Technologies, Inc. and Mr. Saron became Vice President of the Corporation. From 1988 to present Mr. Saron has served as President and director of Aaron Medical Industries, Inc. (formerly Suncoast Medical Manufacturing, Inc.). In March, 1995 Mr. Saron was elected Chairman and Chief Executive Officer of An-Con Genetics, Inc. Andrew Makrides, age 54, President, member of the Board of Directors, and former Chairman, received a Bachelor of Arts degree in Psychology from Hofstra University and a JD Degree from Brooklyn Law School. He is a member of the New York Bar and has practiced law from 1968 until joining An-Con Genetics, Inc. as Executive Vice President and director, in 1982. Mr. Makrides became President of the Company in 1985 and has served as such to date. Delton N. Cunningham, age 31, Vice President and Chief Financial Officer holds a Bachelor of Science in Accounting from the University of Florida. He is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Mr. Cunningham began his career with the Miami office of Arthur Andersen & Company. In June of 1991 Mr. Cunningham joined Aaron Medical Industries, Inc., as the Company's Chief Financial Officer. In June of 1992 Mr. Cunningham became Vice President of Aaron Medical Industries, Inc. and in April of 1993 he was elected Corporate Secretary of Aaron by the Board of Directors. In June, 1995, Delton Cunningham was appointed Chief Financial Officer of An-Con. Tsang Yang Tseng, age 48, is a medical doctor and the owner of several medical clinics in Taiwan and has other business operations in Far East Asia. Currently he also serves as the Vice President in charge of Far Eastern affairs for the Company. Robert Speiser, was initially an unpaid consultant to the Company in June of 1989, and became Chief Executive Officer ("CEO") in 1990. He was appointed Chairman of the Board of Directors ("Chairman") in May 1992. On March 20, 1995, Mr. Speiser resigned as the Chairman and CEO and agreed to remain as a consultant to the Company. As of the date of this prospectus Mr. Speiser is no longer a consultant for the Company (See "Certain Transactions"). Joseph F. Valenti, age 79 filled a vacancy on the Board of Directors on October 1, 1995. He is the former Vice-President of the International Division of Aaron Medical Industries, Inc. having retired on January 1, 1995 from that position. He continues to be the principal shareholder and chief executive officer of Valpex International Corporation, a company which is wholly owned by him, engaged in the import of products. This import company is a major supplier of the Company's light bulbs which are used in the Company's various manufactured products. The prices paid by the company for the products are competitive with those from other sources. He received a Bachelor of Arts Degree in Languages from the College of the City of New York in 1939. He has been associated with Aaron Medical Industries, Inc. and its predecessor companies since 1980 and was charged with developing the international sales department and increasing exports sales on behalf of Aaron. George W. Kromer, Jr., age 55 filled a vacancy on the Board of Directors and became a director on October 1, 1995. Mr. Kromer is a Senior Financial Correspondent for "Today's Investor" and is utilized as a consultant by a number of companies whose shares are listed on the American Stock Exchange and in the Over-the- Counter market. 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. REMUNERATION Item 10. The following table sets forth the compensation paid to the executive officers of the registrant for the three years ended December 31, 1995: Annual Compensation A B C D E Name and Other(a) Principal Annual Position Year Salary Bonus Compensation Robert Saron CEO 1995$116,000 $39,600 $23,700 Andrew Makrides President 1995 77,000 11,800 8,000 1994 62,500 126,500 14,000 1993 3,500 -- 14,000 Moshe Citronowicz 1995 97,000 11,800 8,000 Delton Cunningham Treasurer 1995 82,900 8,800 8,000 Robert Speiser CEO(Former) 1995 12,500 -0- 8,000 1994 84,850(B)235,000 1993 6,500 --6,000 (continued on page 45) REMUNERATION (continued) Annual Compensation Long Term Compensation F G H I Awards Payouts Restricted Stock Options LTIP All other Year Awards SAR'S Payouts Compensation Name and Principal Position Robert Saron CEO 1995 $-- -- -- -- Andrew Makrides President 1995 $-- -- -- -- 1994 -- -- -- $2,700 1993 -- -- -- 2,700 Moshe Citronowicz 1995 -- -- -- -- Delton Cunningham Treasurer 1995 -- -- -- -- Robert Speiser CEO(Former) 1995 -- -- -- 47,000(c) 1994 -- -- -- 36,400 1993 -- -- -- 22,600 (a) Other compensation includes health insurance for officers and the personal use of an auto by each of the above named officers. The exact amount of personal use auto benefit cannot be determined and was estimated to be less than $10,000 in any one year. (b) Includes $22,350 paid to Mr. Speiser in his capacity as Chairman of the Board of Directors of Aaron. (c) Mr. Speiser resigned on March 20, 1995, as an officer of An-Con and Aaron and became a consultant to the Company at $4,000 per month plus use of an auto, office space and medical insurance. He received $47,000 in consulting, medical and auto expenses. His contract was for one year to end March 20, 1996. There is no contract or arrangement for the Board of Directors to be compensated in their capacities as Board members. The Company Board of Directors presently consists of Robert Saron (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 a verbal agreement as a financial and public relations consultant by An-Con for the past nine months at an average monthly fee of $450. There has been no change in the pricing of any SAR's previously or currently awarded. Employment Contracts On the 8th of September, 1995, the Company entered into an employment agreement with J. Robert Saron providing for Mr. Saron to act as an executive employee of the Company. The agreement is for a period of 5 years and provides for compensation in the amount of $118,335 per year plus additional amounts for automobile allowance ($600 per month) and a bonus equal to 10% of the Company's pre-tax profits in excess of the first $200,000 of profit in any given year. The agreement also provides for annual cost of living percentage increases as to salary and automobile allowance. In addition to the foregoing, the agreement provides for a vacation of three weeks per year, reimbursement of business expenses, group insurance and life insurance. The agreement may be terminated (a) upon the death of Mr. Saron, or (b) on thirty (30) days notice by Mr. Saron to terminate, or (c) by the Company, (i) without cause, upon the majority approval of the Board of Directors on thirty (30) days written notice (wherein the Company shall be obligated to pay the employee compensation under the agreement for the balance term of the agreement) and (ii) the employee may elect, in lieu of (i) above, to cancel his agreement and obtain severance payments equal to three times the annual salary and bonus in effect during the month preceding such termination; or (d) by the Company for cause, if during the time of employment, the employee violates the covenant not to compete provisions of the agreement, or is found guilty of a felony or crime of moral turpitude. The agreement provides for a covenant not to compete directly or indirectly against the Company for a period of one year. Such agreement also provides for indemnification of Mr. Saron for any liability while acting as an officer and director of the Company except in the instances where it is determined by a court of competent jurisdiction that (a) he has breached his duty of loyalty to the corporation or the shareholders, or (b) acted not in good faith or intentionally improperly, or (c) paid unlawful dividends or made unlawful stock purchases or redemptions, or (c) otherwise engaged in a transaction in which he received improper personal benefit against the interests of the corporation or its shareholders. On September 8, 1995, the Company also entered into a similar employment agreement with Andrew Makrides, President, for a period of 5 years and providing for annual compensation in the amount of $78,500, a monthly automobile allowance of $500 per month, and bonuses equal to 3% of the Company's pre-tax profits in excess of the first $300,000 of profits in An-Con Genetics, Inc. and annual cost of living percentage increases. In all other respects the agreement is similar to that of Mr. Saron set forth above. Effective September 8, 1995 the Company entered into a similar 3- year executive employment agreement (the "Agreement") with Delton N. Cunningham, as Vice-President and Secretary of the Company. Mr. Cunningham has also been appointed Treasurer and Chief Financial Officer of the Company. The Agreement provides for one year extensions unless written notice of termination is provided by the Company nine months prior to the termination date and contains termination provisions similar to those of Messrs. Saron and Makrides. The Agreement also provides for a salary of $75,000 per year, a monthly automobile allowance of $500, a bonus equal to 3% of the Company's pre-tax profits in excess of $300,000, 3-weeks paid vacation, reimbursement of expenses, and group medical insurance. The Agreement contains a one-year non- compete covenant commencing upon termination of employment. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF AN-CON The following table sets forth certain information as of March 31, 1996, with respect to the beneficial ownership of the Company's common stock by all persons known by the Company to be the beneficial owners of more than 5% of its outstanding shares, by directors who own common stock and by all officers and directors as a group. Number Nature Percentage Name and Title Shares of Outstanding Address of Class Owned Ownership(i)Shares Andrew Makrides Common Stock 441,667 Beneficial 5.4% (v) 255 3rd St. St. James, New York Tsang Yang Tseng Common Stock 666,667 Beneficial 8.2% (v) 190-1 Ming-Chun Road Chi-Yi, Taiwan Robert Speiser Common Stock 753,333 Beneficial 9.3% (ii)(v) 1340 Boca Ciega Isle Drive St. Petersburg, Florida 33706 Dr. Louis F. Powell Common Stock 422,587 Beneficial 5.2% (vi) 202 Bluffview Drive Belleair, FL 34640 J. Robert Saron Common Stock 487,385 Beneficial 6.0% (iii) Ashley Drive Seminole, FL 34642 Delton Cunningham Common Stock 74,946 Beneficial .9% (iv) 7500 Normandy Ct. Seminole, FL 34642 George W. Kromer Jr. Common Stock 35,000 Beneficial .4% 5 Elm Court Selden, NY 11784(i) Joseph F. Valenti Common Stock 92,206 Beneficial 1.1% 5700 Mariner Street Tampa, FL 33609(i) All Officers Common Stock 1,797,871 Beneficial 22% and Directors as a Group (6 persons) (ii) (i) Based on 8,141,436 shares outstanding as of March 31, 1996, which is inclusive of the shares issued and held in escrow for the benefit of Aaron shareholder's and 337,000 shares reserved and underlying warrants issued to employees including 30,000 warrants to Robert Saron, 20,000 warrants to Andrew Makrides, 20,000 warrants to Delton Cunningham, 35,000 warrants to Joseph Valenti, and 35,000 warrants to George Kromer. (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 432,385 additional shares of An-Con (in addition to the 25,000 shares he had received prior to the merger). (iv) Delton Cunningham received 44,946 shares of An-Con as a result of the exchange of shares in addition to the 10,000 shares issued to him in connection with services rendered to An-Con. (v) During 1994, two transactions took place that materially changed shareholders' control of the Company: (a) Robert Speiser, a former officer and director of the Company and Andrew Makrides, an officer and director of the Company, received an aggregate of 1,205,000 shares of common stock during the second quarter of 1994 effectively giving them, at that time, 29.887% of the outstanding shares of the Company. (b) During the third quarter of 1994 the Company sold 666,667 shares of common stock to a foreign investor which constituted 16.5% of the outstanding shares of the Company, at the time of issue. (vi) Dr. Louis F. Powell is a director of Aaron and as a result of the exchange of shares pursuant to the Acquisition Agreement became the beneficial owner of 422,587 of An-Con shares. See "Certain Transactions". CERTAIN TRANSACTIONS Purchase of Aaron Medical Industries, Inc. On June 10, 1993, a letter of intent was entered into whereby all of the outstanding shares of Aaron were to be exchanged for shares of An-Con resulting in Aaron shareholders owning 49% of the outstanding shares of An-Con on a fully-diluted basis as of the closing date. The agreement further provides that Aaron shall operate as a wholly-owned subsidiary having two directors; one designated by the present An-Con management and one designated by the present Aaron management. The An-Con shares issued for Aaron shares shall be held by an Escrow Agent for the benefit of Aaron shareholders for delivery upon effectiveness of a registration statement. See "Rescission Offer" for a description of the terms of the Company's present Rescission Offer to former Aaron shareholders to repurchase the An-Con shares issued pursuant to the Acquisition Agreement at a repurchase price of $.392 per share. The agreement was restated and further amended on April 14, 1995 and November 20, 1995 and the former Aaron shareholders are being asked to ratify these changes. The Acquisition Agreement as amended deleted the 80% condition that Aaron shareholders would receive 80% of the combined company if An- Con could not raise the required funds and merely contained the provision whereby An-Con covenanted to provide up to a total of $1,000,000 in funding for Aaron, now the wholly owned subsidiary of An-Con. Due to possible adverse tax consequences to former Aaron shareholders, this covenant was later deleted in the November 20, 1995 restated and amended agreement, (the "Final Acquisition Agreement") which is the agreement that is being presented to the former shareholders of Aaron and is the subject of a registration statement. The Final Acquisition Agreement is being presented to the former shareholders of Aaron for ratification or, in the alternative, if they so choose, to dissent and request fair value at $.22 per Aaron share or $1,331,800 in lieu of An-Con shares pursuant to the exchange. For the calendar year ended December 31, 1995, An-Con had advanced shares of its Common Stock valued at $78,000 for the benefit of Aaron. The agreement as amended has deleted all references to the $1,000,000. After consulting with tax counsel it was determined that it was in the best interests of shareholders and the Company to delete the aforementioned as part of the acquisition and the Acquisition Agreement was so amended in November, 1995. See "Material Contacts Between An- Con and Aaron Concerning the Acquisition" for a detailed discussion of the various amendments to the Acquisition Agreement. Cash and Other Transactions with Aaron During 1993 there were no cash transactions directly between the Companies. In 1994 a total of $226,000 was contributed in cash by An-Con to Aaron. In addition in 1995 An-Con contributed 60,000 shares valued at $78,000 to Aaron in connection with its purchase of its present premises. During 1994 and 1995 Aaron advanced to An-Con for operating purposes a total of $140,100. In addition to the foregoing Aaron paid an aggregate of $47,200 of expenses of Robert Speiser of which $24,900 was charged by An-Con to Mr. Speiser's loan account and $22,300 was expended by An-Con as general and administrative expenses. See "Rescission Offer" for a description of the terms of the Company's present Rescission Offer to former Aaron shareholders. Purchase of Multi-Function Cautery Device In 1994, prior to and in contemplation of the Acquisition, the Company purchased the technology for a multi-functional cautery device for 91,350 shares of restricted common stock valued by the Company at $59,400 and assigned the technology to Aaron for development and marketing. The Company, through its Aaron subsidiary, has developed and test marketed the device and will be shipping orders in the fourth quarter of 1996. See "Business- Multifunction Cautery". Sale of Common Stock In connection with an offering of 666,667 shares of common stock by the Company pursuant to Regulation S, Tsang Yang Tseng a non- U.S. person investor purchased all the shares offered at a price equal to 75% of the market value of the shares at the close of business on August 26, 1994. Mr. Tseng is now an unsalaried officer of the Company. The Company received $1,000,000 and paid $150,000 in commissions. The investor agreed that the 666,667 shares of common stock of An-Con Genetics, Inc., subscribed for pursuant to an agreement dated June 19, 1994, shall be held for investment and not with a view to the unlawful distribution thereof by the investor and shall not be sold for a minimum period of 18 months. The Company agreed to cooperate fully in the application and petition of the investor for permanent U.S. status and the issuance of a permanent green card pursuant to U.S. Immigration and Naturalization Service ("INS") Regulation Section 204.6 relating to the Fifth Employment-Based Preference For Alien Investors In a New Commercial Enterprise. The Company is also obliged, over a period of two years, to create ten full-time positions for qualified employees pursuant to a business plan. The Company has already hired the 10 new employees and is presently in compliance with the terms of the agreement. Any future transactions involving the INS and the investor are not deemed significant. Transactions with Officers Robert Speiser, the former Chief Executive Officer (CEO) and Andrew Makrides the President made cash loans to the Company during the period October 12, 1990 to December 31, 1993 of $159,000 and $21,500, respectively. In addition to these loans, Mr. Speiser advanced his own cash of $76,100 in the form of loans for product development, travel and other expenses. Interest on these loans has accrued at 9% to 12% per annum from inception. During 1995, Mr. Speiser received $90,700 in re-payment of principal on his loan. As of December 31, 1995, the books of the Company reflected a principal balance due of $-0- on loans to Mr. Speiser and Mr. Makrides. The sole balance reflected by the Company's books is approximately $80,000 which is currently disputed by the Company. In 1992, in order to deter threatened action against the Company by the landlord to file a judgment for rent arrears of $41,700, Mr. Speiser obtained a consent judgment against the Company in favor of himself in the Counties of Suffolk and Westchester for $92,239 and $190,957 respectively, inclusive of interest to December 31, 1992. On March 29, 1993 and in subsequent letters of instruction to the Sheriff of Suffolk County, Mr. Speiser requested that the execution of the above-mentioned judgments be held in abeyance until August 30, 1993. As of February 28, 1994, the execution order had expired. Mr. Speiser has stated he does not intend to enforce this judgment and will place it in trust for the benefit of the Company. As of this date, the landlord has rescinded the outstanding debt and entered into a new lease with the Company. However, notwithstanding the removal of the threat by the landlord and repayment of the principal amount loaned to the Company in the past, Mr. Speiser has not yet issued satisfactions on the judgments against the Company as of the date hereof. The Company has requested that Mr. Speiser issue and deliver the satisfactions in favor of the Company and is currently in negotiation with Mr. Speiser to obtain the satisfaction of judgment. Mr. Speiser claims he has not been fully reimbursed with respect to the amounts of the judgments. The Company has taken the position that the judgments are based upon unsubstantiated claims. However, the Company has recorded the liability of such claims on its books. In January, 1992, the Company had entered into 5-year employment agreements as amended February, 1993, wherein the Company had accrued $310,000 in salaries to its Chief Executive Officer and President for $175,000 and $135,000, respectively. The agreements, as amended, also called for incentive stock options of 8 million and 4 million, for Messrs. Speiser and Makrides respectively, at $.001 per share, pre reverse split of 1 for 15. The agreements were terminable upon a lump-sum severance of an amount equal to three times the executive's annual salary and bonus in effect the month preceding such termination. In 1994, the aforesaid officers voluntarily rescinded their employment contracts and incentive stock options. Mr. Makrides was then awarded a new employment contract for 3 years and 421,667 (post-split) shares of the Company valued at $126,500. (This agreement was later voluntarily cancelled by Mr. Makrides on September 5, 1995). However, Mr. Makrides was issued 421,667 shares in March, 1994 in consideration of his waiver of prior accrued salaries due. No other employment agreement was signed with Mr. Speiser, but in March, 1994 he had received 783,333 shares of the Company valued at $235,000 in consideration for his waiver of prior accrued salaries due. (See Executive Compensation.) On March 20, 1995 Mr. Speiser, at the request of the Board of Directors, resigned his position as chairman and CEO. The Board determined that Mr. Speiser had allegedly taken certain actions without the consent of, or without making full disclosure to, the Board. Such actions consisted of, among other things, (i) a preferential use of a significant amount of the Company's cash funds for repayment of certain indebtedness of the Company to himself (at a time that funds were needed for other obligations, creditors and operational needs of the corporation), (ii) caused issuance by Aaron to himself of warrants to purchase shares of Aaron (prior to the acquisition) without advising or receiving the consent of the Board of Directors of the Company, and (iii) generally not apprising the Board of Directors of his acts or plans concerning the Company. At the time of resignation, Mr. Speiser signed a one-year consulting agreement with Aaron and the Company, which provided for, among other things, a monthly reduction of his outstanding loan to the Company, a $1,500 per week retainer (to be reduced to $1,250 per week during last 6 months of the agreement), a commission on funding introduced by him to the Company pursuant to formula. The Company has requested receipts from Mr. Speiser for expenses submitted which were made part of the Company's outstanding loan indebtedness to Mr. Speiser. Mr. Speiser is presently not employed by the Company in any capacity. During the first quarter of 1996, pursuant to the Company's 1996 Employee Stock Incentive Plan, the Company's board of directors authorized issuance of warrants to employees, officers and directors. A total of 337,000 warrants for the purchase of 337,000 shares of Common Stock of the Company were issued and the Board reserved a total of 337,000 shares of Common Stock issuable upon exercise of the warrants. The warrants are exercisable at a price of $1.25 per share for a period of five years. As of the date of this prospectus, no warrants have been exercised. LEGAL PROCEEDINGS On December 29, 1992, Robert Speiser, the then Chief Executive Officer of An-Con, obtained a Confession of Judgment in the Supreme Court, State of New York, Counties of Suffolk and Westchester for amounts due on loans to the Company of $92,239 and $190,957 inclusive of interest at 12% to May 27, 1992 and 9% thereafter. These loans represent amounts claimed by Mr. Speiser to have been expended on behalf of the Company and funds loaned to the Company. As reported to the Board of Directors, Mr. Speiser's actions were motivated solely to deter threatened action by the landlord to file a judgment at that time of $41,700 in rental arrears. Mr. Speiser has indicated that he does not intend to enforce this judgment. On March 29, 1993 and in subsequent letters of instruction to the Sheriff of Suffolk County, Mr. Speiser requested that the execution of the above-mentioned judgments be held in abeyance for a 60 day period, until August 30, 1993. On February 28, 1994, the executive order expired. As of December 31, 1995, the Company had repaid $235,100 of the principal amount upon which the aforesaid judgments were based. See "Certain Relationships and Related Transactions". A lawsuit was commenced against the Company by Frank Scura, a non-affiliated person in the Supreme Court of the State of New York, Suffolk County, in December 1991 alleging breach of a financial consulting agreement and seeking damages of $3,000,000. In 1993, a settlement had been reached between the parties whereby the Company had agreed to issue 100,000 (pre-split) shares to the plaintiff in full settlement of any and all claims. Mr. Scura subsequently refused to execute the stipulation of settlement. The Company has taken the position that Mr. Scura's claim has no merit and does not present a material contingent liability. On March 14, 1996 MegaDyne Medical Products, Inc. a Utah Corporation filed a complaint for injunctive relief and damages for patent infringement (35 USC.S. 271) in the U.S. District Court, District of Utah, Central Division. MegaDyne asserts that the Company has used its process for creating an Electro-surgical knife coated with a non-stick material. MegaDyne states that it is entitled to an accounting from the Company and to recover the damages allegedly sustained by MegaDyne as a result of infringing its product. Such damages allegedly include, but are not limited to, lost sales and profits due to sales of the infringing products and a reasonable royalty for use of the patented invention. MegaDyne claims it is presently unable to ascertain the full extent of monetary damages it has suffered by reason of Aaron's aforesaid acts of infringement. The Megadyne complaint also seeks (i) a preliminary and permanent injunction, (ii) accounting of all sales, (iii) compensatory and punitive damages and (iv) legal fee reimbursement. The Company has filed an answer denying the allegations and pleading numerous affirmative defenses, including, but not limited to, defenses questioning the validity of the plaintiff's patent for failure to comply with various sections of the U.S. Patent Law. In addition the Company has counterclaimed for an accounting, dismissal of plaintiff's complaint, a declaratory judgment declaring Aaron's right to manufacture the blades in question, an injunction prohibiting plaintiff from threatening the Company and its customers with infringement, and for attorney's fees. As of March 31, 1996 the Company sold approximately $90,000 of Resistick. The Company counsel claims that scientific testing demonstrates that the Company's electro-surgical blade does not infringe MegaDyne's patent in that the Company's blade is resistive in nature as opposed to Megadyne's which is allegedly capacitive. On August 27, 1996, a federal judge, after a hearing, denied plaintiff Megadyne's motion for a preliminary injunction, based upon, among other things, that Plaintiff failed to demonstrate a reasonable likelihood of success on the merits in the action for infringement. The lawsuit is continuing pending a trial for the permanent injunction. DESCRIPTION OF AN-CON SECURITIES Common Stock of An-Con General The authorized capital stock of An-Con consists of 15,000,000 shares of common stock. The holders of the shares of common stock (i) have equal ratable rights to dividends from funds legally available therefor, when as and if declared by the board of directors of An-Con; (ii) are entitled to shares ratably in all the assets of An-Con available for distribution of holders of common stock upon liquidation, dissolution or winding up of the affairs of the Company, (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto. Such shares are entitled to one vote per share in all matters which the shareholders are entitled to vote upon at all meetings of shareholders. All shares of common stock which are the subject to this offering, when paid for, will be fully paid and non- assessable. Non-Cumulative Voting The holders of shares of common stock of An-Con do not have cumulative voting rights which means that the holders of more than 50% of such outstanding shares can elect all of the directors to be elected and thus the holders of the remaining shares will not be able to elect any of An-Con's directors. Upon the consummation of the Acquisition and effectiveness of this Prospectus, the present shareholders of An-Con (exclusive of the Aaron shareholders exchanging their shares) will own at least 50% of the outstanding shares and will be in a position to elect all of the members of the Board of Directors. (See "Risk Factors" and "Principal Shareholders"). Dividends An-Con has not paid any cash dividends in the past, and any dividends to be issued in the future will rest within the discretion of the Board of Directors and will depend, among other things, upon An-Con's earnings, its capital requirements and financial conditions, as well as other relevant factors. The Company has not paid cash dividends since its inception and presently does not intend to pay dividends in the foreseeable future, but intends to retain all earnings, if any, for use in its business operations. Debentures The Debentures have been issued under an indenture (the "Indenture") dated as of February 17, 1987, between An-Con and Continental Stock Transfer & Trust company, as Registrar (the "Debenture Registrar"). The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to and are qualified in their entirety by reference to all of the provisions of the Indenture, including the definitions therein of certain terms. Whenever particular provisions or defined terms of the Indenture are referred to, such provisions or defined terms are incorporated herein by reference. Over the years, pursuant to conversion and special offers to exchange indebtedness for equity, the number of outstanding debentures were reduced from a principal amount of $1,711,000 to $78,000 as of the date of this Prospectus. Each Debenture consists of $1,000 principal amount (or multiples thereof) of indebtedness, obligation of An-Con, mature in 1997, and bear interest from the date of delivery at the rate of 8% per annum, payable semi-annually on May and November of each year, to the registered owner thereof, with certain exceptions, at the close of business on the 15th day preceding each interest payment date. Principal and interest are payable and the Debentures are exchangeable, convertible and transferable at offices or agencies of An-Con maintained for such purposes in the Borough of Manhattan, City of New York. Payment of interest by the Company may be made by check mailed to the address of the person entitled thereto as it appears in the Debenture register. Conversion The holders of the Debentures were entitled, at any time and from time to time until and including the close of business on February 17, 1991 to convert the Debentures or portions thereof (which are $1,000 or integral multiples thereof) into Common Stock of An-Con at a stated conversion price, which is subject to adjustment in certain circumstances. Subordination of Debentures The payment of the principal and interest on the Debentures is subordinated in right of payment to the extent set forth in the Indenture to the prior payment in full of the principal of and interest on all Senior Debt of An-Con as defined in the Indenture. Redemption The Debentures are subject to redemption at the election of An- Con, in consideration of the payment of 105% of their principal amount of $1000 each (plus any unpaid interest to date of redemption), upon not less than 30 days' notice by mail at any time and from time to time after April, 1989. Continental Stock Transfer & Trust Company, Two Broadway, New York, New York 10004, is the Debenture Registrar under the Indenture. The Company does not have any loans outstanding from the Debenture Registrar. Warrants The Company has issued and has outstanding a total of 200,000, 2 1/2 year restricted warrants which expire in November, 1998, each of which is exercisable to purchase one share of Common Stock at a price of $3.00 per share. The Company has reserved a total of 200,000 shares of common stock issuable on the exercise of the warrants and to date no warrants have been exercised. Each warrant does not have any voting or equity rights but merely constitutes a right to purchase one share of common stock of the Company. The exercise price for each warrant is adjustable in the event the Company declares a stock dividend, reclassification of shares, consolidation or merger. The Company has agreed to register the shares underlying the warrants in a new registration statement to be filed. TRANSFER AGENT The Registrar for An-Con's Common Stock is Continental Stock Transfer & Trust Company, Two Broadway, New York. ("Continental"). Continental is also the Agent for the Company's outstanding Debentures. Aaron has no transfer agent for its shares and maintains its own transfer records. LEGAL MATTERS The legality of the Common Stock of An-Con to be issued in the Acquisition will be passed upon for An-Con by its Corporate Counsel, Alfred V. Greco, P.C., New York, N.Y. Alfred V. Greco, P.C. is the beneficial owner of 76,667 shares of Common Stock of An-Con. EXPERTS The audited consolidated financial statements incorporated in this Proxy Statement/Prospectus have been examined by Bloom & Company, independent Certified Public Accountants, for the periods indicated and to the extent set forth therein, and have been included based upon the report of such firm appearing elsewhere herein and upon the authority of such firm as experts in auditing and accounting. INFORMATION AS TO UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited financial statements of the Company for the interim periods ended March 31, 1996 and March 31, 1995, have been prepared by management from the books and records of the Company and reflect, in the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations of the Company, on a consolidated basis, as at the periods indicated therein and are of a normal recurring nature. OTHER MATTERS Certain persons, because of their relationship with Aaron might be deemed to be underwriters of the An-Con Common Stock pursuant to Rule 145 (c) of the Securities Act of 1933. The Acquisition Agreement, as amended, provides, however, that each such person will furnish a letter to An-Con to the effect that: (i) he has no present plan or intention to transfer, sell or otherwise dispose of any shares of An-Con Common Stock he may receive as a result of the Acquisition; (ii) that any future disposition by him of any shares of An-Con Common Stock he receives in the Acquisition will be accomplished in accordance with Rule 145 (d) of the Securities Act of 1933; and (iii) he agrees to a legend to be placed on the shares of An-Con received in the Acquisition which references the restrictions on such shares and describes his status as a person deemed to be an underwriter pursuant to Rules 144 and 145. Aaron and An- Con anticipate that this measure will comply with the requirements of Rules 144 and 145, and all interpretations thereof, and that as a result no person will be deemed to be an underwriter of shares of An-Con Common Stock as the result of the Acquisition. AN-CON GENETICS, INC. CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report . . . . . . . . . . . .F-2 Consolidated Balance Sheet at December 31, 1995. . .F-3 Consolidated Statements of Operations for the years ended December 31, 1995 and 1994. . . . . . . . .F-5 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1995 and 1994. . . . . .F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1994. . . . . . . . F-13 Consolidated Notes to Financial Statements . . . . F-18 UNAUDITED CONSOLIDATED CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Balance Sheet June 30, 1996 . . . . . F-39 Consolidated Statement of Operations for the Six Months Ended June 30, 1996 and 1995. . . . . F-41 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1995 . . . . F-42 Consolidated Notes to Financial Statements . . . . F-45 AARON MEDICAL INDUSTRIES, INC. FINANCIAL STATEMENTS Independent Auditors Report. . . . . . . . . . .F-50 Balance Sheet December 31, 1994 and 1993 . . . .F-51 Income Statements for the Years Ended December 31, 1995 and 1994 . . . . . . . . . . .F-53 Statement of Cash Flows for the Years Ended December 31, 1994 and 1993 . . . . . . . . . . .F-54 Statement of Stockholders Equity For the Years Ended December 31, 1994 and 1993 . . . . . . . .F-56 Notes to Financial Statements. . . . . . . . . .F-57 Schedules of Cost of Sales . . . . . . . . . . .F-68 Schedules of Operating Expenses. . . . . . . . .F-69 An-Con Genetics, Inc. Consolidated Financial Statements For the period ended December 31, 1995 and 1994 an BLOOM AND COMPANY 50 CLINTON STREET HEMPSTEAD, NY 11550 Tel. (516) 486-5900 Fax (516) 486-5476 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of An-Con Genetics, Inc. We have audited the accompanying consolidated balance sheet of An-Con Genetics, Inc. and subsidiary as of December 31, 1995 and the related statements of operations and shareholders' equity, and cash flows for the years ended December 31, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of An-Con Genetics, Inc. and subsidiary as of December 31, 1995 and the related results of its operations, and its cash flows for the years ended December 31, 1995 and 1994 in conformity with generally accepted accounting principles. S/Bloom and Company BLOOM AND COMPANY April 15, 1996 Except for Notes 7 and 11 August 30, 1996 AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 ASSETS Current assets: Cash $ 165,800 Trade accounts receivable 652,300 Inventories 606,200 Prepaid expenses 73,900 Deferred tax asset 183,300 Total current assets 1,681,500 Property and equipment, net 1,269,500 Other assets: Goodwill, net 100,300 Deferred charges 95,000 Patent rights, net 259,500 Unamortized debt issue costs, net 3,700 Deposits 7,700 466,200 $3,417,200 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current liabilities: Accounts payable $ 887,300 Accrued interest 157,900 Notes payable - current portion 132,000 Due to Aaron shareholders 1,331,800 Current portion of obligations under capital leases 31,400 Total current liabilities 2,540,400 Long-term debt, net 643,100 Obligations under capital leases 4,700 Stockholders' equity Common stock par value $.015; 15,000,000 shares authorized, issued and outstanding 4,305,340 shares, on December 31, 1995 64,700 Additional paid in capital 11,541,100 Accumulated deficit (11,366,200) 239,600 Subscriptions receivable ( 10,600) Total stockholders' equity 229,000 $ 3,417,200 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 Sales $5,521,000 $ 85,500 Costs and expenses: Cost of sales 3,215,300 56,700 Research and development 121,900 11,300 Professional services 368,400 265,200 Salaries and related costs 850,000 405,200 Selling, general and administration 1,184,900 378,600 5,740,500 1,117,000 (Loss) from operations (219,500) (1,031,500) Other income and (expense): Interest expense (net of income) (68,700) (26,400) Miscellaneous 57,300 1,500 ( 11,400) (24,900) Income (loss) before extraordinary item (230,900) (1,056,400) Extraordinary item: Gain from settlement of debt 76,800 54,200 Income (loss) before income tax (154,100) (1,002,200) Income tax -- -- Net income (loss) $ ( 154,100)$(1,002,200) Per share Net loss before extraordinary item$( .054) Net income (loss) $( .04)$( .39) Weighted average number of shares outstanding primary and fully diluted 4,354,349* 2,586,688 *This number should be used to calculate earnings per share because it includes 153,333 An-Con shares to be issued to the stockholders of the unconsolidated subsidiaries of An-Con, Xenetics Biomedical Inc. and Automated Diagnostics, Inc. in exchange for the shares they hold in the respective companies. The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Common number of Common Paid-in shares Stock Capital Deficit Balance January 1, 1994 987,695 $ 15,000$9,090,700$(10,209,900) Shares issued in exchange for convertible debt and accrued interest at $1.00 per share 236,066 3,500 355,400 Exercise of warrants received by convertible debt holders at $1.50 per warrant 202,001 3,000 288,100 Expired warrants 16,900 Shares issued in exchange for cash less commission of $150,000 to a foreign investor at $1.50 per share 666,667 10,000 840,000 Shares issued for the purchase of technology at $.65 per share 91,350 1,400 58,000 Warrants issued for services and consulting compensation plan valued at $.38 per warrant The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Paid-in Treasury Subscriptions Capital Stock Receivable Warrants Total Balance January 1, January 1, 1994 $ (6,000) $ -- $ 136,900$ (973,300) Shares issued in exchange for convertible debt and accrued interest at $1.00 per share 358,900 Exercise of warrants received by convertible debt holders at $1.50 per warrant (44,000) 247,100 Expired warrants (16,900) -0- Shares issued in exchange for cash less commission of $150,000 to a foreign investor at $1.50 per share 850,000 Shares issued for the purchase of technology at $.65 per share 59,400 Warrants issued for services and consulting compensation plan valued at $.38 per warrant 133,000 133,000 The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (continued) Common number of Common Paid-in shares Stock Capital Deficit Warrants exercised at $1.50 per share as per 1994 service and consulting compensation plan 120,500 1,800 149,300 Shares issued for officers bonus at $.30 per share in conjunction with the rescission of executive warrants 1,205,000 18,100 343,400 Shares issued for consulting and legal services at $.30 per share 516,061 7,700 147,200 Shares issued for legal services at $.90 per share 85,000 1,300 74,700 Net (loss) for 1994 (1,002,200) Balance December 31, 1994 4,110,340 $61,800 $11,363,700 $(11,212,100) The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED) Paid-in Treasury SubscriptionsCapital Stock Receivable Warrants Total Warrants exercised at $1.50 per share as per 1994 service and consulting compensation plan (44,300) (45,800) 61,000 Shares issued for officers bonus at $.30 per share in conjunction with the rescission of executive warrants (120,000) 241,500 Shares issued for consulting and legal services at $.30 per share 154,900 Shares issued for legal services at $.90 per share 76,000 Net (loss) for 1994 (1,002,200) Balance December 31, 1994 $( 6,000)$ (88,300) $ 87,200$ 206,300 The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Common number of Common Paid-in shares stock Capital Deficit Balance December 31, 1994 4,110,340 $61,800$11,363,700$(11,212,100) Shares issued for consulting and legal services at $.40 per share 27,500 400 10,600 Shares issued in exchange for outstanding bonds at $.40 per share 35,000 500 13,500 Shares issued as part of purchase of building at $1.30 per share 60,000 900 77,100 Shares issued for cash at $1.00 per share 80,000 1,200 78,800 Shares issued in escrow for the purchase of Aaron Medical Industries, Inc. 3,399,096 (memorandum only) Shares held in treasury given in exchange for legal fees at $.40 per share Warrants cancelled 74,400 The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (Continued) Paid-in Treasury Subscriptions capital Stock Receivable Warrants Total Balance December 31, 1994 $ (6,000) $(88,300) $87,200 $206,300 Shares issued for consulting and legal services at $.40 per share 11,000 Shares issued in exchange for outstanding bonds at $.40 per share 14,000 Shares issued as part of purchase of building at $1.30 per share 78,000 Shares issued for cash at $1.00 per share 80,000 Shares issued in escrow for the purchase of Aaron Medical Industries, Inc. 3,399,096 (memorandum only ) Shares held in treasury given in exchange for legal fees at $.40 per share 6,000 6,000 Warrants cancelled 12,800 (87,200) The accompanying notes are an integral part of the financial statements. (continued on next page) AN-CON GENETICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Common number of Common Paid-in shares stock Capital Deficit Cash received to reduce subscriptions receivable Shares canceled previously issued for services (7,500) (100) (2,900) Cash collection of warrants outstanding 900 Cost of underwriting for Aaron acquisition (75,000) Income for year 1995 ( 154,100 ) Balance December 31, 1995 4,305,340 $ 64,700$11,541,100 $(11,366,200) (Table continued below) Paid-in Treasury Subscriptions Capital Stock Receivable Warrants Total Cash received to reduce subscriptions receivable $64,900 $64,900 Shares canceled previously issued for services (3,000) Cash collection of warrants outstanding 900 Cost of underwriting for Aaron acquisition (75,000) Income for year 1995 (154,100) Balance December 31, 1995 $ 0 $ (10,600) $ 0 $ 229,000 AN-CON GENETICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 Cash flows from operating activities: Net income (loss) $ (154,100) $(1,002,200) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 171,000 120,300 Tax benefit 183,300 -- Shares issued for services 14,000 230,700 Warrants issued for services -- 57,800 (Gain) loss from settlement of debt ( 76,700) 26,900 Shares issued for officers bonus -- 241,500 Provision for tax benefit (183,300) -- Change in assets and liabilities: Increase in receivables ( 151,200) ( 900) (Increase) decrease in prepaid expenses 4,900( 10,100) Increase in inventories ( 91,800) ( 7,500) Increase (decrease) in accounts payable 335,900( 68,400) Increase (decrease) in accrued interest 45,600( 2,500) Decrease in customers deposits ( 85,100) -- Total adjustments ( 166,600) 587,800 Net cash provided by (used in) operations $ 12,500 $(414,400) The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (Continued) 1995 1994 Net cash provided by (used in) operating activities $ 12,500 $(414,400) Cash flows from investing activities: (Increase)decrease in fixed assets(236,300) 4,300 Increase in security deposits 1,800 ( 300) Acquisition costs ( 20,000) (75,000) Purchase of technology (126,600) -- Net cash applied to investing activities (381,100) ( 71,000) Cash flows from financing activities Receipt of common stock subscription 64,900 -- Loans and advances to affiliate -- (190,600) Common shares issued 80,900 850,000 Decrease in loans from officers ( 90,700) (165,900) Common shares issued for warrants -- 383,400 Reduction in notes payable and capital leases 3,600 -- Cost of underwriting ( 75,000) -- Net cash provided by (applied to) financing activities ( 16,300) 876,900 Net increase (decrease) in cash (384,900) 391,500 Cash at beginning of year 550,700 20,300 Cash at end of year $ 165,800 $ 411,800 The accompanying notes are an integral part of these financial statements. AN-CON GENETICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994 Cash paid during the twelve months ended December 31: 1995 1994 Interest $ 27,700 $ -0- Income Taxes -0- -0- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 1.The Company issued 35,000 restricted post-split shares to convertible note holders to redeem $70,000 in notes payable and $26,900 of related accrued interest. The shares were valued at $14,000, 50% of the market price of the Company's unrestricted shares at the time of issuance. The issuance cost of the redeemed bonds, in the amount of $6,100 was written off. 2.The Company issued 27,500 post-split shares for services valued at $11,000, 50% of the market price of the Company's unrestricted shares at the time of issuance. 3. On January 11, 1995, An-Con acquired all of the outstanding capital stock of Aaron Medical Industries, Inc. (Aaron), in exchange for issuing 3,399,096 shares of the Company to an escrow agent. The total acquisition price of Aaron shares was valued at $1,331,800. According to the agreement An-Con will register the shares that are placed in escrow. Aaron's former shareholders voted and approved An-Con's acquisition of their Company, and An-Con completed the acquisition, prior to filing and effectiveness of a registration statement, under the Securities Act of 1933. Consequently, the former shareholders of Aaron have been given the right to accept the registered shares of An-Con or elect to receive the value of their share in cash. The former shareholders of Aaron have the right to accept the registered shares of An-Con or elect to receive the value of their shares in cash. Since (a) the vote was previously taken by Aaron's shareholders and shares were already delivered by them, and (b) An-Con shares were already issued prior to filing and effectiveness of a registration statement under the Securities Act of 1933, and (c) since the Company has already been acquired since January, 1995, the shareholders of Aaron are to be provided with an effective registration statement by An-Con and are being requested to choose either to accept delivery of the An-Con shares pursuant to the acquisition agreement, as amended, or, in the alternative, to receive cash for their shares of Aaron. The amount of $1,331,800, value of the consideration due to the former Aaron shareholders, is recorded as a current liability of An-Con, as of March 31, 1995. AN-CON GENETICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (continued): FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995: The Acquisition of Aaron was accounted for using the purchase method. Accordingly, $2,012,800 was allocated to assets acquired based on their estimated fair values. This treatment resulted in $335,800 of cost in excess of net assets acquired. Such excess (which has increased for additional acquisition costs) is being amortized on a straight-line basis over five years. In connection with the acquisition, the Company assumed $681,600 net liabilities of Aaron. In 1995 the Company reduced goodwill for the tax benefit recognized by Aaron as a result of its net operating loss carryover of $183,300 as per Fasb 109 paragraph 30. 4. On June 26, 1995 the Company's subsidiary, Aaron Medical, purchased a building for $625,000 by issuing 60,000 An-Con shares valued at $78,000 and a purchase money mortgage of $500,000. A security deposit given to the seller of $12,200 was applied to the purchase and $34,800 was paid in cash. 5. On November 16, 1995 the Company purchased the business of Suncoast Design Service for $96,500. Suncoast is in the business of designing and maintaining assembly line equipment for manufacturing companies. The Company paid $15,000 in cash and issued notes of $81,500. The note is payable at $823.11 per week over a period of two years. 6. On December 15, 1995 the Company purchased the technology to manufacture a 30 watt electrosurgical coagulation device (ECU) for $185,000. $100,000 of cash at closing and $85,000 in notes payable over eighteen months at 10% with monthly payments of $5,105.85. 7. An-Con shares being held by the Company were issued for legal services valued at $6,000. 8. During the year subscriptions receivable for shares issued for legal services were canceled valued at $12,800. The Company determined they were uncollectible. FOR THE YEAR ENDED DECEMBER 31, 1994 1. The Company issued 236,066 shares and the equivalent number of warrants to convertible note holders in redemption of $332,000 in notes. The warrants were called by the Company and 202,001 warrants were exercised for $290,880. As at December 31, 1994, $44,000 of notes taken by the Company for the exercise of the warrants had not been paid. These notes bear annual interest rate of nine percent. AN-CON GENETICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (continued): FOR THE YEAR ENDED DECEMBER 31, 1994 2. The Company purchased a multifunctional cautery device for 91,350 shares of unregistered common stock valued at $59,400. 3. As a part of a services and consulting compensation plan, filed as a registration statement on form S-8, the Company issued 350,000 warrants to purchase 350,000 common shares of the Company at $1.50 per share. The value assigned to these rights was $133,000. As of December 31, 1994, 120,500 warrants were exercised for $136,300 in cash and $44,300 as subscriptions receivable. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Consolidation The consolidated financial statements include the accounts of An-Con and its wholly owned subsidiary Aaron Medical Industries, Inc.. Significant intercompany accounts and transactions have been eliminated. Fair values of financial instruments Fair values of cash and cash equivalents, securities with original maturities of less than 90 days, short-term investments and short-term debt approximate cost due to the short period of time to maturity. Inventories Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis (which approximates actual cost on a current average or first-in, first-out basis). Inventories at fiscal year-ends were as follows: 1995 1994 Raw materials $ 296,700 -- Work in process 239,900 -- Finished goods 69,600 17,900 Total $ 606,200 $17,900 Property, Plant and Equipment Property and other equipment are stated at cost. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 7-15 years; buildings, 30 years. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective as of the beginning of fiscal 1995. This adoption had no material effect on the Company's financial statements. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings per common and common equivalent share Earnings per common and common equivalent share are computed using the weighted average number of outstanding common and dilutive common equivalent shares outstanding. The Company's primary and fully diluted earnings per share are the same and they are computed by dividing the Company earnings by the weighted average number of common shares outstanding and common stock equivalents. The only dilutive common stock equivalent or other convertible securities were the common shares of Automated Diagnostics, Inc. and Xenetics Biomedical, Inc, An- Con's unconsolidated and discontinued subsidiaries, which were convertible to 153,333 common shares of the Company. The 3,399,096 shares, issuable in exchange for $1,331,800 liability to Aaron shareholders were not included in computing the fully diluted earnings per share, for the reason of being anti-dilutive. Cost of acquisition/Stock issue cost As per APB 16 the Company policy is to capitalize professional fees in connection with the acquisition of its wholly owned subsidiary and deduct from capital in excess of par value the costs associated with the underwriting to register the shares to be given to the shareholders of the subsidiary. Investments The equity method is used to account for investments in corporate joint ventures and other investments in common stock if the Company has the ability to exercise significant influence over operating and financial policies of the investee enterprise. That ability is presumed to exist for investments of 20% or more and is presumed not to exist for investments of less than 20%; both presumptions may be overcome by predominant evidence to the contrary. The Company initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the Company's share of income of the investee and is reduced to reflect the Company's share of losses of the investee or dividends received from the investee. The Company's share of the income or losses of the investee is included in the Company's net income as the investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses and amortization of the difference between cost and underlying equity in net assets, also are applicable to the equity method. Under the equity method, an investment in common stock is shown on the balance sheet of the Company as a single amount. Likewise, an investor's share of earnings or losses from its investment is ordinarily shown in its income statement as a single amount. AN-CON GENETICS, INC CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Investments (continued) The cost method is used when ownership of securities in an affiliated company represents less than 20% of the total outstanding shares of that Company. Under this method the Company records an investment in the stock of an investee at cost, and recognizes as income dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition by the Company. The net accumulated earnings of an investee subsequent to the date of investment are recognized by the Company only to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment. A loss in value of an investment that is other than a temporary decline shall be recognized the same as a loss in value of other long-term assets. Evidence of a loss in value might include, but would not necessarily be limited to, absence of the ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. A current fair market value of an investment that is less than its carrying amount may indicate a loss in the value of the investment. Research and Development Costs Research and development costs are charged to expense when incurred. Disclosure in the financial statements is made for the total research and development costs charged to expense in each period for which an income statement is presented. Only the development costs that are purchased from another enterprise and have alternative future use are capitalized and are amortized over five years. Research and Development arrangements Company accounts for its obligations under an arrangement for the funding or research and development by others by determining whether the Company is contractually obligated to pay for research not yet performed. If so determined, to the extent that the Company is obligated to pay, the Company records a liability and charges research and development costs to expense. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 1. 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. Accumulated amortization totaled $144,100 at December 30, 1995, after taking into account the impairment discussed below. At each balance sheet date, the Company assesses whether there has been an impairment in the value of such intangibles by determining whether projected undiscounted future cash flow from operations for each Company, as defined in Statement of Financial Accounting Standards No. 121, " Accounting for the impairment of Long -Lived Assets to be Disposed of," exceeds its net book value as of the assessment date. At December 30, 1995, $250,000 of intangible assets were written down to their fair value due to an impairment recognized in the first quarter of 1995 (see note 7). Income Recognition Income is recognized on the accrual basis, i.e., revenues are recognized and reported in the income statement when the amount and timing of revenues are reasonably determinable and the earning process is complete or virtually complete. Accounting for Income Taxes In February 1992, the FASB issued Statement No. 109, Accounting for Income Taxes. FASB 109 requires an asset and liability approach for financial accounting and reporting for income taxes. It requires recognition of (1) current tax liabilities or assets for the estimated taxes payable or refundable on tax returns for the current year, and (2) deferred tax liabilities or assets for the estimated future tax effects attributable to temporary differences and carryforwards. The Company has adopted the policy of preparing its financial statements in accordance with FASB 109. Nonmonetary Transactions The accounting for non-monetary assets is based on the fair values of the assets involved. Cost of a non-monetary asset acquired in exchange for another non-monetary asset is recorded at the fair value of the asset surrendered to obtain it. The difference in the costs of the assets exchanged is recognized as a gain or loss. The fair value of the asset received is used to measure the cost if it is more clearly evident than the fair value of asset surrendered. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Stock-Based Compensation The Company has adopted Accounting Principles Board Opinion 25 for its accounting for stock based compensation. Under this policy: 1. . . Compensation costs are recognized as an expense over the period of employment attributable to the employee stock options. 2. Stocks issued in accordance with a plan for past or future services of an employee is allocated between the expired costs and future costs. Future costs are charged to the periods in which the services are performed. The proforma amounts of the difference between compensation cost included in net income and related cost measured by the fair value based method, including tax effects are disclosed. NOTE 2. DESCRIPTION OF BUSINESS An-Con Genetics, Inc. ("the Company") was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 1 Huntington Quadrangle, Melville, New York 11747. Currently, the Company is actively engaged in the business of acquiring ownership interests in medical products and related technologies. Also, An-Con has devoted its resources to marketing a product called OmniFix II, an alcohol based tissue fixative which is sold to hospital and clinical laboratories. On January 11, 1995 the Company acquired a 100% ownership interest in Aaron Medical Industries, Inc. a St. Petersburg, Florida based Company engaged in the manufacturing and distributing of medical products. 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. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. DESCRIPTION OF BUSINESS (continued) Aaron Medical Industries, Inc. manufactures and sells its products under the Aaron label to over eight hundred fifty distributors worldwide and has private label arrangements with several large hospital supply Companies. Additionally, private label arrangements have been made with large buying groups. These private label arrangements, combined with the Aaron label allows the Company to gain a greater market share for the distribution of its products. Purchase - Aaron Medical Industries, Inc. On January 11, 1995, the Company acquired Aaron Medical Industries, Inc. which was accounted for by the purchase method. Total assets acquired were valued at $2,012,800 and liabilities assumed were valued at $681,000. In order to properly transfer the shares agreed upon to the Aaron shareholders the arrangement called for the shares to be registered so they could be freely traded. The assets were valued at $335,800 more than their cost basis which created goodwill. Purchase - Aaron Medical Industries, Inc. The goodwill is being written off over 5 years using the straight-line method. Because the registration statement was not timely filed the Aaron shareholders have been given the choice of accepting cash at 22 cents per share for their Aaron shares, $1,331,800, or taking the An-Con shares in exchange. The Aaron shareholders have 30 days from the effective day of the registration statement to accept the cash offer or they will receive the An-Con shares. The $.22 cents per share valuation for the Aaron shares exchanged was determined by (a) a separate fair valuation of current assets, which included (i) discounted value of receivables (ii) market value of inventory at estimated selling price, less cost of disposal and reasonable profit allowance, (iii) pre-paid expenses and security deposits at present value; (b) non-current assets of plant, property and equipment at current replacement cost; (c) intangible assets at present value of future benefits; (d) present value of liabilities, accounts and note payable and long term debt. The amount of goodwill was determined by comparing the financial position of Aaron at December 31, 1994 with the financial position of similar companies in the same industry. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. DESCRIPTION OF BUSINESS (continued) Purchase - Suncoast Design On November 16, 1995 the Company purchased the business of Suncoast Design Service for $96,500. Suncoast is in the business of designing and maintaining assembly line equipment for manufacturing companies (machine shop). Suncoast has moved its equipment onto the premises of the Company and continues to bill its previous customers in the Company's name. Purchase - ECU Technology On December 15, 1995 the Company purchased the technology to manufacturer, a 30 watt electrosurgical coagulation device (ECU) for $185,000; $100,000 at closing and $85,000 in notes payable over eighteen months at 10% with monthly payments of $5,105.85. The device is to be made by a third party manufacturer that the Company has a one year contract with to produce the unit for a fixed price. As part of the agreement the Company hired the individual that brought the technology to the Company as a salesman. This individual lent the Company $30,000 to be paid back at 10% interest over 2 years. NOTE 3. PROPERTY AND EQUIPMENT As of December 31, 1995, property and equipment consisted of the following: Equipment $ 1,173,100 Property held under capital leases 55,000 Building 637,500 Furniture and Fixtures 111,200 Leasehold Improvements 24,400 2,001,200 Less: Accumulated Depreciation( 768,800) 1,232,400 Machinery under construction 37,100 $ 1,269,500 NOTE 4. LEASE AGREEMENTS On February 28, 1995 an agreement was entered into with the landlord of one Huntington Quadrangle, Melville, New York for a new lease on the same premises beginning February 1, 1995 and extending to January 31, 1997. The annual rental is $24,000 payable $24,000 upon signing the lease, and $1,000 per month for 24 months. The landlord and the Company have signed general releases absolving each of any past due debts or damages. The Company has written off prior rents charged to operations in the amount of $54,200. Annual rental expense was $24,000, for the year ended December 31, 1995 and 1994 for the parent Company, An-Con. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 4. LEASE AGREEMENTS (continued) The following is a schedule of future minimum rental payments as of December 31, 1995: Amount 1996 $ 24,000 1997 2,000 $ 26,000 Aaron had rent expense of $23,400 for the period January 1, 1995 to June 26, 1995 when Aaron purchased the building. Total consolidated rent expense for the Company was $47,400 in 1995 and $24,000 in 1994, unconsolidated. Capital leases The Company is the lessee of transportation and telephone equipment under capital leases expiring in various years through May, 1997. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for 1995 and 1994. This amortization amounted to $10,000 and $0 for 1995 and 1994 respectively. The following is a summary of property held under capital leases: 1995 1994 Transportation $ 38,800 $ 38,800 Telephone equipment 16,200 16,200 55,000 55,000 Less: Accumulated depreciation (25,500) (10,000) $ 29,500 $ 45,000 Minimum future lease payments under capital leases as of December 31, 1995 for each of the next four years and in the aggregate are: Amount 1996 $ 34,400 1997 3,200 1998 -- 1999 -- Total minimum lease payments 37,600 Less: Amount representing interest6,000 Present value of net minimum lease payments $ 31,600 AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 4. LEASE AGREEMENTS (continued) The interest rates on the capitalized leases range between 9.73% and 15.10% and are imputed based on the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return. The capital leases provide for purchase options. Generally, purchase options are at prices representing the expected fair value of the property at the expiration of the lease term. NOTE 5. ACCRUED BONUS For the year 1995 accrued bonuses earned by the officers and employees of the Company amounted to $72,000. The bonus arrangement based on employment contracts calls for 10% of the profits of Aaron over $200,000 to 1% of the profits of Aaron over $300,000 to be paid to certain employees. NOTE 6. NOTES PAYABLE-OFFICERS The Chief Executive Officer (CEO) and the President made cash loans to the Company during the period October 12, 1990 to December 31, 1993 of $159,000 and $21,500, respectively. In addition to these loans, the CEO advanced his own cash of $76,100 in the form of loans for product development, travel and other expenses. Interest on these loans were at 9% to 12% and has been accrued from inception. This interest is shown as part of accrued interest payable. During 1995 Mr. Speiser received $99,400 in payment of principal and interest on his loan. His loan balance at December 31, 1995 was $ -0- and accrued interest was $73,800. NOTE 7. INTANGIBLE ASSETS At December 31, 1995, the intangible assets consisted of the following: Balance Balance Beginning Additions, at end ofAccumulated of Period at cost Write-Offs Period Amortization Classification: Patents, trademarks, and copyrights Patent rights $ 250,000 $ (250,000) $ -0-$-0- (Bar code reader) Patent rights 59,400 59,400 8,900 (Multifunction Cautery) Patent rights 59,900 $ 11,600 -0- 71,500 44,400 (cauteries) Patent rights (ECU) -0- 185,000 -0- 185,000 3,100 $ 369,300 $ 196,600 $(250,000) $ 315,900 $ 56,400 AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 7. INTANGIBLE ASSETS (continued) The cost of patents, trademarks, and copyrights acquired are being amortized on the straight-line method over their remaining lives, ranging from 2 to 5 years. Amortization expense charged to operations in 1994 and 1995 was $3,000 and $14,300 respectively. Balance Balance Beginning Additions, at end ofAccumulated of Period at cost Write-Offs Period Amortization Goodwill Goodwill $ -0- $ 335,800 $ -0- $ 335,800$ 86,200 (Purchase Aaron) Elimination of valuation for tax asset (183,300) (183,300) Goodwill -0- 15,500 -0- 15,500 300 (Purchase Suncoast Covenant not to compete) (Purchase Suncoast) -0- 20,000 -0- 20,000 1,200 $ -0- $ 188,000 $ -0- $188,000 $ 87,700 Aaron, the Company's subsidiary had recognized a tax asset for carryover losses of $366,600 on January 11, 1995 (the date of purchase) and a corresponding valuation allowance of $366,600. As per Financial Accounting Standards Board (FASB) Statement of Standards Number 109 paragraph 30. If a valuation allowance is recognized for the deferred tax asset for an acquired entity's deductible temporary differences or operating loss or tax credit carryforwards at the acquisition date, the tax benefits for those items that are first recognized (that is, by elimination of that valuation allowance) in financial statements after the acquisition date shall be applied (a) first to reduce to zero any goodwill related to the acquisition, (b) second to reduce to zero other noncurrent intangible assets related to the acquisition, and (c) third to reduce income tax expense. Goodwill represents the excess of the cost of Companies acquired over the fair value of their net assets at dates of acquisition and is being amortized on the straight-line method over 5 years. Amortization expense charges to operations for 1994 and 1995 and 1995 was $-0- and $87,700, respectively. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 8. LONG-TERM DEBT The long term debt of the Company includes the convertible debentures and notes payable of the Company. As of April 21, 1987, the Company had sold 1,711 convertible debentures units. Each unit consisted of $1,000 subordinated debentures and 50 common stock warrants. As of December 31, 1995, 1,633 units of debentures had been converted into common shares of An-Con Genetics, Inc. The number of outstanding debentures was 78 units. On October 7, 1994, the Company made an offer to debenture holders to convert each debenture and accrued interest into 500 restricted shares of common stock. The offer was valid for 45 days. The Company extended the offer and in 1995 seventy bonds were redeemed for shares. As of December 31, 1995 the Company had not paid the interest due on the convertible debentures for the semiannual periods ending in November, 1989 to November , 1995. The amount of unpaid interest was $36,200. Events of Default are defined in the indenture as being:(a) default for 30 days in payment of any interest installment when due, and default in payment of principal (or premium, if any) when due; (b) default for 60 days after written notice to the Company by holders of 25% in principal amount of the outstanding debentures in the performance of any other covenant of the Company in the indenture; and (c)certain events of bankruptcy, insolvency and reorganization of the Company. If an Event of Default shall occur and be continuing, the holders of not less than 25% in principal amount of the outstanding debentures may declare the principal of all debentures to be due and payable. Under the terms of the indenture, no periodic evidence is required to be furnished as to the absence of default or compliance with the indenture. The holders of a majority in principal amount of the outstanding debentures may direct the time, method and place of conducting any proceeding for any remedy available to the holders. The right of a holder of any debenture to institute a proceeding with respect to the indenture is subject to certain conditions precedent, including the provision of notice of indemnification to the debenture holders made by the Registrar. The holders of a majority in principal amount of the outstanding debentures may on behalf of the holders of all debentures waive any past default and its consequences under the indenture, except a default in the payment of the principal of, or interest on, any debenture or a default in respect of the conversion right of the debenture holders. As of December 31, 1995, the bondholders had made no declaration that the principal was due and payable. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 8. LONG-TERM DEBT (continued) 8% - Bonds payable due in 1997 interest payable semi-annually in May and November in default. 77,900 10% - Mortgage payable to former landlord for purchase of property at 7100 30th Avenue North, St. Petersburg, Florida on June 26, 1995 for $500,000 payable in monthly installments of $5,673.06 inclusive interest until July 1, 1998 when a balloon payment of $ 442,733 is due. 493,900 10% - Note payable for the purchase of the ECU technology at $5,104.85 per month self- liquidating for 18 months beginning January 15, 1996 and extending until June 15, 1997. 85,000 10% - Note payable in connection with the purchase of the ECU Technology at $1,384.35 per month for 24 months self-liquidating beginning January 15, 1996 and extending until December 15, 1997. 30,000 6.5% - Note payable over 2 years in connection with the purchase of Suncoast Machine Shop on November 16, 1995 payable at $630.80 per week self-liquidating with the last payment due November 5, 1997. The original amount of the note was $61,500.00. 58,200 0% - Loan payable over 2 years in connection with the purchase of Suncoast Machine Shop on November 16, 1995 payable at $192.31 per week self-liquidating with the last payment due November 5, 1997. The original amount of the note was $20,000.00. 18,800 9% - Note payable to insurance premium finance Company at $5,661.00 per month for 2 months. 11,300 775,100 Less: Current portion (132,000) Long Term Debt $ 643,100 The following are maturities of long term debt for each of the next 5 years: 1996 $ 132,000 1997 186,900 1998 456,200 1999 -- 2000 -- $ 775,100 AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 9. DISCONTINUED OPERATIONS The Company's unconsolidated subsidiaries, Automated Diagnostics and Xenetics Biomedical, discontinued operations in 1987 and 1989, respectively. In view of the above and the Company's lack of finances, the previously agreed upon mergers have not taken place. However, the Company has continued the development of Omnifix. In consideration of the Company's failure to consummate its agreement to merge, An-Con intends to deliver 153,333 shares of its common stock to Automated and Xenetic shareholders on an adjusted basis. NOTE 10. WARRANTS As of December 31, 1995, the Company had no outstanding warrants. (a) Consulting Compensation Plan On June 24, 1994, the Company filed a services and consulting compensation plan on Form S-8 with the SEC. Pursuant to the plan the Company issued 350,000 warrants with the right to purchase shares at $1.50 for consulting and legal costs of the filing. As part of the plan the Company registered 85,000 shares for the payment of legal services. To date 120,500 warrants have been exercised. Because the exercise of certain warrants was not paid for promptly, the Company rescinded the arrangement in October, 1994. As of January 25, 1995, all remaining warrants have been canceled. NOTE 11. NET OPERATING LOSS CARRYFORWARDS The Company's accounting policies require the recognition of a deferred tax asset for the operating loss carryforward as follows: Year loss Loss Expiration Estimated incurred Amount Date Tax Asset 1983 $ 376,000 1998 $ 132,000 1984880,000 1999 308,000 1985764,000 2000 267,000 1986301,000 2001 105,000 1987730,000 2002 255,000 1988757,000 2003 265,000 1989374,000 2004 131,000 1990382,000 2005 134,000 1991246,000 2006 86,000 1992 1,004,000 2007 352,000 1993465,000 2008 163,000 1994 1,197,000 2009 419,000 1995 637,200 (a) 2010 223,000 Total $8,113,200 2,840,000 Deferred tax valuation allowance (2,840,000) $ -0- AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 11. NET OPERATING LOSS CARRYFORWARDS (continued) (a) An-Con's unconsolidated loss for the year ended December 31, 1995. $8,113,200 of losses are available to offset future taxable income and may have future benefits. Because of the history of losses from operations, the management believes it is more likely that the estimated tax asset of $2,840,000 (resulting from the loss carry forward) will not be realized. Thus, a valuation allowance of $2,840,000 (100%) is set up to reduce the tax asset. However, if the Company achieves sufficient profitably to utilize a portion of the deferred tax asset, the valuation allowance will be reduced through a credit to income. Where an ownership change has occurred, Section 382 operates to limit the annual use of a corporation's NOL but does not eliminate the carryforward. In each post-ownership change year, the corporation can use its NOL carry forwards, up to the amount of the "Section 382 Limitation," to offset annual income. Pursuant to Section 382(b), the "Section 382 Limitation" equals the value of the corporation (immediately before the ownership change, Sec. 382(e), multiplied by the long term tax exempt rate (the highest Long Term AFR in effect for any month in the three calendar month period ending with the month of the change, Sec. 382(f)). If the corporation does not have income for the year at least equal to Section 382 limitation, the unused portion of the limitation is carried forward to the following year. Pursuant to the Internal Revenue Code, IRC. Sec. 368(a), the acquisition of Aaron by An-Con is a considered Type B reorganization. The transaction should not limit the net operating loss carryforward of Aaron. At December 31, 1995, Aaron had the following net operating loss carryforwards available: Year of Expiration Loss Date Amount 1988 2004 $ 131,434 1989 2005 371,386 1990 2006 16,198 Total $ 519,018 The amount of loss carryforward utilized to offset the taxable income of Aaron in 1995 was $483,400, which resulted in a tax saving of $183,300. Based on the profitable operations of the five years ended December 31, 1995 and management's assessment of Aaron's future prospects, it is more likely than not that net deferred taxable assets will be realized through the future taxable earnings. Based on an estimated tax rate of 35.5%, the tax benefit of the unutilized net operating loss carryforward of Aaron is estimated to be $183,300. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 12. RETIREMENT PLANS The Company provides a tax-qualified profit-sharing retirement plan under sec. 401k of the IRC. (the "Qualified Plans") for the benefit of eligible employees with an accumulation of funds for retirement on a tax-deferred basis and provides for annual discretionary contributions to individual trust funds. The Company has made no contributions during 1994 and 1995 to the plan. NOTE 13. RELATED PARTY TRANSACTIONS During 1995, A company that is controlled by a recently elected board member sold to the Company materials that went into the production of certain of the Company's products. The value of these materials sold to the Company for 1995 was $158,600. NOTE 14. PURCHASE OF BUILDING On June 26, 1995 the Company, exercised its option to purchase the building it occupied for $625,000. The purchase was financed as follows: Cash $ 47,000 Purchase money mortgage 500,000 An-Con shares (60,000 x $1.30 per share) 78,000 Total purchase price $ 625,000 (a) Payment of principal and interest at 10% payable monthly at $5,373.06 until July 1, 1998 when a balloon payment of $439,074.27 is due. (b) The An-Con shares are restricted for 2 years and are being held pursuant to an escrow agreement. The agreement further restricts the release of the shares until the seller takes such action as is necessary to further investigate, define and remediate such contamination that exists on the property and is referred to in environmental reports pursuant to a Remedial Action Plan approved by the State of Florida's appropriate agencies. Two years from the date of Closing, if Seller and Guarantors have not defaulted under or been in breach of any of their obligations to Buyer, Buyer shall obtain and deliver to Escrow Agent additional shares of Stock if the Closing Market Price of the Stock on the thirtieth day prior to such date shall be less than $78,000.00. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 15. COMMITMENTS AND CONTINGENCIES Environmental conditions -Purchase of Building As part of the purchase of 7100 30th Avenue North, St. Petersburg, Florida (manufacturing facility) the seller acknowledged it had previously conducted assessments to document environmental conditions existing on the property, the results of which are set forth in a June 23, 1994 Contamination Assessment Report (Project No. 94170501) and a January 27, 1995 Contamination Assessment Addendum (Project No. 950111302) (the "Environmental Reports"). As a result of the Environmental Reports, a recommendation was made that a Remedial Action Plan be developed for the property which would include removal of contaminated soil in two locations on the property. Evironmental conditions -Purchase of Building The Seller guaranteed (the "Environmental Guaranty") at its sole cost and expense to undertake through a qualified environmental engineering firm such action as is necessary to further investigate, define and remediate such contamination that exists on the property and is referred to in the Environmental Reports pursuant to a Remedial Action Plan approved by the State of Florida Department of Environmental Protection (DEP) and any other appropriate agencies (the "Environmental Work"). The environmental work shall begin promptly upon State of Florida approval of the intended environmental work, which approval and remediation will be diligently pursued and accomplished. Satisfaction of the Environmental Guaranty shall be evidenced by delivery to Buyer of a Site Completion Rehabilitation Order (SCRO) or its equivalent document from DEP approving completion of the Environmental Work. Environmental conditions -Purchase of Building (continued) In January 1996, the State of Florida approved a Remediation Plan and work should begin in the 2nd Quarter of 1996. No assessment can be made at this time if there will be any cost to the Company if the Seller does not complete the work required in the plan approved by the State of Florida. Leases The Company leases a portion of its capital equipment and certain of its administrative facilities under operating leases that expire at various dates through 1997. Rental expense was $47,400 in 1995 and $24,000 in 1994. Minimum rental commitments under all non- cancelable leases with an initial term in excess of one year are payable as follows: 1996 - $58,000; 1997 - $5,200; 1998 - $ 0; 1999 - $0; 2001 and beyond $-0-. Commitments for construction or purchase of property, plant, and equipment approximated $200,000 at December 31, 1995. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 15. COMMITMENTS AND CONTINGENCIES (continued) Third Party Liability In 1988, An-Con was the principal shareholder of Xenetics, Inc. At that time, Xenetics had outstanding payroll tax liabilities of approximately $15,000, a liability which may be considered an obligation of the Company. Employment Agreements On September 8, 1995 the Company either executed new employment agreements with key employees or revised old employment agreements with its executives. These six agreements are for terms from 2-5 years and call for salaries of $35,000 to $118,335. Bonus arrangements call for 10% of the profits over $200,000 for the Chairman to 1% of the profits over $300,000 for the international sales representative for profits of Aaron only. Employee Benefit Plans Subsequent to December 31, 1995, the Company established a stock option plan on February 15, 1996 (hereafter referred to as the EOP plan) under which officers, key employees and non-employee directors may be granted options to purchase shares of the Company's authorized but unissued Common Stock. Under the plan, the option purchase price is not less than fair market value at the date of grant. The Company accounts for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, Accounting for Stock-Based Compensation," the Company intends to continue to apply APB No. 25 for purposes of determining net income and to adopt the proforma disclosure requirements for fiscal 1996. Employee Benefit Plan Options currently expire no later than five years from the grant date. When proceeds are received by the Company from exercises, they are credited to Common Stock and Capital in excess of par value. Additional information with respect to EOP Plan Activity was as follows: Shares Outstanding Options available Number Aggregate for options of shares Price December 31, 1995 $ -0- $ -0- $ -0- February 15, 1996 337,000 337,000 379,000 Grants 337,000 337,000 379,000 Exercise -0- -0- -0- Cancellations -0- -0- -0- The exercise price for options outstanding under the EOP Plan at February 15, 1995 was $1.125. These options will expire if not exercised on February 15, 2001. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 15. COMMITTMENTS AND CONTINGENCIES (continued) Legal Proceeding Scura A lawsuit was brought against the Company by a former consultant in the Supreme Court of the State of New York, Suffolk County, in December 1991 alleging breach of a financial consulting agreement and seeking damages of $3,000,000. In 1993, a settlement had been reached between the parties whereby the Company had agreed to, issue 100,000 (pre-split) shares to the plaintiff in full settlement of any and all claims. Such right being subject to the consent of the underwriter. Mr. Scura subsequently refused to execute the stipulation of settlement. Company counsel is of the opinion that Mr. Scura's claim has no merit and does not present a material contingent liability. Speiser On December 29, 1992, Robert Speiser, the then Chief Executive Officer of An-Con, obtained a confession of judgement in the Supreme Court, State of New York, counties of Suffolk and Westchester for amounts due on loans to the Company of $92,239 and $190,957 inclusive of interest at 12% to May 27, 1992 and 9% thereafter. These loans represent amounts claimed by Mr.Speiser to have been expended on behalf of the Company and funds loaned to the Company. As reported to the Board of Directors, Mr. Speiser's actions were motivated solely to deter threatened action by the landlord to file a judgement at that time of $41,700 in rental arrears. Mr. Speiser has indicated that he does not intend to enforce this judgement. On March 29, 1993 and in subsequent letters of instruction to the Sheriff of Suffolk County, Mr. Speiser requested that the execution of the above-mentioned judgements be held in abeyance for a 60 day period, until August 30, 1993. On February 28, 1994, the executive order expired. As of December 13, 1995, the Company had repaid $235,100 of the principal amount upon which the aforesaid judgements were based. MegaDyne On March 14, 1996 MegaDyne Medical Products, Inc. a Utah Corporation filed a complaint for injunctive relief and damages for patent infringement (35 USC.S. 271) in the U.S. District Court, District of Utah, Central Division. MegaDyne asserts that Aaron has used its process for creating an Electro-surgical knife coated with a non-stick material. MegaDyne states in its suit it is entitled to an accounting from Aaron and to recover the damages sustained by MegaDyne as a result of infringing products. Such damages include, but are not limited to, lost sales and profits due to sales of the infringing products and a reasonable royalty for use of the patented invention. MegaDyne is presently unable to ascertain the full extent of monetary damages it has suffered by reason of Aaron's aforesaid acts of infringement. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTES 15. COMMITMENTS AND CONTINGENCIES (continued) Megadyne As of March 31, 1996 the Company sold approximately $90,000 of the Aaron Products called Resistick. Aaron counsel has stated "that scientific testing has proven that the Aaron Medical electro-surgical blade is resistive in nature. Thus, there is no capacitive coupling of radio frequency energy as recited in independent claims 1 and 5 of U.S. 4,785,807. Accordingly, there appears to be no literal infringement of the patent in suit. However, without benefit of the prosecution history, an authoritative opinion as to infringement under the doctrine of equivalents is not possible. Initial investigation suggests that the Aaron Medical electro-surgical blade does not include a second coat of non- stick fluorinated hydrocarbon material as recited independent claims 1 and 5." As claimed by MegaDyne. NOTE 16. SUBSEQUENT EVENTS OmniFix Formula The Company entered into an agreement with certain parties ("developers") who had developed and were sole owners of a histological, mercury and formaldehyde-free fixative ("fixative"), on February 20, 1988. The Company received the sole and exclusive right to manufacture, market and distribute the fixative throughout the world. The agreement shall remain in full force and effect for a period of five years and shall be renewed automatically for periods of three years, unless otherwise terminated on consent of the parties, or if less than 4,000 gallons of OmniFix are sold in any given year and the licensor is not otherwise compensated for the amount of royalty payable resulting from the deficiency. The Company sold 4,028 gallons in 1995. New Company Products The Company intends to substantially replace OmniFix II with OmniFix 2000, which, in addition to preserving thin tissue specimens, also provides preservation of thicker/larger tissues. The Company is presently initiating test marketing of this new product and plans to file a new patent application with the U.S. Patent office. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 16. SUBSEQUENT EVENTS (continued) Bank Line of Credit On March 16, 1996, the Company entered into a three month agreement with a commercial bank for a line of credit of $100,000. Interest is to be paid at 2.5% over the banks prime rate. Stock Option Plan On February 15, 1996, the Company established an employee stock option plan (EOP) by issuing 337,000 warrants to purchase the Company's shares or $1.125 per share expiring February 15, 2001. NOTE 17. INDUSTRY SEGMENT REPORTING The Company operates predominantly in one industry segment. The Company designs, develops, manufactures and markets battery operated medical cauteries and related products at various levels of integration. The Company sells its products directly to distributors worldwide and also has private label arrangements with hospital and healthcare companies. The Company's principal markets are in the United States, Europe, and South America, with the U.S. and Europe being the largest based on revenues. The Company's major products include cauteries, Benda-A-lights, nerve locators, and reusable pen lights and electrodes. Cauteries disposable and replaceable account for 50% of the Company's sales. Geographic and segment information for the year ended December 31, 1995 is presented in the following table. Operating Income Identifiable Sales Loss(1)(3) Assets(2) 1995 - (in thousands) Geographic Area United States $ 4,226 $ 22 $ 3,601 Europe 1,245 6 -0- Latin America 50 1 -0- Other -0- -0- -0- $ 5,521 $ 29 $ 3,601 Segment Medical Products $ 4,325 $ 189 $ 2,831 Non medical products 1,196 (160) 770 $ 5,521 $ 29 $ 3,601 AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 17. INDUSTRY SEGMENT REPORTING (continued) (1) Allocable operating income was determined by sales percentage by geographic area. (2) The Company had no assets or liabilities outside the United States, in the two years ended December 31, 1995. All assets were identified as United States source. (3) Allocable operating expenses were determined by a percentage of total sales by segment. One significant customer accounted for 17% of revenues in 1995. (4) Allocation of assets was done by sales percentage. 1994 - For 1994 the Company had sales of one product of $85,000, all in the United States. However, Aaron the Company's subsidiary which was acquired in January 1995 had domestic and international sales of $3.3 million and $800,000 respectively. Income for Aaron by segment was based on sales and is $264,000 and $54,000 for medical and non-medical respectively. Income for Aaron by geographic area was $258,000 and $60,000 for domestic and international sales respectively. All assets were located in the United States. During 1995, a substantial portion of the Company's consolidated net sales and consolidated income from operations was derived from foreign operations. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and exchange controls, limitations on foreign participation in local enterprises, possible nationalization or expropriation, potential default on the payment of government obligations with attendant impact on private enterprise, political instability and health care regulation and other restrictive governmental actions. Changes in the relative value of currencies take place from time to time and could adversely affected the Company's results of operations and financial condition. The future effects of these fluctuations on the operations of the Company's and its subsidiaries are not predictable. AN-CON GENETICS, INC. CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET JUNE 30, 1996 ASSETS Current assets: Cash $ 75,400 Trade accounts receivable 581,700 Inventories 727,400 Prepaid expenses 28,400 Deferred tax asset 99,100 Total current assets 1,512,000 Property and equipment, net 1,429,800 Other assets: Goodwill, net 60,400 Deferred charges, net 195,000 Patent rights, net 297,600 Unamortized debt issue costs, net 3,100 Deposits 7,700 563,800 $ 3,505,600 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED BALANCE SHEET JUNE 30,1996 (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 738,500 Accrued interest 189,100 Notes payable - current portion 183,700 Due to Aaron shareholders 1,331,800 Obligations under capital leases - current portion 31,300 Total current liabilities 2,474,400 Long-term debt, net 514,600 Obligations under capital leases,net 600 Stockholders' equity: Common stock par value $.015; 15,000,000 shares authorized, issued and outstanding 4,425,340 shares on June 30, 1996 66,500 Additional paid in capital 11,659,300 Accumulated deficit (11,209,800) Total stockholders' equity 516,000 $ 3,505,600 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 1996 1995 Sales $ 3,214,200$2,592,300 Costs and expenses: Cost of sales 1,599,600 1,501,300 Research and development 26,300 -- Professional services 125,600 219,400 Salaries and related costs 493,100 291,100 Selling, general and administration 664,500 696,700 2,909,100 2,708,500 Gain(Loss)from operations 305,100( 116,200) Other income (expense): Interest, net ( 64,500) ( 3,900) Miscellaneous -- 2,500 ( 64,500) ( 1,400) Gain (Loss) before extraordinary item 240,600 ( 117,600) Extraordinary item: Gain from settlement of debt, net of taxes -- 76,800 Income 240,600( 40,800) Provision for income tax ( 84,200) -- Realized benefit of loss carryforward -- -- Net income (loss) $ 156,400$ ( 40,800) Per share, Primary and fully diluted: Gain(Loss) before extraordinary item $ .02$(.02) Extraordinary item -- .01 Net income (loss) $ .02 $(.01) Weighted average number of shares outstanding - Fully Diluted 6,898,040 6,643,040 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 1996 1995 Cash Flows from operating activities Net income (loss) $ 156,400$( 40,800 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 116,400 45,900 Common stock issued for professional fees 5,700 7,900 Gain from forgiveness of debt -- (76,800) Employee stock option granted 16,900 -- Changes in current assets and liabilities: Increase (decrease)in receivables 70,600 (267,200) (Increase) decrease in inventories (121,200) ( 97,100) (Increase) decrease in prepaid expenses 45,500 ( 2,300) (Decrease) in accounts payable (171,400) 100,400 Increase in accrued interest 31,200 ( 600) Decrease in deferred tax 84,200 -- Total adjustments 77,900 (289,800) Net cash provided by (used in) operating activities 234,300 (330,600) Cash flows from investing activities (Increase)in deferred cost (100,000) -- (Increase)in fixed assets (204,800)( 108,300) (Increase)in patents ( 69,500) -- Net cash used in investing activities (374,300)( 108,300) Cash flows from financing activities Decrease in obligations under capital lease ( 4,200)( 3,700) Decrease in notes payable - officers --( 90,800) (Increase)decrease in long term debt ( 76,800)( 7,300) Common shares issued for cash 120,000 1,000 Decrease in subscriptions receivable 10,600 49,000 Net cash provided by (used in) financing activities 49,600( 51,800) Net increase (decrease) in cash and cash equivalents ( 90,400) (490,700) Cash and cash equivalents, beginning of period 165,800 550,700 Cash and cash equivalents, end of period $ 75,400$ 60,000 The accompanying notes are an integral part of the financial statements. AN-CON GENETICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Cash paid during six months ended June 30: 1996 1995 Interest $ 18,900 $9,300 Income Taxes -0- -0- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE SIX MONTHS ENDED JUNE 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 period ended the Company wrote off warrants previously issued for $5,700. FOR THE SIX MONTHS ENDED JUNE 30, 1995 The Company issued 35,000 restricted post-split shares to convertible noteholders to redeem $70,000 in notes payable and $26,900 of related accrued interest. The shares were valued at $14,000, 50% of the market price of the Company s unrestricted shares at the time of issuance. The issuance cost of the redeemed bonds, in the amount of $6,100 was written off. The Company issued 27,500 post split shares for services valued at $11,000, 50% of the market price of the Company s unrestricted shares at the time of issuance. On January 11, 1995, An-Con acquired all of the outstanding capital stock of Aaron Medical Industries, Inc.(Aaron), in exchange for issuing 3,399,096 shares of the Company to an escrow agent. The total acquisition price of Aaron shares was valued at $1,331,800. According to the agreement An-Con will register the shares that are placed in escrow. The former shareholders of Aaron have the right to accept the registered shares of An-Con or elect to receive the value of their shares in cash. Since (a) the vote was previously taken by Aaron s shareholders and shares were already delivered by them, and (b) An-Con shares were already issued prior to filing and effectiveness of a registration statement under the Securities Act of 1933, and (c) since the Company has already been acquired since January, 1995, the shareholders of Aaron are to be provided with an effective registration statement by An-Con and are being requested to choose either to accept delivery of the An-Con shares pursuant to the Acquisition Agreement, as amended, or, in the alternative, to receive cash for their shares of Aaron. The amount of $1,331,800, value of the consideration due to the former Aaron shareholders, is recorded as a current liability of An-Con, as of March 31, 1995. AN-CON GENETICS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Continued) The acquisition of Aaron was accounted for using the purchase method. Accordingly, $2,012,800 was allocated to assets acquired based on their estimated fair values. This treatment resulted in $335,800 of cost in excess of net assets acquired. Such excess (which has increased for additional acquisition costs) is being amortized on a straight line basis over 5 years. In connection with the acquisition the Company assumed $681,600 net liabilities of Aaron. The company utilized a loss carryforward of $700 as an offset against its estimated taxable income of equal amount. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 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 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 1995 Annual Report to the SEC on Form 10-KSB. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (A) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (B) Accounts Receivable Accounts receivable are presented net of the allowance for doubtful accounts. (C) Inventories Inventories are stated at the lower of cost, determined by the FIFO method or market. (D) Property, Plant and Equipment Property and other equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: leasehold improvements-term of lease: furniture, fixtures and equipment 5 years. (E) Bond Issue Costs Costs related to a bond issue are classified as deferred charges and amortized using the straight line method, over the life of the bonds. (F) Investments The equity method is used to account for investments in corporate joint ventures and other investments in common stock if the company has the ability to exercise significant influence over operating and financial policies of the investee enterprise. That ability is presumed to exist for investments of 20% or more and is presumed not to exist for investments of less than 20%; both presumptions may be overcome by predominant evidence to the contrary. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (F) Investments The Company initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the Company's share of income of the investee and is reduced to reflect the company's share of losses of the investee or dividends received from the investee. The Company's share of the income or losses of the investee is included in the Company's net income as the investee reports them. Adjustments similar to those made in preparing consolidated financial statements, such as elimination of intercompany gains and losses and amortization of the difference between cost and underlying equity in net assets, also are applicable to the equity method. Under the equity method, an investment in common stock is shown in the balance sheet of the Company as a single amount. Likewise, an investor's share of earnings or losses from its investment is ordinarily shown in its income statement as a single amount. The cost method is used when ownership of securities in an affiliated company represents less than 20% of the total outstanding shares of that Company. Under this method the Company records an investment in the stock of an investee at cost, and recognizes as income dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition by the Company. The net accumulated earnings of an investee subsequent to the date of investment are recognized by the company only to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as a reduction of cost of the investment. A loss in value of an investment that is other than a temporary decline shall be recognized the same as a loss in value of other long-term assets. Evidence of a loss in value might include, but would not necessarily be limited to, absence of the ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. A current fair market value of an investment that is less than its carrying amount may indicate a loss in the value of the investment. (G) 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. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (G) Research and Development (continued) Only the research and development costs that are purchased from another enterprise and have alternative future use are capitalized and are amortized over five years. (H) 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. (I) Patents, Franchises, Licenses and Operating Rights The cost of franchises, license options to acquire technology and operating rights acquired are amortized using the straight-line method over their useful lives, 5 years. (J) Stock Issue Costs Stock issue costs are treated as a reduction of the amount received from the sale of the related capital stock. (K) Net Earning (Loss) Per Share Net earnings (loss) per share are computed based upon the weighted average number of outstanding common shares during the period considered. (L) Income Recognition Income is recognized on the accrual basis, i.e., revenues are recognized and reported in the income statement when the amount and timing of revenues are reasonably determinable and the earning process is complete or virtually complete. (M) Accounting for Income Taxes In 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income taxes." This statement requires that deferred taxes be established for all temporary differences between the book and tax bases of assets and liabilities, including those which have not been previously AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (M) Accounting for Income Taxes (continued) recognized. In addition, deferred tax balances must be adjusted to reflect tax rates that will be in effect in the years in which the temporary differences are expected to reverse. (N) 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 is used to measure the cost if it is more clearly evident than the fair value of asset surrendered. (O) 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. 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. (P) Principles of Consolidation The consolidated financial statements include the accounts of An-Con Genetics, Inc. and its wholly-owned subsidiary Aaron Medical Industries, Inc., after elimination of material intercompany accounts and transactions. 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 1 Huntington Quadrangle, Melville, New York 11747. AN-CON GENETICS, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4. STOCK-BASED COMPENSATION In the first quarter of 1996, the Company issued warrants to purchase 337,000 restricted shares of the Company stocks to various employees, in exchange for their services. Under the terms of the stock warrant plan, warrants are granted a price of $1.125 per share. The warrants may be exercised at any time during the period commencing February 16, 1996 and ending February 15, 2001. The Company applies APB opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, based on a stock price of $1.175 per share when warrants were issued, a compensation cost of $.05 per warrant was recognized. Had the compensation cost for the Company's warrants been determined based on the fair value at the grant date of the awards under the warrants plan consistent with the method of FASB Statement 123 Accounting for Stock Based Compensation, the cost per warrant would have been $.11 and Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Net Income As reported $61,400 Pro forma 41,200 Primary and fully As reported .009 diluted earnings Pro forma .006 per share NOTE 5. 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 first six months of 1996, 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. Also, approximately 70% of former shareholders of Aaron Medical Industries, Inc. had indicated their decision to accept 2,379,367 shares of An-Con. The Company's fully diluted and primary earnings per share are the same and are computed assuming the conversion of these securities. AARON MEDICAL INDUSTRIES, INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 BLOOM AND COMPANY 50 CLINTON STREET HEMPSTEAD, NY 11550 (516) 486-5900 (516) 486-5476 Board of Directors Aaron Medical Industries, Inc. St. Petersburg, Florida We have audited the accompanying balance sheets of Aaron Medical Industries, Inc. as of December 31, 1994 and 1993, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit 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 Aaron Medical Industries, Inc. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supporting information included in the accompanying schedules is presented for the purpose of additional analysis and is not a required part of the basic financial statements of Aaron Medical Industries, Inc. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. BLOOM AND COMPANY Hempstead, New York April 15, 1995 AARON MEDICAL INDUSTRIES, INC. BALANCE SHEETS DECEMBER 31, 1994 AND 1993 ASSETS Current assets: 1994 1993 Cash $ 138,900$ 115,800 Accounts receivable 498,400 263,000 Inventories 490,200 447,600 Prepaid expenses and other assets 63,900 19,700 Notes receivable -- 5,100 Total current assets 1,191,400 851,200 Property, plant and equipment 452,200 155,200 Other assets: Patents, trademarks and copyrights, net 16,500 21,900 Deposits as security 18,000 21,000 34,500 42,900 $1,678,100$1,049,300 The accompanying notes are an integral part of the financial statements. F-51 AARON MEDICAL INDUSTRIES, INC. BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: 1994 1993 Accounts payable and accrued expenses $ 327,400 $ 194,000 Current maturity of long-term debt 18,900 52,100 Customer deposits and credits 106,300 51,100 Current portion of obligations under capital leases 8,400 2,600 Total current liabilities 461,000 299,800 Long-term debt -- 46,200 Obligations under capital leases 36,000 31,100 Loans and advances due to affiliate 190,600 -- Commitments and contingencies Stockholders' equity: Common stock, par value $.001 per share, authorized 10,000,000 shares, issued and outstanding on December 31, 1994 and 1993 are 5,960,042 6,0006,000 Additional paid in capital 609,400 609,400 Retained earnings, since January 1, 1993 435,600 117,300 1,051,000 732,700 Less: subscriptions receivable ( 60,500) ( 60,500) Total stockholders' equity 990,500 672,200 $1,678,100$1,049,300 The accompanying notes are an integral part of the financial statements. F-52 AARON MEDICAL INDUSTRIES, INC. INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 1994 1993 Net sales $4,069,600 $3,222,300 Cost of sales 2,628,300 2,008,700 Gross profit 1,441,300 1,213,600 Operating expenses: Selling expenses 567,400 414,100 General and administrative expenses 627,200 676,200 1,194,600 1,090,300 Income from operations 246,700 123,300 Other income (expense): Change in estimate of useful lives of equipment 55,000 -- Gain from settlement of debt 13,900 -- Interest (expense), net of income (7,600) (6,000) Other income 10,300 -- 71,600 (6,000) Income before income taxes and extraordinary item 318,300 117,300 Income taxes 118,100 33,000 Income before extraordinary item 200,200 84,300 Extraordinary item: Utilization of operating loss carryforward 118,100 33,000 Net income $ 318,300 $ 117,300 Weighted average number of shares 5,960,0425,360,004 Earnings per share $.05 $.02 The accompanying notes are an integral part of the financial statements. F-53 AARON MEDICAL INDUSTRIES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 1994 1993 Cash flows from operating activities: Net income $ 318,300 $117,300 Adjustments to reconcile net income to net cash provided by (Used in) operating activities: Depreciation and amortization 8,600 51,300 Common shares issued for services -- 59,000 Changes in assets and liabilities: (Increase) decrease in receivables (235,400) 49,900 (Increase) in inventories ( 42,600) (49,000) (Increase) in prepaid expenses and other assets ( 44,200) ( 3,000) (Increase) decrease in notes receivable 5,100 ( 5,100) (Increase) in goodwill ( 6,000) -- Increase (decrease) in accounts payable 133,400 (36,200) Increase in customer deposits 55,200 33,600 Total adjustments ( 125,900) 100,500 Net cash provided by operating activities $ 192,400$ 217,800 The accompanying notes are an integral part of the financial statements. AARON MEDICAL INDUSTRIES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (Continued) 1994 1993 Net cash provided by operating activities $ 192,400$ 217,800 Cash flows from investing activities: (Increase) in fixed assets ( 294,200) (33,600) (Increase) decrease in security deposits 3,000 ( 18,700) Net cash used in investing activities ( 291,200) ( 52,300) Cash flows from financing activities: Increase due to affiliate 190,600 -- Increase in capital leases 10,700 -- (Decrease) in long-term debt( 79,400) ( 70,600) Net cash provided by (used in) financing activities 121,900 ( 70,600) Net increase in cash 23,100 94,900 Cash at beginning of year 115,800 20,900 Cash at end of year $ 138,900 $ 115,800 SCHEDULE OF NONCASH TRANSACTIONS 1. In 1994, the Company leased a telephone system valued at $16,200 and paid $1,600 on the financing arrangement. 2. In 1993, the Company issued 510,000 shares of common stock for services valued at $53,900. 3. In 1993, the Company leased an automobile valued at $38,800 and paid $5,100 on the financing arrangement. 4. In 1993, certain employees of the Company exercised their options to purchase 550,000 shares of common stock by signing promissory notes for $60,500. The amount of the receivable, $60,500, is recorded as a reduction of stockholders' equity. The accompanying notes are an integral part of the financial statements. F-55 AARON MEDICAL INDUSTRIES, INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 Common Stock Number of Paid-In Subscript.Retained Shares Par Value Capital ReceivableEarnings Balance January 1, 1993 4,760,042$ 4,800 $ 491,100 $ -- $-- Exercise of options issued to directors for services rendered 140,000 140 3,750 Shares issued to directors for services @ $.11 per share 420,000 420 44,800 Shares issued as compensation for services at $.11 per share 90,000 90 9,800 Shares issued for stock options exercised at $.11 per share 550,000 550 59,950 (60,500) Net income 1993 117,300 Balance December 31, 1993 5,960,042 6,000 609,400 (60,500)117,300 Net income 1994 318,300 Balance December 31, 1994 5,960,042$ 6,000 $ 609,400$(60,500)$435,600 The accompanying notes are an integral part of the financial statements. F-56 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 THE BUSINESS Aaron Medical Industries, Inc. (the Company), through its predecessor Key Technologies, Inc., was first incorporated February 27, 1976 as Medical Products Development, Inc. On February 23, 1981, the name of the Company was changed to Key Medical, Inc., and on January 23, 1984, it was renamed Key Technologies, Inc. The Company'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. The Company manufactures many types of cauteries. The Company 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 patented light is distributed through the largest automotive tool distributor, Snap On Tools Corporation and various retail outlets and stores. Aaron Medical Industries, Inc. manufactures and sells its products under the Aaron label to over eight hundred fifty distributors worldwide and has private label arrangements with the largest hospital supply company in the U.S., Baxter Healthcare Corporations Hospital Supply Division. Additionally, private label arrangements have been made with other national firms such as General Medical Corporation and the largest buying group, Abco Dealers, Inc. These private label arrangements, combined with the Aaron label allow the Company to gain a greater market share for the distribution of its products. In 1993, the Company expanded into the electrosurgery and laproscopic markets through its current distribution base. NOTE 1. ACCOUNTING POLICIES a. Depreciation: The cost of property, plant, and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Depreciation is computed on the straight-line method for financial reporting. F-57 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (continued) NOTE 1. ACCOUNTING POLICIES (continued) a. Depreciation (continued) During 1994, the Company increased its estimate of the useful lives of certain machinery and equipment and furniture and fixtures for financial reporting purposes, as permitted by generally accepted accounting principles. This change had the effect of increasing income before extraordinary items and net income for 1994 by $55,000 ($.01 per share). b. Patents, Trademarks, and Copyrights: The cost of patents, trademarks, and copyrights acquired are being amortized on the straight-line method over their remaining lives, ranging from 5 to 10 years. Amortization expense charged to operations in 1994 and 1993 were $11,400 and $11,000, respectively. c. Accounts Receivable: Sales are generally recorded when goods are shipped, and profit is recognized at that time. The Company sells its products primarily to consumers who generally pay within 60 days. Accounts for which no payments have been received for three consecutive months are considered delinquent and customary collection efforts are initiated. Accounts for which no payments have been received for six months are written off. Collections on accounts previously written off are included in income as received. Based on past performance, an allowance for doubtful accounts of 1% of accounts receivable is maintained to offset possible future losses. d. Inventories: Inventories are stated at the lower of cost determined by the LIFO method or market. e. Accounting for Income Taxes: In February 1992, the Financial Accounting Standards Board (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. F-58 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 1. ACCOUNTING POLICIES (continued) e. Accounting for Income Taxes: (continued) The judgment regarding the need for a valuation allowance depends on the entity's specific facts and circumstances; there are no precise formulas for determining whether a valuation allowance is needed or the amount of the allowance. Such a need is based on an assessment of the likelihood of the entity's ability to generate sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward period under the applicable tax law to realize the tax benefits recognized as a result of deductible temporary differences, and operating loss carryforwards. The Company has adopted the policy of preparing its future financial statements in accordance with FASB 109. NOTE 2. ACCOUNTS AND NOTES RECEIVABLE The following is a summary of accounts receivables at December 31: 1994 1993 Trade accounts $ 503,300 $ 267,000 Less: allowance for doubtful accounts ( 4,900) ( 4,000) $ 498,400 $ 263,000 During 1993, the Company sold 550,000 common shares to certain employees and received notes in the amount of $60,500 which are due in 1995. These notes bear interest at 9% per annum which is to be paid semi-annually through 1995. NOTE 3. INVENTORIES Inventories as of December 31, consisted of: 1994 1993 Raw materials $ 327,200 $ 220,000 Work in progress 81,600 113,000 Finished goods 81,400 105,200 Supplies -- 9,400 Total $ 490,200 $ 447,600 F-59 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 3. INVENTORIES (continued) Inventories are stated at the lower of cost determined by the LIFO method or market. If the FIFO method had been used, inventories would have been approximately $465,700 and $425,200 at December 31, 1994 and 1993, respectively, and net income for 1994 and 1993 would have been approximately $293,800 and $95,000, respectively. NOTE 4. PROPERTY, PLANT, AND EQUIPMENT The following is a summary of property, plant, and equipment, at cost, less accumulated depreciation: 1994 1995 Machinery and equipment $ 972,700$ 739,000 Furniture and fixtures 89,300 81,800 Leasehold improvements 3,800 3,800 Capitalized transportation equipment 38,800 38,800 1,104,600 863,400 Less: accumulated depreciation ( 698,600)( 708,200) 406,000 155,200 Machinery and equipment- Construction in progress 46,200 -- Total $ 452,200$ 155,200 Depreciation expense charged to operations was $52,200 and $40,500 in 1994 and 1993 respectively. Computer equipment with a cost of $47,100 was pledged as collateral for a bank loan in 1993. The useful lives of property, plant, and equipment for purposes of computing depreciation are: Machinery and equipment 5-15 years Furniture and fixtures 5-10 years Leasehold improvements Length of the lease F-60 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 5. LONG-TERM DEBT The following is a summary of long-term debt as of December 31: 1994 1993 7.5% note payable to bank in monthly installments of $1,868.21, inclusive of interest through September, 1994 which was refinanced in February, 1992. $ -- $ 16,000 8.875% note payable to landlord affiliate for rental of premises. Payments began in May of 1993 and are $1,956.29 monthly, inclusive of interest through April of 1995.7,400 29,500 0% note payable to unsecured creditors as stipulated in Chapter 11 Reorganization, payable $1,055.69, beginning in May, 1994 and ending in May, 1998. 11,500 52,800 Less: Current maturities included in current liabilities 18,900 98,300 $ -- $ 46,200 The following are maturities of long-term debt for each of the next three years: 1995 $ 18,900 1996 -- 1997 -- $ 18,900 F-61 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 6. LEASES a. Operating Lease On March 8, 1993, the Company entered into a five year operating lease agreement with minimum future rental payments for each of the next five years beginning on May 1, 1993. The following is a schedule of minimum future rental payments. Year 2 $ 52,500 12,500 Year 3 66,200 15,000 Year 4 92,600 20,000 Year 5 136,100 28,000 Total minimum rental payments $347,400 Purchase Option. "If Lessee has fully and faithfully kept and performed all of the terms and conditions of the Lease, then and in that event Lessee shall have the Option to Purchase the Premises at the end of twenty four (24) months for $625,000 by giving Lessor one hundred twenty (120) days notice, prior to the end of the twenty fourth (24th) month, and providing Lessor with a non-refundable deposit in the amount of $25,000 at such time of notice." The agreement calls for additional rent for: a. Increases in real estate taxes over 1992 levies. b. Increases in insurance costs over fiscal year ending July 1993 levels. c. Increase in any rent taxes imposed by governmental agencies. b. Capital Leases The Company is the lessee of transportation and telephone equipment under capital leases expiring in various years through May, 1997. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for 1994 and 1993. F-62 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 6. LEASES (continued) b. Capital Leases (continued) The following is a summary of property held under capital leases: 1993 1994 Transportation equipment $ 38,800 $ 38,800 Telephone equipment 16,200 -- 55,000 38,800 Less: accumulated depreciation (10,000) ( 500) $ 45,000 $ 38,800 Minimum future lease payments under capital leases as of December 31, 1994 for each of the next five years and in the aggregate are: 1995 $ 13,500 1996 34,400 1997 3,200 1998 -- 1999 -- Total minimum lease payments 51,100 Less: Amount representing interest 9,100 Present value of net minimum lease payments $ 42,000 The interest rates on the capitalized leases range between 9.73% and 15.10% and are imputed based on the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return. The capital leases provide for purchase options. Generally, purchase options are at prices representing the expected fair value of the property at the expiration of the lease term. F-63 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 7. INCOME TAXES An analysis of income tax expense at the statutory federal and state rates are as follows: 1994 1993 Computed federal income tax at the statutory rate $ 100,600 $ 26,500 State income tax - net of federal tax benefits 17,500 6,500 Income tax expense $ 118,100 $ 33,000 The Company had net operating loss carryforwards of $1,128,100 and $1,248,300 as of December 31, 1994 and 1993, respectively. The loss carryforwards expire at various future dates and may provide future tax benefits. In accordance with APB-11, because the benefit of the operating loss carryforwards was not assured beyond any reasonable doubt, no recognition was made in the accounts in the year of loss. When realized in 1994 and 1993, the tax benefits of $118,100 and $33,000 were reported as extraordinary items in the respective years. NOTE 8. STOCK OPTIONS Under the terms of its 1992 stock option plan, options to purchase shares of the Company's common stock were granted as compensation to the Company's Directors. The options may be exercised up to and including December 10, 1996 at various prices. All options granted through December 31, 1993 have been exercised. The following is a summary of the stock options: Outstanding, beginning of year $ -- $ 540,000 Granted during the year -- 475,000 Cancelled during the year -- -- Exercised during the year --(1,015,000) Outstanding, end of year (at prices ranging from $.01 to $.11 per share) -- -- Eligible, end of year for exercise currently (at prices ranging from $.01 to $.11) -- -- F-64 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 8. STOCK OPTIONS (continued) On March 25, 1992, the Board of Directors authorized an employee stock bonus plan by setting aside 165,000 shares of the Company's stock. These shares were valued at $.11 each. NOTE 9. COMMITMENTS AND CONTINGENCIES Under the terms of an installment loan agreement with a bank, the Company is required to: 1. Make monthly installments of $1,839.71 which began on October 28, 1992 and ended on September 28, 1994. 2. Pay interest at a variable rate of 1.5% in excess of base rate charged by the bank which is presently 6.0%. 3. The loan was personally guaranteed by the president of the Company. As of December 31, 1994, the Company had entered into employment agreements with three of its executive employees with various extension dates through 1999. NOTE 10. ISO 9000 CERTIFICATION The company is currently undergoing International Standards Organization (ISO 9000) certification to make its products readily acceptable by the European Common Market. "ISO 9000" is a series of generic quality standards used for all aspects of a business issued by the International Organization for Standardization. In the current competitive markets many U.S. customers are beginning to require this certification which is synonymous with quality control. The company is committed to implementing this system and has hired a consultant at a cost of $30,000 to help put the system in place. The goal is to be ready for inspection and receive approval for ISO 9000 certification by December 31, 1995. F-65 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 11. EMERGENCE FROM REORGANIZATION UNDER THE BANKRUPTCY CODE On February 5, 1992 Aaron Medical Industries, Inc. (formerly Key Technologies, Inc. and Sun-Key Medical Manufacturing, Inc.) was: "ORDERED, ADJUDGED AND DECREED that the confirmation of the Plan vests all of the property of the estate in the debtor, free and clear of all claims and interests of creditors and debtor is released from all dischargeable debts." On October 31, 1988, Key Technologies, Inc. filed a petition for an order of relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the middle district of Florida, Tampa Division, case number 88-6569 8B1. The order of protection was granted on November 8, 1988. Total payments under the plan amount to $310,300 on final total indebtedness of $1,679,000. The priority creditors are receiving $4,000 per month which began on April 30, 1990 and extended through April, 1994. After April 1994, the unsecured creditors will receive monthly payments amounting to $1,055.69. The unsecured creditors do not have interest accruing on their debt. The priority creditors received initially 12% interest on their debt. An analysis of debt and its disposition are as follows: Total unsecured debt $ 1,531,900 Priority claims 136,600 Secured claims 10,500 1,679,000 Cash payments through December 31, 1994 ( 176,700) 947,652 shares issued for debt( 108,900) Merchandise accepted in payment of debt ( 13,200) Forgiveness under the plan ( 1,368,700) Balance due under the plan on December 31, 1994 $ 11,500 This amount is included in current maturity of long-term debt, see Note 5. F-66 AARON MEDICAL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 12. CORPORATE ACQUISITION On June 11, 1993, the Company entered into an agreement whereby An- Con Genetics, Inc. [(An-Con), a public company with offices in Melville, New York], shall acquire a 100% interest in the Company in exchange for 49% of the outstanding shares of An-Con. The agreement is to be considered a pooling of interests for financial reporting purposes. The An-Con shares to be exchanged for Aaron shares shall be registered for SEC compliance requirements. On April 15, 1995, An- Con and Aaron initiated and signed their final agreement. Included in the exchange of shares of Aaron for An-Con, An-Con shall register its securities for public sale to derive $3,000,000 to $5,000,000 of proceeds for the use of Aaron and An-Con. NOTE 13. QUASI-REORGANIZATION In June of 1993, the shareholders of the Company authorized a corporate readjustment based on ARB-43 Chapter 7A. During the prior 10 years, the Company had experienced losses in excess of $2 million dollars and had received protection under Chapter 11 of the Federal Bankruptcy Act in 1988. The Company came out of Chapter 11 in February, 1992. The Company became profitable in 1991 and believes it is appropriate to eliminate the accumulated deficit from past unprofitable operations. Due to the nature of the Company's assets, a downward adjustment in valuation was not required. The resulting financial statements will have more credibility, and make it easier for the Company to borrow money for its profitable operations. In addition, by eliminating the deficit in retained earnings, the possibility of paying dividends in the future becomes more likely. The effective date of quasi-reorganization was January 1, 1993 and as such, marks a turning point in the Company's operations. The accumulated deficit of $2,096,000 was eliminated by a transfer from additional paid in capital. The Company does not expect any future tax benefits related to items occurring prior to the reorganization. F-67 AARON MEDICAL INDUSTRIES, INC. SCHEDULES OF COST OF SALES FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 1994 1993 Manufacturing Costs: Raw materials used $ 1,617,400$ 1,319,900 Direct labor costs 631,800 435,200 Freight 83,500 34,900 Sterilization 56,400 24,000 Other 85,200 52,300 2,474,300 1,866,300 Indirect Manufacturing Expenses: Occupancy 41,500 41,000 Supplies 23,600 16,700 Utilities 16,000 17,800 Repairs and maintenance 39,000 48,300 Depreciation 33,900 18,600 Total cost of sales $ 2,628,300 $ 2,008,700 F-68 AARON MEDICAL INDUSTRIES, INC. SCHEDULES OF OPERATING EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 1994 1993 Selling Expenses: Advertising $ 147,500 $ 60,700 Travel and entertainment 31,500 14,300 Shipping 11,500 8,400 Salaries 82,100 76,000 Bad debt expense 3,400 7,100 Show expense 115,700 84,100 Commissions 175,700 163,500 Total Selling Expenses $ 567,400 $ 414,100 General and Administrative Expenses: Officers'salaries $ 238,200 $ 228,300 Office salaries 22,200 51,500 Payroll taxes 26,500 32,700 Printing, stationery and supplies 28,200 36,400 Telephone 21,100 22,600 Insurance 61,100 45,900 Postage 16,500 12,200 Professional fees 66,800 67,800 Utilities 5,300 5,600 Depreciation 18,300 21,900 Amortization 11,400 11,000 Auto5,100 5,800 Dues and subscriptions 5,300 4,000 Education 4,000 2,500 Equipment lease 1,400 700 Employee benefits 41,400 36,700 Directors fees -- 5,500 Taxes and licenses 12,100 9,800 Rent10,500 23,900 Facilities provided (14,600) 13,600 Other expenses 46,400 37,800 Total General and Administrative Expenses $ 627,200 $ 676,200 F-69 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form SB-2 Amendment No. 1 to Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Melville, State of New York on September 18, 1996. AN-CON GENETICS, INC. S/J. Robert Saron J. Robert Saron Chief Executive Officer, Chairman of the Board of Directors Pursuant to the requirements of the Securities Act of 1933, this Form SB-2 Amendment No. 1 to Registration Statement on Form S-4 has been signed by the following persons in the capacities and on the dates indicated. S/ J. Robert Saron September 18, 1996 J. Robert Saron Chairman of the Board of Directors and CEO S/ Andrew Makrides September 18, 1996 Andrew Makrides, President, Director S/ Delton Cunningham September 18, 1996 Delton N. Cunningham Secretary-Treasurer, Chief Financial Officer S/ George W. Kromer September 18, 1996 George W. Kromer, Jr. Director , 1996 Joseph F. Valenti Director c: ANCN-F.SB2 PART II Item 24. Indemnification of Directors and Officers. Reference is made to Section 145 of the Delaware General Corporation law which provides for indemnification of directors and officers of a corporation and other specified persons subject to the specific requirements therein contained. In general, these sections provide the persons who are officers or directors of the corporation may be indemnified by the corporation for acts performed in their capacities as such. There are no provisions in the An-Con's Certificate of Incorporation, Amendments thereto or its By-Laws relating to indemnification as of the date of this Proxy Statement/Prospectus. Further reference is made to sections 102 and 145 of the Delaware General Corporation Law which provide for elimination of directors liability in certain instances, and indemnification of directors and officers of a corporation and other specified persons subject to the specific requirements therein contained. In general, section 102 allows an authorizing provision in the Certificate of Incorporation which would, subject to certain limitations, eliminate or limit a director's liability for monetary damages for breaches of his or her fiduciary duty. However, such an enabling provision could not limit or eliminate a director's liability for: (a) breaches of the duty of loyalty to the Corporation or its stockholders; (b) for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; (c) for the payment of unlawful dividends or unlawful stock repurchases or redemptions; or (d) for transactions in which the director received an improper personal benefit. There is currently such an enabling provision in the Company's Certificate of Incorporation. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, An-Con, will, unless in the opinion of its counsel that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. I Item 25. Other Expenses of Issuance and Distribution. Registration Fees. . . . . . . . . . . . . . $1,785.15 Federal Taxes. . . . . . . . . . . . . . . . . -- * State Taxes and Fees . . . . . . . . . . . . .1,300.00* Transfer Agent's Fees. . . . . . . . . . . . .1,000.00* Printing Costs . . . . . . . . . . . . . . . 10,000.00* Accounting fees 40,000.00* Legal. . . . . . . . . . . . . . . . . . . .120,000.00* *Estimated Total .174,085.15* Item 26. Recent Sales of Unregistered Securities On September 17, 1993 the Company sold 500 shares of Common Stock valued at $750 to an investor at $1.50 per share. On April 5, 1994, the Company issued a total of 438,000 shares to 14 investors (some of whom are accredited investors). Such investors (a) converted indebtedness of the Company to them of a total of $358,900 into 236,066 shares of Common Stock (or an average of $1.52 per share); and (b) exercised warrants (issued to them in connection with the loans originally made to the Company in 1992 and 1993) and purchased 202,001 shares at an average exercise price of $1.50 per share or a total consideration for the exercise of $291,000. In May, 1994, the Company authorized the issuance of a total of 591,061 shares of Common Stock (valued at $177,300) to 21 persons, some of whom are accredited investors, as compensation for past services rendered. In May, 1994, the Company issued to Andrew Makrides, President and Robert Speiser, Chairman of the Board, 421,667 shares and 783,333 shares respectively in lieu of back salaries. The shares issued were valued at a total of $361,500 or $.30 per share. In January, 1995, pursuant to Acquisition Agreement dated January 11, 1995, as subsequently amended, the Company issued and placed in escrow a total of 3,399,096 shares of Common Stock in exchange for all of the outstanding shares of Aaron Medical Industries, Inc. In March, 1995, the Company issued a total of 35,000 shares valued at $.40 per share in exchange for 70 bonds held by sixteen bondholders. In April, 1995, the Company issued an additional 27,500 shares valued at $.40 per share to three consultants as compensation for services rendered. In June, 1995, the Company issued the total of 60,000 shares valued at $1.30 per share (or a total of $78,000) as part of the purchase price paid for real estate upon which the Company maintains its principal offices in St. Petersburg, Florida. During December and January of 1995-1996, the Company sold a total of 200,000 shares for $200,000, and warrants to purchase 200,000 shares at $3.00 per share, to a total of nine persons, some of whom were accredited investors. The warrants expire in November, 1998. In April 18, 1996, in exchange for construction services the Company issued 55,350 shares of Common Stock to a privately held corporation valued at $.69 per share. II Except as to the issuance in escrow of 3,399,096 shares in January, 1995 (which shares are the subject of this registration statement), the Company relies upon the exemption to the registration provisions of the Securities Act of 1933 as set forth in Section 4(2) thereof with respect to each of the foregoing issuances. Item 27. Exhibits. Exhibit No. Description Location 2 Restated and Amended Agreement between Registrant and Aaron Medical Industries, Inc. to Exchange Shares * 5 Opinion of Alfred V. Greco, P.C. regarding legality of securities being registered and Consent of Alfred V. Greco, P.C. . . . .Filed Herewith 8 Opinion of Bloom and Company . . . . . .Filed Herewith 23(a) Consent of Bloom and Company as to An-Con Financial Statements Aaron Financial Statements Tax opinion . . . . . . . . . . . . .Filed Herewith 99 Federal Court Decision Denying Megadyne's request for Preliminary Injunction against Aaron Medical Industries, Inc. . . . . . . . . . . . .Filed Herewith __________________________________ *Previously filed with Form S-4 Item 28. Undertakings. The Company will supplement the prospectus after the end of the rescission offer period, to include the results of the rescission offer and the transactions by the Company during the offering period. The Company will file a post-effective amendment to this registration statement if the amount of shares that the Company will purchase from rescission offerees requires a further sale of securities to secure funding by the Company. Such post-effective amendment will also specify any change in the terms of offering of shares by the Company from the terms set forth on the cover page of this prospectus. III EXHIBITS ALFRED V. GRECO, P.C. A Professional Corporation 666 Fifth Avenue (14th Floor) New York, N.Y. 10103 Alfred V. Greco Tel. 212-246-6550 Attorney At Law Fax 212-582-0176 September 19, 1996 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Registration Statement Form SB-2, (Commission File No. 33-80763) Rescission Offer to Repurchase 3,399,056 Shares of An-Con Genetics, Inc. (the "Company") Gentlemen: The undersigned has been requested to render an opinion concerning the registration of 3,399,056 shares of An-Con Genetics, Inc. of common stock which was issued and placed In Escrow pursuant to a certain Final Restated and Amended Stock Exchange Agreement between An-Con Genetics, Inc. and Aaron Medical Industries, Inc. dated January 11, 1995 as later amended in April and November, 1995 (the "Exchange Agreement"). Pursuant to the terms of the Exchange Agreement, a total of 3,399,056 shares of Common Stock of An-Con Genetics, Inc. were exchanged for all the issued and outstanding shares of Aaron Medical Industries, Inc.. Due to irregularities with respect to the premature offer of the shares to more than 100 investors of Aaron Medical Industries, Inc. prior to filing and effectiveness of a registration statement with the Securities and Exchange Commission, and to rectify possible violations of the Federal Securities Laws (and State Blue Sky Laws), An-Con Genetics, Inc. is offering rescission to all the Aaron shareholders that acquired the shares of An-Con Genetics, Inc. on the exchange. The shares are presently being held In Escrow subject to the effectiveness of the registration statement filed by the Company with the Securities and Exchange Commission. In connection with the foregoing matter, the undersigned has reviewed the Exchange Agreement and the resolutions of the Board of Directors of the Company authorizing the issuance and delivery of the shares pursuant thereto, as well as other corporate EXHIBIT 5,PAGE 1 Securities and Exchange Commission September 19, 1996 Page -2- records of the Company and am satisfied that the Agreement was duly authorized and executed, and the shares were properly issued and placed into escrow pursuant to the terms thereof. The shares, presently held In Escrow by Delton Cunningham, CFO of An-Con Genetics, Inc. and CFO of Aaron Medical Industries, Inc., when issued, were validly issued, fully paid and nonassessable. Upon effectiveness of the registration statement and subject to the Rescission Offer, when the shares are transferred and delivered to former Aaron shareholders pursuant to the terms of the Exchange Agreement, such shares will constitute shares that have been validly issued, fully paid and are nonassessable. Consent of Alfred V. Greco, P.C., the undersigned on behalf of Alfred V. Greco, P.C. does hereby consent the use of the name of the firm in the prospectus and elsewhere in the registration statement filed with An-Con Genetics, Inc. pursuant to Form SB-2. Very truly yours, S/ Alfred V. Greco Alfred V. Greco EXHIBIT 5, PAGE 2 Bloom and Company 50 Clinton Street Hempstead, NY 11550 (Tel) 516 486-5900 (Fax) 516 486-5476 September 19, 1996 Robert Saron,Chairman An-Con Genetics, Inc. 7100 30th Avenue N. St. Petersburg, FL 33710 Re: An-con Genetics, Inc. with Aaron Medical Industries, Inc. Dear Mr. Saron: Our firm has been requested to provide certain information to An-Con Genetics, Inc., regarding the tax consequences of an acquisition by An-Con Genetics, Inc. of the stock of Aaron Medical Industries, Inc. Pursuant to the instructions we have received, we are forwarding our opinion directly to you. The analysis is based upon the following information provided to us by Andrew Makrides and Delton Cunningham. 1) An-Con will acquire all of the stock of Aaron in exchange for its common stock. After the acquisition, the old Aaron shareholders will own approximately 44% of the An-Con stock outstanding. 2) An-Con has a net operating loss of approximately $5,000,000 prior to the acquisition of Aaron. Based on these facts, we have specifically focused on the following issues: I) Whether the acquisition of Aaron by An-Con will be tax free, and whether the tax-free transaction would be disturbed if An- Con agreed to pay Aaron $l million as part of the reorganization to be used as working capital? 2) Whether the net operating loss of An-Con will be limited by the addition of new shareholders? 3) Whether the An-Con net operating loss could be utilized to offset income of Aaron if An-Con and Aaron file consolidated returns? After thorough research and discussions with Mr. Makrides and Mr. Cunningham, our analysis is as follows: 1) Pursuant to IRC Section 368 (a)(J)(B), an acquisition will be tax-free if it is the acquisition by one corporation, in exchange solely for its voting stock, of the stock of another corporation, if immediately after the acquisition, the acquiring corporation is in control of the acquired corporation. The statutory language provides that for this transaction to be tax-free, An-Con must use solely its voting stock to acquire the voting stock of Aaron and must be in control of Aaron after the acquisition. Based on the EXHIBIT 8, PAGE 1 Robert Saron, Chairman An-con Genetics, Inc. Page 2 facts provided, An-Con will be acquiring 100% of Aaron's stock solely in exchange for its voting stock and therefore the transaction would meet the statutory tests for tax-free treatment to both An-Con's and Aaron's shareholders. However, if in addition to the stock there was an agreement for An-Con to pay cash or any other form of consideration to Aaron or its shareholders the tax-free nature of the transaction could be destroyed. The additional payment could be treated as consideration and thereby cause the transaction to no longer be an exchange of solely voting stock of the acquirer. In addition to the statutory requirements, a number of non- statutory requirements have developed from rulings and case law over the past 30 years. The main non-statutory requirements are: (a) continuity of proprietary interest, (b) active business requirement, and (C) business purpose. The first requirement will be met as long as there is a continuing proprietary interest in An-Con by the Aaron shareholders. Because this is a B reorganization, the Continuity of Interest test will be met, unless there is a prearranged plan for the Aaron shareholders to sell their stock in An-Con. Based on the information provided, it appears that neither the Active business requirement, nor the Business purpose test, will pose any problems in the tax-free treatment of the transaction. 2) IRC Section 382 limits the usefulness of net operating loss carry-forwards where there has been an "ownership change" in the loss corporation. An ownership change occurs when a shareholder of a loss corporation increases their ownership of stock by more than 50 percentage points. Generally, shareholders that own less than 5% of the company, prior to the shift in ownership, are grouped together to determine if an ownership change has occurred. When dealing with a public company all of the shareholders will be considered as one. Therefore, if the new shareholders own more than 50% of the company after the transaction, a Section 382 ownership change would have occurred. However, the facts Mr. Makrides and Mr. Cunningham have provided state that they will only own 44% and therefore, the general test for an ownership change will not be met. When a tax-free reorganization under Section 368(a)(f)(E) is involved, an additional test for an ownership change must be examined. An "equity structure shift" in a tax-free reorganization can also trigger a Section 382 ownership change. An equity structure shift (a change of ownership percentages as a result of a tax-free reorganization) however, will not trigger an ownership change unless the shareholders of the old loss corporation retain less than a 50 percent ownership in the reorganization survivor. In other words, if control of the loss corporation changes as a result of the reorganization, the requirements for an ownership change through an equity structure shift will have been satisfied. Since the Aaron shareholders will only own 44% of the An-Con stock, the reorganization s equity structure shift will not trigger an EXHIBIT 8,PAGE 2 Robert Saron, Chairman An-Con Genetics, Inc. Page 3 ownership change. Where an ownership change has occurred, Section 382 operates to limit the annual use of a corporation s NOL if it 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 the annual income. Pursuant to Section 382(b), the "Section 382 Limitation" equals the value of the corporation (immediately before the ownership change, Sec. 3829(c), multiplied by the long term exempt tax rate (the highest Long Term AFR in effect for any month in the 3 calendar month period ending with the month of the following year. 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. 3) The final issue relates to the utilization of An-Con s losses against Aaron s income in a consolidated return filing. Generally, the taxable income of a consolidated group is determined by aggregating the income and losses of each member of the group. However, an exception to the general rule occurs with regard to losses incurred by group members in taxable years in which they were not part of a consolidated return, which are carried forward to years in which they are part of the consolidated group. In this situation, the Separate Return Limitation Year ("SRLY") rules limit the use of such loss by the group. The SRLY rules provide that a loss that arises in a separate year cannot be used to offset the consolidated taxable income attributable to other members of the group. The SRLY losses can only be used to offset income of that particular corporation. A major exception to the SRLY rules applies when dealing with the Parent of a consolidated group. Generally, a separate taxable year of the Parent is not treated as a Separate Return Limitation Year. Pursuant to Regulation Section 1.1502-1(f) (2) (I), the losses attributable to the separate return years of the Parent can be used to offset consolidated taxable income of the group in consolidated years. In effect, the Parent is treated as a consolidated group in years in which new subsidiaries exist. Therefore, it would appear that the Separate Return Limitation Year rules do not pose any threat to the utilization of An-Con's losses since An-Con would be the Parent in the consolidated group. Please be advised that the above analysis is based upon the facts as presented. If the facts are not as they have been set forth, the analysis should not be relied upon. If the facts are materially different, please contact us and we will review and revise our opinion. Very truly yours, S/Bloom and Company Bloom and Company EXHIBIT 8,PAGE 3 BLOOM AND COMPANY 50 CLINTON STREET HEMPSTEAD, NY 11550 TEL (516) 486-5900 Fax (516) 486-5476 September 19, 1996 Consent of Auditors Financial Statements We consent to the use in this registration statement on Form SB-2 Amendment #2 of our reports dated April 15, 1996 and August 30, 1996 relating to the consolidated financial statements of An-Con Genetics, Inc. for the period indicated in the reports and report dated April 15, 1995 relating to the financial statements of Aaron Medical Industries, Inc. for the period indicated in that report and to the reference of our firm under the caption "Experts" in the accompanying prospectus. Tax We also consent to the use in this registration statement of our tax opinion dated September 19, 1996 and to the reference of our firm under the caption "Tax Opinion" in the accompanying prospectus. S/Bloom and Company Bloom and Company Exhibit 23(a) IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH C ENTRAL DIVISION MEGADYNE MEDICAL PRODUCTS, INC. PLAINTIFF MEMORANDUM DECISION AND ORDER VS. Civil No. 2:96-CV-233C AARON MEDICAL INDUSTRIES, INC., et al., DEFENDANTS Plaintiff, Megadyne Medical Products, Inc. filed this action against Aaron Medical Industries, Inc., claiming that Aaron has infringed claims 1 and 5 of the Blanch Patent, United States Patent Number 4,785,807 ('807 Patent), which Megadyne owns. On June 5, 1996, plaintiff filed a motion for preliminary injunctive relief, seeking to enjoin defendant from making or selling any electrical surgical blade that infringed the claims of the '807 Patent. A hearing on plaintiff's motion for preliminary injunction was held on August 1, 1996, and August 13, 1996. Having considered the evidence presented at that hearing, the memoranda filed by the parties, and the relevant law, the court denies plaintiff's motion and enters the following findings of fact and conclusions of law: FINDINGS OF FACT 1. Megadyne owns the '807 Patent. The '807 Patent is directed to an electrosurgical knife, the blade of which is coated with a fluorinated hydrocarbon material, commonly known as teflon. Electrical energy is delivered through the blade of the knife during surgery to cauterize tissue and minimize bleeding. 2. According to Megadyne, this invention solves a long-standing problem in electrosurgery, that is, the buildup of flesh or char on the knife blade during surgery. The typical electrosurgery is performed by the direct (ohmic) conduction of electrical energy from the stainless steel blade to the flesh. Although teflon, with its non-stick quality, would appear to be a simple solution to the char buildup, the fact that Teflon is an electrical insulator, thereby preventing the direct conduction of electrical energy from the blade to the patient's flesh, initially made it seem unworkable for use in electrosurgery. The innovation of the Megadyne invention is that the blade is coated with Teflon yet is able to transfer the electricity to the flesh by capacitive coupling. 3. Aaron manufactures and sells an electrosurgical knife with a coated blade which Megadyne contends infringes claims 1 and 5 of the '807 Patent. Independent claim 1 (the relevant limitations are underlined) reads: An electrosurgical instrument for use with a source of radio- frequency electrical energy during surgery to cauterize tissue, said instrument comprising: EXHIBIT 99(a), PAGE 1 A. A stainless steel portion of said instrument for receiving said radio-frequency energy and having at least one flesh contacting surface formed thereon; B. A first coat of primer material covering at least all of said flesh contacting surface; and C. A second coat of fluorinated hydrocarbon material entirely covering the primer material to cause a total thickness of the first and second coats of about 3 mils thereby enabling said radio frequency energy to be transported across said coatings to said flesh by capacitive coupling. Independent claim 5 (the relevant limitations are underlined) reads: An electrosurgical knife for utilizing radio-frequency energy to cause hemostasis during surgery comprising: A. A stainless steel blade at least a part of whose surface is abraded B. A first coat of primer material covering said abraded surface of said blade; and C. A second coat of non-stick fluorinated hydrocarbon material completely covering said primer material only to a thickness sufficient to ensure transmission of radio- frequency electrical energy from said blade to said flesh essentially exclusively by capacitive coupling to cause hemostasis during surgery. 4. Aaron contends that its blade does not infringe the claims of the '807 Patent because its blade, which has an aggregate thickness of 0.7 mils, is only about one fourth the total thickness of the limitation of "about 3 mils," and because its blade delivers at least a substantial portion of the electrical energy by ohmic conduction, not by capacitive coupling. 5. Megadyne asserts that the Aaron blade does infringe the claim limitations. According to Megadyne, "about 3 mils" refers to a range based upon the function, "thereby enabling said radio-frequency energy to be transported across said coating to said flesh by capacitive coupling" and would read on the 0.7 mils of the Aaron blade. 6. Megadyne argues that the Aaron blade operates by capacitive coupling to a degree sufficient to infringe the claims, particularly claim 1, which does not have the "essentially exclusively" language found in claim 5. 7. Plaintiff brought an infringement action against Aspen Laboratories, claiming Aspen's electrosurgical blade infringed the '807 Patent. The case went to trial in 1993, and a jury found that Aspen had infringed the claims of the Megadyne patent. The court entered judgment on the jury's verdict and, based upon the jury's finding of willfulness, doubled the damage award. On appeal the judgment was affirmed. Megadyne Medical Products, Inc. vs. Aspen Laboratories, Inc. 52 F.3rd 344 (Fed.Cir. 1995). EXHIBIT 99(a),PAGE 2 8. After losing its appeal in the Federal Circuit, Aspen sought to have the '807 Patent reexamined by the United States Patent and Trademark Office (PTO). The PTO conducted a reexamination of the '807 Patent and concluded that the invention was patentable. 9. In support of their motion for preliminary injunction, plaintiff submitted the affidavits of William G. Pitt and David B. Kieda; Doctor Kieda also testified at the hearing. Mr. Pitt stated in his affidavit that the Aaron electrosurgical blade was coated with "extremely pure" polytetrafluoroethylene (PTFE), commonly known as "teflon." 10. Doctor Kieda testified that he had tested the Aaron blade and found that it performed through capacitive coupling. Both of plaintiff's witnesses gave an opinion that the Aaron blade was similar to the Aspen blade, which they had examined for purposes of the earlier litigation. 11. Doctor Kieda, in his second affidavit and in testimony at the hearing, disputed the evidence of defendant's expert, William Bowers, who submitted an affidavit and testified at the hearing. Mr. Bowers had tested the Aaron blade and had concluded that the Aaron blade operating primarily by ohmic conduction with a secondary capacitive effect. Mr. Bowers based this conclusion on tests which showed that the Aaron blade had a phase shift far less than that associated with capacitive circuits. However, Dr. Kieda testified that Mr. Bowers had failed to adjust for the resistive components used in his testing, and once the necessary adjustments were made, the results were consistent with capacitive coupling. CONCLUSION OF LAW 1. To obtain a preliminary injunction, plaintiff must establish: (1) a reasonable likelihood of success on the merits; (2) irreparable harm, (3) the balance of hardships tipping in its favor; and (4) a tolerable impact of the injunction on the public interest. Hybritech Inc. v Abbott Laboratories, 849 F.2nd 1446, 1451 (Fed. Cir. 1988). 2. To determine the likelihood of success in a patent infringement case, the court may construe disputed claim language as a matter of law. The court than determines whether the accused device is likely to fall within the scope of the claims. Sofamor Danek Group, Inc. v. DePuy-Motech, Inc. 74 F.3d 1216, 1220 (Fed. Cir. 1996). 3. To construe the claims, the court first looks to the claims themselves, the specification, and the prosecution history. The court may also, in its discretion, consider extrinsic evidence in interpreting the claims. Markman v Westview Instruments, Inc. 52 F.3d 967, 979-980 (Fed. Cir. 1995), affd, U.S. , 64 U.S.L.W. 4263 (1996). In the present case, the court finds that the evidence presented is insufficient to support a finding that there is a reasonable likelihood that Megadyne will succeed on the merits: Megadyne has not met its burden of establishing the claims should be construed so as to read on the Aaron blade. The parties dispute the interpretation that the court should give certain terms in the claims and the specification does not define the disputed terms. At this stage, the prosecution history does not resolve the issue. Defendant argues that the proper construction limits the claim so they can be read only on devices with a thickness of 3 EXHIBIT 99(a), PAGE 3 mils that transmit electricity to the flesh by capacitive coupling and could be not read on its device, which has a thickness of .7 mils and operates, to some degree, by ohmic conduction. Plaintiff disputes such an interpretation of the claims and argues that it is too narrow. 4. The court concludes that Plaintiff has failed to establish a substantial likelihood that claims 1 and 5 should be interpreted to read on a device, such as the Aaron blade, with an aggregate thickness of 0.7 mils and which operates, to some degree, by ohmic conduction. 5. Plaintiff has also failed to present sufficient evidence to establish that there is a substantial likelihood that the Aaron device performs substantially the same function, in substantially the same way, to achieve substantially the same result as the claimed invention. As discussed above, the expert testimony before the court as to whether the Aaron blade delivered electrical energy primarily through ohmic conduction or by capacitive coupling was contradictory. Although Dr. Kieda testified that Mr. Bowers was incorrect in his determination that the Aaron blade operated primarily by ohmic conduction, the court cannot make that conclusion based on the evidence presented, which appeared to be a battle of equally knowledgeable experts. 6. Much of plaintiff's argument focused on its prior infringement action against Aspen. The jury verdict for Plaintiff in that case might be evidence to support a finding of the likelihood of success if the issue before this court was the validity of the patent. Hybritech, Inc. v. Abbott Laboratories, 849 F.2nd 1446, 1453(Fed.Cir 1988). Although Aaron does dispute the validity of the patent, at this stage, the court finds that the '807 patent is valid. However, in order to show a likelihood of success on the merits, a plaintiff must present proof on both validity and infringement. Sofamor Danek 74 F.3d at 1219. To establish infringement, the claims at issue must be compared with the accused device. Amstar Corp. v. Envirotech Corp., 730 F.2d 1476 (Fed. cir. 1984). Therefore, the court's analysis has focused on the claims of the '807 patent and the Aaron blade, not an analysis of the similarities of the Aaron blade and the Aspen blade. The court finds the evidence presented with regard to the Aaron blade is equivocal and insufficient to support a finding that plaintiff is likely to succeed on its claims. The plaintiff having failed to establish a reasonable likelihood of success on the issue of infringement, the court hereby DENIES the motion for a preliminary injunction. IT IS SO ORDERED this 27 day of August, 1996. BY THE COURT; TENA CAMPBELL United States District Judge EXHIBIT 99(a), PAGE 4 -----END PRIVACY-ENHANCED MESSAGE-----