Form 10KSB

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005
Commission file number 0-12183

BOVIE MEDICAL CORPORATION
[Missing Graphic Reference]
(Exact name of small business issuer as specified in its charter)

Delaware No.
 
11-2644611
(State or other jurisdiction
 
(IRS Employer Identification No.)
of incorporation or organization)
 
 

734 Walt Whitman Rd., Melville, New York 11747
(Address of principal executive offices)

(631) 421-5452
(Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act
Common Stock, $.001 Par Value
(Title of class)

Securities registered under Section 12(g) of the Exchange Act
None

Indicate by check mark whether the registrant (I) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB any amendment to this Form 10-KSB. [ ]

Issuer’s revenues for its most recent fiscal year were $20,211,141.

The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of March 17, 2006 was approximately $37,445,121.

The number of shares of the registrant's $.01 par value common stock outstanding as of March 17, 2006 was 14,115,068.

Company Symbol-BVX Company SIC (Standard Industrial Code)-3841



DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference.
Bovie Medical Corporation
2005 Form 10-KSB Annual Report

Table of Contents

Part I
 
 
 
Part II
 
 
 
Part III
 
 
 


 

BOVIE MEDICAL CORPORATION
 
Part I

ITEM 1. Description of Business

Background

Bovie Medical Corporation (“the Company” or “Bovie”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 734 Walt Whitman Road, Melville, New York 11747.

Bovie is actively engaged in the business of manufacturing and marketing medical products and developing related technologies. Aaron Medical Industries, Inc. (“Aaron”), a 100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing our medical products. Over the past several years, we changed our focus to the manufacture and marketing of generators and electrosurgical disposables, evidenced by the development of a broad range of electrosurgical generators designed for doctor’s offices, surgicenters and hospitals.
 
We manufacture and market products both under private label and the Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has original equipment manufacturing (OEM) agreements with other medical device manufacturers. These OEM and private label arrangements and our use of the Bovie/Aaron label allow us to gain greater market share for the distribution of our products.

Company Products

Electrosurgery Products

We continue to expand our line of electrosurgery products, which include, generators, electrodes, electrosurgery pencils, and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue and constitute our largest product line. Our accessories for electrosurgery products are substantially compatible with most major manufacturers’ electrosurgery generator products. With the exception of OEM products, all of our electrosurgery generators and accessories are marketed using the internationally recognized Bovie trademark. It is estimated that 80% of all surgical procedures performed worldwide are accomplished by electrosurgery, including laparoscopic, as well as general surgery and surgical procedures in gynecology, urology, plastic surgery and dermatology.

Bovie/Aaron 800 and 900 High Frequency Generators

These products are low powered generators, designed primarily for dermatology and plastic surgery in a physician’s office. The units are 30-watt high frequency generators used mainly in doctors’ offices for removing small skin lesions and growths.

Bovie/Aaron 950

Bovie has developed the first high frequency generator with cut capacity for outpatient surgical procedures. It was designed mainly for use in doctors’ offices and is utilized in a variety of specialties including dermatology, gynecology, and plastic surgery.

Bovie/Aaron 1250

We have also developed a 120-watt multipurpose electrosurgery generator. The unit features monopolar and bipolar functions with pad sensing. The product is being produced in at least two private label formats in addition to the Bovie/Aaron label.
 

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Bovie/Aaron 2250/IDS 300

Given the market interest in more powerful electrosurgical generators, we have developed a 200-watt multipurpose digital electrosurgery generator designed for the rapidly expanding surgi-center market in the United States. This unit features both monopolar and bipolar functions, has pad and tissue sensing, plus nine blended cutting settings. This unit has the capability to do most procedures performed today in the surgi-center or outpatient settings and was introduced in 2003. The Bovie® IDS Series are the latest electrosurgical generators with fully digital implementation. Bovie is using dedicated digital hardware instead of a general purpose controller for processing data. The digital hardware allows very high parallel data processing throughout the operation. All data is sampled and processed digitally. While 200 watts is more than enough power to do most procedures in the operating room, 300 watts is considered the standard and believed to be what most hospitals and surgi-centers will require. The Bovie IDS-300 has been designed based on a digital feedback system. The unit has a tissue sensing capability 20 times faster than the market leader. For the first time in electrosurgery, through digital technology, we are able to measure tissue impedance in real time (5000 times a second). As the impedance varies, the power is adjusted to deliver a consistent clinical effect.

Battery Operated Cauteries

Battery operated cauteries constitute our second largest product line. 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 arresting bleeding in many types of surgery. Battery operated cauteries are primarily sterile one-time use products. Bovie manufactures the broadest line of cauteries in the world, including but not limited to, a line of replaceable battery and tip cauteries, which are popular in overseas markets.

Battery Operated Medical Lights

We manufacture a variety of specialty lighting instruments for use in ophthalmology as well as patented specialty lighting instruments for general surgery, hip replacement surgery and for the placement of endotracheal tubes in emergency and surgical procedures. We also manufacture and market physicians’ office use penlights.

Nerve Locator Stimulator

Bovie manufactures a nerve locator stimulator primarily used for identifying motor nerves in hand and facial reconstructive surgery. This instrument is a self-contained, battery-operated unit, used for single surgical procedures.

New Products

Low Temperature Focused Plasma Technology (in development)

In February 2000, we entered into a Joint Venture Agreement with a non-affiliated German corporation, Jump Agentur Fur Elektrotechnik GMBH, wherein we have a 50% interest in the equity and a 50% interest in the profits of the joint venture. Pursuant to the agreement, Bovie initially advanced $200,000 to the partnership to cover costs of further research toward the production of two commercial prototypes. Bovie has made available its facilities in Florida for development, manufacturing and marketing of the products of the joint venture and is responsible to expend its best efforts to secure all necessary financing for the research, development and marketing of the products estimated to be an amount up to $1.5 million. To date we have expended approximately $.7 million for the development of the technology. Based upon our current cash position, cash flows and credit facility we believe we have the financial resources to satisfy our obligations.

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Pursuant to agreement, the joint venture acquired an exclusive license to produce and market any surgical/medical devices utilizing this technology. In fiscal 2005 and 2004, Bovie made additional advances to the joint venture in the form of research and development of prototypes expending $161,190 and $39,286 in development and engineering costs, respectively.
 
This technology utilizes a gas ionization process using only one working electrode. The device produces a stable thin focused beam of ionized gas that can be controlled in a wide range of temperatures and intensities, providing the surgeon with precision, minimal invasiveness and an absence of conductive currents during surgery substantially reducing overheating in the area or burning.

The device has been developed and patented in both Europe and the United States. Bovie has constructed its first two pre-production prototypes for field-testing purposes as a prelude to eventual FDA submission and clearance for manufacturing. The initial intended uses are in the areas of veterinary medicine, dermatology, plastic surgery, cosmetology and gastroenterology.

To date there have been no revenues recorded by the joint venture.

New Generator Platform

We have developed a new generator platform, which incorporates a flexible and simple user interface and allows for customization of the output modes for a variety of electrosurgical applications.

·  
GI Device (Icon GI)-

The Icon GI (in development) is as a customized designed specialty electrosurgical product for the gastroenterological market. This product is designed to improve safety and convenience in performing GI procedures (a) by ensuring that the accessories are properly connected, thereby avoiding procedural mishaps, and (b) by allowing for the settings to be customized by the physician user. Available statistics indicate that during the period 1996 to 2000 colonoscopies performed in the United States increased 100%. We expect to file our 510K applications for clearance to market the Icon GI device in June 2006.

·  
Bovie Button

After a review of time-motion studies and focus groups of gastroenterologists and GI lab assistants we have recently completed development of a new device designed to eliminate the foot pedal and cables which are associated with standard electrosurgical generators found in all gastrointestinal (“GI”) labs. On March 1, 2006, subject to sterilization validation, we received clearance from the US Food and Drug Administration (“FDA”) to market the Bovie Button. We anticipate commencement of marketing of the Bovie Button during 2006.

Suture Removal Device (in development)

In October 2003 we entered into an exclusive worldwide license agreement with Emergency Medical Innovations, LLC., (EMI) a non-affiliated company, to manufacture and market a disposable suture removal device (patent pending). The device is expected to reduce time for removing stitches in a doctor’s office, medical clinic or emergency room. The device is designed to remove sutures with a tension free cut to be utilized in various medical procedures on humans and animals. We are presently developing pre-production prototypes and subject to FDA clearance for marketing, we have now targeted the last quarter of 2006 for release and marketing to medical professionals. We expended development funds of approximately $66,000 in 2005 and $50,000 in 2004. When the product begins selling we will pay a 6% royalty to EMI, the licensor.

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The exclusive license agreement provides for, among other things, a term of 15 years, with automatic 2-year renewals thereafter, subject to mutual agreement on minimum production and sales. Bovie has the right to terminate on 90-days notice to Licensor if it determines in its sole discretion that the product is non-competitive and not commercially viable. Licensor may terminate the agreement if Bovie violates a material term and does not cure the breach within 60-days after receipt of notice of default. In addition, Bovie may lose exclusivity if there is a 10% decrease in sales over a consecutive two calendar year period.

Bovie may elect to retain exclusivity by paying sufficient royalties to offset loss to Licensor resulting from the decreased sales.

We expect to market this product in 2006

Endoscopic Modular Instruments

In January, 2006, pursuant to agreement to acquire technology from Henvil Corp. Ltd.(“Henvil”) and Steve Livneh, its principal, we acquired patent pending technology for new endoscopic disposable and reusable modular instruments (“the Product”). The innovative modular forceps are ergonomically designed to provide surgeons’ added comfort and improved safety while reducing per-procedure costs. The modular forceps offer a unique and simpler assembly process for laparoscopic procedures and is the first modular design for the arthroscopy market. Commercial prototypes have been developed and based on current projections we expect to commence marketing during fiscal 2006. The estimated annual worldwide market size for instruments of these categories is estimated to exceed $200 million.

The agreement requires us to purchase certain equipment and machinery ($400,000.00 value) and to hire Henvil to develop the technology and complete the design of the arthroscopic and laparoscopic instruments. In addition we must also purchase tools and molds expected to cost approximately $120,000. Henvil and Steve Livneh have also been hired as consultants for the development of the technology. The consultants are to be paid $30,000 per month from the day of execution of the agreement. In addition, commencing with the year following the first sale or commercial delivery of the Product, Bovie shall pay to Henvil’s principal, Steve Livneh, an initial minimum royalty of the greater of $35,000 per year or 3% of adjusted gross revenues received from the sale and marketing of the instruments. Thereafter, a royalty equal to 2.5% of adjusted gross sales for the life of the patents issuable for the technology.

Mr. Livneh also shall receive 50,000 5-year restricted stock options to purchase Bovie common stock for each category of instrumentation (a total of 100,000 stock options) exercisable at the closing price of Bovie common stock on the American Stock Exchange on the date of issuance of the options. The options shall vest immediately subject to Bovie’s prior application seeking FDA clearance for marketing the Product.

Manufacturing, Marketing and Distribution

Bovie manufactures the majority of its products on its premises in St. Petersburg, Florida. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name, the Bovie/Aaron name and private label. Major distributors include Allegiance (a Cardinal Company), IMCO, McKesson Medical Surgical, Inc., NDC (Abco, Cida and Starline), Owens & Minor, and Physician Sales & Service.

We have a major OEM customer, Arthrex, Inc., for which we manufacture products on a private label basis, pursuant to agreement. The agreement provides, among other things, that we will be reimbursed for our expenses in developing products according to Arthrex’s specifications. Arthrex owns the technology and we may not generally compete with the product developed in Arthrex markets. The agreement further provides that Arthrex is not obliged to place any orders for the product developed, but if it does seek to place orders, it must place them with us. The agreement also generally provides for product warranties,

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insurance, termination, and confidentiality. In fiscal 2005, Arthrex orders represented approximately 15% of revenues for us. As such, should Arthrex determine to reduce or cease placement of orders for the products, our business will be adversely affected.

We are presently in the final stages of developing a new OEM product line based upon our own digital technology. We began shipping pilot production models during the first quarter of fiscal 2006. In addition, in order to foster growth and visibility in the marketplace: (a) We created two new regional sales managerships in 2005 and plan to add two additional regional sales managers in 2006, and (b) We are currently formulating strategic partnerships with companies that have historically strong hospital sales relationships to improve our position in the acute care (hospital) market.

Competition

The medical device industry is highly competitive. Many competitors in this industry are well established, do a substantially greater amount of business, and have greater financial resources and facilities than we do.

We believe we rank third in the field of electrosurgical generator manufacturing and we sell our products and compete with other manufacturers in various ways. In addition to advertising, attending trade shows and supporting our distribution channels, we strive to enhance product quality, improve user friendliness and expand product exposure.

We also compete by private labeling our products for major distributors under their label. This allows us to have our product in the marketplace and thereby compete from two different approaches, our Aaron or Bovie label, and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. Our main competitors do not private label their products

Lastly, we only sell our product through distributors. Since we never sell direct to the end user we are participating with our distribution partners, and never competing with them. Many of the companies we compete with sell direct, thus competing directly with distributors they sometimes use.

Main competitors are Conmed, Valleylab (a division of Tyco) and Erbe Electromedizine, in the electrosurgery market and Xomed (a division of Medtronics) in the battery operated cautery market. We believe our competitive position did not change in 2005.
 
Government Regulation

United States

The Company’s products and research and development activities are subject to regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities:

·  
Product development.
·  
Product testing.

·  
Product labeling.
·  
Product storage.

·  
Pre-market clearance or approval.
·  
Advertising and promotion.

·  
Product traceability, and
·  
Product indications.

In the United States, medical devices are classified on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls. These controls include registration and listing, labeling, pre-market notification and adherence to the FDA Quality System Regulation. Class II devices are subject to general and special controls. Special controls include

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performance standards, post market surveillance, patient registries and FDA guidelines. Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness. Currently, we only manufacture Class I and Class II devices. Pre-market notification clearance must be obtained for some Class I and most Class II devices when the FDA does not require pre-market approval.

Manufacturing

Manufacturing and distribution of our products may be subject to continuing regulation by the FDA. We will also be subject to routine inspections by the FDA to determine compliance with the following:

·  
Quality System Regulations.
·  
Medical device reporting regulations, and

·  
FDA restrictions on promoting products for unapproved or off-label uses.

In addition to regulations enforced by the FDA, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act and other federal, state and local regulations.

International

To market products in the European Union and countries other than the United States, we must obtain regulatory approval similar to that required by the FDA. All of our medical devices are classified as Class III devices under the European Medical Devices directive. Therefore, we were required to obtain the “CE Mark” certification from a “Notified Body” in one of the member countries in the European Union. The CE Mark certification is an international symbol of adherence to quality assurance standards and compliance with the applicable European Medical Devices Directive.

Approval by a Notified Body typically includes a detailed review of the following:

·
Description of the device and its components,
·
Safety and performance of the device,

·
Clinical evaluations with respect to the device,
·
Methods, facilities and quality controls used to manufacture the device, and

·
Proposed labeling for the device.

Manufacturing and distribution of a device is subject to continued surveillance by the Notified Body after CE Mark certification to ensure continued compliance with quality control and reporting requirements.

Pre-market notification clearance must be obtained for some Class I and most Class II devices when the FDA does not require pre-market approval. A pre-market approval application is required for most Class III devices. A pre-market approval application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device. The pre-market approval application typically includes:

·  
Results of bench and laboratory tests, animal studies, and clinical studies,
·  
A complete description of the device and its components,

·  
A detailed description of the methods, facilities and controls used to manufacture the device, and
·  
Proposed labeling.

The approval process can be expensive, uncertain and lengthy. A number of devices for which FDA approval has been sought by other companies have never been approved for marketing. To date we have not experienced non-approval of any of our devices heretofore submitted to the FDA.

We obtained CE Mark certification to market our products in the European Union in 1999. In addition to CE Mark certification, each member country of the European Union maintains the right to impose additional regulatory requirements.

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Outside of the European Union, regulations vary significantly from country to country. The time required to obtain approval to market products may be longer or shorter than that required in the United States or the European Union. Certain European countries outside of the European Union do recognize and give effect to the CE Mark certification. We are permitted to market and sell our products in those countries.
 
Patents and Trademarks

We own a total of twelve outstanding patents but do not believe our current patents have a material effect on our operations. The useful lives of our existing patents have substantially diminished. We can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right.

We have recently filed new patent applications for the Bovie Button and a snare device (GI accessory products) and we will file later this year for our new Generator Platform and a Plasma Stream patent application relating to the plasma technology. We also plan to file new trademark applications relating to our GI products later this year.

Liability and Insurance

The manufacture and sale of medical products entail significant risk of product liability claims. Bovie currently maintains product liability insurance with combined coverage limits of $5 million on a claim made basis. There is no assurance that this coverage will be adequate to protect us from any liabilities we might incur in connection with the sale or testing of our products. In addition, we may need increased product liability coverage as products are commercialized. This insurance is expensive and in the future may not be available on acceptable terms, if at all.

Research and Development

The amount expended by us on research and development of our products during the years 2005 and 2004, totaled $985,807 and $907,389 respectively. We have not incurred any direct costs relating to environmental regulations or requirements. Our research and development costs for our products are not borne by our customers.

Employees

Presently Bovie has a total of approximately 140 full time employees. These consist of 4 executive officers, 22 supervisory and managerial personnel, 8 sales, 106 technical support administrative and factory employees.

Significant Subsidiary - Aaron Medical Industries, Inc.

Aaron Medical Industries, Inc., is a Florida Corporation with offices in St. Petersburg, Florida. It is principally engaged in the business of marketing our medical products.
 
ITEM 2. Description of Properties

Bovie has executive office space at 734 Walt Whitman Road, Melville, New York and its St. Petersburg, Florida manufacturing facility located at 7100 30th Ave N. Bovie leases the executive offices in New York for $1,450 per month through the year 2006. Bovie owns its main facility in Florida consisting of 28,000 square feet of office, warehousing and manufacturing space.

On August 20, 2003, Bovie signed an agreement to lease approximately 20,000 square feet of space located at 3200 Tyrone Blvd., St. Petersburg Florida for sixty-two months commencing on September 1, 2003 and terminating on October 31, 2008, with an option to renew for an additional five years. This additional space provides Bovie with a total of 48,000 square feet of manufacturing warehousing and office space in

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Florida. The building leased is in close proximity to our present manufacturing facility in St. Petersburg, Florida. The base monthly rent is $8,750 commencing on November 1, 2003. The base rent increases by 3% for each year of the lease. We are responsible for common area maintenance, insurance and real estate taxes which have been established at $1,667 per month for the first year of the term of the lease.
 
In October 2004 a hurricane damaged the roof of approximately 1500 square feet of office space at 7100 30th Ave N, St. Petersburg causing extensive water damage. The offices had been used by several engineers which had to be moved to other space. An additional 4200 square feet of office and warehouse space was leased on a month-to-month basis at 7191 30th Ave N, St. Petersburg for $2,140 per month which continues into 2006.

The damage to our building was $245,264 which the insurance company has paid to us. The City of St. Petersburg issued a permit and the contractor completed the repairs in 2005.

ITEM 3. Legal Proceedings

We presently have no material litigation outstanding.
 
ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to securities holders during the fourth quarter of the year ended December 31, 2005.

PART II

ITEM 5. Markets and Market Prices

Bovie’s common stock has been traded on the American Stock Exchange since November 5, 2003. Prior to that it was traded in the over-the-counter market on the OTC bulletin board. The table shows the reported high and low bid prices for the common stock during each quarter of the last eight respective quarters as reported by the OTC Bulletin Board (symbol “BOVI”) and the American Stock Exchange (symbol “BVX”). These prices do not represent actual transactions and do not include retail markups, markdowns or commissions.

2005
 
High
  
Low
 
 
      
1st Quarter
$
3.05
$
2.20
2nd Quarter
 
2.54
  
1.95
3rd Quarter
 
2.44
  
1.60
4th Quarter
 
2.99
  
2.05
 
 
 
 
 

2004
High
Low
 
 
 
1st Quarter
$
3.70
$
2.32
2nd Quarter
 
3.10
  
2.31
3rd Quarter
 
3.00
  
2.06
4th Quarter
 
2.72
  
2.25
 
 
      

On March 17, 2006, the closing bid for Bovie’s Common Stock as reported by the American Stock Exchange was $3.41 per share. As of March 17, 2006, the total number of shareholders of the Bovie’s Common Stock was approximately 1,500, of which approximately 700 are estimated to be shareholders

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whose shares are held in the name of their broker, stock depository or the escrow agent holding shares for the benefit of Bovie Medical Corporation shareholders and the balance are shareholders who keep their shares registered in their own name.

ITEM 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Level Overview

We are a medical device company engaged in the manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

We divide our operations into three reportable business segments.  Electrosurgical products, battery operated cauteries and other products. The electrosurgical segment sells electrosurgical products which include generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

Domestic sales accounted for 83% of total revenues in 2005 as compared to 85% in 2004. Most of the Company’s products are marketed through medical distributors which distribute to more than 6,000 hospitals and to doctors and other health-care facilities.

International sales accounted for 17% of total revenues in 2005 as compared to 15% in 2004. The Company’s products are sold in more than 150 countries through local dealers. Local dealer support is coordinated by sales and marketing personnel at the St. Petersburg, Florida facility. We have no manufacturing facilities branch offices other than the Florida facility. We sell our products to distributors that distribute them in the following countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, India, Italy, Japan, Korea, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan and the United Kingdom, China, the CIS (former Soviet Union), Cyprus, Indonesia, Ireland, Korea, Latin America, Malaysia, the Philippines, Thailand, Turkey, and Vietnam. Our business is generally not seasonal in nature.

Outlook for 2006

The Company’s outlook for the fiscal year ending December 31, 2006 is positive, as we expect revenues to be at a record level which should translate into improved net earnings when compared to fiscal year 2005. Our optimism is based on our sales during the first three months of fiscal year 2006 and on current budget estimates. The outlook excludes any sales which may be generated by Bovie’s new products (detailed in part I of this report), some of which we expect to begin marketing during the current calendar year. As part of our anticipated growth, we expect higher costs in selling, payroll, professional fees, administrative costs and added expenses for research and development of new products. Growth, to a significant degree, will be fueled by anticipated higher OEM sales and generally increased sales in most product areas. Foreign sales are also forecast to be higher. The markets for our products are highly competitive; however, we believe that our competitive advantage is rooted in our ability to offer products that meet changing demand. In addition, we offer the flexibility, quality of products and responsiveness that a smaller company can offer.

Fiscal year 2006 should feature new product introductions either by Bovie alone, and/or in collaborations with other larger medical companies. Although there is no assurance that agreements will transpire, we view possible agreements (not strictly OEM) to be beneficial in certain niche market segments. The shifting away from being highly dependent on OEM contracts toward designing, developing and marketing our own brand of products, is accelerating and we anticipate that this will result in improved margins in the future.

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The outlook is based on a number of assumptions which are subject to change; some of which are outside our control. A variation in our assumptions may result in a change in this outlook.

RESTATEMENT OF FINANCIAL STATEMENTS

We adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities - An Interpretation of ARB51 that requires the consolidation of legal structures, called Variable Interest Entities (VIEs). Our joint venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”) qualified as a VIE. We had historically accounted for the investment in JAG on the equity basis. We have restated our balance sheets and consolidated JAG in the years ended December 31, 2004 and 2003. The most significant impact to our financial statements was to add the intangible assets of JAG, totaling approximately $350,000 in 2004 and $360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000 in 2003 to our balance sheets. The impacts on our consolidated statements of net income or cash flows was not material.

We amended our statement of operations for the year ended December 31, 2004 and reclassified a $245,264 gain from insured damages to our building from a hurricane as other income instead of an extraordinary item. The reclassification did not affect our taxable net income which remained at $1,511,997 nor did it affect our earnings per share and diluted earnings per share of $.11 and $.09, respectively.

Results of Operations (to be read in conjunction with the profit and loss statement)

The table below outlines the components of the consolidated statements of earnings as a percentage of net sales and the year-to-year percentage change in dollar amounts:

Analysis of 2005/2004
 
 
  
Percentage change in dollar amounts
 
2005
2004
%
2004/2005
 
%
%
Change
%
         
Sales
100.0
100.0
0
(1.4)
Cost of sales
62.6
61.1
1.5
.1
Gross profit
37.4
38.9
(1.5)
(3.8)
         
Other costs:
        
R & D
4.9
4.4
.5
8.6
Professional fees
2.2
2.0
.2
7.6
Labor
9.9
9.6
.3
1.7
SGA
17.6
16.4
1.2
9.4
Development cost - joint venture
.8
.2
.6
310.3
         
Total other costs
35.4
32.6
2.8
8.6
 
        
Income from operations
2.0
6.2
(4.2)
(68.2)
 
        
Other income/expense
.1
1.2
(1.1)
(89.6)
 
        
Net income before taxes and minority expense
2.1
7.4
(5.3)
(71.9)

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Income tax expense
(.8)
(2.2)
(1.4)
(69.7)
Income tax benefit
.7
2.2
1.5
(75.6)
 
        
Net income after taxes
2
7.4
(5.4)
(73.1)
 

The table below sets forth domestic/international and product line sales Information:

Net Sales (in thousands)
                  
Percentage
    
             
Increase
    
Change
    
     
2005
2004
    
(Decrease)
    
2005/2004
    
                         
Domestic/international sales in thousands)
                        
                         
Domestic
 
$
16,830
17,506
 
  
(676 )
 
 
(4)
%
  
International
 
 
3,381
2,989
 
  
392
 
 
13
 
 
 
 
 
  
 
 
    
 
 
  
 
 
Total net sales
 
$
20,211
20,495
 
  
(284)
  
 
(1)
 
 
 
 
 
  
 
 
    
 
 
  
 
 
Product line sales:
 
 
  
 
 
    
 
 
  
 
 
Electrosurgical
 
$
12,191
12,684
 
  
(493)
 
 
(4)
 
 
Cauteries
 
 
5,462
5,460
 
  
2
 
 
--
 
 
Other
 
 
2,558
2,351
 
  
207
 
 
9
 
 
 
 
 
  
 
 
    
 
 
  
 
 
Total net sales
 
$
20,211
20,495
 
  
(284)
 
 
(1)
 
 

2005 Compared with 2004

Our net sales decreased 1% in 2005 to $20.2 million from $20.5 million in 2004($.3 million decrease). Net sales remained relatively constant across our product lines. Approximately 4,500 generator units were shipped in 2004 as compared to 4,600 for 2005. No sales of one particular electrosurgical product dominates the number of units sold. We increased prices for our products in 2005 by an average of 3.5%
 
Arthrex sales of generators and accessories decreased 2.9 million or 50% from 5.9 million in 2004 to 3.0 million in 2005. The decrease was offset by increase of generators sold through distributors.

Domestic sales were $16.7 million for 2005, representing a decrease of 4% as a result of decreased shipments of generators and accessories to Arthrex. International sales were $3.5 million for 2005, representing an increase of 15% as a result of higher shipments of generators. Excluding the impact of foreign currency, international sales increased $.45 million in 2005.
 
Cost of sales represented 63% of sales in 2005 compared to 61% in 2004. The 2% higher cost of sales in 2005 was mainly attributable to the increased payroll and overhead.

Research, development and engineering expenses represented 4.9% and 4.4% of sales for 2005 and 2004, respectively. These expenses increased 1% in 2005 to $985,807, an increase over 2004 spending of $78,418. The higher spending level is the result of development spending in advance of our proposed product launches in 2006. New products under development by us are the suture removal device, GI Icon gastrointestinal device and various improvements to our line of electrosurgical generators.

-11-


Research and development for the J. Plasma device increased from $39,286 in 2004 to $161,190 in 2005, an increased of 310% or $121,904.

Professional fees increased from $415,606 in 2004 to $447,346 in 2005, an increase of $31,740 or 8%. Professional fees mostly increased as a result of the costs of filing and S-3 registration statement.

Salaries and related costs increased by 1.7% from $1.98 million to $2.01 million. The number of sales and administrative employees and benefits remained approximately the same in 2005 as compared with 2004.
Selling, general and administrative expenses increased by .3% million or 9.4% in 2004 to $3.6 million in 2005. The 9.4% increase in selling, general and administrative expenses is primarily due to an increase in commission expense, increased general liability insurance, and increased repairs and maintenance.

Net interest expense increased to $22,703 in 2005 from $15,090 in 2004, primarily as a result of a higher interest rate on our outstanding mortgage. An increase from 4.75% to 7.5% during 2005.

The effective income tax rate was 36.2% in 2005 and 2004. There was also a tax loss carryover benefit of 36.2% in 2004. An estimate of alternative minimum tax was $10,000 in 2005 and AMT paid for 2004 was $22,015. Income from operations was $403,968 in 2005 as compared to $1,268,556 in 2004. A decrease of 68% or $864,588. The main reasons for the decrease in earning was higher research and development of $200,322, a decrease in gross profit of $295,008 and an increase in SG&A of $303,972.

In October 2004 a hurricane tore a portion of the roof off the office facility at 7100 30th Avenue North, St. Petersburg, Florida causing extensive water damage to that portion of the building. The cost of the building allocated to the loss was $63,749 of which there was depreciation of $12,278 leaving a net cost of $51,471. As per Financial Accounting Standard Board interpretation number 30 we have recognized a gain of $245,264 from the non-monetary asset being involuntarily converted to a monetary asset through the payment by the insurance company of $296,735. This is reflected as other income on the consolidated statement of income.

Net earnings, decreased 73% to $.4 million from $1.5 million in 2004. Basic net earnings per share, decreased by 73% to $.03 in 2005 from $.11 in 2005. Diluted earning per share in 2005 was $.03 as compared to $.09 for diluted earnings per share for 2004.
 
We sell our products through distributors both overseas and in US markets. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows.

We have arrangements with various sales representatives to develop markets for our new products and to maintain customer relations. Our current representatives receive an average commission of approximately 4% of sales in their market areas. In 2005 and 2004, commissions paid were $442,373 and $367,299 respectively, an increase of 20%. The increase was due to increased sales upon which we pay commissions. This increase was offset by the decrease in OEM sales.

An adequate supply of raw materials is available from both domestic and international suppliers. The relationship between our suppliers and us is generally limited to individual purchase order agreements, supplemented by contractual arrangements with key vendors to ensure availability of certain products. We have developed multiple sources of supply where possible.

In order to provide additional working capital, we have secured a $1.5 millions credit facility with a local commercial bank. This facility is payable on demand. For the year ended December 31, 2005, we had zero funds drawn down on this credit facility.


-12-


Our ten largest customers accounted for approximately 65% of net revenues for 2005 as compared to 70% in 2004. For both years December 31, 2005 and 2004, our ten largest trade receivables accounted for approximately 66% of outstanding receivables in both years. In 2005 and 2004 one customer accounted for 15% and 29% of total sales, respectively.

Product Development

Most of our products and product improvements have been developed internally. Funds for this development have come from internal cash flow and the sale of common stock upon the exercise of stock options. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products and product improvements to complement and expand our existing product lines. We have a centralized research and development focus, with its one manufacturing location responsible for new product development and product improvements. Our research, development and engineering units at the manufacturing location maintain relationships with distribution locations and customers in order to provide an understanding of changes in the market and product needs. During 2005 we invested in the J Plasma technology, the suture removal technology, the Gastrointestinal “GI” device and undertook development of Cardio and Urological Electrosurgical devices for a contractual partner. The suture removal device and the GI device are slated to be marketed during 2006. The ongoing cost for this development will be paid from operating cash flows.

In the next year we do not contemplate any material purchase or acquisition of assets which our ordinary cash flow and or credit line would not be able to sustain.

We believe that Bovie has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures needed for the expansion of our manufacturing site, working capital requirements, and product development programs, subject to Bovie maintaining compliance with our credit facility.

Non-Medical Products

We discontinued our non-medical product line in 2003 by selling our inventory at cost, and licensing our customer list and manufacturing technology to our largest customer in that field for $500,000 payable in equal installments over 5 years. The transaction is being accounted for as a licensing agreement over five years and in 2005 and 2004 we received income of $100,000 and $100,000, respectively, from the licensing.

Reliance on Collaborative, Manufacturing and Selling Arrangements

We are dependent on certain contractual OEM customers for product development wherein we are to provide the manufacturing of the product developed. However, the customer has no legal obligation to purchase the developed products. Should the collaborative customer fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between Bovie and its contractual customers which could adversely affect production of our products. We also have informal collaborative arrangements with two foreign suppliers where in we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase orders are never for more than one year and are supported by orders from our customers.

In January 2006 we entered into an agreement to acquire patents and technology for endoscopic disposable and reusable modular instruments requiring us to purchase equipment, tools and molds valued at $520,000. As part of the agreement, we retained the services of the seller and its principal at rate of $30,000 per month for one year to develop commercial prototypes for marketing.

-13-


Liquidity and Capital Resources

Our working capital at December 31, 2005 was $5.5 million as it was at December 31, 2004. Accounts receivable days sales outstanding were 45 days and 41 days at December 31, 2005 and 2004 respectively. Days sales in inventory increased 28 days to 86 days at December 31, 2005 from 58 days at December 31, 2004. The higher days sales in inventory is due to increased inventories resulting from additional orders to be shipped and products to be manufactured under a new OEM contract.

We applied cash of $.2 million to operations in 2005 compared with generating cash of $2.04 million in 2004. The decrease in cash from operations in 2005 compared to the prior year is primarily due to the increase of inventory of $.9 million and trade receivables of .4 million.

In 2005 we used $.9 million for the purchase of fixed assets. Total borrowing declined by $31,665 which is the amount we reduced our first mortgage by. Employees and others exercised options and purchased shares for $138,861.

We had 1.3 million in cash and cash equivalents at December 31, 2005. We also had outstanding borrowings totaling $.348 million at that date. Current maturities of long-term debt at December 31, 2005 were $.348 million. We believe our cash on hand, as well as anticipated cash flows from operations, will be sufficient to fund future operating capital requirements, future manufacturing facility construction and other capital expenditures and future acquisitions to supplement our current product offerings. Should additional funds be required, we have $1.5 million of additional borrowing capacity available under our existing credit facility.

The Company’s future contractual obligations for agreements with initial terms greater than one year, including agreements to purchase materials in the normal course of business, are summarized as follows (in thousands):

 
 
Payment Period
 
 
2006
2007
2008
2009
Long-term debt
348
-0-
-0-
-0-
Operating leases
142
135
115
-0-
Unconditional purchase obligations
2,587
-0-
-0-
-0-

The Company’s additional borrowing capacity, along with the expected expiration period of the commitments, is summarized as follows (in millions):

 
 
    
Amount of Commitment
 
 
 
Total
  
Expiration Per Period
 
 
 
Amount
  
Less than
  
In excess of
 
 
 
Committed
  
1 year
  
1 year
 
Secured revolving credit agreement and other lines of credit
 
$
1.5
 
$
1.5
 
 
-0-
 

As of December 2005 the total amount is available.

Our future results of operations and the other forward-looking statements contained herein, particularly 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, there are other factors that could cause actual results to differ materially, such as business conditions and the general economies; competitive factors including rival manufacturers’ availability of components at reasonable prices; risk of nonpayment of accounts receivable; risks associated with foreign operations; and litigation involving intellectual property and consumer issues.

-14-


We believe that we have the product mix, facilities, personnel, competitive edge, operating cash flows and financial resources for business success in the immediate (1 year) future and distant future (after 1 year), but future revenues, costs, margins, product mix and profits are all subject to the influence of a number of factors, as discussed above.

Critical Accounting Estimates

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted (GAAP) in the United States of America (U.S.). Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements.

The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, property, plant and equipment, minority investment, legal proceedings, research and development, warranty obligations, product liability, pension obligations, sales returns and discounts, and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, actuarial valuations, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses in the collection of accounts receivable. We make estimates regarding the future ability of our customers to make required payments based on historical credit experience and expected future trends. If actual customer financial conditions are less favorable than projected by management, additional accounts receivable write-offs may be necessary, which could unfavorably affect future operating results.

Inventory Reserves

We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience, and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which could unfavorably affect future operating results.

Income Taxes

We operate in multiple tax jurisdictions both inside and outside the United States. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions. Tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different tax rates. Because tax adjustments in certain jurisdictions can be

-15-

significant, we record accruals representing our best estimate of the probable resolution of these matters. To the extent additional information becomes available, such accruals are adjusted to reflect the revised estimated probable outcome.
Other Matters

We distribute our products throughout the world. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our operating results are primarily exposed to changes in exchange rates among the United States dollar and European currencies, in particular the euro and the British pound. When the United States dollar weakens against foreign currencies, the dollar value of sales denominated in foreign currencies increases. When the United States dollar strengthens, the opposite situation occurs. We manufacture our products in the United States, China and Bulgaria and incur the costs to manufacture in US dollars. This worldwide deployment of factories serves to partially mitigate the impact of the high costs of manufacturing in the US.

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to Statement No. 123, Share-Based Payment. This revision supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This revision requires companies to recognize the cost of stock options based on the grant-date fair value pursuant to their employee stock option plans over the period during which the recipient is required to provide services in exchange for the options, typically the vesting period. Effective with our fiscal year 2006 that commenced on January 2, 2006 we will expense stock options, that are granted after January 1, 2006. This is in accordance with Statement of Financial Accounting Standards No. 123R “Share Based Payment.” No employee stock options were granted during the first three months of fiscal year 2006.

(See Note 1. Significant Accounting Policies)
 
ITEM 7. Financial Statements.

The information required by this item may be found on pages F-1 through F-29 of this Annual Report on Form 10-KSB.

(See Attached)

ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no disagreements with, or changes in, accountants.

ITEM 8A. Disclosure Controls And Procedures

(a) Evaluation of disclosure controls and procedures

An evaluation of the effectiveness of the design and operation of Bovie’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of December 31, 2005 was carried out under the supervision and with the participation of Bovie’s management, including the President and Chief Executive Officer and the Chief Financial Officer (“the Certifying Officers”). Based on that evaluation, the Certifying Officers concluded that Bovie’s disclosure controls and procedures are effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions and timely reporting regarding required disclosure.

-16-


(b) Changes in internal controls

There was no change to Bovie’s internal control over financial reporting during the quarter ended December 31, 2005 that materially affected, or is reasonably likely to materially affect, Bovie’s internal control over financial reporting.

ITEM 8B. Other Information

There was no information to be disclosed on Form 8K that was not reported.

Part III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons

Bovie’s Executive Officers and directors are as follows:

 Name
Position  
Director Since
Andrew Makrides
Chairman of the Board, President, CEO and
December 1982
 
Chief Financial Officer
  
J. Robert Saron
President of Aaron Medical Industries,Inc. and Director
August 1994
George Kromer
Director
October 1995
Brian Madden
Director
September 2003
Moshe Citronowicz
Executive Vice President and Chief Operating Officer
--
Michael Norman
Director
September 2004
Randy Rossi
Director
September 2004

Directors serve for one-year terms and are elected at the annual shareholders meeting.

Andrew Makrides, Esq. Age 64, Chairman of the Board and President, member of the Board of Directors, received a Bachelor of Arts degree in Psychology from Hofstra University and a Juris Doctor Degree from Brooklyn Law School. He is a member of the Bar of the State of New York and practiced law from 1968 until joining Bovie Medical Corporation as Executive Vice President and director, in 1982. Mr. Makrides became President of the Company in 1985 and the CEO in December 1998 and has served as such to date. Mr. Makrides employment contract extends to December 31, 2009.

J. Robert Saron, age 53, Director, holds a Bachelor degree in Social and Behavioral Science from the University of South Florida. From 1988 to present Mr. Saron has served as a director of Aaron Medical Industries, Inc. (formerly Suncoast Medical Manufacturing, Inc.). Mr. Saron served as CEO and chairman of the Board of the Company from 1994 to December 1998. Mr. Saron is presently the President of Aaron Medical Industries, Inc., which serves as the Company’s marketing subsidiary, and he is also a member of the Board of Directors of the Company. Mr. Saron serves on two industry boards, the Health Industry Distributors Association Education Foundation and the Health Care Manufacturing Marketing Council. Mr. Sarons employment contract extends to December 31, 2009.

George Kromer, Jr., age 65, became a director on October 1, 1995. Bovie Medical Corporation 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 business publications since 1980. In 1976, he received a Master’s Degree in health administration from Long Island University. 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.

-17-


Moshe Citronowicz, age 53, is a graduate of the University of Be’er Sheva, Be’er Sheva, Israel, with a Bachelor of Science Degree in electrical engineering. Since coming to the United States in 1978, Mr. Citronowicz has worked in a variety of manufacturing and high tech industries. In October 1993, Mr. Citronowicz joined the Company as Vice President of Operations. He is responsible for all areas of manufacturing, purchasing, product redesign, as well as new product design. In September 1997, Mr. Citronowicz was appointed by the Board of Directors to the position Executive Vice President and Chief Operating Officer. Mr. Citronowicz’s employment contract extends to December 31, 2009.

Charles Peabody, CPA, resigned his position in August 2005.

Brian Madden, age 51, graduated from Iona College in 1976 with a Bachelor of Business Administration degree. Mr. Madden is married with two children and is currently the President of Liberty Title Agency. He has been a member of the boards of various professional and civic organizations such as: Long Island Housing Partnership, chairman of NYS Land Title Assoc-Agents Committee, Elwood School Board, Good Samaritan Hospital Board of Governors, Long Island Children’s Museum and various others. Mr. Madden presently sits on our audit committee.

Randy Rossi, age 46, has over 14 years of experience in medical manufacturing. Most recently, he was President of the Patient Care Division, Kendall/TYCO which specialized in Wound Care, Urology and Incontinent Care with revenues in excess of $500M.

Michael Norman, CPA age 49, manages a CPA firm specializing in business financial planning as well as governmental and financial auditing. Mr. Norman is a member of the Nassau County Board of Assessors, Treasurer of the Don Monti Memorial Research Foundation and a Glen Cove City Councilman, all located on Long Island, New York. He also serves as the expert member of Bovie’s audit committee.

We have a 3-member audit committee consisting of three independent members of the Board of Directors, George Kromer Chairman, Brian Madden and Michael Norman CPA. One of the independent members, Michael Norman serves as a financial expert for the Committee.

On March 30, 2004 Bovie adopted an executive employee ethics code.

A copy of the code of ethics which expressly relates to the CEO and CFO (Andrew Makrides) will be provided without charge to any person upon request to Bovie Medical Corporation, 734 Walt Whitman Road, Melville, NY 11747, Attn: Andrew Makrides.
-18-

ITEM 10. Executive Compensation

The following table sets forth the compensation paid to the executive officers of the registrant for the three years ended December 31, 2005:


   
Long Term
 
Annual Compensation
Compensation
(a)
(b)
I
(d)
(g)
 
Name and Principal Position
 
Year
 
Salary($)
 
Bonus($)
 
Securities Underlying Options/ SARs(#)
 
 
 
 
 
Andrew Makrides
President, CEO,
Chairman of
the Board and Chief Financial Officer (B)
2005
$186,418
3,428
25,000
2004
$167,320
3,189
25,000
2003
$158,406
2,967
110,000
 
 
 
 
 
 
 
 
 
  
 
 
 
J. Robert Saron
President of Aaron
Medical and
Director
2005
$256,173
4,854
25,000
2004
$233,036
4515
25,000
2003
$219,786
4,200
110,000
 
 
 
 
 
 
 
 
 
  
 
 
 
Moshe Citronowicz
Executive
Vice President-
Chief Operating
Officer
2005
$193,451
3,567
25,000
2004
$170,766
3,318
25,000
2003
$158,637
3,086
110,000
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
Charles Peabody (A)
2005
$50,515
  
25,000
Chief Financial
2004
$81,825
1,579
25,000
Officer
2003
$77,221
1,532
60,000
 
  
 
 
 
 
  
 
 
 

  
In 2003, 2004 and 2005, a total of 585,000, 225,000, 225,000 and options were granted to executive officers and directors, respectively of which the 225,000 options granted in 2005 were not pursuant to qualified shareholder approved plan and are restricted.
 
(A) Resigned on August 9, 2005.

(B) Assumed the office of CFO upon the resignation of Charles Peabody.

-19-


Option Grants Table:

The following table sets forth, with respect to grants of stock options made during 2005 to each of the Named Executive Officers: (I) the name of the executive officer (column (a)); (ii) the number of securities underlying options granted (column (b)); (iii) the percent the grant represents of the total options granted to all employees during 2005; (iv) the per share exercise price of the options granted (column (d)); (v) the expiration date of the options (column (e)); and (vi) the potential realizable value of each grant, assuming the market price of the Common Stock appreciates in value from the date of grant to the end of the option term at a rate of (A) 5% per annum (column (f)) and (B) 10% per annum (column (g)).

Option Grants in 2005:

 
Individual Grants
 
Potential Realizable
Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name
(a)
 
Number of Securities
Underlying Options Granted
(b)(1)
% of Total Options
Granted to Employees in 2005
(c)
Exercise or Base Price per Share
(d)
Expiration Date
(e)
5%($)
(f)
10%($)
(g)
 
Charles Peabody(CFO)(3)
25,000
5.85%
2.25
      
 
Moshe Citronowicz(COO)
25,000
5.85%
2.25
05/05/15
35,375
89,648
 
J. Robert Saron(2)
25,000
5.85%
2.25
05/05/15
35,375
89,648
 
Andrew Makrides(CEO)(CFO)
25,000
5.85%
2.25
05/05/15
35,375
89,648

Total options granted were 427,500 which represents 100% of the options granted in 2005, all of which are restricted.

(1) Such options were granted at 100% of fair market value on the date of grant
(2) President of Aaron Medical Industries, Inc., our subsidiary.
(3) Resigned his position on August 9, 2005.

-20-


Equity Compensation Plan Information:

Plan category
Number of Securities
to be issued upon
exercise of
outstanding options,
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
 
Equity compensation Plans approved by Security holders
 
 
 
 
 3,751,370
$1.14
483,300
     
 
Total
 
4,168,870
$1.25
483,300
 
The following table summarizes: 1. The options granted in the last fiscal year 2005 and 2. The aggregated option exercises in the last fiscal year and the fiscal year-end option values.

Aggregate Option/SAR Exercises in the Fiscal Year Ended December 31, 2005 Option/SAR Values
(a)
(b)
(c)
(d)
(e)
Name
Shares Acquired on Exercise (#)
Value Realized ($)
Number of Securities Underlying Unexercised Options/SARs at December 31, 2005 (#)
Value of Unexercised In-the Money Options/SARs at December 31, 2005($)
       
Exercisable
Unexercisable
Exercisable
Unexercisable
Andrew Makrides
-
-
535,000
-
1,080,800
-
Alfred Greco (2)
-
-
  
-
  
-
George Kromer
-
-
440,000
-
868,325
-
Moshe Citronowicz
25,000
72,500
465,000
-
952,200
-
Rob Saron
-
-
555,000
-
1,141,650
-
Brian Madden
-
-
85,000
-
66,300
-
Michael Norman
-
-
60,000
-
46,800
-
Charles Peabody(3)
-
-
  
-
  
-
Randy Rossi
-
-
50,000
-
39,500
-
 
 
 
  
 
    
  Total
25,000
72,500
2,190,000
-
4,195,575
-
 

(1) Assumes $2.98 per share fair market value on December 31, 2005 which was the closing price on December 30, 2005, the last day of trading in 2005.

(2) Mr. Greco resigned his position on the board on May 9, 2005 but still remains corporate counsel.

(3) Mr. Peabody resigned his position as CFO on August 9, 2005.

-21-


In 2003, the Board of Directors adopted and shareholders approved Bovie’s 2003 Executive and Employee Stock Option Plan covering a total of one million two hundred thousand (1,200,000) shares of common stock issuable upon exercise of options to be granted under the Plan. In 2005, the Board of Directors granted 25,000 restricted, nonqualified options to each Executive Officer and Director totaling 225,000 shares.

Outside Directors are compensated in their capacities as Board members through option grants. Our Board of Directors presently consists of J. Robert Saron, Andrew Makrides, Chairman CEO, and President, George Kromer, Jr., Randy Rossi, Michael Norman and Brian Madden. For the past years, pursuant to a written agreement, Mr. Kromer has been retained by Bovie Medical Corporation as a business and public relations consultant on a month-to-month basis at the current average monthly fee of $2,000.

Mr. Greco is the managing director of Alfred V. Greco PLLC, a partner of Sierchio, Greco and Greco counsel to Bovie, to which Bovie paid legal fees of $80,400 during 2005.

There have been no changes in the pricing of any options previously or currently awarded.

In January, 2004, we extended employment contracts with certain of our officers for six years. The employment agreements provide, among other things, that the Executive may be terminated as follows:

(a)  
Upon the death of the Executive and the Executive’s estate shall be paid the basic annual compensation due the Employee pro-rated through the date of termination.

(b)  
By the Resignation of the Executive at any time upon at least thirty (30) days prior written notice to Bovie; and Bovie shall be obligated to pay the Employee the basic annual compensation due him pro-rated to the effective date of termination,

(c)  
By Bovie, for cause if during the term of the Employment Agreement the Employee violates the provisions of Paragraph 12 hereof, or is found guilty in a court of law of any crime of moral turpitude.

(d)  
By Bovie, without cause, with the majority approval of the Board of Directors, at any time upon at least thirty (30) days prior written notice to the Executive: and Bovie shall be obligated to pay the Executive compensation currently in effect including all bonuses, accrued or prorate, and expenses up to the date of termination. Thereafter, for the period remaining under the contract, Bovie shall pay the Executive the salary then in effect at the time of termination payable weekly. Employee shall not have to account for other compensation other sources or otherwise mitigate his damages due to such termination.

(e)  
If Bovie terminates the agreement, without cause, or fails to meet its obligations to the Executive on a timely basis, or if there is a change in the control of Bovie, the Executive may elect to terminate his employment agreement. Upon any such termination or breach of any of its obligations under the Employment Agreement, Bovie shall pay the Executive a lump sum severance equal to three times the annual salary and bonus in effect the month preceding such termination or breach as well as any other sums which may be due under the terms of the Employment Agreement up to the date of termination.

 

-22-

The following schedule shows all contracts and terms with officers of Bovie.

Bovie Medical Corporation
December 31, 2005
 
 
 
 
 
 
Contract
Expiration
Current
Auto
 
Date
Date(1)
Base Pay
Allowance
 
 
 
 
 
Andrew Makrides
01/01/98
1/31/2009(1)
$178,274
$ 6,067
J. Robert Saron
01/01/98
1/31/2009(1)
252,410
6,067
Moshe Citronowicz
01/01/98
1/31/2009(1)
185,482
6,067
         

(1)  
Includes total extensions for six years- Salaries increase annually pursuant to a contract formula. In the event of a change in control, each officers’ contract contains an option for each respective officer to resign and receive 3 years salary.
 
ITEM 11. Section 16(a) Beneficial Ownership Reporting Compliance

The following table sets forth certain information as of December 31, 2005, 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/or options to levy common stock and by all officers and directors as a group.
 
 
Number of Shares
 
 
 
Nature of
Percentage of
Name and Address
Title
Owned (i)
Ownership
Ownership(i)
The Frost National Bank
Common
1,000,000
Beneficial
5.5%
FBO Renaissance
        
US Growth Investment
        
Trust PLC.
        
Trust no. W00740100
        
 
        
The Frost National Bank
Common
1,000,000
Beneficial
5.5%
FBO, BFS US Special
        
Opportunities Trust PLC.
        
Trust no. W00118000
        
 
        
Directors and Officers
        
Andrew Makrides
734 Walt Whitman Road
Melville, NY 11746
Common
850,800(ii)
Beneficial
5.8%
       
       
 
        
George Kromer
P.O. Box 188
Farmingville, NY 11738
Common
440,000(iii)
Beneficial
3.0%
       
       

J. Robert Saron
7100 30th Avenue North
St. Petersburg, FL 33710
Common
799,363(iv)
Beneficial
5.5%
       
       

-23-


 
        
Moshe Citronowicz
7100 30th Avenue North
St. Petersburg, FL 33710
Common
639,591 (v)
Beneficial
4.4%
       
       
Brian Madden
300 Garden City Plaza
Garden City, NY 11530
Common
85,000 (vi)
Beneficial
.6%
       
 
        
Mike Norman
Common
60,000(vii)
Beneficial
.4%
410 Jericho Tpke,
        
Jericho, NY
        
 
        
Randy Rossi
Common
60,000(viii)
Beneficial
.4%
2641 Kelliwood Circle
        
Shrevesport, LA
       
 
        
Officers and Directors as a group(7 Persons)
  
2,934,754(ix)
  
18%

 
(i) Based on 14,040,728 outstanding shares of Common Stock and 4,168,870 outstanding options to acquire a like number of shares of Common Stock as of December 31, 2005, of which officers and directors owned a total of 2,190,000 options and 744,753 shares at December 31, 2005. We have calculated the percentages on the basis of the amount of outstanding securities plus, for each person or group, any securities that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.

(ii) Includes 315,800 shares reserved and 535,000 ten year options owned by Mr. Makrides to purchase shares of Common Stock of the Company. Exercise prices for his options range from $.50 for 155,000 shares to $3.25 for 25,000 shares.

(iii) Includes 440,000 shares reserved pursuant to ten year options owned by Mr. Kromer to purchase shares of the Company. Exercise prices for his options range from $.50 for 100,000 shares to $3.25 for 25,000 shares.

(iv) Includes 555,000 shares reserved pursuant to 10 year options owned by Mr. Saron, exercisable at prices ranging from $.50 per share for 155,000 shares, and $3.25 per share for 25,000 shares.

(v) Includes 465,000 shares reserved pursuant to 10 year options owned by Mr. Citronowicz exercisable at prices ranging from $.50 for 155,000 shares to $3.25 for 25,000 shares.

(vi) Includes 85,000 shares reserved pursuant to 10 year options owned by Mr. Madden exercisable at prices ranging from $3.25 for 25,000 to $2.13 for 25,000 options to purchase Common Stock. Mr. Madden has no financial interest in 25,000 shares of Bovie owned by his wife.

(vii) Includes 60,000 shares reserved pursuant to 10 year options owned by Mr. Norman exercisable at prices ranging from $2.13 for 25,000 shares to $2.25 for 35,000 shares.

(viii) Includes 50,000 share reserved pursuant to 10 year options owned by Mr. Rossi exercisable at price ranging from $2.13 for 25,000 to $2.25 for 25,000 shares.

(ix) Includes 2,190,000 shares reserved for outstanding options owned by all Executive Officers and directors as a group. The last date options can be exercised is May 5, 2015.

-24-


ITEM 12. Certain Relationships and Related Transactions

Recent Developments

In 1998, Maxxim Medical Corporation (“Maxxim”) a then publicly owned corporation, acquired 3,000,000 shares of our common stock from us pursuant to a certain agreement in exchange for assets and equipment, the ownership of the trade name “Bovie” and other future business to be conducted between our corporations. As part of the agreement, Maxxim was granted rights to demand that we register the shares with the SEC. Maxxim later becgvame a privately owned corporation. Maxxim allegedly sold the Bovie common stock to ACMI Corporation (“ACMI”) in 2000. After a continuing dispute between Maxxim and ACMI, in May, 2004 a bankruptcy court declared ACMI the owner of the 3,000,000 Bovie shares

In September 2004, ACMI Corporation privately sold the 3,000,000 shares to a limited number of sophisticated accredited investors. As part of the sale, ACMI Corporation assigned the demand registration rights to the accredited investors. Shortly after completion of the sale by ACMI Corporation, the accredited investors exercised their registration rights and demanded that we file the registration statement with the SEC covering the 3,000,000 shares of common stock. We filed the registration statement as requested for the 3,000,000 shares of common stock and listed the accredited investors as selling stockholders (the “Selling Stockholders”). The registration statement became effective in September, 2005. All proceeds from any sale of shares of our Company pursuant to the registration statement are for the benefit of the Selling Stockholders and not Bovie. However, pursuant to separate agreement with ACMI and the Selling Stockholders, we are in the process of being reimbursed for our legal, accounting and other expenses incurred in connection with the offering..

In 2005, the Executive Officers and directors were awarded a total of 225,000 non-qualified options to purchase our Common Stock at an exercise price of $2.25 per share expiring on May 5, 2015. (See Executive Compensation)

A former director, Alfred V. Greco Esq. is the principal of Alfred Greco PLLC, a partner of Sierchio, Greco and Greco the Company’s counsel. Alfred V. Greco PLLC received $80,400 and $63,650 in legal fees for the years 2005 and 2004, respectively.

A director, George Kromer also serves as a consultant to us with consulting compensation of $22,906 and $20,751 for 2005 and 2004, respectively.

Two relatives of the chief operating officer of the Company are employed by the Company. Yechiel Tsitrinovich, an engineering consultant received compensation for 2005 and 2004 of $79,776 and $79,776 respectively. The other relative, Arik Zoran, is an employee of the Company in charge of the engineering department. He had a two year contract providing for a salary of $90,000 per year plus living expenses and benefits which has been extended. For 2005 and 2004 he was paid $157,045 and $144,314 which includes living expenses and benefits. The Company is attempting at this time to secure a permanent work visa for Mr. Zoran.

-25-

ITEM 13A.  Exhibit s List and Reports on Form 8K

Exhibit 4.2
Registration Rights Agreement dated May 8, 1998
Exhibit 4.3
Assignment of Registration Rights Agreement dated September, 2004
Exhibit 10.1
Joint Venture Agreement dated February 25, 2000
Between Bovie Medical Corporation and Jump Agentur fur
Elektrotechnik GmBH
Exhibit 10.2
Agreement between Bovie Medical Corporation and Arthrex Inc. dated June 2002
Exhibit 10.3
Distribution and Service Center Agreement  between Bovie Medical Corp and Symbol Medical Limited dated December 31, 2004
Exhibit 10.4
Employment Agreement- Andrew Makrides
Exhibit 10.5
Employment Agreement-Robert J. Saron
Exhibit 10.6
Employment Agreement-Moshe Citronowicz
Exhibit 10.7
Amended Employment Agreement between Bovie and Andrew Makrides dated as of January 6, 2004.
Exhibit 10.8
Amended Employment Agreement between Bovie and J. Robert Saron dated as of January 6, 2004.
Exhibit 10.9
Amended Employment Agreement between Bovie and Moshe Citronowciz dated as of January 6, 2004.
Exhibit 10.10
License Agreement between Bovie and Emergency Medicine Innovations, LLC dated October 22, 2004.
_____________________
 
 
ITEM 13B.  8K’s Filed in the Fourth Quarter

No Form 8-K was filed in the fourth quarter of 2005.

-26-


ITEM 14. Principal Accountant Fees And Services

The following table sets forth the aggregate fees billed to us for fiscal years ended December 31, 2005 and 2004 by Bloom & Co., LLP, our auditors:


 
 
2005
  
2004
 
Audit Fees (1)
 
$
130,027
 
$
133,442
 
 
 
 
 
 
 
 
 
Non-Audit Fees:
 
 
 
 
 
 
 
Related Fees(2)
 
 
25,000
 
 
--
 
Tax Fees(3)
 
 
5,000
 
 
5,000
 
All other Fees(4)
 
 
--
 
 
--
 
Total Fees paid to Auditor
 
$
160,027
 
$
138,442
 


(1) Audit fees consist of fees billed for professional services rendered for the audit of Bovie’s annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Bloom & Co., LLP in connection with statutory and regulatory filings or engagements.

(2) Audit-Related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Bovie’s consolidated financial statements and are not reported under “Audit Fees”. During 2005 services related to the filing of a Form S3 with the SEC were performed.

(3) Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.

(4) All other fees consist of fees for products and services other than the services reported above. In the past the Board of Directors had considered the role of Bloom & Co., LLP in providing certain tax services to Bovie and had concluded that such services were compatible with Bloom & Co., LLP’s independence as our auditors. In addition, since the effective date of the SEC rules stating that an auditor is not independent of an audit client if the services it provides to the client are not appropriately approved (which was previously done by the Board of Directors). Now the Audit Committee will pre-approve all audit and permissible non-audit services provided by the independent auditors.
 
Audit Committee

The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors, pursuant to which it may pre-approve any service consistent with applicable law, rules and regulations. Under the policy, the Audit Committee may also delegate authority to pre-approve certain specified audit or permissible non-audit services to one or more of its members, including the Chairman. A member to whom pre-approval authority has been delegated must report its pre-approval decisions, if any, to the Audit Committee at its next meeting, and any such pre-approvals must specify clearly in writing the services and fees approved. Unless the Audit Committee determines otherwise, the term for any service pre-approved by a member to whom pre-approval authority has been delegated is twelve months.
 
Prior to September 29, 2003 the audit committee consisted of the board of directors. On September 29, 2003 the board of directors appointed Brian Madden, George Kromer (both independent directors) and Andrew Makrides as audit committee members. Mr. Madden was considered audit committee financial expert until Mr. Michael Norman CPA was made a board member on September 23, 2004. The audit committee is presently made up of three members, George Kromer (Chairman), Michael Norman, CPA (Financial Expert) and Brian Madden.

-27-

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Melville, New York on March 28, 2006.

 
Bovie Medical Corporation
 
 
 
 
 
 
By: /s/ Andrew Makrides 
 
Andrew Makrides
 
President
 
Chairman of the Board
 
Chief Financial Officer





 


PART II

ITEM 7. FINANCIAL STATEMENTS

BOVIE MEDICAL CORPORATION INDEX
TO FINANCIAL STATEMENTS

Contents
 
 
 
 
 
 
 


 



BLOOM & CO., LLP 50 CLINTON STREET. HEMPSTEAD. NEW YORK 11550:
TEL: 516 - 486-5900
CERTIFIED PUBLIC ACCOUNTANTS
FAX: 516 - 486-5476
 
 
STEVEN BLOOM, CPA
FREDERICK PAUKER, CPA
SIROUSSE TABRIZTCHI, Ph.D. CPA
MEMBER OF AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and Shareholders of
Bovie Medical Corporation

We have audited the accompanying consolidated balance sheets of Bovie Medical Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations, 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 audits in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial position of Bovie Medical Corporation as of December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/Bloom and Company LLP
Hempstead, New York
March 28, 2006
 












BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005 AND 2004

ASSETS

 
  
2005
  
2004
  
Current assets:
  
 
  
 
  
 
  
 
  
 
  
Cash
  
$
1,295,266
  
$
2,294,746
  
Trade accounts receivable, net
    
2,316,761
    
1,954,287
  
Inventories
    
2,996,832
    
2,001,637
  
Prepaid expenses
    
335,492
    
328,765
  
Deferred tax asset
    
386,200
    
386,200
  
 
              
 
              
Total current assets
    
7,330,551
    
6,965,635
  
 
              
Property and equipment, net
    
2,595,641
    
2,116,324
  
 
              
Other assets:
              
 
              
Repair parts
    
--
    
124,363
  
Brand name/Trademark
    
1,509,662
    
1,509,662
  
Purchased technology (net)
    
33,663
    
88,572
  
License rights
    
280,000
    
350,000
  
Deposits
    
21,215
    
14,445
  
 
    
1,844,540
    
2,087,042
  
 
              
Total Assets
  
$
11,770,732
  
$
11,169,001
  
 
              
 
              
The accompanying notes are an integral part of the financial statements.
              

 

 

F-1

BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005 AND 2004
(Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Current liabilities:
    
2005
    
2004
  
 
          
Accounts payable
  
$
868,212
  
$
620,151
  
Accrued expenses and other liabilities
    
471,006
    
568,482
  
Customers deposits
    
--
    
36,000
  
Deferred Revenue
    
141,586
    
157,844
  
Current maturities of long term debt
    
348,328
    
31,668
  
 
            
Total current liabilities
    
1,829,132
    
1,414,145
  
 
            
Mortgage Payable-Non current
    
--
    
348,325
  
Minority interest
    
140,000
    
150,000
  
Stockholders' equity:
            
 
            
Preferred stock 10,000,000 shares
authorized, none outstanding
            
 
            
Common stock par value $.001;
40,000,000 shares authorized,
14,040,728 and 13,862,128
issued and outstanding
on December 31, 2005 and
December 31, 2004 respectively,
    
14,059
    
13,881
  
Additional paid in capital
    
20,530,090
    
20,391,407
  
Accumulated deficit
    
(10,742,549
)
  
(11,148,757
)
Total stockholders' equity
    
9,801,600
    
9,256,531
  
 
            
Total liabilities and stockholders' equity
  
$
11,770,732
  
$
11,169,001
  
 
The accompanying notes are an integral part of the financial statements.
            




 

F-2

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 
  
 
  
 
  
 
  
2005
  
2004
  
 
  
 
      
Sales
  
$
20,211,141
    
20,495,101
  
Cost of sales
    
12,649,209
    
12,638,161
  
 
              
Gross Profit
    
7,561,932
    
7,856,940
  
 
              
Other costs:
             
Research and development
    
985,807
    
907,389
  
Professional services
    
447,346
    
415,606
  
Salaries and related costs
    
2,010,599
    
1,977,053
  
Selling, general and administration
    
3,553,022
    
3,249,050
  
Development cost - joint venture
   
161,190
    
39,286
  
 
              
Total other costs
    
7,157,964
    
6,588,384
  
 
              
Income from operations
    
403,968
    
1,268,556
  
 
            
Other income and (expense):
             
               
Gain from involuntary conversion of fixed assets
          
245,264
  
Interest income
    
46,959
    
3,263
  
Interest expense
    
(22,703
)
  
( 15,090
)
 
    
24,256
    
233,437
  
 
              
Net income before income tax and minority expense
   
428,224
    
1,501,993
  
Minority Interest in expense
    
10,000
    
10,000
  
               
Income tax expense
    
(164,016
)
  
(541,000
)
Income tax benefit
    
132,000
    
541,000
  
 
            
Net income
 
$
406,208
  
$
1,511,993
  
 
            
The accompanying notes are an integral part of the financial statements.
          



 

F-3

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(CONTINUED)

 
  
2005
  
2004
  
 
  
 
  
 
  
Basic earnings per common share
  
$
.03
  
$
.11
  
 
            
Diluted earnings per common share
    
.03
    
.09
  
 
            
Weighted average number
            
of common shares outstanding
    
13,923,134
    
13,755,552
  
 
            
Incremental items:
            
Stock options
    
1,827,150
    
2,422,329
  
 
          
Diluted weighted average
          
common shares outstanding
    
15,750,284
    
16,177,881
  
 
            
The accompanying notes are an integral part of the financial statements.
          


 

 

F-4

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
 
 
 
 
 
 
 
 
Options
Common
Paid-
    
 
Outstanding
Shares
Value
in Capital
Deficit
Total
             
January 1, 2004
3,988,800
13,464,528
$13,482
$20,097,095
$(12,660,750)
$7,449,827
 
 
 
 
 
 
 
Options granted
370,000
--
--
--
--
--
 
            
Options exercised
(397,600)
397,600
399
294,312
--
294,711
 
            
Options forfeited
(10,000)
--
--
--
--
--
 
            
Income for period
--
--
--
--
1,511,993
1,511,993
 
            
December 31, 2004
3,951,200
13,862,128
$13,881
$20,391,407
$(11,148,757)
$9,256,531
 
 
 
 
 
 
 
Options granted
427,500
          
             
Options exercised
(178,600)
178,600
178
138,683
  
138,861
             
Options foreited
(31,230)
          
             
Income for period
        
406,208
406,208
             
December 31, 2005
            
 
4,168,870
14,040,728
$14,059
$20,530,090
$(10,742,549)
$9,801,600
             



 

F-5

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

 
  
2005
  
2004
  
Cash flows from operating activities:
          
 
            
Net income
  
$
406,208
  
$
1,511,993
  
Adjustments to reconcile
              
net income to net cash provided
              
by operating activities:
              
 
              
Depreciation and amortization
    
545,876
    
395,119
  
Write down of inventories and parts
          
303,872
  
Write down development cost
              
Involuntary conversion of fixed assets
          
( 245,264
)
 
              
Change in assets and liabilities:
              
Trade receivables
    
(362,474
)
  
(322,106
)
Prepaid expenses
    
( 6,727
)
  
61,260
  
Inventories and parts
    
(870,832
)
  
249,503
  
Accounts payable
    
248,061
    
(59,641
)
Accrued expenses
    
(133,476
)
  
149,251
  
 Deferred Revenue
    
( 16,258
)
      
 
              
Total adjustments
    
(595,830
)
  
531,994
  
 
              
 
              
Net cash (applied to) provided by operations
  
$
(189,622
)
$
2,043,987
  
 
            
 
            
The accompanying notes are an integral part of the financial statements.
          





 

 

F-6

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(Continued)

 
  
2005
  
2004
  
Net cash (applied to) provided by operating activities
  
$
(189,622
)
$
2,043,987
  
 
              
Cash flows from investing activities:
              
 
              
(Increase) in fixed assets
    
(908,283
)
  
(606,505
)
Decrease(Increase)in security deposits
    
( 6,770
)
  
( 4,975
)
Purchase of technology
    
( 2,001
)
  
--
  
Involuntary conversion of fixed assets
          
296,735
  
 
              
Net cash (used in) investing activities
    
(917,054
)
  
(314,745
)
 
              
Cash flows from financing activities;
              
 
              
Sale of common stock
    
138,861
    
290,425
  
Reduction in subscription receivable
          
4,286
  
Reduction in mortgage
    
(31,665
)
  
(35,344
)
 
              
Net cash (provided by) financing activities
    
107,196
    
259,367
  
 
              
Net increase(decrease) in cash
    
(999,480
)
  
1,988,609
  
 
              
Cash at beginning of year
    
2,294,746
    
306,137
  
 
              
Cash at end of year
  
$
1,295,266
  
$
2,294,746
  
 
              
Cash paid during the twelve months ended December 31:
              
 
              
 
    
2005
    
2004
  
Interest
  
$
22,703
  
$
11,625
  
 
              
Income Taxes
    
22,015
    
--
  
 
              
The accompanying notes are an integral part of these financial statements.
            
 
          


 

 

F-7

BOVIE MEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 2005 AND 2004

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2005 AND 2004:

In October 2004 a hurricane tore a portion of the roof off the office facility at 7100 30th Avenue North, St. Petersburg, Florida causing extensive water damage to that portion of the building. The cost of the building allocated to the loss was $63,749 of which there was depreciation of $12,278 leaving a net cost of $51,471. As per Financial Accounting Standard Board interpretation number 30 we have recognized a gain of $245,264 from the non-monetary asset being involuntarily converted to a monetary asset through the payment by the insurance company of $296,735.

There were no non-cash transactions reported in 2005.

 

 

F-8

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Consolidated Financial Statements

The accompanying consolidated financial statements include the accounts of Bovie Medical Corporation and its wholly owned subsidiary Aaron Medical Industries, Inc. Intercompany transaction accounts have been eliminated in consolidation.

The equity method of accounting is used when the Company has a 20% to 50% interest in other companies. Under the equity method, original investments are recorded at cost and adjusted by the company's share of undistributed earnings or losses of these companies.

Cash and cash equivalents
 
Holdings of highly liquid investments with maturities of three months or less, when purchased, are considered to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair values. The amount of federally insured cash deposits was $100,000 as of December 31, 2005.
 
Fair Values of Financial Instruments

The carrying amount of trade accounts receivable, accounts payable, prepaid and accrued expenses, bonds and notes payable, and amounts due to shareholders, as presented in the balance sheet, approximates fair value.

Accounts Receivable

Accounts for which no payments have been received for three consecutive months are considered delinquent and a reserve is setup for them. Customary collection efforts are initiated and an allowance for uncollectible accounts is set up and the related expense is charged to operations. We give negotiated sales volume discounts which amounted to $397,950 and $382,433 for 2005 and 2004, respectively. Sales as shown on the profit and loss statement are net of all discounts.

Inventories and Repair Parts

Inventories are stated at the lower of cost or market. Cost is determined principally on the average actual cost method. Finished goods and work-in-process inventories include material, labor, and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon cost of materials. Bovie monitors usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the item. Bovie adjusts down the inventory for estimated obsolescence (inventory judged to be unused in the manufacturing process for 2 years and is eventually discarded) or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-down may be required.

 

F-9

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories and Repair Parts (Continued)

Inventory at December 31, 2005 and 2004 was as follows:

 
 
2005
  
2004
 
Raw materials (net of reserves)
 
$
1,139,730
 
$
705,188
 
Work in process
 
 
1,267,991
 
 
742,289
 
Finished goods
 
 
589,111
 
 
554,160
 
 
 
 
  
 
 
  
 
Total
 
$
2,996,832
 
$
2,001,637
 

Reserves for obsolescence of raw materials were $670,802 and $817,808 at December 31, 2005 and 2004, respectively. There were no reserves for finished goods or work in progress.
 
Obsolete raw material inventory charged to operations was $213,944 and $303,872 for 2005 and 2004, respectively.

Repair Parts. We acquired the inventory of repair parts in conjunction with the purchase of the Bovie line of generators and Bovie trade name, on May 8, 1998. Bovie has maintained the inventory to service the previously sold generators. The useful life of repair parts is estimated to be five to seven years and the Company has set up an allowance for excess and obsolete parts.

As of December 31, 2005 and 2004 the inventory of parts were as follows:

 
  
2005
  
2004
  
Raw materials
  
$
317,614
  
$
317,615
  
Allowance for excess or obsolete parts
    
( 317,614
)
  
(193,252
)
Total
  
$
--
  
$
124,363
  

Notes Payable

We account for all note liabilities that are due and payable in one year as short term notes for example: Our line of credit with a commercial bank and our insurance premium financing arrangement had zero balances at December 31, 2005.

Property, plant and equipment

 These assets are recorded at cost less depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expenses, as incurred. The estimated useful lives are: machinery and equipment, 7-15 years; buildings, 30 years; and leasehold improvements, 10-20 years.


 

 

F-10

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill and Other Intangible Assets

These assets consist of licenses, purchased technology and brand name. The licenses and purchased technology (other intangibles) are being amortized by the straight-line method over a 5-20 year period. The brand name (goodwill) qualifies as an indefinite-lived intangible asset and is not subject to amortization.
 
Goodwill/brand name/trademark represents the excess of purchase price over fair value of identifiable net assets of acquired businesses.  Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses.  Goodwill/brand name/trademark and other intangible assets had been amortized over periods ranging from 5 to 40 years through December 31, 2001. 
 
In June 2001, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 142 "Goodwill and other Intangible Assets" ("SFAS 142").  We adopted SFAS 142 effective January 1, 2002.  As a result of the adoption of this standard, amortization of goodwill and certain intangibles has been discontinued.
 
Impairment of Long-Lived Assets
 
We review long-lived assets consisting of intangible assets subject to and not subject to amortization and property, plant and equipment subject to depreciation.  Our brand name is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may have been impaired. In the event of impairment of any intangible asset, the excess of the carrying amount over the fair value is recognized as impairment loss. The impairment losses are not restored in the future. We assess the recover- ability of goodwill and other intangible assets based on an independent appraisal and or undiscounted cash flows that measures the impairment, if any.

Revenue recognition

Revenue is recognized when title has been transferred to the customer, which is generally at the time of shipment. The following policies apply to our major categories of revenue transactions:

Sales to customers are evidenced by firm purchase orders. Title and the risks and rewards of ownership are transferred to the customer when product is shipped. Payment by the customer is due under fixed payment terms.

Product returns are only accepted at our discretion and in accordance with our “Returned Goods Policy”. Historically, the level of product returns has not been significant. We accrue for sales returns, rebates and allowances based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.

Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are generally provided for sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data.

Amounts billed to customers related to shipping and handling have been included in net sales. Shipping and handling costs included in cost of sales expense were $124,159, and $132,752 for 2005 and 2004, respectively.

We have no consignment inventory with customers but we do have inventory consigned to contract manufactures who produce components for us. For December 31, 2005 and 2004 we had consigned work in progress of $288,112 and $62,452, respectively.

 

F-11

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

We sell to a diversified base of customers around the world and, therefore, believe there is no material concentration of credit risk.

We assess the risk of loss on accounts receivable and adjust the allowance for doubtful accounts based on this risk assessment. Historically, losses on accounts receivable have not been material. Management believes that the allowance for doubtful accounts of $119,490 and $112,392 at December 31, 2005 and 2004, respectively, is adequate to provide for probable losses resulting from accounts receivable.

Advertising Costs

All advertising costs are expensed, as incurred. The amounts of advertising costs were $468,716 and $452,121 for 2005 and 2004, respectively.
 
Net Earnings Per Common share

Basic earnings per share ("EPS") is computed based on the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential shares outstanding (i.e., options and warrants) during the period. (See Significant Accounting Policies - Stock Based Compensation)
 
Research and Development Costs

Research and development expenses are charged to operations. Only the development costs that are purchased from another enterprise and have alternative future use are capitalized and are amortized over the estimated useful life of the asset, generally five years.

Research and Development Costs for Others

For research and development activities that are partially or completely funded by other parties and the obligation is incurred solely to perform contractual services all expenses are charged to cost of sales and all revenues are shown as sales.

We will only develop electrosurgical products for others that use our product as the base for their instrument. Our development agreements provide that the customer must pay the costs for the development as it progresses and further provide that any future purchases of the developed product must be purchased from us. We assume no contractual risk and operate as the customer’s original equipment manufacturer. Our agreements call for no minimum order, but the customer may not manufacture or purchase this product from any other manufacturer.

Income Taxes

Bovie and its wholly owned subsidiary file a consolidated federal income tax return. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

F-12

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Non-monetary 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 the asset surrendered.

Stock-Based Compensation

The Company had adopted SFAS 123 and has adopted the amendments to SFAS 123 disclosure provisions required under SFAS 148. Bovie will continue to account for stock-based compensation utilizing the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Under this policy:

1. Compensation costs are recognized as an expense over the period of employment attributable to any employee stock options. 2. Stocks issued in accordance with a plan for past or future services of an employee are allocated between the expired costs and future costs. Future costs are
charged to the periods in which the services are performed.

 In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based compensation - Transition and Disclosure - an amendment of FASB Statement No. 123. Statement No. 148 amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 to require disclosure in interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Bovie does not intend to adopt a fair-value based method of accounting for stock-based employee compensation until a final standard is issued by the FASB that addresses concerns related to the applicability of current option pricing models to non-exchange traded employee stock option plans. SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for annual periods ending after December 15, 2002 and interim periods beginning after December 31, 2002.

Bovie adopted the amendments to SFAS 123 disclosure provisions required under SFAS 148 and continued to use intrinsic value method under APB 25 to account for stock-based compensation. As such, the adoption of this statement did not have a significant impact on Bovie’s financial position, results of operations or cash flows.

 

F-13

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

At December 31, 2005, we had key employee and director stock option plans, which are described more fully in Note 8.  The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans.  Under Opinion No. 25, no compensation expense is recognized because the exercise price of the Company's stock options equals the market price of the underlying stock on the measurement date (date of grant).  Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement No. 123, Accounting for Stock-Based Compensation, the Company's net earnings and net earnings per share would have been as follows: (in thousands)

 
 
2005
  
2004
 
Net earnings:
 
 
 
 
 
  As reported
 
$
406
 
$
1,512
 
  Deduct: Compensation expense --
 
 
  
 
 
 
 
    fair value method
 
 
(372
)
 
(522
)
  Pro forma
 
$
34
 
$
990
  
 
Basic net earnings per share:
 
 
  
 
 
  
 
  As reported
 
$
.03
 
$
.11
 
  Pro forma
 
$
.00
 
$
(.07
)
 
 
 
  
 
 
  
 
Diluted net earnings per share:
 
 
  
 
 
  
 
  As reported
 
$
.03
 
$
.09
 
  Pro forma
 
$
.00
 
$
(.06
)
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
             
 
               
 
The weighted-average fair value per share of options granted during 2005 and 2004, estimated on the date of grant using the Black-Scholes option-pricing model, was $1.41 and $1.00, respectively.  The fair value of options granted was estimated on the date of grant using the following assumptions:
 
 
2005
2004
Risk-free interest rate
4.5%
4.18%
Expected dividend yield
0.00%
0.00%
Expected stock price volatility
30%
43%
Expected option life
5 years
10 years
 

 

F-14

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard (SFAS) 123R, Share-Based Payment: This statement is a revision of SFAS 123, Accounting for Stock-Based Compensation and supersedes APB 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based at their fair values beginning with the first fiscal year beginning after June 15, 2005, with early adoption encouraged. Under the current rules, the Company will be required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning December 1, 2005.

Under SFAS 123R, the pro forma disclosures previously permitted will no longer be an alternative to financial statement cognition. Bovie must determine the appropriate fair value model to be used for valuing share-based payments to employees, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first of adoption of SFAS 123R, while the modified retrospective method would record compensation expense for all unvested stock options and restrictive stock beginning with the first period restated.

Additionally, SFAS 123R clarifies the timing for recognizing compensation expense for awards subject to acceleration of vesting on retirement. This compensation expense must be recognized over the period from the date of grant to the date retirement eligibility is met if it is shorter than the vesting term. The effect on future earnings is dependent upon a number of factors including the number of options granted, the vesting period, the exercise price of the options, the Company stock price and volatility, and other factors and therefore cannot be determined. However, while the adoption of FAS 123R will have no effect on the Company's cash flows or financial position, the Company believes that it will have an adverse effect on future results of operations.

In March 2005, the U.S. Securities and Exchange Commission, or SEC, released Staff Accounting Bulletin 107, Share-Based Payments, ("SAB 107"). The interpretations in SAB 107 express views of the SEC staff, or staff, regarding the interaction between SFAS 123R and certain SEC rules and regulations, and provide the staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R and disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS 123R. SAB 107 requires stock-based compensation be classified in the same expense lines as cash compensation is reported for the same employees. We will apply the principles of SAB 107 in conjunction with our adoption of SFAS 123R.

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement of APB 20, Accounting Changes and SFAS 3 Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 improves financial reporting because its requirements enhance the consistency of financial information between periods. SFAS 154 is effective for

 

F-15


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is required to adopt the provisions of SFAS 154 in its first fiscal quarter of fiscal 2006. We do not expect the adoption of this statement to have a material impact on our financial position or results of operations.

The adoption of SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4; had no effect on the Company's financial position or results of operations.

FASB Interpretation No. 46R, Consolidation of Variable Interest Entities - An Interpretation of ARB51 The FASB finalized FIN 46R in December 2003. FIN 46R expands the scope of ARB51 and various EITFs and can require consolidation of legal structures, called Variable Interest Entities (VIEs). Companies with investments in Special Purpose Entities (SPEs) were required to implement FIN 46R in 2003; however, companies with VIEs are permitted to implement in the first quarter of 2004. While we do not have SPEs, we do have a VIE that we have determined will qualify for consolidation. The entity is our joint venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”). We have consolidated this entity in the years ended December 31, 2005 and 2004.

Reclassifications: Certain prior year amounts have been reclassified to conform with the presentation used in 2005.

RESTATEMENT OF FINANCIAL STATEMENTS

We adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities - An Interpretation of ARB51 that requires the consolidation of legal structures, called Variable Interest Entities (VIEs). Our joint venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”) qualifies as a VIE. We had historically accounted for the investment in JAG on the equity basis. We have restated our balance sheets and consolidated JAG in the years ended December 31, 2004 and 2003. The most significant impact to our financial statements is to add the intangible assets of JAG, totaling approximately $350,000 in 2004 and $360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000 in 2003 to our balance sheets. The impacts on our consolidated statements of net income or cash flows are not material.

We amended our statement of operations for the year ended December 31, 2004 and reclassified a $245,264 gain from insured damages to our building from a hurricane as other income instead of an extraordinary item. The reclassification did not effect our taxable net income which remained at $1,511,997 nor did it effect our earnings per share and diluted earnings per share of $.11 and $.09, respectively.













 

F-16

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2. DESCRIPTION OF BUSINESS

Background

Bovie Medical Corporation (“Bovie”) was incorporated as An-Con Genetics, Inc. in 1982, under the laws of the State of Delaware and has its principal executive office at 734 Walt Whitman Road, Melville, New York 11747.

Bovie is actively engaged in the business of manufacturing and marketing medical products and developing related technologies. Aaron Medical Industries, Inc. ("Aaron"), a 100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing our medical products. Previously Bovies largest product line was battery-operated cauteries, we have shifted our focus to the manufacture and marketing of generators and electrosurgical disposables. This new focus on high frequency generators is evident in the development of the Aaron 800 and Aaron 900 high frequency desiccators, the Aaron 950- the first high frequency desiccator with cut capability, the Aaron 1250 and the Aaron 2250. The Aaron 1250 and Aaron 2250 are designed for today’s rapidly expanding surgi-center market.

Additionally, our new 200-watt electrosurgical unit and our new 300-watt electrosurgical unit are being marketed under the Bovie name.

Bovie also manufactures a variety of specialty lighting instruments for use in ophthalmology, general surgery, hip replacement surgery, and for the placement of endotracheal tubes.

Bovie manufactures and markets its products both under private label and the Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has original equipment manufacturing (OEM) agreements with other medical device manufacturers. These OEM arrangements combined with private label and the Bovie/Aaron label allows us to gain greater market share for the distribution of its products.

Joint Venture Agreement

In February 2000, Bovie entered into a Joint Venture Agreement with a German corporation, Jump Agentur Fur Elektrotechnik GMBH. Pursuant to the agreement, Bovie advanced $200,000 to the partnership to cover costs of further research toward the production of two commercial prototypes for our contribution we received a 50% equity interest and 50% interest in the profits. Bovie has made available its facilities in Florida for development, manufacturing and marketing of the products of the joint venture and is responsible to expend its best efforts to secure all necessary financing for the research, development and marketing of the products estimated to be an amount up to $1,500,000, as per contract. 

Pursuant to agreement, the joint venture acquired an exclusive license to produce and market any surgical/medical devices utilizing this technology. In fiscal, 2005 and 2004, Bovie made additional advances to the joint venture in the form of research and development of prototypes expending $161,090 and $39,286 in development costs and engineering costs, respectively.  Bovie has charged these costs to operations as equity in net loss of unconsolidated affiliate. To date the joint venture has no revenues and is not considered by us to be a significant subsidiary.








 

F-17

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. DESCRIPTION OF BUSINESS(CONTINUED)

The device has been developed and patented in both Europe and the United States. Bovie has constructed two pre-production prototypes for field-testing purposes as a prelude to eventual submission to the FDA for clearance to manufacture. The initial intended uses are in the areas of dermatology and plastic surgery. Other contemplated surgical uses for the technology are cardiovascular, thoracic, gynecological, trauma and other surgeries.

FASB finalized Interpretation No. 46R, Consolidation of Variable Interest Entities-An Interpretation of ARB51 (FIN 46R) in December 2003, making the new guidance applicable to us in the first quarter of 2004. FIN 46R expands the scope of ARB51 and can require consolidation of “variable interest entities (VIEs)” Once an entity is determined to be VIE, the party with the controlling financial interest, the primary beneficiary , is required to consolidate it.

We have an investment in a joint venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”) of which we are the primary beneficiary. We had previously recorded our interest in the Joint Venture on the equity basis. Under FIN 46R, as the primary beneficiary we have consolidated the Joint Venture and restated our balance sheet as of December 31, 2004.

The impact of consolidating JAG on our balance sheets was replacement of our $200,000 previously recorded investment in the Joint Venture by license rights of $350,000 in 2004 and $360,000 in 2003 and a minority interest of $150,000 in 2004 and $160,000 in 2003, for JAG . Consolidating the Joint Venture did not materially affect our statements of operations or cash flows, for the years ended December 31, 2004, and 2003.

NOTE 3. TRADE ACCOUNTS RECEIVABLE

As of December 31, 2005 and 2004 the trade accounts receivable were as follows:

 
 
2005
  
2004
 
Trade accounts receivable
 
$
2,495,457
 
$
2,131,445
 
Less: allowance for doubtful accts
 
 
( 119,490
)
 
( 112,392
)
allowance for discounts
 
 
( 59,207
)
 
( 64,766
)
 
 
 
 
 
 
 
 
Trade accounts receivable, net
 
$
2,316,760
 
$
1,954,287
 

Bad debt expense charged to operations was $16,808 in 2005 and $5,477 in 2004.

At December 31, 2005 trade accounts receivable were pledged as collateral in connection with bank loans.
 











 

F-18


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2005 and 2004 property, plant and equipment consisted of the following:
 
 
  
2005
  
2004
  
 
  
 
  
 
  
Equipment
  
$
1,297,261
  
$
992,542
  
Building
   
791,618
    
573,736
  
Furniture and Fixtures
   
1,045,835
    
969,948
  
Leasehold Improvements
   
731,001
    
626,804
  
Molds
   
661,462
    
516,689
  
 
    
4,527,177
    
3,679,719
  
 
              
Less:accumulated depreciation
   
(1,931,536
)
  
(1,563,395
)
 
              
Net property, plant, and equipment
 
$
2,595,641
  
$
2,116,324
  
 
              

Depreciation expense for the years ended December 31, 2005 and 2004 were $428,966 and $338,724, respectively.

Property and Rental Agreements

The following is a schedule of future minimum rental payments as of December 31, 2004 and for the next five years.


2006
 
 $
141,952
 
2007
 
 
135,308
 
2008
 
 
115,150
 
2009
 
 
-0-
 
2010
 
 
-0-
 
 
 
$
392,410
 
 

Total consolidated rent expense for the Company was $185,314 in 2005 and $152,442 in 2004.




 

F-19

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. INTANGIBLE ASSETS

At December 31, 2005 and 2004 intangible assets consisted of the following:


 
 
2005
  
2004
 
Indefinite life assets:
 
 
 
 
 
Brand name/Trademark (life indefinite)
 
$
1,509,662
 
$
1,509,662
 
               
Other intangibles:
 
 
  
 
 
  
 
 License rights (20yr life)
 
 
280,000
 
 
350,000
 
               
Purchased technology (5 yr life)
 
$
280,764
 
$
278,763
 
Less: Accumulated amortization
 
 
(247,101)
  
 
(190,191
)
 
 
 
  
 
 
  
 
Net carrying amount
 
$
33,663
 
 $
88,572
 

Trademark and brand name were recognized in connection with the 1998 acquisition of Bovie Medical Corporation.  We continue to market products, release new products and product extensions and maintain and promote these trademarks and brand names in the marketplace through legal registration and such methods as advertising, medical education and trade shows.  It is our belief that these trademarks and brand names will generate cash flow for an indefinite period of time.  Therefore, in accordance with SFAS 142, our trademarks and tradenames intangible assets are not amortized.
 
The cost of licenses, trademarks, patent rights, technologies and copyrights acquired are being amortized on the straight-line method over five to twenty years. Amortization expense charged to operations in 2005 and 2004 was $74,910 and $56,395, respectively.

NOTE 7. LONG-TERM DEBT AND LINE OF CREDIT

The long-term debt of the Company at December 31, 2005 and 2004 includes a mortgage and notes payable.
   
 
 
2005
  
2004
 
Mortgage payable
 
$
348,328
 
$
379,994
 
Term loan
 
 
--
 
 
--
 
Line of credit- bank
 
 
--
 
 
--
 
 
 
$
348,328
 
$
379,994
 

Mortgage Payable

In 2001, Bovie paid off its existing mortgage on its premises at 7100 30th Avenue North, St. Petersburg, Florida, and replaced it with a new first mortgage of $475,000, from its commercial lender. The interest Bovie pays on the mortgage is variable at the banks base rate which is 7.5%, presently. Bovie makes principal payments of $2,639 per month plus interest. The mortgage has a balloon payment of $320,562 due in November of 2006.


 

F-20


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. LONG-TERM DEBT AND LINE OF CREDIT (Continued)

Mortgage Payable(Continued)

The scheduled principal payments for the next five years are as follows:

Year
 
Amount
 
 
 
 
 
2006
 
$
348,328
 
2007
    
0
  
2008
    
0
  
2009
    
0
  
2010
    
0
  
   
$
348,328
  


Line of Credit - Commercial Bank

Advances under the new line of credit secured in May of 2001 are limited to the lesser of $1,500,000 or 80% of net accounts receivable from non-affiliated parties. Availability was $1,500,000 on December 31, 2005. The annual interest rate on the loan is variable and is based on the bank's base rate. The line has no expiration date and is due on demand by the bank. The bank has a security interest in inventory, accounts receivable and equipment of the Company (the collateral). The balance due the bank on the credit line at December 31, 2005 was zero.

NOTE 8. OPTIONS

Stock-Based Compensation

The Company has an employee incentive compensation plan (the “Plan”) pursuant to which the Company’s board of directors may grant stock options to officers and key employees. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant. All stock options have a ten year term and vest upon schedule on the date of the grant. During 2005 and 2004, a total of 427,500 and 370,000 options were granted at prices between $2.25 and $2.15, respectively. The 5,597,500 authorized and there were a total of 483,300 additional shares available for grant under the various plans.

 
 

F-21


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. OPTIONS (CONTINUED)

Stock-option activity during the periods indicated was as follows:
 
2005
2004
 
  
Weighted
  
Weighted
 
  
average
  
average
 
Number of
exercise
Number of
exercise
 
Shares
price
Shares
price
 
 
 
 
 
Balance January 1,
3,951,200
1.15
3,988,800
1.00
 
    
 
 
Exercised
(178,600)
.77
(397,600)
.74
Cancelled & forfeited
(31,230)
.50
( 10,000)
.50
Granted
427,500
2.25
370,000
2.32
 
    
 
 
Balance December 31,
4,168,870
1.25
3,951,200
1.13

Stock-Based Compensation

Stock options consisted of the following at December 31, 2005:

 
 
Number of Options
Currently Exercisable
Weighted Average
Remaining Estimated Life
 
 
Exercise Price
456,000
7.5
$ 3.25
95,000
7.5
1.30
113,000
2.0
1.125
50,000
2.0
1.15
1,238,400
2.5
.75
475,000
7.0
.70
1,013,970
5.5
.50
35,000
8.5
2.95
215,000
8.5
2.13
60,000
8.5
2.41
417,500
4.6
225
4,168,870
4.6
1.25(a)

(a) The amount of $1.25 represents the weighted average exercise price of the outstanding options.

At December 31, 2005 and 2004, the number of options exercisable was 4,168,870 and 3,951,.200, respectively, and the weighted-average exercise prices of those options were $1.25 and $1.13, respectively.

During the year 2005 Bovie cancelled 31,230 options issued prior to December 31, 2002 at an exercise price of .50 per share (the “cancelled options”). The cancelled options were not replaced. In addition, we issued 427,500 options during the year at exercise price of $2.25.  The options issued in 2005 did not affect the fiscal year 2005 statement of operations as the market value for Bovie’s common stock was the same as the exercise price on the day granted. Had the compensation cost for Bovie’s three stock option issuances

 

F-22

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. OPTIONS (CONTINUED)

been determined based on the fair value at the grant date for awards in 2005 consistent with the provisions of SFAS No.123, the Company's net earnings and earnings per share would have been reduced by $372,000 as per the pro forma amounts indicated in Note 1 under Significant Accounting Policies.

Effective with our fiscal year 2006 that commenced on January 2, 2006 we will expense stock options, that are granted after January 1, 2006. This is in accordance with Statement of Financial Accounting Standards No. 123R “Share Based Payment.” No employee stock options were granted during the first three months of fiscal year 2006.

 
NOTE 9. TAXES AND NET OPERATING LOSS CARRYFORWARDS

As of December 31, 2005, the components of deferred tax assets were as follows:
Deferred tax assets:
 
 
 
 
 
 
 
 
2005
  
2004
 
 
 
 
 
 
 
Accounts receivable(allowances)
 
$
178,697
 
$
177,158
 
Inventories(reserves)
 
 
990,314
 
 
1,011,060
 
Net operating loss carry forwards
 
 
2,220,000
 
 
2,392,000
 
Patent rights, primarily due to
 
 
  
 
 
  
 
Amortization
 
 
(163,245)
  
 
(118,439
)
 
 
 
    
 
  
 
Total gross deferred tax assets
 
 
3,225,766
  
 
3,461,779
 
Less: Valuation allowance
 
 
(2,839,566
)
 
(3,075,579
)
 
 
 
  
 
 
  
 
Net deferred tax assets - current
 
$
386,200
 
$
386,200
 

Bovie had net operating losses (NOLs) of approximately $6,872,000 at December 31, 2005. These NOLs and corresponding estimated tax assets, computed at a 35% tax rate, expire as follows:

Year loss
Expiration
Loss
Estimated
Incurred
Date
Amount
Tax Asset
 
 
 
 
1992
2012
797,000
$ 279,000
1993
2013
465,000
163,000
1994
2014
1,197,000
419,000
1995
2015
637,000
223,000
1998
2018
548,000
192,000
1999
2019
2,184,000
764,000
2002
2022
515,000
180,000
 
 
 
 
Total
 
$ 6,343,000
$ 2,220,000
 
Under the provisions of SFAS 109, NOLs represent temporary differences that enter into the calculation of deferred tax assets. Realization of deferred tax assets associated with the NOL is dependent upon generating sufficient taxable income prior to their expiration.

 

F-23


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. TAXES AND NET OPERATING LOSS CARRYFORWARDS(Continued)

Management believes that there is a risk that certain of these NOLs may expire unused and, accordingly, has established a valuation allowance against them. Although realization is not assured for the remaining deferred tax assets, based on the historical trend in sales and profitability, sales backlog, and budgeted sales of Bovie’s wholly owned and consolidated subsidiary, Aaron Medical Industries, Inc., management believes it is likely that they may not be totally realized through future taxable earnings. In addition, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carryforward period are significantly reduced.

The valuation allowance of $2,839,566 as of December 31, 2005 decreased by $236,013 from December 31, 2004. The change in valuation allowance was a consequence of decreasing tax assets of $172,000 and reserving for additional allowances for accounts receivable and inventory loss of $19,207, and patent amortization of $(44,806). The Company believes it is possible that the benefit of these additional assets may not be realized in the future. A reconciliation of the Federal statutory tax rate to Bovie’s effective tax rate is as follows:

Tax at statutory rate
35.0%
State income taxes, net of U.S. federal benefit
2.4%
Tax benefit of loss carry forward
(37.2%)
 
  
Effective tax rate
-0-%

NOTE 10. RETIREMENT PLANS

Bovie and/or its subsidiary provides a tax-qualified profit-sharing retirement plan under section 401k of the Internal Revenue Code the ("Qualified Plans") for the benefit of eligible employees with an accumulation of funds for retirement on a tax-deferred basis and provides for annual discretionary contribution to individual trust funds.

All employees are eligible to participate if they have one year of service in Bovie. The employees may make voluntary contributions to the plan of up to 15% of their annual compensation. Bovie’s contributions to the plan are discretionary but may not exceed 50% of the first 4% of an employees annual compensation if he contributes 4% or more to the plan. Vesting is graded and depends on the years of service. After six years of service, the employees are 100% vested.

Bovie has made a contribution during 2005 and 2004 of $67,838 and $61,177 respectively, for the benefit of its employees. The Company also maintains a group health and dental insurance plan. The employees are eligible to participate in the plan after three months of full-time service.
 

 

F-24


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11. RELATED PARTY TRANSACTIONS

Professional Services and Employment Agreements

A former director, Alfred V. Greco Esq. is the principal of Serchio Greco & Greco LLP,, Bovie’s counsel. The legal fees paid to Serchio Greco & Greco LLP were $80,400 and $63,650 for the years 2005 and 2004, respectively. Alfred V. Greco, PLLC of which Mr. Greco is a principal, was counsel during 2005.

A director, George W. Kromer, Jr. also serves as a consultant to us. The consulting fees paid to Mr. Kromer were $22,906 and $20,751 for 2005 and 2004, respectively.

Two employees of the Engineering Department of Bovie are related to the chief operating officer. Yechiel Tsitrinovich served as an engineering consultant and was paid fees of $79,776 and $86,764, for 2005 and 2004 respectively. Bovie entered into a two-year contract with Mr. Arik Zoran for him to assume supervision of the engineering department, for a salary of $90,000 per year plus living expenses and benefits. During 2005 Mr. Zorans salary was $157,045. Bovie agreed to secure a permanent work visa for Mr. Zoran.

Employment Agreement

Bovie has employment agreements with five key employees. These agreements are for terms extending to December 31, 2009.

Employee Benefit Plans

In 1996, 1998, 2001 and 2003, Bovie established stock option plans under which officers, key employees and non-employee directors may be granted options to purchase shares of Bovie's authorized, but unissued, Common Stock. Under its existing Employee Stock Option Plans, the Company has Options outstanding as of December 31, 2005 for employees to purchase 4,168,870 shares of common stock at exercise prices ranging from $.50 to $3.25.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We have no material legal proceeding pending against us at this time. During 2005 and 2004 legal fees associated with the deductible on our insurance policy were $-0- and $ -0-, respectively.

Product Liability

Bovie currently has product liability insurance which it believes to be adequate for its business. The Company's existing policy expires December 31, 2006. During 2005 our legal fee deductible was $10,000 per case up to $50,000. In 2005 that legal fee deductible went from $10,000 to $50,000 per case and the maximum out of pocket went from $50,000 to $250,000. In 2005 we will set up a reserve for the cost of legal fees on a monthly bases equal to an estimate based on past product liability cases and legal costs.
 

 

F-25


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. COMMITMENTS AND CONTINGENCIES(Continued)

Bank Line of Credit and Term Loan

The financial covenants of the bank are:

Maximum Liability to Net Worth Ratio: On a consolidated basis, Bovie shall maintain a Maximum Liability to Tangible Net Worth Ratio of 1.00: 1.00 defined as liability (total liabilities, including any subordinated debt) divided by Adjusted Tangible Net Worth.

Minimum Adjusted Tangible Net Worth: Bovie shall maintain Minimum Tangible Adjusted Net Worth of $5,000,000 at all times, defined as total net worth minus intangibles and related party receivables.

Minimum Fixed Charge Coverage: Bovie shall maintain a Minimum Fixed Charge Coverage of 2:00:1:00 measured at Bovie’s fiscal year end, defined as (After tax income + depreciation + amortization + lease expense + interest expense) divided by (lease expense + interest expense + current maturities of long term debt). We believe we are in compliance with all the bank’s covenants.

Joint Venture - J Plasma Technology

The agreement provides that we shall be responsible to expend our best efforts to obtain additional capital if required up to a total estimated amount of $1.5 million. As of December 31, 2005 we have expended approximately $700,000 for product development and are additionally obligated to expend our best efforts to finance up to 800,000 million more.

Deferred Revenue

During the past two years we have sold generators and guaranteed to replace hand pieces for 5 years. A portion of the sale associated with the future delivery of the additional hand pieces are considered deferred revenue.
 
NOTE 13. EARNINGS PER SHARE

In 2005 and 2004, basic earnings per share were $.03 and $.11 per share, respectively. The weighted average common shares outstanding at December 31, 2005 and 2004 were 13,923,134 and 13,755,552, respectively. 

Diluted basic earnings per share for 2005 and 2004 were $.03 and $.09, respectively. Diluted weighted average common shares outstanding at December 31, 2005 and 2004 were 15,750,284 and 16,177,881, respectively.

 

F-26


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. INDUSTRY SEGMENT REPORTING

Disclosures about Reportable Segments - Types of products and services.

Bovie has three reportable segments: electrosurgical generator and accessories, battery operated cauteries and other medical products. The electrosurgical segment sells electrosurgical products which includes generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

Measurement of segment profit or loss and segment assets

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Bovie evaluates performance based on profit or loss from operations before income taxes not including non-recurring gains and losses. There were no intersegment sales and transfers in 2005 and 2004.

Bovie now operates in three reportable segments, electrosurgical products, cauteries and other medical products.

Bovie’s principal markets are the United States, Europe, Asia and Latin America, with the U.S. and Europe being the largest markets based on revenues. Bovie's major products include cauteries, electrosurgery generators, nerve locators, disposable penlights and electrodes. Electrosurgical products, cauteries, accounted for 60% and 62%, 27% and 27% of our sales for 2005 and 2004, respectively.

In 2005 and 2004, one significant customer accounted for 15% and 29% of total sales, respectively.

Bovie’s ten largest customers accounted for approximately 65% of net revenues for 2005 and 70% of revenue in 2004.

At December 31, 2005 and 2004, receivables from Bovie’s 10 largest customers accounted for approximately 66% and 66% of outstanding accounts receivable, respectively.
 
 

F-27


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. INDUSTRY SEGMENT REPORTING(Continued)

Summary information by segment area for years ended December 31, 2005 and 2004 were as follows:  
(in thousands)
 
 
 
 
 
Cauteries
Electrosurgical
Other
Total
 
 
 
 
 
Year ended December 31, 2005
        
Net sales
5,462
12,191
2,558
20,211
Interest income
13
28
6
47
Interest expense
6
14
3
23
Depreciation & Amortization
160
356
78
594
Income taxes
44
98
22
164
Income tax benefit
35
79
18
132
Segment net earnings(basic)
109
244
53
406
Total Assets
3,178
7,063
1,530
11,771
Capital expenditures
245
545
118
908
         
Year ended December 31, 2004
 
 
 
 
Net sales
5,460
12,684
2,351
20,495
Interest income
1
2
--
3
Interest expense
4
9
1
14
Depreciation & amortization
158
186
51
395
Income taxes
194
216
46
456
Income tax benefit
(194)
(216)
(46)
(456)
Segment net earnings(basic)
538
602
127
1,267
Total assets
2,975
6,832
1,212
11,019
Capital expenditures
164
375
67
606
Other Income
66
152
27
245
 
 
 
 
 

 

 

F-28

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. INDUSTRY SEGMENT REPORTING(CONTINUED)

Information by geographic area is as follows (in thousands):


 
  
Net Sales
  
Long Lived Assets
  
Year ended December 31, 2005
  
 
  
 
  
 
  
 
  
 
  
United States
  
$
16,830
  
$
2,545
  
Europe
    
1,460
    
50
  
Asia
    
759
        
South America
    
558
        
Other
    
604
        
 
              
Total
  
$
20,211
  
$
2,595
  
 
              
 
            
Year ended December 31, 2004
          
               
United States
  
$
17,506
  
$
2,107
  
Europe
    
1,222
    
60
  
Asia
    
635
        
South America
    
586
        
Other
    
546
        
 
              
Total
  
$
20,495
  
$
2,167
  
 
          


Assets and liabilities outside the U.S.A. (in thousands)

 
 
2005
  
2004
 
 
 
 
 
 
 
Total assets
 
$
622
 
$
411
 
Total liabilities
 
 
10
 
 
-0-
 
Net property, plant and equipment
 
 
100
 
 
29
 
 
 
 
 
 
 
 
 

Bovie had no assets (other than certain trade receivables, equipment, molds and inventory) outside the United States, in the years ended December 31, 2005 and 2004.

 

 

F-29

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. INDUSTRY SEGMENT REPORTING(CONTINUED)

During 2005 and 2004, a portion of Bovie’s consolidated net sales and consolidated gain 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 regulations and other restrictive governmental actions. Changes in the relative value of currencies take place from time to time and could adversely affect Bovie’s results of operations and financial condition. The future effects of these fluctuations on the operations of Bovie and its subsidiaries are not predictable.

 NOTE 15. RESEARCH AND DEVELOPMENT PERFORMED FOR OTHERS

Bovie has entered into several manufacturing and development agreements to produce electrosurgical products for medical equipment companies. The agreements are considered Original Equipment Manufacturing (OEM) contracts that call for: (1) Bovie to develop specific use devices and components (2) the customer is not committed to a certain dollar amount of purchases and (3) Bovie charges what it believes will be its costs for the development of the product. If the customer rejects or terminates the contract then it forfeits the development payments we have incurred. The customer must fulfill its agreement if Bovie delivers its working prototypes timely.

The following is research and development revenue and costs related to specific contracts, for 2005 and 2004:

Contracted Development Payments Received:
 
 
2005
  
2004
 
Amounts:
 
 
 
 
 
Revenue from development in progress
 
$
368,334
 
$
230,120
 
 
 
 
 
 
 
  
 
Revenues included in Gross Sales
 
$
368,334
 
$
230,120
 
 
 
 
  
 
 
  
 
Cost of Research and Development contracts
 
 
  
 
 
  
 
included in gross profit
 
$
368,334
 
$
230,120
 

NOTE 16. RESEARCH AND DEVELOPMENT COSTS CAPITALIZED

During the years 2005 and 2004 we had capitalized development costs, performed by third parties for our line of electrosurgical generators of $ 2,001 and $-0-, respectively.

 

 

F-30

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. SUBSEQUENT EVENT

Endoscopic Modular Instruments

In January, 2006, pursuant to agreement to acquire technology from Henvil Corp. LTD and Steve Livneh, its principal, we acquired patent pending technology for new endoscopic disposable and reusable modular instruments (“the Product”) from Henvil Corp. LTD. (‘Henvil”). The innovative modular forceps are ergonomically designed to provide surgeons’ added comfort and improved safety while reducing per-procedure costs. The modular forceps offer a unique and simpler assembly process for laparoscopic procedures and is the first modular design for the arthroscopy market. Commercial prototypes have been
developed and based on current projections we expect to commence marketing during fiscal 2006. The estimated annual worldwide market size for instruments of these categories is estimated to exceed $200 million.

The agreement requires us to purchase certain equipment and machinery ($400,000.00 value) and to hire Henvil to develop the technology and complete the design of the arthroscopic and laparoscopic instruments. In addition we must also purchase tools and molds expected to cost approximately $120,000. Henvil and Steve Livneh have also been hired as consultants for the development of the technology. The consultants are to be paid $30,000 per month from the day of execution of the agreement. In addition, commencing with the year following the first sale or commercial delivery of the Product, Bovie shall pay to Henvil’s principal, Steve Livneh, an initial minimum royalty of the greater of $35,000 per year or 3% of adjusted gross revenues received from the sale and marketing of the instruments. Thereafter, a royalty equal to 2.5% or adjusted gross sales for the life of the patents issuable for the technology.

Mr. Livneh also shall receive 50,000 5-year restricted stock options to purchase Bovie common stock for each category of instrumentation (a total of 100,000 stock options) exercisable at the closing price of Bovie common stock on the American Stock Exchange on the date of issuance of the options. The options shall vest immediately subject to Bovie’s prior application seeking FDA clearance for marketing the Product.

 

F-31
 

EXHIBIT INDEX

Exhibit 4.2
Registration Rights Agreement dated May 8, 1998 (1)
Exhibit 4.3
Assignment of Registration Rights Agreement dated September, 2004 (2)
Exhibit 10.1
Joint Venture Agreement dated February 25, 2000
Between Bovie Medical Corporation and Jump Agentur fur
Elektrotechnik GmBH (3)
Exhibit 10.2
Agreement between Bovie Medical Corporation and Arthrex Inc. dated June 2002 (4)
Exhibit 10.3
Distribution and Service Center Agreement  between Bovie Medical Corp and Symbol Medical Limited dated December 31, 2004 (5)
Exhibit 10.4
Employment Agreement- Andrew Makrides (6)
Exhibit 10.5
Employment Agreement-Robert J. Saron (7)
Exhibit 10.6
Employment Agreement-Moshe Citronowicz (8)
Exhibit 10.7
Amended Employment Agreement between Bovie and Andrew Makrides dated as of January 6, 2004 (9)
Exhibit 10.8
Amended Employment Agreement between Bovie and J. Robert Saron dated as of January 6, 2004 (10)
Exhibit 10.9
Amended Employment Agreement between Bovie and Moshe Citronowciz dated as of January 6, 2004 (11)
Exhibit 10.10
License Agreement between Bovie and Emergency Medicine Innovations, LLC dated October 22, 2004 (12)
_____________________