-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NRWUgVtlGUsNTW/Rfg8AGVZt2yN8DI8tmGcM7v4CudAC2IUhyLDYyN/muGd6pjve xLpXDFATOTfN5TUxQbhByw== 0000719135-99-000011.txt : 19990416 0000719135-99-000011.hdr.sgml : 19990416 ACCESSION NUMBER: 0000719135-99-000011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOVIE MEDICAL CORP CENTRAL INDEX KEY: 0000719135 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 112644611 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-12183 FILM NUMBER: 99595031 BUSINESS ADDRESS: STREET 1: 734 WALT WHITMAN ROAD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5166948470 MAIL ADDRESS: STREET 1: 734 WALT WHITMAN ROAD CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: AN CON GENETICS INC DATE OF NAME CHANGE: 19920703 10KSB 1 FINANCIAL STATEMENTS U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number 0-12183 December 31,1998 BOVIE MEDICAL CORPORATION Formerly known as AN-CON GENETICS, INC. (Exact name of registrant as specified in its charter) Delaware 11-2644611 (State or other jurisdiction (IRS Employer Identification No.) 734 Walt Whitman Road, Melville, NY 11747 (Address of principal executive offices) Issuer's telephone number (516) 421-5452 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 Par Value (Title of class) 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. [ X ] Issuer's revenues for its most recent fiscal year were $8,441,846. 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 26,1999 was approximately $10,655,106. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:14,709,695 and Preferred Shares 2,000,000. DOCUMENTS INCORPORATED BY REFERENCE There are no documents incorporated by reference. Bovie Medical Corporation 1998 Form 10-KSB Annual Report Table of Contents Part I Item 1.Description of Business Item 2.Properties Item 3.Legal Proceedings Item 4.Submission of Matters to a Vote of Security Holders Part II Item 5.Markets and Market Prices Item 6.Management's Discussion and Analysis Item 7.Financial Statements (See Financial Section) Item 8.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III Item 9.Directors, Executive Officers, Promoters and Control Persons Item 10.Remuneration Item 11.Security Ownership of Certain Beneficial Owners and Management of Bovie Medical Corporation Item 12.Certain Relationships and Related Transactions Item 13.Exhibits and Reports on Form 8-k Bovie Medical Corporation Item 1. Description of Business. Background Bovie Medical Corporation, formerly known as An-Con Genetics, Inc.("the Company") was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 734 Walt Whitman Road, Melville, New York 11747. Currently, the Company is actively engaged in the business of manufacturing and marketing medical products and developing related technologies. Aaron Medical Industries, Inc. ("Aaron"), a 100% owned subsidiary of the Company, a St. Petersburg, Florida based Corporation, is engaged in the manufacturing and distributing of medical products. Although, Aaron's largest current product line is battery operated cauteries, the Company has shifted its focus to the manufacture and marketing of electrosurgical generators and electrosurgical disposables. This new focus is evident in the development of the Aaron 800 and 1200 electrosurgical generators (see below). The Company also manufactures a variety of specialty lighting instruments for use in ophthalmology, general surgery, hip replacement surgery, and for the placement of endotracheal tubes. An industrial version of this light is distributed through a large automotive tool distributor, and various retail outlets and stores. The Company manufactures and markets its products both under private label and the Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has many original equipment manufacturing (OEM) agreements. These OEM arrangements combined with private label and the Bovie/Aaron label allow the Company to gain greater market share for the distribution of its products. Bovie Medical Corporation is a non-operating company while Aaron as a 100% owned subsidiary which presently accounts for 100% of operations. Company Products Battery Operated Cauteries Battery operated cauteries constitute the Company's 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 a sterile one-time use product. The Company manufactures more types of cauteries than any other company in the world, including but not limited to, a line of replaceable battery and tip cauteries, which are popular in overseas markets. Electrosurgical Products The Company continues to expand its line of electrosurgical products. Electrosurgical products include electrodes, electrosurgical pencils, and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissues and constitute the Company's second largest product line and are compatible with all major manufacturers' electrosurgical generator products. Aaron 1200 The Company has developed a 120 watt, full-featured electrosurgical generator for outpatient surgical procedures. It is used in a variety of specialties including dermatology, gynecology, and plastic surgery. Aaron 800 The Aaron 800 is a low powered office based generator designed primarily for dermatology. The unit is a 30 watt high frequency desiccator used mainly in doctors offices for removing small skin lesions and growths. This unit was designed with sufficient technology to permit the manufacture of more powerful office based generators without requiring time-consuming expense of redesign. Electrosurgical Coated Electrodes The Company is developing a coated electrosurgical blade as per its agreement with Advanced Refractory Technologies, Inc. (ART), the manufacturer and developer of Dylyn a new coating technology; Development activities for the process and production are ongoing. The Company relies on ART for successful development of the production process. Performance by ART is essential for production and marketing to commence. The Company discontinued its Resistick line of reduced stick electrodes used in electrosurgery. The reduced stick electrode market is dominated by MegaDyne Medical Products, Inc. The discontinuance of Resistick sales is a result of the settlement by Aaron with MegaDyne in a suit against Aaron for patent infringement. See legal proceedings and notes to the financial statement. Battery Operated Medical and Industrial Lights The Company manufactures 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 pro-surgery procedures. These lighting instruments have also been adapted for commercial and industrial use and are sold to automotive mechanics through Companies such as Snap-On Tools, MAC and Matco. Nerve Locator Stimulator The Company manufactures three different nerve locator stimulators primarily used for identifying motor nerves in hand and facial reconstructive surgery. These instruments are self-contained, battery operated units, used for single surgical procedures. Manufacturing, Marketing and Distribution The Company manufactures the majority of its products on its premises in St. Petersburg, Florida. Labor intensive sub-assemblies and labor intensive products may be out-sourced to the Company's specification. The Company markets its products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under both the Bovie/Aaron name and private label. Major distributors include Allegiance, Bergen Brunswig Medical, Burrows, McKesson, General Medical, Owens & Minor, and Physician Sales & Service. Competition The medical device industry is highly competitive. Many Competitors in this industry are well established, do a substantial amount of business, and have greater financial resources and facilities than the Company. Main competitors are Conmed in the electrosurgery market and Xomed in the battery operated cautery market. Management believes that, based upon recent developments, the Company has the ability to aggressively compete in these markets. Regulation Many medical products are subject to guidelines, regulations and testing requirements by federal and state authorities including the Food and Drug Administration ("the FDA"). In the United States, the FDA imposes standards, which may affect the clinical testing, manufacture and marketing of certain products. Compliance with the standards and requirements involving product safety, efficacy and labeling may prove to be very expensive and time consuming. No assurance can be given that the regulatory authorities will render the requisite approval of the marketing of some of the products that the Company plans to market. Other countries usually impose regulatory requirements concerning the development, testing, marketing and manufacture of certain products, which influence the overseas sales potential of these products. Patents and Trademarks The Company owns a total of fourteen patents. No assurance can be given that competitors will not infringe the Company's patent rights or otherwise create similar or non infringing competing products that are technically patentable in there own right. (See competition) Liability Insurance Management believes that general and product liability exposures are adequately covered by insurance. Research and Development The approximate amount expended by the Company on research and development of its products during the years 1998 and 1997, totaled $183,173 and $96,738 respectively. The Company has not incurred any direct costs relating to environmental regulations or requirements. Employees Presently the Company has a total of approximately 90 employees. These consist of 5 executives, 6 administrative, 5 sales, and 74 technical or factory employees. SIGNIFICANT SUBSIDIARY - AARON MEDICAL INDUSTRIES, INC. Aaron Medical Industries, Inc., is a Florida Corporation with offices and manufacturing facilities in St. Petersburg, Florida. It is principally engaged in the business of manufacturing and marketing medical products. Aaron manufactures and sells its products under its own label to distributors worldwide. Item 2. Properties. The Company has executive office space at 734 Walt Whitman Road, Melville, NY and its St. Petersburg, Florida facility. The Company leases the executive offices in NY for $1,226 per month and the lease expires in the year 2000. As part of the purchase of its St. Petersburg, Florida (manufacturing facility), the Company caused the seller to acknowledge that it had previously conducted assessments to document environmental conditions existing on the property, the results of which, are set forth in a June 23, 1994 Contamination Assessment Report (CAR) and a January 27, 1995 Contamination Assessment Addendum (CARA). The Florida Department of Environmental Protection (FDEP) stated in a letter, dated March 31, 1995, that based on their review of the CARA, the CAR could not be approved and that additional work was needed to be performed. In February of 1998, the environmental engineering firm Geo-Ambient conducted a second addendum to the CAR, (CAR Addendum II) to complete the additional work requested by the FDEP. Based on the results of CAR Addendum II, Geo-Ambient recommended to the FDEP that a "no further action" status be granted for the site. However, as of the date here of the FDEP has not yet issued a Site Completion Rehabilitation Order (SCRO). Based on the "no further action" finding by Geo-Ambient and the anticipated issuance of an SCRO by the FDEP management of the Company has estimated the present value of the cost of environmental work to be zero. At the request of the FDEP, GEO-Ambient conducted an additional water test in July of 1998 and found the results to be consistent with previous tests. The nature and extent of the environmental work, if any is to be required, has not yet been determined by the FDEP. Therefore, no work has been completed by the seller. Recent Acquisition of Technology On February 9, 1998 the Company entered into a series of contemporaneous agreements ("Contemporaneous") and transactions involving two non- affiliated companies, Advanced Refractory Technologies, Inc. ("ART") a privately held New York corporation engaged in research and development of a certain patented nanocomposite technology for the coating of products ("DYLYN" Technology"), and BSD Development Beta Corporation (BSD), a privately held company organized under Delaware Law. As a result of the aforesaid transactions, the registrant acquired certain job-coating equipment valued at $672,460 and consisting of two DYLYN deposition reactors inclusive of components and two electro-blade surgical mounting fixtures (the "Equipment") for coating electrosurgical blades and other specified medical devices utilizing the DYLYN Technology. The aforesaid, in addition to the acquisition by the Company of the Equipment, resulted in the acquisition by it of an exclusive 10-year license to use the DYLYN Technology to jobcoat specified medical products together with a manufacturing arrangement with ART whereby ART will operate and maintain the equipment for the use of the DYLYN Technology under the License Agreement at ARTs location in Buffalo, New York. The Company acquired all of the outstanding securities of BSD which is now a wholly owned subsidiary of registrant. The license is an exclusive 10-year license to use the DYLYN technology to job-coat specified medical products for marketing anywhere in the world. It provides essentially for payment of a royalty to ART based upon net revenues derived by the registrant directly or indirectly from the sale of products or fees from sub-licensees utilizing the DYLYN Technology. The exclusivity of the license is contingent upon ART receiving minimum job-coating fees of $200,000 in the first contract year and increasing by $100,000 per year for each succeeding contract year up to a minimum of $500,000 in the fourth contract year and each succeeding year thereafter. The 10-year license is renewable for an additional 10-year period upon notice prior to 180 days of expiration, plus the payment by the registrant of $2 million in cash or in shares of common stock of registrant having a fair market value aggregating $2 million. The license may be terminated by ART in the event of (a) registrant's failure to pay any fee due, (b) breach or default by registrant of any material term of the License Agreement or other related agreements between ART, BSD and or registrant; (c) breach or default of the Manufacturing Agreement; (d) registrant files a petition in bankruptcy or for an arrangement under any federal or state bankruptcy laws or is adjudicated insolvent; or (e) a petition is filed proposing adjudication of registrant as bankruptcy or insolvent, and such petition is not dismissed within 90 days after filing thereof. Manufacturing Agreement Pursuant to the Contemporaneous Agreements, the Company was assigned a Manufacturing Agreement dated February 9, 1998, which provides that ART will job-coat products pursuant to the registrant's specifications for a fee based upon its base cost as defined plus a percentage thereof, unless otherwise agreed. The manufacturing Agreement which is for a term of 5- years and renewable for an additional 5-years at the option of the registrant also provides for minimum annual job-coating fees which are to be offset against fees payable by the registrant to maintain exclusivity under the License Agreement. Maintenance of exclusivity of the License will satisfy and obviate the minimum annual job-coating fees payable under the Manufacturing Agreement. Exchange of Shares-BSD Pursuant to the Contemporaneous Agreements, the Company issued 2,000,000 preferred shares of its stock to ART and acquired all of the outstanding shares of common stock of BSD and an 8% convertible Debenture of BSD in the principal amount of $750,000(which was paid to the Company) in exchange for 3,000,000 shares of common stock of the company. Upon completion of such transactions, the Company issued a total of 5,000,000 preferred and common shares and owned all of the outstanding securities of BSD which had licensing and manufacturing rights to operate the Equipment (which rights have been assigned to the Company.) Future Obligation of the Company Among other things the Preferred Stock issued to ART is convertible into 2,000,000 shares of common stock of Bovie Medical Corporation and shall have certain preferences on liquidation and anti-dilution aspects. In the event Bovie Medical Corporation should issue any shares of any series or class of its preferred stock having substantially the same rights and preferences as the Preferred Stock without the prior consent of ART (which shall not be unreasonably withheld), then Bovie Medical Corporation is to issue and deliver to ART, without payment of any additional consideration by ART, an additional number of shares of An-Con's common stock having an aggregate fair market value equal to $500,000. Exchange of Shares-Maxxim On May 8, 1998, the Company entered into and consummated a strategic alliance agreement with Maxxim Medical, Inc., ("Maxxim"), a Delaware corporation the shares of which are listed on the New York Stock Exchange, which agreement provided for the acquisition by the Company of the trademark "Bovie," a supply, license and distributorship arrangement concerning electrosurgical devices and the acquisition of Maxxim's electrosurgical generator product line in exchange for 3,000,000 shares of common stock of the Company. More specifically, the agreement provides for (a) an irrevocable royalty-free sub-license to Maxxim to use the "Bovie" name on any electrosurgical products marketed by Maxxim; (b) a 2- year exclusive distributorship in Maxxim to resell the Bovie electrosurgical generator product line anywhere in the world, and (c) a non-exclusive right to sell the Company products anywhere in the world. The distributorship arrangement provides for anticipated cooperation between Maxxim and An-Con, with respect to research and development of new products and Maxxim's option to become the exclusive distributor thereof. Maxxim also agreed to certain minimum purchase orders for the Bovie generator product line, the Aaron 1200 generators and other An-Con products and accessories aggregating $3,000,000 during the initial 5-year term of the agreement, subject to quality control and An-Con's ability to meet commercially reasonable purchase orders of Maxxim. Kenneth Davidson, the chairman of the Board of Maxxim, has been appointed a member of the Board of Directors of An-Con. As consideration for the foregoing, the Company agreed to exchange 3,000,000 shares of common stock for the Bovie Electrosurgical Generator line, the "Bovie" trademark and trade name, and entered into agreements for the aforementioned supply, license, and distributorship arrangement involving Maxxim's commitments to purchase the Company's current and future products. Due to the Company's exhaustion of its authorized shares, in lieu of common stock, the Company had issued a secured convertible promissory note to Maxxim in the principal amount of $3,000,000 due on May 7, 2008, bearing interest at the rate of 1% above the prime lending rate in effect at Nations Banc Montgomery Securities LLC, which was retired when the Company's shareholders authorized an increase in the authorized capitalization of the Company and the Company issued Maxxim 3 million shares in September 1998. Item 3. Legal Proceedings In February 1998 the Company settled its patent infringement lawsuit with MegaDyne by payment of $150,000 and a pledge not to sell coated blades in the electrosurgical market for six months. Item 4.Submission of Matters to a Vote of Security Holders On September 8, 1998, a special meeting of shareholders was held to approve: 1. An increase in the authorized capitalization of the Company from a total of 15,000,000 shares having a par value $.015 per share to 50,000,000 shares having a par value of $.001 per share. 2. To create a class of blank preferred stock consisting of 10,000,000 shares having a par value of $.001 per share. 3. To change the name of the Corporation to "Bovie Medical Corporation." 4. To ratify the Company's 1998 Non-statutory Stock Purchase and Option Plan. All proposals were approved by a majority of the votes cast at the meeting at which a quorum was present in person or by proxy. As a result of certain contractual obligations management filed an amendment to the Company's certificate of Incorporation increasing the authorized capitalization to 40 million shares of common stock $.001 par value instead of 50 million shares of common stock authorized by the shareholders. On December 16,1998, an annual meeting of shareholders was held to approve the election of directors and appoint the Company's auditors. All proposals were approved by a majority of the votes cast at the meeting at which a quorum was present in person or by proxy. PART II Item 5. Markets and Market Prices Bovie's common stock is traded in the over-the-counter market on the National Association of Securities Dealers, Inc. Bulletin Board ("NASD Bulletin Board"). The table shows the reported high and low bid prices for the common stock during each quarter of the last eight quarters as reported by the NASD Bulletin Board (symbol "Bovie"). These prices do not represent actual transactions and do not include retail markups, markdowns or commissions. 1998 High Low 1st Quarter 2 1/8 5/8 2nd Quarter 1 13/16 1 1/8 3rd Quarter 1 1/4 27/32 4th Quarter 15/16 17/32 1997 High Low 1st Quarter 1 5/16 1 2nd Quarter 1 1/8 11/16 3rd Quarter 2 1/32 9/16 4th Quarter 13/16 9/16 On March 26, 1999, the Closing bid for Bovie's Common Stock as reported by the NASD Bulletin Board was $.635 per share. As of March 26, 1999, the total number of shareholders of the Company's Common Stock was approximately 1,000 exclusive of shareholders whose shares are held in the name of their broker or stock depositories or the escrow agent holding shares for the benefit of Bovie Medical Corporation shareholders which are estimated to be 1,000 additional shareholders. Item 6. Management's Discussion and Analysis. Results of Operations Bovie's net revenues for 1998 were approximately $8.4 million as compared to $7.3 million for 1997. The increase in sales of $1,070,565 (15%) was the net result of $358,574 increase in revenues from sale of cauteries and the balance of the increase was mostly attributable to contract sales to Maxxim as part of purchase of the Bovie trade name. The sales for medical products represented approximately 90% of total sales in 1998 as compared to approximately 87% in 1997. This was due to a decrease in non-medical lighting products of $120,057 which is directly attributable to one customer decreasing purchases from the Company. The Cost of goods sold increased by $1,135,267 (27%) from $4,138,774 in 1997 to $5,274,041 in 1998. Consequently, the percentage of gross profit from sales decreased from 44% in 1997 to 38% in 1998. The difference in cost of sales and gross profits were principally due to the gross loss on sales to Maxxim, as per the agreement dated May 8,1998, and the decrease in the profit margin on sale of Pen Lights. During 1998 and 1997, the Company's family of cauteries accounted for 41% and 43% of sales, respectively, and 35% and 39% of cost of goods sold, respectively. Research and development expenses increased from $96,738 to $183,173, from 1997 to 1998. The Company continued to invest in the development of ECU (electrosurgical coagulation) devices, and other Company products which is evidenced by acquisition costs in 1998 of $29,290. Research and development costs are made up of materials costs, engineering costs, depreciation of reactors, and payroll. Research and development costs of the Company have increased in 1998 mostly by the depreciation expense on the reactors that the Company purchased from BSD. The Company is developing DYLYN coated products with these reactors. Assuming successful development, when the products are marketed and the reactors are used for manufacturing, depreciation will be charged to cost of goods. The Company estimated the lives of the reactors to be 10 years. The increase in interest expense of 18% amounting to $16,147 was mainly attributable to the Company's contract to purchase the Bovie name. The Company had to pay interest on the note issued as a part of the acquisition price, until shareholders authorized the issuance of additional shares to retire the acquisition note. The need for borrowing has decreased because of the receipt of one million dollars in connection with the BSD transaction. The availability of these funds is expected to lower the interest expense in 1999. The Company's effective income tax rate would have been 35% except that the Company has loss carryforward. Because of a net loss, the Companies operating loss carryforward increased in 1998. General and administrative expenses of the Company increased by $273,268 (18%) from $1.5 million in 1997 to $1.8 million in 1998. This was mainly attributable to the increase in amortization of intangible assets acquired from BSD and Maxxim of $377,598. Salaries and related expenses increased by 25% from $1.3 million in 1997 to $1.6 million in 1998. The increase in salaries were in part because of hiring additional engineering and quality control and technical personnel to produce Bovie generators. Cost of professional services increased by 85% from $298,156 in 1997 to $556,352 in 1998. Additional professional fees were mostly related to the consulting and legal costs of acquiring new technologies and products. The increase in operating expenses resulted in a decrease of $998,156 in operating income and $1,026,637 decrease in net income, from 1997 to 1998. Loss from operations was $920,162 in 1998 as compared to an operating income of $77,994 in 1997. Loss from operations as a percentage of sales was 11% in 1998 and a gain of 1.1% in 1997. Net loss of the Company in 1998 was $998,046 as compared to net income of $28,591 in 1997. Total other costs as a percentage of sales were 48% in 1998 as compared to 43% in 1997. Total other costs mostly increased due to the BSD and Maxxim transactions. For 1999 the Company believes total other costs should not be significantly higher than they were in 1998. The Company sells its products through distributors both in the international market and in the USA. The distributors are contacted through response to company advertising in international medical journals or at domestic or international trade shows. During 1998, international sales of the Company's product lines decreased by a total of $260,590 (15%). In 1998, these sales were $1.5 million (18% of total sales) as compared to $1.8 million (24% of total sales) in 1997. The decrease in international sales volume was mainly attributable to the Company not having its European Community Certification (CE Mark which permits medical devices to be sold in the European Common Market until the middle of 1998. In the fourth quarter of 1998, the Company made agreements with various sales representatives to develop markets for its new products and maintain customer relations. The representatives receive on average approximately 5% of the sales in their market areas. An adequate supply of raw materials is available from both domestic and international suppliers. The relationship between the Company and its suppliers is generally limited to individual purchase order agreements, supplemented by contractual arrangements with key vendors to ensure availability of certain products. The Company has developed multiple sources of supply where possible. New product development and improvements to the Company's facility required by regulatory agencies in 1998 amounted to approximately $21,400. These expenditures were funded primarily through internal cash flow and bank financing. In order to provide additional working capital, the Company secured a $400,000 credit facility with a local commercial bank in the first quarter of 1997 and a $150,000 three year note to purchase fixed assets with interest at 1% over prime. The credit facility is expected to be renewed in May 1999. Discontinued Operations As part of a lawsuit settlement with a competitor of the Company, the Company agreed to discontinue sales of its coated blade products. Sales and gross profits from this product for 1997 and 1998 were $370,677 and $31,000 respectively, and $203,131 and $26,500, respectively. The company is developing a new line of coated blade products, that the Company believes is proprietary. Delays in perfecting the manufacturing process has caused a delay in the Company bringing this product to market. The continuation of these delays could adversely affect the future profitability and cash flows of the project and could impair the carrying value of the related assets. Financial Condition As of December 31, 1998, cash totaled $278,673 as compared to $48,246 at December 31, 1997. Cash used by operating activities was $98,793 in 1997 compared to $14,010 in 1998. Net working capital of the Company was $1,674,297 and $557,237 on December 31, 1998 and 1997, respectively. The amount of cash used in investing activities was $257,733 in 1997, compared to $443,835 in 1998. The Company continued to invest in property, plant and equipment needed for future business requirements, including manufacturing capacity. The net cash inflow from financing was $688,272 in 1998 as compared to $283,868 in 1997. The most significant items of financing activity in 1998 were the reduction of notes payable of $338,738 and the receipt of $982,756 from the exchange of the Company's common stock. The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures for the expansion of its manufacturing site, working capital requirements, and product development programs. The Company's ten largest customers accounted for approximately 49% of net revenues for 1998 as compared to 51% in 1997. At December 31, 1998, the same ten customers accounted for approximately 65% of outstanding accounts receivables as compared to 47% in 1997. Outlook The statements contained in this Outlook are based on current expectations. These statements are forward looking, and actual results may differ materially. The Company believes that the world market for disposable medical products, such as the Company's battery-operated cauteries, has significant growth potential because these type of products have not been affordable or effectively marketed outside the U.S. Because of these factors, the Company has designed certain disposable products to be reusable. The Company presently has a significant portion of the U.S. cautery market and does not expect a dramatic growth in sales of cautery - related products domestically. The Company has focused on expanding its line of electrosurgical products. Electrosurgical products sold by the Company are the standard stainless steel electrodes, the Aaron 800 and 1200 high frequency desiccators. From 1997 to 1998, the Company's electrosurgical sales increased by more than 59% from $1,377,029 to $2,188,683. This increase was attributable to the transaction with Maxxim. Maxxim sold to the Company work in process and raw materials inventory for the Bovie line of generators. The Company agreed to finish the products and sell them back to Maxxim. The agreement increased sales by $592,000, in 1998. The additional increases in sales were attributable to sales of the Aaron 1200 device. In 1998 Resistick sales ceased due to the settlement of the Company lawsuit with MegaDyne. Except for the possible introduction of new electrosurgical products the Company does not expect electrosurgical sales to increase significantly in 1999. The Company through its private label capability sees unique opportunities in the domestic market as its competitors do not private label. The electrosurgical product market is a larger market than the Company has normally sold into and is dominated by two main competitors, ValleyLab and Conmed. The combined markets for these products exceed $100 million annually. Electrosurgical product sales moved from fifth place to second in total Company sales by product line in 1997 and have remained in second place. Non-Medical Products In 1998, the Company had sales of $.8 million of its flexible lighting products used primarily in the automotive and locksmith industries. Approximately $.6 million was sold to one customer. Reliance on Collaborative, manufacturing and Selling Arrangements The Company is dependent on certain contractual partners, for manufacturing and product development. Should a collaborative partner fail to develop and manufacture products, the Company's future business and value of related assets could be negatively affected. No assurance can be given that a collaborative partner may give sufficient high priority to the Company's products. In addition, disagreements or disputes may arise between the Company and its contractual partners which could adversely affect production of its products. Liquidity and Future Plans The Company has recently changed its direction from acquiring ownership interest in companies to acquiring new product technology and expanding manufacturing capabilities through Aaron. The Aaron 800, Aaron 1200, and the Dylyn technology and manufacturing agreement are prime examples of this new direction. Other products and technologies are being evaluated for future development. In order to resume strong international sales growth and maintain its ability to sell in Europe, management has implemented and been certified as ISO9001/EN46001 quality system complaint and has been granted its CE mark (International Quality control.) The Company has obtained a line of credit with a local commercial bank for $400,000 and a $150,000 loan for capital improvements. Interest on these loans is to be paid at 1% over prime. As of December 31, 1998, the Company had paid off the line of credit and had a balance of $58,060 on its term loan which is amortized at a rate of $4,167 per month. The Company's future results of operations and the other forward-looking statements contained here in particular the statements regarding growth in the medical products industry, capital spending, research and development, and marketing and general and administrative expenses, involve a number of risks and uncertainties. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially, are the following: business conditions and the general economy; competitive factors such as rival manufacturers' availability of products at reasonable prices; risk of nonpayment of accounts receivable; risks associated with foreign operations; and litigation involving intellectual property and consumer issues. The management of Bovie Medical Corporation believes that it has the product mix, facilities, personnel, and competitive and financial resources for business success, but future revenues, costs, margins, product mix and profits are all subject to the influence of a number of factors, as discussed above. YEAR 2000 The Company is reviewing its exposure to year 2000 computer-related risks as well as trying to review those of its suppliers and customers, to evaluate any potential impact on January 1, 2000 and beyond. We believe that all internal systems will be compliant or at least have no material adverse effect on its ability to operate on or after January 1,2000. No significant program revisions have been identified which would result in significant cost in future periods. The Company anticipates, but cannot assure, that should a problem arise, it will be able to take necessary steps to minimize the impact with minimal or no material adverse effect on the results of the Company or its customers. The cost of this effort thus far has been immaterial and has been included in operating expenses. Item 7. Financial Statements. (See Attached) Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no disagreements with or changes in accountants. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons The Company's Executive Officers and directors are as follows: Name Position Director since Andrew Makrides Chairman of the December,1982 Board, President, CEO and Director J. Robert Saron President of August, 1994 Aaron And Director George Kromer Director October 1995 Alfred V. Greco Director April, 1998 Kenneth W. Davidson Director July, 1998 Keith Blakely Director December, 1998 Delton Cunningham Secretary, Treasurer Vice President/ CFO Moshe Citronowicz Executive Vice President Chief Operating Officer Andrew Makrides, Esq. age 57, 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 JD 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. J. Robert Saron, age 46, Director, holds a Bachelors 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 and member of the Board of Directors of the Company. Alfred V. Greco, Esq. age 63, Director, is President of Alfred V. Greco, P.C., and has been counsel to the Company since its inception. Mr. Greco is a member of the Bar of the State of New York and has been engaged in the practice of law for the past 35 years in the City of New York. The main focus of Mr. Greco's experience for the past 30 years has been in the area of corporate and securities law during which he has represented a large number of public companies, securities brokerage firms, executives and registered representative and has developed a broad range of experience in administrative, regulatory and legal aspects of public companies. Mr. Greco graduated from Fordham University School of Law with a Doctor of Law degree, in June 1960. He was admitted to the New York State Bar in March 1961. Delton N. Cunningham, age 34, Vice President and Chief Financial Officer holds a Bachelor of Science in Accounting from the University of Florida. He is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Mr. Cunningham began his career with the Miami office of Arthur Anderson, LLP. In June of 1991 Mr. Cunningham joined Aaron Medical Industries, Inc., as the Company's Chief Financial Officer. In June of 1992 Mr. Cunningham became Vice President of Aaron Medical Industries, Inc. and in April of 1993, he was elected Corporate Secretary of Aaron by the Board of Directors. George W. Kromer, Jr., age 56, filled a vacancy on the Board of Directors and became a director on October 1, 1995. Mr. Kromer is a Senior Financial Correspondent for "Today's Investor" and is utilized as a consultant by a number of companies whose shares are listed on the American Stock Exchange and Over-the-Counter Exchange. 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 financial publications since 1980. He received a Master's Degree in 1976 from Long Island University in Health Administration. He was engaged as a Senior Hospital Care Investigator for the City of New York Health & Hospital Corporation from 1966 to 1986. He also holds a Bachelor of Science Degree from Long Island University's Brooklyn Campus and an Associate in Applied Science Degree from New York City Community College, Brooklyn, New York. Moshe Citronowicz , age 46, is a graduate of the University of Be'er Sheva, Be'er Sheva, Israel, with a Bachelor of Science degree in electrical engineering. He has also received certificates from Worcester Polytech, Lowell University and the American Management Association for completion of seminars in MRP, master scheduling, purchasing SPC, JIT, accounting and plant management. Since coming to the United States in 1978, Mr. Citronowicz has worked in a variety of manufacturing and high tech industries. In October 1993, Mr. Citronowicz joined the Company as Vice President of Operations. He is responsible for all areas of manufacturing, purchasing, product re-design, as well as new product design. In September 1997, Mr. Citronowicz was appointed by the board of directors to the position Executive Vice President and Chief Operating Officer. Kenneth W. Davidson, age 51, is a chairman and Chief Executive Officer of Maxxim Medical, Inc., a Delaware Corporation the shares of which are listed on the New York Stock Exchange. Mr. Davidson has been a director of Maxxim since 1986. Prior to that he was the Corporate Director of Business Development at Intermedics Incorporated, which is principally a manufacturer of implantable medical devices such as pacemakers. Keith Blakely, age 45, is a founder, officer, principal shareholder, and director of ART for the past fifteen years. He is also Chairman of the External Advisory Board for the Center for Advanced Ceramic Technology at Alfred University, a Director of the Clarkson University Center for Advanced Materials and Processes, and the Vice-chairman of the Board of the Western New York Technology Development Center. Prior to his association with ART, Mr. Blakely served in various management, production, quality, and engineering positions at the Carborundum Company. REMUNERATION Item 10. The following table sets forth the compensation paid to the executive officers of the registrant for the three years ended December 31, 1998: Summary Compensation Table Annual Compensation Name and Principal Position Year Salary Bonus(a) Other(b) Andrew Makrides President, CEO Chairman of 1998 $ 99,478 1,918 9,809 the Board 1997 103,382 1,784 9,598 1996 90,000 8,400 9,700 J. Robert Saron President of Aaron Medical 1998 144,559 2,814 9,809 and Director 1997 155,865 2,460 9,352 1996 143,000 42,600 8,100 Moshe Citronowicz Executive 1998 112,463 22,891 9,809 Vice President- 1997 107,044 1,921 9,352 Chief Operating 1996 104,600 11,200 8,100 Officer Delton Cunningham 1998 86,023 1,631 9,809 Secretary, 1997 90,325 1,516 9,262 Treasurer, 1996 86,000 8,400 7,400 Vice President/ CFO (a) In 1997, the officers waived their right to 1996 bonuses and the bonuses which were contributed to the capital of the Company. (b) Other compensation consists of medical insurance and auto. REMUNERATION (continued) Item 10. The following table sets forth the compensation paid to the executive officers of the registrant for the three years ended December 31, 1998: Summary Compensation Table Long Term compensation Underlying Name and Principal Stock Options/ Position Year Awards(#) SARS(#) Pay-outs Andrew Makrides President, CEO Chairman of 1998 -- -- -- the Board 1997 -- -- -- 1996 70,000 -- -- J. Robert Saron President of Aaron Medical 1998 -- -- -- and Director 1997 -- -- -- 1996 90,000 -- -- Moshe Citronowicz Executive Vice President Chief 1998 -- -- -- Operating 1997 -- -- -- Officer 1996 25,000 -- -- Delton Cunningham Secretary, Treasurer, 1998 -- -- -- Vice President, 1997 -- -- -- CFO 1996 55,000 -- -- (a) In 1997, the officers waived their right to 1996 bonuses and the bonuses which were contributed to the capital of the Company. (b) Other compensation consists of medical insurance and auto. Option Grants and Exercise The following table summarizes (i)option grants to the Named Executive Officers during the year ended December 31, 1998 and (ii) the value of the options held by the named Executive Officers at December 31, 1998. Option Grants in the Last Fiscal Year Individual Grants Number of Percent of Securities Total Options Underlying Granted to Exercise or Options Employees in Base Price Per Expiration Name Granted Fiscal Year Share Date Andrew Makrides 150,000 19% $0.75 12/31/08 J. Robert Saron 150,000 19% $0.75 12/31/08 Moshe Citronowicz 150,000 19% $0.75 12/31/08 Delton Cunningham 150,000 19% $0.75 12/31/08 The options were granted on January 14, 1998 under Bovie Medical Corporation Incentive and Stock option Plan. The following table sets forth information with respect to the exercises of stock options by the Named Executive Officers during the year ended December 31, 1998 and unexercised options held by the Named Executive Officers on December 31, 1998. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values Value of Number of Unexercised Unexercised In-The-Money Options Options at Shares At Fiscal Year Fiscal Acquired Value End (#) Year Name on Exercise(#) Realized Exercisable End (a) Andrew Makrides - - 220,000 - J. Robert Saron - - 240,000 - Moshe Citronowicz - - 175,000 - Delton Cunningham - - 205,000 - ___________________ (a) The exercise price of the options were higher than the closing sale price for the Common Stock. The sales price as reported on NASDAQ National Market on December 31, 1998 was $0.5625. Outside Directors are compensated in their capacities as Board members through option grants. The Company's Board of Directors presently consists of J. Robert Saron, Andrew Makrides, Chairman CEO, and President, Kenneth Davidson, Keith Blakey, George W. Kromer, Jr. and Alfred V.Greco. Mr. Kromer has been retained on a month-to-month basis pursuant to verbal agreement as a financial and public relations consultant by Bovie Medical Corporation for the past year at an average monthly fee of $1,000. Mr. Greco is an officer and director of Alfred v. Greco PC, Counsel to the corporation which earned legal fees from the Company of $182,953 during 1998. He also received 75,000 ten year options to purchase the Company's Stock at $.75. These options were authorized but not issued as of December 31, 1998. In 1998 George Kromer was awarded 100,000 stock options, for ten years to purchase Bovie Medical Corporation stock at $.75 per share. There have been no changes in the pricing of any options previously or currently awarded. On January 1, 1998, the Company renegotiated contracts with its officers, for periods of one to five years. The following schedule shows all contracts and terms with officers of the company. BOVIE MEDICAL CORPORATION OFFICERS CONTRACTS DECEMBER 31, 1998 Officers Contract Expiration Contractual Auto Date Date Base Pay Allowance Delton Cunningham 1/1/98 12/31/2000 $ 78,872 $6,310 Moshe Citronowicz 1/1/98 12/31/2002 99,905 6,310 Andrew Makrides 1/1/98 12/31/2002 92,773 6,310 J. Robert Saron 1/1/98 12/31/2002 136,123 6,310
Item 11. Security Ownership of Certain Beneficial Owners and Management of Bovie. The following table sets forth certain information as of December 31, 1998, with respect to the beneficial ownership of the Company's common stock by all persons known by the Company to be the beneficial owners of more than 5% of its outstanding shares, by directors who own common stock and by all officers and directors as a group.
Number of Nature Percentage Name and Address Title Shares of of Of Class Ownership Ownership(i) Shares(i) Advanced Refractory Technologies, Inc. Preferred 2,000,000 Beneficial 10.7% 699 Hertel Ave. Buffalo, NY 14207 Eric Rainer Bashford Charitable Trust Common 1,125,000 Beneficial 6.02% 2689 Strang Blvd Yorktown Heights, NY 10598 Norman Fuchs, Individual Retirement Account Common 1,125,000 Beneficial 6.02% 5 Flagpole Lane East Setauket, NY 11209 Maxxim Medical, Inc. Common 3,000,000 Beneficial 16.1% 10300 49th St. North Clearwater, FL 33762 Directors Andrew Makrides Common 538,000(ii) Beneficial 2.8% 734 Walt Whitman Road Melville, NY 11746 George Kromer Common 135,000(iii) Beneficial .7% P.O. Box 188 Farmingdale, NY Alfred Greco Common 51,500(iv) Beneficial .3% 666 5th Ave. New York, NY 10103 J.Robert Saron Common 673,805(v) Beneficial 3.6% Ashley Drive Seminole, FL Keith Blakely -- (vi) -- 0 c/o Technologies, Inc. 699 Hertel Ave. Buffalo, NY 14207 Kenneth Davidson -- (Vii) -- 0 c/o 10300 49th St. North Clearwater, FL 33762 Officers and Directors as a group 1,965,954 Includes 10.5% 975,000 shares Reserved for Option
(i) Based on 16,699,695 common and preferred shares and 1,980,500 options outstanding to acquire shares. Officers and directors have 975,000 options to acquire shares at December 31, 1998. ii)Includes 220,000 shares owned by Mr. Makrides reserved pursuant to 10 year options to purchase shares of the Company. His options range from $.75 for 150,000 to $1.15 for 50,000. (iii) Constitute 135,000 shares reserved pursuant to 10 year options owned by Mr. Kromer to purchase shares of the Company. (iv) Does not include 75,000 shares reserved pursuant to 10 year options exercisable at $.75 per share. Granted but not delivered until 1999. Represents shares owned by Alfred V Greco PC. (v) Includes 240,000 shares reserved pursuant to 10 year options exercisable at $.75 per share owned by Mr. Saron. (vi) Does not include 2 million shares of preferred stock of the Company (convertible into 2 million shares of common stock) held by ART, of which Mr. Blakely is an officer, director and major shareholder. (vii) Does not include 3 million shares of common stock held by Maxxim Medical Inc. of which Mr. Davidson is an officer, director and major shareholder. Item 12. Certain Relationships and Related Transactions Joseph Valenti Valpex International Corporation ("Valpex"), a Company owned and operated by Mr. Joseph Valenti, was a supplier of vacuum and Krypton bulbs and vinyl pouches to Aaron for several years. In 1996, Mr. Valenti joined Bovie Medical Corporation as a director. On May 10, 1996, Valpex and Aaron entered a three year agreement that allows Aaron to purchase products directly from Valpex's manufacturers and suppliers. In exchange, Aaron agreed to pay a commission to Valpex on purchases from the agreed upon list of Valpex's suppliers. In 1998 and 1997, respectively, the equivalent sales of Valpex to Aaron were $77,200 and $117,700, respectively. Mr. Valenti resigned from the Board of Directors in August of 1998. The related party transaction between the Company and Valpex International Corporation were on terms that were no less favorable than could have been obtained in an arms' length transaction with an unrelated third party. At the time the Company entered into its agreement with Valpex International Corporation the agreed upon pricing was substantially better than other pricing available in the market. In January 1998 the executive officers of the Company entered into new employment agreements with the company. See executive compensation - officers contracts. George Kromer, a director, also serves as a consultant to the Company with average consulting compensation of approximately $1,000 per month. The aforesaid transactions were on terms no less favorable to the Company than could have been obtained in arms-length transactions with unrelated third parties. Robert Speiser As of December 31, 1997, the Company had repaid $235,100 of a principal amount previously owned to Mr. Robert Speiser a former officer director and principal shareholder of the Company. The Company has accrued a liability for $73,800 to Mr. Speiser, which was the balance of his loan to the Company and accrued interest on that loan. Mr. Speiser is disputing this amount because he feels he is due additional interest and back wages he estimated to be an additional $80,000 and the Company is trying to settle Mr. Speiser's claim. See "Certain Relationships and related Transactions". Presently there is no lawsuit between the Company and Mr. Speiser. Alfred V. Greco A director is the CEO of Alfred V Greco PC, the company's council which received $182,953 in legal fees. See "Security ownership" of certain beneficial owners and management. Norman Fuchs During October 1998 the Company entered into a consulting agreement with ATH Venture Inc. of which Norman Fuchs is an officer director and principal shareholder. Mr. Fuchs through his Individual Retirement Account beneficially owns 1,125,000 shares of the Company (6.02%) and pursuant to the consulting agreement receives $5,000 per month from the Company. Item 13. Exhibits and Reports on Form 8-k No Form 8-k was filed in the fourth quarter of 1998. SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Petersburg, State of Florida, on April 14, 1999. Bovie Medical Corporation By: S/J. Andrew Makrides Andrew Makrides Chairman of the Board President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title and Date S/Andrew Makrides Chairman of the Board Andrew Makrides Chief Executive Officer President, Director April 14, 1999 S/J. Robert Saron Director J. Robert Saron April 14, 1999 S/George W. Kromer Director George W. Kromer April 14, 1999 S/ Delton Cunningham Secretary, Treasurer Delton Cunningham Principal Accounting Officer April 14, 1999 S/Kenneth Davidson Director Kenneth Davidson April 14, 1999 S/Alfred Greco Director Alfred Greco April 14, 1999 S/Keith Blakely Director Keith Blakely April 14, 1999 PART II ITEM 7. FINANCIAL STATEMENT BOVIE MEDICAL CORPORATION INDEX TO FINANCIAL STATEMENTS Contents Page Consolidated Balance Sheet at December 31, 1998 19 Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 21 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998 and 1997 23 Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 25 Notes to Consolidated Financial Statements 28 Consent of Certified Public Accountant 49 Independent Auditors' Report 50 BOVIE MEDICAL CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 ASSETS Current assets: Cash $ 278,673 Trade accounts receivable, net 1,002,834 Inventories 1,476,548 Prepaid expenses 78,440 Deferred tax asset 175,010 Other Assets 23,051 Total current assets 3,034,556 Property and equipment, net 2,162,337 Other assets: Repair parts 355,756 Trade name 1,791,257 License and manufacturing rights 2,955,984 Goodwill, net 4,120 Patent rights, net 226,054 Deposits 129,765 5,462,936 Total Assets $10,659,829 The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Current liabilities: Accounts payable $ 385,558 Accrued expenses 302,388 Notes payable - current portion 569,187 Due to shareholders 103,126 Total current liabilities 1,360,259 Long-term debt 11,226 Stockholders' equity: Preferred Stock, par value $.001 10,000,000 shares authorized 2,000,000 issued and outstanding On December 31, 1998 2,000 Common stock par value $.001; 40,000,000 shares authorized, issued and outstanding 14,809,695 shares, on December 31, 1998 14,780 Additional paid in capital 21,199,945 Accumulated deficit (11,928,381) Total stockholders' equity 9,288,344 Total liabilities and stockholders' equity $ 10,659,829 The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 1998 1997 Sales $8,441,846 $7,371,281 Cost of sales 5,274,041 4,138,774 Gross Profit 3,167,805 3,232,507 Other costs: Research and development 183,173 96,738 Professional services 552,352 298,156 Salaries and related costs 1,599,925 1,280,370 Selling, general and administration 1,752,517 1,479,249 Total other costs 4,087,967 3,154,513 Income from operations ( 920,162) 77,994 Other income and (expense): Interest income 4,163 4,005 Interest expense ( 103,843) ( 87,696) Miscellaneous 21,796 34,288 ( 77,884) ( 49,403) Income before income tax ( 998,046) 28,591 Income taxes: Current -- ( 8,577) Tax benefit -- 8,577 Net income (loss) $( 998,046) $ 28,591 The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED) Earnings per share 1998 1997 Net income (loss): Basic $ (.07) N/S Diluted $ (.07) N/S Weighted average number of shares outstanding 13,876,328 8,186,256 Weighted average number of share assuming conversion of securities 13,876,328 8,443,972 N/S - Not Significant The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued) Common Warrants number of Common Paid in Outstanding shares stock Capital Balance January 1, 1997 $1,121,000 $8,110,648 $121,671 $12,921,356 Shares exchanged for warrants (200,000) 100,000 1,500 ( 1,500) Shares issued to retire debts -- 51,800 637 33,761 Shares issued for services -- 17,500 263 6,737 Warrants issued 143,000 -- -- -- Collection of subscriptions receivable -- -- -- -- Employee contribution of Bonus -- -- -- 70,600 Net income -- -- -- -- Balance as of December 31, 1997 $1,064,000 $8,279,948 $124,071 $13,030,962 The accompanying notes are an integral part of the financial statements. (Continued on next page) BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued) Deficit Receivable Total Balance January 1, 1997 $(10,958,926) $(64,000) $2,020,109 Shares exchanged for warrants -- -- -- Shares issued to retire debts -- -- 34,398 Shares issued for services -- -- 7,000 Warrants issued -- -- - Collection of subscriptions receivable -- 64,000 64,000 Employee contribution of Bonus -- - 70,600 Net income 28,591 - 28,591 Balance as of December 31, 1997 $(10,930,335 $ -- $2,224,698 The accompanying notes are an integral part of the financial statements. (Continued on next page) BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Preferred Common Warrants number of Preferred number of Outstanding shares Stock share Balance January 1, 1998 1,064,000 -- -- 8,279,948 Shares exchanged for warrants at $.75 ( 83,500) -- -- 83,500 Shares issued for consulting services at $.40 per share -- -- -- 306,667 Shares issued for employee bonus -- -- -- 100,000 at $.20 per share Shares issued for purchase of patent right at $.40 per share -- -- -- 39,580 Shares issued for purchase of equipment, license, manufacturing rights and cash at $.98 per share -- 2,000,000 2,000 2,900,000 Shares issued for trade name and inventory at $1.00 per share -- -- -- 3,000,000 BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED) Preferred Common Warrants number of Preferred number of Outstanding shares Stock share Receipt of cash on subscriptions receivable Aaron officers -- -- -- -- Adjustment to par value of stock from $.015 to $.001 as per stockholders meeting -- -- -- -- Warrants issued 1998 1,000,000 -- -- -- Loss for 1998 -- -- -- -- Balance as of December 31, 1998 $1,980,500 $2,000,000 $2,000 $14,709,695 The accompanying notes are an integral part of the financial statements. (Continued on next page) BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED) Common Paid-in stock Capital Deficit Total Balance January 1, 1998 $124,071 $13,030,962 (10,930,335) 2,224,698 Shares exchanged for warrants at $.75 84 62,157 -- 62,241 Shares issued for consulting services at $.40 per share 307 122,360 -- 122,667 Shares issued for employee bonus at $.40 per share 100 19,900 -- 20,000 Shares issued for purchase of patent rights at $.40 per share 40 16,229 -- 16,269 Shares issued for purchase of equipment, license, manufacturing rights and cash at $.98 per share 3,000 4,855,000 -- 4,860,000 Shares issued for trade name and inventory at $1.00 per share 3,000 2,977,000 -- 2,980,000 BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED) Common Paid-in stock Capital Deficit Total Receipt of cash on subscriptions receivable Aaron officers -- 515 -- 515 Adjustment to par value of stock from $.015 to $.001 as per stockholders meeting (115,822) 115,822 -- -- Warrants issued 1998 -- -- -- -- -- Loss for 1998 -- -- ( 998,046) ( 998,046) Balance as of December 31,1996 $14,780 $21,199,945 $(11,928,381) $9,288,344 The accompanying notes are an integral part of the financial statements. (Continued on next page) BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 1998 1997 Cash flows from operating activities: Net income (loss) $ (998,046) $ 28,591 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 787,088 311,138 Shares issued for services 162,667 7,000 Write down inventory of repair parts 193,219 -- Change in assets and liabilities: (Increase) decrease in receivables ( 211,009) 64,565 (Increase) decrease in prepaid expenses ( 10,510) ( 11,876) Increase in inventories ( 24,697) (109,925) Increase (decrease) in other receivables 34,212 ( 7,738) Increase (decrease) in accounts payable ( 13,532) (388,126) Increase in accrued expense 66,598 7,578 Total adjustments 984,036 ( 127,384) Net cash provided (used in) operations $( 14,010) $( 98,793) The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued) 1998 1997 Net cash provided by (used in) operating activities $( 14,010) $ ( 98,793) Cash flows from investing activities: Increase in fixed assets (301,220) (244,352) Increase in security deposits ( 2,615) ( 10) Acquisition of patent rights -- ( 13,371) Purchase of Technology ( 20,000) -- Increase deposit on equipment (120,000) -- Net cash used in investing activities (443,835) (257,733) Cash flows from financing activities Receipt of common stock subscription -- 64,000 Common shares issued 982,756 -- Loans from shareholders 3,972 2,736 Cost of issuing common stock - Purchase of Aaron -- -- Increase in term borrowing 40,280 69,534 Payment of long term borrowing ( 28,734) (220,466) Term loan -- 150,000 Repayment of term loan ( 50,006) ( 41,936) Borrowing - line of credit -- 85,000 Repayment - line of credit (260,000) (225,000) Net cash used in financing activities 688,272 283,868 Net increase (decrease) in cash 230,427 (72,658) The accompanying notes are an integral part of the financial statements. BOVIE MEDICAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Continued) 1998 1997 Cash at beginning of year 48,246 120,904 Cash at end of year $ 278,673 $ 48,246 Cash paid during the twelve months ended December 31: 1998 1997 Interest $ 104,657 $ 71,651 Income Taxes -0- -0- The accompanying notes are an integral part of these financial statements. BOVIE MEDICAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 1. In February of 1998, the Company issued 5 million shares valued at $.98 per share for two reactors, 1 million in cash and a license and manufacturing agreement to coat medical products with a multi patented advanced coating technology called Dylyn. 2. The Company issued 306,667 restricted shares valued at $.40 per share for consulting services. 3. The Company issued 100,000 restricted shares valued at $.40 per share to an officer of the Company in the form of a salary bonus. 4. The Company issued 39,580 restricted shares valued at $.40 for patent rights on its OmniFix products. 5. The Company issued 3,000,000 shares valued at $1.00 per share for the trade name "Bovie" and inventory of raw materials to produce electrosurgical generators. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 1. In February of 1997, 10 year convertible subordinated debentures of the Company came due and the Company offered each bond holder 2,200 shares of common stock for each $1,000 bond and accrued interest of $550. Nineteen bondholders accepted the offer and forty-three bondholders received cash for their bonds and accrued interest. The total amounts of principal and accrued interest on the converted bonds were $19,000 and $10,826 respectively. The balance of the bondholders have not redeemed their bonds or accepted the share offer. CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 2. The Company issued 10,000 shares of common stock in exchange for $4,772 of accounts payable. 3. The Company issued 100,000 shares of common stock as a result of the exercise of 200,000 warrants that were issued in conjunction with a private placement of the Company's securities. The Company accepted $70,600 from management as a contribution to capital for an outstanding liability for bonuses earned in 1996. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Consolidated Financial Statements The consolidated financial statements include the accounts of Bovie Medical Corporation and its wholly owned subsidiary Aaron Medical Industries, Inc. Intercompany transaction accounts have been eliminated. Fair Values of Financial Instruments Cash and cash equivalents. Holdings of highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair values. The carrying amount of accounts receivable and accounts payable, bonds and notes payable, and amounts due to shareholders, as presented in the balance sheet, approximates fair value. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally on the average actual cost method. Inventory at fiscal year-end was as follows: Raw materials $ 959,989 Work in process 254,832 Finished goods 260,727 Total $ 1,475,548 BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventory that will be used to repair Bovie Generators was acquired by the Company in its transaction with Maxxim. Estimates for the use of the repair raw materials range from 5-7 years. The cost of this inventory was $548,975. Due to the prolonged period necessary for disposition of these materials as per the agreement and uncertainty regarding the utilization for repairs, the cost was reduce by $193,219 to approximate pair market value. Long-lived Assets Long-lived and assets consist of property plant and equipment, intangible assets. Property, plant and equipment are recorded at cost less depreciation and amortization. Depreciation and amortization are accounted for on the straight-line method based on estimated useful lives. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and large renewals, which extend the life of the asset, are capitalized whereas maintenance and repairs and small renewals are expenses as incurred. The estimated useful lives are: machinery and equipment, 7-15 years; buildings, 30 years; and leasehold improvements 10-20 years. Intangible assets consist of patent rights and goodwill. Goodwill represents the excess of the cost of assets of the acquired companies over the values assigned to net tangible assets. These intangibles are being amortized by the straight- line method over a 5-year period. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No.121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be disposed of. In accordance with SFAS No.121, the Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recovered. The Company assesses the recover ability of long-lived assets held and to be used based on undiscounted cash flows and measures the BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impairment, if any, using discounted cash flows. Adoption of SFAS No.121 did not have a material impact on the Company's consolidated financial position, operating results or cash flows. Revenue Recognition and Product Warranty Revenue from sales of products is generally recognized upon shipment to customers. The Company warrants its products for one year. The estimated future costs of warranties are not material. Income is recognized in the financial statements (and the customer billed) when products are shipped from stock. Net sales are arrived at, by deducting discounts and freight from gross sales. Environmental Remediation The Company accrues environmental remediation costs if it is probable that an asset has been impaired or a liability incurred at the financial statement date and the amount can be reasonably estimated. Environmental compliance costs are expenses as incurred. Certain environmental costs are capitalized based on estimates and depreciated over their useful lives. Earnings Per Common and Common Equivalent Share In February 1997, the Financial Accounting Standards Board issued SFAS 128. "Earnings Per Share." SFAS 128 establishes new standards for computing and presenting earnings per share ("EPS"). Specifically, SFAS 128 replaces the previously required presentation of primary EPS with a presentation of basis EPS, requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the financial statements issued for periods ending after December 15, 1997. BOVIE MEDICAL CORPORATION CONSOLIDATED NOTES TO FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1997, the Company adopted SFAS 128. Research and Development Costs Only the development costs that are purchased from another enterprise and have alternative future use are capitalized and are amortized over five years. Income Taxes The Company and its wholly-owned subsidiary file a consolidated federal income tax return. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. 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. 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 asset surrendered. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-Based Compensation The Company has adopted Accounting Principles Board Opinion 25 for its accounting for stock based compensation. Under this policy: 1. Compensation costs are recognized as an expense over the period of employment attributable to the employee stock options. 2. Stocks issued in accordance with a plan for past or future services of an employee is allocated between the expired costs and future costs. Future costs are charged to the periods in which the services are performed. The pro forma amounts of the difference between compensation cost included in net income and related cost measured by the fair value based method, including tax effects are disclosed. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. Specifically, SFAS 130 requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. However, SFAS 130 does not specify when to recognize or how to measure the items that make-up comprehensive income. SFAS 130 is effective for fiscal years beginning after December 15, 1997, and early application is permitted. Management believes the application of SFAS 130 will not have a material effect on the Company's future financial statements. In April 1998, the FASB issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which will become effective for the BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) for the Company in fiscal 2000. It requires costs of start-up activities and organization costs to be expressed as incurred. The Company currently follows this approach and such costs have been minimal in the past. In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Financial Reporting for Segments of Business Enterprise." SFAS 131 supersedes the "industry segment" concept of SFAS 14 with a "management approach" concept as the basis for identifying reportable segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and early application is permitted. Management believes the application of SFAS 131 will not have a material effect on the Company's future financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Post-retirement Benefits," which became effective for the fiscal years beginning after December 15, 1997. The statement standardizes the disclosure requirements for pension plans and other post retirement benefits. To the extent practicable, the statement requires additional information on changes in the benefit obligations and fair value of plan assets. The Company adopted the SFAS 132. The adoption of SFAS No. 132 did not have material impact on the Company's consolidated financial statements, the results of operations or the notes thereto. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which becomes effective for the Company in fiscal 2000. Historically the Company has not utilized such instruments or engaged in such activities; therefore, the adoption of SFAS No. 133 will not impact the Company's consolidated financial statements, the results of operations or the notes thereto. NOTE 2. DESCRIPTION OF BUSINESS Bovie Medical Corporation, formally An-Con Genetics, Inc. ("the Company") was incorporated in 1982, under the laws of the State BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. DESCRIPTION OF BUSINESS (CONTINUED) of Delaware and has its principal executive office at 734 Walt Whitman Road, Suite 207, Melville, New York 11747. Currently, the Company is actively engaged in the business of manufacturing and marketing medical products and developing related technologies. Aaron Medical Industries, Inc. On January 11, 1995 the Company acquired a 100% ownership interest in Aaron Medical Industries, Inc. a St. Petersburg, Florida based Company engaged in the manufacturing and distributing of medical products. Aaron's largest current product line is battery operated cauteries. Cauteries were originally designed for precise hemostatic in ophthalmology. Today they have a variety of uses including sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual hematoma (smashed fingernail) and for stopping bleeding in many types of surgery. Aaron manufactures many types of cauteries. Aaron additionally manufactures a variety of specialty lighting instruments for use in ophthalmology, as well as a patented flexible lighting instrument for general surgery, hip replacement surgery, and for the placement of endotracheal tubes. An industrial version of this light is distributed through a large automotive tool distributor, and various retail outlets and stores. Aaron Medical Industries, Inc. manufactures and sells its products under the Bovie/Aaron label worldwide and has private label arrangements. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. DESCRIPTION OF BUSINESS (CONTINUED) ECU Technology On December 15, 1995 the Company's subsidiary, Aaron, purchased design rights for the technology to manufacture a 30 watt electrosurgical coagulation device (ECU) The ECU was being made by a third party manufacturer. The Company had a one year contract with the manufacturer to produce the unit at a fixed price with a provision for a second year extension at an agreed upon price. The Company has hired an electrical engineer to head up the project and has relocated the production to the St. Petersburg facility. The Company has developed a 120 watt electrosurgical coagulation device (ECU) which it began marketing in 1998. NOTE 3. TRADE ACCOUNTS RECEIVABLE As of December 31, 1998 the trade accounts receivable were as follows: Trade accounts receivable $ 1,066,498 Less: allow for doubtful accounts ( 60,437) Trade accounts receivable, net $ 1,006,061 NOTE 4. PROPERTY, PLANT AND EQUIPMENT As of December 31, 1998 property, plant and equipment consisted of the following: Equipment $ 2,267,541 Building 637,485 Furniture & Fixtures 375,752 Leasehold Improvements 251,505 Molds 92,061 3,624,344 Less: Accumulated depreciation (1,462 ,048) Net property, plant, and equipment $ 2,162,296 BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Depreciation expenses for the years ended December 31, 1998 and 1997 were $326,843 and $216,000, respectively. NOTE 5. RENTAL AGREEMENTS On May 6, 1997, an agreement was entered into with the landlord of 734 Walt Whitman Rd., Melville, New York for a new lease on premises beginning May 6, 1997 and extending for three years to May 5, 2000. The annual rental is $14,722 payable $1,226.83 per month. The following is a schedule of future minimum rental payments as of December 31, 1998: Amount 1999 $ 14,722 2000 4,907 $ 19,629 Total consolidated rent expense for the Company was $21,342 in 1998 and $19,294 in 1997. NOTE 6. DUE TO SHAREHOLDERS A former Chief Executive Officer (CEO) and past President made cash loans to the Company during the period October 12, 1990 to December 31, 1993 of $180,500. In addition to these loans, the past CEO advanced his own cash of $76,100 in the form of loans for product development, travel and other expenses. Interest on these loans were at 9% to 12% and had been accrued from inception. His loan balance at December 31, 1998 was $73,800. The Company has been negotiating to settle this matter. In response to the recission offer made by Bovie Medical Corporation to Aaron's former shareholders, certain shareholders owning 46,800 shares have not contacted the Company. The recession price owed to these shareholders, including $10,538 of accrued interest is $29,325. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. INTANGIBLE ASSETS Patent Infringement Lawsuit On January 22, 1998, Aaron and MegaDyne Medical Products, Inc.(MMP), a Utah Corporation, entered an agreement to settle an action that MMP had brought against the Company, in the U.S. District court of Utah, for infringing a patent for an electrosurgical product. Aaron agreed to pay $150,000 for damages resulting from the patent infringement, for a period, of six months not to manufacture or sell any electrosurgical instrument that infringes the Patent, and to provide MMP with a list of customers who had purchased the infringing product. Additional costs associated with the settlement were legal fees of $92,038, write down or inventory of $12,047 and estimated future sales refunds of $7,500. Total costs charged as Selling, General and Administrative, were $261,585. At December 31, 1998, the intangible assets consisted of the following: Classification Amount ECU Technology $ 330,216 Multifunction Cautery 59,400 Patent rights 87,769 Goodwill 188,000 License and manufacturing agreement 3,247,540 Trade name 1,877,299 5,790,224 Less: Accumulated Amortization 812,785 $4,977,439 BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. INTANGIBLE ASSETS (CONTINUED) The Company acquired the License and manufacturing rights to coat its medical products, using a new technology, and entered a product development and manufacturing agreement, in February 1998(See the Supplemental Schedule of non-cash transactions). The acquisition cost of the manufacturing rights was $3,247,540. In accordance with the agreement, the seller is responsible for perfecting the production technology. However, in 1998, certain delays were experienced in the development of bulk production methods. Continuation of such delays may impair the future cash flows from the product and the carrying value of related assets. The trade name Bovie was acquired for $1,877,299, on May 8, 1998(See the Supplemental Schedule of non-cash transactions). The cost of patents, trademarks, patent rights, technologies and copyrights acquired are being amortized on the straight-line method over their remaining lives, ranging from 2 to 20 years. Amortization expense charged to operations in 1998 and 1997 was $461,245 and $60,570, respectively. NOTE 8. LONG-TERM DEBT The long-term debt of the Company includes the mortgages, convertible debentures and notes payable of the Company. Bonds payable $ 20,000 Mortgage payable 441,325 Term loan 58,060 7% Note payable 15,369 9% Note payable 5,377 Other note payable 40,281 580,412 Less: Current portion 569,187 Long-term debt $ 11,225 BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. LONG-TERM DEBT (CONTINUED) Convertible Debenture As of April 21, 1987, the Company had sold 1,711 convertible debenture units. Each unit consisted of $1,000 subordinated debentures and 50 common stock warrants. As of December 31, 1998, 1,691 units of debentures had been converted into common shares of Bovie Medical Corporation or have been redeemed. The remaining number of outstanding debentures was 20 units. In February of 1997, the 10-year notes of $78,000 and accrued interest of $42,580 came due and the Company offered each bond holder 2,200 shares of common stock for their $1,000 bond and accrued interest of $550. Nineteen bondholders accepted the offer and forty-three bondholders received cash for their bonds and accrued interest. The balance of the bondholders have not redeemed their bonds or accepted the share offer. Mortgage Payable 10% - Mortgage payable to former landlord for purchase of property at 7100 30th Avenue North, St. Petersburg, Florida secured on June 26, 1995 for $500,000 payable in monthly installments of $5,673.06 inclusive of interest until July 1,1998 when a balloon payment of $ 442,733 is due. Because the environmental issue has not been remediated the mortgage is not due. Notes Payable to a Commercial Bank The notes payable is for a term loan of $150,000. The interest on the term loan is the bank's prime rate plus 1%. The loan is repaid in equal monthly payments plus accrued interest based on a three year amortization. The bank has a security interest in inventory, accounts receivable and equipment of the Company (the collaterals. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. LONG-TERM DEBT (CONTINUED) Line of Credit - Commercial Bank The advances under the line of credit are limited to the lesser of $400,000 or 65% of accounts receivable from non affiliated parties. The annual interest rate on the loan is the bank's prime rate plus one percent. The line expires March 31, 1998. The bank has a security interest in inventory, accounts receivable and equipment of the Company (the collateral). 7% Note Payable - This note was issued in connection with the purchase of a probe scope technology payable $779.14 per month for 48 months self-liquidating beginning November 1996 with the last payment due October, 2000. 9% Note Payable - This note was issued to finance the insurance premium. The note is payable at $5,661.00 per month for 2 months. Other notes payable - To a supplier for the purchase of a product line to supplement electrosurgical products. The following are maturities of long term debt for each of the next 5 years: 1999 569,187 2000 11,225 $ 580,412 NOTE 9. OPTIONS As of December 31, 1998, outstanding options were as follows: Number of Options Exercise Currently Exercisable Price 200,000 $ 2.000 50,000 1.150 307,000 1.125 30,000 1.120 1,393,500 0.750 1,980,500 $ 0.950 (a) (a) The amount of $0.950 represents the weighted average exercise price of the outstanding options. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. OPTIONS (CONTINUED) In 1996 the Company issued 921,000 10 year non-statutory stock options to employees exercisable at from $.75 to $1.15 a share. In 1997, the Company issued 100,000 shares of common stock in exchange for 200,000 options. Also, 143,000 warrants were issued to the Company's employees as a part of the employee benefit plan (Note 16). In 1998, the Company authorized 1,341,000 options under its 1998 services and compensation plan and issued only 800,000. The Company issued 200,000 Options for investment banking services. The exercise price of the options is two dollars per share and they expire after two years from the date of issue. The holders of 83,500 options exercised their rights and purchased equal number of shares at $.75 per share. The options became exercisable in 1997 and 1998 and expire at various dates through December, 2007. At December 31, 1998, 1,980,500 shares of stock were reserved for that purpose. 1,980,500 options are currently exercisable with a weighted average life of approximately eight years. The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the common stock option plans. The Company used the Black-Scholes Model to determine the fair value of the options with the following weighted average assumptions, zero dividend yield; expected volatility of 50%; and risk free interest rate of 6% and expected life of ten and two years for the 800,000 and 200,000 options issued in 1998, respectively. Had the compensation cost for the Company's two stock option issuances been determined based on the fair value at the grant date for awards in 1996 consistent with the provisions of SFAS No.123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. OPTIONS (CONTINUED) 1998 1997 Net earnings (Loss) - as reported $( 998,146) $ 99,191 Net earnings (Loss) -pro forma (1,417,000) 65,151 Earnings (loss) per share (.07) .0352 Earnings (Loss) per share-pro forma (.10) .008 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions, zero dividend yield; expected volatility of .50%; risk-free interest rate of 6%; and expected lives of 3 years. NOTE 10. NET OPERATING LOSS CARRYFORWARDS As of December 31, 1998, the components of deferred tax assets were as follows Deferred tax assets: Inventories $ 82,550 Net operating loss carry-forwards 2,827,000 Patent rights, primarily due to amortization 109,815 Total gross deferred tax assets 2,936,815 Less: Valuation allowance (2,936,815) Net deferred tax assets - non-current $ -- The Company had NOLs of approximately $7,974,000 at December 31, 1998, primarily because of the past operating losses associated with discontinued businesses. These NOLs and corresponding estimated tax assets, computed at 35% tax rate, expire as follows: BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year loss Expiration Loss Estimated incurred Date Amount Tax Asset 1984 1999 $ 672,000 $ 235,000 1985 2000 764,000 267,000 1986 2001 301,000 105,000 1987 2002 730,000 255,000 1988 2003 757,000 265,000 1989 2004 374,000 131,000 1990 2005 382,000 134,000 1991 2006 246,000 86,000 1992 2007 1,004,000 352,000 1993 2008 465,000 163,000 1994 2009 1,197,000 419,000 1995 2010 637,000 223,000 1998 2013 548,000 192,000 Total $ 8,077,000 $ 2,827,000 Under the provisions of SFAS 109, NOLs represent temporary differences that enter into calculation of deferred tax assets. Realization of deferred tax assets associated with the NOL is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these NOLs may expire unused and, accordingly, has established a valuation allowance against them. Although realization is not assured for the remaining deferred tax assets, based on the historical trend in sales and profitability, sales backlog, and budgeted sales of the Company's wholly owned and consolidated subsidiary, Aaron Medical Industries, Inc., management believes it is more likely than not they will be realized through future taxable earnings. However, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carryforward period are significantly reduced. The valuation allowance of $2,523,315, as of January 1, 1997 was increased by $413,500 as a consequence of recognizing additional deferred tax assets, in 1998. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. NET OPERATING LOSS CARRYFORWARDS (CONTINUED) Income before taxes and provisions for income tax expense (benefit) from continuing operations at December 31,1997 were: Current Federal income tax $ 6,262 Current State income tax 2,315 Total $ 8,577 The actual income tax expense attributable to earnings from continuing operations for the year ended December 31, 1997 differed from the amounts computed by applying the US Federal tax rate of 35% to pretax earnings from continuing operations as a result of the tax benefit of operating loss carryforwards of $8,577. In 1998, the Company had a net loss and its effective and actual tax rates were zero. NOTE 11. RETIREMENT PLANS The Company 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 to the Company. The employees may make voluntary contribution to the plan up to 15% of their annual compensation. The Company's contributions to the plan are discretionary but may not exceed 25% of the first 4% of the annual compensation that an employee contributes to the plan. Vesting is graded and depends on the years of service. After six years of service the employees are 100% vested. The Company has made a contribution during 1998 and 1997 of $23,607 and $10,557 respectively, for the benefit of its employees. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. RETIREMENT PLANS(CONTINUED) The Company also maintains a group health and dental insurance plan. The employees are eligible to participate in the plan after three months of full-time service to the Company. NOTE 12. RELATED PARTY TRANSACTIONS During 1998, a company that was controlled by a board member that resigned in 1998 received commissions from the purchase of materials the Company used in the production of certain of the Company's products. The value of these materials sold to the Company for 1998 and 1997 was $77,153 and $117,700, respectively. In May of 1996, the Company signed a termination agreement with the supplier of these products, which allows the Company to purchase these products directly from the manufacturer. In exchange, the Company will pay commissions to the board member for a period of 3 years based on the amount of material purchased from certain vendors. Alfred V Greco A director is the CEO of Alfred V Greco PC, the Company's council which received $182,953 in legal fees. See Security ownership of certain beneficial owners and management. Norman Fuchs During October 1998 the Company entered into a consulting agreement with ATH Venture Inc. of which Norman Fuchs is an officer director and principal shareholder. Mr. Fuchs through his Individual Retirement Account beneficially owns 1,125,000 shares of the Company (6.02%) and pursuant to the consulting agreement receives $5,000 per month from the Company. George Kromer A director, also serves as a consultant to the Company with average consulting compensation of approximately $1,000 per month. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. PROPERTIES The Company had moved its executive offices to the Aaron facility located at 7100 30th Avenue N., St. Petersburg, Florida 33710-2902, during the first quarter of 1995. The Company has additional executive office space at 734 Walt Whitman Road, Melville, which it leases for $1,226.83 per month. The lease runs through the year 2000. As part of the purchase of 7100 30th Avenue North, St. Petersburg, Florida (manufacturing facility) the seller acknowledged it had previously conducted assessments to document environmental conditions existing on the property, the results of which are set forth in a June 23, 1994 Contamination Assessment Report (CAR) and a January 27, 1995 Contamination Assessment Addendum (CARA). The Florida Department of Environmental Protection (FDEP) stated in a letter, dated March 31, 1995, that based on their review of the CARA, the CAR could not be approved and that additional work was needed to be performed. In February of 1998, the environmental engineering firm Geo- Ambient conducted a second addendum to the CAR, (CAR Addendum II) to complete the additional work requested by the FDEP. Based on the results of CAR Addendum II, Geo-Ambient recommended to the FDEP that a "no further action" status be granted for the site. However, as of the date of filing the FDEP has not yet issued a Site Completion Rehabilitation Order (SCRO). The Company has received a report and recommendations on the results of the water tests performed. As a result of previous sampling that showed that one on-site monitoring well still had groundwater exceedances for vinyl chloride and total xylene, the State Department of Environmental Protection has placed the site on a "monitoring-only" plan. The plan includes 4 quarters of sampling, concluding in May, 1999. The first quarter report was issued this past July. Because the exceedances were very slight, the mortgagee has requested a "no further action". DEP disagreed, instead requiring the monitoring plan. At the end of the period, DEP will likely approve a "no further action" BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. PROPERTIES (CONTINUED) unless the well concentrations have not declined. In that case, DEP could ask for further monitoring or some type of groundwater treatment. The SCRO is on hold and the Company believes it will not be issued for more than a year pending action on the above issue. Based on the above paragraph and the "no further action" finding by Geo-Ambient and the future issuance of an SCRO by the FDEP management of Bovie Medical Corporation has estimated the present value of the cost of environmental work to be zero. NOTE 14. COMMITMENTS AND CONTINGENCIES Environmental conditions -Purchase of Building (See Note 13 - properties) Leases The Company leases administrative facilities under an operating lease that expires in 2000. Rental expense was $21,342 in 1998 and $19,294 in 1997. Minimum rental commitments under all non- cancelable leases with an initial term in excess of one year are payable as follows: 1999 - $14,722; 2001 and beyond $4,907. There was no commitment for construction or purchase of property, plant, and equipment approximated at December 31, 1998. Employment Agreements The Company has employment agreements with seven key employees. These agreements are for terms from 2-5 years and call for salaries of $51,000 to $136,000. During 1997 officers waived their right to 1996 bonuses and allowed the board of directors to determine future bonuses. These bonuses valued at $70,600 were shown as a contribution to paid in capital. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) Employee Benefit Plans In 1996, the Company established stock option plans under which officers, key employees and non-employee directors may be granted options to purchase shares of the Company's authorized but unissued Common Stock. Under Employee Stock Warrant Plans, the Company has warrants outstanding as of December 31, 1998 for the purchase of 1,780,500 shares of restricted common stock at exercise prices ranging from $.75 to $1.125. Product Liability The Company currently has product liability insurance which, it believes to be adequate for its business. The Company's existing policy expires in May 1999. Speiser On December 29, 1992, Robert Speiser, the then, Chief Executive Officer of the Company, obtained a confession of judgement in the Supreme Court, State of New York, counties of Suffolk and Westchester for amounts due on loans to the Company of $92,239 and $190,957 inclusive of interest at 12% to May 27, 1992 and 9% thereafter. These loans represent amounts claimed by Mr. Speiser to have been expended on behalf of the Company and funds loaned to the Company. As reported to the Board of Directors, Mr. Speiser's actions were motivated solely to deter threatened action by a landlord to file a judgement at that time of $41,700 in rental arrears on the Melville, NY lease. Mr. Speiser has indicated that he does not intend to enforce this judgement. On March 29, 1993 and in subsequent letters of BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) instruction to the Sheriff of Suffolk County, Mr. Speiser requested that the execution of the above-mentioned judgements be held in abeyance for a 60-day period, until August 30, 1993. On February 28, 1994, the executive order expired. As of December 31, 1998, the Company had repaid $235,100 of the principal amount upon which the aforesaid judgements were based. The Company has accrued a liability for $73,800 to Mr. Speiser which was the balance of his loan to the Company and accrued interest on that loan. Mr. Speiser is disputing this amount because he feels he is due additional interest and back wages in the amount of $80,000. See "certain Relationships and Related Transactions". Presently there is no lawsuit between the Company and Mr. Speiser .The Company is pursuing a settlement of this matter. Bank Line of Credit and Term Loan. The bank line of credit and term loan require the Company 1. To maintain a current ratio of not less than 1.10 to one, senior debt to net worth ratio of not more than 1.5 to one, and an interest coverage ratio of not less than eight to one. 2. Not to expend more than $400,000 for acquisition of fixed assets, in the course of the year. 3. To submit its audited financial statements, forms 10KSB, and 10Q's, and accounts payable and receivable aging schedules. 4. Maintain its depository and cash management accounts with the bank. 5. Not to guarantee obligations of any other person or encumber its assets with any mortgage, security deed, or lien other than security interests required by the bank loan agreement. BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) 6. Not to default in any material contract with third parties. NOTE 15. EARNING PER SHARE In 1998, the Company sustained an $.07 loss per share. Because of the Company's loss, the convertible shares and warrants had anti-dillutive effect and were not used to compute any diluted loss per share. For the Year Ended 1997, the earnings per share were as follows: Income Share Per Share Basic Earning Per Share Income before $ 28,591 8,186,256 N/S Effect of Dillutive securities Convertible shares of Xenetics Biomedical, Inc. and Automated Diagnostics, Inc. 153,333 Wats 104,383 Diluted Earnings per Share Income before items assuming conversion of Securities $ 28,591 8,443,972 N/S Warrants to purchase 387,000 shares of common stock at $1.125 during 1997 were not included in the computation of diluted earnings per share because warrants' exercise prices were greater than the average price of common shares in 1997. N/S - Not Significant BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. PURCHASE OF ASSETS FOR SHARES Acquisition of BSD Development Beta Corporation On February 9, 1998, the Company exchanged 3,000,000 shares of its common stock and 2,000,000 shares it preferred stock for all preferred and common shares of BSD Development Beta Corporation (BSD). As a part of the agreement with the sellers, the Company acquired through BSD $1 million cash, a licensing and manufacturing agreement and certain equipment valued at $672,460. The equipment will be used for coating electrosurgical blades and other medical devices using DYLYN technology under a management agreement with Advance Refractory Technologies (ART), the seller of the equipment which has agreed to operate and maintain the equipment. To date development of the production methods needed to produce a commercially viable blade has been hampered by technical difficulties. The company is monitoring the process and believes ART will produce a commercially viable blade in the future. As a part of the agreement with ART, the Company obtained an exclusive ten-year renewable license to use the DYLYN Technology for coating specified medical products. Maxxim Medical, Inc. Asset Acquisition, Supply and License Agreement On May 8, 1998, the company entered into and consummated a strategic alliance agreement with Maxxim Medical, Inc., (Maxxim), a Delaware corporation the shares of which are listed on the New York Stock Exchange. The agreement provided for the acquisition, by the Company, of the trade name and the trademark Bovie, a supply, license and distributorship arrangement concerning electrosurgical devices and the acquisition of Maxxim's electrosurgical generator product line in exchange for 3,000,000 shares of common stock of The Company. More specifically, the agreement provides for (a) and irrevocable royalty-free sub-license to Maxxim to use the Bovie name; (b) a 2-year exclusive distributorship in Maxxim to resell the Bovie electrosurgical generator product line anywhere in the world, BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. PURCHASE OF ASSETS FOR SHARES (CONTINUED) and (c) a non-exclusive right to sell An-con products anywhere in the world. The distributorship arrangement provides for anticipated cooperation between Maxxim and the Company with respect to research and development of new products and Maxxim's option to become the exclusive distributor thereof. Maxxim also agreed to certain minimum purchase orders for the Bovie generator product line, the Aaron 1200 generators and other An-con products and accessories aggregating $3,000,000 during the initial 5-year term of the agreement, subject to quality control and the Company's ability to meet commercially reasonable purchase orders of Maxxim. Kenneth Davidson, the chairman of the Board of Maxxim, has been elected a member of the Board of Directors of the Company. As consideration for the foregoing, the Company agreed to exchange 3,000,000 shares of common stock for the Bovie Electrosurgical Generator line, the Bovie trademark and trade name, and entered into agreements for the aforementioned supply, license, and distributorship arrangement involving Maxxim's commitments to purchase the Company a current and future products. Due to the Company's lack of sufficient authorized shares, in lieu of common stock, the Company had issued a secured convertible promissory note to Maxxim in the principal amount of $3,000,000 which was retired when the shareholders authorized the required shares and the Company delivered them to Maxxim. NOTE 17. INDUSTRY SEGMENT REPORTING The Company's principal markets are the United States, Europe, and Latin America, with the U.S. and Europe being the largest markets based on revenues. The Company's major products include cauteries, Bend-A-lights, nerve locators, reusable pen lights and electrodes. Cauteries, disposable and replaceable, account for 41% and 42% of Company's sales for 1998 and 1997, respectively. One significant customer accounted for 7% and 9% of revenues in 1998 and 1997, respectively. In 1998 that customer accounted for $.6 million of non-medical sales which is 71% of that segments sales. The Company's ten largest customers accounted BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. INDUSTRY SEGMENT REPORTING (CONTINUED) for approximately 49% of net revenues for 1998. At December 31, 1998, the same ten customers accounted for approximately 65% of outstanding accounts receivable. Summary information by geographic area and significant industry segment for years ended December 31,1998 and 1997 were as follows: Operating Gain Identifiable Sales (Loss) Assets 1998 - (in thousands) Geographic Area United States $ 6,921 $ ( 259) $ 7,018 Europe 1,520 ( 81) 145 $ 8,441 $ ( 340) $ 7,163 Segment Medical Products $ 7,599 $ ( 302) $ 6,447 Non-medical products 842 ( 38) 716 $ 8,441 $ ( 340) $ 7,163 1997-(in thousands) Geographic Area United States $ 5,980 $ 384 $ 3,803 Europe 1,406 86 96 Latin America 100 10 -- $ 7,486 $ 480 $ 3,899 Segment Medical Products $ 6,181 $ 451 $ 3,236 Non-medical products 1,305 29 663 $ 7,486 $ 480 $ 3,899 1998 1997 Assets and liabilities outside the U.S.A. Total assets $ 102 $ 96 Total liabilities -0- -0- Net property, plant and equipment -0- -0- BOVIE MEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. INDUSTRY SEGMENT REPORTING (CONTINUED) The Company had no assets (other than certain trade receivables) or liabilities outside the United States, in the two years ended December 31, 1998. During 1998, a portion of the Company's consolidated net sales and consolidated loss from operations was derived from foreign operations. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and exchange controls, limitations on foreign participation in local enterprises, possible nationalization or expropriation, potential default on the payment of government obligations with attendant impact on private enterprise, political instability and health care regulation and other restrictive governmental actions. Changes in the relative value of currencies take place from time to time and could adversely affected the Company's results of operations and financial condition. The future effects of these fluctuations on the operations of the Company's and its subsidiaries are not predictable. CONSENT OF CERTIFIED PUBLIC ACCOUNTANT We consent to the incorporation by reference in this Annual Report on Form 10-KSB of Bovie Medical Corporation of our report dated March 31, 1999, included in the Annual Report to Stockholders of Bovie Medical Corporation Bloom and Company Hempstead, New York March 31, 1999 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Bovie Medical Corporation We have audited the accompanying consolidated balance sheet of Bovie Medical Corporation and subsidiary as of December 31, 1998 and the related consolidated statements of operations and shareholders' equity, and cash flows for the years ended December 31, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Bovie Medical Corporation and subsidiary as of December 31, 1998 and the results of their operations, and their cash flows for the years ended December 31, 1998 and 1997 in conformity with generally accepted accounting principles. BLOOM AND COMPANY Hempstead, New York March 31, 1999 EX-27 2 FDS --
5 (Replace this text with the legend) YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 278,673 0 1,066,498 60,437 1,476,548 3,034,566 3,624,344 1,462,248 10,659,829 1,360,259 11,226 0 2,000 14,780 0 10,659,829 8,441,846 8,441,846 5,274,041 9,362,008 0 0 103,843 (998,046) 0 (998,046) 0 0 0 (998,046) (0.07) (0.07)
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