# Apyx Medical Corp: Form 10-K for the period ended Dec 31, 2008 - Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135) - Form: 10-K - Filed: 2009-03-16 - Accepted by EDGAR: Mar 16, 2009, 11:32 ET - Period: 2008-12-31 - Accession: 0001140361-09-007066 - Inline XBRL: no - Main document: https://www.sec.gov/Archives/edgar/data/719135/000114036109007066/form10k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000114036109007066/ ## Business As filed, 16,831 characters. ### Overview Bovie Medical Corporation (“the Company” or “Bovie”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 734 Walt Whitman Road, Melville, New York 11747. Bovie is actively engaged in the business of manufacturing and marketing medical products and developing related technologies. Aaron Medical Industries, Inc. (“Aaron”), a 100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing our medical products. Bovie Canada ULC, a 100% owned subsidiary located in Windsor, Ontario, functions mainly as a product development and manufacturing company focused on endoscopic devices. Over the past several years, we changed our focus to the manufacture and marketing of generators and electrosurgical disposables, evidenced by the development of a broad range of electrosurgical generators designed for doctor’s offices, surgi-centers and hospitals. We manufacture and market products both under private label, the Bovie label, and the Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has original equipment manufacturing (OEM) agreements with other medical device manufacturers. These OEM and private label arrangements and our use of the Bovie/Aaron label allow us to gain greater market share for the distribution of our products. ### Company Products ### Electrosurgery Products We continue to expand our line of electrosurgery products, which include desiccators, generators, electrodes, electrosurgery pencils, and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue and constitute our largest product line. Our accessories for electrosurgery products are substantially compatible with most major manufacturers’ electrosurgery generator products. With the exception of OEM products, all of our electrosurgery generators and accessories are marketed using the internationally recognized Bovie trademark. It is estimated that 80% of all surgical procedures performed worldwide are accomplished by electrosurgery, including laparoscopic, as well as general surgery and surgical procedures in gynecology, urology, plastic surgery and dermatology. Our electrosurgery products fall under two categories, monopolar or bipolar. Monopolar products require the use of a grounding pad attached to the patient for the return of the electrical current, while bipolar products consist of two electrodes, one for the inbound current and one for the return current and therefore do not require the use of a grounding pad. ### Bovie/Aaron 800 and 900 High Frequency Desiccators These products are low powered desiccators, designed primarily for dermatology and plastic surgery in a physician’s office. The units are 30-watt high frequency desiccators used mainly for removing small skin lesions and growths. ### Bovie/Aaron 950 Bovie has developed the first and only high frequency desiccator with cut capacity for outpatient surgical procedures. It was designed mainly for use in doctors’ offices and is utilized in a variety of specialties including dermatology, gynecology, and plastic surgery. ### Bovie/Aaron 1250 We have also developed a 120-watt multipurpose electrosurgery generator. The unit features monopolar and bipolar functions with pad sensing. This generator was recently redesigned and will be sold under the name Bovie 1250U. The redesign allows one unit to work with a line voltage ranging from 100 – 240 VAC and replaces the previous need for three different versions. ### Bovie/Aaron 2250 / 3250 and Bovie IDS 200 / 300 / 400 Given the market interest in more powerful electrosurgical generators, we have developed the Bovie IDS platform - 200-watt, 300-watt, and 400-watt multipurpose digital electrosurgery generators designed for the rapidly expanding surgi-center market. This unit features both monopolar and bipolar functions, has pad and tissue sensing, plus nine blended cutting settings. The Bovie IDS 200 / Aaron 2250 has the capability to do most procedures performed today in the surgi-center or outpatient settings and was introduced in 2003. The Bovie® IDS Series are electrosurgical generators with fully digital implementation. Bovie is using dedicated digital hardware instead of a general purpose controller for processing data. The digital hardware allows very high parallel data processing throughout the operation. All data is sampled and processed digitally. Although 200 watts is more than enough power to do most procedures in the operating room, 300 watts is considered the standard and believed to be what most hospitals and surgi-centers will require. The Bovie IDS 400 is a 400 watt generator designed primarily for sale in the overseas markets. The Bovie IDS 300, Aaron 3250 and IDS 400 have been designed based on a digital feedback system. For the first time in electrosurgery, through digital technology, we are able to measure tissue impedance in real time (5,000 times a second). As the impedance varies, the power is adjusted to deliver a consistent clinical effect. ### ICON GI The ICON GI is an innovative, custom designed specialty electrosurgical generator for the gastrointestinal (“GI”) and other niche markets. This product incorporates an easy to use touch-screen interface which provides the user flexibility in achieving a desired effect through different digitally built-in modes. The ICON GI is also designed to improve safety and convenience by requiring the use of only split pads with digital technology to protect against pad burns, it features specialized error messaging to prevent misinterpretation and allow for quicker troubleshooting, and has specialized audible alerts to indicate improper cable connections. The ICON line represents a new foundation platform that can be readily expanded thereby reducing the development time and cost for future new specialized generators and also allowing the user to easily upgrade existing units. ### Bovie Button After a review of time-motion studies and focus groups of gastroenterologists and GI lab assistants, we developed a device designed to eliminate the foot pedal and cables which are associated with standard electrosurgical generators found in all GI labs. ### Battery Operated Cauteries Battery operated cauteries constitute our second largest product line. Cauteries were originally designed for precise hemostasis (to stop bleeding) in ophthalmology. The current use of cauteries has been substantially expanded to include sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual hematoma (smashed fingernail) and for arresting bleeding in many types of surgery. Battery operated cauteries are primarily sterile one-time use products. Bovie manufactures one of the broadest line of cauteries in the world, including but not limited to, a line of replaceable battery and tip cauteries, which are popular in overseas markets. ### Battery Operated Medical Lights We manufacture a variety of specialty lighting instruments for use in ophthalmology as well as specialty lighting instruments for general surgery, hip replacement surgery and for the placement of endotracheal tubes in emergency and surgical procedures. We also manufacture and market physicians’ office use penlights. ### Nerve Locator Stimulator Bovie manufactures a nerve locator stimulator primarily used for identifying motor nerves in hand and facial reconstructive surgery. This instrument is a self-contained, battery-operated unit, used for single surgical procedures. ### New Products ### SEER and BOSS product lines On April 29, 2008, we signed an agreement with Boston Scientific Corporation to acquire technology, patents, and assets related to the use of conductive sintered steel as an electrode for radio frequency (RF) cutting and coagulation, intended to lower blood loss, quicken procedure times and provide cost savings for hospitals. Potential fields of therapy for the technology acquired include liver, pancreatic and kidney tumor therapies along with orthopedic and blood vessel sealing. The process involves delivery of RF current and sterile saline for resection, haemostatic sealing and coagulation in open and laparoscopic surgery. The worldwide market size for the liver and orthopedic market is expected to total $500 million in 2009. We completed development and started production of the SEER product in 2008, and it is designed mainly for the liver, pancreatic and kidney tumor markets. The BOSS product line expands on the premise of the SEER patent and is anticipated to go into production in 2009 and is designed mainly for the orthopedic market. Prior to the April 29, 2008 agreement, we had a development and manufacturing agreement signed in 2007 that required us to develop and manufacture certain products using Boston Scientifics’ intellectual property, with which we complied. Boston Scientific terminated the original agreement and through the contract settlement negotiations we acquired the rights to the intellectual property and equipment in consideration for releasing Boston Scientific from any further obligations as outlined in the original development and manufacturing agreement. A new agreement was signed in place of the previous distribution and marketing agreement between the companies for the technology’s use in Boston Scientifics’ oncology business. As part of this new agreement, we granted a limited license to Boston Scientific until 2016 for uses outside of our intended fields listed above. The estimated fair value of the intellectual property and molds we acquired under this contract settlement approximated $1,455,000 and $40,000, respectively. The total of these amounts has been reflected as other income, and included in purchased technology and prepaid expenses, respectively in the accompanying 2008 consolidated financial statements. ### ICON GP/VS This generator expands upon our recently developed ICON platform which incorporates a flexible and simple user interface and allows for customization of the output modes for a variety of electrosurgical applications. This product, like the ICON GI, its predecessor generator, is designed and being developed to add safety features and improve convenience in performing general purpose procedures and includes a vessel sealing component. ### ICON GS (J-Plasma) In February 2000, we entered into a Joint Venture Agreement with a non-affiliated German corporation, Jump Agentur Fur Elektrotechnik GMBH (“JUMP”), wherein we owned a 50% interest in the equity and a 50% interest in the profits of the joint venture. On April 30, 2007, we acquired the remaining 50% interest in the J-Plasma joint-venture for total consideration of $500,000 (of which $200,000 is being held in escrow for two years from the date of the acquisition), resulting in the Company having 100% ownership of the medical device technology. The technology utilizes a gas ionization process producing a stable thin focused beam of ionized gas that can be controlled in a wide range of temperatures and intensities, providing the surgeon greater precision, minimal invasiveness and an absence of conductive currents during surgery. Recent engineering improvements include increases in power and efficiency and component miniaturization, making manufacturing easier and less costly. Production prototypes have been developed for testing purposes. We recently filed for 510K FDA approval to market the Icon GS. This J-Plasma technology is the foundation for our new product, the ICON GS plasma system, which is currently in development. The development of this new gas system generator also includes the design of a new proprietary handpiece. Prior to our contracting with JUMP Agentur and prior to the formation of the joint venture, JUMP Agentur had licensed its J-Plasma technology to Soring, a German company. The agreement was terminated but Soring has filed its own patent possibly using the plasma technology as its basis. Management of both JUMP and Bovie believes Soring may have breached its agreement with JUMP and may be liable for its actions. As a result, there is no assurance that there will not be future litigation involving the joint venture and/or JUMP Agentur with Soring or the possible loss of our competitive advantage. ### Endoscopic Modular Instruments ### MEG Handle and Accessories In January, 2006, pursuant to an agreement to acquire technology from Henvil Corp. Ltd.(“Henvil”) and Steve Livneh, its principal, we acquired patent pending technology for new endoscopic disposable and reusable modular instruments (“the Product”). The innovative modular forceps are ergonomically designed to provide surgeons added comfort and improved safety while reducing per-procedure costs. The modular forceps offer a unique and simpler assembly process for laparoscopic procedures and are the first modular design for the arthroscopy market. The estimated annual worldwide market size for instruments of these categories is estimated to exceed $200 million. Pursuant to this agreement, commencing with the year following the first sale or commercial delivery of the Product, Bovie will pay to Henvil’s principal, Steve Livneh, an initial minimum royalty of the greater of $35,000 per year or 3% of adjusted gross revenues received from the sale and marketing of the instruments. Thereafter, Mr. Livneh will be paid a royalty equal to 2.5% of adjusted gross sales for the life of the patents issuable for the technology. As additional consideration for the acquisition of the technology, Mr. Livneh received 50,000 5-year restricted stock options to purchase Bovie common stock for each category of instrumentation (a total of 100,000 stock options) exercisable at the closing price of Bovie common stock on January 11, 2006. The options vested upon FDA clearance for marketing the product. Mr. Livneh later became an officer of Bovie on October 1, 2006. See below and “Item 10 – Directors, Executive Officers and Corporate Governance”. ### Polarian Handle and Accessories In October 2006 we acquired assets of Lican Developments LTD (Lican), an Ontario, Canada Corporation. As a result of the asset acquisition, Steve Livneh became President of Bovie Canada. The assets acquired included proprietary patent pending technologies, working prototypes in various stages of development and production equipment. Lican is a product development and manufacturing company focused on endoscopic devices. Technologies in development include: - A new surgical handle platform called the Polarian. The Polarian handle supports a plurality of electrical and mechanical modes to be used in conjunction with disposable, Seal-N-Cut bipolar cartridges. This is an advanced entrant into the growing vessel and tissue sealing and cutting market. - Tip-On-Tube a disposable tip technology complementary to Bovie’s previously acquired and announced Modular Ergonomic Grip (MEG) forceps. Bovie acquired the MEG technology in January 2006. Bovie Canada is continuing the further development of these technologies as well as manufacturing the new devices and other Bovie products. Bovie Canada’s facility features state-of-the-art manufacturing equipment such as computerized multi-axis machinery, micro-laser welding equipment and electro-discharge drilling machinery. Endoscopic instruments (and their continued development), acquired in the January 2006 agreement with Henvil, have become part of the Bovie Canada operations and are included in the Bovie Canada array of technologies. Patent applications have been filed. ### Suture Removal Device Based on feedback from initial studies, this device is currently undergoing a redesign, and is intended to reduce the time for removing stitches in a doctor’s office, medical clinic or emergency room. The device is designed to remove sutures with a tension free cut to be utilized in various medical procedures on humans and animals. ### Employees Bovie has 174 full time employees consisting of 5 executive officers, 30 supervisory personnel, 11 sales personnel, and a total of 128 technical support, administrative, and production employees. None of our current employees are covered by any collective bargaining agreement and we have never experienced a work stoppage. We consider our employee relations to be good. ### Significant Subsidiaries Aaron Medical Industries, Inc., is a Florida Corporation with offices in St. Petersburg, Florida. It is principally engaged in the business of marketing our medical products. Bovie Canada ULC (a wholly owned subsidiary of BVX Holdings, LLC, which is wholly owned by Bovie), is an Alberta, Canada Corporation with its facility located in Windsor, Ontario. The principal function of this facility is product development and manufacturing focused mainly on endoscopic devices. ## Risk factors As filed, 16,140 characters. In addition to risks and uncertainties in the ordinary course of business, important risk factors that may affect us are discussed below. ### Global Economic Conditions and Financial Crisis The current global economic crisis described below should also be considered when reviewing each of the subsequent paragraphs setting forth the various aspects of our business, operations, and products. The recent global economic and financial market crisis has caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and lower consumer and business spending. Although the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on the Company and our ability to borrow money in the credit markets and potentially to draw on our revolving credit facility or otherwise obtain financing. Similarly, current or potential customers and suppliers may no longer be in business, may be unable to fund purchases or determine to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins, and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet customer demand in a timely manner or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations. ### Manufacturing, Marketing and Distribution Concentrations Bovie manufactures the majority of its products on its premises in St. Petersburg, Florida. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name, the Bovie/Aaron name and private label. Major distributors include Allegiance (a Cardinal Company), IMCO, McKesson Medical Surgical, Inc., Medline, NDC (Abco, Cida and Starline), Owens & Minor, and Physician Sales & Service. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected. We have a major OEM customer, Arthrex, Inc. for which we manufacture products on a private label basis, pursuant to an agreement. On August 31, 2007, we amended and extended this manufacturing agreement for an additional three year period. The amended terms continue to provide that we will be reimbursed for our expenses in developing any changes or modifications to products according to Arthrex’s specifications, and Arthrex continues to own the intellectual property. In addition, general provisions for product warranties, insurance, termination, and confidentiality remain the same. The main change to the amended manufacturing agreement is the elimination of the provision that required Arthrex to exclusively purchase the products from us as well as the elimination of the provision that required us to forego competing in the same Arthrex markets with said products. This amended Arthrex Agreement has termination dates of December 6, 2010 and March 2011 for the generators. In fiscal 2008, Arthrex orders represented approximately 20% of our total revenues. As such, should Arthrex determine to reduce or cease placement of orders for the products, our business will likely be adversely affected. ### Reliance on Other Collaborative, Manufacturing and Selling Arrangements We are also dependent on other OEM customers because we manufacture products for them; however they have no legal obligation to purchase such products. Should the collaborative customer fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that a collaborative customer will give sufficient high priority to our products. Finally, disagreements or disputes may arise between Bovie and its contractual customers, which could adversely affect production of our products. We also have informal collaborative arrangements with three foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by orders from our customers. ### Competition The medical device industry is highly competitive. Many competitors in this industry are well established, do a substantially greater amount of business, and have greater financial resources and facilities than we do. Domestically, we believe we rank third in the number of units sold in the field of electrosurgical generator manufacturing and we sell our products and compete with other manufacturers in various ways. In addition to advertising, attending trade shows and supporting our distribution channels, we strive to enhance product quality, improve user friendliness and expand product exposure. We also compete by private labeling our products for major distributors under their label. This allows us to increase our position in the marketplace and thereby compete from two different approaches, our Aaron or Bovie label, and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. We believe our main competitors do not private label their products. Lastly, at this time we sell the majority of our products through distributors. Many of the companies we compete with sell direct, thus competing directly with distributors they sometimes use. Main competitors are Conmed, Valleylab (a division of Covidien) and Erbe Electromedizine, in the electrosurgery market, Xomed (a division of Medtronics), in the battery operated cautery market, Salient Surgical Technologies (formerly Tissuelink) in the saline enhanced sintered steel market and Ethicon and U.S. Surgical in the endoscopic instrumentation market. We believe our competitive position did not change in 2008. ### Government Regulation ### United States The Company’s products and research and development activities are subject to regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities: - Product development. - Product testing. - Product labeling. - Product storage. - Pre-market clearance or approval. - Advertising and promotion. - Product traceability, and - Product indications. In the United States, medical devices are classified on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls. These controls include registration and listing, labeling, pre-market notification and adherence to the FDA Quality System Regulation. Class II devices are subject to general and special controls. Special controls include performance standards, post market surveillance, patient registries and FDA guidelines. Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness. Currently, we only manufacture Class I and Class II devices. Pre-market notification clearance must be obtained for some Class I and most Class II devices when the FDA does not require pre-market approval. All Bovie Medical products have been cleared by the Pre-market notification process. To date, the FDA has not failed to clear any devices we have submitted. A pre-market approval application is required for most Class III devices. A pre-market approval application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device. The pre-market approval application typically includes: - Results of bench and laboratory tests, animal studies, and clinical studies - A complete description of the device and its components - A detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. The pre-market approval process can be expensive, uncertain and lengthy. A number of devices for which pre-market approval has been sought by other companies have never been approved for marketing. ### Manufacturing Manufacturing and distribution of our products may be subject to continuing regulation by the FDA. We will also be subject to routine inspections by the FDA to determine compliance with the following: - Quality system regulations. - Medical device reporting regulations, and - FDA restrictions on promoting products for unapproved or off-label uses. In addition to regulations enforced by the FDA, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act and other federal, state and local regulations. ### International Regulation To market products in the European Union, our products must bear the “CE” mark. Manufacturers of medical devices bearing the CE mark have gone through a conformity assessment process that assures that products are manufactured in compliance with a recognized quality system and to comply with the European Medical Devices Directive. Each device that bears a CE mark has an associated Technical File that includes a description of the following: - Description of the device and its components, . A summary of how the device complies with the essential requirements of the medical devices directive, - Safety (risk assessment) and performance of the device, - Clinical evaluations with respect to the device, - Methods, facilities and quality controls used to manufacture the device, and - Proposed labeling for the device. Manufacturing and distribution of a device is subject to ongoing surveillance by the Notified Body to ensure continued compliance with quality system and reporting requirements. We began CE marking of devices for sale in the European Union in 1999. In addition to the requirement to CE mark, each member country of the European Union maintains the right to impose additional regulatory requirements. Outside of the European Union, regulations vary significantly from country to country. The time required to obtain approval to market products may be longer or shorter than that required in the United States or the European Union. Certain European countries outside of the European Union do recognize and give effect to the CE mark certification. We are permitted to market and sell our products in those countries. ### Patents and Trademarks We have twenty patents and trademarks; however we do not believe the patents and trademarks have a material effect on our operations as their remaining useful lives are minimal. We can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right. We have recently filed new patent applications for various new products including a scanning cannula, modular laparoscopic and endoscopic instruments, the output stage to our generator platform, our ICON product line and a Plasma Stream patent application relating to the plasma technology. ### Liability and Insurance The manufacture and sale of medical products entail significant risks of product liability claims. Bovie currently maintains product liability insurance with combined coverage limits of $10 million on a claims made basis. There is no assurance that this coverage will be adequate to protect us from any possible liabilities we might incur in connection with the sale or testing of our products. In addition, we may need increased product liability coverage as products are commercialized. This insurance is expensive and in the future may not be available on acceptable terms, if at all. ### Adverse Weather Our manufacturing facilities are located in St. Petersburg, Florida and could be affected by multiple weather risks, most notably hurricanes (one of which previously caused damage to the roof of one of our buildings as well as some of our furniture and equipment). The damage was mildly disruptive to operations. Although we carry casualty insurance and business interruption insurance, future possible disruptions of operations due to hurricanes or other weather risks could affect our ability to meet our commitments to our customers and impair important business relationships, the loss of which could adversely affect our operations and profitability. ### Research and Development Our research and development activities are an essential component of our efforts to develop new innovative products for introduction in the marketplace. New and improved products play a critical role in the Company’s sales growth. The Company continues to place emphasis on the development of proprietary products and product improvements to complement and expand its existing product lines. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. Our research and development activities are primarily developed internally and are expensed as incurred. These expenses include direct expenses for wages, materials and services associated with the development of our products net of any reimbursements from customers. Research and development expenses do not include any portion of general and administrative expenses. The Company has two complementary facilities that both contribute to a centralized research and development focus. Our St. Petersburg, FL facility has been our flagship research and design location, followed later by our addition of the Canadian facility in October 2006. Currently both facilities are working synergistically developing our new products the ICON GP/VS and ICON GS, as well as the accompanying Endoscopic Modular Instruments, the Polarian handle and accessories. We expect to make future investments to enable us to develop new technologies and products to further our strategic objectives and strengthen our existing business. However, we cannot guarantee that any of our previous or future investments will be successful. The amount expended by us on research and development of our products during the years 2008, 2007 and 2006, totaled approximately $2.1, $1.6, and $1.0 million respectively. During the past three years, we invested in the J Plasma technology, currently used in one of our new products under development, the ICON GS plasma system. In addition, we invested in the SEER and BOSS devices, Endoscopic Modular Instruments and undertook development of Cardio and Urological Electrosurgical devices for a contractual partner. We have not incurred any direct costs relating to environmental regulations or requirements. For 2009 we expect our expenditures for research and development activities to remain around the same level as 2008. ### Foreign Currency Risk We operate internationally and enter into transactions denominated in foreign currencies (most notably the Canadian dollar and the Euro). To date, we have not hedged our exposure to changes in foreign currency exchange rates, and as a result, we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars and have recently begun to invoice certain product sales in Euros. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency. We charged $88,464 to accumulated other comprehensive loss for the year ended December 31, 2008 as a result of changes in the relationship of the U.S. dollar to the Canadian dollar using the re-measurement method of translating our Canadian subsidiary’s financial statements into U.S. dollars. Other foreign currency transaction gains amounted to $4,505. ## Properties As filed, 1,153 characters. Bovie currently has the following locations: - Our executive office at 734 Walt Whitman Road, Melville, New York which is leased for approximately $1,500 per month. - A 28,000 square foot manufacturing facility at 7100 30th Ave N., St Petersburg, Florida which we own. - A research and manufacturing facility at 4056 North Services Rd. E., Windsor, Canada which is leased for approximately $2,800 per month through December 2010. - A research and manufacturing facility at 3200 Tyrone Blvd., St. Petersburg, Florida which is leased for approximately $12,700 per month under a lease that expires in September 2013. In addition, on September 11, 2008, we acquired a 60,000 square foot facility located at 5115 Ulmerton Rd. in Largo, Florida. This facility is currently being renovated to suit our manufacturing needs. We anticipate a move date near the end of the second quarter of 2009. This new facility consists of office, warehousing and manufacturing space. Upon the move to the new manufacturing facility, the Company intends to sell its facility at 7100 30th Ave. N., St. Petersburg and sublease its facility at 3200 Tyrone Blvd., St. Petersburg. ## Legal proceedings As filed, 766 characters. In 2008, a civil action was instituted by Erbe USA, Inc. (“Erbe”) in the US District Court for the Northern District of Georgia, Atlanta Division, against Bovie and a recently hired employee, seeking equitable relief and damages. The complaint essentially alleges that the newly hired employee, among other things, breached his employment agreement with Erbe USA, Inc., (“Erbe”) by wrongfully taking Erbe’s confidential information and trade secrets for use in his new employment with the assistance of Bovie. Bovie denies the allegations and pursuant to a Consent and Protective Order, the action has been stayed pending mutual discovery by the parties. It is too early in the proceeding to determine the extent, if any, of Bovie’s possible exposure in the lawsuit. ## Management's discussion and analysis As filed, 42,133 characters. Our future results of operations and the other forward-looking statements contained herein, particularly the statements regarding growth in the medical products industry, capital spending, research and development, and marketing and general and administrative expenses, involve a number of risks and uncertainties. In addition to the factors discussed above, there are other factors that could cause actual results to differ materially, such as business conditions and the general state of the economy; competitive factors including rival manufacturers’ availability of components at reasonable prices; risk of nonpayment of accounts receivable; risks associated with foreign operations; and litigation involving intellectual property and consumer issues. We believe that we have the product mix, facilities, personnel, competitive edge, operating cash flows and financial resources for business success in the immediate (1 year) future and distant future (after 1 year), but future revenues, costs, margins, product mix and profits are all subject to the influence of a number of factors, as discussed above. The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes. ### Executive Level Overview We are a medical device company engaged in the manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products. We internally divide our operations into three product lines. Electrosurgical products, battery operated cauteries and other products. The electrosurgical line sells electrosurgical products which include dessicators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income. Most of the Company’s products are marketed through medical distributors, which distribute to more than 6,000 hospitals and to doctors and other health-care facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented 17% of total revenues in 2008 as compared with 15% in 2007 and 12% in 2006. The Company’s products are sold in more than 150 countries through local dealers, including Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the CIS (former Soviet Union), Cyprus, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, The Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, Vietnam and various countries in Latin America. Local dealer support is coordinated by sales and marketing personnel at the St. Petersburg, Florida facility.. Our business is generally not seasonal in nature. ### Outlook for 2009 The Company continues to work diligently on the development and marketing of our new products and technologies which we view as the vehicles to our future growth. Management is encouraged by the positive acceptance of our new SEER tissue resection device having already established a direct and specialty sales team as well as receiving initial orders. A 510(k) FDA application for the BOSS orthopedic device, an expansion and companion of SEER, should be submitted in the near future. The recent 510(k) application for our ICON GS/J-Plasma now includes an improved system with several new features that should increase efficiency for the physician or surgeon, while reducing manufacturing costs. Management is undertaking a marketing strategy for the ICON GS, a system we believe to be versatile with possible uses in a wide variety of surgical specialties. Bovie Canada continues to direct efforts to finalize development of its MEG and Polarian vessel sealing instruments. The submission of a 510(k) FDA application for Polarian is scheduled to be completed in the next several months. The Company remains focused on its efforts to maximize shareholder value through the development of products that provide high margin and growing profit opportunities. In today’s economic environment, marked by historic uncertainty, forecasting has become increasingly more difficult. We have and will always, take a conservative approach. Every effort has been made to provide an outlook based on our experience and knowledge; however, variations often impact forecasting which may result in a change in this outlook. We strongly encourage individuals to visit our website: www.boviemedical.com to view the most current news. ### Results of Operations The table below outlines the components of the consolidated statements of earnings as a percentage of net sales for the periods indicated: | | Year Ended December 31, 2008 | December 31, 2007 | December 31, 2006 | | --- | ---: | ---: | ---: | | Sales | 100.0% | 100.0% | 100.0% | | Cost of sales | 57.8 | 60.7 | 60.3 | | Gross profit | 42.2 | 39.3 | 39.7 | | Other costs: | | | | | Research and development | 7.3 | 5.7 | 3.9 | | Professional fees | 3.5 | 2.6 | 2.0 | | Salaries and related costs | 10.8 | 9.7 | 9.6 | | Selling, general and administration | 16.0 | 14.0 | 13.9 | | Development cost - joint venture | - | - | 0.5 | | Total other costs | 37.6 | 32.0 | 29.9 | | Income from operations | 4.6 | 7.3 | 9.8 | | Other income/expense | 5.3 | 0.5 | 0.3 | | Net income before taxes and minority expense | 9.9 | 7.8 | 10.1 | | Minority interest | 0.0 | 0.0 | 0.1 | | Benefit (provision) for income taxes | (3.4) | 0.5 | (0.2) | | Net income | 6.5 | 8.3 | 10.0 | 15 ### 2008 Compared with 2007 The table below sets forth domestic/international and product line sales information: | Net Sales (in thousands) Domestic/international sales | 2008 | 2007 | Increase (Decrease) | Percentage Change 2008/2007 | | --- | ---: | ---: | ---: | ---: | | Domestic | $23,176 | $24,474 | $(1,298) | (5.3)% | | International | 4,920 | 4,305 | 615 | 14.3% | | Total net sales | $28,096 | $28,779 | $(683) | (2.4)% | | Product sales: | | | | | | Electrosurgical | $19,473 | $20,284 | $(811) | (4.0)% | | Cauteries | 6,265 | 6,131 | 134 | 2.2% | | Other | 2,358 | 2,364 | (6) | 0.0% | | Total net sales | $28,096 | $28,779 | $(683) | (2.4)% | The results of operations for the year ended December 31, 2008 show a decrease in sales of approximately $683,000 or 2.4% compared with the year ended December 31, 2007. Sales of electrosurgical products decreased by 4.0% or $0.8 million compared with the year ended December 31, 2007 while sales of cauteries increased by 2.2% from $6.1 million to $6.3 million. Other sales remained about the same at $2.4 million. This overall decrease was mainly the result of a decrease in OEM electrosurgical sales. No sales of one particular electrosurgical product dominated the number of units sold. Our ten largest customers accounted for approximately 70% of net revenues for 2008 as compared with 71% in 2007. In 2008 and 2007, Arthrex was our only customer that accounted for over 10% of total revenues (20%, and 21% of our revenues for such years). Arthrex sales of generators and accessories decreased by approximately $0.5 million or 6.5% to $5.7 million for the year ended December 31, 2008 from $6.2 million for the year ended December 31, 2007. Domestic sales were $23.2 million for the year ended December 31, 2008, representing a decrease of 5.3% from the prior year. International sales were $4.9 million for the year ended December 31, 2008, representing an increase of 14.3% or $0.6 million over the prior year. The international sales increase was primarily a result of increased sales in our IDS product line coupled with our customers increased purchasing power due to the declining US dollar exchange rate. Cost of sales represented 57.8% of sales during the year ended December 31, 2008 or 2.9% better than the 60.7% during the year ended December 31, 2007. This was mainly from changes in product sales mix resulting in material costs decreasing by 8.4%, direct labor decreasing by 1.1% and overhead decreasing by 7.3% mainly due to a decrease in contractor development services. Research and development expenses were 7.3% and 5.7% of sales for the years ended December 31, 2008 2007, respectively. These expenses increased 25.4% in 2008 to approximately $2.1 million, an increase over the year ended December 31, 2007 of approximately $0.4 million. This increase is largely due to costs related to our Canadian facility, annual salary increases, and costs related to our new SEER (Saline Enhanced Electrosurgical Resection) device. Professional services expenses increased from approximately $0.7 million in 2007 to $1.0 million in 2008, an increase of approximately $250,000 or 34.3%. This increase is mainly attributable to an increase in legal costs related to the litigation for the Erbe lawsuit and audit fees for Sarbanes Oxley related testing. Salaries and related costs increased by 7.5% to $3.0 million in 2008 compared with $2.8 for the year ended December 31, 2007. The increase was mainly attributable to additional employees needed to foster our growth in various areas coupled with annual salary increases. Selling, general and administration expenses increased as a percentage of sales by 3.0% for 2008 compared with the year ended December 31, 2007 or an increase of approximately $0.5 million to a total of $4.5 million for 2008 from $4.0 million for 2007. This increase was mainly due to increased costs of establishing a distribution channel in Europe for the MEG and SEER product lines, coupled with increases in travel costs, amortization, and commissions. We have arrangements with various sales representatives to develop markets for our new products and to maintain customer relations. Our current representatives receive an average commission of approximately 4% of sales in their market areas. In 2008 and 2007, commission expenses were approximately $727,800 and $633,200 respectively, an increase of 14.9%. The increase was due to increased sales upon which we pay commissions. Net interest earned decreased by approximately $131,000 during the year ended December 31, 2008 when compared with 2007. This was due to lower interest rates on the sweep account coupled with the interest expense incurred on debt that was used to acquire a new building. During 2008, we realized other income in the amount of approximately $1.5 million, as a result of our acquiring intellectual property from a contract settlement with Boston Scientific Corporation. Our income tax provision for the year ended December 31, 2008 was approximately $945,000 compared with approximately $6,100 for the year ended December 31, 2007. Our effective tax rate was approximately 34% for the year ended December 31, 2008, which percentage is somewhat less than statutory rates because of certain research and development tax credits we used during the year. The prior year tax provision was minimal because we offset the current provision that would otherwise be due through the utilization of net operating loss carryforwards that had been reduced by a valuation allowance at December 31, 2006. Net earnings for fiscal 2008 decreased 18.4% to $1.8 million from $2.2 million in 2007. Basic net earnings per share decreased by 26.7% to $0.11 in 2008 from $0.15 in 2007. Diluted earning per share in 2008 was $0.11 compared with $.13 for diluted earnings per share for 2007. ### 2007 Compared with 2006 The table below sets forth domestic/international and product line sales information: | Net Sales (in thousands) Domestic/international sales | 2007 | 2006 | Increase (Decrease) | Percentage Change 2007/2006 | | --- | ---: | ---: | ---: | ---: | | Domestic | $24,474 | $23,431 | $1,043 | 4.5% | | International | 4,305 | 3,245 | 1,060 | 32.7% | | Total net sales | $28,779 | $26,676 | $2,103 | 7.9% | | Product sales: | | | | | | Electrosurgical | $20,284 | $18,255 | $2,029 | 11.1% | | Cauteries | 6,131 | 5,846 | 285 | 4.9% | | Other | 2,364 | 2,575 | (211) | (8.1)% | | Total net sales | $28,779 | $26,676 | $2,103 | 7.9% | The results of operations for the year ended December 31, 2007 show increased sales but a decrease in pre-tax income compared with the year ended December 31, 2006. Sales of electrosurgical products increased by 11.1% or $2.0 million compared with the year ended December 31, 2006 while sales of cauteries increased by 4.9% from $5.8 million to $6.1 million. Other sales decreased by 8.1% from $2.6 million to $2.4 million. This decrease was mainly the result of a decrease in contracted development services revenue as OEM developed products went into production and was offset by the increase in electrosurgical product sales. No sales of one particular electrosurgical product dominated the number of units sold. Our ten largest customers accounted for approximately 71% of net revenues for 2007 compared with 73% in 2006. Arthrex was our only customer that accounted for over 10% of 2007 total revenues (21% of such revenues) whereas in 2006, two customers accounted for greater than 10% of our sales (Arthrex for 22% and Medtronic for 10.5%). Arthrex sales of generators and accessories increased slightly by approximately $50,000 or 0.1% to $6.2 million for the year ended December 31, 2007 from $6.1 million for the year ended December 31, 2006. Domestic sales were $24.5 million for the year ended December 31, 2007, representing an increase of 4.5% from the prior year. International sales were $4.3 million for the year ended December 31, 2007, representing an increase of 33.3% or $1.1 million over the prior year. The international sales increase was primarily a result of increased sales in our IDS product line coupled with our customers increased purchasing power due to the declining US dollar exchange rate. Cost of sales represented 60.7% of sales during the year ended December 31, 2007 and remained relatively the same, as a percentage of sales, compared with 60.3% during the year ended December 31, 2006, with; total cost of sales of $17.5 million and $16.1 million, respectively. The fractional percentage increase was the net result of an increase in material cost of 0.9% offset by combined decreases of 0.2% in direct labor costs and 1.1% in overhead costs. Research and development expenses were 5.7% and 3.9% of sales for the years ended December 31, 2007 and 2006, respectively. These expenses increased 52.6% in 2007 to approximately $1.6 million, an increase over the year ended December 31, 2006 of approximately $0.6 million. This increase is largely due to costs related to our Canadian facility, annual salary increases, and ICON GI final program testing. New products under development are the modular forceps instruments, Polarian, and our ICON GS plasma technology, and various improvements to our line of electrosurgical generators. In August 2007, we began production and sales of the ICON GI device. Professional services expenses increased from approximately $0.5 million in 2006 to $0.7 million in 2007, an increase of approximately $218,000 or 41.9%. This increase is mainly attributable to an increase in legal costs related to the development of additional manufacturing and development contracts as well as an increase in patent related filings during the year ended December 31, 2007 compared with the year ended December 31, 2006. Salaries and related costs increased by 9.7% to $2.8 million in 2007 compared with $2.6 million for the year ended December 31, 2006. The increase was mainly attributable to additional employees needed to foster our growth in various areas coupled with annual salary increases. Selling, general and administration expenses increased as a percentage of sales by 0.1% for 2007 compared with the year ended December 31, 2006 or an increase of approximately $0.3 million to a total of $4.0 million for 2007 from $3.7 million for 2006. This increase was mainly due to increased AMEX exchange fees, coupled with increases in regulatory fees, amortization, commissions and depreciation expenses. We have arrangements with various sales representatives to develop markets for our new products and to maintain customer relations. Our current representatives receive an average commission of approximately 4% of sales in their market areas. In 2007 and 2006, commissions paid were approximately $633,200 and $592,200 respectively, an increase of 6.9%. The increase was due to increased sales upon which we pay commissions. Net interest earned increased by approximately $53,000 during the year ended December 31, 2007 compared with 2006, primarily as a result of our higher invested cash balances. During the years ended December 31, 2007 and 2006 we recorded current income tax provisions of approximately $60,000 and $48,000, respectively (which amounts related primarily to alternative minimum income taxes) and a benefit for deferred income taxes of approximately $53,900 at December 31, 2007. At December 31, 2006, a significant portion of our deferred income tax assets arising from net operating loss carryforwards were reduced by valuation allowances. In 2007, we satisfied ourselves that such valuation allowances were no longer necessary in accordance with the provisions of Financial Accounting Standards Statement No. 109 "Accounting for Income Taxes". The reversal of the valuation allowance was the primary reason for the benefit we recorded in 2007. Net earnings for fiscal 2007 decreased 16.3% to $2.2 million from $2.7 million in 2006. Basic net earnings per share decreased by 21.1% to $0.15 in 2007 from $0.19 in 2006. Diluted earnings per share in 2007 was $0.13 compared with $0.16 for diluted earnings per share for 2006. ### Liquidity and Capital Resources Our working capital at December 31, 2008 was $9.8 million compared with $10.0 million at December 31, 2007. Accounts receivable days sales outstanding were 37 days and 39 days at December 31, 2008 and 2007 respectively. Day’s sales in inventory increased 34 days to 144 days at December 31, 2008 from 110 days at December 31, 2007. The higher days sales in inventory is due to increased inventories resulting from additional orders to be shipped and products to be manufactured under OEM contracts. In fiscal 2008, net cash provided by operating activities amounted to $0.7 million compared with net cash provided of $2.1 million from operations in 2007. The decrease in cash generated by operations in 2008 compared with the prior year is primarily due to an increase in the balance of trade accounts receivable and the build up of inventory parts to accommodate the anticipated increase in sales of new products. Net cash used in investing activities was $4.5 million and $1.7 million during 2008 and 2007, respectively, which amounts were used for the purchase of property and equipment (most notably a new facility), purchased technology and license rights. Net cash provided by financing activities was $2.9 million for fiscal 2008, an increase of $2.7 million compared with fiscal 2007. During fiscal 2008, we received $4.0 million from industrial revenue bonds through RBC Bank, These funds covered approximately $2.7 million of the $3 million purchase price for the facility and the remainder is being held in escrow until such time we complete our renovations to prepare the facility for our manufacturing needs. The bonds, which are being amortized over a 20 year term, balloon in 10 years and bear interest at a fixed interest rate of 4.6%. Scheduled maturities of this indebtedness are $125,000, $135,000, $140,000, $145,000 and $155,000 for 2009, 2010, 2011, 2012 and 2013. We had $2,500,000 in cash and cash equivalents at December 31, 2008. We believe our cash on hand, as well as anticipated cash flows from operations, will be sufficient to meet our operating cash commitments for the next year. Should additional funds be required, we have $5.0 million of additional borrowing capacity available under our existing line of credit facility with RBC Bank (see below). The Company’s future contractual obligations for agreements with initial terms greater than one year and agreements to purchase materials in the normal course of business are summarized as follows (in thousands): | Description | Years Ending December 31, 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Operating leases | 282 | 278 | 252 | 247 | 223 | 11 | | Employment agreements | 1,038 | 814 | 64 | | - | - | | Purchase Commitments | 5,766 | - | - | - | - | - | The Company has a $5 million secured revolving line of credit with RBC Bank (USA) that is due on demand. The line of credit allows for maximum borrowings of $5,000,000, and advances under the line bear interest at 4.39% and are secured by a perfected first security interest in all our business assets, namely inventory, accounts receivable, equipment, and general intangibles. Through May 12, 2009, the full amount of the line is available, and subsequent to such time, available borrowings will be based on a borrowing base utilizing a percentage of eligible receivables and inventories. As of December 31, 2008 and March 1, 2009, no borrowings were outstanding under the line of credit. ### Critical Accounting Estimates In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, sales returns and discounts, and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following: ### Allowance for doubtful accounts We maintain an allowance for doubtful accounts for estimated losses in the collection of accounts receivable. We make estimates regarding the future ability of our customers to make required payments based on historical credit experience and expected future trends. If actual customer financial conditions are less favorable than projected by management, additional accounts receivable write-offs may be necessary, which would unfavorably affect future operating results. ### Inventory reserves We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience, and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results. ### Long-lived assets We review long-lived assets which are held and used, including property and equipment and intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. ### Share-based Compensation Under the Company’s stock option plan, options to purchase Common Shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with SFAS Statement 123 (R) with option expense amortized over the vesting period based on the binomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. ### Income Taxes We operate in multiple tax jurisdictions both inside and outside the United States. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions. Tax audits associated with the allocation of this income and other complex issues may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required between jurisdictions with different tax rates. Because tax adjustments in certain jurisdictions can be significant, we record accruals representing our best estimate of the probable resolution of these matters. To the extent additional information becomes available, such accruals are adjusted to reflect the revised estimated probable outcome. ### Recent Accounting Pronouncements ### SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141) In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; non-controlling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired contingencies related to acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and income tax positions to be recognized as income tax expense. The impact of our adoption of SFAS 141R will depend upon the nature and terms of business combinations, if any, that we consummate on or after January 1, 2009. ### SFAS No. 157 – Fair Value Measurement In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements. This standard defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The partial adoption of SFAS No. 157 on January 1, 2008, for financial assets and liabilities did not have a material impact on the Company’s consolidated financial position or results of operations. ***SFAS No. 158 – Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)*** In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)”. This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to (a) recognize the funded status of a benefit plan—measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation—in its statement of financial position; (b) recognize, as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FAS 87, Employers’ Accounting for Pensions, or FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions); and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. Adoption of this statement did not have a material effect on the Company’s consolidated financial position or results of operations. ### SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," which provides a fair value option election that permits entities to irrevocably elect to measure certain financial assets and liabilities (exceptions are specifically identified in the Statement) at fair value as the initial and subsequent measurement attribute, with changes in fair value recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption of SFAS No. 159 on January 1, 2008, for financial assets and liabilities did not have a material impact on the Company’s consolidated financial position or results of operations. ### SFAS No. 160 - Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for partial and/or step acquisitions. SFAS No. 160 will be effective for the Company in the first quarter of fiscal year 2010, however since we do not have any minority interests, it will not impact our consolidated financial statements. ### SFAS No. 161 – Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”. This Standard requires enhanced disclosures regarding derivatives and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. The Standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. As SFAS No. 161 relates specifically to disclosures, the Standard will have no impact on our consolidated financial position or results of operations. ***EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received to Be Used in Future Research and Development Activities” (EITF No. 07-3)*** In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received to Be Used in Future Research and Development Activities” (EITF No. 07-3). EITF No. 07-3 requires companies that are involved in research and development activities to defer nonrefundable advance payments for future research and development activities and to recognize those payments as goods and services are delivered. The Company will be required to assess on an ongoing basis whether or not the goods or services will be delivered and to expense the nonrefundable advance payments immediately if it is determined that delivery is unlikely. EITF No. 07-3 is effective for new arrangements entered into subsequent to the beginning of the Company’s fiscal year 2009. The Company is currently evaluating the impact that the adoption of EITF No. 07-3 will have, but does not believe it will be material to the consolidated financial position or results of operations. ***FASB Staff Position (“FSP”) FSP FAS 142-3, Determination of the Useful Life of Intangible Assets or FSP FAS 142-3.*** In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets or FSP FAS 142-3”. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the intangible asset. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of FSP FAS 142-3 will have, but does not believe it will be material to the consolidated financial position or results of operations. ### SFAS No. 162 - The Hierarchy of Generally Accepted Accounting Principles In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. The implementation of this standard did not have any effect on the Company’s financial statements. ### SFAS No. 163 - Accounting for Financial Guarantee Insurance Contracts In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60”. The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in FAS 163, issued by enterprises included within the scope of FAS 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163, which is effective for fiscal years beginning after December 15, 2008, is not expected to have any effect on our financial statements. ***FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)*** In May 2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. FSP APB 14-1 must be applied retrospectively to previously issued cash-settleable convertible instruments as well as prospectively to newly issued instruments. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Because we do not have any convertible debt instruments, we do not expect that the adoption of this statement will have any effect on our consolidated financial statements. ### FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FASB Staff Position addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, *Earnings per Share*. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. At this time, the Company does not believe FSP EITF 03-6-1 will have any impact on our earnings per share calculations. ### FASB Staff Position (“FSP”) No. EITF 08-7, Accounting for Defensive Intangible Assets In November 2008, the Emerging Issues Task Force issued EITF No. 08-7, “Accounting for Defensive Intangible Assets” which clarifies the accounting for “defensive” intangible assets subsequent to initial measurement. EITF 08-7 applies to acquired intangible assets which an entity has no intention of actively using, or intends to discontinue use of the intangible asset but holds it (locks up) to prevent others from obtaining access to it (i.e., a defensive intangible asset). Under EITF 08-7, the Task Force reached a consensus that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., an asset separate from other assets of the acquirer) and the useful life assigned to an acquired defensive asset should be based on the period during which the asset would diminish in value. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008. ## Market risk As filed, 599 characters. Our short term investments consist of cash, cash equivalents and overnight investments. As such we do not believe we are exposed to significant interest rate risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid overnight money market investments. If a 10% change in interest rates were to have occurred on December 31, 2008, this change would not have had a material effect on the fair value of our investment portfolio as of that date. ## Controls and procedures As filed, 4,605 characters. ### Controls and Procedures We have carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of December 31, 2008. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. ### Changes in Internal Control over Financial Reporting Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ### Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: - pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; - provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and - provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, our management has concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria. The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by Kingery & Crouse, P.A., our independent registered public accounting firm, as stated in their report, which is attached to our audited financial statements. Filed Mar 16, 2009. Source: SEC EDGAR, the filing index for accession 0001140361-09-007066. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.