UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Form 10-KSB Pursuant to Section 13 or
15 (d) of the Securities Exchange Act of 1934
for the Year Ended December 31, 1997
Commission file number 132-3
- -------------------------------------------------------------------------------
Diapulse Corporation of America
-------------------------------
(Exact name of registrant as specified on its charter)
Delaware 13-5671991
- --------------------- -----------------------
(State or other jurisdiction of) (I.R.S. Employer
incorporation of organization) Identification
Number)
321 East Shore Road
Great Neck, New York 11023
- ---------------------------- ------------------
(Address of principal offices) (Zip Code)
Registrant's telephone number (516) 466- 3030
including area code ------------------
- -----------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.025 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------- ------
<PAGE>
Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the mean of the bid and the ask prices of the common
stock on October 25, 1998 as reported by an independent market maker.
$1,981,029
Number of shares outstanding of each of the registrant class of common stock as
of October 25, 1998
3,962,058
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
Diapulse Corporation of America
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal proceedings
Item 4. Submission of Matters to
a Vote of Security Holders
PART II.
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters
Item 6. Management's Discussion
and Analysis of Financial Condition
and Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure
PART III.
Item 9. Directors and Executive Officers
of the Registrant
Item 10. Executive Compensation
Item 11. Security Ownership of Certain
Beneficial Owners and Management
Item 12. Certain Relationships
and Related Transactions
PART IV.
Item 13. Exhibits, Financial Statements,
and Reports on Form 8-K
Signatures
Financial Statements
<PAGE>
PART I
ITEM 1. Business
Diapulse Corporation of America (the Company) is a Delaware Corporation
organized in 1957. The Registrant develops, manufactures and markets Diapulse
Technology, a proprietary medical system which produces non-thermal pulsed high
frequency, high peak power electromagnetic energy to treat post-operative edema
and pain in acute and chronic wounds. It is used in hospitals, nursing
facilities, outpatient clinics, physicians practice and by prescription in
patients' homes. A number of insurance companies reimburse for treatment. The
Registrant has not significantly varied the product or its service rendered
since its last filing for the year ended December 31, 1996.
Suppliers - The Registrant purchases raw materials and component parts of its
units from various suppliers of electronic products. A majority of the
individual component parts of the Diapulse units are standard and available from
many suppliers. Were the Registrant to change from its present suppliers for any
reason, it believes that no significant difficulties would be experienced in the
replacement of raw materials from other suppliers, and there would be no
reduction in the quality or quantity of the material purchased.
Sales and customers - Until October 1987, the Registrant derived substantially
all of its revenue from sales of the Diapulse and related parts to customers in
foreign countries. Upon obtaining Food and Drug Administration approval to
market Diapulse in the United States in October 1987, the Registrant began
selling and renting Diapulse nationally. The Registrant is not dependent upon
any single customer, but sells and rents to numerous customer's the loss of
any one of which would not have a significant effect on the Registrant's results
of operations. Medicare reimbursement, however, represents 30% and 36% of the
Registrant's revenue for 1997 and 1996.
The Registrant rents and sells Diapulse machines to hospitals, nursing homes and
physicians, and rents its equipment to individuals covered by Medicare and
private insurance companies whose claims have been assigned to the Registrant in
various parts of the country. Payment has been received from private insurance
and reimbursements have also been received from Medicare following
administrative procedures.
Backlog - The Registrant has sufficient inventory of complete units and spare
parts to manufacture additional units for the foreseeable future to fill orders
as they arrive. Because orders are filled quickly, firm backlog at most points
in time is not significant. Orders received by the Registrant are not seasonal
and are routinely filled throughout the year.
Patents - The Registrant has patents whose rights thereunder expire in 1999.
New patents (patents pending) have been applied for in 1996 and 1997.
Employees - The Registrant has forty-two full-time and part-time employees and
commission sales representatives.
- 1 -
<PAGE>
ITEM 2. Properties
The Registrant leases approximately 6,000 square feet of office space in Great
Neck, New York for a term expiring December 31, 1998 at an annual rental of
approximately $111,360 under a lease entered into during the year ended December
31, 1991. The premises are used as the national and international headquarters
of the Company, as well as for research and development. In addition, the
registrant leases approximately 100 sq. ft. at a cost of $2,580 per year in
Carlsbad, California for a sales office.
ITEM 3. Legal Proceedings
The Company is involved as plaintiff in litigation filed in August 1994,
alleging deceptive acts and practices, false advertising, unfair competition,
breach of contract, interference with contract and breach and participation in
breach of fiduciary duty under New York law and under Federal Law. The complaint
demands damages in an unspecified amount for compensatory, punitive and treble
damages, profits and attorneys' fees. The defendants answered in April 1997 and
asserted counterclaims against the Company for alleged Federal Law violations,
interference with contract, deceptive acts and unfair trade practices and trade
disparagement. The counterclaims demand unspecified damages. It is impossible
for counsel at this time to assess the defendants' counterclaims. Management for
the Company believes that the defendants, at this time may not have significant
assets and that all of the counterclaims are without merit.
On September 10, 1997 and on October 28, 1997 the United States Department of
Health & Human Services Departmental Appeals Board ("the Appeals Board")
notified the Company that the Medicare Appeals Council ("the Council") had
decided to review certain hearing decisions made earlier in 1997 wherein an ALJ
had concluded that the Company's Diapulse equipment was durable medical
equipment and that the related treatment to the beneficiary was medically
necessary, and therefore, the Company was entitled to be paid. On March 4, 1998
the Appeals Board sent a notice to the Company that the Council was vacating the
decision involving four patient's cases (the September 10th "review") and
remanding the matter to the ALJ and directing HCFA and the Company to supply
additional information to the ALJ so that a new decision on a complete record be
rendered. A hearing was held on May 13, 1998, in which the Company provided all
the information required by the Appeals Council and the ALJ. Written request was
made to HCFA by the ALJ on May 12, 1998 no reply was received by the ALJ so
a new decision on a complete record may be rendered. A second request was made
on June 17, 1998. On June 3rd, 1998 the October 28, 1997 "review" was similarly
remanded to the ALJ. A hearing was held on October 29, 1998 and the Company is
supplying additional information requested by the ALJ. In view of the foregoing
and the lack of significant collections and age of the receivables the Company
has provided an allowance of approximately $1,007,000, the remaining uncollected
balance as of October 12, 1998.
- 2 -
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the years
covered by this report.
Part II
ITEM 5. Market For Registrant's Common Equity and Related
Stockholder Matters
The Registrant's common stock has been traded on the NASDAQ over- the-counter
market, under the symbol DIAC. The bid and ask closing sales prices are listed
below.
Quarter Ended
--------------------------------------------------
1997 1996
-------------------------- --------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---- ---- ---- ----- ---- ---- ---- -----
Common Shares:
Bid:0.62 2.625 2.375 1.00 1.00 1.00 0.50 1.00
Ask:0.87 3.125 2.50 1.732 1.25 1.25 0.75 1.55
As of December 31, 1997, there were approximately 1500 stockholders of record.
The company has not paid any cash dividends during any of the periods indicated
above. The Company anticipates that it will continue to retain its earnings to
finance the growth of its business.
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview - The Registrant has been establishing and expanding its distribution
network, sales force and sales and rental programs. Controlled, and double-blind
studies demonstrating the clinical value of the Registrant's product have been
published in peer review medical journals which continue to aid marketing. At
the present time there are 38 Diapulse publications on Medline.
Net Revenues - During 1997 net revenues increased 54.9% as compared to 1996.
This increase was primarily due to sales of equipment, improved and expanded
marketing rental program, expansion of Registrant's network and sales force.
- 3 -
<PAGE>
Cost of Sales - Increase in cost of sales is due primarily to inventory write
down of $92,000 in 1997 and increased sales of equipment.
Operating Expenses - Operating expenses, exclusive of interest, increased in
1997 largely due to the expansion of the sales force and related expenses. In
addition, the company recorded in its books the fair value of a stock option
granted to one of it's representatives in the amount of $169,000 and provided an
allowance of approximately $1,007,000 for the outstanding Medicare receivables.
Interest Expense - Interest expense increased by $36,760 from 1996 to 1997,
primarily as a result of an income tax examination change.
Inflation - In the opinion of management, inflation has not had a material
effect on the operations of the Registrant.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 and 1996, the Registrant had working capital of
$137,298. Working capital for 1996 was $291,465.
The Registrant considers, and currently uses for internal management purposes,
a number of measures of liquidity. These measures include working capital and
operating ratios, all of which are set forth below.
WORKING CAPITAL RATIOS:
These ratios measure the Registrant's ability to meet its short-term
obligations.
1997 1996
---- ----
Working capital $137,298 $291,465
Current ratio 1.2 to 1.0 1.4 to 1
Quick ratio .98 to 1.0 .56 to 1
- 4 -
<PAGE>
ITEM 7. Financial Statements
The financial statements to be provided pursuant to this Item are
included under Item 13 of this report.
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
Part III
ITEM 9. Directors and Executive Officers of the Registrant
The executive officers and key employees of the Company as of March
31, 1998 were as follows:
Name Age Title
---- ----- -----
Jesse Ross 76 President, Director and
Chairman of the Board
David M. Ross 50 Director
Raymond Evans 61 Director
Howard Mann 63 Director
Jesse Ross has been actively engaged in the business of the Registrant and has
been its President since its incorporation. He has devoted his full time
services to the business of the Registrant since 1957.
David M. Ross, son of Jesse Ross, became a Director of the Company during 1981.
Mr. Ross was an independent sales representative and consultant in 1997.
Raymond Evans became a Director of the Company during 1989. Mr. Evans resigned
from the Board of Directors in March 1998.
Howard Mann became a Director of the Company during 1996.
ITEM 10. Executive Compensation
Cash Compensation - For the year ended December 31, 1997, no officer received or
was entitled to receive $100,000 or more in compensation from the Registrant.
The President received no compensation during the years of 1996 and 1997. No
cash bonuses were earned by any of the Registrant's officers during the year.
Compensation pursuant to plans - The Registrant has no pension, retirement,
stock or any other form of compensation plans.
- 5 -
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners - No individual or group outside
of management is known to the Registrant to be the beneficial owner of more than
five percent of the Registrant's common stock.
Security ownership of management - The following table sets forth certain
information with respect to shares of the Registrant's common stock beneficially
owned by all officers and directors of the Registrant as of December 31, 1997.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ------------------ -------------------- ----------
Jesse Ross 2,181,750(i) 55.07%
Raymond Evans 8,000 0.20%
All officers and
directors as a
group (2 persons) 2,189,750 55.27%
(i) Include certain shares owned by the wife and other relatives of
this individual
ITEM 12. Certain Relationships and Related Transactions
One of the Company's directors, who is a son of the President, had served as an
independent sales representative for the Company has now joined the Company as a
full time employee. In addition, during 1997 another son of the President began
working as an independent sales representative for the Company. Commissions and
consulting fees earned by these individuals during 1997 and 1996 were
approximately $142,000 and $87,200,respectively. The Company had outstanding
advances to these representatives of approximately $268,000, at December 31,
1997. At December 31, 1996, the Company had outstanding advances of
approximately $233,000 from these representatives.
There are other individuals that currently work or have worked for the Company
that are related to the President. The amounts due these individuals for
accumulated salaries and interest thereon, at December 31, 1997 and 1996 were
$212,077 and $210,979, respectively. Salaries and interest incurred for these
individuals during 1997 and 1996 was approximately $26,000 and $44,000,
respectively.
Part IV
ITEM 13. Exhibits, Financial Statement, and Reports
on Form 8-K
- 6 -
<PAGE>
During the quarter ended December 31, 1997, Form 8-K was filed by the
Registrant to report a change of auditors.
Financial Statements - The financial statements are filed as part of this
annual report.
- 7 -
<PAGE>
DIAPULSE CORPORATION OF AMERICA
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
Page
Reports of Independent Certified Public Accountants F-2 - F-3
Financial statements:
Balance sheets F-4 - F-5
Statements of operations F-6
Statements of stockholders' equity (deficiency) F-7
Statements of cash flows F-8 - F-9
Notes to financial statements F-10 - F-20
F-1
<PAGE>
Report of Independent Certified Public Accountants
Stockholders of
Diapulse Corporation of America
Great Neck, New York
We have audited the accompanying balance sheet of Diapulse Corporation of
America as of December 31, 1997, and the related statements of operations,
stockholders' equity (deficiency), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in more detail in Note 2 to the financial statements, as of
December 31, 1997, the Company had certain outstanding receivables from Medicare
of approximately $1,036,000. On September 10, 1997 and October 28, 1997, the
Health Care Financing Administration of the United States Department of Health &
Human Services notified the Company that the Medicare Appeals Council ("The
Council") had decided to review certain decisions made earlier in 1997 wherein
an Administrative Law Judge ("ALJ") had concluded that the Company's diapulse
equipment was durable medical equipment and that the related treatment to the
beneficiary was medically necessary, and therefore, the Company was entitled to
be paid. The Company was notified that The Council is reviewing these decisions
because it believes that the ALJ's decisions are not supported by substantial
evidence, and because there is a broad policy issue in these cases that may
affect the public interest. With respect to the September 10, 1997 notification,
The Council vacated the ALJ's decision and remanded the cases back to an ALJ for
further proceedings, including a new decision. In view of (1) the foregoing and
(2) the lack of significant collections and age of the receivables, the Company
has provided an allowance for $1,007,000, the remaining uncollected balance as
of October 12, 1998. Under generally accepted accounting principles, a loss is
provided only when it is both probable and subject to reasonable estimation. We
have been unable to obtain sufficient competent evidential matter to satisfy
ourselves that the allowance and related loss provided in the financial
statements is both probable and subject to reasonable estimation and therefore,
in accordance with generally accepted accounting principles.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to obtain sufficient
competent evidential matter regarding the allowance for doubtful accounts, the
financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of Diapulse Corporation of America as
of December 31, 1997, and the results of operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
March 13, 1998
(except for Note 12 as to which the date is May 1, 1998 and the last paragraph
of Note 2 as to which the date is October 12, 1998)
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Diapulse Corporation of America
We have audited the accompanying balance sheet of Diapulse Corporation of
America as of December 31, 1996, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Diapulse Corporation of America
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
DAVID BERDON & CO. LLP
Certified Public Accountants
Great Neck, New York
April 14, 1997
F-3
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 696,282 $ 150,316
Current portion of accounts receivable, net of
allowance for doubtful accounts of $1,164,953
and $18,985 in 1997 and 1996 162,158 315,089
Inventory, current portion 137,645 455,461
Commission advances, less allowance for doubtful
accounts of $37,749 in 1997 - 181,172
Other current assets 14,066 21,878
----------- -----------
Total current assets 1,010,151 1,123,916
----------- -----------
Property and equipment, net 102,228 115,762
----------- -----------
Other assets:
Accounts receivable, net of current portion - 620,569
Inventory, net of current portion 160,613 -
Commission advances to related parties 268,488 232,932
Security deposits 22,765 16,695
----------- -----------
Total other assets 451,866 870,196
----------- -----------
Total assets $1,564,245 $2,109,874
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
1997 1996
---------------- ----------------
<S> <C> <C>
Current liabilities:
Current portion of amounts due to officer and former
officer $ 224,081 $ 469,275
Accounts payable and accrued liabilities including
$212,077 and $210,979 to related parties in 1997
and 1996 263,933 253,176
Bank line of credit - 110,000
Accrued income tax audit and related interest 138,000 -
Income taxes payable 246,839 -
----------- -----------
Total current liabilities 872,853 832,451
Long-term portion of amounts due to officer 1,523,007 1,227,350
----------- -----------
Total liabilities 2,395,860 2,059,801
----------- -----------
Stockholders' equity (deficiency):
Common stock, $.025 par value per share; authorized
15,000,000 shares, issued 3,962,058 shares in 1997
and 1996 99,051 99,051
Additional paid-in capital 2,293,272 2,124,272
Accumulated deficit ( 3,221,610) ( 2,170,922)
----------- -----------
( 829,287) 52,401
Less treasury stock, 1,328 shares in 1997 and 1996,
at cost ( 2,328) ( 2,328)
----------- -----------
Total stockholders' equity (deficiency) ( 831,615) 50,073
----------- -----------
Total liabilities and stockholders' equity (deficiency) $ 1,564,245 $ 2,109,874
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Rentals and sales, net of returns and
allowances $2,616,292 $1,688,550
Cost of sales and rentals 272,195 98,762
----------- ----------
Gross margin 2,344,097 1,589,788
----------- ----------
Operating expenses
Selling, general and administrative 1,571,799 1,382,015
Provision for doubtful accounts 1,198,384 -
Interest expense (including $28,000 in 1997
related to an income tax audit; balance
principally to related parties) 225,166 188,406
----------- ----------
Total operating expenses 2,995,349 1,570,421
----------- ----------
Income (loss) from operations ( 651,252) 19,367
Interest and other income 24,131 2,991
----------- ----------
Income (loss) before income taxes ( 627,121) 22,358
Income taxes, all current 423,567 6,096
----------- ----------
Net income (loss) ($1,050,688) $ 16,262
=========== ==========
Basic and diluted earnings (loss) per share ($ .27) $ .00
=========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Stock Issued Paid-In Accumulated Treasury Stock Equity
Shares Amounts Capital Deficit Shares Amounts (Deficiency)
------------ ------- ----------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 3,962,058 $99,051 $2,124,272 ($2,187,184) 1,328 ($2,328) $ 33,811
Net income - - - 16,262 - - 16,262
------------ -------- ---------- ----------- ------ ------- ------------
Balance, December 31, 1996 3,962,058 99,051 2,124,272 ( 2,170,922) 1,328 ( 2,328) 50,073
Stock options granted to non-
employee - - 169,000 - - - 169,000
Net loss - - - ( 1,050,688) - - ( 1,050,688)
------------ -------- ---------- ----------- ------ ------- -----------
Balance, December 31, 1997 3,962,058 $99,051 $2,293,272 ($3,221,610) 1,328 ($2,328) ($ 831,615)
============ ======== ========== =========== ====== ====== ===========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Operating activities:
Net income (loss) ($1,050,688) $ 16,262
---------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 19,682 12,890
Provision for losses on accounts receivable 1,198,384 -
Provision for losses on commission advances 37,749 -
Deferred salaries and accrued interest
(officer and former officer) 172,076 130,656
Stock options granted to non-employees 169,000 -
Changes in assets and liabilities:
Accounts receivable ( 424,884) ( 157,785)
Inventories 195,908 62,458
Other current assets 7,812 ( 10,319)
Commission advances 107,867 23,388
Security deposits ( 6,070) -
Accounts payable and accrued liabilities 10,757 ( 197,482)
Accrued tax examination change and
related interest 138,000 -
Income taxes payable 246,839 -
---------- ---------
Total adjustments 1,873,120 ( 136,194)
---------- ---------
Net cash provided by (used in)
operating activities 822,432 ( 119,932)
---------- ---------
Net cash used in investing activities, capital
expenditures ( 44,853) -
---------- ---------
Financing activities:
Loans from officers 60,438 50,000
Repayments to officers ( 182,051) ( 112,069)
Net borrowings (repayments) under bank
line-of-credit ( 110,000) 110,000
---------- ---------
Net cash provided by (used in)
financing activities ( 231,613) 47,931
---------- ---------
Net increase (decrease) in cash 545,966 ( 72,001)
Cash and cash equivalents, beginning of year 150,316 222,317
---------- ---------
Cash and cash equivalents, end of year $ 696,282 $150,316
========== ========
(Continued)
</TABLE>
See notes to financial statements.
F-8
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash paid during the years for:
Interest $144,370 $53,580
======== =======
Income taxes $ 48,345 $35,555
======== =======
Supplementary information:
Non-cash investing and financing activities:
Reclassification of machines included in
equipment to inventory $ 38,705 $59,199
========= =======
</TABLE>
See notes to financial statements.
F-9
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Description of Business and Summary of Significant Accounting Policies
Description of Business and Concentrations
Diapulse Corporation of America ("the Company") develops, manufactures and
markets Diapulse (Registered Trademark) Technology, a proprietary medical
system which produces non-thermal pulsed high frequency, high peak power
electromagnetic energy to treat post-operative edema and pain in acute and
chronic wounds. The Company's product is sold and rented to hospitals,
nursing facilities, outpatient clinics, physicians' practice and on
prescription in a patient's home throughout the United States. A number of
insurance companies reimburse for treatment. During 1997 and 1996,
approximately 30% and 36% of revenue were from rentals to patients covered
through Medicare (see Note 2). During 1997, approximately 46% of revenue
was from sales to one customer. The Company does not require collateral
for its accounts receivable.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for parts and components and
the specific identification method for finished goods. When equipment on
rental is sold, the net book value of the equipment is included with cost
of sales and the proceeds are included with sales.
The Company classifies machinery which has never been rented and held for
sale as inventory.
Depreciation
Depreciation is computed based on a straight-line method over the
estimated useful lives of the related assets, ranging from five to fifteen
years.
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes." This
statement requires the use of the asset and liability approach in the
recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns. If it is more likely than not that
some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
F-10
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," in 1997. In
accordance with SFAS No. 128, the Company has presented both basic net
income (loss) per share and diluted net income (loss) per share in the
financial statements for all periods presented.
New Accounting Standards
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting (SFAS) No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Retirement Benefits." These statements, which are effective for
fiscal years beginning after December 15, 1997, expand or modify
disclosures and will have no impact on the Company's financial position,
results of operations or cash flows.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates are used in accounting for accounts
receivable allowance, depreciation and amortization, inventory and income
taxes.
Financial Instruments
Fair values of financial instruments are estimates that, in many cases,
may differ significantly from the amounts that could be realized upon
immediate liquidation. In cases where market prices are not available,
estimates of fair value are based on discounted cash flow analysis which
utilize current interest rates for similar financial instruments with
comparable terms and credit equity.
F-11
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
2. Accounts Receivable
At December 31, 1997 and 1996, accounts receivable included approximately
$1,036,000 and $785,000, respectively, of Medicare claims for rentals of
Diapulse's self-administered medical treatment at home. Medicare has not
assigned a separate code for this treatment and most claims for
reimbursement from Medicare are denied when submitted. In these cases, the
Company has to institute the administrative procedure of requesting a
review of the claim and, if denied, a hearing with a Medicare hearings
officer. If necessary, the Company can appeal the findings of the hearings
officer to an Administrative Law Judge ("ALJ") of the Social Security
Administration. Through December 31, 1997, the Company had received
totally favorable decisions in all claims going through this procedure.
On September 10, 1997 and on October 28, 1997 the Health Care Financing
Administration of the United States Department of Health & Human Services
Departmental Appeals Board ("the Appeals Board") notified the Company that
the Medicare Appeals Council ("the Council") had decided to review certain
decisions made earlier in 1997 wherein an ALJ had concluded that the
Company's diapulse equipment was durable medical equipment and that the
related treatment to the beneficiary was medically necessary, and
therefore, the Company was entitled to be paid. The Company was notified
that the Council is reviewing these decisions because it believes that the
ALJ's decisions are not supported by substantial evidence, and because
there is a broad policy issue in these cases that may affect the public
interest. With respect to the September 10, 1997 notification, the Council
vacated the ALJ's decision and remanded the cases back to an ALJ for
further proceedings including a new decision. In view of (1) the foregoing
and (2) the lack of significant collections and age of the receivables,
the Company has provided an allowance of approximately $1,007,000, the
remaining uncollected balance as of October 12, 1998. In connection with
the above, the Company (1) provided an allowance for doubtful accounts of
$37,949 for commission advances and (2) reversed accrued commissions
payable of $58,197.
F-12
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. Inventories
1997 1996
----------- -----------
Parts, components and sub-assemblies $ 75,845 $129,995
Finished goods 222,413 325,466
--------- ---------
$298,258 $455,461
========= =========
The Company's inventory quantities currently exceeds its annual sales
quantities. The Company is expanding its distribution network to try to
facilitate the movement of its inventory. The Company's inventory value
has been written down to estimated net realizable value. As of December
31, 1997 and 1996, the above amounts are net of an allowance for inventory
obsolescence of $193,278 and $101,278, respectively. Inventory at December
31, 1997, not expected to be sold within one year, is classified as a
non-current asset.
4. Commission Advances and Accrued Commissions
Commission advances represents cash advances by the Company to several of
its independent sales representatives, which are to be applied against
future sales made by the representatives. These advances are non-interest
bearing. See Note 6 for commission advances to related parties. Accrued
commissions are generally paid upon receipt of accounts receivable.
5. Fair Values of Financial Instruments
As of December 31, 1997 and 1996, the fair value of cash equals its
carrying value.
The fair values of the Company's liabilities due to officer and former
officer approximates carrying values.
F-13
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. Related Party Transactions
Due to Officer and Former Officer
Due to officer (President) and former officer at December 31, 1997 and
1996 consists of the following:
<TABLE>
<CAPTION>
Accrued Accrued Cash
Interest Salaries Advances Total
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Officer $ 971,870 $579,386 $71,751 $1,623,007
Former officer 94,004 30,077 - 124,081
---------- -------- ------- ----------
$1,065,874 $609,463 $71,751 $1,747,088
========== ======== ======= ==========
December 31, 1996:
Officer $ 932,676 $579,386 $71,751 $1,583,813
Former officer 82,735 30,077 - 112,812
---------- -------- ------- ----------
$1,015,411 $609,463 $71,751 $1,696,625
========== ======== ======= ==========
</TABLE>
There are no formal agreements or written documentation with respect to
the repayment of these amounts. For each of the years in the two-year
period ended December 31, 1997, the President of the Company did not earn
any renumeration for the services he provided.
The President of the Company agreed not to demand repayment of $1,523,007
of the above amounts due him prior to January 1, 1999 and, accordingly,
such amount has been classified as a long-term liability.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of December 31, 1997 and 1996
included $212,077 and $210,979, respectively, representing unpaid salaries
and interest thereon, to parties related to the President of the Company.
Salaries and interest incurred for these individuals during 1997 and 1996
were $25,873 and $43,900, respectively.
F-14
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. Related Party Transactions (Continued)
Interest
Interest is charged on all amounts due to officers and former officer and
other related parties at the bank's current prime rate, plus two
percent, compounded monthly.
Due from Related Parties
One of the Company's directors who is a son of the President and served
as an independent sales representative for the Company has now joined
the Company as a full time employee. In addition, another son of the
President also serves as an independent sales representative for
the Company. Commissions and consulting fees earned by these individuals
during 1997 and 1996 were approximately $142,000 and $87,200,
respectively.
As of December 31, 1997 and 1996, the Company had commission advances to
these individuals in the amount of $268,488 and $232,932. They are
guaranteed by the President of the Company and he has agreed to
subordinate repayment of amounts due to him to the extent of the advances.
7. Property and Equipment
Property and equipment, at cost, at December 31, 1997 and 1996 consisted
of the following:
1997 1996
---- ----
Rental equipment $159,244 $177,283
Autos 15,500 5,000
Furniture and fixtures 58,262 58,262
Machinery and equipment 7,875 7,875
Office equipment 15,878 6,465
Computer equipment 7,829 7,829
-------- --------
Total property and equipment 264,588 262,714
Less accumulated depreciation 162,360 146,952
-------- --------
$102,228 $115,762
======== ========
F-15
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued expenses and interest thereon (see Note 6) $212,097 $210,979
Accrued commissions payable (see Note 2) -- 20,537
Accounts payable and other accrued liabilities 51,836 21,660
-------- --------
$263,933 $253,176
======== ========
</TABLE>
9. Commitments
The Company has a short-term operating lease on its premises located in
Great Neck, New York through December 31, 1998. Minimum rental payments
under the terms of the lease for 1998 are $112,360.
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $111,500 and $106,500, respectively.
10. Income Taxes
The annual provision for income taxes for the years ended December 31,
1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Computed Federal and State taxes $313,567 $6,096
Income tax audit (a) 110,000 --
-------- ------
$423,567 $6,096
======== ======
</TABLE>
(a) The Internal Revenue Service is presently examining the tax returns
of the Company for the years 1993, 1994 and 1995. The Company has
accrued $138,000, representing the tax and interest it believes it
will owe as a result of the examination and an accrual for related
state taxes.
F-16
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
10. Income Taxes (Continued)
The reasons for the difference between the total tax provision and the
amounts computed by applying the statutory Federal income tax rate to the
income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Expected tax (benefit) ($213,000) $8,000
Increase in allowances 403,000 --
Stock compensation 57,000 --
Income tax audit 120,000 --
Accrued interest to officer and spouse 17,000 --
State income taxes, net of Federal income tax benefit 23,000 --
Other 17,000 ( 2,000)
-------- ------
$424,000 $6,000
======== ======
</TABLE>
Deferred tax assets at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Accrued salaries and interest $ 702,000 $382,000
Allowance for doubtful accounts 481,000 7,594
Stock compensation 68,000 --
Other 19,000 --
---------- ---------
Gross deferred tax assets 1,270,000 389,594
Deferred tax liabilities -- --
---------- ---------
Net deferred assets before valuation allowance 1,270,000 389,594
Deferred tax assets valuation allowance ( 1,270,000) ( 389,594)
$ -- $ --
========== =========
</TABLE>
The Company has provided a valuation allowance of 100% based on its prior
experience of not realizing the benefit of the deferred tax assets and the
uncertainty of realizing such benefit in the future.
F-17
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
11. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"("EPS").
Statement No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing
earnings by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that could occur if common stock equivalents, such as stock
options and warrants, were exercised. All earnings per share amounts for
all periods have been restated to conform to the Statement No. 128
requirement.
<TABLE>
<CAPTION>
For The Year Ended 1997
-------------------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic and Diluted EPS
Net loss ($1,050,688) 3,960,730 ($.27)
========== ========= ====
<CAPTION>
For The Year Ended 1996
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic and Diluted EPS
Net income $16,262 3,960,730 $.00
======= ========= ====
</TABLE>
All options outstanding during 1997 were anti-dilutive. In 1996, there
were no potentially dilutive shares.
12. Bank Line of Credit
The Company has a line of credit with Fleet Bank for $200,000 due on
demand. On December 31, 1996, the Company had an outstanding balance of
$110,000 on this line. There was no balance due as of December 31, 1997.
As of May 1, 1998, the line bears interest at 1.5% above prime (previously
thereto, the rate was 2% above prime) and the bank has a security interest
in substantially all of the assets of the Company. The line is guaranteed
by the President of the Company and he has agreed to subordinate $977,350
of amounts due him.
F-18
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
13. Advertising and Promotions
Advertising and promotion costs were approximately $27,000 and $12,200 in
1997 and 1996, respectively.
14. Reclassification of Equity Accounts
During 1997, the Company discovered an error in the number of common
shares issued and outstanding. The Company determined that there were 206
more shares outstanding than had been previously recorded. The
accompanying financial statements reflect the correction of the error.
This had no effect on net income (loss), earnings (loss) per share or
total shareholders' equity (deficiency).
15. Stock Options
On March 27, 1997, the Company granted to the President an option to
purchase an aggregate of 1,000,000 shares of common stock of the Company
at the purchase price of $.50 per share for one year from March 27, 1997,
and if not exercised during that period, at $.625 per share from March 27,
1998 for the balance of the term of the option. The option was to
terminate on March 27, 2002. By a letter dated March 28, 1997, the
President notified the Company that he wished to exercise his option, but
that the shares would not be released to him until he had arranged for the
payment of the shares. By letter dated November 15, 1997, the President
notified the Company that the agreement was null and void and of no
further force or effect, and that the March 27, 1997 exercise of such
option was null and void.
On March 29, 1997, the Company entered into an equipment purchase and
stock agreement ("the agreement") with an independent sales representative
whereby the Company sold $1,200,000 of equipment and granted the
representative a stock option to purchase 100,000 shares of the Company's
common stock at $1.00 per share, 100,000 shares at $1.50 per share, and
100,000 shares at $2.00 per share. In addition, the representative earned
a $240,000 commission on the transaction. These stock options must be
exercised within 120 days after the market price is maintained for 30 days
at a price of $5.00 per share for 100,000 shares, $6.00 a share for the
next 100,000 shares, and $7.00 a share for the final 100,000 shares. The
applicable rights are lost if the options are not exercised before 120
days after the above market prices are maintained for 30 days. Management
has determined the fair value of the options granted to the representative
to be $169,000 and, accordingly, has recorded this expense in its 1997
financial statements. The fair value of the option has been calculated in
accordance with Statement of Financial Accounting Standards No. 123 using
the Black-Scholes method. It was estimated that the stock options will be
exercised over a three-year, four-year and five-year period. A risk-free
interest rate of 6.5% was deemed appropriate.
F-19
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
16. Litigation
The Company is involved as plaintiff in litigation filed in August 1994,
alleging deceptive acts and practices, false advertising, unfair
competition, breach of contract, interference with contract and breach and
participation in breach of fiduciary duty under New York law and under
Federal Law. The complaint demands damages in an unspecified amount for
compensatory, punitive and treble damages, profits and attorneys' fees.
The defendants answered in April 1997 and asserted counterclaims against
the Company for alleged Federal Law violations, interference with
contract, deceptive acts and unfair trade practices and trade
disparagement. The counterclaims demand unspecified damages.
It is impossible for counsel at this time to assess the defendants'
counterclaims. Management for the Company believes that the defendants, at
this time may not have significant assets and that all of the
counterclaims are without merit.
17. Fourth Quarter Adjustments (Unaudited)
During the fourth quarter of the year ended December 31, 1997, the Company
recorded the following adjustments; sales were reduced for the
non-reimbursable portion of Medicare accounts receivable of approximately
$160,000; the fair value of a stock option granted to one of its
representatives in the amount of $169,000 applicable to March 31, 1997; an
allowance for doubtful accounts of approximately $1,007,000 relating to
Medicare accounts receivable was recorded; and inventory was written down
to lower of cost or market by $92,000.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
DIAPULSE CORPORATION OF AMERICA
Registrant
By: /s/Jesse Ross
-----------------------------
Jesse Ross - President
Date: November 3, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and dates
indicated.
Name and Capacity Date
- ----------------- -----
/s/ Jesse Ross November 3, 1998
- ---------------------------
Name: Jesse Ross
Title: President, Director and
Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 88,085 150,316
<SECURITIES> 608,197 0
<RECEIVABLES> 1,327,111 954,643
<ALLOWANCES> (1,164,953) (18,985)
<INVENTORY> 298,258 455,461
<CURRENT-ASSETS> 1,010,151 1,123,916
<PP&E> 264,588 262,714
<DEPRECIATION> (162,360) (146,952)
<TOTAL-ASSETS> 1,564,245 2,109,874
<CURRENT-LIABILITIES> 872,853 832,451
<BONDS> 0 0
0 0
0 0
<COMMON> 99,051 99,051
<OTHER-SE> (2,328) (2,328)
<TOTAL-LIABILITY-AND-EQUITY> 1,564,245 2,109,874
<SALES> 2,616,292 1,688,550
<TOTAL-REVENUES> 2,616,292 1,688,550
<CGS> 272,195 98,762
<TOTAL-COSTS> 3,267,544 1,669,183
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 225,166 188,406
<INCOME-PRETAX> (627,121) 22,358
<INCOME-TAX> 423,567 6,096
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,050,688) 16,262
<EPS-PRIMARY> (0.27) 0.00
<EPS-DILUTED> (0.27) 0.00
</TABLE>
