<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Year Ended December 31, 1998
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
including area code (516)-466-3030
- --------------------------------------------------------------------------------
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 X No___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulations S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB: [X]
Registrant's revenue for its most recent fiscal year ended December 31, 1998:
$1,490,282.
<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 March 31, 1999 as reported by an independent market maker:
$1,505,582.
Number of shares outstanding of each of the registrant class of common stock as
of March 31, 1999: 3,960,730.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
DIAPULSE CORPORATION OF AMERICA
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to 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 Disagreement 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" or the
"Registrant") 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 practices 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
the date of its Annual Report on Form 10KSB for the year ended
December 31, 1997.
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 the Diapulse nationally. The
Registrant is not dependent upon any single customer, but
sells and rents to numerous customers, the loss of any one of
which would not have a significant adverse effect on the
Registrant's results of operations. Medicare reimbursement,
however, represented 1% and 30% of the Registrant's revenue
for 1998 and 1997, respectively.
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; reimbursements have also been received
from private insurance. 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, 1997 and 1998.
- 1 -
<PAGE>
Employees - The registrant has thirty-six full-time and
part-time employees and commission sales representatives.
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, 2001 for minimum rental payments as follows:
December 31, 1999 - $99,700, December 31, 2000 - $118,142 and
December 31, 2001 - $121,686. The premises are used as
national and international headquarters for 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, (the "Action"). In the Action, the Company
alleged 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 Health Care
Financing Administration of the Untied 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 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 doubtful receivables of
approximately $1,493,000, the remaining uncollected balance as
of December 31, 1998.
- 2 -
<PAGE>
The Company is involved as a defendant in litigation,
commenced on June 19, 1997, with a former employee. The
complaint alleges that the Company entered into a salary-loan
agreement in the amount of $94,064 with the employee and that
said amount was not paid. The Company is vigorously defending
the lawsuit on the grounds that (1) the amount was only to be
paid when the Company had sufficient funds to make the
payments and (2) the action is barred by the applicable
statute of limitations. The Company also interposed a
counterclaim for the misuse of corporate funds. The parties
are currently conducting discovery; an evaluation of the
likely outcome cannot be made at this early stage of the
litigation. The liability for the amount in question is
reflected on these financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders
during the period covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Registrant's common stock is traded on the NASDAQ
over-the-counter market, under the symbol DIAC. The high and
low bid information for the last two fiscal years is listed
below. The quotations reflect interdealer prices, without
retail markup, markdown or commission, and may not represent
actual transactions.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---- ---- ---- ----- ---- ---- ---- -----
Low
Bid: .75 .75 .25 .07 .63 2.38 2.38 1.22
High
Bid .75 .75 .25 .22 .63 2.53 2.38 1.22
</TABLE>
As of December 31, 1998, 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.
- 3 -
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview - During the fiscal year ended December 31, 1998, 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 publications
on Medline which mention Diapulse.
Net Revenues - During the year ended December 31, 1998 net
revenues decreased 43% as compared to the year ended December
31, 1997. This decrease was primarily due to a decline in
sales of equipment.
Cost of Sales - During the year ended December 31, 1998 cost
of sales decreased $152,201 as compared to the year ended
December 31, 1997 due primarily to the decrease in the sales
of equipment.
Operating Expenses - Operating expenses, exclusive of
interest, decreased by $929,722 in 1998 as compared with 1997
due to the reduction of sales of equipment.
Interest Expense - Interest expense from 1997 to 1998
decreased by $20,657 due to decrease in taxes payable.
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, 1998, the Registrant had working capital of
$15,412. Working capital as of December 31, 1997 was $137,298.
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.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Working Capital $15,412 $137,298
Current ratio 1.03 to 1.0 1.2 to 1.0
Quick ratio .60 to 1.0 .98 to 1.0
</TABLE>
- 4 -
<PAGE>
IMPACT OF YEAR 2000 ISSUE
The Company is in the process of assessing its computer
applications to insure their functionality with respect to
the "Year 2000" millennium change. At present, the Company
does not anticipate that material incremental costs will be
incurred in any single future year due to the year 2000 issue.
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, 1999 were as follows:
Name Age Title
Jesse Ross 76 President, Director and
Chairman of the Board
David M. Ross 50 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 1989. He was an independent sales
representative and consultant in 1997.
Howard Mann became a Director of the Company during 1996.
BOARD OF DIRECTORS
Directors are elected at the annual meeting of the Company's
stockholders to hold office until the next annual meeting and
until their successors are elected and qualified. Officers
serve at the discretion of the Board of Directors and may
receive such compensation for their services as is fixed from
time to time by resolution of the Board.
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for
their service as such.
- 5 -
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of
1934, and the rules issued thereunder, the Company's directors
and executive officers are required to file with the
Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. reports of ownership
and changes in ownership of Common Stock and other equity
securities of the Company. Copies of such reports are required
to be furnished to the Company. Based solely on a review of
the copies of such reports furnished to the Company, or
written representations that no other reports were required,
the Company believes that, during the Company's fiscal year
ended December 31, 1998, all of its executive officers and
directors complied with the requirements of Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
Cash Compensation - For the year ended December 31, 1998, no
officer received or was entitled to receive more than $100,000
in compensation from the Registrant. No cash bonuses were
earned by any of the Registrant's officers during the year.
The following table sets forth the annual compensation paid to
executive officers of the Company for the three fiscal years
ended December 31, 1998. For the year ending December 31, 1998
the President deferred $100,000 of salary.
<TABLE>
<CAPTION>
Long Term
Compensation Awards -
Other Securities
Name and Annual Underlying Options All Other
Principal Position Year Salary ($) Bonus ($) Compensation (#) Compensation
------------------ ---- ---------- --------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jesse Ross 1998 0 0 -- 0 0
President, Director and 1997 0 0 -- 0 0
Chairman of The Board 1996 0 0 -- 0 0
- ------------------------------------
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock
option grants made to each of the named executive officers in
fiscal 1998. No stock appreciation rights were granted to
these individuals during such year.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Percent of Total
Options Granted to
Number of Securities Employees in Fiscal
Name Underlying Options Year Exercise Expiration
---- Granted (#) ---- Price ($/Sh) Date
----------- ------------ ----
<S> <C> <C> <C> <C>
Jesse Ross 0 --% -- --
</TABLE>
- 6 -
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option
exercises and option holdings for the fiscal year 1998 with
respect to each of the named executive officers. No named
executive officers exercised any options during such year.
AGGREGATE OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year At Fiscal Year End ($)
Shares Acquired End (#) Exercisable/
Name On Exercise (#) Value Realized ($) Exercisable/Unexercisable Unexerciseable
---- --------------- ------------------ ------------------------- ----------------------
<S> <C> <C> <C> <C>
Jesse Ross 0 -- 0 exercisable/ $ 0 exercisable/
0 unexercisable $ 0 unexercisable
</TABLE>
Compensation pursuant to plans - The Registrant has no
pension, retirement, stock or any other form of compensation
plans.
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 director of the Registrant as of December 31, 1998.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Jesse Ross 2,181,750 (i) 55.07%
All officers and directors
as a group (1 person) 2,181,750 55.07%
(i) Includes 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,
previously served as an independent sales representative for
the Company, and is now employed by 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 1998 and 1997 were approximately $130,500 and $142,000,
respectively.
- 7 -
<PAGE>
As of December 31, 1998 and 1997, the Company had aggregate
commission advances to these individuals in the amount of
$299,638 and $268,488, respectively. These advances 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.
There are other individuals that currently work or have worked
for the Company who are related to the President. The amounts
due these individuals for accumulated salaries and interest
thereon, at December 31, 1998 and 1997, were $223,590 and
$212,097, respectively. Salaries and interest incurred for
these individuals during 1998 and 1997 were approximately
$42,954 and $25,873, respectively.
COMPANY POLICY
The Company believes that each of the foregoing transactions
embodies terms no less favorable to the Company than those
that could have been obtained from unaffiliated parties. Any
ongoing or future transactions between the Company and its
officers, directors, principal stockholders, or other
affiliates will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties on an
arms-length basis and will be approved by a majority of the
Company's independent and disinterested directors. Any future
loans to officers, directors, principal stockholders, or
affiliates will be made for a bonafide business purpose, on
terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority
of the Company's independent and disinterested directors.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
During the quarter ended December 31, 1998, a Report on Form
8-K was filed by the Registrant to report a change of
auditors.
Financial Statements - The financial statements commence at
page F-1 and are filed as part of this annual report on Form
10KSB.
- 8 -
<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: May 20, 1999
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 May 20, 1999
Name: Jesse Ross
Title: President, Director and
Chairman of the Board
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
<PAGE>
DIAPULSE CORPORATION OF AMERICA
YEARS ENDED DECEMBER 31, 1998 AND 1997
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-21
F-1
<PAGE>
Granick & Gendler
CERTIFIED PUBLIC ACCOUNTANTS
-----------------------------------------------------------------------
60 EAST 42ND STREET
NEW YORK, N.Y. 10165
(212) 697-1075
Report of Independent Certified Public Accountants
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, 1998, 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 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 that 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, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Granick & Gendler
GRANICK & GENDLER
Certified Public Accountants
New York, New York
March 2, 1999
F-2
<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 statements
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-3
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 319,868 $ 696,282
Current portion of accounts receivable, net of
allowance for doubtful accounts of $1,493,000
and $1,164,953 in 1998 and 1997 (Note 2) 38,440 162,158
Inventory, current portion (Note 3) 195,418 137,645
Commission advances, less allowance for doubtful
accounts of $11,306 and $37,749 in 1998 and 1997 43,034 ---
Other current assets 15,953 14,066
---------- ----------
Total current assets 612,713 1,010,151
---------- ----------
Property and equipment, net 34,775 102,228
---------- ----------
Other assets:
Accounts receivable, net of current portion 98,923 ---
Inventory, net of current portion (Note 3) 146,125 160,613
Commission advances to related parties 299,638 268,488
Security deposits 24,168 22,765
---------- ----------
Total other assets 568,854 451,866
---------- ----------
Total assets $1,216,342 $1,564,245
========== ==========
The accompanying Notes are an integral part of these financial statements.
F-4
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
1998 1997
---- ----
Current liabilities:
Current portion of amounts due to officer/
stockholder and former officer $ 228,822 $ 224,081
Accounts payable and accrued liabilities
including $223,590 and $212,077 to related
parties in 1998 and 1997 (Note 6) 309,979 263,933
Bank line of credit 50,000 ---
Accrued income tax audit and related interest 8,500 138,000
Income taxes payable --- 246,839
----------- -----------
Total current liabilities 597,301 872,853
Long term portion of amounts due to officer 1,692,980 1,523,007
----------- -----------
Total liabilities 2,290,281 2,395,860
----------- -----------
Commitments (Note 9)
Stockholders' (deficiency):
Common stock, $.025 par value per share;
authorized 15,000,000 shares, issued
3,962,058 shares in 1998 and 1997 99,051 99,051
Additional paid-in capital 2,293,272 2,293,272
Accumulated deficit (3,463,934) (3,221,610)
----------- -----------
(1,071,611) (829,287)
Less treasury stock, 1,328 shares in 1998
and 1997, at cost (2,328) (2,328)
----------- -----------
Total stockholders' (deficiency) (1,073,939) (831,615)
----------- -----------
Total liabilities and stockholders'
(deficiency) $ 1,216,342 $ 1,564,245
=========== ===========
The accompanying Notes are an integral part of these financial statements.
F-5
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
Revenue:
Rental income $1,405,282 $1,393,154
Sale of machinery 85,000 1,223,138
---------- ----------
Total revenue 1,490,282 2,616,292
Cost of sales and rentals 119,994 272,195
---------- ----------
Gross margin 1,370,288 2,344,097
---------- ----------
Operating expenses:
Selling, general and administrative 1,334,632 1,571,799
Provision for doubtful accounts 505,829 1,198,384
Interest expense (including $28,000 in 1997
related to an income tax audit; balance
principally to related parties) 204,509 225,166
---------- ----------
Total operating expenses 2,044,970 2,995,349
---------- ----------
(Loss) from operations (674,682) (651,252)
Interest and other income 21,118 24,131
---------- ----------
(Loss) before income taxes (653,564) (627,121)
Income taxes (Note 10) (411,240) 423,567
---------- ----------
Net (loss) ($242,324) ($1,050,688)
========== ==========
Basic and diluted (loss) per share (Note 11) ($ .06) ($ .27)
========== ==========
Weighted average number of common shares
outstanding 3,960,730 3,960,730
========== ==========
The accompanying Notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
DIAPULSE CORPORATION OF AMERICA
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Total
Stockholders'
Common Stock Additional Accumulated Treasury Stock Equity
Shares Issued Amounts Paid-In-Capital Deficit Shares Amounts (Deficiency)
------ -------------- --------------- ------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,962,058 $99,051 $2,124,272 ($2,170,922) 1,328 ($2,328) $ 50,073
Stock Options granted to non-employees --- --- 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)
Net loss (242,324) (242,324)
------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,962,058 $99,051 $2,293,272 ($3,463,934) 1,328 ($2,328) ($1,073,939)
========= ======= ========== =========== ===== ======= ===========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-7
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
Operating activities:
Net (Loss) ($242,324) ($1,050,688)
--------- -----------
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation 12,125 19,682
Provision for losses on accounts receivable 505,829 1,198,384
Provision for losses on commission advances 11,306 37,749
Deferred salaries and accrued interest
(officer and former officer) 343,521 172,076
Stock options granted to non-employees --- 169,000
Changes in assets and liabilities:
Accounts receivable (481,034) (424,884)
Inventories (43,285) 195,908
Other current assets (1,887) 7,812
Commission advances (85,490) 107,867
Security deposits (1,403) (6,070)
Accounts payable and accrued liabilities (123,522) 10,757
Accrued tax examination change and
related interest (129,500) 138,000
Income taxes payable (246,839) 246,839
--------- -----------
Total adjustments (240,179) 1,873,120
--------- -----------
Net cash provided by (used in)
operating activities (482,503) 822,432
--------- -----------
Net cash provided by (used in) investing activities
Capital Expenditures --- (44,853)
Disposition of Assets 55,328 ---
--------- -----------
Net cash provided by (used in)
investing activities 55,328 (44,853)
--------- -----------
Financing activities:
Loans from officers 200,000 60,438
Repayments to officers (199,239) (182,051)
Net borrowing (repayments) under bank
line-of-credit 50,000 (110,000)
--------- -----------
Net cash provided by (used in)
financing activities 50,761 (231,613)
--------- -----------
Net increase (decrease) in cash (376,414) 545,966
Cash and cash equivalents, beginning of year 696,282 150,316
--------- -----------
Cash and cash equivalents, end of year $ 319,868 $ 696,282
========= ===========
(Continued)
The accompanying Notes are an integral part of these financial statements.
F-8
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
Cash paid during the years for:
Interest $101,101 $144,370
======== ========
Income taxes $ 3,265 $ 48,345
======== ========
Supplementary information:
Non-cash investing and financing activities:
Reclassification of machines included in
equipment to inventory $ 62,327 $ 38,705
======== ========
The accompanying Notes are an integral part of these financial statements.
F-9
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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. For the year 1998 there are no major suppliers of component
parts or raw materials. The Company's product is sold and rented to
hospitals, nursing facilities, outpatient clinics, physicians' practices and
prescribed for use in patients' homes throughout the United States. A number
of insurance companies reimburse for treatment. During 1998 and 1997,
approximately 1% and 30%, respectively, of revenue was from rentals to
patients covered through Medicare (see Note 2). During 1997, approximately
46% of revenue was from sales to one customer. In 1998 there was no major
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 in the cost of sales
and the proceeds are included in sales.
The Company classifies machinery which has never been rented and held for
sale as inventory.
Income Recognition
Income from the sale of a machine is recognized upon shipping of the machine.
Rental income is recognized on a monthly basis.
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.
Rental equipment is depreciated over a five-year life on a straight-line
basis.
F-10
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Description of Business and Summary of Significant Accounting Policies
(Continued)
Income Taxes
The Company follows Statement of Financial Accounting Standards ("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.
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.
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, 1998 AND 1997
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, 1998 and 1997, accounts receivable included approximately
$506,000 and $1,036,000, 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
reimbursements from Medicare are denied when submitted. In such 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 favorable decisions on 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 for doubtful receivables of approximately $1,493,000, the
remaining uncollected balance as of December 31, 1998. For the year ended
December 31, 1997 the Company provided an allowance of approximately
$1,007,000, the remaining uncollected balance of the Medicare Accounts
Receivable as of October 12, 1998. In connection with the above, the Company
(1) provided an allowance for doubtful accounts of $11,306 and $37,949 for
commission advances for the years 1998 and 1997, respectively, and (2)
reversed accrued commissions payable of $99,681 and $58,197 for the years
1998 and 1997, respectively.
F-12
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
3. Inventories
1998 1997
---- ----
Parts, components and subassemblies $101,994 $ 75,845
Finished goods 239,549 222,413
-------- --------
$341,543 $298,258
-------- --------
The Company's inventory quantities currently exceed 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, 1998
and 1997, the above amounts are net of an allowance for inventory
obsolescence of $93,278 and $193,278, respectively. Inventory at December 31,
1998 and 1997, not expected to be sold within one year, is classified as a
non-current asset.
4. Commission Advances and Accrued Commissions
Commission advances represent 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, 1998 and 1997, the fair value of cash equals its carrying
value.
The fair values of the Company's liabilities due to officer and former
officer approximate carrying values.
F-13
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. Related Party Transactions
Due to Officer and Former Officer
Due to officer (President) stockholder and former officer at December 31,
1998 and 1997 consists of the following:
Accrued Accrued Cash
Interest Salaries Advances Total
-------- -------- -------- -----
December 31, 1998:
Officer/Stockholder $ 913,594 $679,386 $200,000 $1,792,980
Former Officer
(Deceased) 98,745 30,077 --- 128,822
---------- -------- -------- ----------
$1,012,339 $709,463 $200,000 $1,921,802
========== ======== ======== ==========
December 31, 1997:
Officer/Stockholder $ 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
========== ======== ======== ==========
There are no formal agreements or written documentation with respect to the
repayment of these amounts. For each of these years in the two-year period
ended December 31, 1998 the President of the Company did not take any
remuneration for the services he provided. The 1998 expense has been accrued
in the Financial Statements. In 1997, the President of the Company did not
earn any remuneration for the services he provided.
In 1998 the President of the Company agreed not to demand repayment of
$1,692,980 of the above amounts due him prior to January 1, 2000. In 1997 the
President of the Company agreed not to demand repayment of $1,523,007 prior
to January 1, 1999 and, accordingly, such amounts have been classified as
long-term liabilities.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of December 31, 1998 and 1997
included $223,590 and $212,097 (see Note 8), respectively, representing
unpaid salaries and interest thereon, to parties related to the President of
the Company. Salaries and interest incurred for these individuals during 1998
and 1997 were $42,954 and $25,873, respectively.
F-14
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
6. Related Party Transactions (Continued)
Interest
Interest is charged on all amounts due to officer 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, previously
served as an independent sales representative for the Company and is now
employed by 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
1998 and 1997 were approximately $130,500 and $142,000, respectively.
As of December 31, 1998 and 1997, the Company had commission advances to
these individuals in the amounts of $299,638 and $268,488. These advances are
guaranteed by the President of the Company, who 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, 1998 and 1997 consisted of
the following:
1998 1997
---- ----
Rental equipment $ 96,916 $159,244
Autos 15,500 15,500
Furniture and fixtures 58,262 58,262
Machinery and equipment 7,875 7,875
Office equipment 22,878 15,878
Computer equipment 7,829 7,829
-------- --------
Total property and equipment 209,260 264,588
Less accumulated depreciation 174,485 162,360
-------- --------
$ 34,775 $102,228
======== ========
F-15
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1998 and 1997
1998 1997
---- ----
Accrued expenses and interest to related
parties (see Note 6) $223,590 $212,097
Accounts payable and other accrued liabilities 86,389 51,836
-------- --------
$309,979 $263,933
======== ========
9. Commitments
The Company has a three year operating lease on its premises located in Great
Neck, New York through December 31, 2001. The Company also leased office
space located in California through June 30, 1999. Minimum rental payments
under the terms of the leases for 1999 are listed below.
Rent expense for the years ended December 31, 1998 and 1997 was approximately
$114,091 and $111,500, respectively.
Minimum rental payments are as follows:
Year Ending
-----------
December 31, 1999 $115,990
December 31, 2000 118,142
December 31, 2001 121,686
--------
Total commitment $355,818
========
10. Income Taxes
The annual provision for income taxes for the years ended December 31, 1998
and 1997 consisted of the following:
1998 1997
---- ----
Computed Federal and State taxes ($411,240) $313,567
Income tax audit (a) --- 110,000
-------- --------
($411,240) $423,567
======== ========
(a) The Internal Revenue Service has examined the tax returns of the Company
for the years 1993, 1994 and 1995. The Company accrued $138,000,
representing the additional tax and related interest in 1997.
F-16
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
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
(loss) before income taxes are as follows:
1998 1997
---- ----
Expected tax (benefit) ($222,000) ($213,000)
Increase in allowances --- 403,000
Stock compensation --- 57,000
Income tax audit --- 120,000
Deferred interest to officer and spouse 31,200 17,000
State income tax (refund) net of Federal
income tax benefit (20,600) 23,000
Deferred salary payable to officer 34,000 ---
Other 1,100 17,000
Federal income tax refund (129,600) ---
Net operating loss carryback (105,300) ---
-------- --------
($411,200) $424,000
======== ========
Deferred tax assets at December 31, 1998 and 1997 consisted of the
following:
Deferred tax assets: 1998 1997
---- ----
Accrued salaries and interest $ 767,200 $ 702,000
Allowance for doubtful accounts --- 481,000
Stock compensation - options 68,000 68,000
Other 19,000 19,000
Net operating loss carryforward 162,083 ---
----------- -----------
Gross deferred tax assets 1,016,283 1,270,000
Deferred tax liabilities --- ---
----------- -----------
Net deferred assets before valuation allowance 1,016,283 1,270,000
Deferred tax assets valuation allowance (1,016,283) (1,270,000)
----------- -----------
$ 0 $ 0
=========== ===========
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, 1998 AND 1997
11. Earnings Per Share
The Company uses SFAS No. 128, "Earnings Per Share" ("EPS"). This statement
classifies earnings per share into two categories: 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 reflect the
potential dilution that could occur if common stock equivalents, such as
stock options and warrants, were exercised.
For The Year Ended 1998
---------------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic and Diluted EPS
Net loss ($ 242,324) 3,960,730 ($.06)
========== ========= ====
For The Year Ended 1997
---------------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic and Diluted EPS
Net loss ($1,050,688) 3,960,730 ($.27)
========== ========= ====
All options outstanding during 1998 and 1997 were anti-dilutive.
12. Bank Line of Credit
The Company has a line of credit with Fleet Bank for $200,000 due on demand.
There was no balance due as of December 31, 1997. On December 31, 1998 the
Company had an outstanding balance of $50,000 that was repaid on January 5,
1999. As of December 31, 1998, the line bears interest at 1.5% 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, who has
agreed to subordinate $ 977,350 of his loans to the Company.
F-18
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
13. Advertising and Promotions
Advertising and promotion costs were approximately $9,500 and $27,000 in
1998 and 1997, respectively.
14. 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 28, 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 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 SFAS 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, 1998 AND 1997
15. Litigation
The Company is involved as plaintiff in litigation filed in August 1994,
alleging deceptive acts and practices, false advertising, unfair
competition, 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.
The Company was initially involved as a defendant in litigation, commenced
on June 19, 1997, with a former employee. The complaint alleges that the
Company entered into a salary-loan agreement in the amount of $94,064 with
the employee and that said amount was not paid. The Company is vigorously
defending the lawsuit on the grounds that (1) the amount was only to be paid
when the Company had sufficient funds to make the payments and (2) the
action is barred by the applicable statute of limitations. The Company also
interposed a counterclaim for the misuse of corporate funds. The parties are
currently conducting discovery; an evaluation of the likely outcome cannot
be made at this early stage of the litigation. The liability for the amount
in question is reflected on the 1998 and 1997 financial statements.
16. 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>
17. 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 (loss), (loss) per share or total shareholders' equity (deficiency).
18. Impact of Year 2000 Issue
The Company is in the process of assessing its computer applications to
insure their functionality with respect to the "Year 2000" millennium
change. At present, the Company does not anticipate that material
incremental costs will be incurred in any single future year due to the year
2000 issue.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-mos 12-mos
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 119868 88085
<SECURITIES> 200000 608197
<RECEIVABLES> 1630363 1327111
<ALLOWANCES> (1493000) (1164953)
<INVENTORY> 341543 298258
<CURRENT-ASSETS> 612713 1010151
<PP&E> 209260 264588
<DEPRECIATION> (174485) (162360)
<TOTAL-ASSETS> 1216342 1564245
<CURRENT-LIABILITIES> 597301 872853
<BONDS> 0 0
0 0
0 0
<COMMON> 99051 99051
<OTHER-SE> (2328) (2328)
<TOTAL-LIABILITY-AND-EQUITY> 1216342 1564245
<SALES> 1490282 2616292
<TOTAL-REVENUES> 1490282 2616292
<CGS> 119994 272195
<TOTAL-COSTS> 2164964 3267544
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 204509 225166
<INCOME-PRETAX> (653564) (627121)
<INCOME-TAX> (411240) 423567
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (242324) (1050688)
<EPS-PRIMARY> (0.06) (0.27)
<EPS-DILUTED> (0.06) (0.27)
</TABLE>
