- --------------------------------------------------------------------------------
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, 1999
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)
Indicated 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}
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, 2000 as reported by an independent market maker: $ 2,476,286.
Number of shares outstanding of each of the registrant class of common stock as
of March 31, 2000: 3,962,058.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
DIAPULSE CORPORATION OF AMERICA
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
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 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 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
the date of its Annual Report on Form 10LSB for the year ended
December 31, 1998.
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 11 % of the Registrant's revenue
for 1998 and 1999.
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 private insurance and reimbursements have also been
received from Medicare following administrative procedures.
Backlog - The Registrant has sufficient inventory of completed
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
expired in 1999. New patents (patents pending) have been
applied for and issued in 1998 and 1999.
Employees - The registrant has thirty-six 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, 2001 for minimum rental payments as follows:
December 31, 2000 - $118,142 and December 31, 2001 - $121,686.
The premises are used as a 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 $2,978.00 per year in Carlsbad,
California for a sales office.
ITEM 3. Legal Proceedings
The Company was 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.
In early 2000, the parties agreed to a settlement of the
matter and a settlement agreement is in the process of being
concluded and signed. The agreement provides for the payment
of $50,000 to the Company, the agreement by defendants to
refrain from engaging in certain marketing practices in the
future and the dismissal, with prejudice, of all claims
against the Company.
A former employee of the Company sued the Company in 1997 for
certain unpaid deferred salary. The Company counterclaimed for
breaches of contract and fiduciary duty relating to
unauthorized purchases made by the plaintiff when he was an
employee of the Company. The employee obtained summary
judgment on his claim for deferred salary. The judgment amount
was $120,475, including interest. The company's counterclaims
were severed and referred to the trial court for resolution.
Thereafter, a settlement was reached in the sum of $95,000.
The Company is to pay the former employee seven (7)
installments of $13,571 every six months beginning in March
2000. The first payment has been made.
A former employee of the Company, who was terminated in May
1999, filed five small claims actions against the Company. The
employee's son also filed one small claim action against the
Company. Each action brought by the former employee or his
son, except one, seeks $3,000 in damages against the Company
and against various other employees. One action seeks slightly
less than $2,000. Most of the cases allege various employment
contract and/or labor violations; some allege liability for
property allegedly held or used by the Company. All actions
were instituted after the employee was teminated from
employment. It is the opinion of counsel that the actions
filed by the former employee and his son are either meritless
or frivolous.
The Company sued a former employee. The compalint alleges that
the former employee, without authorization, took trade secret
and other confident information and documents relating to the
Company. The law suit seeks to recover possession of the items
allegedly taken by the former employee and to enjoin the
former employee from distributing, sharing or selling the
trade secrets and other confidential information. The former
empoyee counterclaimed for malicious prosecution and seeks
damages in the sum of $1,000,000.
<PAGE>
ITEM 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of security 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 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
------------------------------------------------------------
1999 1998
---------------------------- --------------------------
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
Low
Bid: .25 .25 .25 .50 .75 .75 .25 .07
High
Bid: .50 .50 .50 .625 .75 .75 .25 .22
As of December 31, 1999, there were approximately 1,486
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 - During the fiscal year ended December 31, 1999, 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 40 Diapulse
publications on Medline.
Net Revenues - During the year ended December 31, 1999 net
revenues increased 25.11% as compared to the year ended
December 31, 1998. This increase was due to partial
collections of receivables previously classified as
uncollectible.
<PAGE>
Cost of Sales - During the year ended December 31, 1999, cost
of sales decreased $ 97,952 in 1999 as compared to the year
ended December 31, 1998 due primarily to higher gross profit
percentages in the sales of equipment.
Operating Expenses - Operating expenses, exclusive of
interest, increased by $148,754 in 1999 as compared with 1998
due to the higher volume of sales of equipment.
Interest Expense - Interest expense from 1998 to 1999
decreased by $9,100 due to decrease in borrowing.
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, 1999, the Registrant had working capital of
$86,124. Working capital as of December 31, 1998 was $15,412.
The Registrant considers, and currently used 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.
December 31, December 31,
1999 1998
---- ----
Working Capital 86,124 $15,412
Current ratio 1.18 to 1 1.03 to 1.0
Quick ratio .69 to 1 .60 to 1.0
ITEM 7. Financial Statements
The financial statements to be provided pursuant to this Item
are included under Items F1 - F19 of this report.
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
<PAGE>
PART III
ITEM 9. Directors and Executive Officers of the Registrant
The executive officers and key employees of the Company as of
March 31, 2000 were as follows:
Name Age Title
---- --- -----
Jesse Ross 77 President, Director and
Chairman of the Board
David M. Ross 52 Director
Howard Mann 64 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. Mr. Ross 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 discrtion 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.
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 1999, 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, 1999, 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, 1999. For the year ending December 31, 1999
the President deferred $100,000 of salary.
<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, 1999.
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) 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,
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 1999 and 1998 were approximately $81,891 and $130,500,
respectively.
As of December 31, 1999 and 1998, the Company had an aggregate
commission advances to these individuals in the amount of
$259,904 and $299,638, 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 that are related to the President. The amounts
due these individuals for accumulated salaries and interest
thereon, at December 31, 1999 and 1998 were $203,862 and
$223,592, respectively. Salaries and interest incurred for
these individuals during 1999 and 1998 were approximately
$10,279 and $42,954, 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 year ended December 31, 1999, the Company did not
file any Form 8-K.
Financial Statements - The financial statements commence at
page F1 and are filed as part of this annual report on Form
10KSB.
<PAGE>
DIAPULSE CORPORATION OF AMERICA
YEARS ENDED DECEMBER 31, 1999 AND 1998
CONTENTS
Page
Report of Independent Certified Public Accountant F-2
Financial statements:
Balance sheets F-3 - F-4
Statements of operations F-5
Statements of stockholders' equity (deficiency) F-6
Statements of cash flows F-7 - F-8
Notes to financial statements F-9 - F-19
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, 1999 and 1998 and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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, 1999 and 1998, the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GRANICK & GENDLER
Certified Public Accountants
New York, New York
Except for Note 15 dated March 20, 2000
F-2
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 258,383 $ 319,868
Current portion of accounts receivable, net of
allowance for doubtful accounts of $1,712,000
and $1,493,000 in 1999 and 1998 (Note 2) 83,682 38,440
Inventory, current portion (Note 3) 195,549 195,418
Commission advance, 1ess allowance for doubtful
accounts of $11,306 in 1999 and 1998 34,367 43,034
Other current assets 5,561 15,953
---------- ----------
Total current assets 577,542 612,713
Property and equipment, net 15,413 34,775
---------- ----------
Other assets:
Accounts receivable, net of current portion 4,166 98,923
Inventory, net of current portion (Note 3) 147,519 146,125
Commission advances to related parties 259,904 299,638
Security deposits 24,168 24,168
---------- ----------
Total other assets 435,757 568,854
---------- ----------
Total assets $1,028,712 $1,216,342
========== ==========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-3
<PAGE>
DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current liabilities:
Current portion of amounts due to officer/
stockholder and former officer $ 241,959 $ 228,822
Accounts payable and accrued liabilities
including $203,862 and $223,591 to related
parties in 1999 and 1998 (Note 6) 234,459 309,979
Bank line of credit -- 50,000
Accrued income tax audit and related interest 15,000 8,500
----------- -----------
Total current liabilities 491,418 597,301
Long term portion of amounts due to officer 1,917,616 1,692,980
----------- -----------
Total liabilities 2,409,034 2,290,281
----------- -----------
Commitments (Note 9)
Stockholders' equity deficiency:
Common stock, $.025 par value per share
authorized 15,000,000 shares, issued
3,962,058 shares in 1999 and 1998 99,051 99,051
Additional paid-in capital 2,293,272 2,293,272
Accumulated deficit (3,770,317) (3,463,934)
----------- -----------
(1,377,994) (1,071,611)
Less treasury stock, 1,328 shares in 1999
and 1998 at cost (2,328) (2,328)
----------- -----------
Total stockholders' equity deficiency (1,380,322) (1,073,939)
----------- -----------
Total liabilities and stockholders' equity
deficiency $ 1,028,712 $ 1,216,342
=========== ===========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-4
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue:
Rental income $1,747,000 $1,405,282
Sales of machinery 117,500 85,000
---------- ----------
Total revenue 1,864,500 1,490,282
Cost of sales and rentals 22,042 119,994
---------- ----------
Gross margin 1,842,458 1,370,288
Operating expenses:
Selling, general and administrative 1,328,913 1,334,632
Provision for doubtful accounts 660,302 505,829
Interest expense (principally to related parties) 195,409 204,509
---------- ----------
Total operating expenses 2,184,624 2,044,970
---------- ----------
(Loss) from operations (342,166) (674,682)
Interest and other income 4,131 21,118
---------- ----------
(Loss) before income taxes (338,035) (653,564)
Income taxes (Note 10) (31,652) (411,240)
---------- ----------
Net (loss) ($ 306,383) ($ 242,324)
========== ==========
Basic and diluted (loss) per share (Note 11) ($ .08) ($ .06)
========== ==========
Weighted average number of common shares
outstanding 3,960,730 3,960,730
========== ==========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-5
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENT OF STOCKHOLDERS' EQUITY DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Stock Paid-In- Accumulated Treasury Stock Equity
Shares Issued Amounts Capital Deficit Shares Amounts Deficiency
------ -------------- ------- ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 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)
Net Loss (306,383) (306,383)
-----------------------------------------------------------------------------------
Balance, December 31, 1999 3,962,058 $99,051 $2,293,272 ($3,770,317) 1,328 ($2,328) ($1,380,322)
========= ======= ========== ========== ===== ====== ==========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-6
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net (Loss) ($306,383) ($242,324)
--------- ---------
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation 7,276 12,125
Provision for losses on accounts receivable 660,302 505,829
Provision for losses on commission advances 11,306 11,306
Deferred salaries and accrued interest (officer
and former officer) 468,553 343,621
Changes in assets and liabilities:
Accounts receivable (610,787) (481,034)
Inventories (1,525) (43,285)
Other current assets 10,392 (1,987)
Commission advances 37,096 (85,490)
Security deposits --------- (1,403)
Accounts payable and accrued liabilities (350,808) (123,522)
Accrued tax examination change and related interest 6,500 (129,500)
Income taxes payable -- (246,839)
--------- ---------
Total adjustments 238,305 (240,179)
--------- ---------
Net cash (used in) operating activities (68,078) (482,503)
--------- ---------
Net cash provided by (used in) investing activities
Capital Expenditures (3,082) --
Disposition of Assets 15,168 55,328
--------- ---------
Net cash provided by (used in) investing activities 12,086 55,328
--------- ---------
</TABLE>
(Continued)
The accompanying Notes are an integral part of these financial statements.
F-7
<PAGE>
DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Financing activities:
Loans from officers 475,000 200,000
Repayments to officers (430,493) (199,239)
Net borrowing (repayments) under bank line-of-credit (50,000) 50,000
--------- ---------
Net cash provided by (used in) financing activities (5,493) 50,761
Net (decrease) in cash (61,485) (376,414)
Cash and cash equivalents, beginning of year 319,868 696,282
--------- ---------
Cash and cash equivalents, end of year $ 258,383 $ 319,868
========= =========
Cash paid during the years for:
Interest $ 64,642 $ 101,101
========= =========
Income taxes $ - 0 - $ 3,265
========= =========
Supplementary information:
Non-cash investing and financing activities:
Reclassification of machine included in
equipment to inventory $ - 0 - $ 62,327
========= =========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-8
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 1999 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
1999 and 1998, approximately 11% and 1%, respectively, of revenue was from
rentals to patients covered through Medicare (see Note 2). In 1999 and
1998 there were no major customers. 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 is held for resale 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-9
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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.
Loss Per Share
The Company adopted SFAS No. 128, "Earnings Per Share,". In accordance
with SFAS No. 128, the Company has presented both basic net (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-10
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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, 1999 and 1998, accounts receivable included approximately
$407,000 and $506,000 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 most 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. A new decision, which is
fully favorable, has been rendered in some of the cases. 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 $1,712,000 and $1,493,000, the remaining
uncollected balance as of December 31, 1999 and 1998, respectively. In
connection with the above, the Company (1) provided an allowance for
doubtful accounts of $11,306 for commission advances for the year 1998 and
(2) reversed accrued commissions payable of $99,681 for the year 1998.
F-11
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
3. Inventories
1999 1998
---- ----
Parts, components and subassemblies $ 94,097 $101,994
Finished goods 248,971 239,549
-------- --------
$343,068 $341,543
======== ========
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, 1999 and 1998, the above amounts are net of an allowance for inventory
obsolescence of $93,278. Inventory at December 31, 1999 and 1998, 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, 1999 and 1998, 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-12
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
6. Related Party Transactions
Due to Officer and Former Officer
Due to officer (President) stockholder and former officer at December 31,
1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
Accrued Accrued Cash
Interest Salaries Advances Total
-------- -------- -------- -----
<S> <C> <C> <C> <C>
December 31, 1999:
Officer/Stockholder $ 863,230 $779,386 $375,000 $2,017,616
Former Officer 111,882 30,077 -- 141,959
(Deceased) ---------- -------- -------- ----------
$ 975,112 $809,463 $375,000 $2,159,575
December 31, 1998: ========== ======== ======== ==========
Officer/Stockholder $ 913,594 $679,386 $200,000 $1,792,980
Former Officer 98,745 30,077 -- 128,822
(Deceased) ---------- -------- -------- ----------
$1,012,339 $709,463 $200,000 $1,921,802
========== ======== ======== ==========
</TABLE>
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, 1999, the President of the Company did not take
any remuneration for the services he provided. The 1999 and 1998 expenses
have been accrued in these Financial Statements.
In 1999 the President of the Company agreed not to demand repayment of
$1,917,616 of the above amounts due him prior to January 1, 2001. In 1998
the President of the Company agreed not to demand repayment of $1,692,980
prior to January 1, 2000 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, 1999 and 1998
included $203,862 and $223,592 (see Note 8), respectively, representing
unpaid salaries and interest thereon, to a former officer and parties
related to the President of the Company. Interest incurred for these
individuals during 1999 and 1998 were $10,279 and $42,954, respectively.
F-13
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 one 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 1999 and 1998 were approximately $81,891 and $130,500,
respectively.
As of December 31, 1999 and 1998, the Company paid commission advances to
these individuals in the amounts of $259,902 and $299,638 respectively.
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, 1999 and 1998 consisted
of the following:
1999 1998
---- ----
Rental equipment $ 81,749 $ 96,916
Autos 15,500 15,500
Furniture and fixtures 58,262 58,262
Machinery and equipment 10,019 7,875
Office equipment 23,816 22,878
Computer equipment 7,829 7,829
-------- --------
Total property and equipment 197,175 209,260
Less accumulated depreciation 181,762 174,485
-------- --------
$ 15,413 $ 34,775
======== ========
F-14
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 1999 and 1998
1999 1998
---- ----
Accrued expenses and interest to related
parties (see Note 6) $203,862 $223,590
Accounts payable and other accrued liabilities 30,597 86,389
-------- --------
$234,459 $309,979
======== ========
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 September 30, 2000. Minimum
rental payments under the terms of the leases for 1999 are listed below.
Rent expense for the years ended December 31, 1999 and 1998 was
approximately $114,091 and $111,500, respectively.
Minimum rental payments are as follows:
Year Ending
-----------
December 31, 2000 120,077
December 31, 2001 121,686
--------
Total commitment $241,763
========
10. Income Taxes
The annual provision for income taxes for the years ended December 31,
1999 and 1998 consisted of the following:
1999 1998
Computed Federal and State taxes ($41,652) ($411,240)
Income tax audit 10,000 --
-------- ---------
($31,652) ($411,240)
======== =========
F-15
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
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:
1999 1998
---- ----
Expected tax (benefit) ($114,932) ($222,000)
Income tax audit 10,000 --
Deferred interest to officer and spouse 47,025 31,200
State income tax (refund) net of Federal
income tax benefit (20,600)
Deferred salary payable to officer 34,000 34,000
Other 2,255 1,100
Federal income tax refund -- (129,600)
Net operating loss carryback (10,000) (105,300)
-------- --------
($ 31,652) ($411,200)
======== ========
Deferred tax assets at December 31, 1999 and 1998 consisted of the
following:
Deferred tax assets: 1999 1998
---- ----
Accrued salaries and interest $ 848,200 $ 767,200
Stock compensation - options 68,000 68,000
Other 19,000 19,000
Net operating loss carryforward 202,000 162,083
----------- -----------
Gross deferred tax assets 1,137,200 1,016,283
Deferred tax liabilities -- --
----------- -----------
Net deferred assets before valuation allowance 1,137,200 1,016,283
Deferred tax assets valuation allowance (1,137,200) ( 1,016,283)
----------- -----------
$ 0 $ 0
=========== ===========
The Company has provided a valuation allowance of 100% based on its prior
experience of not the uncertainty of realizing such benefit in the future.
The company has a net operating loss carry forward of approximately
$600,000, approximately $500,000 of which will expire in 2018 and
approximately $100,000 of which will expire in 2019.
F-16
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
11. (Loss) Per Share
The Company uses SFAS No. 128, "Earnings Per Share" ("EPS"). Loss per
share is computed by dividing the loss by the weighted average number of
common shares outstanding during the period.
For The Year Ended 1999
------------------------------------------------------
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
--------- --------- -----
(Loss) Per Share ($306,383) 3,960,730 ($.08)
========= ========= =====
For The Year Ended 1998
------------------------------------------------------
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------
(Loss) Per Share ($242,324) 3,960,730 ($.06)
========= ========= =====
All options outstanding during 1999 and 1998 were anti-dilutive.
12. Bank Line of Credit
The Company has a line of credit with Fleet Bank for $200,000 due on
demand. On December 31, 1998 the Company had an outstanding balance of
$50,000 that was repaid on January 5, 1999. There was no balance due as of
December 31, 1999. As of December 31, 1999 and 1998, the line bears
interest at a rate of 1% above prime and 1.5% above prime respectively 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-17
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
13. Advertising and Promotions
Advertising and promotion costs were approximately $4,600 and $9,500 in
1999 and 1998, 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 expiration date
of the option is March 27, 2002.
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. These stock options
must be exercised within 120 days after the market price of the stock is
maintained for 30 days a a price of $5.00 per share for 100,000 shares,
$6.00 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.
F-18
<PAGE>
DIAPULSE CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
15. Litigation
The Company was 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.
In early 2000, the parties agreed to a settlement of the matter and a
settlement agreement is in the process of being concluded and signed. The
agreement provides for the payment of $50,000 to the Company. The
agreement also provides for the defendants to refrain from engaging in
certain marketing practices in the future and the dismissal, with
prejudice, of all claims against the Company
A former employee sued the Company in 1997 for certain unpaid deferred
salary. The Company counterclaimed for breaches of contract and fiduciary
duty relating to unauthorized purchases made by the plaintiff when he was
an employee of the Company. The employee obtained summary judgment on his
claim for deferred salary. The judgment amount was $120,475, including
interest. The Company's counterclaims were severed and referred to the
trial court for resolution. Thereafter, a settlement was reached in the
sum of $95,000. The Company is to pay the former employee seven (7)
installments of $13,571 every six months beginning in March 2000. The
first payment has since been made.
A former employee of the Company, who was terminated in May 1999, filed
five small claim actions against the Company and other employees and an
officer-shareholder of the Company. Each action seeks $3,000 in damages.
The former employee's son also filed one small claim action for
approximately $2,000 against the Company and an employee and an
officer-shareholder of the Company. Most of the cases allege various
employment contract and/or labor violations; some allege liability for
property allegedly held or used by the Company. All actions were
instituted after the employee was terminated from employment. It is the
opinion of counsel that the actions filed by the former employee and his
son are either meritless or frivolous.
The Company also sued a former employee alleging that this former
employee, without authorization, took trade secrets and other
confidential information and documents relating to the Company. The
lawsuit seeks to recover possession of the items allegedly taken by the
former employee and to enjoin the former employee from distributing,
sharing or selling the trade secrets and other confidential information.
The former employee counterclaimed for malicious prosecution and seeks
damages in the sum of $1,000,000.
F-19
<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: April, 2000
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 March 31, 2000
- ----------------------------------
Name: Jesse Ross
Title: President, Director and
Chairman of the Board
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 58383 119868
<SECURITIES> 200000 200000
<RECEIVABLES> 1799848 1630363
<ALLOWANCES> (1712000) (1493000)
<INVENTORY> 343068 341543
<CURRENT-ASSETS> 577542 612713
<PP&E> 197175 209260
<DEPRECIATION> (181762) (174485)
<TOTAL-ASSETS> 1028712 1216342
<CURRENT-LIABILITIES> 491418 597301
<BONDS> 0 0
0 0
0 0
<COMMON> 99051 99051
<OTHER-SE> (2328) (2328)
<TOTAL-LIABILITY-AND-EQUITY> 1028712 1216342
<SALES> 1864500 1490282
<TOTAL-REVENUES> 1864500 1490282
<CGS> 22042 119994
<TOTAL-COSTS> 2206666 2164964
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 195409 204509
<INCOME-PRETAX> (338035) (653564)
<INCOME-TAX> (31652) (411240)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (306383) (242324)
<EPS-BASIC> (0.08) (0.06)
<EPS-DILUTED> (0.08) (0.06)
</TABLE>
