ITEM 1. 	Business
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 on prescription in a patients' home. A number of insurance companies reimburse for treatment. The Registrant has not significantly varied the product or its service rendered since its last filing for the year ended December 31, 1995.
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 any one of many suppliers. Were the Registrant to change from its present suppliers for any reason, 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 Dialpulse 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 effect on the Registrant's results of operations.
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 been received from Medicare following administrative procedures to receive such reimbursement.
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.
Employees - The Registrant has forty-two full-time and part-time employees and commission salesmen.
- ----------------------------------------------------------------------------- ITEM 2.
ITEM 2.	Properties
The Registrant leases approximately 6,000 square feet of office space in Great Neck, New York for a term expiring December 31, 1998 at an annual rental of approximately $111,360 under a lease entered into during the year ended December 31, 1991. The premises are used as the national and international headquarters of the Company, as well as for research and development. The Registrant does not lease or own any other premises.
ITEM 3.
ITEM 3.	Legal Proceedings
None to be reported.
ITEM 4.
ITEM 4.	Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year covered by this report
- ------------------------------------------------------------------------------ Part II
ITEM 5.
ITEM 5.	Market For Registrant's Common Equity and Related Stockholder Matters
The Registrant's common stock has been traded on the NASDAQ over-the-counter market, under the symbol DIAC. The bid and ask closing sales prices are listed below.
Quarter Ended ____________________________________________________________________________ 1996 1995 _______________________________ ____________________________ Mar31 Jun30 Sep30 Dec31 Mar31 Jun30 Sep30 Dec31	 Common Shares: Bid: $0.56 $1.00 $1.00 $1.00 $1.00 $1.00 $0.50 $1.00 Ask: $1.00 $1.25 $1.25 $1.25 $1.25 $1.25 $0.75 $1.25 	
As of December 31, 1996, there were approximately 1,500 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.
ITEM 6. 	Selected Financial Data
The following selected financial data should be read in conjunction with the more detailed financial statements and related notes included elsewhere herein.
SELECTED FINANCIAL DATA: Year Ended December 31, _______________________________________________________ 1996 1995 1994 1993 1992 __________ ___________ ___________ ________ ________ Net revenues:	 Rentals and sales $1,688,550 $1,782,286 $1,528,729 $1,264,966 $766,906
Net income (loss) 16,262 59,319 110,447 54,788 (59,182)
Income (loss) per share 0.00 0.01 0.03 O.01 (0.02)
At year end: Total assets 2,109,874 2,112,507 2,146,224 1,427,005 1,048,701 Long-term obligations 1,227,350 977,350 977,350 977,350 865,205 Working capital 291,465 607,667 582,870 551,528 292,744 Stockholders' equity (defict) 50,073 33,811 (25,508) (137,010) (488,755) Cash dividends	 paid per share - - - - -
- ----------------------------------------------------------------------------- ITEM 7.
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview - The Registrant has been establishing and expanding its distribution network, sales force and sales and rental programs. Control, blind 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 36 diapulse publications on Medline.
Net Revenues - During 1996 net revenues decreased 5.2% as compared to 1995, primarily as a result of turnover in the Company's sales force. Net revenues increased 16.6% in 1995 from 1994 levels, and increased 20.9% in 1994 from 1993 levels. These increases were primarily attributable to an improved marketing program, expansion of the Registrant's distribution network sales force, as well as a broader rental program.
Cost of Sales - Cost of sales is relatively stable in that it represented approximately 5.8% of net revenues in 1996, as compared to 6.9% of net revenues in 1995, and 5.0% of net revenues in 1994.
Operating Expenses - Operating expenses, exclusive of interest, was about the same in 1996 as it was in 1995. This is a result of the Company's overhead expenses being relatively stable. Operating expenses increased in 1995 by 17.6% over 1994, primarily as a result of an increase in bad debt expense.
Interest Expense - Interest expense, principally due to officers, decreased by approximately 5% from 1995 to 1996, and increased by approximately 25% from 1994 to 1995. The increase and decrease in interest expense is primarily due to changes in the prime rate, to which all the Company's debt is pegged.
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, 1996 and 1995, the Registrant had working capital of $291,465 and $607,667 respectively.
It is the intention of management to utilize the cash flow from operations to support the financial requirements of the Registrant and the working capital should be sufficient to support future operations. The Registrant has no capital expenditure commitments.
- ----------------------------------------------------------------------------- At December 31, 1996 there was $785,185 of Medicare receivables arising from covered individuals for rentals of Diapulse's self-administered medical treatment at home. When claims are denied, the Company institutes the administrative procedure of requesting a review of the claim, and if necessary, a hearing with a Medicare hearings officer. If the claim has still not been approved the Company appeals the findings of the hearings officer with an administrative law judge of the Social Security Administration. To date, approximately 135 such cases have been adjudicated, with the Company receiving totally favorable decisions from the administrative law judge and Medicare hearing officer in all 135 cases. The Company is awaiting decisions on approximately 200 more cases.
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.
WORKING CAPITAL RATIOS: 1996 1995 1994 _________ _________ _________ Working capital $ 291,465 $ 607,667 $ 582,870 Current Ratio 1.4 to 1 1.6 to 1 1.5 to 1 Quick Ratio .56 to 1 .91 to 1 1.0 to 1
ITEM 8.
ITEM 8.	Financial Statements and Supplementary Data.
Annual Financial Statements. See Part IV, Item 14 of this Form 10-K
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Not Applicable
- ----------------------------------------------------------------------------- Part III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The executive officers and key employees of the Company are as follows:
Name Age Title ______________________ ____ _________________________
Jesse Ross 75 President, Director and Chairman of the Board
David M. Ross 49 Director
Raymond Evans 60 Director
Howard Mann 62 Director
	 Jesse Ross has been actively engaged in the business of the Registrant and has been its President since its incorporation. He has devoted his full time services to the business of the Registrant since 1957.
David M. Ross, son of Jesse Ross, became a Director of the Company during 1981. Mr. Ross is also an independent sales representative for the Registrant's product.
Raymond Evans became a Director of the Company during 1989.
Howard Mann became a Director of the Company during 1996.
The present term of office for the above directors expires during April 1997.
ITEM 11.
ITEM 11. Executive Compensation.
Cash Compensation - For the year ended December 31, 1996, no officer received or was entitled to receive $100,000 or more in compensation from the Registrant. The President received no compensation during 1996. No cash bonuses were earned by any of the Registrant's officers during the year.
Compensation pursuant to plans - The Registrant has no pension, retirement, stock or any other form of compensation plans.
- ----------------------------------------------------------------------------- ITEM 12.
ITEM 12. 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, 1996.
Name of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class __________________ ______________________ ________ Jesse Ross 2,220,150 (i) 56.04% David Ross 77,600 (i) 1.96% Raymond Evans 8,000 0.20%
					 All officers and directors as a group (3 persons) 2,305,750 58.20% 					 (i)Include certain shares owned by the wives and other relatives of these individuals
ITEM 13.
ITEM 13.	Certain Relationships and Related Transactions
One of the Company's directors, who is a son of the President, serves as an independent sales representative for the Company. In addition, during 1996 another son of the President began working as an independent sales representative for the Company. Commissions and consulting fees earned by these individuals during 1996, 1995 and 1994 were approximately $87,200, $53,800, and $80,800, respectively. The Company had outstanding advances to these representatives of approximately $233,000, and $199,000 at December 31, 1996 and 1995, respectively.
There are several other individuals that currently work or have worked for the Company that are related to the Pesident. The amounts due these individuals for salaries and commissions, and interest thereon, at December 31, 1996 and 1995 were $210,979 and $216,659, respectively. Salaries and interest incurred for these individuals during 1996, 1995 and 1994 was approximately $44,000, $43,000 and $40,000, respectively.
- ----------------------------------------------------------------------------- Part IV -------
ITEM 14.
ITEM 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
Financial Statements - The financial statements listed in the accompanying Index on page are filed as part of this annual report.
Financial Statement Schedules - There are no financial statement schedules filed as part of this annual report, since the required information is included in the financial statements, including the notes thereto, or the circumstances requiring inclusion of schedules are not present.
Report on Form 8-K - There were no reports filed on Form 8-K during the fourth quarter of 1996.
- ----------------------------------------------------------------------------- SIGNATURES ----------
Pursuant to the requirments of Section 13 or 15(d) of the Securites 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 4/30/97
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA
INDEX DECEMBER 31, 1996 ---------------------------------
CONTENTS
PAGE ------
Independent Auditors' Report
BALANCE SHEETS - DECEMBER 31, 1996 AND 1995 TO 4
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
	STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 TO 8
NOTES TO FINANCIAL STATEMENTS TO 16
- ---------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Stockholders of Diapulse Corporation of America
We have audited the accompanying balance sheets of Diapulse Corporation of America as of December 31, 1996 and 1995, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diapulse Corporation of America at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ DAVID BERDON & CO. LLP
Cerified Public Accountants
Great Neck, New York April 14, 1997
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA BALANCE SHEETS DECEMBER 31, 1996 AND 1995 -------------------------------
Note 1996 1995 ----- ------------- ------------ A S S E T (Note 12)
CURRENT ASSETS: Cash 14 $ 150,316 $ 222,317 Current portion of accounts receivable, net of allowance for doubtful accounts of $18,985 in 1996 and $60,000 in 1995 3 315,089 777,873 Inventory 2 & 5 455,461 458,720 Commission advances 4 181,172 238,544 Other current assets 21,878 11,559 ------------ ------------ TOTAL CURRENT ASSETS 1,123,916 1,709,013
PROPERTY AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION 2 & 8 115,762 187,851 ------------ ------------ OTHER ASSETS: Accounts receivable, net of current portion 3 620,569 - Commission advances, net of current portion 4 & 7 232,932 198,948 Security deposits 16,695 16,695 ----------- ------------ TOTAL OTHER ASSETS 870,196 215,643 ----------- ------------
TOTAL ASSETS $2,109,874 $2,112,507 =========== ============
The accompanying notes are an integral part of these statements.
- ------------------------------------------------------------------------------ DIAPULSE CORPORATION OF AMERICA
BALANCE SHEETS DECEMBER 31, 1996 AND 1995 --------------------------------
Notes 1996 1995 ------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY								
CURRENT LIABILITIES: Current portion of due to officer and former officer 7 $ 469,275 $ 650,688 Accounts payable and accrued liabilities 7 & 9 253,176 450,658 Bank line of credit 12 110,000 - ----------- ------------ TOTAL CURRENT LIABILITIES 832,451 1,101,346
LONG-TERM PORTION OF DUE TO OFFICER 7 1,227,350 977,350 ----------- ------------ TOTAL LIABILITIES 2,059,801 2,078,696 ----------- ------------
COMMITMENTS 10
STOCKHOLDERS' EQUITY (Note 13):				 					 Common stock, $.025 par value per share; authorized 15,000,000 shares; issued 3,961,852 shares 99,046 99,046 Additional paid-in capital 2,124,277 2,124,277 Accumulated deficit (2,170,922) (2,187,184) ------------ ------------ 52,401 36,139 Less: Treasury stock, 1,328 shares in 1996 and 1995, at cost (2,328) (2,328) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 50,073 33,811 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,109,874 $2,112,507 ============ ============
The accompanying notes are an integral part of these statements.
- ------------------------------------------------------------------------------ DIAPULSE CORPORATION OF AMERICA STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
Notes 1996 1995 1994 ----- ---------- ----------- -------------
NET REVENUES: Rentals and sales, net of returns and allowances $1,688,550 $1,782,286 $ 1,528,729 ---------- ----------- ------------- TOTAL NET REVENUES 1,688,550 1,782,286 1,528,729 				 							 COST OF SALES AND RENTALS 98,762 123,782 76,664 ---------- ----------- ------------- GROSS MARGIN 1,589,788 1,658,504 1,452,065 ---------- ----------- -------------
OPERATING EXPENSES: Selling, general and administrative 1,382,015 1,380,648 1,174,502 Interest expense (principally to officers) 7 188,406 197,770 157,643 				 		 	---------- ----------- ------------- TOTAL OPERATING EXPENSES 1,570,421 1,578,418 1,332,145 ---------- ----------- ------------- INCOME FROM OPERATIONS 19,367 80,086 119,920
INTEREST AND OTHER INCOME 2,991 4,233 1,527 ---------- ----------- -------------
INCOME BEFORE INCOME TAXES 22,358 84,319 121,447 				 							 PROVISION FOR INCOME TAXES 11 6,096 25,000 11,000 ----------- ----------- ------------- 						 	---------- ----------- ------------- NET INCOME $ 16,262 $ 59,319 $ 110,447 =========== ============ =============
EARNINGS PER COMMON SHARE 2 $ 0.00 $ 0.01 $ 0.03 ========= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 13 3,961,852 3,916,852 3,961,852 =========== =========== =========== 				 						
The accompanying notes are an integral part of these statements.
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
Common Stock Additional Issued Paid-in Accumulated Shares Amounts Capital Deficit ----------- -------- ------------ ------------ BALANCE JANUARY 1, 1994 AS ORIGINALLY REPORTED 3,956,448 $98,911 $2,131,781 $(2,356,950)
Reclassification of equity accounts (Note 13) 5,404 135 (7,149) - ----------- -------- ------------ ------------
BALANCE, JANUARY 1, 1994 AS RESTATED 3,961,852 99,046 2,124,632 (2,356,950)
Treasury Stock sold (355)
Net income 110,447 ----------- --------- ------------ ----------- BALANCE, DECEMBER 31, 1994 3,961,852 99,046 2,124,277 (2,246,503)
Net income 59,319 ----------- --------- ----------- ----------- BALANCE DECEMBER 31, 1995 3,961,852 99,046 2,124,277 (2,187,184)
Net income 16,262 ----------- --------- ----------- ----------- BALANCE DECEMBER 31, 1996 3,961,852 $99,046 $2,124,277 $(2,170,922) =========== ========= =========== ============
Total Treasury Stock Stockholders' Shares Amounts Equity (Deficit) ---------- ---------- ------------------- BALANCE JANUARY 1, 1994 AS ORIGINALLY REPORTED 6,728 $(11,797) $ (138,055)
Reclassification of equity accounts (Note 13) (4000) 7,014 - --------- ---------- ------------------- BALANCE JANUARY 1, 1994 AS RESTATED 2,728 (4,783) (138,055)
Treasury stock sold (1,400) 2,455 2,100
Net income 110,447 ---------- ---------- ------------------- BALANCE DECEMBER 31, 1994 1,328 (2,328) (25,508)
Net income 59,319 ---------- ---------- ------------------ BALANCE December 31, 1995 1,328 (2,328) 33,811
Net income 16,262 ---------- ----------- ------------------
BALANCE, DECEMBER 31, 1996 1,328 $ (2,328) $ 50,073 ========== ========== ==================
The accompanying notes are an integral part of these statements.
- ---------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
1996 1995 1994 --------------- ------------ ------------ OPERATING ACTIVITIES: Net income $ 16,262 $ 59,319 $110,447 Non-cash items included in net income: Prior period adjustments - - 8,439 Depreciation 12,890 22,813 18,223 Deferred salaries and accrued interest - officer and former officer 130,656 186,598 197,309 Increases and decreases in assets and liabilities: Increase in accounts receivable (157,785) 78,132 (24,123) (Increase) decrease in inventories 62,458 74,335 (38,845) (Increase) decrease in other current assets (10,319) (1,000) (3,588) (Increase) decrease in commission advances 23,388 (26,965) (43,615) Decrease in accounts payable and accrued liabilities (197,482) (38,681) (98,438) --------- --------- --------- Net Cash Provided by (Used in) Operating Activities (119,932) 354,551 125,809 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures - (39,784) (17,296) ----------- ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES - (39,784) (17,296) ----------- ---------- -----------
FINANCING ACTIVITIES:										 Loans from officers 50,000 50,000 48,000 Sale of treasury stock - - 2,100 Repayments to officers (112,069) (271,953) (94,868) Net borrowings under bank line-of-credit 110,000 (19,000) 19,000 ------------- ------------ ------------ NET CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES 47,931 (240,953) (25,768) ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH (72,001) 73,814 82,745
CASH - BEGINNING OF YEAR 222,317 148,503 65,758 ------------- ------------ ------------ CASH - END OF YEAR $ 150,316 $ 222,317 $ 148,503 										 ============ =========== ============
The accompanying notes are an integral part of these statements.
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 ----------------------------------------------------
1996 1995 1994 ---------- ---------- ---------- Cash Paid During the Years For:
Interest $ 53,580 $ 78,665 $ 86,688
Income Taxes $ 35,555 $ 12,443 $ 7,636
SUPPLEMENTAL SCHEDULE OF NON - CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of machines held for rental from inventory to equipment $ - $ 34,132 $ 12,630 										 Reclassification of machines included in equipment reclassified to inventory $ 59,199 $ - $ -
									 The accompanying notes are and integral part of these statements
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA NOTES TO FINANCIAL STATEMENTS
Note 1 - Business description
Diapulse Corporation of America (the Company) 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 on prescription in a patients' home. A number of insurance companies reimburse for treatment.
Note 2 - Summary of significant accounting policies 	 A summary of the Company's significant accounting policies are as follows:
(a) Inventory
Inventory is valued at the lower of cost or market. Cost is determined using the first-in, first-out method for parts and components and the specific identification method for finished goods.
The Company classifies machinery which has never been rented and held for sale as inventory.
(b) 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.
(c) Income Taxes
During 1993, the Company adopted FAS 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.
(d) Earnings Per Common Share Earnings per common share is based on the weighted average number of common shares outstanding during each of the periods presented.
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e)	Use of Estimates in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, taxes, and contingencies.
(f)	Financial Instruments
Fair values for 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.
(g)	Cash and Cash Equivalents
Short-term investments with a maturity of three months or less at the time of purchase are reported as cash equivalents.
(h)	Reclassifications
Certain items in the accompanying financial statements have been reclassified to make them comparable to 1996. These reclassifications had no effect on net income.
In prior years the Company's financial statements were prepared on a consolidated basis with its subsidiary. As there were no balances in the subsidiary's accounts and it is no longer in existence, the current and prior years amounts as reflected in the accompanying financial statements have been prepared on a Company only basis.
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA 	NOTES TO FINANCIAL STATEMENTS -------------------------------
NOTE 3 - ACCOUNTS RECEIVABLE
At December 31, 1996 and 1995 accounts receivable included $785,185 and $427,797, respectively, of Medicare claims from covered individuals for rentals of Diapulses' self-administered medical treatment at home and in covered facilities. Due to the relative low volume of claims for the Diapulse treatment, Medicare has not assigned a separate code for this treatment. As a result of this, most claims for reimbursement from Medicare are denied when submitted. In these cases, the Company has to institute the administrative procedure of requesting a review of the claim and if denied, a hearing with a Medicare hearings officer. If necessary, the Company can appeal the findings of the hearings officer to an administrative law judge of the Social Security Administration. To date, the Company has received totally favorable decisions in all claims going through this procedure. Since the administrative procedure described above can take over two years, a portion of the receivables are shown as non-current in the accompanying financial statements.
As the Company has received totally favorable decisions on all Medicare claims to date, no allowance has been provided against these receivables in the accompanying financial statements. The Company has provided for an allowance for doubtful accounts against the non-Medicare accounts receivable in the accompanying financial statements.
NOTE 4 - COMMISSION ADVANCES Commission advances represents monies advanced by the Company to several of its independent sales representatives, which is to be applied against future sales made by the representatives. Currently, these advances bear no interest.
As explained in Note 7, included in commission advances as of December 31, 1996 and 1995 are advances made to related parties.
NOTE 5 - INVENTORY Inventory at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---------- ---------- Parts, components and subassemblies $ 129,995 $ 157,384 Finished goods 325,466 301,336 ---------- ---------- $ 455,461 $ 458,720 ========== ==========
The Company's inventory quantities have historically exceeded its annual sales quantities. The Company is attempting to expand its distribution network, which if attained should increase the movement of inventory.
- ----------------------------------------------------------------------------- DIAPULSE CORPORATION OF AMERICA 	NOTES TO FINANCIAL STATEMENTS	 -------------------------------
NOTE 6 - FAIR VALUES OF FINANCIAL INSTRUMENTS As of December 31,1996 the fair values of cash, commission advances and loans receivable approximated their carrying values.
The fair values of the Company's debt approximates carrying values, based on similar instruments with similar terms and interest rates.
NOTE 7 - RELATED PARTY TRANSACTIONS
Related party transactions consisted of the following:
Due to Officer and Former Officer
Due to officer and former officer at December 31, 1996 and 1995 consisted of the following:
Accrued Accrued Cash Interest Salaries Advances Total ------------ ------------ ------------ ------------ December 31, 1996 - Officer $ 932,676 $ 579,386 $ 71,751 $1,583,813 Former officer 82,735 30,077 - 112,812 ------------ ------------ ------------ ------------ $ 1,015,411 $ 609,463 $ 71,751 $1,696,625 ============ ============ =========== ===========
December 31, 1995 - Officer $ 812,987 $ 579,386 $ 133,820 $1,526,193 Former officer 71,768 30,077 - 101,845 ------------ ------------ ----------- ----------- $ 884,755 $ 609,463 $ 133,820 $1,628,038 ============ ============ =========== ===========
During 1995 the President of the Company extended to January 1, 1997 the due date of $977,350 due him. During 1996 he extended to January 1, 1998 the due date of $1,227,350 due him.
- ------------------------------------------------------------------------------ DIAPULSE CORPORATION OF AMERICA
		NOTES TO FINANCIAL STATEMENTS	 ---------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS (continued)
Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities as of December 31, 1996 and 1995 included $210,979 and $216,059, respectively, representing unpaid salaries and interest thereon, to parties related to the President of the Company. Salaries and interest incurred for these individuals during 1996, 1995 and 1994 was $43,900, $43,076 and $39,730, respectively.
Interest is charged on all amounts due to officers and former officer and other related parties at the bank's current prime rate, plus two percent, compounded monthly.
Due from Related Parties One of the Company's directors who is a son of the President serves as an independent sales representative for the Company. 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 1996, 1995 and 1994 were approximately $87,200, $53,800, and $80,800, respectively.
As of December 31, 1996 and 1995 the Company had commission advances to these individuals in the amounts of $232,932 and $198,948, respectively. They have been guaranteed by the President of the Company and he has agreed to subordinate amounts due to him to the extent of the advances.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment, at cost, at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---------- ---------- Rental equipment $ 177,283 $ 236,481 Autos 5,000 5,000 Furniture and fixtures 58,262 58,262 Machinery and equipment 7,875 7,875 Office equipment 6,465 6,465 Computer equipment 7,829 7,829 ---------- ---------- TOTAL PROPERTY AND EQUIPMENT 262,714 321,912
LESS: ACCUMULATED DEPRECIATION 146,952 134,061 ---------- ---------- $ 115,762 $ 187,851 ========== ==========
- ------------------------------------------------------------------------------ DIAPULSE CORPORATION OF AMERICA 	NOTES TO FINANCIAL STATEMENTS	 -------------------------------
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---------- ---------- Accrued expenses and interest thereon (see Note 7) $ 210,979 $ 216,059 Accrued commissions payable 20,537 215,310 Accounts payable and other accrued liabilities 21,660 86 Corporation taxes payable - 19,203 ---------- ---------- $ 253,176 $ 450,658 ========== ==========
NOTE 10 - COMMITMENTS The Company has extended its lease on the premises located in Great Neck, New York through December 31, 1998. Minimum rental payments under the terms of the lease are as follows:
1997 $111,360 1998 111,360 --------- Total $222,720 =========
Rent expense for the years ended December 31, 1996, 1995 and 1994 was approximately $106,500, $108,000 and $104,000, respectively.
- ------------------------------------------------------------------------------ DIAPULSE CORPORATION OF AMERICA
		NOTES TO FINANCIAL STATEMENTS ---------------------------------
NOTE 11 - INCOME TAXES The annual provision for income taxes for the years ended December 31, 1996, 1995 and 1994 consisted of the following:
1996 1995 1994 ---------- ---------- ---------- Computed federal and New York State tax $ 6,096 $ 25,000 $ 64,500
Tax benefit of operating loss carryforward - - (53,500) ---------- ---------- ---------- $ 6,096 $ 25,000 $ 11,000 ========== ========== ==========
Deferred tax assets (liabilities) at December 31, 1996 and 1995 consisted of the following:
1996 1995 ------------ ------------ DEFERRED TAX ASSETS: Accrued salaries $ 382,000 $ 382,000 Allowance for doubtful accounts 7,594 24,000 ------------ ------------ GROSS DEFERRED TAX ASSETS 389,594 406,000
DEFERRED TAX LIABILITIES: Accumulated depreciation - (10,000) ------------ ------------ NET DEFERRED TAX ASSETS BEFORE VALAUATION ALLOWANCE 389,594 396,000
DEFERRED TAX ASSETS VALUATION ALLOWANCE (389,594) (396,000) ------------ ------------ $ - $ - ============ ============
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.
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NOTES TO FINANCIAL STATEMENTS --------------------------------
NOTE 12 - BANK LINE-OF-CREDIT During 1996 the Company established a line-of-credit with Fleet Bank for $200,000. On December 31, 1996 the Company had an outstanding balance of $110,000 on this line. Fleet Bank has a security interest in substantially all of the assets of the Company.
NOTE 13 - RECLASSIFICATION OF EQUITY ACCOUNTS During 1996 the Company discovered an error in the recording of the number of shares of stock issued and outstanding between treasury stock and common stock in prior years. The accompanying financial statements reflect the correction of this error. This had no effect on net income or total stockholders' equity.
NOTE 14 - CASH As of December 31,1996 the Company had funds in a bank in excess of the insured amount.
NOTE 15 - ADVERTISING AND PROMOTIONS Advertising and promotion costs were approximately $12,200 in 1996, $14,500 in 1995 and $11,500 in 1994.
NOTE 16 - SUBSEQUENT EVENT 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 shall terminate on March 27, 2002.
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