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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2001
Securities and Exchange Commission File Number
000-26369
Dicom Imaging Systems, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0422026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
#201 - 15047 Marine Drive
White Rock, British Columbia
Canada V6B 1C5
(Address of principal executive offices, including zip code)
(604) 531-2521
(Registrant's Telephone Number, Including Area Code)
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 (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrants Common
Stock, $0.001 par value, as of September 30, 2001, was 26,632,653.
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DICOM IMAGING SYSTEMS, INC.
Page
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PART I - Financial Information 4
Item 1. Financial Statements:
Consolidated Balance Sheets as at September 30, 2001 and December 31, 2000 4
Consolidated Statements of Operations for the three months and nine months
ended September 30, 2001 and September 30, 2000 5
Consolidated Statements of Cash Flows for the nine months ended September 30,
2001 and September 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7
PART II - Other Information 7
Item 1. Legal Proceedings. 7
Item 2. Changes in Securities. 8
Item 3. Defaults Upon Senior Securities. 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K. 8
Signatures 10
Exhibits 10
2
Forward-looking Statements
Certain statements in this Quarterly Report on Form 10-QSB, as well
as statements made by Dicom Imaging Systems, Inc. ("Dicom" or the "Company") in
periodic press releases, oral statements made by the company's officials to
analysts and shareholders in the course of presentations about the company,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the company to be materially
different from any future results, performance or achievements expressed or
implied by the forward looking statements. Such factors include, among other
things, (1) general economic and business conditions; (2) interest rate changes;
(3) the relative stability of the debt and equity markets; (4) competition; (5)
demographic changes; (6) government regulations; (7) required accounting
changes; (8) disputes or claims regarding the Dicom's proprietary rights to its
software and intellectual property; and (9) other factors over which Dicom has
little or no control.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Expressed in U.S. dollars)
As At September 30, 2001 and December 31, 2000
September 30, December 31,
2001 2000
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Unaudited Audited
Assets
Current assets:
Cash and cash equivalents $ - $ 73,150
Accounts receivable - 78,568
Inventory - 107,340
Prepaid expenses - 43,181
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- 302,239
Intangible assets - 260,708
Equipment - 107,553
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$ - $ 670,500
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Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 428,647 $ 254,507
Accrued liabilities 26,642 267,378
Payables to related parties - 120,742
Loans from related parties (note 3) - 556,685
Deferred revenue - 156,471
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455,289 1,355,783
Stockholders' deficit:
Authorized:
10,000,000 preferred stock, $.001 par value
50,000,000 common stock, $.001 par value
Issued:
26,632,653 common stock 26,633 21,600
Additional paid in capital 1,807,041 1,189,042
Deficit (2,288,963) (1,895,925)
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Total stockholder's deficit (455,289) (685,283)
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$ - $ 670,500
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Continuing Operations (note 1)
4
Consolidated Statements of Operations
(Expressed in U.S. dollars)
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
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Revenue $ 352,541 $ 1,026,027 $ 1,448,390 $ 2,221,685
Cost of sales 100,269 236,700 649,307 601,573
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Gross profit 252,272 789,327 799,083 1,620,112
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Operating expenses:
Depreciation 47,045 26,522 104,051 68,205
General and administrative 192,070 292,303 1,033,528 661,815
Research and development 17,466 188,272 104,441 398,844
Selling and marketing 38,063 182,514 316,741 465,692
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294,644 689,611 1,558,761 1,594,556
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Net income/(loss) from operations (42,372) 99,716 (759,678) 25,556
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Other income 366,640 - 366,640 -
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Net income $ 324,268 $ 99,716 $ (393,038) $ 25,556
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Net income/(loss) per common share, basic
and diluted $ 0.01 $ 0.00 $ (0.01) $ 0.00
Weighted average common shares outstanding,
- basic 26,632,653 21,600,000 26,632,653 21,600,000
- diluted 26,632,653 33,181,808 29,634,607 33,181,808
5
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
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Operations:
(Loss)/income for the period $ (393,038) $ 25,556
Items not involving cash:
Stock based compensation (8,689) 231,926
Depreciation and amortization 104,051 68,205
Gain on foreclosure of assets (242,927) -
Loss on disposal of assets - 2,754
Cancellation of debt (140,666) -
Non-cash interest expense 128,456 5,200
Changes in operating assets and liabilities:
Accounts receivable 25,870 (136,661)
Inventory 96,908 (98,102)
Prepaid expenses 43,181 (6,235)
Accounts payable 314,806 188,650
Accrued liabilities (228,639) 50,465
Deferred revenue (106,774) (62,317)
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Net cash generated/(used) in operating activities (407,460) 269,441
Investments:
Purchase of equipment (511,818) (103,164)
Purchase of trademarks - (306,871)
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Net cash used in investing activities (511,818) (410,035)
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Financing:
Issue of common shares 503,265 -
Loan from related party 342,863 250,000
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Net cash provided by financing activities 846,129 250,000
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(Decrease)/increase in cash and cash equivalents (73,150) 109,406
Cash and cash equivalents, beginning of period 73,150 18,263
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Cash and cash equivalents, end of period $ (0) $ 127,669
Supplementary information:
Interest paid - $ 13,372
Income taxes paid - -
Non-cash transactions:
Issuance of stock options (8,689) 231,926
Issuance of convertible loans 128,456 19,500
6
1. Continuing operations
On September 4, 2001, pursuant to the terms a Security Agreement described in
Item 3: Defaults Upon Senior Securities, Torchmark Holdings Ltd. ("Torchmark")
foreclosed on its security interest and caused Dicom to deliver and assign to
Torchmark substantially all of Dicom's assets. Following this foreclosure of
Dicom's assets, the Company ceased business operations on September 4, 2001.
2. Basis of presentation
The accompanying unaudited interim financial statements of Dicom Imaging System,
Inc. have been prepared in accordance with generally accepted accounting
principles and the rules of the Securities and Exchange Commission ("SEC"), and
should be read in conjunction with the audited financial statements and notes
thereto contained in the Company's latest Annual Report filed with the SEC on
Form 10-KSB. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year
2000, as reported in Form 10-KSB, have been omitted.
3. Loans from related parties
On September 4, 2001 the Company defaulted on its loans to Torchmark Holdings
Ltd., totaling approximately $972,290. Pursuant to the Security Agreement,
Torchmark took possession of substantially all of Dicom's assets on September 4,
2001 as payment on defaulted loans. This resulted in a gain on the foreclosure
of Dicom's assets of $225,973, being the difference between the loans
outstanding and the net book values of the assets foreclosed on.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
accompanying unaudited interim consolidated financial statements for the
three-month and nine-month periods ended September 30, 2001 and September 30,
2000, and the Form 10-KSB for the fiscal year ended December 31, 2000. These
unaudited interim consolidated financial statements have been prepared by
management and have not been reviewed by the Company's auditor.
Following the foreclosure of Dicom's assets by Torchmark on September 4, 2001,
the Company ceased business operations on that date. Management is in the
process of negotiating a merger of Dicom with another company, Reality Networks,
Inc. ("Reality Networks"), which, if successfully concluded, could result in a
re-commencement of new business operations. Dicom has entered into a letter of
intent with Reality Networks, proposing a share exchange of ninety percent (90%)
of the Company's shares of common stock for all the issued and outstanding
shares of Reality Networks. This will result in a change of control of the
Company. On November 7, 2001 a related Share Exchange Agreement was signed. If
this contemplated merger is not successfully concluded, the Company will be
wound down voluntarily. Since the Company has ceased business operations, a
detailed analysis of the results of operations for the third quarter of 2001 is
considered irrelevant and could be construed to be mis-leading.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 21, 2000, the Company entered into a License Agreement (the
"License Agreement") with Dicom Imaging UK ("UK"), a partnership of Great
Britain, whereby UK obtained the exclusive rights to distribute copies of
Dicom's software in the United Kingdom and the Republic of Ireland. On December
14, 2000, Dicom issued a notice of termination of the License Agreement to UK,
7
due to the failure by UK to pay $150,000 in license fee payments by December 1,
2000, and the two parties entered into an arbitration process. On September 1,
2001, Dicom entered into a settlement agreement with UK, whereby the two parties
agreed to terminate the license agreement for a payment of $10,000 by Dicom to
UK.
Item 2. Changes in Securities.
None, other than previously reported.
Item 3. Defaults Upon Senior Securities.
None, other than previously reported.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On November 7, 2001, the Company, Reality Networks, Inc., a Delaware
corporation ("Reality Networks"), and the shareholders of Reality Networks (the
"Reality Networks Shareholders") entered into a Share Exchange Agreement (the
"Share Exchange Agreement"). Pursuant to the Share Exchange Agreement, the
Company intends to effect a "reverse stock split" so that all the current issued
and outstanding shares of common stock of the Company will equal approximately
1,000,000 shares of common stock, and at the closing, the Reality Networks
Shareholders will be issued approximately 9,000,000 shares of common stock of
the Company so that they would own approximately 90% of the Company's issued and
outstanding shares calculated on a post-closing basis. Additionally, the Company
intends to change its name to "Reality Networks, Inc." or "Reality Wireless
Networks, Inc."; Brent Haines, currently CEO of Reality Networks, may serve as
CEO and President of the Company; and the Company intends to relocate its
offices to Campbell, California. It is also contemplated that the Company's
board of directors will be restructured in connection with the proposed
transaction.
Closing and effectiveness of the Share Exchange Agreement is subject
to, among other things, approval of the transaction by the affirmative vote or
consent of the majority of holders of voting securities of the Company, the
filing by the Company of a definitive information statement on Securities and
Exchange Commission Schedule 14C, and customary closing conditions. The Company
intends to solicit the consent of Torchmark Holdings Ltd., the holder of a
majority of the voting securities of the Company, to the Share Exchange
Agreement and the transactions contemplated thereby.
The Share Exchange Agreement also provides that each of Brent Haines
and Rick Ramirez, holders of the majority of the shares of common stock of
Reality Networks, and Torchmark and certain of Torchmark's affiliates have
agreed to transfer not more than 50% of the shares of the Company's common stock
held by each of them for a period of 12 months following closing of the Share
Exchange Agreement. Additionally, the Company has agreed to file a registration
statement for not less than 50% of the shares of common stock of the Company
held by each of Brent Haines, Rick Ramirez, Torchmark and certain of Torchmark's
affiliates not less than 120 days after effectiveness of the Share Exchange
Agreement.
The foregoing description of the Share Exchange Agreement and the
related transactions thereto does not purport to be complete and is qualified
entirely by reference to the Share Exchange Agreement attached as Exhibit 10.18
and incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
8
REGULATION
SB NUMBER EXHIBIT
10.15 (8) Form of Note dated September 4, 2001, made by Torchmark to
Dicom.
10.16 (9) Letter of Intent dated October 2, 2001 between Reality
Networks and Dicom
10.17 (10) Form of Amendment No. 1 to Letter of Intent, dated
October 10, 2001.
10.18 Form of Share Exchange Agreement dated November 7, 2001
between Dicom, Reality Networks, the Reality Networks
Shareholders, Torchmark and certain affiliates of
Torchmark.
(8) Incorporated by reference to the exhibits to the registrant's Current Report
on Form 8-K (File No. 000-26369), filed on September 7, 2001.
(9) Incorporated by reference to the exhibits to the registrant's Current Report
on Form 8-K (File No. 000-26369), filed on October 4, 2001.
(10) Incorporated by reference to the exhibits to the registrant's Current
Report on Form 8-K (File No. 000-26369), filed on October 26, 2001.
(b) Reports on Form 8-K.
On July 24, 2001, Dicom filed a Current Report on Form 8-K (File No.
000-26369) stating under "Item 1. Changes in Control of Registrant" that it had
issued 5,032,653 shares of common stock to Torchmark in order to purchase
certain image archiving, retrieval and enhancement software, and that Torchmark
now owns 51% of the voting securities of Dicom. In addition, under "Item 5.
Other Events", Dicom stated generally the reasons why it had entered into that
certain Convertible Loan Agreement (the "Loan Agreement") and Software Purchase
Agreement, both dated July 3, 2001, and both by and between Dicom and Torchmark,
and stated that if a certain loan from Torchmark is not repaid or renegotiated
by September 3, 2001, then Torchmark will have the right pursuant to the terms
of that certain Security Agreement dated July 3, 2001 by and between Dicom and
Torchmark (the "Security Agreement"), to require the Company to deliver and/or
assign all or any portion of the Company's assets and any and all certificates
of title and other documents relating thereto to Torchmark.
On August 31, 2001, Dicom filed a Current Report on Form 8-K (File No.
000-26369) stating under "Item 5.Other Events and Regulation FD Disclosure" that
(i) Dicom is unable to meet certain conditions included in the Loan Agreement;
(ii) on August 28, 2001, Torchmark served notice that Dicom was in breach of the
Loan Agreement; and (iii) pursuant to the Security Agreement dated July 3, 2001
by and between Dicom and Torchmark, Torchmark declared all indebtedness held by
Dicom and owing to Torchmark immediately due and payable.
On September 7, 2001, Dicom filed a Current Report on Form 8-K (File
No. 000-26369) stating under "Item 5.Other Events and Regulation FD Disclosure"
that (i) on September 4, 2001, pursuant to the terms the Security Agreement,
Torchmark required Dicom to deliver and assign to Torchmark substantially all of
Dicom's assets and any and all certificates of title and other documents
relating thereto; (ii) the value of the assets assigned to Torchmark exceeds the
approximately $972,290 owed by Dicom to Torchmark; (iii) pursuant to the
Security Agreement, on September 4, 2001, Torchmark signed a Note payable to
Dicom for $527,709.76, an amount equal to the difference between the value of
the assets assigned to Torchmark and the approximately $972,290 owed by Dicom to
Torchmark; and (iv) Torchmark acknowledged cancellation of Dicom's debt of
approximately $972,290 to Torchmark.
9
On October 4, 2001, Dicom filed a Current Report on Form 8-K (File No.
000-26369) stating under "Item 5.Other Events and Regulation FD Disclosure" that
on October 2, 2001, Dicom Imaging Systems, Inc. and Reality Networks, Inc.
entered into a letter of intent (the "Letter of Intent") proposing a share
exchange of ninety percent (90%) of the Company's shares of common stock for all
the issued and outstanding shares of Reality Networks, this will result in a
change of control of registrant.
On October 26, 2001, Dicom filed a Current Report on Form 8-K (File No.
000-26369), stating under "Item 5. Other Events and Regulation FD Disclosure"
that (i) Dicom cancelled the Note for the principal amount of $527,709.76 dated
September 4, 2001, payable to Dicom from Torchmark; (ii) as consideration for
the cancellation of the Note, Torchmark committed to the payment of
approximately $38,000, which funds are necessary for the payment of certain
expenses related to that certain contemplated exchange of shares of common stock
by and between Dicom and Reality Networks (as reported in Dicom's Current Report
on Form 8-K, filed October 4, 2001 (File No. 000-26369)), including but not
limited to, an extension of directors' and officers' liability insurance,
attorneys' fees, accountancy fees, filing fees for a Securities and Exchange
Commission Schedule 14C, consultancy fees, and costs associated with
distributing an SEC Schedule 14C to the beneficial shareholders of Dicom; and
(iii) extensions of certain termination dates of the Letter of Intent.
SIGNATURES
In accordance with the requirements the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
DICOM IMAGING SYSTEMS, INC.
Date: November 19, 2001 By: /s/ David Gane
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President and Chief Executive Officer
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION OF EXHIBIT
3.1 (1) Articles of Incorporation of the Registrant
3.2 (1) Bylaws of the Registrant
10.1 (2) License Agreement dated March 17, 2000 between Dicom and CLG
Investments Limited
10.2 (3) Settlement Agreement dated September 26, 2000 between Dicom
and CLG Investments Limited
10.3 (4) Marketing Agreement dated October 4, 2000, between Dicom and
Eastman Kodak Company
10.4 (4) Software Bundling and Co-Marketing Agreement dated February
13, 2001, between Dicom and Olympus America Inc.
10.5 (4) Authorized Dealer Agreement dated April 6, 2001, between Dicom
and Dental X Change, Inc.
10.6 (5) Executive Employment Agreement dated November 22, 2000,
between Dicom and Paul Fernandez
10.7 (5) Promissory Note dated November 7, 2000 between Dicom and
Torchmark Holdings Ltd. This Promissory Note replaces the
Promissory Note dated August 16, 2000 that was included in
Form 10-QSB, file number 000-26369, filed on November 14,
2000.
10
10.8 (5) Convertible Loan Agreement dated November 7, 2000 between
Dicom and Torchmark Holdings Ltd.
10.9 (5) Convertible Loan Agreement dated December 21, 2000 between
Dicom and Torchmark Holdings Ltd.
10.10 (5) Convertible Loan Agreement dated February 14, 2001 between
Dicom and Torchmark Holdings Ltd.
10.11 (6) Software Purchase Agreement dated July 3, 2001 between Dicom
and Torchmark Holdings Ltd.
10.12 (6) Convertible Loan Agreement dated July 3, 2001 between Dicom
and Torchmark Holdings Ltd.
10.13 (6) Security Agreement dated July 3, 2001 between Dicom and
Torchmark Holdings Ltd.
10.14 (7) Amendment No. 1 to Software Purchase Agreement dated July 30,
2001 between Dicom and Torchmark Holdings Ltd.
10.15 (8) Form of Note dated September 4, 2001, made by Torchmark to
Dicom.
10.16 (9) Letter of Intent dated October 2, 2001 between Reality
Networks and Dicom
10.17 (10) Form of Amendment No. 1 to Letter of Intent, dated October 10,
2001.
10.18 Share Exchange Agreement dated November 7, 2001 between
Reality Networks and Dicom
(1) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-SB, file number 000-26369.
(2) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-QSB, file number 000-26369, filed on May 16, 2000.
(3) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-QSB, file number 000-26369, filed on November 14, 2000.
(4) Confidential treatment requested.
(5) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-KSB, file number 000-26369, filed on May 17, 2001.
(6) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 8K, file number 000-26369, filed on July 24, 2001.
(7) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-QSB, file number 000-26369, filed on August 14, 2001.
(8) Incorporated by reference to the exhibits to the registrant's Current Report
on Form 8-K (File No. 000-26369), filed on September 7, 2001.
(9) Incorporated by reference to the exhibits to the registrant's Current Report
on Form 8-K (File No. 000-26369), filed on October 4, 2001.
(10) Incorporated by reference to the exhibits to the registrant's Current
Report on Form 8-K (File No. 000-26369), filed on October 26, 2001.
11