U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM_____TO_____.
Commission File Number 0-27106
RSI Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1767211
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7400 Metro Blvd., Suite 475, Minneapolis, Minnesota 55439
(Address of principal executive offices) (Zip Code)
(612) 896-3020
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. YES_X_ NO ___
The Company had 4,769,765 shares of Common Stock, $ 0.01 par value per share,
outstanding as of November 3, 1997.
Transitional Small Business Disclosure Format (Check one): Yes __ No _X_
<PAGE>
RSI Systems, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997
(unaudited) and June 30, 1997 ................................3
Consolidated Statements of Operations (unaudited) - Three
months ended September 30, 1997 and 1996 .....................4
Consolidated Statements of Cash Flows (unaudited)- Three
months ended September 30, 1997 and 1996 .....................5
Notes to Consolidated Financial Statements ...................6
Item 2. Management's Discussion and Analysis .........................8
PART II OTHER INFORMATION ...................................................11
Signatures ...................................................................12
Exhibit Index ................................................................13
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
As Of September 30, 1997 and June 30, 1997
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
Assets (Unaudited)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 518,233 $ 1,152,671
Accounts receivable, net 861,511 747,427
Inventories 538,180 544,613
Prepaid expenses 33,536 41,556
- ---------------------------------------------------------------------------------------------------
Total current assets 1,951,460 2,486,267
- ---------------------------------------------------------------------------------------------------
Property and equipment
Furniture and equipment 719,634 718,998
Leasehold improvements 4,818 4,818
Less accumulated depreciation (393,510) (332,589)
- ---------------------------------------------------------------------------------------------------
Net property and equipment 330,942 391,227
- ---------------------------------------------------------------------------------------------------
Other assets 2,500 2,500
Less accumulated amortization (1,979) (1,979)
------------ ------------
Net other assets 521 521
Total assets $ 2,282,923 $ 2,878,015
===================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable 861,605 1,166,507
Accrued expenses 266,332 363,165
Deferred revenue 88,946 123,989
Line of credit 158,692 --
- ---------------------------------------------------------------------------------------------------
Total current liabilities 1,375,575 1,653,661
- ---------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock ($.01 par value per share, 10,000,000 shares
authorized, 4,769,765 and 4,757,265 issued and
outstanding, respectively) 47,698 47,573
Additional paid-in capital 14,358,256 14,358,381
Unearned compensation (75,001) (100,000)
Accumulated deficit (13,423,605) (13,081,600)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 907,348 1,224,354
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,282,923 $ 2,878,015
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended September 30, 1997 and 1996
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
Net sales $ 1,096,049 433,876
Cost of goods sold 426,732 473,200
- --------------------------------------------------------------------------------
Gross profit (loss) 669,317 (39,324)
Research and development 225,671 482,603
Selling, general, and administrative 768,393 699,026
- --------------------------------------------------------------------------------
Operating loss (324,747) (1,220,953)
Other income (expense):
Interest income (expense), net (16,958) 7,963
Other expense (300) (6,027)
- --------------------------------------------------------------------------------
Other income (expense), net (17,258) 1,936
- --------------------------------------------------------------------------------
Net loss $ (342,005) (1,219,017)
================================================================================
Net loss per common share $ (0.07) (0.37)
================================================================================
Weighted average shares outstanding 4,766,097 3,284,969
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (342,005) (1,219,017)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 60,921 67,609
Unearned compensation 24,999 --
Foreign currency translation -- 81,723
Changes in operating assets and liabilities:
Accounts receivable (114,084) 238,096
Inventories 6,433 13,879
Prepaid expenses 8,020 40,700
Accounts payable (304,902) 240,472
Accrued expenses (96,833) (186,826)
Deferred revenue (35,043) --
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (792,494) (723,364)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to furniture and equipment (636) (79,673)
Proceeds from sale of equipment -- 275
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (636) (79,398)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 3,968,149
Proceeds from line of credit 158,692 --
Other -- 13,102
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 158,692 3,981,251
- ---------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (634,438) 3,178,489
Cash and cash equivalents at beginning of period $ 1,152,671 1,032,921
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 518,233 4,211,410
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RSI SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
1. BASIS OF PRESENTATION:
The unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in the financial statements have been
omitted or condensed pursuant to such rules and regulations. The accompanying
unaudited financial statements should be read in conjunction with the Company's
June 30, 1997 financial statements and related notes included in the Company's
Annual Report on Form 10-KSB.
The financial statements reflect all adjustments, of a normally recurring
nature, necessary to fairly present the results of operations and financial
position of the Company for the interim periods.
Net loss per common share. Net loss per common share amounts are based on the
weighted average number of shares of common stock outstanding. Common stock
equivalents have not been included in the computation as the effect would be
anti-dilutive.
2. PRIVATE OFFERING:
Effective September 30, 1996, the Company sold 1,500,000 shares of common stock
to "accredited investors" through a private offering at a price of $ 3.00 per
share. Net proceeds to the Company from the private placement were approximately
$ 4,000,000. The proceeds are being used to fund continued research and
development, expand sales and marketing activities, purchase capital equipment
and inventory, finance accounts receivable, and for other general corporate
purposes, including working capital.
3. DEBT:
In July, 1997 the Company signed a commercial loan agreement with a bank for a
$1,000,000 discretionary revolving credit facility. Under the terms of the
agreement, working capital funds are drawn based on a borrowing base comprised
of eligible accounts receivable and inventory. The interest rate on the loan is
equal to 4.0 points above a base rate set by the bank.
<PAGE>
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by the forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein. The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of such Act.
Forward looking statements are beyond the ability of the Company to control and
in many cases the Company cannot predict what factors would cause results to
differ materially from those indicated by the forward looking statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RSI Systems, Inc. (the "Company" or RSI) designs, develops, manufactures and
markets telecommunications products for video conferencing.
The Company's primary product, the Video Flyer, is a self-contained, high
performance video conferencing peripheral unit which connects directly to any
size TV, projection system, PC, MAC or laptop (properly configured) and can
support most of the popular industry cameras and recording, playback and
communication devices. The Video Flyer was designed to comply with all industry
video communications primary standards. The Company markets its products
domestically and internationally through a variety of channels, including
authorized resellers, OEM and private lable relationships and direct sales to
major accounts. The Company offers full training and support to its customers
through a variety of materials and programs.
Incorporated under the laws of Minnesota on December 21, 1993 the Company's
early efforts were directed toward the development and introduction to the
marketplace of products which attached directly to personal computers, Macintosh
computers and laptop computers. These activities formed the basis for the
Company's operations through fiscal year 1996. During fiscal year 1997, a new
management team redirected the Company's focus toward the expanding mobile
workgroup video conferencing market segment, culminating in the introduction of
its second generation product - the Video Flyer during the second half of fiscal
year 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales. Net sales for the first quarter of fiscal year 1998 were $ 1,096,049,
up 153% from $ 433,876 in the first quarter of fiscal year 1997. Sales are
derived primarily from video conferencing units, but also include sales of
peripheral equipment used with the systems. The increase in sales in the first
quarter of fiscal year 1998 compared to the first quarter of fiscal year 1997
was a result of higher pricing and higher unit volume associated with the
Company's second generation product - the Video Flyer through the Company's
expanded distribution channels. Although the ultimate effects of competition on
future market price points and unit sales is uncertain, the Company expects
average pricing and unit sales through the remainder of fiscal year 1998 to be
higher than comparable quarters in fiscal year 1997, as a result of a shift to
full production of Video Flyer in the first quarter of fiscal year 1998.
Consequently, the Company expects higher net sales during fiscal year 1998
compared to fiscal year 1997.
Gross Profit (Loss). Gross profit was $669,317 or 61% of sales in the first
quarter of fiscal year 1998 compared to a gross loss of $( 39,324) or ( 9%)
during the first quarter of fiscal year 1997. In addition to carrying a higher
unit price than previous generation products, the Video Flyer also has a lower
unit manufacturing cost, resulting in a higher gross margin per unit. In
addition, the higher cost of goods sold
<PAGE>
relative to sales in the first quarter of fiscal year 1997 reflects discounts
granted to certain customers who took delivery during this period.
Research and Development Expenses. Research and development expenses were $
225,671 for the first quarter of fiscal year 1998, or 21% of sales, compared to
research and development expenses of $ 482,603, or 111% of sales for the first
quarter of fiscal year 1997. The percentage decrease in the first quarter of
fiscal year 1998 was due to higher sales as discussed above as well as a
reduction in the actual dollar spending. During the first quarter of fiscal year
1998 the Company's research and development efforts were directed primarily
toward enhancements to the Video Flyer. In the first quarter of fiscal year
1997, the Company was involved in two simultaneous development efforts - the
completion of a computer-free version of its previous generation system, and
prototype testing of its new Video Flyer.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses were $ 768,393 in the first quarter of fiscal year 1998,
or 70% of sales, compared to $699,026, or 161% of sales for the first quarter of
fiscal year 1997. The percentage decrease was due to higher sales in the first
quarter of fiscal year 1998 as discussed above. The higher dollar spending in
the current fiscal quarter reflects increased selling and product promotion
activity.
Other Income (Expense). Other income (expense) was $(17,258) in the first
quarter of fiscal year 1998, compared to $1,936 in the first quarter of fiscal
year 1997. In the first quarter of fiscal year 1998, the higher amount of other
(expense) was associated with interest charges on inventory procured by the
Company's third party manufacturer on behalf of the Company to support required
lead times.
As a result of the foregoing, the net loss for the first quarter of fiscal year
1998 was $(342,005), or $(.07) per common share, compared to a net loss of
$(1,219,017), or $(.37) per common share in the first quarter of fiscal year
1997.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
Net cash used in operating activities was ($ 792,494) in the first quarter of
fiscal year 1998, compared to $( 723,364) in the first quarter of fiscal year
1997. While the net loss in the first quarter of fiscal year 1998 of $( 342,005)
was considerably lower than the net loss in the first quarter of fiscal year
1997 of $(1,219,017), the Company used a higher amount of cash for operations in
the first quarter of fiscal year 1998 as a result of an increase in accounts
receivable and a decrease in accounts payable and accrued expenses during the
first quarter of fiscal year 1998. The decrease in accounts payable and accrued
expenses during the first quarter of fiscal year 1998 was due to efforts by the
Company to bring payments to certain key vendors in line with established terms.
The impact on cash from operations of reductions in accounts payable and accrued
expenses was partially offset by an increase in the Company's outstanding line
of credit.
During the first quarter of fiscal year 1998, the Company signed a commercial
loan agreement with a bank for a $1,000,000 discretionary revolving credit
facility, and in September 1997, the Company first borrowed against the line of
credit. Under the terms of the agreement, working capital funds are drawn based
on a borrowing base comprised of a percentage of eligible accounts receivable
and inventory.
<PAGE>
Through September 30 , 1997, cash requirements of the Company have been funded
primarily by cash received from equity investments in the Company and its new
credit facility. At September 30, 1997 the Company had cash and cash equivalents
of $518,233, an outstanding line of credit balance of $158,692 and borrowing
capability of approximately $ 304,000 on the revolving credit facility.
The Company believes remaining funds from the private placement and funds from
the line of credit will be sufficient to cover cash needs until sufficient cash
flow from operations can be achieved. Management plans to continue to increase
sales and improve operating results by expanding distribution of its products
through an expanded dealer network, enhanced dealer support services and
additional emphasis on larger, national and OEM/private lable accounts. In the
event sales do not materialize at expected rates, management would conserve cash
by reducing administrative expenses, sales and marketing expenses and research
and development expenses. To the extent that the Company requires cash in excess
of the funds generated by the private placement, its line of credit or future
operations, management would seek additional financing, however no formal
arrangements have been made in this regard and no assurance can be made that any
such financing would be available on favorable terms or at all.
New Accounting Pronouncements
Beginning in the second quarter of fiscal year 1998, the Company will be
required to adopt the provisions of Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (SFAS No. 128). Under SFAS No. 128, companies are
required to present basic and diluted earnings per share instead of primary and
fully diluted earnings per share as required by Accounting Principles Board
Opinion No. 15 "Earnings per Share" (APB No. 15). Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed in the same manner as basic earnings per share except that
the weighted average number of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding if all
potentially dilutive common shares had been issued using the treasury stock
method.
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
RSI Systems, Inc.
Dated: November 14, 1997 By: /s/ Donald C. Lies
-------------------------
Donald C. Lies
Its President & Chief Executive Officer
By: /s/ James D. Hanzlik
-------------------------
James D. Hanzlik
Its Chief Financial Officer
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Item No. Title of Document Method of Filing
-------- ----------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 518,233
<SECURITIES> 0
<RECEIVABLES> 861,511
<ALLOWANCES> 0
<INVENTORY> 538,180
<CURRENT-ASSETS> 1,951,460
<PP&E> 330,942
<DEPRECIATION> 393,510
<TOTAL-ASSETS> 2,282,923
<CURRENT-LIABILITIES> 1,375,575
<BONDS> 0
0
0
<COMMON> 47,698
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,282,923
<SALES> 1,096,049
<TOTAL-REVENUES> 1,096,049
<CGS> 426,732
<TOTAL-COSTS> 426,732
<OTHER-EXPENSES> 994,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,958
<INCOME-PRETAX> (342,005)
<INCOME-TAX> 0
<INCOME-CONTINUING> (342,005)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (342,005)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
