SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
RSI SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
ANNUAL MEETING
RSI SYSTEMS, INC.
One Corporate Plaza
7400 Metro Boulevard, Suite 475
Edina, Minnesota 55439
TO THE SHAREHOLDERS OF RSI SYSTEMS, INC.:
You are cordially invited to attend our Annual Meeting of Shareholders
to be held on December 19, 1997, at 10:00 a.m., local time, at the Radisson
Hotel South in Bloomington, Minnesota.
The formal Notice of Meeting, Proxy Statement and form of proxy are
enclosed.
Whether or not you plan to attend the meeting, please date, sign and
return the enclosed proxy in the envelope provided as soon as possible so that
your vote will be recorded.
Very truly yours,
Donald C. Lies
Chairman of the Board
November ______, 1997
PLEASE SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD PROMPTLY
TO SAVE THE COMPANY THE EXPENSE
OF ADDITIONAL SOLICITATION.
<PAGE>
RSI SYSTEMS, INC.
One Corporate Plaza
7400 Metro Boulevard, Suite 475
Edina, Minnesota 55439
------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 19, 1997
-----------------------------
TO THE SHAREHOLDERS OF RSI SYSTEMS, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of RSI
Systems, Inc. (the "Company") will be held on December 19, 1997, at 10:00 a.m.,
local time, at the Radisson Hotel South in Bloomington, Minnesota for the
following purposes:
1. To elect two directors to serve for three year terms or until
their successors are elected and qualified;
2. To consider and act upon a proposal to amend the restated
Articles of Incorporation to eliminate the Company's three
different classes of directors in favor of one class of
directors to be elected annually.
3. To consider and act upon a proposal to amend the Company's
1994 Stock Option Plan to increase the number of shares of
Common Stock reserved for issuance by 300,000 shares and to
increase the options issuable to non-employee directors.
4. To consider and act upon a proposal to ratify the appointment
of KPMG Peat Marwick LLP, certified public accountants, as
independent auditors for the Company for the year ending June
30, 1998.
5. To consider and act upon such other matters as may properly
come before the meeting or any adjournment thereof.
The close of business on November 3, 1997 has been fixed as the record
date for the determination of shareholders who are entitled to vote at the
meeting or any adjournments thereof.
By Order of the Board of Directors,
Donald C. Lies
CHAIRMAN OF THE BOARD
November ______, 1997
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YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. NO ADMISSION
TICKET OR OTHER CREDENTIALS WILL BE NECESSARY. IF YOU DO NOT PLAN TO ATTEND THE
MEETING, PLEASE BE SURE YOU ARE REPRESENTED AT THE MEETING BY MARKING, SIGNING,
DATING AND MAILING YOUR PROXY CARD IN THE REPLY ENVELOPE PROVIDED.
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<PAGE>
RSI SYSTEMS, INC.
One Corporate Plaza
7400 Metro Boulevard, Suite 475
Edina, Minnesota 55439
-------------------
PRELIMINARY PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 19, 1997
INTRODUCTION
The Annual Meeting of Shareholders (the "Annual Meeting") of RSI
Systems, Inc. (the "Company") will be held on December 19, 1997, at 10:00 a.m.,
local time, at the Radisson Hotel South in Bloomington, Minnesota, or at any
adjournment or adjournments thereof, for the purposes set forth in the Notice of
Annual Meeting of Shareholders.
A proxy card is enclosed for your use. You are solicited on behalf of
the Board of Directors to SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING
ENVELOPE. No postage is required if mailed within the United States. The cost of
soliciting proxies, including the preparation, assembly and mailing of the
proxies and soliciting material, as well as the cost of forwarding such material
to the beneficial owners of the Company's Common Stock, will be borne by the
Company. Directors, officers and regular employees of the Company may, without
compensation other than their regular compensation, solicit proxies by
telephone, telegraph or personal conversation. The Company may reimburse
brokerage firms and others for expenses in forwarding proxy materials to the
beneficial owners of Common Stock.
Any shareholder giving a proxy may revoke it at any time prior to its
use at the Annual Meeting either by giving written notice of such revocation to
the Secretary of the Company, by filing a duly executed proxy bearing a later
date with the Secretary of the Company, or by appearing at the Annual Meeting
and filing written notice of revocation with the Secretary of the Company prior
to use of the proxy. Proxies will be voted as specified by shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE PROPOSALS SET FORTH IN THE NOTICE OF MEETING.
The Company expects that this proxy material will first be mailed to
shareholders on or about November ____, 1997.
<PAGE>
VOTING OF SHARES
Only holders of Common Stock of record at the close of business on
November 3, 1997 will be entitled to vote at the Annual Meeting. On November 3,
1997, the Company had 4,769,765 outstanding shares of Common Stock, each such
share entitling the holder thereof to one vote on each matter to be voted on at
the Annual Meeting. The presence at the Annual Meeting, either in person or by
proxy, of the holders of a majority of the outstanding shares of Common Stock
entitled to vote at the meeting is required for a quorum for the transaction of
business at the Annual Meeting. In general, shares of Common Stock represented
by a properly signed and returned proxy card will be counted as shares present
and entitled to vote at the Annual Meeting for purposes of determining a quorum,
without regard to whether the proxy card reflects abstentions (or is left blank)
or reflects a "broker non-vote" on a matter (I.E., a card returned by a broker
on behalf of its beneficial owner customer that is not voted on a particular
matter because voting instructions have not been received and the broker has no
discretionary authority to vote). Holders of shares of Common Stock are not
entitled to cumulate voting rights.
Except for the election of directors to the Board of Directors, all
other proposals that may come before the Annual Meeting described in this Proxy
Statement require the approval of a majority of the shares present and entitled
to vote, either in person or by proxy, on that matter. Directors shall be
elected by a plurality of the votes cast by holders of shares entitled to vote,
either in person or by proxy. Shares represented by a proxy card including any
broker non-votes on a matter will be treated as shares not entitled to vote on
that matter, and thus will not be counted in determining whether that matter has
been approved. Share represented by a proxy card voted as abstaining on any of
the proposals will be treated as shares present and entitled to vote that were
not cast in favor of a particular matter, and thus will be counted as votes
against that matter.
ELECTION OF DIRECTORS
NOMINATION
The Restated Bylaws of the Company provide that the number of directors
shall be not less than three or more than seven, as may be designated by the
Board of Directors from time to time. The Board of Directors (the "Board") has
set its size at four and has nominated the two individuals set forth below to
serve as directors of the Company for three year terms or until their respective
successors have been elected and qualified. All of the nominees are members of
the current Board.
The Board recommends a vote FOR the election of each of the nominees
listed below. In the absence of other instructions, the proxies will be voted
FOR the election of the nominees named below. If, prior to the Annual Meeting,
the Board should learn that any nominee will be unable to serve by reason of
death, incapacity or other unexpected occurrence, the proxies that otherwise
would have been voted for such nominee will be voted for such substitute nominee
as selected by the Board. Alternatively, the proxies, at the Board's discretion,
may be voted for such fewer number of nominees as results from such death,
incapacity or other unexpected occurrence. The Board has no reason to believe
that any of the nominees will be unable to serve.
<PAGE>
<TABLE>
<CAPTION>
INFORMATION ABOUT NOMINEES AND OTHER DIRECTORS
NAME OF NOMINEES AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---------------- --- -------------------- --------------
<S> <C>
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2000:
Donald C. Lies 49 Chief Executive Officer and July 1996
President of the Company
Byron G. Shaffer 64 Private Investor February 1995
DIRECTOR NOT STANDING FOR ELECTION THIS YEAR WHOSE TERM EXPIRES IN 1998:
Richard F. Craven 54 Private Investor December 1993
DIRECTOR NOT STANDING FOR ELECTION THIS YEAR WHOSE TERM EXPIRES IN 1999:
David W. Stassen 45 President and Chief Executive June 1995
Officer of Spine-Tech, Inc.
</TABLE>
DONALD C. LIES became President, Chief Executive Officer and a director
of the Company on July 1, 1996. Before joining the Company, Mr. Lies founded
CHORUS Marketing Group in May of 1989 and served as its President until June of
1996. CHORUS specialized in both reengineering of management and marketing and
sales processes for a variety of office and factory automation systems
manufacturers and service providers. From 1987 to 1989, Mr. Lies served as the
Vice President of Marketing and Sales for Com Squared Systems, a computer
software design, manufacturing and reselling company. From 1985 to 1987, Mr.
Lies was director of Scanning Products Marketing for commercial products at
National Computer Systems. Prior to that, Mr. Lies served as General Manager and
Vice President for Norstan, Inc. in its information systems division for five
years. Before joining Norstan, Mr. Lies was in sales for the office systems
group of IBM. Mr. Lies is the brother-in-law of David W. Stassen who is also a
director of the Company.
BYRON G. SHAFFER has served as a director of the Company since February
1995. Mr. Shaffer has been a private investor for the last 20 years and has also
served as a director of Mentor Corporation, a medical products manufacturer,
since 1976.
DAVID W. STASSEN was elected as a director of the Company in June 1995.
He has served as President and Chief Executive Officer of Spine-Tech, Inc., a
manufacturer of spinal implants, since June
<PAGE>
1992 and as a director since June 1991. From January 1990 until June 1992, Mr.
Stassen served as Executive Vice President of St. Paul Venture Capital, Inc. He
is also a director of Avecor Cardiovascular, Inc., a medical products company.
Mr. Stassen is the brother-in-law of Donald C. Lies who is the Chief Executive
Officer, President and a director of the Company.
RICHARD F. CRAVEN, a founder of the Company, has served as a director
since its inception in December 1993. Mr. Craven is a private investor and has
been involved as a manager, owner and developer in several real estate ventures.
He has been a licensed real estate broker and a licensed insurance agent since
1965. Mr. Craven is also a director of VideoLabs, Inc.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The business and affairs of the Company are managed by the Board of
Directors, which held eight meetings during fiscal 1997. Pursuant to the current
terms of the Company's restated Articles of Incorporation, the directors are
divided into three classes with the term of one class expiring each year. As the
term of each class expires, the successors to the directors in that class will
be elected for a term of three years. This board has submitted a proposal for
approval at the Annual Meeting of Shareholders to amend the restated Articles of
Incorporation to eliminate the classified board in favor of a single class
board.
The terms of Messrs. Lies and Shaffer expire at the year 2000 Annual
Meeting of Shareholders. The term of Mr. Craven expires at the 1998 Annual
Meeting of Shareholders, and the term of Mr. Stassen expires at the 1999 Annual
Meeting of Shareholders. If the Shareholders approve the proposal to amend the
restated Articles of Incorporation to eliminate the classified Board, all
directors' terms will expire at the 1998 Annual Meeting of Shareholders.
Effective October 1997, three directors of the Company, Mr. Richard J.
Braun, Mr. William J. Brummond and Mr. Dennis A. Leese
<PAGE>
resigned as members of the board and Donald C. Lies was elected Chairman of the
Board.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Messrs. Stassen,
Shaffer and Craven, supervises the financial affairs of the Company and
generally reviews the results and scope of the audit and other services provided
by the Company's independent accountants and reports the results of their review
to the full Board and to the Company's management. The audit committee held one
meeting during fiscal year 1997. The Compensation Committee, which consists of
Messrs. Stassen, Shaffer and Craven, has general responsibility for management
of compensation matters, including recommendations to the Board of Directors on
compensation arrangements for officers and incentive compensation for employees
of the Company. The Compensation Committee held two meetings during fiscal year
1997.
All of the directors of the Company attended 75% or more of the
aggregate meetings of the Board and all such committees on which they served.
DIRECTOR COMPENSATION
The Board of Directors of the Company has established the following
compensation policies for directors of the Company. Non-employee directors
receive $100 for each meeting attended. Also, under the Company's 1994 Stock
Plan, each non-employee director is granted, upon election to the Board, an
option to purchase 10,000 shares of Common Stock, exercisable at fair market
value on the date of grant and vesting in equal increments of 25% every three
months and expiring ten years from the date of grant. After the year a
non-employee director is first elected to the Board, such non-employee director
will also receive annually, at the time of the Annual Meeting of Shareholders,
an option to purchase 5,000 shares of Common Stock exercisable at fair market
value on the date of grant, vesting in equal increments of 25% every three
months and expiring ten years from the date of grant. Existing directors who are
employees of the Company receive no additional compensation for serving as
directors.
<PAGE>
PRINCIPAL SHAREHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of November 3, 1997, the number
of shares of the Company's Common Stock beneficially owned by: (i) each director
of the Company; (ii) the Chief Executive Officer and other most highly
compensated executive officers of the Company whose salary and bonus exceeded
$100,000 in fiscal 1997 (the Named Executive Officers); (iii) each shareholder
who is known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock; and (iv) all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and dispositive
power over such shares. Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or member of a group to acquire them within 60
days are treated as outstanding only when determining the amount and percent
owned by such group or person. The address for all directors and officers of the
Company is 7400 Metro Boulevard, Suite 475, Minneapolis, MN 55439.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
- ---- ------------------ ----------------
Donald C. Lies........................ 281,600 (1) 5.6
Dennis A. Leese....................... 299,450 (2) 6.2
Richard F. Craven..................... 841,750 (3) 17.1
Byron G. Shaffer...................... 241,750 (4) 5.0
David W. Stassen...................... 28,750 (5) *
All Current Executive Officers and 1,693,300 (6) 32.1
Directors as a Group (7 persons).
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* Indicates ownership of less than 1%.
(1) Includes 261,250 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes 36,750 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(3) Includes (i) 155,250 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 15,000 shares owned
by Mr. Craven's three children.
(4) Includes (i) 46,250 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 28,000 shares owned
by Mr. Shaffer's four children.
(5) Includes 13,750 shares which may be acquired within 60 days upon the
exercise of stock options.
(6) Includes 513,250 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
<PAGE>
EXECUTIVE COMPENSATION AND OTHER BENEFITS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered for the years ended June 30, 1995, 1996 and 1997
to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal 1997 and (ii) the Named Executive Officers. Other than those
individuals listed below, no executive officer of the Company received cash
compensation of more than $100,000 in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
-----------------------------
RESTRICTED ALL OTHER
FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) ($)
- --------------------------- ---- --------- -------- --------- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 1997 $150,000 $0 $200,000 215,000 $7,800
CHIEF EXECUTIVE OFFICER (1)
AND PRESIDENT
</TABLE>
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(1) On July 1, 1996, the Company granted Donald C. Lies 25,000 shares of
restricted common stock vesting in equal increments of 25% of such
shares at each interval of six months from July 1, 1996, so long as Mr.
Lies remains employed by the Company. On June 30, 1997, Mr. Lies owned
18,750 shares of the restricted stock and 6,250 shares of unrestricted
stock pursuant to the agreement, with an aggregate value of $40,625
based on the June 30, 1997 closing bid price of the Company's Common
Stock of $1.625 per share.
OPTION GRANTS AND EXERCISES
The tables below set forth information about the stock options held by
the Named Executive Officer and the potential realizable value of the options
held by such person on June 30, 1997. No stock options were exercised by the
named executive officer of the Company during fiscal year 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION
NAME OPTIONS GRANTED(#)(1) IN FISCAL YEAR 1997 PRICE($/sh) DATE
- ---- --------------------- ------------------- ----------- ----
<S> <C> <C> <C> <C>
Donald C. Lies 110,000(2) 22.0% $8.00 June 30, 2006
CHIEF EXECUTIVE OFFICER 5,000(3) 1.0% $1.38 February 5, 2007
AND PRESIDENT 100,000(4) 20.0% $1.13 April 13, 2002
</TABLE>
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(1) During fiscal year 1997, options to acquire an aggregate of 500,000
shares of Common Stock were granted to all employees and options to
acquire 70,000 shares of Common Stock were granted to non-employee
directors.
(2) 110,000 options were granted to Mr. Lies on July 1, 1996. The options
become vested and exercisable in installments of 27,500 every six
months commencing six months after the date of the grant.
(3) 5,000 options were granted to Mr. Lies on February 6, 1997. The options
become vested and exercisable in
<PAGE>
quarterly installments of 1,250 commencing three months after the date
of the grant.
(4) 100,000 options were granted to Mr. Lies on April 14, 1997, and 75,000
were vested and exercisable on the date of the grant. The remaining
25,000 options become vested and exercisable in annual installments of
8,333 commencing one year after the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT JUNE 30, 1997 (#) AT JUNE 30, 1997 ($)(1)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 0 $0 103,750 111,250 $37,812 $13,438
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
</TABLE>
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(1) Based on the June 30, 1997, closing bid price of the Company's Common
Stock of $1.625 per share.
EMPLOYMENT AGREEMENTS
The Company and Donald C. Lies have entered into an employment
agreement, dated as of July 1, 1996, which provides that Mr. Lies will receive
the following: (i) an annual salary of $150,000; (ii) a grant of 25,000 shares
of restricted Common Stock vesting in equal increments of 25% of such shares at
each interval of six months from the effective date of Mr. Lies employment, so
long as Mr. Lies remains employed by the Company; (iii) a grant of options to
purchase 110,000 shares of Common Stock at $8.00 per share, vesting in equal
increments of 25% of such options at each interval of six months from July 1,
1996, so long as Mr. Lies remains employed by the Company; and (iv) an
automobile allowance of $650 per month. In fiscal year 1997, an arrangement in
which Donald C. Lies was to purchase 110,000 shares of the Company's Common
Stock at $3.00 per share was terminated prior to it's consummation. In addition
to the foregoing, Mr. Lies is entitled to all other benefits available generally
to employees of the Company, including vacation and health benefits.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Richard Craven, a director of the Company, is a director of
VideoLabs, Inc. ("VideoLabs"), a Minneapolis, Minnesota based manufacturer of
video cameras. Both Mr. Craven and Douglas Clapp, a former officer of the
Company, are beneficial owners of more than 5% of the outstanding shares of
VideoLabs. In December 1993, the Company purchased certain videoconferencing
technology from VideoLabs and issued to VideoLabs a convertible promissory note
in the amount of $100,000. In May 1995, VideoLabs converted its note into 88,888
shares, 25,000 shares of which were sold in July 1995. In addition, the Company
has purchased FlexCam cameras from VideoLabs and sold them as optional equipment
in connection with the sales of video conferencing systems. From inception until
June 30, 1995, the Company's purchases from VideoLabs totaled $22,740. Net
purchases by the Company from VideoLabs were approximately $8,972, and $57,140
during fiscal year 1997 and 1996 respectively. The Company believes its
transactions with VideoLabs have been on terms no less favorable than could have
been obtained from unaffiliated third parties on an arm's length basis.
<PAGE>
Mr. Richard Craven, a director of the Company, is the father-in-law of
the owner/partner of Pointe Design, which is a Minneapolis, Minnesota based
company that designs and prints advertising and other marketing tools. The
Company has used Pointe Design's services to print marketing brochures and other
advertising media. Net purchases by the Company from Pointe Design totaled
$97,500 and $28,661 during fiscal year 1997 and 1996 respectively.
The Company was required to obtain a letter of credit in the amount of
$1,000,000 in favor of AT&T Corporation in September 1994. Richard F. Craven,
the Company's Chairman of the Board of Directors, pledged certain of his
personal assets to secure his personal guarantee in order to obtain such letter
of credit. In consideration of the personal guarantee, the Company issued Mr.
Craven warrants to purchase 200,000 shares of the Company's Common Stock at
$1.00 per share. The Company believes its transactions with Mr. Craven are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.
The Company was also required to obtain a letter of credit in the
amount of $250,000 in favor of AT&T Corporation in December 1994. Byron G.
Shaffer, a director of the Company, and his spouse pledged certain of their
personal assets to secure a personal guarantee in order to obtain such letter of
credit. In consideration of the personal guarantee, the Company issued Mr.
Shaffer a warrant to purchase 25,000 shares of the Company's Common Stock at
$2.00 per share. The Company believes its transactions with Mr. Shaffer are on
terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis. The letter of credit has now expired.
In May 1996, the Company obtained a letter of credit in the amount of
$600,000 in favor of Lucent. Messrs. Craven and Shaffer, directors of the
Company, pledged certain personal assets to secure their personal guarantees of
this letter of credit. In consideration of these directors' guarantees, the
Company issued each of Messrs. Craven and Shaffer a warrant to purchase 7,500
shares of Common Stock with an exercise price equal to the market price of the
Common Stock on the date of the warrant, which was $8.00 per share on May 22,
1996. The warrants expire on May 22, 2000. The terms of the warrants provide
that if, during the one year term of the letter of credit, the Company secures
additional financing pursuant to a private placement or registered secondary
offering of securities, the warrant exercise price would be reduced to the price
at which such securities are offered to investors. In connection with the recent
private placement completed by the Company, on September 30, 1996, the exercise
price of the warrants was reduced to $3.00 per share. The Company believes the
foregoing transactions with Messrs. Craven and Shaffer are on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's length basis.
PROPOSAL TO AMEND THE RESTATED
ARTICLES OF INCORPORATION
TO ELIMINATE THE COMPANY'S THREE CLASSES OF
DIRECTORS IN FAVOR OF ONE CLASS ELECTED ANNUALLY
The Company's Restated Articles of Incorporation currently provide that
the directors of the Company shall be divided into three classes as nearly equal
in number as possible, with the term of office of one class expiring each year
at the regular meeting of shareholders. Each director is elected to hold office
for a term of three consecutive years and until a successor has been elected an
qualified. One effect of this classified board structure is to render it more
difficult for shareholders to change the composition of the board of directors
because only one-third of the directors may be voted upon in any year. The
classified board structure also renders it more difficult for a purchaser of a
significant percentage of the Company's
<PAGE>
stock to effect a change in management. This tends to discourage potential
acquirers of the Company who do not have the support of the directors.
The Board of Directors has determined that the classified board
structure is an unnecessary anti-takeover device and does not serve the
interests of the Company's shareholders. The Company believes that the election
by shareholders of the entire board each year will enhance the responsiveness of
the board to shareholder concerns.
Accordingly, the Board of Directors has proposed that Article V of the
Company's Restated Articles of Incorporation be amended to provide that the
entire board of directors be elected each year for a one-year term. As so
amended, the provisions of Article V, Sections 1, 2 and 3 of the Restated
Articles of Incorporation would read as set forth in Appendix A hereto.
The Board of Directors recommends that the shareholders vote FOR the
approval of the proposed amendment to the Restated Articles of Incorporation.
The affirmative vote of the holders of a majority of shares of Common Stock of
the Company entitled to vote, present in person or by proxy at the Annual
Meeting is necessary for approval. Unless a contrary choice is specified, all
proxies solicited by the Board will be voted FOR approval of the proposed
amendment.
PROPOSAL TO AMEND THE 1994 STOCK PLAN
INTRODUCTION
In November 1994, the Board adopted the RSI Systems, Inc. 1994 Stock
Plan (the 1994 Plan), which was approved by the Company's shareholders in
February 1995. An aggregate of 120,000 shares of the Company's Common Stock was
initially reserved for issuance under the 1994 Plan. In 1995, the Board amended
the 1994 Plan, which amendments were approved by the shareholders, to increase
the number of shares of Common Stock reserved for issuance under the 1994 Plan
to 400,000 shares. In February 1997, the Board again amended the 1994 Plan,
which amendments were approved by the shareholders, to increase the maximum
number of shares authorized to be issued under the 1994 Plan from 400,000 shares
to 600,000 shares.
In October 1997, the Board again amended the 1994 Plan, subject to
shareholder approval, to increase the maximum number of shares authorized to be
issued under the 1994 Plan from 600,000 to 900,000 shares and to increase the
number of options automatically granted to non-employee directors of the
Company.
The purpose of the 1994 Plan is to enable the Company to retain and
attract executives and other key employees, non-employee directors and
consultants who contribute to the Company's success by rewarding them with an
opportunity to acquire an equity interest in the Company, thereby increasing
their personal interest in the Company's long-term success and growth. Along
with the proposed amendments the major features of the 1994 Plan are summarized
below, which summary is qualified in its entirety by reference to the full text
of the 1994 Plan, a copy of which may be obtained from the Company.
AMENDMENT
In addition to the shares of Common Stock directly reserved for
issuance under the 1994 Plan, the 1994 Plan also provides that if any shares
which have been optioned cease to be subject to stock options, or
<PAGE>
if any shares subject to any restricted stock award granted hereunder are
forfeited or such award otherwise terminates without a payment being made to the
participant, such shares shall again be available for distribution in connection
with future awards under the 1994 Plan. As of November 3, 1997, options were
outstanding under the 1994 Plan to purchase an aggregate of 590,750 shares. The
proposed amendment to the 1994 Plan, if adopted by the Company's Shareholders
would increase in the number of shares reserved for issuance under the 1994 Plan
by 300,000 shares, thus permitting the Company to continue the operation of the
1994 Plan for the benefit of new participants and to allow additional awards to
current participants. If this amendment is approved, 309,250 shares of Common
Stock will be available for future grants (in addition to any other shares which
are contributed to the 1994 Plan from unexercised stock options and forfeited or
terminated awards). The Company anticipates that it will issue additional
options in the future to the extent that a sufficient number of shares are
reserved for issuance under the 1994 Plan.
The 1994 Plan provides that upon first being elected to the Board,
non-employee Directors are automatically granted an option to purchase 10,000
shares of common stock at fair market value on the date of grant. After the year
a non-employee director is first elected, non-employee directors annually
receive an option to purchase 5,000 shares of stock at fair market value on the
date of grant. Existing directors who are employees of the company receive no
additional compensation for services as directors. The proposed amendment to the
1994 Plan, if approved by the Company's Shareholders, would increase the number
of options to purchase shares of stock by new non-employee directors to 20,000
and would provide a one time grant of 20,000 options to purchase shares of
Common Stock to existing non-employee directors at fair market value on the date
of grant.
SUMMARY OF THE 1994 PLAN
GENERAL. The 1994 Plan permits the granting of awards to eligible
employees of: (i) stock options to purchase Common Stock that qualify as
"incentive stock options" ("Incentive Options"), within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) options
to purchase Common Stock that do not qualify as such Incentive Options, and thus
constitute non-qualified stock options ("Non-Qualified Options") (Incentive
Options and Non-Qualified Options are collectively referred to as "Options");
and (iii) restricted stock awards ("Restricted Stock Awards") (Options and
Restricted Stock Awards are collectively referred to as "Awards"). Eligible
employees under the 1994 Plan include executive officers, other key employees,
non-employee directors, consultants and other persons having a contractual
relationship with the Company who are responsible for or contribute to the
management, growth and/or profitability of the business of the Company.
The 1994 Plan is administered by the Compensation Committee, which
selects the eligible employees to be granted Awards under the 1994 Plan,
determines the type of Award and the amount of the grants to the participants,
and determines the discretionary terms and conditions of any Award granted under
the 1994 Plan. The Compensation Committee may delegate to officers of the
Company the authority to select employees for Awards who are not officers of the
Company.
The 1994 Plan provides that no Incentive Option shall be granted under
the 1994 Plan after October 31, 2004. The Compensation Committee determines the
period for which Options shall be exercisable, but in no event may an Incentive
Option be exercisable more than ten years after the date the option is granted
or five years after the date of grant if the grantee of such an Incentive Option
is a person who owns, or is deemed to own, more than 10% of the combined voting
power of all classes of stock of the Company. In the event of any merger,
reorganization, consolidation, recapitalization, stock dividend, or other change
in corporate structure affecting the Common Stock, or spin-off or other
distribution of assets to shareholders, appropriate adjustments will be made by
the Compensation Committee to: (i) the number
<PAGE>
of shares reserved for issuance under the 1994 Plan, (ii) the number and
exercise price of shares subject to outstanding Options granted under the 1994
Plan; and (iii) the number of shares subject to Restricted Stock Awards granted
under the 1994 Plan.
The Board may amend or discontinue the 1994 Plan, but no amendment or
discontinuation shall be made which would impair the rights of a holder of an
Award without such holder's consent, or which would without the approval of the
stockholders of the Company, cause the 1994 Plan to no longer comply with
appropriate securities or other laws. The Compensation Committee may amend the
terms of any Award granted, but no such amendment shall impair the rights of any
holder without his or her consent, except to the extent authorized under the
1994 Plan.
OPTIONS. Options are exercisable at such time or times as determined by
the Compensation Committee at or after the date of grant, and may be exercised
in whole or in part (as determined by the Compensation Committee) at any time
during the option period by giving notice of exercise to the Company specifying
the number of shares to be purchased. The exercise price for Options shall be
determined by the Compensation Committee at the date of grant. In no event,
however, shall the exercise price per share under an Incentive Option be less
than 100% of the Fair Market Value (as defined below) of the Common Stock on the
date of grant of the Option. If an Incentive Option is granted to a person who
owns, or is deemed to own, 10% of the combined voting power of all classes of
stock of the Company, the exercise price shall be no less than 110% of the Fair
Market Value (as defined below) of Common Stock on the date the Option is
granted. The Fair Market Value of the Company's Common Stock on a given date is
determined by the Compensation Committee in accordance with the applicable
Treasury Department regulations under Section 422 of the Code with respect to
"Incentive Stock Options." Notwithstanding any other provisions of the 1994 Plan
to the contrary, the aggregate Fair Market Value of Common Stock with respect to
any Incentive Option exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
AUTOMATIC OPTION GRANT TO NON-EMPLOYEE DIRECTORS. Each non-employee
director shall, as of the date he or she is first elected to the Board,
automatically be granted a Non-Qualified Option to purchase 10,000 shares of
Common Stock at an exercise price per share equal to 100% of the Fair Market
Value of a share of stock on such date. The term of such Non-Qualified Option
shall be ten years, which shall not expire upon the termination of service as a
director. Such Non-Qualified Option shall be exercisable in equal increments of
25% of the total shares subject to the option every three-month period during a
period of one year following the date of grant. After a non-employee director is
first elected to the Board, such non-employee director will also receive at the
time of the Annual Meeting of Shareholders each year, an option to purchase
5,000 shares of Common Stock, at an exercise price equal to 100% of the Fair
Market Value of a share of Common Stock on such date.
Payment of an option exercise price may be made either by certified or
bank check, or in any other form of legal consideration deemed sufficient by the
Compensation Committee and consistent with the 1994 Plan's purpose and
applicable law, including promissory notes and unrestricted stock already owned
by the optionee. Options may not be transferred other than by will or the laws
of descent and distribution, and all Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
In the event of the sale by the Company of substantially all of its
assets and the consequent discontinuance of its business, or in the event of a
merger, exchange, consolidation or liquidation of the Company, the Board shall,
in its sole discretion, provide for one or more of the following: (i)
acceleration of the vesting of any outstanding Options; (ii) termination of the
1994 Plan and cancellation of all outstanding Options not exercised prior to a
specified date (which date shall give optionees a reasonable
<PAGE>
period of time in which to exercise vested Options prior to the effectiveness of
any sale, merger, exchange, consolidation or liquidation) or (iii) continuation
of the 1994 Plan and assumption of the Options by the surviving corporation.
RESTRICTED STOCK AWARDS. Restricted Stock Awards are grants to
participants of shares of Common Stock that are subject to restrictions and the
possibility of forfeiture for a period of time set by the Compensation Committee
during which the participant must remain continuously employed by the Company.
If, before the expiration of this period, the participant ceases to be an
employee for any reason other than death, retirement or disability, or in the
event of an unforeseeable emergency of a participant still in service of the
Company, and the Compensation Committee finding that a waiver of the
restrictions would be in the best interest of the Company, then the shares
received pursuant to the Restricted Stock Award shall be forfeited to the
Company. Unless otherwise specifically provided, holders of Restricted Stock
Awards shall have all the rights of a shareholder of the Company, including the
right to vote the shares and to receive any dividends.
The recipient of a Restricted Stock Award shall not be permitted to
sell, transfer, pledge or assign shares awarded under the 1994 Plan for a period
set by the Compensation Committee. In no event, however, shall the restriction
period be less than one year. Notwithstanding the foregoing, all restrictions
with respect to any participant's shares of a Restricted Stock Award shall lapse
on the date determined by the Compensation Committee, prior to the occurrence of
any of the following events: (i) dissolution or liquidation of the Company,
other than in conjunction with a bankruptcy; (ii) any merger, consolidation,
acquisition, separation, reorganization or similar occurrence, where the Company
will not be the surviving entity; or (iii) the transfer of substantially all of
the assets of the Company or 75% or more of the outstanding stock of the
Company.
EFFECT OF TERMINATION OF EMPLOYMENT. If a participant's employment or
other service with the Company is terminated by reason of death, disability or
retirement, each Option granted to such participant will remain exercisable to
the extent then exercisable for six months after such termination of employment
or until the expiration of the stated term of the Option, whichever is shorter.
In the event of termination by reason of retirement or disability, if an
Incentive Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, the option will thereafter be
treated as a Non-Qualified Option. If a participant's employment terminates for
any other reason, the Options shall thereupon terminate, except that, if the
optionee is involuntary terminated without cause by the Company, the Option may
be exercised to the extent that it was exercisable at such termination date for
the lesser of three months (or a shorter or longer period as the Compensation
Committee may specify at the time of the grant) or the balance of the Option's
term.
FEDERAL INCOME TAX CONSEQUENCES
The following description of federal income tax consequences is based
on current statutes, regulations and interpretations. The description does not
include foreign, state or local income tax consequences. In addition, the
description is not intended to address specific tax consequences applicable to
an individual participant who receives an Award.
INCENTIVE OPTIONS. There will not be any federal income tax
consequences to either the participant or the Company as a result of the grant
to an employee of an Incentive Option under the 1994 Plan. The exercise by a
participant of an Incentive Option also will not result in any federal income
tax consequences to the Company or the participant, except that (i) an amount
equal to the excess of the fair market value of the shares acquired upon
exercise of the Incentive Option, determined at the time of exercise, over the
<PAGE>
amount paid for the shares by the participant will be includable in the
participant's alternative minimum taxable income for purposes of the alternative
minimum tax, and (ii) the participant may be subject to an additional excise tax
if any amounts are treated as excess parachute payments (see explanation below).
Special rules will apply if previously acquired shares of Common Stock are
permitted to be tendered in payment of an Option exercise price.
If the participant disposes of the Incentive Option shares acquired
upon exercise of the Incentive Option, the federal income tax consequences will
depend upon how long the participant has held the shares. If the participant
does not dispose of the shares within two years after the Incentive Option was
granted, nor within one year after the participant exercised the Incentive
Option and the shares were transferred to the participant, then the participant
will recognize a long-term capital gain or loss. The amount of the long-term
capital gain or loss will be equal to the difference between (i) the amount the
participant realized on disposition of the shares, and (ii) the exercise price
at which the participant acquired the shares. The Company is not entitled to any
compensation expense deduction under these circumstances.
If the participant does not satisfy both of the above holding period
requirements (a "disqualifying disposition"), then the participant will be
required to report as ordinary income, in the year the participant disposes of
the shares, the amount by which the lesser of (i) the fair market value of the
shares at the time of exercise of the Incentive Option or (ii) the amount
realized on the disposition of the shares, exceeds the exercise price for the
shares. The Company will be entitled to a compensation expense deduction in an
amount equal to the ordinary income includable in the taxable income of the
participant. This compensation income may be subject to withholding. The
remainder of the gain recognized on the disposition, if any, or any loss
recognized on the disposition, will be treated as long-term or short-term
capital gain or loss, depending on the holding period.
NON-QUALIFIED OPTIONS. Neither the participant nor the Company incurs
any federal income tax consequences as a result of the grant of a Non-Qualified
Option. Upon exercise of a Non-Qualified Option, a participant will recognize
ordinary income, subject to withholding, on the date of exercise in an amount
equal to the difference between (i) the fair market value of the shares
purchased, determined on the date of exercise, and (ii) the consideration paid
for the shares. The participant may be subject to an additional excise tax if
any amounts are treated as excess parachute payments (see explanation below).
Special rules will apply if previously acquired shares of Common Stock are
permitted to be tendered in payment of an Option exercise price.
At the time of a subsequent sale or disposition of any shares of Common
Stock obtained upon exercise of a Non-Qualified Option, any gain or loss will be
a capital gain or loss. Such capital gain or loss will be long-term capital gain
or loss if the sale or disposition occurs more than one year after the date of
exercise and short-term capital gain or loss if the sale or disposition occurs
one year or less after the date of exercise.
In general, the Company will be entitled to a compensation expense
deduction in connection with the exercise of a Non-Qualified Option for any
amounts includable in the taxable income of the participant as ordinary income,
provided the Company complies with any applicable withholding requirements.
RESTRICTED STOCK AWARDS. With respect to shares issued pursuant to a
Restricted Stock Award that are not subject to a substantial risk of forfeiture,
a participant will include as ordinary income in the year of transfer an amount
equal to the fair market value of the shares received on the date of receipt.
With respect to shares that are subject to a substantial risk of forfeiture, a
participant may file an election under Section 83(b) of the Code within 30 days
after the shares are transferred to include as ordinary income in
<PAGE>
the year of transfer an amount equal to the fair market value of the shares
received on the date of transfer (determined as if the shares were not subject
to any risk of forfeiture). The Company will receive a corresponding tax
deduction, provided that proper withholding is made. If a Section 83(b) election
is made, the participant will not recognize any additional income when the
restrictions on the shares issued in connection with the stock award lapse. At
the time any such shares are sold or disposed of, any gain or loss will be
treated as long-term or short-term capital gain or loss, depending on the
holding period from the date of receipt of the Restricted Stock Award.
A participant who does not make a Section 83(b) election within 30 days
of the transfer of a Restricted Stock Award that is subject to a substantial
risk of forfeiture will recognize ordinary income at the time of the lapse of
the restrictions in an amount equal to the then fair market value of the shares.
The Company will receive a corresponding tax deduction, provided that proper
withholding is made. At the time of a subsequent sale or disposition of any
shares of Common Stock issued in connection with a Restricted Stock Award as to
which the restrictions have lapsed, any gain or loss will be treated as
long-term or short-term capital gain or loss, depending on the holding period
from the date the restrictions lapse.
EXCISE TAX ON PARACHUTE PAYMENTS. The Code also imposes a 20% excise
tax on the recipient of "excess parachute payments," as defined in the Code and
denies tax deductibility to the Company on excess parachute payments. Generally,
parachute payments are payments in the nature of compensation to employees of a
company who are officers, shareholders, or highly compensated individuals, which
payments are contingent upon a change in ownership or effective control of the
company, or in the ownership of a substantial portion of the assets of the
company. For example, acceleration of the exercisability of Options, or the
vesting of Restricted Stock Awards, upon a change in control of the Company may
constitute parachute payments, and in certain cases, "excess parachute
payments."
AWARDS UNDER THE 1994 PLAN
Upon shareholder approval of the proposed amendments to the 1994 Plan,
the following Awards will automatically be granted under the Plan:
NEW PLAN BENEFITS
1994 PLAN
NAME AND POSITION DOLLAR VALUE($) NUMBER OF OPTIONS
Non-Employee director group $0 75,000 (1)
(1) The exercise price of such options will be equal to the Fair Market
Value of the Common Stock on the date of approval of the amendment to
the 1994 Plan by the Company's Shareholders.
Other than as set forth above, as of the date of this Proxy Statement,
the Compensation Committee has not approved any awards under the 1994 Plan in
excess of the number of shares currently available for issuance under the 1994
Plan. Neither the number nor types of future 1994 Plan awards to be received by
or allocated to particular participants or groups of participants is presently
determinable.
BOARD OF DIRECTORS RECOMMENDATION
The Board recommends that the shareholders vote FOR the approval of the
proposed amendments to the 1994 Plan. The affirmative vote of the holders of a
majority of shares of Common Stock of the Company entitled to vote, present in
person or by proxy at the Annual Meeting, assuming a quorum is
<PAGE>
present, is necessary for approval. Unless a contrary choice is specified,
proxies solicited by the Board will be voted FOR approval of the proposed
amendments to the 1994 Plan.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board has appointed KPMG Peat Marwick LLP, independent certified
public accountants, as auditors of the Company for the fiscal year ending June
30, 1998. Although it is not required to do so, the Board wishes to submit the
selection of KPMG Peat Marwick LLP to the shareholders for ratification.
Representatives of KPMG Peat Marwick LLP will be present at the Annual Meeting.
Such representatives will have an opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
BOARD OF DIRECTORS' RECOMMENDATION
The Board recommends a vote FOR ratification of the appointment of KPMG
Peat Marwick LLP as auditors of the Company for the fiscal year ending June 30,
1998. The affirmative vote of the holders of a majority of shares of Common
Stock of the Company present in person or by proxy at the Annual Meeting,
assuming a quorum is present, is necessary for approval. Unless a contrary
choice is specified, proxies solicited by the Board will be voted FOR the
ratification of KPMG Peat Marwick LLP.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Proposals of shareholders intended to be presented in the proxy
materials relating to the next Annual Meeting must be received by the Company at
its principal executive offices on or before_____, 1997.
OTHER BUSINESS
The management of the Company does not intend to present other items of
business and knows of no items of business that are likely to be brought before
the Annual Meeting except those described in this Proxy Statement. As to other
business, if any, that may properly come before the Annual Meeting, it is
intended that proxies solicited by the Board will be voted in accordance with
the judgment of the person or persons voting the proxies.
<PAGE>
SECTION 16(a) OF THE EXCHANGE ACT
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and all persons who
beneficially own more than 10% of the outstanding shares of the Company's Common
Stock, to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of Company's Common
Stock and other equity securities of the Company. Executive officers, directors
and greater than 10% shareholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) reports they file. To the Company's
knowledge, based on review of the copies of such reports furnished to the
Company, and based on written representations by such persons that no other
reports were required, during the year ended June 30, 1997, none of the
Company's directors, officers or beneficial owners of greater than 10% of the
Company's Common Stock failed to file on a timely basis the forms required by
Section 16 of the Exchange Act.
MISCELLANEOUS
THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON
FORM 10-KSB (EXCLUSIVE OF EXHIBITS) FOR THE FISCAL YEAR ENDED JUNE 30, 1997 TO
EACH PERSON WHO WAS A SHAREHOLDER OF THE COMPANY AS OF NOVEMBER 3, 1997, UPON
RECEIPT FROM ANY SUCH PERSON OF A WRITTEN REQUEST FOR SUCH AN ANNUAL REPORT.
SUCH REQUEST SHOULD BE SENT TO: ONE CORPORATE PLAZA, 7400 METRO BOULEVARD, SUITE
475, EDINA, MN 55439; ATTN: SHAREHOLDER INFORMATION.
BY ORDER OF THE BOARD OF DIRECTORS
Donald C. Lies
CHAIRMAN OF THE BOARD
Minneapolis, Minnesota
November_____, 1997
<PAGE>
APPENDIX A
ARTICLE V - DIRECTORS
Section 1. NUMBER AND TERM. The business and affairs of this
corporation shall be managed by or under the direction of a Board of Directors
consisting of not less than 3 or more than 7 directors, as may be designated by
the Board of Directors from time to time. Each director shall be elected by the
shareholders to hold office for a term of one year. Each director shall serve
until a successor shall have been duly elected and qualified, unless the
director shall retire, resign, die or be removed.
Section 2. (Deleted)
Section 3. VACANCIES. Any vacancies occurring in the Board of
Directors for any reason, and any newly created directorships resulting from an
increase in the number of directors, may be filled by a majority of the
directors then in office. Any directors so chosen shall hold office until the
next election of directors and until their successors shall be elected and
qualified subject, however, to prior retirement, resignation, death or removal
from office.
<PAGE>
RSI SYSTEMS, INC.
1994 STOCK PLAN
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- --------------------------------------------------------------------------------
1. General Purpose of Plan; Definitions 1
2. Administration 2
3. Stock Subject to Plan 3
4. Eligibility 4
5. Stock Options 4
6. Restricted Stock 7
7. Transfer, Leave of Absence, etc. 9
8. Amendments and Termination 9
9. Unfunded Status of Plan 10
10. General Provisions 10
11. Effective Date of Plan 11
<PAGE>
RSI SYSTEMS, INC.
SECTION 1. General Purpose of Plan; Definitions.
The name of this plan is the RSI Systems, Inc. 1994 Stock Plan (the
"Plan"). The purpose of the Plan is to enable RSI Systems, Inc. (the "Company")
and its Subsidiaries to retain and attract executives and other key employees
and non-employee directors who contribute to the Company's success by their
ability, ingenuity and industry, and to enable such individuals to participate
in the long-term success and growth of the Company by giving them a proprietary
interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Board" means the Board of Directors of the Company.
b. "Cause" means a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony,
or a participant's willful misconduct or dishonesty, any of
which is harmful to the business or reputation of the Company.
c. "Code" means the Internal Revenue Code of 1986, as amended.
d. "Committee" means the Committee referred to in Section 2 of
the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be
exercised by the Board, unless the Plan specifically states
otherwise.
e. "Company" means RSI Systems, Inc., a corporation organized
under the laws of the State of Minnesota (or any successor
corporation).
f. "Disability" means permanent and total disability as
determined by the Committee.
g. "Disinterested Person" shall have the meaning set forth in
Rule 16b-3(d)(3) as promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, or any
successor definition adopted by the Commission.
h. "Early Retirement" means retirement, with consent of the
Committee at the time of retirement, from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company.
i. "Fair Market Value" means the value of the Stock on a given
date as determined by the Committee in accordance with the
applicable Treasury Department regulations under Section 422
of the Code with respect to "incentive stock options."
<PAGE>
j. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
k. "Non-Employee Director" means any member of the Board who is
not an employee of the Company, any Parent Corporation or
Subsidiary.
l. "Non-Qualified Stock Option" means any Stock Option that is
not an incentive Stock Option, and is intended to be and is
designated as a "Non-Qualified Stock Option."
m. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company on or after age 60.
n. "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if each of the corporations (other than the Company)
owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations
in the chain.
o. "Restricted Stock" means an award of shares of Stock that are
subject to restrictions under Section 6 below.
p. "Retirement" means Normal Retirement or Early Retirement.
q. "Stock" means the Common Stock of the Company.
r. "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5 below.
s. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
SECTION 2. Administration.
The Plan shall be administered by the Board of Directors or by a
Committee of not less than three Disinterested Persons, who shall be appointed
by the Board of Directors of the Company and who shall serve at the pleasure of
the Board.
The Committee shall have the power and authority to grant to eligible
employees, pursuant to the terms of the Plan: (i) Stock Options or (ii)
Restricted Stock.
<PAGE>
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company
and its Subsidiaries to whom Stock Options and/or Restricted
Stock awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, or Restricted Stock
awards, or a combination of the foregoing, are to be granted
hereunder;
(iii) to determine the number of shares to be covered by each such
award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder
(including, but not limited to, any restriction on any Stock
Option or other award and/or the shares of Stock relating
thereto); and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to
an award under this Plan shall be deferred either
automatically or at the election of the participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate its authority to officers of the Company for the purpose of selecting
employees who are not officers of the Company for purposes of (i) above.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 600,000. Such shares may consist, in whole
or in part, of authorized and unissued shares.
Subject to paragraph (b)(iv) of Section 6 below, if any shares that
have been optioned ceased to be subject to Stock Options, or if any shares
subject to any Restricted Stock award granted hereunder are forfeited or such
award otherwise terminates without a payment being made to the participant, such
shares shall again be available for distribution in connection with future
awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure affecting
the Stock, or spin-off or other distribution of assets to shareholders, such
substitution or adjustment shall be made in the aggregate number of shares
<PAGE>
reserved for issuance under the Plan, in the number and option price of shares
subject to outstanding options granted under the Plan, and in the number of
shares subject to Restricted Stock awards granted under the Plan as may be
determined to be appropriate by the Committee, in its sole discretion, provided
that the number of shares subject to any award shall always be a whole number.
SECTION 4. Eligibility.
Officers, other key employees of the Company and Subsidiaries and
Non-Employee Directors, and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and its Subsidiaries are eligible to be granted Stock Options or
Restricted Stock awards under the Plan. The optionees and participants under the
Plan shall be selected from time to time by the Committee, in its sole
discretion, from among those eligible, and the Committee shall determine, in its
sole discretion, the number of shares covered by each award.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan after October 31, 2004.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of options. To the
extent that any option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Option as
an Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant. In no
event shall the option price per share of Stock purchasable under an Incentive
Stock Option be less than 100% of the Fair Market
<PAGE>
Value of the Stock on the date of the grant of the option. If an employee owns
or is deemed to own (by reason of the attribution rules applicable under Section
425(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation or Subsidiary and an Incentive
Stock Option is granted to such employee, the option price shall be no less than
110% of the Fair Market Value of the Stock on the date the option is granted.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 425(d) of the Code) more than
10% of the combined voting power of all classes of stock of the Company or any
Parent Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(c) Exercisability. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant. If the Committee
provides, in its discretion, that any option is exercisable only in
installments, the Committee may waive such installment exercise provisions at
any time. Notwithstanding anything contained in the Plan to the contrary, in the
event of the sale by the Company of substantially all of its assets and the
consequent discontinuance of its business, or in the event of a merger,
exchange, consolidation or liquidation of the Company, the Board shall, in its
sole discretion, in connection with the Board's adoption of the plan for sale,
merger, exchange, consolidation or liquidation, provide for one or more of the
following: (i) the acceleration of the exercisability of any or all outstanding
Stock Options; (ii) the complete termination of this Plan and cancellation of
outstanding Stock Options not exercised prior to a date specified by the Board
(which date shall give optionees a reasonable period of time in which to
exercise vested options prior to the effectiveness of such sale, merger,
exchange, consolidation or liquidation); and (iii) the continuance of the Plan
with respect to the exercise of options which were outstanding as of the date of
adoption by the Board of such plan for sale, merger, exchange, consolidation or
liquidation and provide to optionees holding such options the right to exercise
their respective options as to an equivalent number of shares of stock of the
corporation succeeding the Company by reason of such sale, merger, exchange,
consolidation or liquidation. The grant of an option pursuant to the Plan shall
not limit in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
(d) Method of Exercise. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of
unrestricted Stock
<PAGE>
already owned by the optionee or, in the case of the exercise of a Non-Qualified
Stock Option or Restricted Stock subject to an award hereunder (based, in each
case, on the Fair Market Value of the Stock on the date the option is exercised,
as determined by the Committee), provided, however, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares may be authorized only at the time the option is granted, and provided
further that in the event payment is made in the form of shares of Restricted
Stock award, the optionee will receive a portion of the option shares in the
form of, and in an amount equal to, the Restricted Stock award tendered as
payment by the optionee. If the terms of an option so permit, an optionee may
elect to pay all or part of the option exercise price by having the Company
withhold from the shares of Stock that would otherwise be issued upon exercise
that number of shares of Stock having a Fair Market Value equal to the aggregate
option exercise price for the shares with respect to which such election is
made. No shares of Stock shall be issued until full payment therefor has been
made. An optionee shall generally have the rights to dividends and other rights
of a shareholder with respect to shares subject to the option when the optionee
has given written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in paragraph (a) of Section
10.
(e) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(f) Termination by Death. If an optionee's employment by the Company
and any Subsidiary or Parent Corporation terminates by reason of death, the
Stock Option may thereafter be immediately exercised, to the extent then
exercisable (or on such accelerated basis as the Committee shall determine at or
after grant), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of six (6) months (or such
shorter period as the Committee shall specify at grant) from the date of such
death or until the expiration of the stated term of the option, whichever period
is shorter.
(g) Termination by Reason of Disability. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of termination due to Disability
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after six (6) months (or such shorter period as
the Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is the shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
to the extent it was exercisable at the time of such Retirement, but may not be
exercised after six (6) months (or such shorter period as Committee shall
specify at grant) from the date of such termination of employment or the
<PAGE>
expiration of the stated term of the option, whichever period is the shorter. In
the event of termination of employment by reason of Retirement, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, the option will thereafter be
treated as a Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee, if
an optionee's employment by the Company and any Subsidiary or Parent Corporation
terminates for any reason other than death, Disability or Retirement, the Stock
Option shall thereupon terminate, except that, if the optionee is involuntarily
terminated without Cause by the Company and any Subsidiary or Parent
Corporation, the option may be exercised to the extent it was exercisable at
such termination for the lesser of three months (or such shorter or longer
period as the Committee may specify at the time of grant) or the balance of the
option's term.
(j) Annual Limit on Incentive Stock Options. The aggregate Fair Market
Value (determined as of the time the Stock Option is granted) of the Common
Stock with respect to which an Incentive Stock Option under this Plan or any
other plan of the Company and any Subsidiary or Parent Corporation is
exercisable for the first time by an optionee during any calendar year shall not
exceed $100,000.
(k) Non-Employee Directors. Each Non-Employee Director shall, as of the
date of the meeting in which such Non-Employee Director is first elected to the
Board of Directors, automatically be granted an Option to purchase 10,000 shares
of Stock at an option price per share equal to 100% of the Fair Market Value of
a share of Stock on such date. All such Options shall be designated as
Non-Qualified Options and shall be subject to the same terms and provisions as
are then in effect with respect to the granting of Non-Qualified Options to
officers and employees of the Company, except that (i) the term of each such
Option shall be ten years, which term shall not expire upon the termination of
service as a director, and (ii) the Option shall become exercisable as to 25% of
the total shares subject to the Option after each consecutive three-month period
during a period of one year following the date of grant. After the year a
Non-Employee Director is first elected, such Non-Employee Director shall receive
a Non-Qualified Stock Option to purchase 5,000 shares, at an option price equal
to 100% of the Fair Market Value of a share of Stock on such date, each year in
connection with the shareholders meeting where directors are elected, even if
such Non-Employee Director will not be elected at such meeting but continues to
serve as a Non-Employee Director.
SECTION 6. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee shall
determine the officers and key employees of the Company and Subsidiaries to
whom, and the time or times at which, grants of Restricted Stock will be made,
the number of shares to be awarded, the time or times within which such awards
may be subject to forfeiture, and all other conditions of the awards. The
Committee may also condition the grant of Restricted Stock upon the attainment
of specified performance goals. The provisions of Restricted Stock awards need
not be the same with respect to each recipient.
<PAGE>
(b) Awards and Certificates. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the then applicable terms and conditions.
(i) Each participant shall be issued a stock certificate in
respect of shares of Restricted Stock awarded under the Plan. Such
certificate shall be registered in the name of the participant, and
shall bear an appropriate legend referring to the terms, conditions,
and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of the RSI Systems, Inc.
1994 Stock Plan and an Agreement entered into between the
registered owner and RSI Systems, Inc. Copies of such Plan and
Agreement are on file in the offices of RSI Systems, Inc.,
7400 Metro Boulevard, Suite 475, Minneapolis, MN 55424."
(ii) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to the Plan shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock awarded under the Plan. In no event shall the
Restriction Period be less than one (1) year. Within these limits, the
Committee may provide for the lapse of such restrictions in
installments where deemed appropriate.
(ii) Except as provided in paragraph (c)(i) of this Section 6,
the participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a shareholder of the Company, including the
right to vote the shares and the right to receive any cash dividends.
The Committee, in its sole discretion, may permit or require the
payment of cash dividends to be deferred and, if the Committee so
determines, reinvested in additional shares of Restricted Stock (to the
extent shares are available under Section 3 and subject to paragraph
(f) of Section 10). Certificates for shares of unrestricted Stock shall
be delivered to the grantee promptly after, and only after, the period
of forfeiture shall have expired without forfeiture in respect of such
shares of Restricted Stock.
<PAGE>
(iii) Subject to the provisions of the award agreement and
paragraph (c)(iv) of this Section 6, upon termination of employment for
any reason during the Restriction Period, all shares still subject to
restriction shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a
participant whose employment is terminated (other than for Cause),
including death, Disability or Retirement, or in the event of an
unforeseeable emergency of a participant still in service, the
Committee may, in its sole discretion, when it finds that a waiver
would be in the best interest of the Company, waive in whole or in part
any or all remaining restrictions with respect to such participant's
shares of Restricted Stock.
(v) Notwithstanding the foregoing, all restrictions with
respect to any participant's shares of Restricted Stock shall lapse, on
the date determined by the Committee, prior to, but in no event more
than sixty (60) days prior to, the occurrence of any of the following
events: (i) dissolution or liquidation of the Company, other than in
conjunction with a bankruptcy of the Company or any similar occurrence,
(ii) any merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will not be
the surviving entity or (iii) the transfer of substantially all of the
assets of the Company or 75% or more of the outstanding Stock of the
Company.
SECTION 7. Transfer, Leave of Absence, etc.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation
or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or
from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose approved by the Company
if the period of such leave does not exceed ninety (90) days (or such longer
period as the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to reemployment is
guaranteed either by a statute or by contract, and provided that, in the case of
any leave of absence, the employee returns to work within 30 days after the end
of such leave.
SECTION 8. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option, Restricted Stock or other
Stock-based award theretofore granted, without the optionee's or participant's
consent, or (ii) which without the approval of the stockholders of
<PAGE>
the Company would cause the Plan to no longer comply with Rule 16b-3 under the
Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory
requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any holder without his or her consent except to the extent authorized
under the Plan. The Committee may also substitute new Stock Options for
previously granted options, including previously granted options having higher
option prices.
SECTION 9. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 10. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant
to any Restricted Stock or other Stock-based awards shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Stock is then listed, and
any applicable Federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Restricted Stock and
other Stock-based awards under the Plan (other than Stock Options) are not
required to make any payment or provide consideration other than the rendering
of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
<PAGE>
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part
of the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the terms of such award so permit, a participant
may elect by written notice to the Company to satisfy part or all of the
withholding tax requirements associated with the award by (i) authorizing the
Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant under this Section 10(d). Any such election shall be in accordance
with, and subject to, applicable tax and securities laws, regulations and
rulings.
(e) At the time of grant, the Committee may provide in connection with
any grant made under this Plan that the shares of Stock received as a result of
such grant shall be subject to a repurchase right in favor of the Company,
pursuant to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the participant
acquired under the Plan, with the price being the then Fair Market Value of the
Stock or, in the case of a termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant. The Committee may, at the time
of the grant of an award under the Plan, provide the Company with the right to
repurchase, or require the forfeiture of, shares of Stock acquired pursuant to
the Plan by any participant who, at any time within two years after termination
of employment with the Company, directly or indirectly competes with, or is
employed by a competitor of, the Company.
(f) The reinvestment of dividends in additional Restricted Stock (or
other types of Plan awards) at the time of any dividend payment shall only be
permissible if the Committee (or the Company's chief financial officer)
certifies in writing that under Section 3 sufficient shares are available for
such reinvestment (taking into account then outstanding Stock Options and other
Plan awards).
SECTION 11. Effective Date of Plan.
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the Stock present and entitled to vote at a meeting of
the Company's shareholders.
<PAGE>
RSI SYSTEMS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Richard F. Craven and Donald C. Lies, and
each of them, as Proxies, each with full power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of Common Stock of RSI Systems, Inc. held of record by the undersigned on
November 3, 1997, at the Annual Meeting of Shareholders to be held on December
19, 1997 at 10:00 a.m., or any adjournment, thereof.
1. ELECTION OF DIRECTORS.
[ ] FOR all nominees listed below [ ] AGAINST all nominees listed below
(except as marked to the contrary
below)
(INSTRUCTION: TO VOTE AGAINST ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH
THE NOMINEE'S NAME.)
BYRON G. SHAFFER DONALD C. LIES
2. PROPOSAL TO AMEND THE RESTATED ARTICLES OF INCORPORATION TO ELIMINATE THE
COMPANY'S THREE DIFFERENT CLASSES OF DIRECTORS IN FAVOR OF ONE CLASS OF
DIRECTORS TO BE ELECTED ANNUALLY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO AMEND THE 1994 STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES RESERVED FOR ISSUANCE BY 300,000 AND TO INCREASE THE OPTIONS ISSUABLE
TO NON-EMPLOYEE DIRECTORS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON THE BACK)
<PAGE>
(CONTINUED FROM THE FRONT)
4. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT
ACCOUNTANTS FOR THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 2, 3, 4 AND 5 AND FOR ALL NOMINEES NAMED IN PROPOSAL 1
ABOVE. Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: November , 1997
--------------------------------------
Signature
--------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
