U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to ______.
Commission File Number 0-27106
RSI Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1767211
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7400 Metro Blvd., Suite 475, Minneapolis, Minnesota 55439
(Address of principal executive offices) (Zip Code)
(612) 896-3020
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. YES _X_ NO __
The Company had 4,752,265 shares of Common Stock, $ 0.01 par value per share,
outstanding as of May 12, 1997.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
RSI Systems, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 (unaudited)
and June 30, 1996...........................................3
Consolidated Statements of Operations (unaudited) - Three
months and nine months ended March 31, 1997 and 1996........4
Consolidated Statements of Cash Flows (unaudited) - Nine
months ended March 31, 1997 and 1996........................5
Notes to Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis........................8
PART II. OTHER INFORMATION...................................................11
Signature....................................................................12
Exhibit Index................................................................13
RSI SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31 1997, AND JUNE 30, 1996
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 348,239 $ 1,032,921
Marketable securities 1,500,000 -
Accounts receivable, net 357,897 524,433
Inventories 451,095 1,744,222
Prepaid expenses 143,245 184,658
------------ ------------
Total current assets 2,800,476 3,486,234
------------ ------------
Property and equipment
Furniture and equipment 675,523 619,807
Leasehold improvements 4,818 4,818
Less accumulated depreciation (272,580) (168,282)
------------ ------------
Net property and equipment 407,761 456,343
------------ ------------
Other assets 316,000 316,000
Less accumulated amortization (309,219) (239,919)
------------ ------------
Net other assets 6,781 76,081
------------ ------------
$ 3,215,018 $ 4,018,658
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 287,642 278,820
Accrued expenses 1,108,498 861,586
------------ ------------
Total current liabilities 1,396,140 1,140,406
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,752,265 and 3,251,015 issued and
outstanding, respectively 47,523 32,510
Additional paid-in capital 14,146,556 10,214,252
Foreign currency translation adjustment - 28,400
Accumulated deficit (12,375,201) (7,396,910)
------------ ------------
Total stockholders' equity 1,818,878 2,878,252
------------ ------------
$ 3,215,018 $ 4,018,658
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
RSI SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
------------------ ------------------
<S> <C> <C>
Net sales $ 668,535 $ 243,349
Cost of goods sold 536,635 239,494
Inventory writedown to lower of cost or market 851,870 -
----------- -----------
Gross profit (loss) (719,970) 3,855
Research and development 365,150 264,949
Selling, general, and administrative 857,677 788,543
----------- -----------
Operating loss (1,942,797) (1,049,637)
----------- -----------
Other income (expense)
Interest income, net 24,772 41,096
Other income (expense), net (20,230) 0
----------- -----------
Other income, net 4,542 41,096
----------- -----------
Net loss $(1,938,255) $(1,008,541)
=========== ===========
Loss per share $ (0.41) $ (0.31)
=========== ===========
Weighted average shares and common
share equivalents outstanding 4,752,265 3,248,427
=========== ===========
Nine months ended Nine months ended
March 31, 1997 March 31, 1996
----------------- -----------------
Net sales $ 1,556,626 $ 800,632
Cost of goods sold 1,352,752 759,816
Inventory writedown to lower of cost or market 1,430,428 -
Gross profit (loss) (1,226,554) 40,816
Research and development 1,292,633 866,562
Selling, general, and administrative 2,537,712 1,995,439
----------- -----------
Operating loss (5,056,899) (2,821,185)
----------- -----------
Other income (expense)
Interest income, net 75,544 161,498
Other income (expense), net 3,064 (154)
----------- -----------
Other income, net 78,608 161,344
----------- -----------
Net loss $(4,978,291) $(2,659,841)
=========== ===========
Loss per share $ (1.17) $ (0.86)
=========== ===========
Weighted average shares and common
share equivalents outstanding
4,253,675 3,086,865
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
RSI SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
March 31, 1997 March 31, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,978,291) $(2,659,841)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 173,598 111,410
Provision for doubtful accounts 146,208 46,744
Inventory writedown to market 1,430,428 -
Foreign currency translation adjustment (28,400) 21,600
Changes in operating assets and liabilities:
Accounts receivable 20,328 (215,123)
Inventories (26,413) (997,406)
Prepaid expenses 41,413 (167,916)
Accounts payable 8,822 (863,436)
Accrued expenses 136,024 (89,418)
----------- -----------
Net cash used in operating activities (3,076,283) (4,813,386)
----------- -----------
Cash flows from investing activities:
Purchase of marketable securities (1,500,000) -
Purchases of furniture and equipment (55,716) (420,030)
----------- -----------
Net cash used in
investing activities (1,555,716) (420,030)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,947,317 7,421,729
Other - 1,003
----------- -----------
Net cash provided by financing
activities 3,947,317 7,422,732
----------- -----------
Net change in cash (684,682) 2,189,316
Cash and cash equivalents, beginning of period 1,032,921 59,499
----------- -----------
Cash and cash equivalents, end of period $ 348,239 $ 2,248,815
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
RSI SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997 and 1996
1. BASIS OF PRESENTATION:
The unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in the financial statements have been
omitted or condensed pursuant to such rules and regulations. The accompanying
unaudited financial statements should be read in conjunction with the Company's
June 30, 1996, financial statements and related notes included in the Company's
Annual Report on Form 10-KSB.
The financial statements reflect all adjustments, of a normally recurring
nature, necessary to fairly present the results of operations and financial
position of the Company for the interim periods.
2. PRIVATE OFFERING:
Effective September 30, 1996, the Company sold 1,500,000 shares of common stock
to "accredited investors" through a private offering at a price of $ 3.00 per
share. Net proceeds to the Company from the private placement were approximately
$ 4,000,000. The proceeds will be used to fund continued research and
development, expand sales and marketing activities, purchase capital equipment
and inventory, finance accounts receivable, and for other general corporate
purposes, including working capital.
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT
COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM
THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by the forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation Securities
Reform Act of 1995 above and elsewhere by the Company should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of such Act. Forward looking statements are
beyond the ability of the Company to control and in many cases the Company
cannot predict what factors would cause results to differ materially from those
indicated by the forward looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
RSI Systems, Inc. (The "Company") was organized in December 1993 and it designs,
develops and markets full-motion video and audio conferencing systems. With its
first generation Eris(TM) peripheral products, the Company's original focus was
to provide desktop personal computers and Macs with video conferencing
capability--the ability to conduct video conferences and simultaneously view and
work on documents such as spreadsheets, diagrams, or reports. The first Eris(TM)
shipments began in February 1995. Fiscal 1996 represented the Company's first
full year of sales.
Beginning in July 1996, a new management team refocused the Company's strategy.
Products were repackaged and modified to solve reseller and customer needs for
complete system solutions. Late in the first quarter of fiscal 1997, the Company
brought to the emerging business conference room and private office marketplace,
a COMPUTER-FREE(TM), cross-platform video conferencing system, allowing users to
conference with any other H.320, standards-based system in the world through the
use of Eris(TM) and any size standard TV.
Product development efforts continued in the second and third quarter of fiscal
1997. In October 1996, the Company's development team announced a second
generation product--the Video Flyer 2000/384(TM) system. The system offers
significantly greater capability and permits operation with one, two or three
ISDN lines, and POTS (Plain Old Telephone System).
Through the third quarter of fiscal 1997, the Company continued its efforts to
build internal sales capabilities and develop distribution channels to sell its
products worldwide. In the third quarter of fiscal 1997, Video Flyer was
approved by regulatory bodies allowing the product to be sold in the United
States and Canada. In addition, the Company completed certification testing
required for regulatory approval to distribute the product in the European Union
and Australia. The Company expects that similar testing to obtain approval in
Pacific Rim countries will be completed by mid- 1997. In March, 1997 the Company
made available to Dealers and Resellers an initial quantity of Video Flyer
units. As of March 31, 1997 the Company had a backlog of Video Flyer orders
totaling approximately $270,000. The Company plans to begin recognizing revenue
from Video Flyer sales in the fourth quarter of fiscal 1997.
RESULTS OF OPERATIONS
Net sales for the third quarter of fiscal 1997 were $668,535 compared to
$243,349 for the same period of fiscal 1996. Net sales for the nine-month period
ended March 31, 1997 were $1,556,626 compared to $800,632 for the same period
last year. The Company's revenue is derived from sales to distributors who
resell the Company's products to end users, and from direct sales. Net sales in
the third quarter increased over prior periods as a result of higher volume and
higher unit pricing. In addition, fiscal 1996 was the first full year of product
sales for the Company, and therefore sales in that year reflected lower volume
associated with the Company's initial selling efforts in the market. Cost of
goods sold was $536,635 for the third quarter of fiscal 1997, or 80% of sales,
compared to $239,494, or 98% of sales, in the comparable period last fiscal
year. For the nine-month period ended March 31, 1997, cost of goods sold was
$1,352,752 or 87% of sales, compared to $759,816 or 95% of sales in the previous
period.
The lower cost of goods sold as a percent of sales in both the third quarter of
fiscal 1997 and the nine months ended March 31,1997 compared to the prior year
periods resulted from sales of newly-packaged product configurations.
In addition, the high cost of goods sold relative to sales in both the third
quarter of fiscal 1996 and nine months ended March 31, 1996 was a result of low
volume manufacturing and expenses associated with the rework of some product
inventory. The rework was necessary to conform the Company's product to certain
European and Pacific Rim country certification requirements.
The inventory write-down of $851,870 in the third quarter of fiscal 1997
reflects charges associated with a reduction of inventory to a lower of cost or
market valuation. The charges are a result of the Company's decision in the
third quarter of fiscal 1997 to speed up the transition to its new generation
product, the Video Flyer. As a result, the Company decreased forecasted future
shipments of its previous generation product. The total inventory write down for
the nine-month period ended March 31, 1997 was $1,430,428, which consists of the
write-down of $851,870 discussed above, plus additional write-downs in the
second quarter of fiscal year 1997.
Research and development expenses were $365,150 for the third quarter of fiscal
1997, or 55% of sales, compared to $264,949, or 109% of sales for the previous
period. For the nine-month period ended March 31, 1997, research and development
expenses amounted to $1,292,633 or 83% of sales compared to $866,562 or 108% of
sales last period. The decrease in research and development expenses as a
percent of sales is a result of increased sales volume in fiscal 1997. The
increase in expenses for the nine months ended March 31, 1997 is a result of the
Company's focus on both the COMPUTER-FREE(TM) Eris(TM) system and Video
Flyer(TM) during the nine-month period ended March 31, 1997, compared to a more
limited effort involving finalization and certification of the Company's
original product during the comparable period last year. In addition, the
increased expenses in the third quarter of fiscal 1997 relate to the purchase of
third party development software products.
Selling, general, and administrative expense was $857,677 in the third quarter
of fiscal 1997, or 128% of sales, compared to $788,543 or 324% of sales for the
comparable period last year. For the nine-month period ended March 31, 1997,
selling, general, and administrative expense was $2,537,712 or 163% of sales,
compared to $1,995,439 or 249% of sales last period. The higher expenses in the
first nine months of fiscal 1997 reflect increased selling and product promotion
activity over the prior period.
Other income (net) was $4,542 in the third quarter of fiscal 1997, compared to
$41,096 in the comparable quarter of fiscal 1996 and $78,608 for the nine-month
period ended March 31, 1997 compared to $161,344 in the prior period. In fiscal
1996, the Company earned a higher amount of interest income primarily due to
interest earned on higher cash balances generated from the Company's initial
public offering.
As a result of the foregoing, the net loss for the third quarter of fiscal 1997
was ($1,938,255), or ($0.41) per share, compared to a net loss of ($1,008,541),
or ($0.31) per share in the comparable period last year. For the nine-months
ended March 31, 1997, the net loss was ($4,978,291) or ($1.17) per share,
compared to a net loss of ($2,659,841) or ($0.86) per share in the prior period.
OUTLOOK
The Company is continuing the transition to its new product line and focusing on
marketing, distribution and product enhancements. Although the Company has a
limited operating history in the competitive and rapidly changing video
conferencing industry, it believes fiscal 1997 product and distribution
initiatives will continue to improve volume, revenues, margins and income from
operations but the magnitude of these improvements is unknown.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Net cash used in operating activities was ($3,076,283) for the nine-month period
ended March 31, 1997, compared to ($4,813,386) for the same period in the
previous fiscal year. Although the net loss for the nine-month period ended
March 31, 1997 was significantly higher than last period, the decreased use of
cash for operations of ($1,737,103) was primarily a result of a decrease in
accounts receivable and prepaid expenses, a decrease in the amount of inventory
purchased during the current period compared to last period and a higher use of
cash last period to reduce accounts payable and accrued expenses. In addition,
the net loss for the nine month period ended March 31, 1997 included $1,430,428
as a non cash-expense related to inventory write-downs.
Cash Flows from Investing Activities
Net cash used in investing activities was ($1,555,716) in the nine-month period
ended March 31, 1997, compared to a use of ($420,030) in the comparable period
for fiscal 1996. The higher figure in fiscal 1997 is largely the result of the
Company's investment of cash in marketable securities during October, 1996.
Purchases of furniture and equipment during the nine-month period ended March
31, 1996 were greater than the comparable period ended March 31, 1997, due to
the Company's initial investments in fixtures and test equipment in connection
with development activity on the Eris (TM) product line.
Cash Flows from Financing Activities
Effective September 30, 1996, the Company sold 1,500,000 shares of common stock
to "accredited investors" through a private offering at a price of $3.00 per
share. Net proceeds to the Company from the private placement was approximately
$ 4,000,000. The proceeds are being used to fund continued research and
development, expand sales and marketing activities, purchase capital equipment
and inventory, finance accounts receivable, and for other general corporate
purposes, including working capital.
In the first quarter of fiscal 1996, the Company completed an initial public
offering of its common stock. The Company sold 1,383,750 shares of common stock,
including 183,750 shares issued upon exercise of the underwriters over-allotment
option, at a price of $ 6.25 per share. Net proceeds to the Company from the
public offering were approximately $ 7,400,000.
Other Financing Activities and Liquidity
The Company has received a commercial loan committment from a bank to provide a
revolving line of credit for working capital. The Company has not signed loan
documents, nor are there any assurances the Company will sign the loan
documents.
As of March 31, 1997, the Company had not achieved a positive cash flow from
operations. The Company therefore has relied on funds from the sale of
securities to fund operations until a positive cash flow can be achieved.
Management believes it has taken appropriate measures to generate a positive
cash flow in the future, and will continue to take such measures as necessary.
To the extent the Company requires cash in excess of the funds remaining from
the sale of securities, from future operations and from a working capital line
of credit, if the Company enters into such a bank arrangement, management would
seek additional financing. No formal arrangements have been make in this regard
and no assurance can be made that such financing would be available on favorable
terms, or at all.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting (1996 Annual Meeting) of the stockholders of the
Company was held on February 6, 1997. The following individuals were
elected to serve on the Board of Directors of the Company for a three
year term or until their respective successors are duly elected and
qualified: Donald Lies (3,185,361 votes in favor and 29,915 votes
against), Byron Shaffer (3,201,276 votes in favor and 14,000 votes
against) and David Stassen (3,185,561 votes in favor and 29,715 votes
against). The following Directors continued as Directors of the
Company after the meeting until the expiration of their respective
terms: William Brummond, Richard Braun, Dennis Leese and Richard
Craven. Also, by vote of 2,990,101 shares in favor, 143,500 shares
against and 81,675 shares abstaining at the 1996 Annual Meeting, the
stockholders of the company approved an amendment to the Company's
1994 Stock Option Plan to increase the number of shares reserved for
issuance from 400,000 shares to 600,000 shares. Also, by a vote of
3,181,301 shares in favor, 5,500 shares against and 28,475 shares
abstaining at the 1996 Annual Meeting, the stockholders ratified the
appointment of KPMG Peat Marwick LLP as independent auditors of the
Company for the year ending June 30, 1997.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RSI Systems, Inc.
Dated: May 14, 1997 By: /s/ James D. Hanzlik
----------------------------------------
Its Chief Financial Officer
Dated: May 14, 1997 By: /s/ Donald C. Lies
----------------------------------------
Its President & Chief Executive Officer
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-QSB FOR THE NINE MONTHS ENDED MARCH 31, 1997
Item No. Title of Document Method of Filing
- -------- ----------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 348,239
<SECURITIES> 1,500,000
<RECEIVABLES> 357,897
<ALLOWANCES> 0
<INVENTORY> 451,095
<CURRENT-ASSETS> 2,800,476
<PP&E> 407,761
<DEPRECIATION> 272,580
<TOTAL-ASSETS> 3,215,018
<CURRENT-LIABILITIES> 1,396,140
<BONDS> 0
0
0
<COMMON> 47,523
<OTHER-SE> 1,771,355
<TOTAL-LIABILITY-AND-EQUITY> 3,215,018
<SALES> 1,556,626
<TOTAL-REVENUES> 1,556,626
<CGS> 1,352,752
<TOTAL-COSTS> 2,783,180
<OTHER-EXPENSES> 3,830,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75,544)
<INCOME-PRETAX> (4,978,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,978,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,978,291)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
