U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
XXX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
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.)
5555 West 78th Street, Suite F, 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 6,663,531 shares of Common Stock, $ 0.01 par value per share,
outstanding as of October 28, 1998.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
1
<PAGE>
RSI Systems, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1998 (unaudited)
and June 30, 1998 .......................................... 3
Statements of Operations (unaudited) - Three
months ended September 30, 1998 and 1997 ................... 4
Statements of Cash Flows (unaudited) - Three
months ended September 30, 1998 and 1997 ................... 5
Notes to Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis ....................... 8
PART II. OTHER INFORMATION ..................................................11
Signatures ...................................................................12
Exhibit Index ................................................................13
2
<PAGE>
RSI SYSTEMS, INC.
Balance Sheets
September 30, 1998 and June 30, 1998
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
Assets (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 371,237 382,093
Marketable securities 984,243 979,555
Accounts receivable, net of allowance for doubtful
accounts of $402,000 and $254,000, respectively 2,073,993 1,541,626
Inventories 470,733 637,422
Prepaid expenses 56,200 56,949
- ------------------------------------------------------------------------------------------------------------------
Total current assets 3,956,406 3,597,645
- ------------------------------------------------------------------------------------------------------------------
Property and equipment
Furniture and equipment 1,099,622 1,038,463
Leasehold improvements 52,184 50,625
Less accumulated depreciation (648,766) (560,403)
- ------------------------------------------------------------------------------------------------------------------
Net property and equipment 503,040 528,685
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 4,459,446 $ 4,126,330
==================================================================================================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 978,822 1,037,331
Accrued expenses 170,659 124,254
Deferred revenue 57,151 40,664
Revolving credit facility 780,317 497,715
Current portion of capital lease obligations 42,128 55,388
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,029,077 1,755,352
- ------------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Capital lease obligations, net of current portion 120,023 107,639
- ------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 120,023 107,639
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock ($.01 par value per share, 10,000,000 shares
authorized, 6,663,531 and 6,657,281 issued and
outstanding, respectively) 66,635 66,573
Additional paid-in capital 17,238,260 17,238,322
Accumulated deficit (14,994,549) (15,041,556)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,310,346 2,263,339
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,459,446 4,126,330
==================================================================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
RSI SYSTEMS, INC.
Statements of Operations
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 2,362,951 1,096,049
Cost of goods sold 1,053,507 426,732
- -------------------------------------------------------------------------------------
Gross profit 1,309,444 669,317
Research and development 273,656 225,671
Selling, general, and administrative 980,339 768,393
- -------------------------------------------------------------------------------------
Operating profit (loss) 55,449 (324,747)
Other income (expense):
Interest income (expense), net (8,142) (16,958)
Other income (expense), net (300) (300)
- -------------------------------------------------------------------------------------
Other income (expense), net (8,442) (17,258)
- -------------------------------------------------------------------------------------
Earnings (loss) before income taxes 47,007 (342,005)
Income tax provision -- --
- -------------------------------------------------------------------------------------
Net earnings (loss) $ 47,007 (342,005)
- -------------------------------------------------------------------------------------
Net earnings (loss) per common share - basic $ 0.01 (0.07)
Net earnings (loss) per common share - diluted $ 0.01 (0.07)
- -------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 6,663,251 4,766,097
Weighted average shares outstanding - diluted 7,112,258 4,766,097
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
RSI SYSTEMS, INC.
Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 47,007 (342,005)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 88,363 60,921
Unearned compensation -- 24,999
Changes in operating assets and liabilities:
Accounts receivable (532,367) (114,084)
Inventories 166,689 6,433
Prepaid expenses 749 8,020
Accounts payable (58,509) (304,902)
Accrued expenses 46,405 (96,833)
Deferred revenue 16,487 (35,043)
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (225,176) (792,494)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of marketable securities (4,688) --
Purchases of furniture and equipment (62,718) (636)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (67,406) (636)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from line of credit 282,602 158,692
Net payments of obligations under capital leases (876) --
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 281,726 158,692
- -------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (10,856) (634,438)
Cash and cash equivalents at beginning of period 382,093 1,152,671
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 371,237 518,233
=================================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
RSI SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
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, 1998 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. DEBT:
On September 22, 1998, the Company signed an amendment to a commercial loan
agreement with a bank for a committed line of credit facility. The amendment
restates a previous agreement dated April 16, 1998, and increases the maximum
line of credit from the original $1,000,000 to $2,000,000. The facility is
secured by all corporate assets and provides working capital based on a
borrowing base comprised of accounts receivable, inventory and marketable
securities. The facility contains certain covenants and conditions, including
minimum net worth and tangible net worth levels. Interest on outstanding
borrowings accrues at the bank's base rate or the base rate plus up to 4%,
depending on the level of each component of the Company's borrowing base and the
outstanding amount on the line of credit. The base rate was 8.25% on September
30, 1998. The facility has a maturity date of June 26, 2000.
3. NET EARNINGS (LOSS) PER SHARE:
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). Under SFAS 128, basic earnings (loss) per
share excludes any dilutive effects of options, warrants, and convertible
securities, and diluted earnings (loss) per share includes such effects, if
dilutive. All net loss per share amounts for all prior periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.
6
<PAGE>
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by the forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein. The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the effective date of such Act.
Forward looking statements are beyond the ability of the Company to control and
in many cases the Company cannot predict what factors would cause results to
differ materially from those indicated by the forward looking statements.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RSI Systems, Inc. (the "Company" or RSI) designs, manufactures and sells high
performance, business quality videoconferencing systems throughout a worldwide
network of resellers and OEM or private label customers. The Company was
incorporated under the laws of Minnesota on December 21, 1993.
Since July 1996, the Company's efforts have been directed toward the emerging
small workgroup and set-top television-based market. The Company's primary
product, the Video FlyerTM PLUS system, provides computer-free television
quality video and audio (without the need for interfacing to any type of
computer system), via a miniaturized, self-contained free standing device which
is fully industry standards based.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Net Sales. Net sales for the first quarter of fiscal year 1999 were $2,362,951,
up 116% from $1,096,049 in the first quarter of fiscal year 1998. The increase
in sales in the first quarter of fiscal year 1999 compared to the first quarter
of fiscal year 1998 was a result of higher unit volume associated with the
Company's increased sales to national accounts and expanded distribution through
its network of resellers and private label relationships with Philips
Electronics N.V. of Eindhoven, The Netherlands (Philips), and VTEL Corporation
(VTEL). The increased net sales due to increased unit volume was partially
offset by lower average selling prices as a result of volume pricing discounts
on sales to certain customers during the period.
Gross Profit. Gross profit was $1,309,444 in the first quarter of fiscal year
1999 compared to a gross profit of $669,317 during the first quarter of fiscal
year 1998. The increased gross profit was a result of higher net sales. Cost of
goods sold as a percentage of net sales were 45% in the first quarter of fiscal
year 1999 compared to 39% in the first quarter of fiscal year 1998. The
increased cost of sales as a percent of net sales during the first quarter of
fiscal year 1999 was due to lower average selling prices on units shipped
compared to the first quarter of fiscal year 1998.
Research and Development Expenses. Research and development expenses were
$273,656 for the first quarter of fiscal year 1999, or 12% of sales, compared to
research and development expenses of $ 225,671, or 21% of sales for the first
quarter of fiscal year 1998. The percentage decrease in the first quarter of
fiscal year 1999 was due to higher sales as discussed above. Actual spending
increased during the first quarter of fiscal year 1999 due to increased
development, testing and certification fees associated with software and
hardware enhancements to the Company's line of videoconferencing engines.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses were
8
<PAGE>
$980,339 in the first quarter of fiscal year 1999, or 41% of sales, compared to
$768,393, or 70% of sales for the first quarter of fiscal year 1998. The
percentage decrease was due to higher sales in the first quarter of fiscal year
1999 as discussed above. The increase in actual expenditures during the first
quarter of fiscal year 1999 was a result of increased sales force compensation
and increased marketing and technical support expenses associated with higher
sales volume.
Other Income (Expense). Other income (expense) was $(8,442) in the first quarter
of fiscal year 1999, compared to $(17,258) in the first quarter of fiscal year
1998. In the first quarter of fiscal year 1998, the higher amount of other
(expense) was due to interest charges on inventory procured by the Company's
third party manufacturer on behalf of the Company to support required lead
times.
As a result of the foregoing, net earnings for the first quarter of fiscal year
1999 was $47,007 or $.01 per common share compared to a net loss of $(342,005),
or $(.07) per common share in the first quarter of fiscal year 1998.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
Net cash used in operating activities was ($225,176) in the first quarter of
fiscal year 1999, compared to $(792,494) in the first quarter of fiscal year
1998, primarily due to the Company generating a profit during the first quarter
of fiscal year 1999 compared to a loss during the first quarter of fiscal year
1998. Although the Company generated a net profit during the first quarter of
fiscal year 1999, the increased sales, which were largely generated in the
second half of the quarter, resulted in an increase in accounts receivable from
June 30, 1998 to September 30, 1998 and a related use of cash. Offsetting the
use of cash due to an increase in accounts receivable, was a decrease in
inventory from June 30, 1998 to September 30, 1998, as the significant number of
Video Flyer units and peripheral devices shipped during the last half of the
quarter were not replaced with additional inventory until after September 30,
1998.
Also in the first quarter of fiscal year 1999, the Company purchased test
fixtures and related equipment to support the increased production of Video
Flyer PLUS. This resulted in an increased use of cash in investing activities
compared to the comparable quarter in fiscal year 1998.
Through September 30, 1998, cash requirements of the Company have been funded
primarily by cash received from equity investments in the Company and a
$1,000,000 credit facility. To finance the significant growth in sales and the
related growth in accounts receivable during the first quarter of fiscal year
1999, the Company increased net outstanding borrowings on its line of credit by
$282,602. In anticipation of continued growth, the Company obtained an increase
to its credit facility on September 22, 1998. Under the terms of the new
agreement, a maximum of $2,000,000 in working capital funds may be drawn based
on a borrowing base comprised of a percentage of eligible accounts receivable,
inventory and marketable securities. At September 30, 1998 the Company had cash
and cash equivalents of $371,237, marketable securities of $984,243 and an
outstanding line of credit balance of $780,317 on the $2,000,000 credit
facility.
The Company believes funds from operations, funds remaining from previous equity
investments in the Company and funds from its line of credit will be sufficient
to cover cash needs during fiscal year 1999. However, in the event the Company
requires cash in excess of the funds from these sources,
9
<PAGE>
management would seek additional financing, however no formal arrangements have
been made in this regard and no assurance can be made that any such financing
would be available on favorable terms or at all.
YEAR 2000 STATUS
The Company has established a timetable for becoming ready for the year 2000.
Currently, the Company is conducting its assessment phase and is expecting to
complete this phase by December 31, 1998. The Company expects to begin utilizing
any newly developed systems related to the Year 2000 issue by July 1, 1999.
To date the costs of assessing the year 2000 problem have been insignificant,
and based on its assessment to date, the Company does not believe remediation
costs will be material to the Company's financial condition or operating
results.
In addition to completing its assessment phase, the Company is currently
preparing a contingency plan to handle a worst case scenario related to the Year
2000 issue. The contingency plan is being developed in order to minimize
uncertainties and the potential costs involved under a worst case scenario
involving replacement of its information systems and sources of supply for
critical components. This plan is expected to be completed by December 31, 1998.
10
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RSI Systems, Inc.
Dated: October 30, 1998 /s/ Donald C. Lies
-------------------------
Donald C. Lies
Its President & Chief Executive Officer
By: /s/ James D. Hanzlik
--------------------------
James D. Hanzlik
Its Chief Financial Officer
12
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RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-QSB FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Item No. Title of Document Method of Filing
- -------- ----------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 371,237
<SECURITIES> 984,243
<RECEIVABLES> 2,073,993
<ALLOWANCES> 402,000
<INVENTORY> 470,733
<CURRENT-ASSETS> 3,956,406
<PP&E> 503,040
<DEPRECIATION> 648,766
<TOTAL-ASSETS> 4,459,446
<CURRENT-LIABILITIES> 2,029,077
<BONDS> 0
0
0
<COMMON> 66,635
<OTHER-SE> 2,243,711
<TOTAL-LIABILITY-AND-EQUITY> 2,310,346
<SALES> 2,362,951
<TOTAL-REVENUES> 2,362,951
<CGS> 1,053,507
<TOTAL-COSTS> 1,053,507
<OTHER-EXPENSES> 1,253,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,142
<INCOME-PRETAX> 47,007
<INCOME-TAX> 0
<INCOME-CONTINUING> 47,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,007
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
