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:
[ ] Preliminary proxy statement
[X] 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.
- --------------------------------------------------------------------------------
(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):
[ ] 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.
5555 West 78th Street Suite F
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 November 19, 1998, at 3:30 p.m., local time, at the Radisson Plaza
Hotel in Minneapolis, Minnesota.
The formal Notice of Meeting, Proxy Statement and form of proxy are
enclosed. Also enclosed is the Company's Annual Report to Shareholders for
fiscal year 1998.
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
October 16, 1998
PLEASE SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD PROMPTLY
TO SAVE THE COMPANY THE EXPENSE
OF ADDITIONAL SOLICITATION.
<PAGE>
RSI SYSTEMS, INC.
5555 West 78th Street Suite F
Edina, Minnesota 55439
----------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 19, 1998
----------------------------
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 November 19, 1998, at 3:30 p.m.,
local time, at the Radisson Plaza Hotel in Minneapolis, Minnesota for the
following purposes:
1. To elect a Board of Directors to serve a one year term or
until their respective successors are elected and qualified;
2. 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 600,000 shares.
3. 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, 1999.
4. To consider and act upon such other matters as may properly
come before the meeting or any adjournment thereof.
The close of business on October 6, 1998 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
October 16, 1998
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
RSI SYSTEMS, INC.
5555 West 78th Street Suite F
Edina, Minnesota 55439
-------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 19, 1998
INTRODUCTION
The Annual Meeting of Shareholders (the "Annual Meeting") of RSI
Systems, Inc. (the "Company") will be held on November 19, 1998, at 3:30 p.m.,
local time, at the Radisson Plaza Hotel in Minneapolis, 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 be mailed to
shareholders on October 16, 1998.
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<PAGE>
VOTING OF SHARES
Only holders of Common Stock of record at the close of business on
October 6, 1998 will be entitled to vote at the Annual Meeting. On October 6,
1998, the Company had 6,663,531 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 individuals set forth below to serve
as directors of the Company for a one year term or until their successors have
been elected and qualified. All of the nominees are members of the current
Board. Byron G. Shaffer, also a current board member, is not standing for
reelection.
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.
INFORMATION ABOUT NOMINEES
NAME OF NOMINEES AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---------------- --- -------------------- --------------
Donald C. Lies 50 Chief Executive Officer and July 1996
President of the Company
Richard F. Craven 55 Private Investor December 1993
David W. Stassen 46 Private Investor June 1995
Manfred P Haiderer 58 President and V.P., U.S.A. February 1998
Operations, Richards-Wilcox, Inc.
-2-
<PAGE>
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, 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.
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.
DAVID W. STASSEN was elected as a director of the Company in June 1995.
He is currently a private investor and previously served as President and Chief
Executive Officer of Spine-Tech, Inc., a manufacturer of spinal implants, since
June 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.
MANFRED D. HAIDERER was elected as a director of the Company in
February 1998. Mr. Haiderer has served as President and V.P., U.S.A. Operations
for Richards-Wilcox Inc., a manufacturer of office and material handling
products since 1990. Prior to that, Mr. Haiderer was President and CEO of Baker
Material Handling Corporation.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The business and affairs of the Company are managed by the Board of
Directors, which held six meetings during fiscal 1998. All directors' terms will
expire at the 1998 Annual Meeting of Shareholders.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Messrs. Stassen,
Shaffer, Craven and Haiderer, 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 1998. The Compensation Committee,
which consists of Messrs. Stassen, Shaffer, Craven and Haiderer, 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 one meeting during fiscal year 1998. 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 as amended, each non-employee director is granted, upon election to the
Board, an option to purchase 20,000 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 first year
a non-employee director is elected to the Board, such non-employee director if
reelected 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 employee
directors receive no additional compensation for serving as directors.
-3-
<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 October 6, 1998, 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 1998 (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 5555 West 78th Street, Suite F, Edina, MN 55439.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
- ---- ------------------ ----------------
Donald C. Lies........................... 396,658 (1) 5.7
Richard F. Craven........................ 993,000 (2) 14.5
Byron G. Shaffer......................... 374,000 (3) 5.6
David W. Stassen......................... 75,000 (4) 1.1
Manfred D. Haiderer...................... 20,000 (5) *
Marti D. Miller.......................... 41,667 (6) *
All Current Executive Officers and
Directors as a Group (6 persons)......... 1,900,325 (7) 25.8
Aaron Boxer Revocable Trust.............. 495,888 (8) 7.5
Perkins Capital Management............... 499,550 (8) 7.5
- --------------------
* Indicates ownership of less than 1%.
(1) Includes 348,333 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes (i) 176,500 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 45,000 shares owned
by Mr. Craven's three children.
(3) Includes (i) 67,500 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 8000 shares owned
by Mr. Shaffer's four children.
(4) Includes 35,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(5) Includes 20,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(6) Includes 41,667 shares which may be acquired within 60 days upon the
exercise of stock options.
(7) Includes 689,000 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(8) Based on information as of December 31, 1997
-4-
<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, 1996, 1997 and 1998
to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal year 1998 and (ii) the other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 in fiscal year
1998 (the "Named Executive Officers"). Other than those individuals listed
below, no executive officer of the Company received cash compensation of more
than $100,000 in fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND PRINCIPAL FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
POSITION YEAR SALARY($) BONUS($) AWARDS OPTIONS(#) $
-------- ---- --------- -------- ------ ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 1997 150,000 0 200,000(1) 215,000 7,800
CHIEF EXECUTIVE OFFICER 1998 171,693 0 0 200,000 7,800
AND PRESIDENT
Marti D. Miller 1996 85,538 0 0 20,000 0
VICE PRESIDENT, 1997 96,000 0 0 40,000 0
ENGINEERING 1998 107,723 0 0 20,000 0
</TABLE>
(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, 1998, Mr. Lies owned
18,750 shares of the restricted stock and had unvested interest in
6,250 shares of the restricted stock pursuant to the agreement, with an
aggregate value of $68,750 based on the June 30, 1998, closing bid
price of the Company's Common Stock of $2.750 per share.
OPTION GRANTS AND EXERCISES
The tables below set forth information about the stock options held by
the Named Executive Officers and the potential realizable value of the options
held by such person on June 30, 1998. No stock options were exercised by the
Named Executive Officers of the Company during fiscal year 1998.
-5-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES EXERCISE
NAME OPTIONS GRANTED(#)(1) IN FISCAL YEAR 1998 PRICE ($/sh) EXPIRATION DATE
---- --------------------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Donald C. Lies 200,000(2) 45.1% 2.81 September 1, 2007
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Marti D. Miller 20,000(3) 4.5% 2.81 September 1, 2007
VICE PRESIDENT,
ENGINEERING
</TABLE>
- --------------------
(1) During fiscal year 1998, options to acquire an aggregate of 443,500
shares of Common Stock were granted to all employees and options to
acquire 120,000 shares of Common Stock were granted to non-employee
directors and other non-employees.
(2) 200,000 options were granted to Mr. Lies on September 2, 1997 and
100,000 were vested and exercisable on the date of the grant. 50,000
options became vested and exercisable on June 30, 1998 and the
remaining 50,000 options become vested and exercisable on June 30,
1999.
(3) 20,000 options were granted to Mr. Miller on September 2, 1997. The
options become vested and exercisable in three equal installments
commencing one year after the date of the grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ON EXERCISE VALUE OPTIONS AT JUNE 30, 1998(#) AT JUNE 30, 1998($)(1)
NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald C. Lies 0 0 320,833 94,167 142,291 27,084
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Marti D. Miller 0 0 30,000 50,000 32,500 32,500
VICE PRESIDENT,
ENGINEERING
</TABLE>
- --------------------
(1) Based on the June 30, 1998, closing bid price of the Company's Common
Stock of $2.750 per share.
-6-
<PAGE>
EMPLOYMENT AGREEMENTS
The Company and Donald C. Lies 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 October, 1997, Mr. Lies's annual
salary was increased to $180,000. 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.
COMPENSATION OF DIRECTORS
The Board of Directors of the Company has established the following
compensation policies for non-employee 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 20,000 shares of Common Stock, exercisable at 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. After the year of election, each
non-employee director will also receive annually an option to purchase 5,000
shares of Common Stock exercisable at 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. On February 6, 1998 options to acquire 20,000 shares of the
Company's Common Stock were granted to non-employee directors, exercisable at
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. Directors who are
employees of the Company receive no additional compensation for serving as
directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Richard F. 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
$108,405, $97,500 and $28,661 during fiscal year 1998, 1997 and 1996
respectively. The Company believes its transactions with Pointe Design have been
on terms no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis.
In connection with the private offering of the Company's Common Stock
in January 1998, certain members of the Board of Directors of the Company
purchased a total of 297,725 shares of the Company's Common Stock.
-7-
<PAGE>
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, which
amendment was approved by the shareholders, to increase the maximum number of
shares authorized to be issued under the 1994 Plan from 600,00 to 900,000
shares. In October 1998, the Board again amended the 1994 Plan, subject to
shareholders approval, to increase the maximum number of shares authorized to be
issued under the 1994 Plan from 900,000 to 1,500,000 shares.
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 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 October 6, 1998, options were outstanding
under the 1994 Plan to purchase an aggregate of 675,000 shares. The proposed
amendment to the 1994 Plan, if adopted by the Company's Shareholders would
increase the number of shares reserved for issuance under the 1994 Plan by
600,000 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, 825,000 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.
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
-8-
<PAGE>
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 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 20,000 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
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specified date (which date shall give optionees a reasonable 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
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
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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 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
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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
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 amendment 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 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, 1999. 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,
1999. 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 June 12, 1999.
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.
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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, 1998, 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, 1998 TO
EACH PERSON WHO WAS A SHAREHOLDER OF THE COMPANY AS OF OCTOBER 6, 1998, UPON
RECEIPT FROM ANY SUCH PERSON OF A WRITTEN REQUEST FOR SUCH AN ANNUAL REPORT.
SUCH REQUEST SHOULD BE SENT TO, 5555 WEST 78TH STREET, SUITE F, EDINA, MN 55439;
ATTN: SHAREHOLDER INFORMATION.
BY ORDER OF THE BOARD OF DIRECTORS
Donald C. Lies
CHAIRMAN OF THE BOARD
Minneapolis, Minnesota
October 16, 1998
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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
October 6, 1998, at the Annual Meeting of Shareholders to be held on November
19, 1998 at 3:30 p.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.)
DONALD C. LIES RICHARD F. CRAVEN ELIM SHAFFER DAVID W. STASSEN
MANFRED D. HAIDERER
2. PROPOSAL TO AMEND THE 1994 STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES RESERVED FOR ISSUANCE BY 600,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON THE BACK)
<PAGE>
(CONTINUED FROM THE FRONT)
3. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT
ACCOUNTANTS FOR THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. 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 AND 4 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: October 16, 1998
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Signature
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Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
