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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 0-27106
RSI SYSTEMS, INC.
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(Name of small business issuer in its charter)
MINNESOTA 41-1767211
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5555 WEST 78TH STREET, SUITE F
MINNEAPOLIS, MN 55439
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(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 896-3020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB for any
amendment to this Form 10-KSB. /X/
The Company's revenues for its most recent fiscal year were $9,199,135.
On September 23, 1999, the Company had 6,971,281 shares of common stock, $.01
par value, outstanding, and the aggregate market value of the common stock as of
that date (based on the average of the closing bid and asked prices as of that
date as reported by the NASDAQ SmallCap Market), excluding outstanding shares
beneficially owned by directors and officers, was approximately $9,219,000
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ___; No _X_
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PART I
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 1. DESCRIPTION OF BUSINESS.
(a) BUSINESS DEVELOPMENT
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 partners.
The Company's fourth-generation product family, the MediaPro-TM- system, is now
being manufactured and is available for sale. This system provides television
quality video and audio via a miniaturized, self-contained free-standing device
which is fully industry standards based and is sold in three different
configurations: laptop, computer-free and dual platform.
The Company was incorporated under the laws of Minnesota on
December 21, 1993. Its founders developed a self-contained desktop
videoconferencing device for connection to personal computers and Apple
Macintosh systems. On July 25, 1995, the Company conducted a public offering of
its common stock, par value $0.01 per share (the "Common Stock"). With the net
proceeds from the public offering, including proceeds from the exercise of the
underwriter's overall allotment option (approximately $7,400,000), the Company
funded further research and development related to the enhancement of the
original product. By June 1996, the target market for this product had not
developed and the product had not achieved its price performance objectives.
In July 1996, a new management team redirected Company efforts
away from the computer-based desktop videoconferencing systems marketplace and
towards the emerging workgroup and settop television-based market. Subsequently,
the Company designed a second-generation system, the Video Flyer, that created a
new level of video, audio and price performance without need for interfacing to
any type of computer system. Deemed a COMPUTER-FREE SYSTEM, the original Video
Flyer evolved into the Video Flyer Plus computer product line of
videoconferencing engines with enhanced features and functionality.
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In September 1996, to fund the development and marketing of its
videoconferencing products, the Company completed a private placement of
1,500,000 shares of its Common Stock resulting in net proceeds to the Company of
approximately $3,943,000. In January 1998, to provide additional funds for
expanded marketing, distribution, product development and general corporate
purposes, the Company completed the private placement of 1,671,255 shares of its
Common Stock resulting in net proceeds of approximately $2,523,000.
In the fall of 1998, the Company began development of a new
videoconferencing engine. The Company's MediaPro system, introduced in June
1999, is a cross-platform, multimedia videoconferencing engine, capable of
operating either with or without a host computer and displaying through a
variety of output devices.
OVERVIEW OF THE MARKETPLACE
Various forms of videoconferencing equipment have been introduced
to the global marketplace during the past 20 years. Initial system offerings
were very expensive and sold primarily as a method to reduce travel expense or
conduct distance meetings between large groups of individuals.
With the establishment of industry standards by the International
Telecommunications Union (ITU) in the early 1990s and the availability of lower
cost electronic componentry, marketplace sales began to rapidly accelerate.
Since then, better products and lower prices throughout the marketplace have
increased the applications for videoconferencing systems, creating distinct
product segments.
The videoconferencing equipment marketplace continued to evolve in
fiscal year 1999, with a clear continued shift toward high quality, reasonably
priced systems, which incorporate expanded capabilities and functionality. This
shift has continued to create expanding opportunities and challenges for the
Company, in what is believed to be an overall market of approximately $1.3
billion currently.
The market is generally recognized as having the following
segmentation:
(1) Consumer Systems. These systems are generally very
inexpensive, operate on standard telephone lines and provide
minimal levels of quality picture and audio performance.
List pricing for these systems currently ranges from $500 to
$1,000.
(2) Desktop Systems. These systems consist of electronic
components or internal devices being added to existing
desktop personal computers. Available from a variety of
different manufacturers, product performance varies widely.
Pricing of these systems based upon system requirements,
functionality, and upgradability also varies widely and
ranges from $1,000 to $5,000.
(3) Set-top/Workgroup Videoconferencing Systems. This segment
has been labeled by H. C. Wainwright & Co., Inc. as "not
only the sweet spot in the videoconferencing market right
now--it IS the market."(1) RSI's Video Flyer product was the
first system to enter this marketplace as a fully
self-contained, high performance television quality
non-computer based product. Deemed COMPUTER-FREE, the Video
Flyer contained no disk drive or internalized moving parts
nor did it require a keyboard for operation. The Company's
new MediaPro product is also targeted toward this market
segment which is estimated to be in the area of $300
million.(2)
The systems in this market segment generally attach to high
quality brand name televisions or other non-computerized
displays to provide medium to exceptional video and audio
performance at price points ranging from $25,000 to under
$10,000. Systems provided by manufacturers in this market
segment are interoperable between each other, thus allowing
for rapid expansion of use and cross-platform compatibility.
This is similar to facsimile machines standardization in the
late 1980s to allow for rapid expansion of the marketplace
regardless of the product brand.
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(1) H. C. Wainwright & Co., Inc.; Videoconferencing Industry THE
RISE OF THE SMALL-GROUP SYSTEM, December 2, 1998.
(2) Ibid.
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(4) Permanent Room Systems. With the improvement in quality of
settop/workgroup systems, this market segment is not growing
as rapidly as it once was, but many permanent rooms are
undergoing refurbishment, creating opportunities for
manufacturers of products that are easily integrated into
permanent room systems. Permanent room systems are intended
to provide a high level of consistent operation for both
audio and video signals. Prices for full room systems are in
the $50,000 and up category, excluding installation. The
Company's videoconferencing engines, because of their
adaptability and quality, can be integrated into these room
systems.
H.C. Wainwright believes that the settop/workgroup systems segment
will continue to grow at a rate of over 45% annually.(3) The Company believes
that the market will generally remain stratified over the next few years within
the segments identified above. New capabilities and features will be introduced
that will encourage more demand in the marketplace. User applications will
become the primary driver of product development and market expansion.
(b) BUSINESS OF THE COMPANY
PRODUCTS
MEDIAPRO 384.
In June 1999, the Company introduced its fourth-generation
product, the MediaPro 384 product family, which is aimed primarily at the
settop/workgroup market segment. The MediaPro 384 product family is a 384 Kbps
product that builds upon the strengths of the Company's Video Flyer Plus product
and added several additional enhancements.
Price points for the MediaPro products are targeted to compete
directly with the Company's major competitors in the workgroup segment. The Dual
Platform model, described below, incorporates greater functionality than the
competitions' at similar or lower price points.
The primary capabilities designed into the MediaPro are:
(1) ETHERNET. All members of the MediaPro 384 product family
have a 10/100 Mbps Ethernet (LAN) interface. By
incorporating an Ethernet interface the product has the
hardware support required to implement H.323 packet based
video conferencing, which will be added in fiscal year 2000.
The MediaPro 384 product also includes an embedded Web
Server that can be accessed via the LAN. The Web Server
provides a remote diagnostics/maintenance interface that
makes installing and supporting the MediaPro 384 product
much easier than other competitive products that exist in
the market.
(2) EASE OF USE. All members of the MediaPro 384 product family
have a Setup Genie (similar to a Windows Wizard) that
assists the person installing the system. The Setup Genie
will prompt the installer to configure all the important
parameters of the system thereby simplifying the
installation process. The new Graphical User Interface (GUI)
that is part of the MediaPro 384 product family further
simplifies the operation of the product. The Company
believes the MediaPro 384 GUI is state of the art in terms
of ease of use.
(3) ARCHITECTURE. All MediaPro 384 systems use a single high
performance motherboard developed by the Company. This
architecture dramatically reduces the chances for system
failure, cost of manufacture and opportunity for increasing
overall operational performance. The network interface is
contained on a daughter card. This allows the Company to
rapidly develop new connectivity options as new network
technologies come to market.
(4) INTERNALIZATION OF MULTIPLE DEVICES. The MediaPro 384 has
all of the components required to perform video conferencing
internalized into the system. The MediaPro 384 system
contains all of
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(3) Ibid.
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the electronics for video, audio, memory for retention of
code, inverse multiplexer and network interfaces which lower
overall cost and eliminate the need for many cumbersome
peripheral devices connected to the videoconferencing
engine.
(5) EXPANSIVE CONNECTIVITY. The MediaPro 384 has the greatest
range of external component connectivity of any system in
its market segment. All MediaPro 384 systems can connect to
any size or brand television set, LCD projector, flat screen
display or other video display device. This flexible
connectivity allows the MediaPro 384 to fit into a variety
of applications ranging from classrooms to boardrooms,
factory floors, lunchrooms, conference centers, hotel
meeting halls, outdoor facilities, living rooms or offices.
The MediaPro 384's unique self-contained component design
also gives it the flexibility to connect to an unlimited
variety of audio devices such as mixers, microphones,
speaker systems, etc. This means that the system can be
installed in virtually any type of environment regardless of
the customer's existing electronic design.
MediaPro's connectivity also permits the use of VCRs and
digital video disk systems (DVDs) for input and playback or
recording of video conferences. This has proved to be very
useful in both educational, legal and various business
applications where training or negotiation sessions need to
be captured or played back for group review.
(6) APPLICATION PROGRAMMING INTERFACE (API). Another important
feature that the MediaPro 384 provides is a well documented,
easy to use, Software Development Kit. This allows System
Integrators to develop custom applications that incorporate
the MediaPro 384.
(7) SOFTWARE ARCHITECTURE. To deliver high performance
television-like video and audio conferencing signals,
customized software must be developed by a manufacturer that
operates within the ITU's published standards (H.320). RSI's
team of engineers created software code that could reside on
flash memory and provide high quality video and audio signal
performance with a high level of operational simplicity.
RSI delivers its software to product users over telephone
lines, which eliminates the need for diskettes or hard
drives. When a new version of software is made available to
the marketplace, existing product users merely place a phone
call to a MediaPro 384 software server and request an
unattended download of the new software. In a matter of
minutes, the new software is loaded onto the user's system
and they are now able to take advantage of all of the new
features or enhancements.
(8) STANDARDS-BASED COMPATIBILITY. The Company has continued to
develop 100-percent standards-based systems. By doing so, it
guaranteed that the MediaPro 384 would interoperate with any
other standards-based videoconferencing system regardless of
manufacturer. The MediaPro 384 system contains no
proprietary standards that will not interoperate with other
standards-based systems. Standards are established and
published by the International Telecommunications Union
(ITU) and are available to all manufacturers for voluntary
compliance.
(9) TWO HIGH SPEED RS232 DATA COMMUNICATION PORTS. The high
speed data ports can be used for a number of applications.
One application is to allow Microsoft NetMeeting to be used
for T.120 data collaboration allowing users to share files
and other information during videoconferences. Another
application is for connection of an external control system
(such as an AMX or Crestron control system). A modem can
be attached to a data port to allow for remote dial up
diagnostics and control. System Integrators can take
advantage of the high speed data ports to integrate
additional applications with the MediaPro 384.
(10) INTERNALIZATION OF THE NETWORK TERMINAL ADAPTERS (NT1S). In
North America most telecommunication services require an
external device known as an NT1 to be attached to each ISDN
line connected to a videoconferencing system. In the case of
a 384 Kbps (three ISDN lines) based system,
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this means that up to three NT1s may have to be purchased by
the customer. Assuming normal wear and tear, compatibility
issues, available power outlets, etc., this can be a source
of frustration and repair. The MediaPro 384 internalizes
these devices and thus eliminates any requirements for
external componentry. At this time, the Company believes it
may be the only video conferencing product in its market
segment that does not require external NT1s.
(11) SYSTEM ENCLOSURE. All members of the MediaPro 384 product
family are packaged in a very attractive and compact
enclosure that is easily transported. The enclosure also
makes it easy to integrate the product into custom
installations. The MediaPro 384 product family supports an
optional remote Infrared Detector that allows the system to
be installed in a wiring closet or in the bottom of a cart.
(12) WARRANTY PROGRAM. The MediaPro 384 was engineered to
eliminate the need for field maintenance and repair. Often
costly and inconsistent, field support can degrade the
functionality and reputation of the manufacturer's installed
base of systems. In 1998, the Company developed and
introduced its full system exchange warranty program named
ServiceAngel. In conjunction with overnight shippers, RSI
will ship an exchange system within one business day of
notification to anywhere in North America or Europe.
Customers have readily endorsed this alternative program to
time consuming and often frustrating in-office system repair
provided by many of the Company's competitors. The
ServiceAngel program also allows the Company to dramatically
reduce its requirement for parts, spares, bench test beds,
and field technicians.
The MediaPro 384 product family is available in three
configurations and each configuration is available with a variety of different
network interfaces such as ISDN BRI and V.35.
(1) MEDIAPRO 384 CF (COMPUTER-FREE). The MediaPro 384 CF is
controlled by an infrared (IR) remote controller and
operates as a standalone device. The new GUI is the easiest
to use and most intuitive User Interface in the market at
this time. The MediaPro 384 CF can be attached to
televisions, LCD display devices, flat panel display devices
and other video display systems. The systems operation is
controlled by a custom designed IR remote controller. The
MediaPro 384 GUI simplifies system setup and operation.
(2) MEDIAPRO 384 LT (LAPTOP). This model works in conjunction
with a Personal Computer or laptop running Windows 95/98 or
Windows NT 4.0. The unit comes with a user interface that is
an application that runs on the computer. The MediaPro 384
LT can display the received video on either the computer's
display device (CRT) or a television. The MediaPro 384 LT
is attached to the computer by an industry standard
peripheral bus known as SCSI. Using the SCSI port as the
interconnect between the MediaPro 384 LT and the computer
allows the MediaPro 384 LT to be used with any properly
equipped desktop or laptop computer. The Company is not
aware of any other system on the market that can bring high
performance, ISDN based, video conferencing to a laptop
computer.
(3) MEDIAPRO 384 DP (DUAL PLATFORM). The MediaPro 384 DP
combines the functionality of the MediaPro 384 CF and
MediaPro 384 LT into one dual purpose product that can
operate as either a MediaPro 384 CF or as a MediaPro 384 LT.
All MediaPro 384 systems can accept additional software features
and upgrades to allow the products to continue to meet the demands of a
continuously changing market. The Company may charge a fee for new, substantial,
software features that it develops. The software updates are received by making
a telephone call to the Company's software server and downloading the software
into the unit to be updated.
VIDEO FLYER.
In addition to the MediaPro 384, the Company manufactures a line
of computer-free videoconferencing engines sold worldwide under the name Video
Flyer. These units were first introduced in the spring of 1997 and are available
in both a 384 Kbps version (three ISDN lines) known as Video Flyer Plus and a
128 Kbps version
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(single ISDN line) called Video Flyer PVS (personal video system).
The Video Flyer Plus system offers high quality 384 audio and
video and carries many of the features and functionality of the Company's
MediaPro systems, including the latest GUI software. Price points are very
competitive with other comparable systems on the market.
The Video Flyer PVS system is aimed toward applications which do
not require all the features or full television-like quality of the 384 system,
at very affordable price points ranging from $2,495, with a small personal
camera, to $3,295, incorporating a pan tilt zoom camera.
ON-GOING PRODUCT DEVELOPMENT.
The Company expects to continue refining its videoconferencing
products to provide greater performance, capability and enhancements to the
marketplace and its existing users. Through increased sales volume, the Company
believes that the overall manufacturing cost of the system may decline, thus
allowing the Company and the marketplace to share in the potential cost
reductions. Additionally, as new forms of communication connectivity are brought
to the marketplace, such as ATM, DSL, etc., the Company will continue to review
their viability and, if deemed appropriate, the Company will create the
connectivity electronics to interoperate within these networks. It is
management's belief that the MediaPro 384 will have an extended life cycle
because of its unique architecture, software design and cross-platform
flexibility.
SALES AND DISTRIBUTION
In 1999, the Company continued with its multilevel approach to
distribution. This approach includes Resellers and Distributors, OEM
partnerships and Preferred Accounts.
RESELLERS AND DISTRIBUTORS.
In fiscal year 1999, the Company introduced its Millennium
Partners Program and used it to strengthen distribution throughout North
America, Europe, Asia, Australia and portions of the Middle East and South
Africa. Through the Millennium program, authorized product resellers and
distributors can purchase videoconferencing equipment and related peripheral
devices from the Company and resell them in their local geographic markets. The
Company provides classroom training, literature, sales, marketing and technical
support to these customers. The Company believes its Millennium program offers
very competitive margins to its resellers and distributors.
The Company plans to continue strengthening its reseller network
on an on-going basis to improve sales coverage by developing successful
long-term relationships with successful resellers, including systems integrators
who provide turnkey solutions to end users.
ORIGINAL EQUIPMENT MANUFACTURER (OEM) PARTNERSHIPS.
In fiscal year 1999, the Company sold equipment under three OEM or
private label distribution agreements.
(1) Gentner Communications Corporation. In October 1998, the
Company entered into a private label agreement with Gentner.
Gentner asked the Company to provide a version of the Video
Flyer Plus for the purpose of integration into Gentner's
product line. The agreement calls for Gentner to purchase a
specific quantity of products through December 1999. There
is no limit to the quantity of product Gentner is allowed to
purchase from the Company. The Company expects a successful
relationship with Gentner.
(2) Philips Business Electronics N.V. of Eindhoven, The
Netherlands. The Company has designed, manufactured and
delivered a version of the Video Flyer product to Philips
Business Electronics. The contract called for specific
minimum quantities to be purchased by Philips and Philips
fulfilled that commitment by June 30, 1999. The Company does
not expect Philips to order significant quantities of the
product in the future.
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(3) VTEL Corporation. In the summer of 1998, the Company entered
into an OEM agreement with VTEL Corporation. The Company
developed a version of the Video Flyer Plus system for the
purpose of resale by VTEL. The contract called for VTEL to
purchase a specific quantity of product and as of June 30,
1999, VTEL had purchased this minimum quantity. The Company
does not expect VTEL to purchase significant quantities of
product in the future.
PREFERRED ACCOUNT SALES.
In selected instances, RSI will continue to sell directly to
and/or support accounts in North America that are of either significant size or
their requirements dictate direct interaction with the manufacturer (the
Company). Though it is not RSI's intention to compete with its other
distribution channels, many of the organizations which make larger purchases of
videoconferencing equipment have dictated that the manufacturer provide
specialized services (be they domestic or global) or modify products for their
specific application. Where practical, RSI will create an environment for these
accounts that will allow them to be transitioned to its authorized resellers or
OEM business partners for long-term future sales and support.
MARKETPLACE COMPETITION
The videoconferencing marketplace has continued to evolve into
relatively well-defined product segments. RSI's videoconferencing product line
is targeted at the settop/workgroup and permanent room marketplaces. The
competition within this marketplace is intense and constant. Many of the
Company's competitors are large companies with resources substantially greater
than those available to RSI.
Polycom, Inc., with its broad distribution channel, is the
industry leader in the settop/workgroup marketplace. Their system is
computer-free, and it integrates a camera and videoconferencing engine into a
single device that has the capability of performing four-location
videoconferences without the use of an independent bridging service. The Polycom
unit also can be used in H.323 (LAN) applications. The price point for the
system is comparable with the Company's price points for its products. The
Company believes that Polycom will continue to create market opportunities for
theirs and the Company's products by aggressively emphasizing the value of
settop videoconferencing architecture. The Company feels that its product can be
differentiated from the Polycom system in architecture, software capability and
selected performance levels in both video, audio and connectivity.
PictureTel Corporation offers products for sale within all market
segments. They offer products which directly compete against RSI's product line.
Currently, their Concorde, Venue and SwiftSite systems are based on personal
computer engines and list at price points higher than RSI's products. RSI is
fully compatible with these systems when operated under published industry
standards. Long-term, the Company believes that PictureTel will continue to
produce competitive products into the market segments and remain a significant
marketplace participant.
VTEL Corporation offers computer-based products that are targeted
at the education and medical vertical markets. Their distribution is through
large interexchange communications carriers such as MCI, Sprint and the Bell
Operating Companies. In order to meet the needs of the workgroup market segment,
they have entered into an OEM agreement with the Company to resell a version of
the RSI product under the VTEL label.
Tandberg offers a full range of videoconferencing systems for sale
within most of the existing marketplace segments. They have strong distribution,
and within the settop rollabout workgroup market segment they offer a
non-computer-based system which delivers consistent video and audio quality.
Their systems are generally higher in price than the Company's products.
Sony Corporation offers a settop and a rollabout system that
compete with the RSI product line. They have worldwide distribution and solid
name recognition.
VCON competes in the Company's identified market segment. They
also provide a computer-based settop and rollabout videoconferencing system.
With a focus on H.323 (LAN) applications, VCON has established distribution in
North America, Europe and portions of Asia. The Company believes that VCON will
continue to expand its distribution presence.
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Intel competes in the workgroup market segment with its rollabout
system. Intel has solid name recognition and strong distribution.
Aethra, C-Phone and several other companies also compete in the
settop market.
Though the Company has unique products with identifiable features
and levels of performance, there is no guarantee that another manufacturer or
organization could not enter the marketplace with similar or improved levels of
capability. The Company expects to continue refining its products, remain at the
lower end of the price curve for high performance systems, offer aggressive
margins to its customers and keep the product at the high end of the performance
curve for comparable systems.
MANUFACTURING
The Company's videoconferencing engines are manufactured by a third
party manufacturer, Altron, Inc. (Altron) under a manufacturing agreement signed
on September 10, 1996. In addition to manufacturing, Altron provides all
purchasing, material control, testing services and product warranty coverage for
the Company's videoconferencing engines. Altron warrants that all products will
be free from defects in material and workmanship for fifteen (15) months from
the date Altron ships to the Company, or for twelve (12) months from the date
the Company ships to the customer, whichever comes first.
A major component in the Video Flyer product family for which the
Company depends on a single source is the compression chip. The Company
currently maintains an inventory of the compression chips sufficient to allow
for time to redesign its videoconferencing engines to accommodate similar
components from other vendors in the event the compression chip currently used
was to become unavailable to the Company. Although materials purchasing services
are provided by Altron, alternate suppliers have been identified by the Company
for most other components in its videoconferencing engines. The Company has no
information which would indicate that the compression chip or other components
currently used may become unavailable during the product life cycle of its
products.
The Company believes Altron has the capacity and capability to satisfy
manufacturing requirements for its videoconferencing engines in the foreseeable
future. The Company has identified an alternate manufacturer with capabilities
acceptable to the Company. If a disruption in manufacturing were to occur, the
Company believes it could utilize the alternative manufacturer to satisfy
production requirements.
APPROVALS AND CERTIFICATIONS
Government and telecommunications carrier approvals, safety
certifications and Electromagnetic Compliance (EMC) certifications are a key
requirement for electronic systems that use the telephone network. The MediaPro
384 product family has received the Safety, EMI and Telephone certifications
required to sell the product into the United States, Canada, the European Union
and Australia. The Company is currently pursuing certification for the MediaPro
product family in other countries.
In the United States the Video Flyer Plus system and similar products
have been certified by the FCC as a class A (business) device. The Company has
received certification from Underwriters Laboratories Inc. ("UL") that the Video
Flyer and similar systems comply with the applicable requirements for U.S. and
Canada Listing. The Company has also received telephone, safety and EMC
certifications for its Video Flyer system in Australia, the European Union,
Singapore, Malaysia, Korea, Indonesia and South Africa.
Although the Company has obtained telephone, safety and EMC
certifications for its videoconferencing systems in the countries noted above,
the Company cannot predict whether it will obtain necessary approvals and
certifications for the systems and similar products or for future products in
additional countries. Also, the Company cannot predict whether applicable law or
regulations might change in a way adverse to the Company's ability to sell its
products in a particular country.
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INTELLECTUAL PROPERTY AND ROYALTY AGREEMENTS
The Company's success is dependent in part on its proprietary
information, technology and expertise. The Company relies on a combination of
patents, trade secrets, copyrights and confidentiality agreements to establish
and protect its proprietary rights. In fiscal year 1998, the Company amended its
U.S. utility patent application for its peripheral videoconferencing system,
originally filed in September 1994, to narrow and refocus the Company's claims.
The Company received a patent on its system on September 1, 1998. The Company
has also applied for various foreign patents relating to its videoconferencing
engines, none of which have been granted to date.
With respect to its technical employees and consultants, the Company
requires these employees to sign an agreement which obligates them to keep
confidential certain trade secrets and information of the Company and to assign
to the Company any inventions arising from their work for the Company, as
permitted by law. Depending on the responsibilities of a particular employee,
the Company may also consider having such an employee sign a non-compete
agreement.
The software embedded in the Company's videoconferencing systems
carries a standard license agreement for the end-user. The software license
agreement is included in the System manuals and grants the purchaser a
non-exclusive and non-transferable license to use the software program.
The Company entered into a software licensing agreement in November
1998 with a software development company. Pursuant to the agreement, the Company
is to pay a royalty fee of $5.00 per unit of videoconferencing systems sold.
Sales of the related videoconferencing systems are expected to begin shipping in
the first quarter of fiscal year 2000.
The Company entered into a software license agreement with a software
development company on April 8, 1998. Pursuant to the agreement, the Company
pays a royalty fee of up to $5.00 per unit of videoconferencing systems sold.
Sales of the related videoconferencing systems began in fiscal year 1998.
The Company entered into a license agreement with a software
development company on February 2, 1996. Pursuant to the agreement, the Company
was granted a non-exclusive, non-transferable license to use and modify specific
software components in the creation of the Company's videoconferencing systems,
subject to certain limitations. License fees payable by the Company included an
initial licensing fee of $60,000 for the right to develop a stand alone
videoconferencing system and an additional $30,000 upon production. In addition
to these licensing and production fees, the Company is required to pay a royalty
of $40.00 on each of the first 1,000 videoconferencing systems sold, $4.75 for
the following 9,000 videoconferencing systems sold, $6.25 for the following
90,000 videoconferencing systems sold and $5.10 for each videoconferencing
systems sold in excess of 100,000. Sales of the related videoconferencing
systems began in fiscal year 1997.
Pursuant to a license agreement with a software development company,
which provides certain ISDN software used in the Company's videoconferencing
systems, the Company pays a royalty of $25 on each of the first 10,000 systems
sold, $15 on each system over 10,000 up to 50,000 and $8 on each system sold in
excess of 50,000.
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses in fiscal year
1999 and 1998 of $1,281,718 and $993,525 respectively.
EMPLOYEES
On September 27, 1999, the Company had thirty-nine full-time employees;
ten in sales; five in marketing and customer support; five in technical support;
nine in product development and engineering; three in operations and seven in
administration and finance. None of the Company's employees is represented by a
labor union. The Company believes its employee relations are good.
9
<PAGE>
CERTAIN IMPORTANT FACTORS
There are several important factors that could cause the Company's
actual results to materially differ from those anticipated by the Company or
which are reflected in any forward-looking statements of the Company. These
factors, and their impact on the success of the Company's operations and its
ability to achieve its goals, as well as those listed in the "Risk Factors"
section of the Company's Registration Statement on Form S-3 (File No.
333-46721), include the following:
(1) The history of operating losses experienced by the Company since
its inception and the ability of the Company to avoid additional
operating losses and net losses over the next year.
(2) The ability of the Company to identify and develop new products
and gain their acceptance by the marketplace and the impact of
new technology on the Company's products.
(3) The impact of competition within the mobile workgroup, private
office and other segments of the overall market for
videoconferencing equipment.
(4) The impact of Year 2000 issues on the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 7,651 square feet of space at its headquarters in
Edina, Minnesota under a lease agreement which expires on September 30, 1999.
The Company also leases 3,479 square feet of warehouse space near its
headquarters. The Company believes its current space is sufficient for its
current and anticipated needs. Currently, the Company is in negotiations with
its landlord to extend the lease for its headquarters until July 2000. If the
lease were not extended, the Company believes it could locate alternative space
suitable for operations with minimal disruption to operations. The following
schedule summarizes payments made in fiscal year 1999 for space leased by the
Company:
<TABLE>
<CAPTION>
Location Amount
-------- ------
<S> <C>
Edina, MN Headquarters $95,840
Edina, MN Warehouse 15,531
Amsterdam Sales Office 40,141
Florida Sales Office 1,220
Chicago Sales Office 4,691
Australia Sales Office 5,869
-----
TOTAL $163,292
--------
--------
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal or administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 25, 1995 (the date of the Company's initial public offering
of Common Stock), the Company's Common Stock has been traded in the
over-the-counter market and is quoted on the NASDAQ SmallCap Market System. The
following table sets forth the high and low close prices for the Company's
Common Stock as reported by NASDAQ. Such quotations represent interdealer
prices, without retail markup, markdown or commission, and do not necessarily
represent actual transactions for the fiscal quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter $3.875 $1.250
Second Quarter 4.000 2.375
Third Quarter 3.000 1.750
Fourth Quarter 3.000 1.500
1999
First Quarter $4.000 $1.500
Second Quarter 3.750 1.875
Third Quarter 3.563 2.375
Fourth Quarter 2.375 1.625
</TABLE>
As of September 23, 1999, there were (a) 6,971,281 shares of Common
Stock outstanding, held of record by approximately 125 persons, (although the
Company has been informed that there are approximately 1,100 beneficial owners)
(b) outstanding options to purchase an aggregate of 1,418,166 shares of Common
Stock, and (c) outstanding warrants to purchase an aggregate of 595,626 shares
of Common Stock. The Company has not declared or paid any cash dividends on its
Common Stock since its inception and does not intend to pay any dividends for
the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998.
NET SALES. In fiscal year 1999, net sales increased to $9,199,135, up
97.3% from $4,662,558 in fiscal year 1998. The increase in sales in fiscal year
1999 compared to fiscal year 1998 was the result of higher unit volume
associated with increased marketing and broader distribution channels, which was
partially offset by lower average pricing.
The Company experienced increased unit sales volume to OEM partners in
both Europe and the United States in fiscal year 1999. In fiscal year 1999, OEM
sales accounted for approximately 50% of total net sales dollars, while OEM
sales amounted to roughly 15% of net sales in fiscal year 1998.
In fiscal year 1999, the Company sold units under a private label
relationship with Philips Business Electronics N.V. (Philips) of Eindhoven, The
Netherlands. Under the agreement, the Company and Philips co-developed a
videoconferencing system for sale to Philips and ultimate distribution through
Philips' worldwide network of resellers. Sales to Philips accounted for
approximately $159,000 of the $4,536,577 increase in net sales in fiscal year
1999 over fiscal year 1998.
11
<PAGE>
In July, 1998, the Company entered into another co-development
agreement with VTEL Corporation of Austin, Texas (VTEL). Under the terms of this
agreement the Company co-developed videoconferencing systems for distribution
through VTEL's worldwide network of resellers. Sales to VTEL accounted for
approximately $2,885,000 of the $4,536,577 increase in net sales in fiscal year
1999 over fiscal year 1998.
In October 1998, the Company entered into a private label agreement
with Gentner Corporation, in which the Company provided a modified version of
the Video Flyer Plus system for the purpose of integration into Gentner's
product line, which is aimed at providing turnkey communications solutions to
its customers. Sales to Gentner accounted for approximately $700,000 of the
$4,536,577 increase in net sales in fiscal year 1999 compared to fiscal year
1998.
Net sales in the fourth quarter of fiscal year 1999 were approximately
$1,453,000, which dropped significantly from average quarterly sales of
approximately $2,582,000 for the nine-month period ending March 31, 1999. The
decrease in net sales during the fourth quarter of fiscal year 1999 was caused
primarily by a reduction in net sales to OEM and private label customers along
with lower net sales to the Company's resellers in the fourth quarter compared
to average quarterly net sales to these customers during the first three
quarters. Net sales to OEM and private label customers decreased during the
fourth quarter of fiscal year 1999 because these customers ordered the minimum
quantities required under their OEM and private label agreements with the
Company. In the fourth quarter of fiscal year 1999, these minimum quantities
were lower than average quarterly minimum quantities during the nine months
ended March 31, 1999.
Sales to the Company's resellers declined during the fourth quarter of
fiscal year 1999 as a result of the Company's introduction of its new MediaPro
product in June 1999. The Company believes many of its current or new resellers
who ordinarily would have ordered units in the fourth quarter of fiscal year
1999 did not do so because they wanted to sell the MediaPro product and
production units were not available until after the end of the Company's fiscal
year. The Company believes that most of the reduction in sales from resellers in
the fourth quarter of fiscal year 1999 may not be recovered in fiscal year 2000
because end users may have purchased alternative equipment from competitors in
the fourth quarter due to the unavailability of MediaPro.
Although the Company plans to continue pursuing and supporting OEM and
private label customers and their needs, it also expects to aggressively pursue
a strategy of building a stronger channel of resellers to sell its products
under the RSI label in fiscal year 2000. The Company believes that the addition
of the MediaPro product line, combined with an ability to offer programs that
provide attractive margins to resellers allows the Company to pursue such a
strategy. With this plan, the Company expects increased unit volume in fiscal
year 2000 compared to fiscal year 1999. The increase resulting from a higher mix
of sales through resellers is expected to more than offset the impact of a lower
mix of sales through private label relationships in fiscal year 2000 compared to
fiscal year 1999.
Average pricing decreased during fiscal year 1999 as a result of an
increased proportion of sales through private label relationships compared to
fiscal year 1998 and competitive pressure on the Company's Video Flyer Plus
product. The Company's new MediaPro product carries higher average pricing than
Video Flyer Plus. The Company's plan to increase the mix of sales to resellers
under its own name in fiscal year 2000 and to emphasize the MediaPro product
line are expected to mitigate downward pressure on price points. Since the
Company may experience increased competition in the future, the Company plans to
continue its strategy of providing additional value added enhancements to its
products in fiscal year 2000 to further counteract any downward pressure on
price points.
As a result of higher expected unit volume and Company plans to
mitigate downward pressure on price, the Company expects fiscal year 2000
revenues to increase compared to fiscal year 1999.
GROSS PROFIT (LOSS). The Company generated a gross profit of $4,751,192
or 51.6% of net sales for fiscal year 1999 compared to a gross profit of
$2,539,005 or 54.5% of net sales for fiscal year 1998. Cost of goods sold in
fiscal year 1999 amounted to $4,447,943, or 48.4% of net sales compared to
$2,123,553 or 45.5% of net sales in fiscal year 1998. The higher cost of goods
sold relative to net sales in fiscal year 1999 resulted from a higher proportion
of sales in fiscal year 1999 to OEM and private label customers which were
priced lower than sales to resellers under the RSI label.
12
<PAGE>
The Company's new MediaPro product was designed with a lower
manufacturing cost than Video Flyer Plus in order to minimize gross profit
erosion. As a result of this factor and an expected shift toward a higher
proportion of sales to resellers under the RSI label, even with increased
competition overall gross margins are expected to remain relatively stable in
fiscal year 2000 compared to fiscal year 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1,281,718 or 13.9% of net sales for fiscal year 1999 compared to $993,525
of 21.3% of net sales for fiscal year 1998. The decrease as a percentage of net
sales was due to higher sales volume in fiscal year 1999 as discussed above. The
higher amount of dollar spending on research and development in fiscal year 1999
compared to fiscal year 1998 was caused by the Company's full scale development
of its new MediaPro product in fiscal year 1999. In fiscal year 1998, the
Company's research and development activities were concentrated on enhancements
to the Video Flyer product line which required lower overall expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses were $4,268,296 or 46.4% of net sales for fiscal year
1999 compared to $3,478,665 or 74.6% of net sales for fiscal year 1998. The
percentage decrease was due to the higher sales volume in fiscal year 1999. In
fiscal year 1999, the Company increased its marketing, sales and technical
support expenses in North America and Europe to help generate and support higher
sales volume, resulting in a higher level of dollar expenditures.
OTHER INCOME AND EXPENSE. In fiscal year 1999, interest expense was
$151,569 compared to $86,649 for fiscal year 1998. The increase in fiscal year
1999 was due to increased outstanding borrowings on the Company's line of credit
throughout fiscal year 1999, compared to fiscal year 1998. The higher borrowing
was a result of growth of the business and related working capital needs in
fiscal year 1999. Interest income was $68,946 in fiscal year 1999 compared to
$53,249 in fiscal year 1998. The higher interest income in fiscal year 1999 was
due to increased cash and cash equivalents available to the Company in fiscal
year 1999 from the Company's private placement in January 1998.
NET OPERATING LOSS CARRYFORWARDS. The Company has net operating loss
carryforwards for financial and federal income tax reporting purposes of
approximately $14,848,000 which can be used to offset taxable income in future
years. Sales of the Company's equity during fiscal year 1998, 1997 and 1996 have
caused changes in ownership under section 382 of the Internal Revenue Code of
1996, which limits the use of the Company's net operating loss carryforwards
existing as of the date of the ownership change. It is not anticipated that any
limitation would have a material adverse effect on the Company.
As a result of the above, the net loss for fiscal year 1999 was
$(878,675) or $(0.13) per share, compared to a net loss of $(1,959,956), or
$(0.34) per share for fiscal year 1998. The net loss was primarily a result of
lower net sales in the fourth quarter of fiscal year 1999 compared to the first
three quarters as discussed above. Although there can be no assurances of
profitability, the Company believes it has entered fiscal year 2000 with a solid
plan for increasing net sales and profitability. This plan is centered around
Company efforts to increase the mix of sales through resellers and maintain
gross margins comparable to fiscal year 1999 with a focus on the MediaPro
product line.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997.
NET SALES. In fiscal year 1998, net sales increased to $4,662,558, up
81.4% from $2,570,851 in fiscal year 1997. The increase in sales in fiscal year
1998 compared to fiscal year 1997 was the result of higher unit volume
associated with increased marketing and broader distribution channels as well as
higher average pricing.
Although sales to resellers in the Pacific Rim declined in fiscal year
1998 due to the economic uncertainty in that region, the Company experienced
increased unit sales volume to resellers in both Europe and the United States in
fiscal year 1998. Also in fiscal year 1998, units sold directly to end users
increased over end user sales volume in fiscal year 1997, due to the Company's
increased focus on large national accounts.
In fiscal year 1998, the Company began selling units under a private
label relationship with Philips Business Electronics N.V. (Philips) of
Eindhoven, The Netherlands. Under the agreement, the Company and Philips
co-
13
<PAGE>
developed a videoconferencing system for sale to Philips and ultimate
distribution through Philips' worldwide network of resellers. Sales to Philips
accounted for approximately 37% of the $2,091,707 increase in sales in fiscal
year 1998 over fiscal year 1997.
The average pricing levels increased in fiscal year 1998 because the
Company's product mix shifted to its new Video Flyer and Video Flyer Plus
products in fiscal year 1998. Video Flyer was first shipped in March, 1997.
Therefore, product mix in fiscal year 1997 included a significant portion of the
Company's previous generation product, which carried a lower overall sales
price.
GROSS PROFIT (LOSS). The Company generated a gross profit of $2,539,005
or 54.5% of net sales for fiscal year 1998 compared to a gross loss of
$(763,793) or (29.7%) of net sales for fiscal year 1997. The 1997 gross loss
resulted from an inventory writedown to lower of cost or market of $1,430,428
related to the Company's previous generation product. Cost of goods sold in
fiscal year 1998 amounted to $2,123,553, or 45.5% of net sales compared to
$1,904,216 or 74.1% of net sales in fiscal year 1997. The lower cost of goods
sold relative to net sales in fiscal year 1998 resulted from a full year of
production of the Company's Video Flyer and Video Flyer Plus products in fiscal
year 1998, compared to only four months in fiscal year 1997. A significant
portion of the Company's sales in fiscal year 1997 were generated from its
previous generation product, which was lower priced and more costly to
manufacture than the Video Flyer.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $993,525 or 21.3% of net sales for fiscal year 1998 compared to $1,528,493
of 59.5% of net sales for fiscal year 1997. The decrease as a percentage of net
sales was due to higher sales volume in fiscal year 1998 as discussed above. The
higher amount of dollar spending on research and development in fiscal year 1997
compared to fiscal year 1998 was caused by the Company's full scale development
of its new Video Flyer product in fiscal year 1997. In fiscal year 1998, the
Company's research and development activities were concentrated on enhancements
to the Video Flyer, requiring lower overall expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling general and
administrative expenses were $3,478,665 or 74.6% of net sales for fiscal year
1998 compared to $3,445,301 or 134.0% of net sales for fiscal year 1997. The
percentage decrease was due to the higher sales volume in fiscal year 1998. In
fiscal year 1998, the Company increased its marketing and sales expenses in
North America and Europe to help generate higher sales. Offsetting these expense
increases were reductions in the Company's Pacific Rim sales office and in
intangible assets amortization expenses. As a result, the actual dollar amount
of expenses in fiscal year 1998 were comparable with the expenses in fiscal year
1997.
OTHER INCOME AND EXPENSE. Interest income was $53,249 for fiscal year
1998 compared to $90,324 for fiscal year 1997. The higher interest income in
fiscal year 1997 was due to higher cash and cash equivalents available to the
Company during fiscal year 1997 due to the Company's private offering in
September, 1996 which raised approximately $3,943,000. In fiscal year 1998,
interest expense was $86,649 compared to $40,340 for fiscal year 1997. The
increase in fiscal year 1998 was due to outstanding borrowings on the Company's
line of credit throughout fiscal year 1998. There was no line of credit during
fiscal year 1997.
As a result of the above, the net loss for fiscal year 1998 was
$(1,959,956) or $(0.34) per share, compared to a net loss of $(5,684,690),
or $(1.30) per share for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES. Cash and cash
equivalents, combined with marketable securities, totaled $1,411,808 on June 30,
1999 compared to $1,361,648 on June 30, 1998. The primary reason for the
relatively stable level of cash and marketable securities during fiscal year
1999 was that cash used in operating activities was largely offset by increased
borrowing from the Company's line of credit, as discussed below.
NET CASH USED IN OPERATING ACTIVITIES. The amount of cash used in
operating activities was $(598,245) during fiscal year 1999 compared to
$(2,582,643) during fiscal year 1998. The cash used in operating activities
14
<PAGE>
resulted mainly from a net loss of $(878,675) which was partially offset by
non-cash depreciation expenses of $291,613.
At June 30, 1999, an increase in the Company's supply of compression
chips and other components resulted in increased levels of inventory compared to
June 30, 1998. In addition, the Company had a higher inventory of Video Flyer
Plus products at June 30, 1999, compared to June 30, 1998. The Company expects
to continue selling both its Video Flyer Plus products and MediaPro products in
fiscal year 2000. In addition, inventory levels are expected to increase in
fiscal year 2000 to support the multiple lines of products and expected overall
growth in sales volume.
In connection with its business growth and new products, accounts
payable increased $294,823 from June 30, 1998 to June 30, 1999, partially
offsetting the cash used in operations resulting from increased inventory
levels.
NET CASH USED IN INVESTING ACTIVITIES. In fiscal year 1998, the Company
invested a portion of the proceeds of a January 1998, private placement of its
common stock in marketable securities. As of June 30, 1999, $1,952,015 of these
securities had matured and a total of $1,964,770 had been invested.
During fiscal year 1999, the Company also invested in new equipment
totaling $122,806 to support the overall growth in the Company.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by financing
activities was $770,576, which was comprised primarily of $750,042 borrowed on
the Company's line of credit and $101,719 from the issuance of common stock
associated with the exercise of employee stock options and stock warrants held
by individuals and a director. Offsetting these sources of cash were payments
made for equipment leased under capital leases of $81,185.
On September 3, 1999, the Company amended its commercial loan agreement
with a bank. The new agreement provided the Company with an increase in its
committed line of credit, from $2,000,000 to $2,500,000. The line is secured by
all corporate assets and provides working capital based on a borrowing base
comprised of accounts receivable, inventory and marketable securities.
Management plans to continue to increase sales and improve operating
results through increased marketing and broader distribution of its products
through a stronger dealer network. The Company believes that funds generated
from operations and funds available under the line of credit will be sufficient
to cover cash needs. In the event these sources of cash are not sufficient,
management would seek additional financing or would conserve cash by reducing
administrative, product development, and sales and marketing expenses.
NASDAQ LISTING REQUIREMENTS
The Nasdaq SmallCap Stock Market requires several minimum valuations
for member companies such as the Company to remain listed. One such requirement
is that the Company maintain a net tangible asset balance of at least $2
million. On June 30, 1999, the Company had a net tangible asset balance of
$1,486,383, which was below the Nasdaq requirement. The Company expects to raise
additional capital and improve operating results in order to meet the Nasdaq
requirement. However, there can be no assurance that the Company will be able to
raise such capital, or of the timing of such activity, or that the Company will
continue to remain listed even if such capital is raised. If the Company is
delisted from the Nasdaq SmallCap Market for failure to meet the listing
requirements, the common stock would be subject to the rules relating to "penny
stocks". These rules require brokers who sell penny stocks to persons other than
established customers and "institutional accredited investors" to complete
documentation, make suitability inquiries of investors and provide investors
with information concerning the risks of trading in the security. These rules
may restrict the ability of brokers to sell the Company's common stock and may
affect the ability of owners of the common stock to sell it in the secondary
market.
YEAR 2000 ISSUES
The Company has completed what it believes to be the critical aspects
of preparing for Year 2000 issues relative to its business. The following
information outlines the current status of the Company's activities and plans
15
<PAGE>
regarding the Year 2000 issue.
COMPANY STATE OF READINESS.
DESCRIPTION OF THE COMPANY'S INFORMATION TECHNOLOGY AND NON-INFORMATION
TECHNOLOGY SYSTEMS. The Company uses a widely used PC based information system
to process financial transactions and generate financial information. The
Company also uses various other PC based software packages to support its
business. These systems are linked by a network at the Company's headquarters in
Edina, Minnesota. No significant information systems are located outside the
Company's headquarters, other than individual stand alone PC software packages
used by sales personnel. The Company's videoconferencing products utilize
imbedded technology supported by microcontrollers which do not utilize time or
dates to operate.
STATUS OF COMPANY TIMETABLE FOR YEAR 2000 READINESS. The Company has
completed the following phases and timetable for becoming ready for the Year
2000:
Awareness Phase - The Company has researched the Year 2000 issue and
has had communication both internally and with outside parties including its
bank, key suppliers and certain customers. The Company is aware of the potential
issues surrounding the Year 2000 problem and this phase is complete.
Assessment Phase - This phase included establishing a Year 2000 team
and investigating how Year 2000 issues may impact the Company, both in terms of
the specific aspects of the business which could be affected, and the
consequences to the Company if it is not prepared. The Company has completed
this phase.
Renovation Phase - The renovation phase covered all Company actions to
correct systems which were not Year 2000 compliant, or develop alternate systems
in all areas which were determined to have a significant impact on the Company
if not corrected. The Company completed this phase.
Validation Phase - This phase included all Company activities performed
to test any new or alternate systems for conducting its business, and taking
corrective actions in situations where new systems do not properly handle year
2000 problems. This phase is completed.
Implementation Phase - In this phase, the Company began utilizing all
newly developed systems which were installed to correct Year 2000 problems as
they relate to the Company. This phase is completed.
DESCRIPTION OF COMPANY RELATIONSHIPS WITH THIRD PARTIES RELATIVE TO
YEAR 2000 ISSUES. The Company has relationships with key suppliers to support
its business. These suppliers include its third party manufacturer, (Altron,
Inc.), suppliers for critical components including 8x8, Inc., suppliers for
third party software utilized in the Company's product and other key vendors.
While the Company believes alternate vendors could be utilized to provide
comparable products and services currently provided by its key vendors, the
Company currently relies on its relationships with its key vendors to conduct
its business, and changes in sources of key products and services could have a
material impact on the Company. The Company has completed the process of
assessing the impact of these third party risks and has determined the risks to
be minimal.
COSTS TO ADDRESS COMPANY'S YEAR 2000 ISSUES.
The costs of assessing the year 2000 problem have been insignificant
and remediation costs have not been material to the Company's financial
condition or operating results.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES.
A worst case scenario relative to the Year 2000 issue would be that the
Company needs to replace both its information technology and non-information
technology systems, and utilize alternate sources of supply for its critical
components and third party manufacturing. Because of its current size, the
Company believes replacement of its current information systems would not result
in costs material to the Company's financial condition or results of operations.
In the event key sources of supply were disrupted due to Y2K issues with
vendors, the Company
16
<PAGE>
believes it could implement suitable alternative sources of supply but the
situation could have a material impact on the Company's business. The Company
has analyzed these uncertainties as part of its Year 2000 assessment phase and
has a plan of action to minimize the uncertainties and mitigate the potential
costs involved, should the worst case scenario occur.
CONTINGENCY PLANS.
The Company currently has a contingency plan to handle the worst case
scenario above. The Company believes it is not practical to implement
remediation efforts to remove the risks of the worst case scenario above, due to
the costs involved and the Company's belief that the likelihood of the worst
case scenario occurring is remote. The Company continues to monitor the Y2K
situation carefully as is relates to its business and expects to take
appropriate measures to mitigate the impact of a worst case scenario should
signs of it become apparent.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statement and Independent Auditors' Report
thereon are included herein.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................ 25
Balance Sheets as of June 30, 1999 and 1998............................. 26
Statements of Operations for the years ended
June 30, 1999, 1998 and 1997.......................................... 27
Statements of Stockholders' Equity for
the years ended June 30, 1999, 1998 and 1997.......................... 28
Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997............................................ 29
Notes to Financial Statements........................................... 30
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position with Company
- ---- --- ---------------------
<S> <C> <C>
Donald C. Lies 51 Chairman of the Board, Chief Executive
Officer and President
Richard F. Craven 56 Chairman of the Board, and Acting Chief Executive
Officer and President
David W. Stassen 47 Director
Manfred D. Haiderer 59 Director
James D. Hanzlik 43 Chief Financial Officer
Marti D. Miller 42 Vice President of Engineering
</TABLE>
DONALD C. LIES became President, Chief Executive Officer and a director
of the Company on July 1, 1996. Before joining the Company, Mr. Lies founded
CHORUS Marketing Group in May of 1989 and served as its President until June of
1996. CHORUS specialized in both reengineering of management, 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. Mr. Lies resigned his position as Chairman, Chief
Executive Officer and President on September 7, 1999.
RICHARD F. CRAVEN became acting President, Chief Executive Officer and
Chairman of the Board on September 7, 1999. He is a founder of the Company and
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
has 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. Mr. Stassen resigned his position as a
director on August 30, 1999.
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. Mr. Haiderer resigned his position as a director on
September 7, 1999.
JAMES D. HANZLIK became Chief Financial Officer on January 9, 1997. Before
joining the Company, Mr. Hanzlik was Vice President, Controller for Sterner
Lighting Group, a manufacturer of commercial lighting. Prior to that, Mr.
Hanzlik served as Controller and Product Group Manager for Despatch Industries
Ltd. a manufacturer of industrial heat processing equipment.
19
<PAGE>
MARTI D. MILLER became Vice President of Engineering in August 1995. Before
joining the Company, Mr. Miller was Director of Engineering for Transition
Networks, Inc.
The members of the Board of Directors are elected annually at the
Annual Meeting of Shareholders. Executive officers are elected by the Board of
Directors and serve until their successors are elected and appointed.
BOARD OF DIRECTORS' COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee 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
Compensation Committee 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. Currently, both committees consist of Mr. Craven only until
replacements to the Board of Directors are installed.
(B) SECTION 16 (a) 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 initial reports of
ownership and reports of changes in ownership of the Company's Common Stock.
Executive officers, directors and greater than 10% beneficial owners are also
required to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based upon a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended June 30, 1999, none of the
Company's directors or 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.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered for the years ended June 30, 1997, 1998 and 1999
to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal year 1999 and (ii) the other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 in fiscal year
1999 (the "Named Executive Officers"). Other than those individuals listed
below, no executive officer of the Company received cash compensation of more
than $100,000 in fiscal year 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND PRINCIPAL FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) 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 1999 194,769 0 0 150,000
Mr. James D. Hanzlik 1997 39,885 0 0 40,000 1,800
CHIEF FINANCIAL OFFICER 1998 89,885 0 0 20,000 4,200
1999 102,625 0 0 40,000 4,800
Marti D. Miller 1997 96,000 0 0 40,000 0
VICE PRESIDENT, 1998 107,723 0 0 20,000 0
ENGINEERING 1999 129,969 0 0 40,000 0
</TABLE>
20
<PAGE>
(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, 1999, Mr. Lies owned
25,000 shares of the restricted stock pursuant to the agreement, with
an aggregate value of $42,200 based on the June 30, 1999, closing bid
price of the Company's Common Stock of $1.688 per share.
OPTION GRANTS AND EXERCISES
The tables below set forth information about the stock options held by
the Named Executive Officers and the potential realizable value of the options
held by such person on June 30, 1999. No stock options were exercised by the
Named Executive Officers of the Company during fiscal year 1999.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS GRANTED (#)(1) IN FISCAL YEAR 1999 ($/SH) EXPIRATION DATE
---- ---------------------- -------------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Donald C. Lies 150,000(2) 23.0% 2.00 September 7, 1999
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Marti D. Miller 40,000(3) 6.1% 2.00 October 6, 2003
VICE PRESIDENT,
ENGINEERING
James D. Hanzlik 40,000(4) 6.1% 2.00 October 6, 2003
CHIEF FINANCIAL
OFFICER
</TABLE>
- --------------------
(1) During fiscal year 1999, options to acquire an aggregate of 653,000 shares
of Common Stock were granted to all employees and options to acquire 50,000
shares of Common Stock were granted to non-employee directors and other
non-employees.
(2) 150,000 options were granted to Mr. Lies on October 7, 1998. As a result of
his resignation from the Company on September 7, 1999, (See Employment
Agreements), the options were cancelled, and none are vested or
exercisable.
(3) 40,000 options were granted to Mr. Miller on October 7, 1998. The options
become vested and exercisable in three equal installments commencing one
year after the date of the grant.
(4) 40,000 options were granted to Mr. Hanzlik on October 7, 1998. The options
become exercisable in three equal installments commencing one year after
the date of the grant.
21
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT JUNE 30, 1999 (#) AT JUNE 30, 1999 ($)(1)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald C. Lies 0 0 406,666 158,334 55,988 4,692
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Marti D. Miller
VICE PRESIDENT, 0 0 51,667 68,333 16,890 5,630
ENGINEERING
James D. Hanzlik 0 0 36,667 63,333 16,890 5,630
CHIEF FINANCIAL
OFFICER
</TABLE>
- --------------------
(1) Based on the June 30, 1999, closing bid price of the Company's Common Stock
of $1.688 per share.
EMPLOYEE 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 and in 1998, Mr. Lies's salary was increased to
$200,000. In addition to the foregoing, the agreement entitled Mr. Lies to all
other benefits available generally to employees of the Company, including
vacation and health benefits. On September 7, 1999, Mr. Lies resigned from the
Company. Under the terms of a severance agreement, Mr. Lies is to be paid his
annual salary of $200,000 in 12 equal monthly installments beginning September
8, 1999. The severance agreement precludes Mr. Lies from competing with the
Company until August 31, 2000.
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 10,000 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 November 19, 1998, options to acquire 10,000 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.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 23, 1999, the number of
shares of the Company's Common Stock beneficially owned by (i) each director of
the Company; (ii) each of the Named Executive Officers; (iii) each person 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, Minneapolis, MN, 55439.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
- ---- ------------------ ----------------
<S> <C> <C>
Donald C. Lies................................ 454,991 (1) 6.2%
Richard F. Craven............................. 998,000 (2) 14.2%
David W. Stassen.............................. 80,000 (3) 1.1%
Manfred D. Haiderer........................... 20,000 (4) *
Marti D. Miller............................... 61,668 (5) *
James D. Hanzlik.............................. 56,668 (6) *
All Current Executive Officers and
Directors as a Group (6 persons).............. 1,671,327 (7) 22.0%
Perkins Capital Management.................... 554,200 8.0%
</TABLE>
- --------------------
* Indicates ownership of less than 1%.
(1) Includes 406,666 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes (i) 47,500 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 40,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(4) Includes 20,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(5) Includes 61,668 shares which may be acquired within 60 days upon the
exercise of stock options.
(6) Includes 56,668 shares which may be acquired within 60 days upon the
exercise of stock options.
(7) Includes 632,502 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
23
<PAGE>
ITEM 12. 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
$148,371, $108,405 and $97,500 during fiscal year 1999, 1998 and 1997
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 176,725 shares of the Company's Common Stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
See Exhibit Index on page 41 which is incorporated herein by
reference. Exhibits that cover management contract or compensatory
plans or arrangements are marked with an asterisk (*) in the Exhibit
Index.
(b) REPORTS ON FORM 8-K
None.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
RSI Systems, Inc.:
We have audited the accompanying balance sheets of RSI Systems, Inc. (the
Company) as of June 30, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RSI Systems, Inc. as of June
30, 1999 and 1998, and the results of its operations and its cash flows for each
of the years in the three-year period ended June 30, 1999, in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota
August 12, 1999, except as to notes 3 and 5
which are as of September 3, 1999, and
note 7(b) which is as of September 7, 1999
<PAGE>
RSI SYSTEMS, INC.
Balance Sheets
June 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 418,863 382,093
Marketable securities 992,945 979,555
Accounts receivable, net of allowance for doubtful
accounts of $228,000 in 1999 and $254,000 in 1998 1,517,650 1,541,626
Inventories (note 4) 1,034,238 637,422
Prepaid expenses 86,566 56,949
------------ -------------
Total current assets 4,050,262 3,597,645
------------ -------------
Property and equipment:
Furniture and equipment 1,318,843 1,038,463
Leasehold improvements 56,279 50,625
Less accumulated depreciation and amortization (852,016) (560,403)
------------ -------------
Net property and equipment 523,106 528,685
------------ -------------
$ 4,573,368 4,126,330
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (note 5) $ 1,247,757 497,715
Current portion of capital lease obligations (note 6) 106,140 55,388
Accounts payable 1,332,154 1,037,331
Accrued expenses 183,569 124,254
Deferred revenue 77,800 40,664
------------ -------------
Total current liabilities 2,947,420 1,755,352
------------ -------------
Long-term liabilities:
Capital lease obligations, net of current portion (note 6) 139,565 107,639
------------ -------------
Total long-term liabilities 139,565 107,639
------------ -------------
Stockholders' equity (note 9):
Common stock, par value $.01 per share, authorized 10,000,000
shares;6,837,281 and 6,657,281 issued and outstanding at
June 30, 1999 and 1998, respectively 68,373 66,573
Additional paid-in capital 17,338,241 17,238,322
Accumulated deficit (15,920,231) (15,041,556)
------------ -------------
Total stockholders' equity 1,486,383 2,263,339
Commitments and contingencies (notes 6 and 7)
------------ -------------
$ 4,573,368 4,126,330
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
RSI SYSTEMS, INC.
Statements of Operations
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net sales $ 9,199,135 4,662,558 2,570,851
Cost of goods sold 4,447,943 2,123,553 1,904,216
Inventory writedown to lower of cost or market (note 4) -- -- 1,430,428
----------- ------------ ------------
Gross profit (loss) 4,751,192 2,539,005 (763,793)
Research and development 1,281,718 993,525 1,528,493
Selling, general, and administrative 4,268,296 3,478,665 3,445,301
----------- ------------ ------------
Operating loss (798,822) (1,933,185) (5,737,587)
Other income (expense):
Other income 2,770 6,629 2,913
Interest income 68,946 53,249 90,324
Interest expense (151,569) (86,649) (40,340)
----------- ------------ ------------
Other income (expense), net (79,853) (26,771) 52,897
----------- ------------ ------------
Net loss $ (878,675) (1,959,956) (5,684,690)
----------- ------------ ------------
----------- ------------ ------------
Basic loss per share $ (0.13) (0.34) (1.30)
Diluted loss per share $ (0.13) (0.34) (1.30)
----------- ------------ ------------
----------- ------------ ------------
Weighted average common shares outstanding:
Basic 6,695,859 5,706,145 4,378,326
Diluted 6,695,859 5,706,145 4,378,326
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
RSI SYSTEMS, INC.
Statements of Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
FOREIGN UNEARNED
COMMON STOCK ADDITIONAL CURRENCY COMPENSATION--
-------------------- PAID-IN TRANSLATION ACCUMULATED RESTRICTED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT STOCK TOTAL
--------- --------- ---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 3,251,015 $ 32,510 10,214,252 28,400 (7,396,910) -- 2,878,252
Common stock sold in private
placement [note 9(a)] 1,500,000 15,000 3,927,892 -- -- -- 3,942,892
Exercise of stock options 1,250 13 4,362 -- -- -- 4,375
Common stock warrant issued to
underwriter -- -- 50 -- -- -- 50
Shutdown of foreign subsidiary -- -- -- (28,400) -- -- (28,400)
Restricted stock award [note 7(b)] -- -- 200,000 -- -- (100,000) 100,000
Common stock issued in settlement
of claim 5,000 50 11,825 -- -- -- 11,875
Net loss for the year ended June 30, 1997 -- -- -- -- (5,684,690) -- (5,684,690)
--------- --------- ---------- ----------- ------------ ----------- ---------
Balances at June 30, 1997 4,757,265 47,573 14,358,381 -- (13,081,600) (100,000) 1,224,354
Common stock sold in private
placement [note 9(a)] 1,671,255 16,712 2,506,233 -- -- -- 2,522,945
Common stock warrant issued
to underwriter -- -- 100 -- -- -- 100
Restricted stock award [note 7(b)] 18,750 188 (188) -- -- 100,000 100,000
Common stock issued in settlement of
trade payables [note 9(a)] 210,011 2,100 373,796 -- -- -- 375,896
Net loss for the year ended June 30, 1998 -- -- -- -- (1,959,956) -- (1,959,956)
--------- --------- ---------- ----------- ------------ ----------- ---------
Balances at June 30, 1998 6,657,281 66,573 17,238,322 -- (15,041,556) -- 2,263,339
Exercise of stock options 23,750 237 26,482 -- -- -- 26,719
Common stock warrant exercised
by individuals 150,000 1,500 73,500 -- -- -- 75,000
Restricted stock award [note 7(b)] 6,250 63 (63) -- -- -- --
Net loss for the year ended June 30, 1999 -- -- -- -- (878,675) -- (878,675)
--------- --------- ---------- ----------- ------------ ----------- ---------
Balances at June 30, 1999 6,837,281 $ 68,373 17,338,241 -- (15,920,231) -- 1,486,383
--------- --------- ---------- ----------- ------------ ----------- ---------
--------- --------- ---------- ----------- ------------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
RSI SYSTEMS, INC.
Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net $ (878,675) (1,959,956) (5,684,690)
loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 291,613 255,230 239,867
Inventory writedown to lower of cost or market (note 4) -- -- 1,430,428
Compensation from restricted stock -- 100,000 100,000
Common stock issued in settlement of claim -- -- 11,875
Foreign currency translation adjustment -- -- (28,400)
Changes in operating assets and liabilities:
Accounts receivable 23,976 (794,199) (222,994)
Inventories (396,816) (92,809) (365,173)
Prepaid expenses (29,617) (15,393) 143,102
Accounts payable 294,823 246,720 887,687
Accrued expenses 59,315 (238,911) (364,067)
Deferred revenue 37,136 (83,325) 123,989
------------ ----------- -----------
Net cash used in operating activities (598,245) (2,582,643) (3,728,376)
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable securities 1,952,015 197,995 --
Purchase of marketable securities (1,964,770) (1,169,603) --
Additions to property and equipment (122,806) (227,218) (99,191)
------------ ----------- -----------
Net cash used in investing activities (135,561) (1,198,826) (99,191)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 101,719 2,522,945 3,947,267
Proceeds from issuance of warrants -- 100 50
Repayments of obligations under capital leases (81,185) (9,869) --
Net proceeds from revolving line of credit 750,042 497,715 --
------------ ----------- -----------
Net cash provided by financing activities 770,576 3,010,891 3,947,317
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents 36,770 (770,578) 119,750
Cash and cash equivalents at beginning of year 382,093 1,152,671 1,032,921
------------ ----------- -----------
Cash and cash equivalents at end of year $ 418,863 382,093 1,152,671
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 126,068 83,600 39,970
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During fiscal year 1999 and 1998, the Company entered into capital lease
obligations for the purchase of equipment in the amount
of $146,307 and $173,204, respectively.
During fiscal year 1998, the Company issued 210,011 shares of its common
stock in exchange for the settlement of $375,896 of
trade payables.
See accompanying notes to financial statements.
5
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(1) DESCRIPTION OF BUSINESS
Founded in 1993, RSI Systems, Inc. (the Company) designs, manufactures, and
resells business level videoconferencing systems for domestic and
international markets. These systems are available in a variety of
configurations and price points.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, became effective for the Company in fiscal 1999.
This standard prescribes a new way of reporting and displaying the
balances of changes in certain equity accounts. SFAS No. 130 does not
affect the measurement or accounting for these accounts. SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
also became effective for the Company in fiscal 1999. This standard
replaces existing disclosure requirements for industry and geographic
segments with requirements for annual and quarterly disclosure
information about reportable operating segments and certain geographic
data. By their nature, SFAS Nos. 130 and 131 had no effect on the
Company's reported operations or financial position.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, effective in 2001, establishes new standards for
recognizing all derivatives as either assets or liabilities, and
measuring those instruments at fair value. The Company does not
anticipate that SFAS No. 133 will have a material impact on its
financial position or results of operations.
(B) CASH AND CASH EQUIVALENTS
The Company considers investments in highly-liquid debt securities
having an initial maturity of three months or less to be cash
equivalents. Cash equivalents amounted to $413,743 and $359,891 at
June 30, 1999 and 1998, respectively.
(C) MARKETABLE SECURITIES
The Company has adopted the provisions of SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Marketable
securities have an original maturity of more than three months and a
remaining maturity of less than 1 year. These investments are
classified as held-to-maturity and are carried at cost in accordance
with SFAS No. 115. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. This
amortization and accretion, as well as interest income and realized
gains and losses, are included in interest income. Marketable
securities at June 30, 1999 and 1998, represent investments in
government bonds.
(D) INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in first-out (FIFO) method.
(Continued)
6
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(E) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over their estimated useful lives which
range from two to seven years.
(F) CAPITALIZED SOFTWARE COSTS
Software development costs are accounted for in accordance with SFAS
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED. Costs associated with the planning and
designing phase of software development, including coding and testing
activities necessary to establish technological feasibility, are
classified as research and development and expensed as incurred. Once
technological feasibility has been determined, additional costs
incurred in development, including coding, testing, and product
quality assurance are capitalized, when material. During 1999, 1998,
and 1997, no software development costs were capitalized.
(G) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. The Company has adopted the
disclosure requirements under SFAS No. 123, ACCOUNTING AND DISCLOSURE
OF STOCK-BASED COMPENSATION.
(H) WARRANTY ACCRUAL
The Company's product carries a warranty from a third party custom
manufacturer of twelve (12) months from the date the Company ships to
the customer, or fifteen (15) months from the date the third party
manufacturer ships to the Company, whichever comes first [note 7(c)].
The cost to the Company for this warranty is included in the total
manufacturing costs charged by the third party custom manufacturer to
the Company for each unit produced. As a result, the third party
manufacturer covers warranty costs for defective units.
(I) REVENUE RECOGNITION
The Company recognizes revenue from system sales upon shipment. Post
sale customer support costs are insignificant and are expensed as
incurred.
(J) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when
incurred.
(Continued)
7
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(K) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are
subject to a valuation allowance based on the estimated realization of
these assets.
(L) ADVERTISING COSTS
All costs related to advertising the Company's products are expensed
in the period incurred. Advertising expense for the fiscal years ended
June 30, 1999, 1998, and 1997 was $324,127, $167,408, and $85,162,
respectively.
(M) NET LOSS PER SHARE
Basic earnings (loss) per common share is computed using the weighted
average number of common shares outstanding during each period.
Diluted earnings (loss) per common share is computed using the
weighted average number of common shares plus potential dilutive
shares of common stock.
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
(3) LIQUIDITY
On September 3, 1999, the Company amended a previous commercial loan
agreement with a Bank for a $2,500,000 revolving credit facility (note 5).
Management plans to continue to increase sales and improve operating
results through increased marketing and broader distribution of products
through a stronger dealer network. The Company believes that funds
generated from operations and funds available under the revolving credit
facility will be sufficient to cover cash needs. In the event sales do not
materialize at the expected rates, management would seek additional
financing or would conserve cash by reducing administrative, product
development, and sales and marketing expenses.
(Continued)
8
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(4) INVENTORIES
Inventories consisted of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Components $ 683,279 476,261
Finished goods 350,959 161,161
------------ -----------
$ 1,034,238 637,422
------------ -----------
------------ -----------
</TABLE>
The fiscal 1997 statement of operations reflects a $1,430,428 charge to
reduce inventory to lower of cost or market. The write-down was associated
with excess inventory resulting from the Company's decision to transition
to a new product line.
(5) REVOLVING CREDIT FACILITY
In September 1998, the Company completed a commercial loan agreement with a
bank for a $2,000,000 committed line of credit facility. This agreement
amended and restated the previous commercial loan agreement dated April
1998. 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 accrue at the bank's base
rate, which was 8.75 % at June 30, 1999. On June 30, 1999, borrowings on
the facility were $1,247,757 leaving $752,243 unused and $744,243
available. The facility had a maturity date of June 26, 2000. On June 30,
1999, the Company was in default of the net worth and tangible net worth
covenant. An amended agreement was completed on September 3, 1999 which
waived the defaults, increased the line of credit facility to $2,500,000,
modified the minimum net worth covenant and extended the maturity date to
June 26, 2001.
(6) LEASES
(A) OPERATING LEASES
The Company leases office space and various equipment under
noncancelable operating leases. Future minimum rental payments due
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30:
<S> <C>
2000 $ 49,333
2001 11,519
2002 4,182
</TABLE>
Total rental expense was $177,677, $204,223, and $135,901 for the
years ended June 30, 1999, 1998, and 1997, respectively.
(Continued)
9
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(B) CAPITAL LEASES
The following is a summary of the leased equipment as of June 30,
1999:
<TABLE>
<S> <C>
Equipment $ 321,232
Less accumulated amortization (84,718)
-----------
$ 236,514
-----------
-----------
</TABLE>
The following is a schedule of future minimum lease payments under
capital leases with the present value of the minimum lease payments as
of June 30, 1999:
<TABLE>
<CAPTION>
Years ending June 30:
<S> <C>
2000 $ 130,011
2001 119,723
2002 27,733
------------
Total minimum lease payments 277,467
Less amount representing interest from 9 % to 15 % (31,762)
------------
Present value of minimum lease payments 245,705
Less current portion (106,140)
------------
$ 139,565
------------
------------
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(A) SOFTWARE LICENSE AGREEMENT
During 1999, the Company entered into a software license agreement
with a software development company. Pursuant to the agreement, in
addition to upfront licensing and production fees of $25,000, the
Company is to pay a royalty fee of $5 per unit of videoconferencing
systems containing the software. Sales of the related systems are to
begin shipping in the first quarter of 2000.
During 1998, the Company entered into a software license agreement
with a software development company. Pursuant to the agreement, the
Company is to pay a royalty fee of up to $5.00 per unit of
videoconferencing systems containing the software. Sales of the
related systems began in fiscal year 1998. Royalty expenses related to
this agreement for fiscal years 1999, 1998, and 1997 were $11,315,
$1,580, and $0, respectively.
(Continued)
10
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
During 1996, the Company entered into a software license agreement
with a separate software development company. Pursuant to the
agreement, in addition to upfront licensing and production fees of
$90,000, the Company is to pay a royalty fee of $40 on each of the
first 1,000 videoconferencing systems sold, $4.75 for the following
9,000 systems, $6.25 for the following 90,000 systems and $5.10 for
each system sold in excess of 100,000. Sales of the related systems
began in fiscal year 1997. Amounts expensed related to this agreement
for fiscal years 1999, 1998, and 1997 were $12,749, $32,560, and
$6,920, respectively.
During 1994, the Company entered into a software license agreement
with a separate software development company. Pursuant to the
agreement, the Company is to pay a royalty fee of $25 on each of the
first 10,000 systems sold, $15 on each system over 10,000 up to
50,000, and $8 on each system sold in excess of 50,000. Amounts
expensed related to this agreement for fiscal years 1999,1998, and
1997 were $56,825, $23,050, and $17,450, respectively.
(B) EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into a two-year employment agreement
with its President and Chief Executive Officer. Pursuant to the
original agreement and subsequent amendments, the officer receives an
annual salary of $200,000. On September 7, 1999, the Company's
President and Chief Executive Officer terminated his employment with
the Company. Under the terms of the employment agreement, the Company
is obligated to pay twelve months' salary to the officer in connection
with the termination.
Also in connection with the employment agreement, on July 1, 1996, the
Company granted 25,000 shares of the Company's common stock to its
President and Chief Executive Officer. The stock is subject to certain
restrictions which lapse at a rate of 6,250 shares every six months
from the date of grant. As of June 30, 1999, all shares of the stock
had been issued. Total compensation expense recognized in fiscal years
1998 and 1997 related to this stock grant was $100,000 per year.
(C) MANUFACTURING AGREEMENT
On August 28, 1996, the Company entered into manufacturing agreement
with a third party custom manufacturer (Manufacturer). Pursuant to
this agreement, the Manufacturer agrees to produce the Company's
videoconferencing products, and warrant that all products will be free
from defects in material and workmanship for twelve (12) months from
the date the Company ships to the customer, or fifteen (15) months
from the date the Manufacturer ships to the Company, whichever comes
first.
The agreement may be terminated by either party upon failure of the
other party to comply with any material term of the agreement after a
30 day written notice and cure period. In the event of such
termination, the Company would be obligated to pay for any goods
accepted under the terms of the agreement. The Company may also
terminate the agreement upon 30 days written notice. In such case, the
Company would be obligated to pay for material and work in progress
for products ordered. As of June 30, 1999, the Company's obligation
for material and work in progress for products ordered was $900,000.
(Continued)
11
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(D) DISTRIBUTOR, DEALER, AND MANUFACTURER REPRESENTATIVE AGREEMENTS
The Company is a party to distributor or dealer agreements with
several companies. Each distributor or dealer has minimum purchase
obligations. The term of each agreement is one year, renewable for
additional one-year periods. Distributors and dealers receive
discounts depending upon the number of systems ordered from the
Company.
(8) INCOME TAXES
At June 30, 1999, the Company has approximately $14,848,000 of net
operating loss carryforwards and $150,000 of tax credit carryforwards for
federal income tax purposes, which begin to expire in 2010. Section 382 of
the Internal Revenue Code of 1986 limits the use of the Company's net
operating loss carryforwards as of the date of a more than 50% change in
ownership. As a result of the public offering discussed at note 9(A), a
Section 382 ownership change occurred. As a result of prior ownership
changes, a portion of the net operating losses are limited in use in any
one year. Subsequent ownership changes may further limit the use of the net
operating losses in any one year.
The provisions for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate for the three years
ended June 30, 1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Expected federal benefit 34% 34% 34%
State taxes, net 3 6 6
Research credits 5 6 --
Change in valuation allowance (42) (46) (40)
--------- --------- --------
Actual tax benefit --% --% --%
--------- --------- --------
--------- --------- --------
</TABLE>
The tax effects of items which comprise a significant portion of deferred
tax assets as of June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,649,000 5,847,000
Other 471,000 279,000
Valuation allowance (6,120,000) (6,126,000)
-------------- ---------------
Net deferred tax asset $ -- --
-------------- ---------------
-------------- ---------------
</TABLE>
A valuation allowance is provided when there is some likelihood that all or
a portion of a deferred tax asset may not be recognized. The net deferred
assets at June 30, 1999 and 1998 are fully offset by a valuation allowance.
The valuation allowance is reviewed periodically.
(Continued)
12
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(9) CAPITAL STOCK
(A) COMMON STOCK
In January 1998, the Company completed a private offering of its
common stock. The Company received $2,522,945, net of offering costs,
in exchange for 1,671,255 shares of common stock ($1.65 per share). A
registration statement for these shares was declared effective by the
Securities and Exchange Commission and the shares are registered and
freely tradable.
On October 14, 1997, the Company issued 210,011 shares of its common
stock as payment on $375,896 in trade debt to two of the Company's key
vendors. A registration statement for these shares was declared
effective by the Securities and Exchange Commission and the shares are
registered and freely tradable.
On September 30, 1996, the Company completed a private offering of its
common stock. The Company received $3,942,892, net of offering costs,
in exchange for 1,500,000 shares of common stock ($3.00 per share). A
registration statement for these shares was declared effective by the
Securities and Exchange Commission and the shares are registered and
freely tradable.
(B) STOCK WARRANTS
As of June 30, 1999, there were outstanding warrants held by a
director of the Company for the purchase of 141,500 shares of common
stock at exercise prices ranging from $1.00 to $3.00 per share. There
were also outstanding warrants held by other third parties for the
purchase of 148,500 shares of common stock at exercise prices ranging
from $0.50 to $1.00 per share.
In January 1998, in connection with the Company's private offering of
1,671,255 shares of its common stock, the Company issued warrants to
the placement agent for the purchase of 167,126 shares of its common
stock. Such warrants have a ten year term and are exercisable at $1.65
per share.
On September 30, 1996, in connection with the Company's private
offering of 1,500,000 shares of its common stock, the Company issued
warrants to the placement agent for the purchase of 150,000 shares of
common stock. Such warrants have a ten year term and are exercisable
at $3.00 per share.
(C) STOCK OPTIONS
The Company has a stock plan which permits the granting of stock
options, including incentive stock options as defined under Section
422 of the Internal Revenue Code of 1986, nonqualified stock options
and restricted stock. The exercise price for options granted under the
stock plan shall be at a price determined at the sole discretion of
the compensation committee of the Company's board of directors
provided, however, that incentive stock options granted under the plan
shall be granted at exercise prices equal to the fair market value on
the date of grant (110% for a stockholder holding 10% or more of the
outstanding shares of common stock).
(Continued)
13
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
The Company has reserved 1,500,000 shares of common stock for issuance
under the plan. At June 30, 1999, 267,250 shares remained available
for grant. Options issued become exercisable over varying periods as
provided in the individual plan agreements and certain options are
subject to accelerated vesting based upon individual employment
agreements or changes in control of the Company.
A summary of changes in common stock options during the years ended
June 30, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
------------------ ------------------
<S> <C> <C>
Outstanding at June 30, 1997 560,750 $ 2.16
Granted 292,500 2.24
Exercised -- --
Canceled (137,000) 2.28
------------------ ------------------
Outstanding at June 30, 1998 716,250 2.17
Granted 703,000 2.11
Exercised (23,750) 1.13
Canceled (162,750) 1.93
------------------ ------------------
Outstanding at June 30, 1999 1,232,750 $ 2.19
------------------ ------------------
------------------ ------------------
Exercisable at June 30, 1999 482,670 $ 2.27
------------------ ------------------
------------------ ------------------
</TABLE>
Options outstanding at June 30, 1999 have an exercisable price per
share ranging between $1.125 and $9.25 and have a weighted average
exercisable price of $2.27 and a weighted average remaining
contractual life of 5.5 years.
The Company also has issued stock options outside the stock option
plan. In July 1996, the Company issued stock options for the purchase
of 110,000 shares of the Company's common stock to an employee of the
Company. The stock options have an exercise price of $8.00 per share
and were fully vested as of June 30, 1999.
In September 1997, the Company also granted stock options for the
purchase of 71,000 shares of the Company's common stock to three
employees of the Company. The stock options have an exercise price of
$2.81 per share and were fully vested as of June 30, 1999.
In September 1997, the Company also granted stock options for the
purchase of 200,000 shares of the Company's common stock to an
employee of the Company. The stock options have an exercise price of
$2.81 per share and vest at a rate of 100,000 in September 1997,
50,000 in June 1998, and 50,000 in June 1999.
(Continued)
14
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
cost has been recognized in the accompanying statements of operations.
Had compensation cost been recognized based on the fair values of
options at the grant dates consistent with the provisions of SFAS No.
123, the Company's net loss and net loss per common share would have
been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Net loss:
As reported $ (878,675) (1,959,956)
Pro forma (1,346,890) (2,452,932)
Net loss per common share:
As reported (0.13) (0.34)
Pro forma (0.20) (0.43)
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999 and 1998,
respectively; risk-free interest rates of 4.49% and 6.16%, expected
option lives of 4.02 years and 6.77 years, expected volatility of
83.8% and 55.5%, and expected dividend yield of $0.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
The weighted average fair values of options granted in 1999 and 1998
were as follows:
<TABLE>
<S> <C>
Fiscal 1999 grants $ 2.16
Fiscal 1998 grants 1.49
</TABLE>
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, marketable securities, and
revolving credit facility approximates fair value because of the short
maturity of those instruments.
(Continued)
15
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 1999, 1998, and 1997
(11) NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (878,675) (1,959,956) (5,684,690)
------------------ ------------------ ------------------
Net loss available to
common stockholders $ (878,675) (1,959,956) (5,684,690)
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Denominator:
Weighted average shares outstanding $ 6,695,859 5,706,145 4,378,326
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Basic loss per share $ (.13) (0.34) (1.30)
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Diluted loss per share $ (.13) (0.34) (1.30)
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
(12) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to three customers represented approximately 48% of net sales in
fiscal 1999, with accounts receivable for these three customers
representing approximately 32% of total accounts receivable as of June 30,
1999. In fiscal 1998, sales to one customer represented approximately 17%
of net sales, with accounts receivable from this customer representing
approximately 33% of total accounts receivable as of June 30, 1998.
(13) RELATED PARTY
During the year ended June 30, 1999, the Company purchased approximately
$148,000 of advertising and marketing services from a related party. The
Company believes that the fees paid related to these services were
equivalent to those that would be paid under an arm's-length transaction.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: September 27, 1999 RSI SYSTEMS, INC.
By: /s/ Richard F. Craven
------------------------------------
Chairman of the Board, and Acting Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 27, 1999.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Richard F. Craven as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
SIGNATURE TITLE
/s/ Richard F. Craven Chairman of the Board, and Acting Chief
- --------------------------------- Executive Officer and President
Richard F. Craven
/s/ James D. Hanzlik Chief Financial Officer
- ---------------------------------
James D. Hanzlik
41
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Exhibit No. Title of Document Method of Filing
- ----------- ----------------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended Filed as Exhibit 3.1 to the Form SB-2 Registration Statement
of the Company, File No. 33-93240C, (the "SB-2 Registration
Statement") and incorporated herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the SB-2 Registration Statement and
incorporated herein by reference.
10.1 1994 Stock Plan* Filed as Exhibit 10.5 to the SB-2 Registration
Statement and incorporated herein by reference.
10.2 Form of Inventions, Confidential Filed as Exhibit 10.2 to the SB-2 Registration
Information and Non-Competition Statement and incorporated herein by reference.
Agreement
10.3 Letter of Credit Agreement, dated Filed as Exhibit 10.13 to the SB-2 Registration
September 19, 1994 Statement and incorporated herein by reference.
10.4 Letter of Credit Agreement, dated Filed as Exhibit 10.14 to the SB-2 Registration
December 13, 1994, as amended Statement and incorporated herein by reference.
10.5 Link Technology Inc. Source Code Software Filed as Exhibit 10.15 to the SB-2 Registration
License Agreement Statement and incorporated herein by reference.
10.6 Design Royalty Agreement between the Filed as Exhibit 10.16 to the SB-2 Registration
Company and Worrell Design Inc. Statement and incorporated herein by reference.
10.7 License Agreement with DSP Software Filed as Exhibit 10.15 to the Company's 1996 10-KSB
Engineering, Inc. dated February 1, 1996 and incorporated herein by reference.
10.8 Addendum to License Agreement with Link Filed as Exhibit 10.17 to the Company's 1996 10-KSB
Technology, Inc. dated April 29, 1996 and incorporated herein by reference.
10.9 Employment Agreement between the Filed as Exhibit 10.20 to the Company's 1996 10-KSB
Company and Donald Lies* and incorporated herein by reference.
10.10 Manufacturing Agreement with Altron, Inc. Filed as Exhibit 10.21 to the Company's 1996 10-KSB
dated August 28, 1996 and incorporated herein by reference.
10.11 Selling Agency Agreement with Miller Filed as Exhibit 10.23 to the Company's 1996 10-KSB
Johnson & Kuehn Incorporated dated and incorporated herein by reference.
August 22, 1996
10.12 Shareholder Agreement dated April 30, Filed as Exhibit 10.24 to the Company's 1996 10-KSB
1996 and incorporated herein by reference.
10.13 New Employee Inventions, Confidentiality Filed as exhibit 10.13 to the Company's
and noncompete Agreement 1997 10-KSB and incorporated herein by reference
10.14 Non-Qualified Stock Option Agreement Filed as exhibit 10.14 to the Company's
with Donald C. Lies* 1997 10-KSB and incorporated herein by reference
</TABLE>
- -------------------
* Denotes an exhibit that covers management contracts or compensatory plans
or arrangements
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title of Document Method of Filing
- ----------- ----------------- ----------------
<S> <C> <C>
10.15 Restricted Stock Agreement with Filed as exhibit 10.15 to the Company's
Donald C. Lies* 1997 10-KSB and incorporated herein by reference
10.16 Qualified Stock Option Agreement with Filed as exhibit 10.16 to the Company's
Donald C. Lies* 1997 10-KSB and incorporated herein by reference
10.17 Termination of Stock Purchase and Filed as exhibit 10.17 to the Company's
Subscription Agreement* 1997 10-KSB and incorporated herein by reference
10.18 Norwest Loan Agreement Filed as exhibit 10.18 to the Company's
1997 10-KSB and incorporated herein by reference
10.19 Selling Agency Agreement with Miller Filed as exhibit 10.19 to the Company's
Johnson & Kuehn Incorporated dated 1998 10-KSB and incorporated herein by reference
December 29, 1997.
10.20 Amended and Restated Credit and Security Filed as exhibit 10.20 to the Company's
Agreement (Norwest Bank Minnesota, N. A.) 1998 10-KSB and incorporated herein by reference
10.21 Amended and Restated Credit and Security Filed as exhibit 10.21 to the Company's
Agreement (Norwest Business Credit, Inc.) 1998 10-KSB and incorporated herein by reference
10.22 First Amendment to the Eximbank guar- Filed as exhibit 10.22 to the Company's
anteed Amended and Restated Credit and 1998 10-KSB and incorporated herein by reference
Security Agreement
10.23 Second Amendment to Amended & Restated Filed herewith electronically
Credit & Security Agreement
10.24 Third Amendment to Amended & Restated Filed herewith electronically
Credit & Security Agreement
10.25 First Amendment to Patent & Trademark Filed herewith electronically
Security Agreement
10.26 First Amendment to Patent & Trademark Filed herewith electronically
Security Agreement
10.27 Severance Agreement Between the Filed herewith electronically
Company and Donald C. Lies
21.1 Subsidiary of the Registrant Filed as Exhibit 21.1 to the Company's 1996 10-KSB
and incorporated herein by reference.
23.1 Consent of KPMG LLP Filed herewith electronically.
24.1 Power of Attorney Included in signature page of this report
and incorporated herein by reference
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
The exhibits referred to in this Exhibit Index will be supplied to a shareholder
at a charge of $.25 per page upon written request directed to Secretary, RSl
Systems, Inc. at the executive offices of the Company.
- -------------------
* Denotes an exhibit that covers management contracts or compensatory plans
or arrangements
43
<PAGE>
Exhibit 10.23
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of September 3, 1999, is made by and between
RSI SYSTEMS, INC., a Minnesota corporation (the "Borrower"), and WELLS FARGO
BUSINESS CREDIT, INC. f/k/a NORWEST BUSINESS CREDIT, INC., a Minnesota
corporation (the "Lender").
Recitals
The Borrower and the Lender have entered into an Amended and Restated
Credit and Security Agreement dated as of April 16, 1998 as amended by First
Amendment to Amended and Restated Credit and Security Agreement dated as of
September 22, 1998 (as so amended, the "Credit Agreement"). Capitalized terms
used in these recitals have the meanings given to them in the Credit Agreement
unless otherwise specified.
The Borrower has requested that certain amendments be made to the
Credit Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment which are
defined in the Credit Agreement shall have the same meanings as defined therein,
unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"`Borrowing Base' means the lesser of:
(a) the Maximum Line less the Norwest Bank Revolving Advances; or
(b) the sum of:
(i) 80% of Eligible Accounts,
(ii) 100% of Eligible Certificates of Deposits, plus
(iii) 100% of Eligible Marketable Securities."
"`Collateral' means the Special Account, all of the Borrower's
Equipment, General Intangibles, Inventory, Receivables, all sums on deposit
in any Collateral
<PAGE>
Account, and any items in any Lockbox; together with (i) all substitutions
and replacements for and products of any of the foregoing; (ii) proceeds of
any and all of the foregoing; (iii) in the case of all tangible goods, all
accessions; (iv) all accessories, attachments, parts, equipment and repairs
now or hereafter attached or affixed to or used in connection with any
tangible goods; and (v) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
"`Issuer' means the issuer of any Letter of Credit."
"`L/C Amount' means the sum of (i) the aggregate face amount of any
issued and outstanding Letters of Credit and (ii) the unpaid amount of the
Obligation of Reimbursement."
"`L/C Application' means an application and agreement for Letters of
Credit in a form acceptable to the Issuer and the Lender."
"`Letter of Credit' has the meaning given in Section 2.11."
"`Maturity Date' means June 26, 2001."
"`Maximum Line' means $2,500,000."
"`Obligation of Reimbursement' has the meaning given in Section
2.12(a)."
"`Obligations' means each and every debt, liability and obligation of
every type and description which the Borrower may now or at any time
hereafter owe to the Lender, whether such debt, liability or obligation now
exists or is hereafter created or incurred, whether it arises in a
transaction involving the Lender alone or in a transaction involving other
creditors of the Borrower, and whether it is direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several, and including
specifically, but not limited to, all indebtedness of the Borrower arising
under this Agreement (including but not limited to the Notes and the
Obligation of Reimbursement) or any other loan or credit agreement or
guaranty between the Borrower and the Lender, whether now in effect or
hereafter entered into."
"`Revolving Note' means the Borrower's Second Replacement Promissory
Note, payable to the order of the Lender in substantially the form of
Exhibit A to the Second Amendment and any note or notes issued in
substitution therefor, as the same may hereafter be amended, supplemented
or restated from time to time."
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"`Second Amendment' means the Second Amendment to Amended and Restated
Credit and Security Agreement by and between the Borrower and the Lender,
dated as of September 3, 1999."
"`Second Amendment Effective Date' means the date on which the
conditions set forth in paragraph 15 of the Second Amendment are either
satisfied or waived by the Lender."
"`Special Account' means a specified cash collateral account
maintained by a financial institution acceptable to the Lender in
connection with Letters of Credit, as contemplated by Sections 2.13 and
3.6."
2. REVOLVING ADVANCES. Section 2.2 of the Credit Agreement is hereby
amended to read as follows:
"Section 2.2 REVOLVING ADVANCES. The Lender agrees, on the terms and
conditions set forth herein, to make advances to the Borrower from time to
time from the date this Agreement is signed and delivered to the
Termination Date (each a "Revolving Advance"). The Lender shall have no
obligation to make a Revolving Advance if, after giving effect to such
requested Revolving Advance, the sum of the outstanding and unpaid
Revolving Advances plus the L/C Amount would exceed the Borrowing Base. The
Borrower's obligation to pay the Revolving Advances shall be evidenced by
the Revolving Note and shall be secured by the Collateral. Within the
limits set forth in this Section 2.2, the Borrower may request Revolving
Advances, prepay, and request additional Revolving Advances. The Borrower
shall make each request for a Revolving Advance to the Lender before 11:00
a.m. (Minneapolis time) of the day of the requested Revolving Advance.
Requests may be made in writing or by telephone."
3. CAPITAL ADEQUACY, ETC. Section 2.6 of the Credit Agreement is
amended to read as follows:
"Section 2.6 CAPITAL ADEQUACY. If any Related Lender determines at any
time that its Return has been reduced as a result of any Rule Change, such
Related Lender may require the Borrower to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule
Change. For purposes of this Section 2.6:
(a) `Capital Adequacy Rule' means any law, rule, regulation,
guideline, directive, requirement or request regarding capital
adequacy, or the interpretation or administration thereof by any
governmental or regulatory authority, central bank or comparable
agency, whether or not having the force of law, that applies to any
Related Lender. Such rules include rules requiring
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financial institutions to maintain total capital in amounts based upon
percentages of outstanding loans, binding loan commitments and letters
of credit.
(b) `L/C Rule' means any law, rule, regulation, guideline,
directive, requirement or request regarding letters of credit, or the
interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or
not having the force of law, that applies to any Related Lender. Such
rules include rules imposing taxes, duties or other similar charges,
or mandating reserves, special deposits or similar requirements
against assets of, deposits with or for the account of, or credit
extended by any Related Lender, on letters of credit.
(c) `Related Lender' includes (but is not limited to) the Lender,
any parent corporation of the Lender and any assignee of any interest
of the Lender hereunder and any participant in the loans made
hereunder.
(d) `Return' for any period, means the return as determined by a
Related Lender on the Advances and Letters of Credit based upon its
total capital requirements and a reasonable attribution formula that
takes account of the Capital Adequacy Rules and L/C Rules then in
effect, costs of issuing or maintaining any Letter of Credit and
amounts received or receivable under this Agreement or the Notes with
respect to any Advance or Letter of Credit. Return may be calculated
for each calendar quarter and for the shorter period between the end
of a calendar quarter and the date of termination in whole of this
Agreement.
(e) `Rule Change' means any change in any Capital Adequacy Rule
or L/C Rule occurring after the date of this Agreement, but the term
does not include any changes in applicable requirements that at the
Closing Date are scheduled to take place under the existing Capital
Adequacy Rules or L/C Rules or any increases in the capital that any
Related Lender is required to maintain to the extent that the
increases are required due to a regulatory authority's assessment of
the financial condition of such Related Lender.
The Lender will promptly notify the Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle the Lender
to compensation pursuant to this Section 2.6. Certificates of any Related
Lender sent to the Borrower from time to time claiming compensation under
this Section 2.6, stating the reason therefor and setting forth in
reasonable detail the calculation of the additional amount or amounts to be
paid to the Related Lender hereunder to restore its Return shall
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be conclusive absent manifest error. In determining such amounts, the
Related Lender may use any reasonable averaging and attribution methods."
4. MANDATORY PREPAYMENT. Section 2.7 of the Credit Agreement is
amended to read as follows:
"Section 2.7 MANDATORY PREPAYMENT. Without notice or demand, if the
outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base plus the L/C Amount, the Borrower shall
immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess."
5. Fees. Section 2.10 of the Credit Agreement is amended to read as
follows:
"Section 2.10 Fees.
(a) UNUSED LINE FEE. For the purposes of this Section 2.10(a),
"Unused Amount" means (i) the Maximum Line, minus (ii) the sum of (A)
the outstanding Revolving Advances and (B) the L/C Amount. The
Borrower shall pay to the Lender an unused line fee of one quarter of
one percent (0.25%) of the average daily Unused Amount during each
calendar quarter, due and payable quarterly in arrears on the first
day of each quarter and on the Termination Date.
(b) LETTER OF CREDIT FEES. The Borrower shall pay the Lender a
fee with respect to each Letter of Credit, if any, computed at the
annual rate of two percent (2%) of the amount of each requested Letter
of Credit for the term of the requested Letter of Credit. Such fee
shall be due and payable in full at the time the Borrower submits an
L/C Application for such Letter of Credit. The foregoing fee shall be
in addition to any and all fees, commissions and charges of any Issuer
of a Letter of Credit with respect to or in connection with such
Letter of Credit.
(c) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower shall pay
the Lender, on demand, the administrative fees charged by the Issuer
in connection with the honoring of drafts under any Letter of Credit,
amendments thereto, transfers thereof and all other activity with
respect to the Letters of Credit at the then-current rates published
by the Issuer for such services rendered on behalf of customers of the
Issuer generally."
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6. LETTER OF CREDIT PROVISIONS. The following new Sections are added
to the Credit Agreement at the end of Article II:
"Section 2.11 ISSUANCE OF LETTERS OF CREDIT.
(a) The Lender may, in its sole discretion and on the terms and
conditions set forth herein, cause an Issuer to issue, from the Second
Amendment Effective Date to the Termination Date, one or more
documentary letters of credit (each, a "Letter of Credit") for the
Borrower's account.
(i) The Lender shall not consider any request for the
issuance of any Letter of Credit for the benefit of the Borrower
if the face amount of the Letter of Credit to be issued, would
exceed the lesser of:
(A) $500,000 less the L/C Amount, or
(B) the Borrowing Base less the sum of (1) all
outstanding and unpaid Revolving Advances and (2) the L/C
Amount.
Each Letter of Credit, if any, shall be issued pursuant to a separate
L/C Application entered by the Borrower and the Lender for the benefit
of the Issuer, completed in a manner satisfactory to the Lender and
the Issuer. The terms and conditions set forth in each such L/C
Application shall supplement the terms and conditions hereof, but if
the terms of any such L/C Application and the terms of this Agreement
are inconsistent, the terms hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date later
than the Maturity Date.
(c) Any request for the issuance of a Letter of Credit under this
Section 2.11 shall be deemed to be a representation by the Borrower
that the statements set forth in Section 4.2 hereof are correct as of
the time of the request.
"Section 2.12 PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT. The
Borrower acknowledges that the Lender, as co-applicant, will be liable to
the Issuer of any Letter of Credit for reimbursement of any and all draws
thereunder and all other amounts required to be paid under
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the applicable L/C Application. Accordingly, the Borrower agrees to pay to
the Lender any and all amounts required to be paid under the applicable L/C
Application, when and as required to be paid thereby, and the amounts
designated below, when and as designated:
(a) The Borrower hereby agrees to pay the Lender on the day a
draft is honored under any Letter of Credit a sum equal to all amounts
drawn under such Letter of Credit plus any and all reasonable charges
and expenses that the Issuer or the Lender may pay or incur relative
to such draw, plus interest on all such amounts, charges and expenses
as set forth below (all such amounts are hereinafter referred to as
the "Obligation of Reimbursement").
(b) The Borrower hereby agrees to pay the Lender on demand
interest on all amounts, charges and expenses payable by the Borrower
to the Lender under this Section 2.12, accrued from the date any such
draft, charge or expense is paid by the Issuer until payment in full
by the Borrower at the Revolving Floating Rate.
If the Borrower fails to pay to the Lender promptly the amount of its
Obligation of Reimbursement in accordance with the terms hereof and the L/C
Application pursuant to which such Letter of Credit was issued, the Lender
is hereby irrevocably authorized and directed, in its sole discretion, to
make a Revolving Advance in an amount sufficient to discharge the
Obligation of Reimbursement, including all interest accrued thereon but
unpaid at the time of such Revolving Advance, and such Revolving Advance
shall be evidenced by the Revolving Note and shall bear interest as
provided in Section 2.3 hereof.
"Section 2.13 SPECIAL ACCOUNT. If this Credit Facility is terminated
for any reason whatsoever, while any Letter of Credit is outstanding, the
Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the maximum aggregate
amount available to be drawn under all Letters of Credit then outstanding,
assuming compliance with all conditions for drawing thereunder. The Special
Account shall be maintained for the Lender by any financial institution
acceptable to the Lender. Any interest earned on amounts deposited in the
Special Account shall be credited to the Special Account. Amounts on
deposit in the Special Account may be applied by the Lender at any time or
from time to time to the Borrower's Obligation of Reimbursement or any
other Obligations, in the Lender's sole discretion, and shall not be
subject to withdrawal by the Borrower so long as the Lender maintains a
security interest therein. The Lender agrees to transfer any balance in the
Special Account to the Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
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"Section 2.14 OBLIGATIONS ABSOLUTE. The obligations of the Borrower
arising under Section 2.12 shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement, under all circumstances whatsoever, including (without
limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of
Credit or any other agreement or instrument relating to any Letter of
Credit (collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure from
all or any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any beneficiary or
any transferee of any Letter of Credit (or any persons or entities for
whom any such beneficiary or any such transferee may be acting), or
other person or entity, whether in connection with this Agreement, the
transactions contemplated herein or in the Related Documents or any
unrelated transactions;
(d) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under any
Letter of Credit against presentation of a draft or certificate which
does not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing."
7. PLEDGE OF SPECIAL ACCOUNT AND COLLATERAL ACCOUNT. The following new
Section 3.6 is added at the end of Article III:
"Section 3.6 SECURITY INTEREST IN SPECIAL ACCOUNT. The Borrower
hereby pledges, and grants to the Lender a security interest in, all
funds held in the Special Account from time to time and all proceeds
thereof, as security for the payment of all Obligations."
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8. CONDITIONS PRECEDENT TO EACH ADVANCE AND EACH LETTER OF CREDIT.
Section 4.2 of the Credit Agreement is amended to read as follows:
"Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND CAUSING ALL
LETTERS OF CREDIT TO BE ISSUED. The Lender's obligation to make each
Advance or issue any Letter of Credit shall be subject to the further
conditions precedent that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of such date of such Advance as though
made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from
such Advance or the issuance of such Letter of Credit, as the case may
be, which constitutes a Default or an Event of Default."
9. MINIMUM BOOK NET WORTH. Section 6.8 of the Credit Agreement is
hereby amended to read as follows:
"Section 6.8 MINIMUM BOOK NET WORTH. The Borrower will maintain its
Book Net Worth determined as at the end of each month, at an amount not
less than the amount set forth opposite such month:
<TABLE>
<CAPTION>
Month Minimum Book Net Worth
----- ----------------------
<S> <C>
July 31, 1999 $1,000,000
August 31, 1999 $900,000
September 30, 1999 $1,000,000
October 31, 1999 $1,000,000
November 30, 1999 $1,100,000
December 31, 1999 $1,150,000
January 31, 2000 $1,300,000
February 29, 2000 $1,450,000
March 31, 2000 $1,650,000
April 30, 2000 $1,825,000
May 31, 2000 $2,050,000
June 30, 2000 $2,300,000
</TABLE>
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10. EVENTS OF DEFAULT. Section 7.1 of the Credit Agreement is amended
to add the following new subsection 7.1(e) immediately after Section 7.1(d):
"(e) Failure to pay when due any amount specified in Section 2.9
hereof relating to the Borrower's Obligation of Reimbursement, or failure
to pay immediately when due or upon termination of the Credit Facility any
amounts required to be paid for deposit in the Special Account under
Section 2.9 or 2.10 hereof."
11. RIGHTS AND REMEDIES. The following new Section 7.2(d) is added to
the Credit Agreement immediately after Section 7.2(c):
"(d) The Lender may make demand upon the Borrower and, forthwith upon
such demand, the Borrower will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to Sections 2.9 and 2.10
an amount equal to the maximum aggregate amount available to be drawn under
all Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder."
12. NO OTHER CHANGES. Except as explicitly amended by this Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit thereunder.
13. WAIVER OF DEFAULTS. The Borrower is in default of Section 6.8 of
the Credit Agreement which requires that the Borrower maintain a minimum Book
Net Worth of at least $2,000,000. As of June 30, 1999, the Borrower had an
actual Book Net Worth of $1,485,000 (the "Default"). Upon the terms and subject
to the conditions set forth in this Second Amendment, the Lender hereby waives
the Default. This waiver shall be effective only in this specific instance and
for the specific purpose for which it is given, and this waiver shall not
entitle the Borrower to any other or further waiver in any similar or other
circumstances.
14. AMENDMENT FEE. The Borrower shall pay the Lender as of the date
hereof a fully earned, non-refundable fee in the amount of $2,500 for the
increase in the Maximum Line and the default waiver in Paragraph 13 of this
Second Amendment.
15. CONDITIONS PRECEDENT. This Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The Revolving Note substantially in the form of Exhibit A hereto,
duly executed on behalf of the Borrower (the "Revolving Note").
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(b) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the articles
of incorporation and bylaws of the Borrower, which were certified and
delivered to the Lender pursuant to the Certificate of Authority of the
Borrower's secretary dated as of June 26, 1997 continue in full force and
effect and have not been amended or otherwise modified except as set forth
in the Certificate to be delivered, and (iii) certifying that the officers
and agents of the Borrower who have been certified to the Lender, pursuant
to the Certificate of Authority of the Borrower's secretary dated as of
April 16, 1998, as being authorized to sign and to act on behalf of the
Borrower continue to be so authorized or setting forth the sample
signatures of each of the officers and agents of the Borrower authorized to
execute and deliver this Amendment and all other documents, agreements and
certificates on behalf of the Borrower.
(c) An amendment to the Patent Security Agreement sufficient to grant
the Lender a security interest in the Borrower's newly acquired patent for
the peripheral video conferencing system technology in Mediapro.
(d) Payment of the fee described in Paragraph 14.
(e) Such other matters as the Lender may require.
16. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Amendment and the Revolving Note and to perform all of its obligations
hereunder, and this Amendment and the Revolving Note have been duly
executed and delivered by the Borrower and constitute the legal, valid and
binding obligations of the Borrower, each enforceable in accordance with
its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the Revolving Note have been duly authorized by all necessary
corporate action and do not (i) require any authorization, consent or
approval by any governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign; (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower; or (iii) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected.
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(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
17. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
18. NO OTHER WAIVER. Except as set forth in paragraph 13 hereof, the
execution of this Amendment and acceptance of the Revolving Note and any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Security Document or other document held by the Lender,
whether or not known to the Lender and whether or not existing on the date of
this Amendment.
19. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
20. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lender
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lender may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses and the fee
required under paragraph 14 hereof.
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21. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
WELLS FARGO BUSINESS CREDIT, INC. RSI SYSTEMS, INC.
By By
--------------------------------- ------------------------------
--------------------------------- ------------------------------
Its Vice President Its
------------------------
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Exhibit A to Second Amendment to
Amended and Restated Credit and
Security Agreement
SECOND REPLACEMENT REVOLVING NOTE
$2,500,000 Minneapolis, Minnesota
September 3, 1999
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below) to the order of WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in
Minneapolis, Minnesota, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Two Million, Five Hundred
Thousand Dollars ($2,500,000) or, if less, the aggregate unpaid principal amount
of all Advances made by the Lender to the Borrower under the Amended and
Restated Credit and Security Agreement dated as of April 16, 1998 by and between
the Lender and the Borrower as amended by a First Amendment to Amended and
Restated Credit and Security Agreement dated as of September 22, 1998 and Second
Amendment to Amended and Restated Credit and Security Agreement of even date
herewith (as the same may hereafter be amended, supplemented or restated from
time to time, the "Credit Agreement") together with interest on the principal
amount hereunder remaining unpaid from time to time (computed on the basis of
actual days elapsed in a 360-day year) from the date of the initial Advance
until this Note is fully paid at the rate from time to time in effect under the
Credit Agreement.
This Note is the Revolving Note as defined in the Credit Agreement and
is subject to the Credit Agreement. To the extent this Note evidences the
Borrower's obligation to pay existing Revolving Advances, this Note is issued in
substitution for and replacement of but not in payment of the Borrower's
promissory note dated as of September 22, 1998 payable to the order of the
Lender in the original principal amount of $2,000,000.
RSI SYSTEMS, INC.
By
--------------------------------------------
Donald C. Lies
Its President
and Chief Executive Officer
<PAGE>
Exhibit 10.24
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
(EXIMBANK GUARANTEED LOAN NO. AP072433XB)
This Third Amendment, dated as of September 3, 1999, is made by and
between RSI SYSTEMS, INC., a Minnesota corporation ("the Borrower") and NORWEST
BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the
"Lender").
Recitals
The Borrower and the Lender have entered into an Amended and Restated
Credit and Security Agreement dated as of April 16, 1998, as amended by First
Amendment to Credit and Security Agreement dated as of June 22, 1998, and as
amended by Second Amendment to Credit and Security Agreement dated as of June
14, 1999 (as amended, the "Credit Agreement"). Capitalized terms used in these
recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.
The Borrower has requested that certain amendment be made to the
Credit Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Third Amendment which
are defined in the Credit Agreement shall have the same meanings as defined
therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"'Maximum Line" means $1,500,000."
"'Revolving Note" means the Borrower's First Replacement Revolving
Note, payable to the order of the Lender in substantially the form of
Exhibit A to the Third Amendment and any note or notes issued in
substitution therefor, as the same may hereafter be amended, supplemented
or restated from time to time."
"`Third Amendment' means that certain Third Amendment to Credit and
Security Agreement dated as of September 3, 1999, by and between the
Borrower and the Lender."
2. NO OTHER CHANGES. Except as explicitly amended by this Third
Amendment, all of the terms and conditions of the Credit Agreement shall remain
in full force and effect and shall apply to any advance or letter of credit
thereunder.
<PAGE>
3. AMENDMENT FEE. The Borrower shall pay the Lender as of the date
hereof a fully earned, non-refundable fee in the amount of $8,250 for the
increase in the Maximum Line set forth in this Amendment.
4. CONDITIONS PRECEDENT. This Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The Revolving Note substantially in the form of Exhibit A hereto,
duly executed on behalf of the Borrower.
(b) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of the Revolving Note and this Third Amendment, (ii)
the fact that the articles of incorporation and bylaws of the Borrower,
which were certified and delivered to the Lender pursuant to its
Certificate of Authority dated as of June 26, 1997 continue in full force
and effect and have not been amended or otherwise modified except as set
forth in the Certificate to be delivered, and (iii) certifying that the
officers and agents of the Borrower who have been certified to the Lender,
pursuant to the Certificate of Authority dated as of June 26, 1997, as
being authorized to sign and to act on behalf of the Borrower continue to
be so authorized or setting forth the sample signatures of each of the
officers and agents of the Borrower authorized to execute and deliver the
Revolving Note and this Third Amendment and all other documents, agreements
and certificates on behalf of the Borrower.
(c) An amendment to the Patent Security Agreement sufficient to grant
the Lender a security interest in the Borrower's newly acquired patent for
the peripheral video conferencing system technology in Mediapro.
(d) Payment of the fee described in Paragraph 3.
(e) Such other matters as the Lender may require.
5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Third Amendment, the amendment to the Patent Security Agreement and the
Revolving Note and to perform all of its obligations hereunder, and this
Third Amendment, the amendment to the Patent Security Agreement and the
Revolving Note have been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Third Amendment, the amendment to the Patent Security Agreement and the
Revolving
-2-
<PAGE>
Note have been duly authorized by all necessary corporate action and do not
(i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, (ii) violate any provision of any law, rule or regulation or of
any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws
of the Borrower, or (iii) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
6. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
7. NO WAIVER. The execution of this Third Amendment and the amendment
of the Patent Security Agreement and acceptance of the Replacement Note and any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Security Document or other document held by the Lender,
whether or not known to the Lender and whether or not existing on the date of
this Third Amendment.
8. RELEASE. The Borrower, hereby absolutely and unconditionally
releases and forever discharges the Lender, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Third Amendment, whether such claims, demands
and causes of action are matured or unmatured or known or unknown.
9. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lender on demand for all
costs and expenses incurred by the Lender in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to
-3-
<PAGE>
the Lender for the services performed by such counsel in connection with the
preparation of this Third Amendment and the documents and instruments incidental
hereto. The Borrower hereby agrees that the Lender may, at any time or from time
to time in its sole discretion and without further authorization by the
Borrower, make an Advance under the Credit Agreement, or apply the proceeds of
any Advance, for the purpose of paying any such fees, disbursements, costs and
expenses and the fee required under paragraph 3 hereof.
10. MISCELLANEOUS. This Third Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By By
---------------------------- --------------------------------------
Brett A. Beugen Donald C. Lies
Its Officer Its President and Chief Executive Officer
-4-
<PAGE>
Exhibit A to Third Amendment to
Amended and Restated Credit and
Security Agreement
FIRST REPLACEMENT REVOLVING NOTE
$1,500,000 Minneapolis, Minnesota
September 3, 1999
For value received, the undersigned, RSI SYSTEMS, INC., a Minnesota
corporation (the "Borrower"), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below) to the order of NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"),
at its main office in Minneapolis, Minnesota, or at any other place designated
at any time by the holder hereof, in lawful money of the United States of
America and in immediately available funds, the principal sum of One Million,
Five Hundred Thousand Dollars ($1,500,000) or, if less, the aggregate unpaid
principal amount of all Advances made by the Lender to the Borrower under the
Credit and Security Agreement dated as of June 26, 1997 by and between the
Lender and the Borrower, as amended by a First Amendment to Credit and Security
Agreement dated as of June 22, 1998, as amended by Second Amendment to Credit
and Security Agreement dated as of June 14, 1999, and as amended by Third
Amendment Credit and Security Agreement of even date herewith (as the same may
hereafter be amended, supplemented or restated from time to time, the "Credit
Agreement") together with interest on the principal amount hereunder remaining
unpaid from time to time (computed on the basis of actual days elapsed in a
360-day year) from the date of the initial Advance until this Note is fully paid
at the rate from time to time in effect under the Credit Agreement.
This Note is the Revolving Note as defined in the Credit Agreement and
is subject to the Credit Agreement. To the extent this Note evidences the
Borrower's obligation to pay existing Revolving Advances, this Note is issued in
substitution for and replacement of but not in payment of the Borrower's
promissory note dated as of June 26, 1997 payable to the order of the Lender in
the original principal amount of $500,000.
RSI SYSTEMS, INC.
By
-----------------------------------------
Donald C. Lies
Its President and Chief Executive Officer
<PAGE>
FIRST AMENDMENT TO PATENT AND TRADEMARK SECURITY AGREEMENT
This Amendment, dated as of September 3, 1999, is made by and between
RSI SYSTEMS, INC., a Minnesota corporation (the "Debtor"), and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association whose address
and principal place of business is Norwest Center, Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479-0085 (the "Secured Party").
Recitals
The Debtor and the Secured Party have entered into an Amended and
Restated Credit and Security Agreement dated April 16, 1998, as amended by a
First Amendment to Amended and Restated Credit and Security Agreement dated as
of June 22, 1998 and by a Second Amendment to Amended and Restated Credit and
Security Agreement dated as of June 14, 1999 (as amended the "Credit
Agreement").
The Debtor and the Secured Party have also entered into a Patent and
Trademark Security Agreement dated as of June 26, 1997 (the "Patent Agreement").
The Secured Party required the Debtor to execute and deliver the Patent
Agreement to the Secured Party as a condition of the financial accommodations
made by the Secured Party in favor of the Debtor under the Credit Agreement.
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement and Patent Agreement, as applicable, unless otherwise
specified.
The Secured Party has requested that the Patent Agreement be amended
to properly reflect the inclusion of the peripheral video conferencing system
technology in Mediapro (the " Mediapro Patent") as a "Patent" arising or
acquired after the date of the Patent Agreement and therefore subject to the
Secured Party's security interest in the Debtor's Patents and Trademarks as
provided under the Patent Agreement "Definitions." The Debtor is willing to
execute this First Amendment to so include the " Mediapro Patent."
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this First Amendment which
are used in the Credit Agreement and Patent Agreement, as applicable, shall have
the same meanings as defined therein, unless otherwise defined herein.
2. EXHIBIT A-1 TO PATENT AGREEMENT. Exhibit A-1, attached hereto, is
added as Exhibit A-1 to the Patent Agreement and shall operate to amend and
become a part of Exhibit A to the Patent Agreement and to include the Mediapro
Patent in Exhibit A under the heading "UNITED STATES ISSUED PATENTS" therein.
<PAGE>
3. NO OTHER CHANGES. Except as explicitly amended by this First
Amendment, all of the terms and conditions of the Patent Agreement shall remain
in full force and effect and shall apply as set forth therein.
4. CONDITIONS PRECEDENT. This First Amendment shall be effective when
the Secured Party shall have received an executed original hereof.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and
warrants to the Secured Party as follows:
(a) The Debtor has all requisite power and authority to execute this
First Amendment and the First Amendment has been duly executed and
delivered by the Debtor and constitutes the legal, valid and binding
obligation of the Debtor enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Debtor of this
First Amendment has been duly authorized by all necessary corporate action
and does not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Debtor, or the articles of
incorporation or by-laws of the Debtor, or (iii) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which the Debtor is a party or by
which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in the Patent
Agreement under Section 3 "Representations, Warranties and Agreements" are
correct on and as of the date hereof as though made on and as of such date,
except to the extent that such representations and warranties relate solely
to an earlier date.
6. REFERENCES. All references in the Patent Agreement to "this
Agreement" shall be deemed to refer to the Patent Agreement as amended hereby;
and any and all references to the Patent Agreement in the Credit Agreement shall
be deemed to refer to the Patent Agreement as amended hereby.
7. MISCELLANEOUS. This First Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date written above.
NORWEST BANK MINNESOTA, RSI SYSTEMS, INC.
NATIONAL ASSOCIATION
By By
---------------------------- -------------------------------------------
Its Vice President Donald C. Lies
Its President and Chief Executive Officer
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 3rd day of
September, 1999, by Donald C. Lies, the President and Chief Executive Officer of
RSI Systems, Inc., a Minnesota corporation, on behalf of the corporation.
-------------------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 3rd day of
September, 1999, by __________, a Vice President of Norwest Bank Minnesota,
National Association, a national banking association, on behalf of the bank.
-------------------------------------------
Notary Public
-3-
<PAGE>
EXHIBIT A-1
UNITED STATES ISSUED PATENTS
<TABLE>
<CAPTION>
Title Patent Number Issue Date
----- ------------- ----------
<S> <C> <C>
Peripheral Audio and 5802281 September 1, 1998
Video Communication
System that interfaces with
a host computer and
determines the formatting
of coded audio/video signals
</TABLE>
A-1
<PAGE>
FIRST AMENDMENT TO PATENT AND TRADEMARK SECURITY AGREEMENT
This Amendment, dated as of September 3, 1999, is made by and between
RSI SYSTEMS, INC., a Minnesota corporation (the "Debtor"), and WELLS FARGO
BUSINESS CREDIT, INC., f/k/a NORWEST BUSINESS CREDIT, INC., a Minnesota
corporation whose address and principal place of business is Norwest Center,
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0152 (the
"Secured Party").
Recitals
The Debtor and the Secured Party have entered into an Amended and
Restated Credit and Security Agreement dated April 16, 1998, as amended by a
First Amendment to Amended and Restated Credit and Security Agreement dated as
of September 22, 1998 (as amended the "Credit Agreement").
The Debtor and the Secured Party have also entered into a Patent and
Trademark Security Agreement dated as of June 26, 1997 (the "Patent Agreement").
The Secured Party required the Debtor to execute and deliver the Patent
Agreement to the Secured Party as a condition of the financial accommodations
made by the Secured Party in favor of the Debtor under the Credit Agreement.
Capitalized terms used in these recitals have the meanings given to them in the
Credit Agreement and Patent Agreement, as applicable, unless otherwise
specified.
The Secured Party has requested that the Patent Agreement be amended
to properly reflect the inclusion of the peripheral video conferencing system
technology in Mediapro (the " Mediapro Patent") as a "Patent" arising or
acquired after the date of the Patent Agreement and therefore subject to the
Secured Party's security interest in the Debtor's Patents and Trademarks as
provided under the Patent Agreement "Definitions." The Debtor is willing to
execute this First Amendment to so include the " Mediapro Patent."
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this First Amendment which
are used in the Credit Agreement and Patent Agreement, as applicable, shall have
the same meanings as defined therein, unless otherwise defined herein.
2. EXHIBIT A-1 TO PATENT AGREEMENT. Exhibit A-1, attached hereto, is
added as Exhibit A-1 to the Patent Agreement and shall operate to amend and
become a part of Exhibit A to the Patent Agreement and to include the Mediapro
Patent in Exhibit A under the heading "UNITED STATES ISSUED PATENTS" therein.
<PAGE>
3. NO OTHER CHANGES. Except as explicitly amended by this First
Amendment, all of the terms and conditions of the Patent Agreement shall remain
in full force and effect and shall apply as set forth therein.
4. CONDITIONS PRECEDENT. This First Amendment shall be effective when
the Secured Party shall have received an executed original hereof.
5. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and
warrants to the Secured Party as follows:
(a) The Debtor has all requisite power and authority to execute this
First Amendment and the First Amendment has been duly executed and
delivered by the Debtor and constitutes the legal, valid and binding
obligation of the Debtor enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Debtor of this
First Amendment has been duly authorized by all necessary corporate action
and does not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Debtor, or the articles of
incorporation or by-laws of the Debtor, or (iii) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which the Debtor is a party or by
which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in the Patent
Agreement under Section 3 "Representations, Warranties and Agreements" are
correct on and as of the date hereof as though made on and as of such date,
except to the extent that such representations and warranties relate solely
to an earlier date.
6. REFERENCES. All references in the Patent Agreement to "this
Agreement" shall be deemed to refer to the Patent Agreement as amended hereby;
and any and all references to the Patent Agreement in the Credit Agreement shall
be deemed to refer to the Patent Agreement as amended hereby.
7. MISCELLANEOUS. This First Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date written above.
WELLS FARGO BUSINESS CREDIT, INC. RSI SYSTEMS, INC.
By By
---------------------------- -------------------------------------------
Its Vice President Donald C. Lies
Its President and Chief Executive Officer
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 3rd day of
September, 1999, by Donald C. Lies, the President and Chief Executive Officer of
RSI Systems, Inc., a Minnesota corporation, on behalf of the corporation.
-------------------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 3rd day of
September, 1999, by __________, a Vice President of Wells Fargo Business Credit,
Inc., a Minnesota corporation, on behalf of the corporation.
-------------------------------------------
Notary Public
3
<PAGE>
EXHIBIT A-1
UNITED STATES ISSUED PATENTS
<TABLE>
<CAPTION>
Title Patent Number Issue Date
----- ------------- ----------
<S> <C> <C>
Peripheral Audio and 5802281 September 1, 1998
Video Communication
System that interfaces with
a host computer and
determines the formatting
of coded audio/video signals
</TABLE>
A-1
<PAGE>
Exhibit 10.27
THIS SEPARATION AND SEVERANCE AGREEMENT (the "Agreement") is made and
entered into this 7th day of September, 1999, by and between RSI Systems, Inc.,
a Minnesota corporation ("Employer"), and Donald C. Lies, a Minnesota resident
("Employee").
WHEREAS, Employee has been employed by Employer as its Chief Executive
Officer; and
WHEREAS, the parties agree that it is in their respective best interest to
sever the employment relationship between them, upon the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the recitals and the mutual
representations, warranties, covenants, agreements and promises made herein, and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. RESIGNATION. The parties hereby agree that Employee hereby resigns as a
director, officer and employee of Employer, all to be effective as of September
7, 1999.
2. SEVERANCE PAYMENTS. The parties hereby agree that Employer shall pay the
Employee one of the following severance amounts. Employer shall choose the
severance payments of paragraph (a) or (b) below on or before September 15, 1999
and shall notify Employee promptly in writing of the choice of severance
payments.
(a) Employer shall pay Employee the lump sum of $166,666.70, constituting
10 months of Employee's salary in effect at the date hereof, subject
to applicable withholding; or
(b) Employer shall pay Employee severance each two weeks in accordance
with Employee's normal pay periods, beginning September 15, 1999 and
ending on August 31, 2000 at the rate of $7,692.31. All such monthly
severance payments shall be made in accordance with the normal payroll
times, and procedures, of the Employer, and shall be subject to all
customary payroll withholdings and deductions, including deductions
for any benefits provided in this Agreement.
3. CONTINUATION OF HEALTH COVERAGE. The Employer agrees to allow Employee
(and any currently covered dependents) to continue to participate in a
health/medical plan of, or reasonably comparable to that maintained from time to
time by Employer for its employees at Employee's cost. Employee's right to
continued coverage under this section shall in no way reduce or limit any
continuation coverage under such group health plan to which Employee or any of
Employee's qualified beneficiaries are entitled under the provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or Minnesota
Statutes " 61A.092 and 62A.17 et seq. This extension of coverage, however, shall
be coordinated with, and shall be provided concurrently with, any benefits or
continuation rights otherwise available to Employee
<PAGE>
and Employee's eligible dependents under state or federal continuation of
coverage statutes, including but not limited to, Minnesota Statutes " 61A.092
and 62A.17 et seq. and the federal Consolidated Omnibus Budget Reconciliation
Act ("COBRA"). Accordingly, within ten (10) days after the date of termination,
Employee and Employee's dependents who are eligible for such statutory
continuation rights shall complete all forms and papers necessary and customary
to elect such continuation coverage. The Parties expressly agree that the
extension of benefits provided for by this Agreement is not intended to create a
retiree health plan covering any other employees. In all other respects, the
payment of benefits, including the amounts and timing thereof, to Employee and
Employee's eligible dependents will be governed by the terms of applicable
employee benefit plans for which Employee and Employee's dependents are
eligible. The Company will answer any reasonable questions that Employee may
have from time to time and will offer him the same assistance given other
participants in employee benefit plans so long as Employee is entitled to
benefits as provided herein or under the terms of those plans.
4. EMPLOYEE TO ACT AS ADVISOR. Employee agrees that for a period of three
months commencing on the date of this Agreement, Employee shall make himself
available to act in an advisory capacity for Employer in connection with various
areas of Employer's business, including advising Employer on a search for a new
Chief Executive Officer. Employee's obligations hereunder shall not include any
reporting time at the Company's facilities or any fixed amount of time devoted
to such advisory role. Employee shall, however, comply with reasonable requests
by Employer for advice.
5. NONCOMPETITION COVENANT. In consideration of the Employer entering into
this Agreement, and agreeing to make the payments contained herein, Employee
hereby agrees that, until August 31, 2000, the Employee shall not, directly or
indirectly, whether as owner, manager, operator, controlling person, employee,
advisor or consultant, engage in the business of manufacturing, selling or
servicing videoconferencing equipment or any other business competitive with the
business conducted by Employer on the date hereof, anywhere within the United
States. In the event of a breach by Employee of the restrictions contained in
this paragraph 5, the Employee hereby agrees that, as liquidated damages and not
as a penalty, the Employee shall be forfeit, and the Employer shall not be
obligated to pay, any amount then remaining unpaid to Employee under paragraph 2
of this Agreement. In addition, and not in limitation, to the specific remedy
provided in the preceding sentence, the Employer shall further be entitled to
enforce this restrictive covenant against the Employee through such remedies as
a court of equity can provide including, without limitation, the remedy of
injunction and specific performance.
6. RELEASE FROM PERSONAL GUARANTIES. The parties acknowledge that Employee
has personally guaranteed the Employer's indebtedness to Employer's principal
lender. Employer agrees to exercise reasonable efforts to obtain the release of
Employee from such personal guaranty; provided, however, that such efforts shall
not require the renegotiation of such indebtedness, pay down of any outstanding
amounts or the payment of any fee. Employer agrees to indemnify, defend and hold
harmless Employee from and against any demand, liability, suit, claim or cause
of action, and any associated costs and expenses (including reasonable
attorneys'
<PAGE>
fees and disbursements) incurred by Employee after the date hereof as a result
of Employee's personal guaranty of such indebtedness.
7. GENERAL RELEASE OF EMPLOYER. In consideration of the payments, benefits,
and other undertakings stated herein, Employee agrees to release and forever
discharge Employer from any and all claims by signing a separate Release in the
form attached hereto as EXHIBIT A, which is incorporated herein by reference, at
the time Employee signs this Agreement.
8. 401(K) BENEFITS. Employer acknowledges that in addition to the payments
and benefits Employee is receiving under this Agreement, Employee is also
entitled to the benefits, if any, available under the Employer's 401(k) profit
sharing and savings plan.
9. CONFIDENTIAL INFORMATION. Employee agrees that Employee will not use or
disclose any information owned by, developed by, for, or about Employer, in any
respect concerning or relating to Employer's business, or the business of any of
its clients or customers, that Employee has acquired during Employee's
employment by Employer ("Confidential Information"). Employee agrees not to use
such Confidential Information himself or disclose such information to any other
party, directly or indirectly, without the prior written consent of Employer.
Employee agrees to return to Employer any and all of Employer's property in
Employee's possession.
10. NON-ADMISSION. Nothing in this Agreement is intended to be, nor will it
be deemed to be, an admission of liability by Employer that it has violated any
state or federal statute, local ordinance, or principle of common law, or that
it has engaged in any wrongdoing whatsoever. Employee acknowledges that Employer
has entered into this Agreement as a compromise to terminate all controversy
and/or claims by or regarding Employee.
11. NON-DISPARAGEMENT. Employee agrees not to disparage Employer in any way
to any person or entity whatsoever, including but not limited to past, present,
and prospective employees, customers, clients, vendors, and suppliers of
Employer. Employer agrees that it shall not, and it shall cause its officers,
directors and employees not to, disparage Employee in any way to any person or
entity whatsoever.
12. MISCELLANEOUS.
(a) MERGER. This Agreement and the attached Release, and the employee
benefit plans in which Employee is a participant, supersede all prior oral
and written agreements, negotiations, commitments, statements, and
communications between the parties with respect to the subject matter
hereof including, without limitation, the Deferred Compensation Agreement.
(b) INVALIDITY. In case any one or more of the provisions of this
Agreement shall be invalid, illegal or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions
contained in this Agreement will not in any
<PAGE>
way be affected or impaired thereby.
(c) BINDING EFFECT/ASSIGNMENT. This Agreement shall be binding upon
Employee's heirs and legal representatives and shall be enforceable by the
successors and assigns of Employer. None of the rights or obligations under
this Agreement shall be assigned or transferred by Employee.
(d) GOVERNING LAW AND VENUE. This Agreement shall be construed and
interpreted in accordance with the substantive and procedural laws of the
State of Minnesota and any dispute arising herefrom shall be venued in
Hennepin County, State of Minnesota.
(e) COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which will be deemed an original, but all
of which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the date and year first written above.
RSI SYSTEMS, INC.
By
Its
-------------------------------------
---------------------------------
------------------------------------------
Donald C. Lies
<PAGE>
EXHIBIT A
RELEASE
1. DEFINITIONS. I intend all words used in this Release to have their plain
meanings in ordinary English. Technical legal words are not needed to
describe what I mean. Specific terms I use in this Release have the
following meanings:
a. "I" "me" and "my", as used herein, shall at all times mean Donald C.
Lies and anyone who has or obtains any legal rights or claims through
said named person.
b. "Employer", as used herein, shall at all times mean RSI Systems, Inc.,
its parent corporations, subsidiaries, successors and assigns,
partners, any affiliated and predecessor companies, their affiliated
and predecessor or management companies, their successors and assigns,
and the present and former officers, directors, shareholders,
partners, employees, attorneys, and agents of any of them, whether in
their individual or official capacities, and the current and former
trustees or administrators of any pension, welfare, or other employee
benefit plan of Employer, in their official and individual capacities.
c. "My Claims" mean all of the claims I have now against Employer,
whether or not I know about those claims, including but not limited
to, claims for any action or inaction, loss, expense, or any damages
of whatever nature arising from any occurrence or occurrences from the
beginning of time until the date of this Release, including claims
for: breach of contract; payment of wages, commissions,
reimbursements, sick pay, vacation pay, employee benefits, insurance,
pension, or other compensation; fraud or misrepresentation; violation
of any federal, state, and/or local law, regulation or rule, including
but not limited to, the Minnesota Human Rights Act, Title VII of the
Civil Rights Act of 1964, the Americans with Disabilities Act, the
Rehabilitation Act, the Age Discrimination in Employment Act, the
Employee Retirement Income Security Act, the Consolidated Omnibus
Budget Reconciliation Act, the Family and Medical Leave Act, the Fair
Labor Standards Act, the Worker Adjustment and Retraining Notification
Act, and all other federal, state, and/or local civil rights laws
prohibiting discrimination or other unlawful activity on the basis of
race, color, creed, marital status, sex, age, religion, national
origin, disability, pregnancy, sexual orientation, political
affiliation, status with respect to public assistance, membership in
local commission, or any other protected class status; sexual
harassment; retaliation; defamation; intentional or negligent
infliction of emotional distress; breach of the covenant of good faith
and fair dealing; promissory estoppel; unjust enrichment; negligence;
wrongful
<PAGE>
termination of employment; constructive discharge; invasion of
privacy; fraudulent inducement; negligent hiring, retention, training,
and/or supervision; all other claims for unlawful employment
practices; all claims for attorney's fees, costs, disbursements, fees,
or other payments; and all other common law, legal, equitable or
statutory claims (whether on a contract, tort, or other theory),
whether they could be brought directly by me on my own behalf or by
any other person, agency, or organization on my behalf.
2. AGREEMENT TO RELEASE MY CLAIMS. On behalf of myself, my attorneys, heirs,
executors, administrators, successors and assigns, I agree to release,
discharge, and give up all My Claims against Employer in exchange for the
compensation, promises and undertakings as described in the Separation and
Severance Agreement between me and Employer. I agree to release and
discharge Employer not only from any and all of My Claims that I could make
on my own behalf, but also from those claims that may or could be brought
by any other person or organization on my behalf. I have not caused or
permitted to be served, filed, or commenced, and I will not cause or permit
to be served, filed, or commenced, any lawsuits, charges, complaints,
actions, notices, or other demands against Employer with any federal,
state, or local judicial or administrative agency or body based on My
Claims. In the event any such claim has been or is asserted, I agree that
this Release shall act as a total and complete bar to my re-employment or
to recovery of any relief or sum or amount whatsoever from Employer,
whether labeled award, liability, damages, judgment, backpay, wages, fine,
or penalty, or otherwise resulting directly or indirectly from any lawsuit,
remedy, charge, or complaint, whether brought privately by me or by anyone
else, including any federal, state, or local judicial or administrative
agency or body, whether or not on my behalf or at my request. The payments
I am receiving represent full and fair compensation for the release of all
My Claims. Employer shall not be obligated and does not owe me anything in
addition to that described above. THIS RELEASE SHALL NOT AFFECT ANY CLAIMS
WHICH COULD BE MADE UNDER ANY EMPLOYEE WELFARE BENEFIT PLAN OR ANY PENSION
OR RETIREMENT PLAN THROUGH EMPLOYER, OR ANY CLAIMS BASED UPON THE PROMISES
AND COMMITMENTS PROVIDED IN THE SEPARATION AND SEVERANCE AGREEMENT PURSUANT
TO WHICH THIS RELEASE IS GIVEN.
3. NON-ADMISSION. Even though Employer is paying me to release My Claims,
Employer does not admit that it is responsible or legally obligated to me.
In fact, Employer denies that it is responsible or legally obligated to me
or that it has engaged in any wrongdoing.
4. CONSIDERATION PERIOD AND RESCISSION OF RELEASE. I understand that I may
take up to twenty-one (21) calendar days after receiving the Separation and
Severance Agreement and this Release to consider whether I wish to sign the
Separation and Severance Agreement and this Release. In addition, I
understand that I may rescind (i.e., revoke and cancel) my release of
claims arising under the federal Age Discrimination in Employment
<PAGE>
Act, 29 U.S.C. ' 621 et seq., within seven (7) calendar days of signing the
Separation and Severance Agreement and this Release. I understand that I
also may rescind (i.e., revoke and cancel) my release of claims arising
under the Minnesota Human Rights Act within fifteen (15) calendar days of
signing the Separation and Severance Agreement and this Release. I
understand that to be effective, the rescission/revocation must be in
writing and delivered to Employer, in care of James Hanzlik, either by hand
or by mail within the respective rescission/revocation periods. If sent by
mail, the rescission must be:
1. Postmarked within the respective rescission/revocation periods as
stated above;
2. Properly addressed, as stated above; and
3. Sent by certified mail, return receipt requested.
5. Knowing and Voluntary. I have read the Separation and Severance Agreement
and this Release carefully and understand and agree to all of their
respective terms. I have had an opportunity to discuss this Release with my
own attorney. In agreeing to sign the Separation and Severance Agreement
and this Release, I have not relied on any statements or explanations made
by Employer or its attorneys.
-------------------------------------
Donald C. Lies
SUBSCRIBED AND SWORN to before me
this ____ day of September, 1999.
- ------------------------------------
Notary Public
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
RSI Systems, Inc.:
We consent to incorporation by reference in the registration statements
(commission File numbers 333-62573 and 33-95912) on Form S-8 of RSI Systems,
Inc., of our report dated August 12, 1999, except as to notes 3 and 5 which are
as of September 3, 1999, and note 7(b) which is as of September 7,1999, relating
to the balance sheets of RSI Systems, Inc., as of June 30, 1999 and 1998, and
the related statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1999, which report
appears in the June 30, 1999, annual report on Form 10-KSB of RSI Systems, Inc.
Minneapolis, Minnesota
September 24, 1999
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 418,863
<SECURITIES> 992,945
<RECEIVABLES> 1,517,650
<ALLOWANCES> 228,000
<INVENTORY> 1,034,238
<CURRENT-ASSETS> 4,050,262
<PP&E> 523,106
<DEPRECIATION> 852,016
<TOTAL-ASSETS> 4,573,368
<CURRENT-LIABILITIES> 2,947,420
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0
0
<COMMON> 68,373
<OTHER-SE> 1,418,010
<TOTAL-LIABILITY-AND-EQUITY> 4,573,368
<SALES> 9,199,135
<TOTAL-REVENUES> 9,199,135
<CGS> 4,447,943
<TOTAL-COSTS> 4,447,943
<OTHER-EXPENSES> 5,550,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,569
<INCOME-PRETAX> (878,675)
<INCOME-TAX> 0
<INCOME-CONTINUING> (878,675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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