U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
XXX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM_____TO_____.
Commission File Number 0-27106
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RSI Systems, Inc.
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1767211
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5555 West 78th Street, Suite F, Minneapolis, Minnesota 55439
- ------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(612) 896-3020
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(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. YES _X_ NO ___
The Company had 7,754,331 shares of Common Stock, $ 0.01 par value per share,
outstanding as of May 11, 2000.
Transitional Small Business Disclosure Format (Check one): Yes ___ No _X_
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RSI Systems, Inc.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 2000 (unaudited)
and June 30, 1999 ..........................................3
Statements of Operations (unaudited) - Three
months and nine months ended March 31, 2000 and 1999........4
Statements of Cash Flows (unaudited) - Nine
months ended March 31, 2000 and 1999........................5
Notes to Financial Statements...............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................9
PART II OTHER INFORMATION....................................................16
Signatures....................................................................17
Exhibit Index.................................................................18
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RSI SYSTEMS, INC.
Balance Sheets
March 31, 2000 and June 30, 1999
<TABLE>
<CAPTION>
March 31,
2000 June 30,
Assets (Unaudited) 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,065 418,863
Marketable securities 81,181 992,945
Accounts receivable, net of allowance for doubtful
accounts of $309,000 and $228,000, respectively 370,999 1,517,650
Inventories 861,474 1,034,238
Prepaid expenses 63,893 86,566
- -----------------------------------------------------------------------------------------------------
Total current assets 1,421,612 4,050,262
- -----------------------------------------------------------------------------------------------------
Property and equipment:
Software 410,049 138,507
Furniture and equipment 1,269,997 1,180,336
Leasehold improvements 56,279 56,279
Less accumulated depreciation and amortization (1,074,283) (852,016)
- -----------------------------------------------------------------------------------------------------
Net property and equipment 662,042 523,106
- -----------------------------------------------------------------------------------------------------
Total assets $ 2,083,654 4,573,368
=====================================================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 792,036 1,332,154
Accrued expenses 139,834 183,569
Deferred revenue 74,736 77,800
Revolving credit facility (Note 3) 388,197 1,247,757
Notes payable - Shareholder (Note 3) 300,000 --
Current portion of capital lease obligations 107,628 106,140
- -----------------------------------------------------------------------------------------------------
Total current liabilities 1,802,431 2,947,420
- -----------------------------------------------------------------------------------------------------
Long-term liabilities:
Capital lease obligations, net of current portion 138,542 139,565
- -----------------------------------------------------------------------------------------------------
Total long-term liabilities 138,542 139,565
- -----------------------------------------------------------------------------------------------------
Stockholders' equity (Note 4):
Common stock ($.01 par value per share, 12,000,000 shares
authorized, 7,754,331 and 6,837,281 issued and
outstanding, respectively) 77,543 68,373
Additional paid-in capital 18,113,620 17,338,241
Accumulated deficit (18,048,482) (15,920,231)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 142,681 1,486,383
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,083,654 4,573,368
=====================================================================================================
</TABLE>
See accompanying notes to financial statements.
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RSI SYSTEMS, INC.
Statements of Operations
Three Months and Nine Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 741,234 2,789,939
Cost of goods sold 374,812 1,311,113
Inventory writedown to lower of cost or market 320,000 --
- ----------------------------------------------------------------------------------------------
Gross profit 46,422 1,478,826
Research and development 164,862 290,068
Selling, general, and administrative 518,953 1,126,225
- ----------------------------------------------------------------------------------------------
Operating income (loss) (637,393) 62,533
Other income (expense):
Interest income (expense), net (52,838) (15,641)
- ----------------------------------------------------------------------------------------------
Other income (expense), net (52,838) (15,641)
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ (690,231) 46,892
==============================================================================================
Net earnings (loss) per common share - basic $ (0.09) 0.01
Net earnings (loss) per common share - diluted $ (0.09) 0.01
==============================================================================================
Weighted average shares outstanding - basic 7,747,171 6,675,092
Weighted average shares outstanding - diluted 7,747,171 7,231,100
==============================================================================================
<CAPTION>
Nine Months Nine Months
Ended Ended
March 31, March 31,
2000 1999
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------
Net sales $ 3,489,988 7,745,484
Cost of goods sold 1,764,097 3,655,709
Inventory writedown to lower of cost or market 320,000 --
- ----------------------------------------------------------------------------------------------
Gross profit 1,405,891 4,089,775
Research and development 650,218 905,954
Selling, general, and administrative 2,728,185 3,098,839
- ----------------------------------------------------------------------------------------------
Operating income (loss) (1,972,512) 84,982
Other income (expense):
Interest income (expense), net (155,739) (30,555)
- ----------------------------------------------------------------------------------------------
Other income (expense), net (155,739) (30,555)
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ (2,128,251) $ 54,427
==============================================================================================
Net earnings (loss) per common share - basic $ (0.29) 0.01
Net earnings (loss) per common share - diluted $ (0.29) 0.01
==============================================================================================
Weighted average shares outstanding - basic 7,333,728 6,666,822
Weighted average shares outstanding - diluted 7,333,728 7,185,469
==============================================================================================
</TABLE>
See accompanying notes to financial statements.
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RSI SYSTEMS, INC.
Statements of Cash Flows
Nine Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
March 31, March 31,
2000 1999
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (2,128,251) 54,427
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 222,267 249,266
Inventory writedown to lower of cost or market 320,000 --
Changes in operating assets and liabilities:
Accounts receivable 1,146,651 (1,455,811)
Inventories (147,236) (390,203)
Prepaid expenses 22,673 (42,761)
Accounts payable (373,868) 817,237
Accrued expenses (43,735) 87,221
Deferred revenue (3,064) 70,165
- ------------------------------------------------------------------------------------------------------
Net cash used in operating activities (984,563) (610,459)
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale (purchase) of marketable securities 911,764 (10,828)
Purchases of furniture and equipment (276,003) (109,081)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 635,761 (119,909)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 618,299 23,906
Net (payments) proceeds from line of credit (859,560) 764,371
Increase in notes payable - Shareholder 300,000 --
Payments on capital lease obligations (84,735) (55,773)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (25,996) 732,504
- ------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (374,798) 2,136
Cash and cash equivalents at beginning of period $ 418,863 382,093
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 44,065 384,229
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
5
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RSI SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in the financial statements have been
omitted or condensed pursuant to such rules and regulations. The accompanying
unaudited financial statements should be read in conjunction with the Company's
June 30, 1999 financial statements and related notes included in the Company's
Annual Report on Form 10-KSB.
The financial statements reflect all adjustments, of a normally recurring
nature, necessary to fairly present the results of operations and financial
position of the Company for the interim periods.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. NET EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share excludes any dilutive effects of options,
warrants, and convertible securities, and diluted earnings per share includes
such effects, if dilutive. Differences between basic and diluted weighted
average shares outstanding result from the dilutive effect of stock options and
warrants under the treasury stock method.
3. DEBT:
On September 3, 1999 the Company signed an amendment to a commercial loan
agreement with a bank for a committed line of credit facility. The amendment
increased the maximum line of credit from the previous level of $2,000,000 to
$2,500,000, modified the minimum net worth covenants and extended the maturity
date to June 26, 2001. The facility is secured by all corporate assets and
provides working capital based on a borrowing base comprised of certain accounts
receivable, inventory and marketable securities. The facility contains certain
covenants and conditions, including minimum net worth and tangible net worth
levels. Interest on outstanding borrowings accrues at the bank's base rate or
the base rate plus up to 4%, depending on the level of each component of the
Company's borrowing base and the outstanding amount on the line of credit. On
March 31, 2000, the base rate was 9% and outstanding borrowings on the facility
were $388,197, with approximately $220,000 available.
On March 31, 2000 the Company was in default on the net worth and tangible net
worth covenant. The Company is in the process of renegotiating net worth
covenants with its bank and obtaining a waiver of the default. There can be no
assurance that the Company will be able to successfully renegotiate the
covenants or obtain such a waiver.
In December 1999 and in February 2000, the Company received two $150,000
payments from its
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Chairman, Mr. Richard F. Craven, in exchange for issuing two separate notes
payable of $150,000 to Mr. Craven. Both notes payable carry an interest rate of
10% and are due on June 17, 2000 and August 24, 2000 respectively. On the due
date, at the election of Mr. Craven, each $150,000 note is convertible into the
Company's Common Stock all or in part at the market prices of the Company's
Common Stock on the date the notes were signed which were $.53 and $.67 per
share, respectively.
4. CAPITAL STOCK:
On September 6, 1999, the Company issued 134,000 shares of its Common Stock and
received $134,000 upon the exercise of warrants held by Mr. Richard F. Craven,
Chairman of the Company.
On November 3, 1999, the Company sold 200,000, 100,000 and 50,000 shares of
Common Stock at $1.00 per share to Mr. Richard F. Craven, Mr. Byron G. Shaffer
and Mr. S. Albert Hanser, respectively, all directors of the Company. Net
proceeds from this private placement of the Company's Common Stock were
$350,000. In addition, the Company issued 166,250 shares of Common Stock as
payment of $166,250 in trade debt due to a key vendor as part of the private
placement.
On November 30, 1999, Mr. Richard F. Craven, Chairman of the Company, purchased
250,000 shares of the Company's Common Stock at $.50 per share. Net proceeds of
this private placement were. $125,000.
5. NET SALES:
Net sales for the nine-month period ended March 31, 2000 includes $290,540 from
Philips Electronics, N.V. as part of an agreement to terminate its OEM/private
label relationship with the Company. Under terms of the agreement, Philips paid
the Company $290,540 for lost gross margin on videoconferencing units ordered by
Philips but not shipped by the Company.
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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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RSI Systems, Inc., (the "Company" or "RSI"), designs, manufactures and sells
high performance, business quality videoconferencing systems throughout a
worldwide network of resellers, distributors and private label partners. The
Company's fourth-generation product family, the MediaPro384(TM) system, 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. The Company was incorporated under the laws of Minnesota on December
21, 1993.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net Sales. Net sales for the third quarter of fiscal year 2000 were $741,234,
down 73% from $2,789,939 in the third quarter of fiscal year 1999. The decrease
in sales in the third quarter of fiscal year 2000 compared to the third quarter
of fiscal year 1999 was primarily a result of lower unit volume associated with
the Company's reduced distribution through OEM relationships and direct sales.
Sales to OEM partners and direct sales volume accounted for approximately 70% of
net sales in the third quarter of fiscal year 1999, or approximately $2,042,000.
In the third quarter of fiscal year 2000, net sales through OEM partners and
direct sales accounted for approximately $193,000 or 25% of net sales.
The decreased OEM sales volume was due to insignificant sales to Vtel, Inc.
(Vtel), Philips Electronics, N.A. (Philips) and Gentner Communications Inc.
(Gentner) in the third quarter of fiscal year 2000, compared to sales of
approximately $1,710,000 to these customers in the third quarter of fiscal year
1999. In the third quarter of fiscal year 1999, Vtel and Gentner purchased
certain quantities of units as part of their agreements with the Company. In the
third quarter of fiscal year 2000, there were no such requirements, as both
customers had previously taken delivery of all minimum purchase quantities
required.
As of September 30, 1999, Philips and the Company terminated their OEM
relationship. The termination was a result of Philips'overall decision to
discontinue its involvement in the settop/workgroup systems videoconferencing
market. No sales were made to Philips in the third quarter of fiscal year 2000.
The Company does not expect any significant sales to Vtel and Philips in the
future. However, the Company does have the right, and expects to manufacture and
distribute videoconferencing units in the future with a design similar to those
formerly distributed by Philips under its former private label relationship with
the Company.
As of December 31, 1999, Gentner Communications, Inc. had taken delivery of all
its minimum purchase commitments to the Company and no sales were made to
Gentner in the third quarter of fiscal year 2000. Since there is currently no
contractual obligation for Gentner to purchase the Company's products, the
timing and amount of future purchases from Gentner is uncertain.
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In the fourth quarter of fiscal year 1999, and continuing into the third quarter
of fiscal year 2000, the Company redirected a significant portion of its North
American sales efforts away from direct selling, and toward efforts to
establish, train and sell primarily through a few carefully selected independent
third party resellers and distributors. The Company believes this shift in
distribution strategy for North America will enhance growth in the longer term
despite negatively affecting sales in the short term. In the third quarter of
fiscal year 2000, direct sales amounted to approximately $165,000 compared to
direct sales of approximately $332,000, for the third quarter of fiscal year
1999.
Gross Profit. Gross profit was $46,422 in the third quarter of fiscal year 2000
compared to a gross profit of $1,478,826 during the third quarter of fiscal year
1999. The lower gross profit was a result of lower unit sales volume and an
inventory writedown during the third quarter of fiscal year 2000. Excluding the
inventory writedown, cost of goods sold as a percentage of net sales were 51% in
the third quarter of fiscal year 2000 compared to 47% in the third quarter of
fiscal year 1999. The higher cost of goods sold percentage was a result of
changes in product mix and related average selling prices during the third
quarter of fiscal year 2000 compared to fiscal year 1999.
As a result of new technology, intense competitive pressure and the effect of
these factors on sales of the Company's previous generation products, the
Company wrote down the cost of certain inventory used in the production of its
previous generation products to estimated market value in the third quarter of
fiscal year 2000. This inventory write down amounted to $320,000 or 43% of net
sales for the period.
Research and Development Expenses. Research and development expenses were
$164,862 for the third quarter of fiscal year 2000, or 22% of sales, compared to
research and development expenses of $290,068, or 10% of sales for the third
quarter of fiscal year 1999. The percentage increase in the third quarter of
fiscal year 2000 was due to lower sales as discussed above. Actual spending was
higher during the quarter of fiscal year 1999 due to a higher level of hardware
and software development activity associated with the Company's new
MediaPro384(TM) product as well as development in support of OEM and private
label partners. During the third quarter of fiscal year 2000 the Company's
research and development efforts were directed toward smaller scale enhancements
to the MediaPro(TM) product.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $518,953 in the third quarter of fiscal year 2000,
or 70% of sales, compared to $1,126,225 or 40% of sales for the third quarter of
fiscal year 1999. The percentage increase was due to lower sales in the third
quarter of fiscal year 2000 as discussed above. The decrease in actual
expenditures during the third quarter of fiscal year 2000 was a result of
decreased sales, marketing, technical support and administrative expenses and
activities associated with lower sales volume. In November 1999, the Company
reduced non-critical headcount by 11, to reduce monthly operating expenses. The
Company currently believes it has the needed resources to effectively execute
its operating plan for the remainder of calendar year 2000.
In addition, during the third quarter of fiscal year 2000 the Company signed a
Modified Separation and Severance Agreement with its previous President and CEO,
Mr. Donald C. Lies. Under the modified agreement, remaining payments of
approximately $90,000 which had been
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accrued and expensed in previous quarters were reversed, which contributed to
the lower overall reduction in selling, general and administrative expenses for
the third quarter of fiscal year 2000.
Other Income (Expense). Other income (expense) was $(52,838) for the third
quarter of fiscal year 2000, compared to $(15,641) for the third quarter of
fiscal year 1999. The Company incurred higher interest expense during the third
quarter of fiscal year 2000 due to higher levels of outstanding borrowings on
both its line of credit and capital lease obligations, as well as interest
charges on material procured on behalf of the Company by its third party
manufacturer.
As a result of the foregoing, the net loss for the third quarter of fiscal year
2000 was $(690,231) or $(.09) per common share compared to a net profit of
$46,892, or $.01 per common share in the third quarter of fiscal year 1999.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
Net Sales. Net sales for the nine-month period ended March 31, 2000 were
$3,489,988, down 55% from $7,745,484 for the nine-month period ended March 31,
1999. The decrease in sales during the nine-month period ended March 31, 2000
was a result of lower unit volume associated with the Company's distribution
through its OEM relationships and direct sales.
OEM and private label sales volume accounted for approximately 51% of net sales
in the nine-month period ended March 31, 1999, or approximately $3,980,000. In
the nine-month period ended March 31, 2000, net sales through OEM/private label
relationships amounted to approximately $880,000. The decreased OEM/private
label sales volume was primarily due to less than $40,000 sales to Vtel in the
nine-month period ended March 31, 2000, compared to sales of approximately
$2,900,000 to this customer during the nine-months ended March 31, 1999. In the
nine-month period ended March 31, 1999, Vtel. purchased a certain quantity of
units as part of an agreement with the Company. In the nine-month period ended
March 31, 2000, there was no such requirement, as Vtel had previously taken
delivery of all minimum purchase quantities required under the agreement.
As of September 30, 1999, Philips and the Company terminated their OEM
relationship. The termination was a result of Philips'overall decision to
discontinue its involvement in the settop/workgroup systems videoconferencing
market. Net sales for the nine-month period ended March 31, 2000 includes
$290,540 from Philips as part of an agreement to terminate its OEM/private label
relationship with the Company. Under terms of the agreement, Philips paid the
Company $290,540 for lost gross margin on videoconferencing units ordered by
Philips but not shipped by the Company. Total sales to Philips were $580,000 and
$540,000 during the nine-month periods ended March 31, 2000 and 1999
respectively.
As a result of both Vtel and Philips fulfilling their minimum purchase
commitments, the Company does not expect any significant sales to these
customers in the future. However, the Company does have the right, and expects
to manufacture and distribute videoconferencing units in the future with a
design similar to those formerly distributed by Philips under its former private
label relationship with the Company.
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Net sales to Gentner for the nine-month period ended March 31, 2000 were down
approximately $270,000 from the previous nine-month period ended March 31, 1999.
As of December 31, 1999, Gentner Communications, Inc. had taken delivery of all
its minimum purchase commitments to the Company. Since there is currently no
contractual obligation for Gentner to purchase the Company's products, the
timing and amount of future purchases from Gentner is uncertain.
In the fourth quarter of fiscal year 1999, and continuing into the third quarter
of fiscal year 2000, the Company redirected a significant portion of its North
American sales efforts away from direct selling, and toward efforts to
establish, train and sell primarily through a lower number of carefully selected
independent third party resellers and distributors. The Company believes this
shift in distribution strategy for North America will enhance growth in the
longer term despite negatively affecting sales in the short term. In the
nine-month period ended March 31, 2000, direct sales amounted to approximately
$475,000 compared to direct sales of approximately $2,145,000 during the
nine-month period ended March 31, 1999.
Gross Profit. Gross profit was $1,405,891 for the nine-month period ended March
31, 2000, compared to a gross profit of $4,089,775 during the nine-month period
ended March 31, 1999. The decreased gross profit was a result of lower unit
sales volume and an inventory writedown to lower of cost or market of $320,000
during the third quarter of fiscal year 2000. Cost of goods sold, (excluding the
$320,000 inventory writedown), as a percentage of sales, (excluding the $290,540
from Philips), (note 5), were 55% for the nine-month period ended March 31, 2000
compared to 47% during the nine-month period ended March 31, 1999.
The 8 percentage point increase in cost of goods sold as a percentage of sales
during the nine-month period ended March 31, 2000 as discussed above, was
primarily associated with the write-off of certain inventory and rework costs in
the second quarter of fiscal year 2000 and changes in product mix and related
average selling prices during the nine-month period ending March 31, 2000
compared to the previous period.
Research and Development Expenses. Research and development expenses were
$650,218, or 19% of sales for the nine-month period ended March 31, 2000,
compared to research and development expenses of $905,954 or 12% of sales for
the nine-month period ended March 31, 1999. The percentage increase in the
nine-month period ended March 31, 2000 was due to lower sales as discussed
above. Actual dollar spending was higher during the nine-month period ended
March 31, 1999 due to higher development activity associated with the Company's
new Media Pro384(TM) product as well as development in support of OEM and
private label partners during that period. During the nine-month period ended
March 31, 2000, the Company's research and development efforts were directed
primarily toward smaller scale enhancements to the MediaPro384(TM).
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses were $2,728,185 for the nine-month period ended March
31, 2000 or 78% of sales, compared to $3,098,839 or 40% of sales the nine-month
period ended March 31, 1999. The percentage increase was due to lower sales
during the nine-month period ended March 31, 2000 as discussed above. The lower
level of actual expenditures during the nine-month period ended March 31,
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2000 was a result of decreased sales, marketing, technical support and
administrative expenses and activities associated with lower sales volume.
Other Income (Expense). Other income (expense) was $(155,739) for the nine-month
period ended March 31, 2000, compared to $(30,555) for the nine-month period
ended March 31, 1999. The Company incurred higher interest expense during the
nine-month period ended March 31, 2000 due to higher levels of outstanding
borrowings on both its line of credit and higher levels of interest charged on
material procured on behalf of the Company by its third party manufacturer. The
Company also earned a higher level of interest income on investments during the
nine-month period ended March 31, 1999, offsetting a greater amount of interest
expense during that period. The higher level of investments were a result of a
higher amount of funds remaining from a private placement of the Company's
common stock in January, 1998.
As a result of the foregoing, the net loss for the nine-month period ended March
31, 2000 was $(2,128,251) or $(.29) per common share, compared to a net profit
of $54,427, or $.01 per common share in the nine-month period ended March 31,
1999.
OUTLOOK
The Company is pursuing a strategy of increasing sales by targeting specific
markets best suited to its product capabilities and increasing distribution
through a few carefully selected third party resellers and distributors. The
Company is also pursuing opportunities for increased distribution by looking for
strategic partner arrangements. Finally, the Company is continuing to enhance
its product offerings to enhance value and competitive advantage. Although the
video conferencing industry remains very competitive and continues to rapidly
change, the Company believes its strategy will allow it to increase revenues,
and improve income from operations in the long term, despite negatively
impacting sales in the short term.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities was ($984,563) for the nine-month period
ended March 31, 2000, which was primarily due to the net loss of approximately
$(1,586,000), (excluding the non-cash items of depreciation and inventory
writedowns), and a decrease in accounts payable of $373,868, which was offset by
a reduction accounts receivable of $1,146,651. Accounts receivable decreased
during the nine-month period ended March 31, 2000 as a result of lower sales
volume during the latter half of the third quarter of fiscal year 2000 compared
to the latter half of the fourth quarter of fiscal year 1999. Accounts payable
decreased during the nine-month period ended March 31, 2000 due to Company
efforts to pay the Company's third party manufacturer within 60 days. The
shorter payment cycle to this vendor was implemented in order to support the
manufacturer's production of MediaPro384(TM).
13
<PAGE>
Prior to inventory reserve increases for a writedown of cost to market value,
inventory increased $147,236 during the nine-month period ended March 31, 2000
as a result of the introduction of the Company's new MediaPro384(TM) product in
late June 1999. The product went into full production in the first quarter of
fiscal year 2000, and inventory levels were increased in order to maintain
product availability. MediaPro384(TM) inventory represents an incremental
addition of overall inventory, as the Company continues to support its previous
product line, Video Flyer Plus.
CASH FLOWS FROM INVESTING ACTIVITIES
During the nine-month period ended March 31, 2000, the Company received net cash
from investing activities of $635,761 primarily as a result of maturities of
government securities of $911,764. Also during the period ended March 31, 2000,
the Company invested approximately $361,000 in capital assets. These assets were
obtained in connection with the Company's continued development, enhancement and
support of its MediaPro384(TM) product. The primary portion of this investment
is represented by $255,000 in software purchased from third parties for
enhancements to MediaPro384(TM). These costs have been capitalized in accordance
with the Company's policy of capitalizing such costs, if material, subsequent to
the establishment of technological feasibility. The Company financed
approximately $85,000 of these costs under an agreement with a leasing company.
CASH FLOW FROM FINANCING ACTIVITIES
Through March 31, 2000, cash requirements of the Company have been funded
primarily by the issuance of common stock, loans from a Director of the Company
and borrowings on a credit facility from its bank.
To finance working capital during the nine-month period ended March 31, 2000,
the Company increased net outstanding borrowings on its line of credit by
approximately $289,000, and in February, 2000 the Company paid down the
outstanding balance on its line of credit with proceeds from the sale of
marketable securities of approximately $1,148,000 to minimize interest costs.
This resulted in an overall net reduction of the line of credit balance of
approximately $859,000. At March 31, 2000, the Company had a balance of $388,197
outstanding on its $2,500,000 credit facility, with approximately $220,000
available.
In September 1999, the Company received net proceeds of $134,000 from the
exercise of warrants held by Mr. Richard F. Craven, Chairman of the Company, for
the purchase of 134,000 shares of Common Stock at $1.00 per share. In addition,
the Company received net proceeds of $350,000 on November 3, 1999 from the
private placement of 200,000, 100,000 and 50,000 shares of Common Stock sold at
$1.00 per share to Mr. Richard F. Craven, Mr. Byron G. Shaffer and Mr. S. Albert
Hanser respectively, all directors of the Company. As part of this private
placement, the Company also issued 166,250 shares of common stock as payment for
$166,250 in trade accounts payable to a key vendor.
14
<PAGE>
On November 30, 1999 the Company received net proceeds of $125,000 from the
private placement of 250,000 shares of Common Stock sold to Mr. Richard F.
Craven, Chairman of the Company, for $.50 per share.
In December 1999 and in February 2000, the Company received two equal $150,000
payments from it Chairman, Mr. Richard F. Craven, in exchange for issuing two
separate notes payable of $150,000 to Mr. Craven. Both notes payable carry an
interest rate of 10% and are due on June 17, 2000 and August 24, 2000
respectively. On the due date, at the election of Mr. Craven, each $150,000 note
is convertible into the Company's Common Stock all or in part at the market
prices of the Company's Common Stock on the date the notes were signed which
were $.53 and $.67 per share respectively.
LIQUIDITY
The Company believes that recent reductions in operating expenses and strong
management of accounts receivable, inventory and accounts payable and funds
available under its line of credit will allow it to minimize the use of cash
from operations until sales increase sufficiently to achieve a positive cash
flow from operations. Management plans to continue its strategy of increasing
sales through pursuit of stronger distribution partners and to continue to
provide these partners with new product offerings and enhancements to increase
its competitive advantage. However, there can be no assurance that sales
increases will materialize, or that the timing of such increases, if any, will
be sufficient to permit the Company to operate without the need for additional
capital.
In the event the Company requires cash in excess of funds available from
operations or its line of credit, management would seek additional financing.
However, no formal arrangements have been made in this regard and no assurance
can be made that any such financing would be available on reasonable terms, or
at all.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RSI Systems, Inc.
Dated: May 12, 2000 /s/ Eugene W. Courtney
---------------------------------------
Eugene W. Courtney
Its President & Chief Executive Officer
By: /s/ James D. Hanzlik
-----------------------------------
James D. Hanzlik
Its Chief Financial Officer
17
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2000
Item No. Title of Document Method of Filing
- -------- ----------------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
18
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 44,065
<SECURITIES> 81,181
<RECEIVABLES> 370,999
<ALLOWANCES> 309,000
<INVENTORY> 861,474
<CURRENT-ASSETS> 1,421,612
<PP&E> 662,042
<DEPRECIATION> 1,074,283
<TOTAL-ASSETS> 2,083,654
<CURRENT-LIABILITIES> 1,802,431
<BONDS> 0
0
0
<COMMON> 77,543
<OTHER-SE> 65,138
<TOTAL-LIABILITY-AND-EQUITY> 2,083,654
<SALES> 3,489,988
<TOTAL-REVENUES> 3,489,988
<CGS> 2,084,097
<TOTAL-COSTS> 2,084,097
<OTHER-EXPENSES> 3,378,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,739
<INCOME-PRETAX> (2,128,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,128,251)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,128,251)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
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