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, 2000
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.)
5593 WEST 78TH STREET
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. |_|
The Company's revenues for its most recent fiscal year were $4,576,277.
On September 22, 2000, the Company had 6,354,559 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 OTC Bulletin Board System), excluding outstanding shares
beneficially owned by directors and officers, was approximately $2,087,000.
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 including resellers, distributors and OEM or private label
partners. The Company's fourth-generation product family, the MediaPro 384(TM)
(MediaPro or MediaPro 384) system, is available for sale worldwide and
represents the Company's primary source of revenue. 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, dual platform and multipoint.
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, the Company redirected its 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 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 384 system, introduced in June
1999, is a cross-platform, multimedia videoconferencing engine, capable of
operating either with or without a host computer or laptop, 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, enhanced, user-friendly 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 2000, 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.
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 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 less than
$1,000 to $6,000.
(3) Set-top/Workgroup Videoconferencing Systems. RSI was one of
the first manufacturers to enter this marketplace. The
Company's new MediaPro product is also targeted toward this
market segment which is estimated to be in the area of $300
million.(1)
The systems in this market segment generally attach to high
quality brand name televisions or other displays to provide
medium to exceptional video and audio performance at price
points ranging from $6,000 to $25,000. 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
machine standardization in the late 1980s to allow for rapid
expansion of the marketplace regardless of the product brand.
(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
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(1) H.C. Wainwright & Co., Inc.; Videoconferencing Industry, THE RISE
OF THE SMALL GROUP SYSTEM, December 2, 1998.
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consistent operation for both audio and video signals. Prices
for full room systems are typically in the $50,000 and up
category, excluding installation. The Company's
videoconferencing engines, because of their adaptability and
quality, can be easily integrated into these room systems.
H.C. Wainwright believes that the settop/workgroup systems segment will
grow at a rate of over 45% annually.(2) 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 previous generation products 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 unique functionality and flexibility at
competitive price points.
The primary capabilities designed into the MediaPro are:
(1) MULTIPOINT. This feature, introduced in fiscal year 2000,
allows users to connect up to three additional sites, for a
four point videoconference.
(2) ETHERNET. All members of the MediaPro 384 product family have
a 10/100 Mbps Ethernet (LAN) hardware interface. By
incorporating an Ethernet interface, the product has the
hardware capability required to implement H.323 packet based
video conferencing. During fiscal year 2000, the Company
continued its development of H.323 software capability, but
elected to complete and introduce other product enhancements
such as the new multipoint feature (describe above) prior to
completion of H.323. The primary reasons for this decision
were; 1) cost considerations and 2) the fact that RSI's
customer base, as well as their support infrastructure had not
yet developed to a point in fiscal year 2000 where full
introduction and implementation of H.323 was feasible.
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.
(3) 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. MediaPro
384's Graphical User Interface (GUI), first introduced in
fiscal year 2000, 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.
(4) 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 inter-
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(2) Ibid.
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face is contained on a daughter card. This allows the Company
to rapidly develop new connectivity options as new network
technologies come to market.
(5) 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 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.
(6) 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 laptop, 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.
(7) 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.
(8) 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 then
able to take advantage of all of the new features or
enhancements.
(9) 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.
(10) 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
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and control. System Integrators can take advantage of the high
speed data ports to integrate additional applications with the
MediaPro 384.
(11) 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, 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.
(12) 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 or portable solutions.
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.
(13) WARRANTY PROGRAM. The MediaPro 384 was engineered to minimize
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.
The Company has a full system exchange warranty program named
Service Angel RSI(R). In conjunction with overnight shippers,
RSI will ship an exchange system within two business days 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 LT (LAPTOP). This model works in conjunction with
a Personal Computer or laptop running Windows 95/98, Windows
2000 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.
(2) MEDIAPRO 384 DP (DUAL PLATFORM). The MediaPro 384 DP combines
the functionality of the MediaPro 384 LT and an alternate
"computer free" mode, into one dual purpose product that can
operate as either with or without a computer. The MediaPro 384
DP is controlled by an infrared (IR) remote controller and
operates as a standalone device. The Company believes the new
GUI Interface on the MediaPro 384 DP, which simplifies set-up
and operation is as easy to use and as intuitive a User
Interface as any GUI in the market at this time. The MediaPro
384 DP can be attached to laptops, televisions, LCD display
devices, flat panel display devices and other video display
systems.
(3) MEDIAPRO 384 MP (MULTIPOINT). The MediaPro 384 MP combines the
functionality of the MediaPro 384 DP with a multi-point
capability. With the MP model, the user can connect up to
three additional sites for a four point conference.
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,
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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 carries 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 (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 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 $1,995, with 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 fiscal year 2000, the Company continued with its multilevel approach
to distribution. This approach included 1) resellers and distributors, 2) OEM
and private label relationships and 3) direct sales to preferred accounts, with
a focus on resellers and distributors.
RESELLERS AND DISTRIBUTORS.
In fiscal year 2000, the Company continued developing its Millennium
Partners Program, which supports and rewards stronger resellers and distributors
throughout North America, Europe, Asia, Australia and portions of the Middle
East and South Africa through higher discounts off list pricing. 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 discounts to
its resellers and distributors.
In fiscal year 2001, the Company plans to continue strengthening its
reseller network to improve sales coverage by developing and supporting
successful long-term relationships with a limited number of stronger resellers,
including systems integrators who provide turnkey solutions to end users.
ORIGINAL EQUIPMENT MANUFACTURER (OEM) PARTNERSHIPS.
In fiscal year 2000, the Company sold equipment primarily under two OEM
or private label distribution agreements.
(1) Gentner Communications Corporation. In October 1998, the
Company entered into a private label agreement with Gentner.
The Company provides Gentner a version of the MediaPro 384
system
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for the purpose of integration into Gentner's product line.
The agreement called for Gentner to purchase a specific
quantity of products through December 1999 and Gentner met
this commitment. Although there is no current minimum quantity
commitment from Gentner, the Company has sold additional
systems to Gentner subsequent to June 30, 2000. The level of
future purchases from Gentner is uncertain.
(2) Philips Business Electronics N.V. of Eindhoven, The
Netherlands. Since fiscal year 1998, the Company has designed,
manufactured and delivered a version of the Video Flyer
product to Philips Business Electronics. The original contract
called for specific minimum quantities to be purchased by
Philips and Philips fulfilled that commitment as of June 30,
1999. As of September 30, 1999, Philips and the Company
terminated their OEM relationship as part of Phillips'
decision to discontinue its pursuit of the settop
videoconferencing market segment. The Company does not expect
Philips to order any of the Company's product in the future
and believes Phillips decision to discontinue its pursuit of
the settop market was due to reasons outside of RSI's control.
In the future, the Company expects to pursue additional OEM and private
label relationships with companies in which MediaPro 384 and similar products
provide unique strategic advantages to the business partner, especially in
geographic areas where the Company has no current presence such as in China.
PREFERRED ACCOUNT SALES.
In selected instances, RSI will continue to sell directly to and/or
support accounts 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. Although the Company redirected its efforts away from
preferred account sales in fiscal year 2000 in order to focus on identifying and
supporting its reseller and distributor channels, it expects that preferred
account sales activity will increase in fiscal year 2001, due to increased
Company focus on identifying applications and vertical market segments which
match MediaPro's unique capabilities.
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 segment and portions of the permanent room
marketplace as well as personal use applications involving laptops or computers.
The competition within the settop marketplace is intense and constant, and is
expected to remain that way in the future. 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. Polycom has a computer-free system
that integrates a camera and videoconferencing engine into a single device with
the capability of performing four-location videoconferences without an
independent bridging service. The Polycom unit also can be used in H.323 (LAN)
applications. The price point for Polcom's non-H.323 system is comparable to, or
lower than the Company's price points for its products. However, 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 connectivity, architecture, software
capability and selected performance levels in both video and audio and therefore
can be sold at either comparable or higher prices depending on the
circumstances.
PictureTel Corporation offers products for sale within all market
segments. They offer products which directly compete against RSI's product line.
Currently, its 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. Recently, PictureTel has directed its efforts toward PC,
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LAN and internet applications. Long-term, the Company believes that PictureTel
will continue to produce competitive products aimed at various market segments
and remain a significant marketplace participant.
VTEL Corporation offers computer-based products that are targeted at
the education, distance learning, telemedicine and other medical vertical
markets. Its distribution is through large interexchange communications carriers
such as MCI, Sprint and the Bell Operating Companies. VTEL has partnered with
Polycom to share in providing comprehensive solutions to its customers.
Tandberg offers a full range of videoconferencing systems for sale
within most of the existing marketplace segments. It has strong distribution,
and within the settop rollabout workgroup market segment it offers a
non-computer-based system which delivers consistent video and audio quality. Its
systems are generally higher in price than the Company's products. Recently,
Tanberg has become a stronger competitor than in recent years. Tanberg has
generated a significant effort in North America and is achieving success there.
Sony Corporation offers a settop and a rollabout system that compete
with the RSI product line. Sony has worldwide distribution and solid name
recognition.
VCON competes in the Company's identified market segment. It also
provides 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 with a significant level of success selling
into government applications. The Company believes that VCON will continue to
expand its distribution presence.
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 focus on niche market segments, 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
in the fall, 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 months from the date
Altron ships to the Company, or for twelve months from the date the Company
ships to the customer, whichever comes first.
The Company depends on a single source for the compression chip
component used in its products. 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
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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, Singapore, Taiwan, Hong Kong, South Africa and Australia. The
Company is currently pursuing certification for the MediaPro product family in
China and other countries.
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.
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 this patent on its system on September 1, 1998 and a second
patent on June 6, 2000. 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.
During fiscal year 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 $5.00 per unit of videoconferencing systems containing the
software. The Company had no sales of related systems containing the software
during fiscal years 1999 and 2000.
During fiscal year 1998, 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 up to $5.00 per unit of videoconferencing systems
containing the software. Sales of the related videoconferencing systems began in
fiscal year 1998.
During fiscal year 1996, 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 $90,000, the Company is to
pay a royalty fee of up to $40.00 per unit of videoconferencing systems
containing the software. Sales of the related videoconferencing systems began in
fiscal year 1997.
During fiscal year 1994, 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 $25.00 per unit of videoconferencing
systems containing the software. Sales of the related videoconferencing systems
began in fiscal year 1994.
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RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses during fiscal
years 2000 and 1999 of $819,733 and $1,281,718 respectively.
EMPLOYEES
On September 22, 2000, the Company had twenty full-time employees;
seven in sales; five in customer and technical support; three in product
development and engineering; two in operations and three in administration and
finance. None of the Company's employees is represented by a labor union. The
Company believes its employee relations are good.
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
twelve months.
(2) The ability of the Company to identify, fund and develop new
products and technological enhancements, gain their acceptance
by the marketplace and the impact of new technology on the
Company's products.
(3) The impact of competition within the settop/workgroup and
other segments of the overall market for videoconferencing
equipment.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 9,520 square feet of space at its headquarters in
Edina, Minnesota under a lease agreement which expires during February 2002. The
Company believes its current space is sufficient for its current and anticipated
needs. The following schedule summarizes payments made in fiscal year 2000 for
space leased by the Company:
Location Amount
-------- --------
Edina, MN Headquarters $ 86,815
Edina, MN Warehouse 29,363
Amsterdam Sales Office 7,088
European Sales Office 33,531
Pacific Rim Sales Office 11,425
--------
TOTAL $168,222
========
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ITEM 3. LEGAL PROCEEDINGS
In February 2000, the Company initiated a suit in Superior Court, San
Bernardino County, California, against a customer, Telestar International,
Corp., (Telestar) for collection of certain unpaid invoices for equipment
ordered and shipped to Telestar. In August 2000, Telestar filed a cross
complaint against the Company for alleged breach of contract and interference
with prospective economic advantage. The cross complaint did not specify an
amount of damages. The Company believes the matter will not have a material
adverse impact on the results of operations or financial position of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 25, 2000
for the purpose of electing three directors to serve for one-year terms
and voting on the proposals as described below. Proxies for the meeting
were solicited pursuant to Section 14 (a) of the Securities Exchange
Act of 1934 and there was no solicitation in opposition to management's
solicitations. All of management's nominees for directors as listed in
the proxy statement were elected with the following vote:
Richard F. Craven - Shares voted "For" (6,629,786),
"Withheld" (62,383)
Byron G. Shaffer - Shares voted "For" (6,625,286),
"Withheld" (66,883)
S. Albert Hanser - Shares voted "For" (6,621,586),
"Withheld" (70,583)
The proposal to amend the Company's 1994 Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance by 500,000
shares was approved with the following vote:
Shares voted "For" (4,161,850)
Shares voted "Against" (301,748)
Shares "Abstaining" (15,565)
Shares not voting (2,213,006)
The proposal to ratify the appointment of KPMG LLP, certified public
accountants, as independent auditors for the Company for the year
ending June 30, 2000 was approved with the following vote:
Shares voted "For" (6,567,039)
Shares voted "Against" (100,630)
Shares "Abstaining" (24,500)
Shares not voting (0)
The Company subsequently changed its independent auditors and filed a
form 8-K regarding this change.
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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 over-the-counter
and was quoted NASDAQ SmallCap Market System until December 20, 1999.
Thereafter, the Company's stock has been quoted on the OTC Bulletin Board
System. The following table sets forth the high and low sales prices for the
Company's Common Stock as reported by NASDAQ and the OTC System. Such quotations
represent interdealer prices, without retail markup, markdown or commission, and
do not necessarily represent actual transactions for the fiscal quarters
indicated.
HIGH LOW
---- ---
1999
First Quarter $4.250 $1.000
Second Quarter 3.750 1.625
Third Quarter 3.750 2.188
Fourth Quarter 2.938 1.563
2000
First Quarter $2.563 $1.188
Second Quarter 1.344 .344
Third Quarter 2.125 .313
Fourth Quarter 1.094 .375
As of September 22, 2000, there were (a) 8,724,883 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 1,456,800 shares of Common
Stock, and (c) outstanding warrants to purchase an aggregate of 332,126 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 2000 COMPARED TO FISCAL YEAR 1999.
Net Sales. In fiscal year 2000, net sales decreased to $4,576,277, down
50.3% from $9,199,135 in fiscal year 1999. The decrease in sales during fiscal
year 2000 was primarily a result of lower unit volume sold through two of the
Company's OEM partners and through direct sales, which was partially offset by
increased sales through reseller and distributor channels. During fiscal year
2000, the Company attempted to mitigate the expected volume reductions from OEM
accounts and direct sales by broadening sales through resellers and
distributors. Although partially successful with this strategy, reseller and
distributor sales increases in fiscal year 2000 were not sufficient to replace
the dollar level of declines in OEM and direct sales during the fiscal year.
As stated above, the Company experienced decreased unit sales volume to
two significant OEM partners in both Europe and the United States in fiscal year
2000. In fiscal year 2000, OEM sales accounted for approximately 21% of net
sales dollars, or approximately $950,000, while OEM sales amounted to
approximately 49% of net sales or $4,500,000 in fiscal year 1999.
Throughout fiscal year 1999, the Company sold units under a private label
relationship with Philips Business Electronics N.V. (Philips) of Eindhoven, The
Netherlands, which began in fiscal year 1998. Under the original
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agreement, the Company and Philips co-developed a videoconferencing system for
sale to Philips and ultimate distribution through Philips' worldwide network of
resellers. 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 fiscal year 2000 includes $290,540 from Philips as part of
an agreement to terminate its OEM/private label relationship with the Company.
As part of the termination, Philips paid the Company $290,540 for lost gross
margin on videoconferencing units ordered by Philips but not shipped by the
Company. Including the termination settlement in fiscal year 2000, total sales
to Philips were $586,000 and $908,000 during fiscal year 2000 and 1999
respectively, a decrease of $322,000.
In July 1998, the Company entered into a 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. At March 31, 1999, VTEL had fulfilled its
minimum purchase commitments under the agreement, and the Company does not
expect any significant sales to this customer in the future. Sales to VTEL were
approximately $32,000 and $2,885,000 during fiscal years 2000 and 1999,
respectively, a decrease of $2,853,000.
In October 1998, the Company entered into a private label agreement
with Gentner Corporation, in which the Company provided videoconferencing
systems for the purpose of integration into Gentner's product line, which is
aimed at providing turnkey communications solutions to its customers. As of
December 31, 1999, Gentner had fulfilled its minimum purchase commitments to the
Company under the original agreement.
During fiscal year 2000, the Company focused its resources on building
longer term relationships with a fewer number of stronger third party resellers
and distributors, thereby taking resources and emphasis away from direct sales,
as part of a strategy of building broader longer term distribution. As a result,
direct sales to end users were approximately $554,000 and $2,112,000 during
fiscal years 2000 and 1999, respectively, a decrease of $1,558,000. Although the
Company expects its efforts to build relationships with resellers and
distributors will improve its overall sales in the long term, sales through
standard distribution were not enough to offset the lower level of direct sales
to end users in fiscal year 2000. Sales through resellers and distributors were
approximately $2,966,000 and $2,494,000 during fiscal years 2000 and 1999,
respectively, an increase of approximately $472,000, or 19%.
Net sales in the fourth quarter of fiscal year 2000 were approximately
$1,086,000, compared to approximately $1,454,000 for the fourth quarter of
fiscal year 1999. The decrease in net sales during the fourth quarter of fiscal
year 2000 was primarily a result of decreased sales both through OEM partners
and direct sales, which were partially offset by increased sales through
resellers and distributors.
Net sales to OEM partners amounted to approximately $62,000 and
$503,000 during the fourth quarter of fiscal year 2000 and 1999, respectively, a
decrease of $441,000. Similarly, direct sales to end users decreased
approximately $419,000 in the fourth quarter of fiscal year 2000 compared to the
fourth quarter of fiscal year1999. Offsetting this decline, sales to resellers
and distributors increased during the fourth quarter of fiscal year 2000
compared to the fourth quarter of fiscal year 1999 by approximately $470,000, or
approximately 135%. In addition to increased efforts on the part of the Company
to build distribution through resellers and distributors, part of the reason for
the increase in sales to these customers in the fourth quarter of fiscal year
2000 compared to the fourth quarter of fiscal year 1999 was due to the Company's
introduction of its new MediaPro product in June 1999. This introduction
resulted in lower than average quarterly sales through resellers in the fourth
quarter of fiscal year 1999. The Company believes many of its 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 June 1999. In the fourth quarter of fiscal
year 2000, the Company's MediaPro products were available throughout the entire
quarter.
In fiscal year 2001, to avoid the risks associated with a concentration
of sales to any one type of distribution channel, the Company is pursuing a
strategy of 1) locating and supporting OEM and private label customers and their
needs, 2) continuing to aggressively pursue and support a select number of
stronger resellers and distributors to sell its products, and 3) increasing
sales on a direct basis to certain preferred accounts. In all three levels of
distribution, the Company plans to focus its resources on applications and
distribution partners who are pursuing videoconferencing applications in which
the technological flexibility of the MediaPro product line is a distinct
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competitive advantage. The Company believes that the adaptability of the
MediaPro product allows the Company and its distribution partners to meet
certain application requirements and needs of certain vertical market segments
better than competitive product offerings. With this focus, in an expected
continuing market increase, the Company expects increased unit sales volume in
fiscal year 2001 compared to fiscal year 2000.
Average pricing to resellers and distributors decreased during fiscal
year 2000 compared to fiscal year 1999 as a result of an increased competitive
pressure on the Company's MediaPro product line. The company continued its
strategy of providing additional value added enhancements to its products in
fiscal year 2000 to counteract this downward pressure on prices, with the
addition of a new Graphical User Interface (GUI) and multipoint capabilities.
However, the Company's downward adjustments to prices in response to competitive
pressures more than offset the effects of additional product value enhancements
during fiscal year 2000 and this pressure is expected to continue. The Company
plans to continue product enhancements and focus its sales and marketing efforts
on less price sensitive applications and market segments during fiscal year 2001
to mitigate expected continual pressure on price points. Through this strategy,
together with increased efforts to sell on a direct basis to preferred accounts
in certain circumstances, the Company expects average pricing to remain
relatively stable during fiscal year 2001 compared to fiscal year 2000.
As a result of higher expected unit volume and Company plans to
mitigate downward pressure on prices, the Company expects fiscal year 2001
revenues to increase compared to fiscal year 2000.
Gross Profit. The Company generated a gross profit of $1,888,416 or
41.3% of net sales for fiscal year 2000 compared to a gross profit of $4,751,192
or 51.6% of net sales for fiscal year 1999. The decrease in gross profit as a
percentage of net sales was primarily a result of an inventory writedown to
lower of cost or market of $341,846 or approximately 7.5% of net sales during
fiscal year 2000. Cost of goods sold in fiscal year 2000 amounted to $2,346,015,
or 51.3% of net sales, compared to $4,447,943 or 48.4% of net sales in fiscal
year 1999. The higher cost of goods sold relative to net sales in fiscal year
2000 resulted primarily from higher fixed overhead costs as a percent of net
sales, due to lower net sales volume during fiscal year 2000 compared to fiscal
year 1999.
As a result of expected stable prices during fiscal year 2001 and
expected stable manufacturing costs, overall gross profit percentages are
expected to remain relatively constant during fiscal year 2001 compared to
fiscal year 2000.
Research and Development Expenses. Research and development expenses
were $819,733 or 17.9% of net sales for fiscal year 2000 compared to $1,281,718
or 13.9% of net sales for fiscal year 1999. The increase as a percentage of net
sales was due to lower sales volume in fiscal year 2000 as discussed above. The
lower amount of dollar spending on research and development in fiscal year 2000
compared to fiscal year 1999 was caused by the fact that Company was carrying
out full-scale development of its new MediaPro product line during fiscal year
1999. In fiscal year 2000, the Company's research and development activities
were concentrated on enhancements to the MediaPro product line which required
lower overall expenditures.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $3,327,248 or 72.7% of net sales for fiscal year
2000 compared to $4,268,296 or 46.4% of net sales for fiscal year 1999. The
percentage increase was due to the lower sales volume in fiscal year 2000 as
well as the lower amount of expenses. The lower level of spending on selling,
general and administrative expenses during fiscal year 2000 was a result of the
Company decreasing its marketing, sales, technical support and administrative
expenses in North America and Europe in response to the significantly lower
level of sales in fiscal year 2000 compared to 1999. During fiscal year 2000,
the Company initiated specific expense reduction measures to minimize net losses
and conserve cash. Since September 27, 1999, the Company has both terminated,
and through attrition, eliminated, nineteen positions across various functional
areas of the Company. The Company has also reduced other costs in the areas of
facilities, communications, professional services and other support costs
throughout fiscal year 2000. The Company believes it has maintained key
personnel in all functional areas necessary to successfully execute its business
strategy for fiscal year 2001.
Other Income and Expense. In fiscal year 2000, interest expense was
$267,384 compared to $151,569 for fiscal year 1999. The increase in fiscal year
2000 was primarily due to carrying charges from the Company's third party
manufacturer on inventory procured on behalf of the Company but not shipped to
the Company at its request.
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The delays in shipment of inventory to the Company were a result of lower than
expected sales volume during fiscal year 2000 compared to fiscal year 1999 and
the Company's effort to minimize cash outlays for inventory received from its
third party manufacturer. Interest income was $41,975 in fiscal year 2000
compared to $68,946 in fiscal year 1999. 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. In addition, in February 2000, the Company utilized marketable securities
to pay down its outstanding line of credit balance in order to minimize interest
expense. This resulted in a reduction in the amount of interest income generated
from marketable securities during fiscal year 2000 compared to fiscal year 1999.
Net Operating Loss Carryforwards. The Company has net operating loss
carryforwards for financial statement and income tax reporting purposes of
approximately $17,760,000 which can be used to offset taxable income in future
years. Changes in the Company's ownership 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 2000 was
$2,482,212 or $0.33 per share, compared to a net loss of $878,675, or $0.13 per
share for fiscal year 1999. The Company believes it has entered fiscal year 2001
with a focused plan for increasing net sales and profitability. This plan is
centered around the Company's efforts to increase volume to OEM and private
label partners and preferred accounts in order to supplement its continued
efforts to increase reseller and distributor sales. In addition, the Company
plans to maintain gross profit percentages consistent with those achieved during
fiscal year 2000 by mitigating competitive price pressure as discussed above.
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 49% 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.
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.
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Gross Profit. 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.
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
or 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999.
Cash, Cash Equivalents and Marketable Securities. Cash and cash
equivalents, combined with marketable securities, totaled $83,930 on June 30,
2000 compared to $1,411,808 on June 30, 1999. The primary reason for the
reduction in cash and marketable securities during fiscal year 2000 was the
Company's net loss during fiscal year 2000. Offsetting a major portion of the
Company's use of cash and marketable securities were proceeds from the issuance
of common stock and notes payable to a director during fiscal year 2000.
Net Cash Used in Operating Activities. The amount of cash used in
operating activities was $1,271,844 during fiscal year 2000 compared to $598,245
during fiscal year 1999. The amount of cash used in operating activities
resulted mainly from a net loss of $2,482,212 which was partially offset by
non-cash depreciation
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expenses of $325,749 and an inventory write down to market of $341,846.
Total inventories decreased approximately $227,000 as of June 30, 2000
compared to June 30, 1999 primarily as a result of increased reserves for
inventory write downs to market. The decline in inventories was not as
significant as the overall level of sales decline from fiscal year 1999 to
fiscal year 2000, due to the Company's decision in fiscal year 2000 to maintain
a stable level of compression chip inventory, as well as to broaden the number
of new items carried in inventory during fiscal year 2000 in support of new
products. The Company maintains a stable level of 8x8 compression chip inventory
because this part is a critical component that can be procured from only one
vendor. The increased number of items carried in inventory as of June 30, 2000
were needed in order for the Company to continue supporting both its new
MediaPro product line and previous generation products. Inventory levels are
expected to remain relatively constant during fiscal year 2001. Reductions in
inventories related to previous generation products are expected to be offset by
inventory increases needed to support expected increases in sales volume.
In connection with its business volume decrease of approximately 50%
during fiscal year 2000, accounts receivable decreased $717,818 from June 30,
1999 to June 30, 2000, or approximately 47%. The decrease in accounts receivable
was partially offset by a decline in the level of accounts payable of $539,368.
Of this total decrease in accounts payable, $364,641 was a result of the
issuance of common stock by the Company to its third party manufacturer in a
non-cash transaction.
Accrued liabilities increased $81,580 from June 30, 1999 to June 30,
2000 primarily as a result of the Company's obligation to its third party
manufacturer of $131,647 for certain materials purchased on behalf of the
Company for previous generation products. The materials have been charged to
cost of goods sold as of June 30, 2000. Offsetting the increase of $131,647, was
a decrease in accrued vacation pay of approximately $30,000, due to the
Company's overall lower number of employees as of June 30, 2000 and a decrease
in accrued interest expense as of June 30, 2000 compared to June 30, 1999.
Net Cash Used in Investing Activities. In fiscal year 2000, the Company
sold all its marketable securities and used the proceeds totaling $992,945 to
pay down a portion of its outstanding line of credit in order to minimize
interest costs. The Company also invested $176,788 of its cash in new equipment
and other capital assets during fiscal year 2000 to support development of
enhancements to the MediaPro product line.
Net Cash Provided by Financing Activities. Cash provided by financing
activities during fiscal year 2000 of $120,754 was generated primarily from
loans to the Company and the purchase of common stock by directors of the
Company as well as the issuance of common stock upon the exercise of employee
stock options and stock warrants held by a director. Offsetting these sources of
cash which totaled $918,300, were payments made for equipment leased under
capital leases of $123,590 and net repayments on the Company's line of credit
totaling $673,956.
In August 2000, the Company modified its commercial loan agreement with
a bank for a $2,500,000 committed line of credit facility. This agreement
amended and restated the previous commercial loan agreement dated September 3,
1999. The new facility is secured by all corporate assets and provides working
capital based on a borrowing base comprised of accounts receivable, inventories,
and marketable securities. The facility has a maturity date of June 26, 2001.
Total outstanding borrowings on the line of credit were $573,801 as of June 30,
2000, leaving approximately $1,926,000 unused and approximately $273,000
available.
Management plans to continue to increase sales and improve operating
results through increased marketing and broader distribution of its products
through a continued focus on a stronger dealer network, as well as efforts to
increase volume through OEM partners and direct sales to preferred accounts. 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 DELISTING
The Nasdaq SmallCap Stock Market requires several minimum valuations
for member companies to
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remain listed. One such requirement is that companies maintain a net tangible
asset balance of at least $2,000,000. On September 30, 2000, the Company had a
net tangible asset balance of $864,136, which was below the Nasdaq requirement.
Although the Company raised additional capital in the second quarter of fiscal
year 2000, the amount of this additional capital, combined with operating
results in the second quarter was not sufficient for the Company to maintain a
level of net worth in excess of the Nasdaq requirement. As a result, on December
20, 1999, the Company was delisted from the Nasdaq SmallCap Stock Market due to
the Company's failure to meet the Nasdaq requirement of a minimum net tangible
asset balance of $2,000,000. The Company's shares are now traded on the OTC
Bulletin Board System, and the common stock is 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.
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statement and Report of Independent Public
Accountants thereon are included herein.
Page
----
Report of Independent Public Accountants and
Independent Auditors' Report............................ 27
Balance Sheets as of June 30, 2000 and 1999............... 28
Statements of Operations for the years ended
June 30, 2000, 1999 and 1998............................ 29
Statements of Stockholders' Equity for
the years ended June 30, 2000, 1999 and 1998............ 30
Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998.............................. 31
Notes to Financial Statements............................. 32
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) CURRENT DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position with Company
---- --- ---------------------
Eugene W. Courtney 64 Chief Executive Officer and President
Richard F. Craven 57 Chairman of the Board and former Interim
President and Chief Executive Officer
Byron G. Shaffer 66 Director
S. Albert Hanser 62 Director
James D. Hanzlik 44 Chief Financial Officer
Marti D. Miller 43 Vice President of Engineering
FORMER DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position with Company
---- --- ---------------------
Donald C. Lies 52 Former Chief Executive Officer and President
David W. Stassen 48 Former Director
Manfred D. Haiderer 60 Former Director
EUGENE W. COURTNEY became President and Chief Executive Officer on
October 1999. Before joining the Company, Mr. Courtney was President and CEO of
HEI, Inc., a designer and builder of microelectronics from 1990 to 1998. During
the 1980's Mr. Courtney served as Group Vice President for National Computer
Systems, and he served as the CEO of Digital Scientific Corporation during the
1970's. Mr. Courtney holds a Bachelor of Electrical Engineering degree from
Princeton University and is a director of several public and privately held
companies.
RICHARD F. CRAVEN became Interim President and Chief Executive Officer
and Chairman of the Board on September 7, 1999 and resigned his position as
Interim President and Chief Executive Officer when Mr. Courtney was appointed in
October 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.
BYRON G. SHAFFER served as a director of the Company from 1995 to
November 19, 1998 and again since September 1999. Mr. Shaffer has been a private
investor for the last 20 years and has also served as a director of Mentor
Corporation, a medical products manufacturer, since 1976.
S. ALBERT HANSER has been a director since September 1999. Mr. Hanser
has been Chairman of Hanrow Financial Group, Ltd. , a merchant banking firm. Mr.
Hanser also has served as Chiarman/CEO of Resource Bank and Trust, Chairman of
First Bank Systems' Merchant Bank and Executive Vice President of Investment
Banking at Dain Bosworth. In addition, he sits on a number of industry, civic
and charitable boards. Mr. Hanser graduated from Brown University in 1959 and
Wharton School of Finance in 1974.
DAVID W. STASSEN was elected as a director of the Company in June 1995.
He served as President and Chief
19
<PAGE>
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 also has served as 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.
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.
DONALD C. LIES became President, Chief Executive Officer and a director
of the Company on July 1, 1996. Mr. Lies is the brother-in-law of David W.
Stassen who was also a director of the Company. Mr. Lies resigned his position
as Chairman, Chief Executive Officer and President on September 7, 1999.
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 Board and to the Company's management. The
Compensation Committee has general responsibility for management of compensation
matters, including compensation arrangements for officers and incentive
compensation for employees of the Company. Currently, both committees consist of
Mr. Craven, Mr. Hanser and Mr. Shaffer.
(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. The following officers failed to file the following forms (on a timely
basis) for the fiscal year ending June 30, 2000: Eugene W. Courtney (Form 3 and
Form 5), James D. Hanzlik (Form 5), and Marti Miller (Form 5). Each of these
forms were subsequently filed by these individuals. Each of the late Forms 5
above contained one transaction that was not reported on a timely basis. 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, 2000, except as disclosed above, 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.
20
<PAGE>
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, 1998, 1999 and 2000
to (i) all persons who served as the Chief Executive Officer of the Company
during fiscal year 2000 and (ii) the other most highly compensated executive
officers of the Company whose salary and bonus exceeded $100,000 in fiscal year
2000 (the "Named Executive Officers"). Other than those individuals listed
below, no executive officer of the Company received cash compensation of more
than $100,000 in fiscal year 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND PRINCIPAL FISCAL ANNUAL COMPENSATION STOCK UNDERLYING COMPENSATION
------------------- ------ ------------------- ----- ---------- ------------
POSITION YEAR SALARY ($) BONUS ($) AWARDS OPTIONS (#) $
-------- ---- ----------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Eugene W. Courtney 1998 0 0 0 0 0
CHIEF EXECUTIVE OFFICER 1999 0 0 0 0 0
AND PRESIDENT 2000 34,615 0 0 100,000 0
Richard F. Craven 1998 0 0 0 0 0
CHAIRMAN AND FORMER 1999 0 0 0 5,000 0
INTERIM CHIEF EXECUTIVE 2000 0 0 0 5,000 0
OFFICER AND PRESIDENT
Marti D. Miller 1998 107,723 0 0 20,000 0
VICE PRESIDENT, 1999 129,969 0 0 40,000 0
ENGINEERING 2000 133,500 0 0 40,000 0
Mr. James D. Hanzlik 1998 89,885 0 0 20,000 4,200
CHIEF FINANCIAL OFFICER 1999 102,625 0 0 40,000 4,800
2000 107,900 0 0 40,000 2,800
Donald C. Lies 1998 171,693 0 0 200,000 7,800
FORMER CHIEF EXECUTIVE 1999 194,769 0 0 150,000 7,800
OFFICER AND PRESIDENT 2000 157,692 0 0 0 1,300
</TABLE>
21
<PAGE>
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, 2000. No stock options were exercised by the
Named Executive Officers of the Company during fiscal year 2000.
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 2000 ($/SH) EXPIRATION DATE
---- ------------------- ------------------- ------ ---------------
<S> <C> <C> <C> <C>
Eugene W. Courtney 100,000(2) 22.6% .375 December 28, 2010
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Richard F. Craven 5,000(3) N/A(3) .5156 May 24, 2010
CHAIRMAN AND FORMER
INTERIM CHIEF
EXECUTIVE OFFICER
AND PRESIDENT
Marti D. Miller 40,000(4) 9.0% .375 December 28, 2010
VICE PRESIDENT,
ENGINEERING
James D. Hanzlik 40,000(5) 9.0% .375 December 28, 2010
CHIEF FINANCIAL
OFFICER
Donald C. Lies 0 N/A N/A N/A
FORMER CHIEF
EXECUTIVE OFFICER
AND PRESIDENT
</TABLE>
---------------------
(1) During fiscal year 2000, options to acquire an aggregate of 442,000
shares of Common Stock were granted to all employees and options to
acquire 45,000 shares of Common Stock were granted to non-employee
directors.
(2) 100,000 options were granted to Mr. Courtney on December 29, 1999. The
options become vested and exercisable in five equal annual installments
commencing on the date of the grant.
(3) 5,000 options were granted to Mr. Craven on May 25, 2000 for services
rendered on the Board of Directors. The options became vested and
exercisable in four equal quarterly installments commencing on the
date of the grant. Mr. Craven received no options for services as
Interim Chief Executive Officer and President.
(4) 40,000 options were granted to Mr. Miller on December 29, 1999. The
options become vested and exercisable in five equal annual installments
commencing on the date of the grant.
(5) 40,000 options were granted to Mr. Hanzlik on December 29, 1999. The
options become vested and exercisable in five equal annual installments
commencing on the date of the grant.
22
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT JUNE 30, 2000 (#) AT JUNE 30, 2000 ($)(1)
--------------- ----- ---------------------------- -----------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eugene W. Courtney 0 0 20,000 80,000 2,500 10,000
CHIEF EXECUTIVE
OFFICER AND
PRESIDENT
Richard F. Craven 0 0 41,250 3,750 0 0
CHAIRMAN AND FORMER (2) (2)
INTERIM PRESIDENT
AND CHIEF EXECUTIVE
OFFICER
Marti D. Miller 0 0 94,667 65,333 1,000 4,000
VICE PRESIDENT,
ENGINEERING
James D. Hanzli 0 0 74,667 65,333 1,000 4,000
CHIEF FINANCIAL
OFFICER
Donald C. Lies 0 0 315,000 0 0 0
FORMER CHIEF
EXECUTIVE OFFICER
AND PRESIDENT
</TABLE>
--------------------
(1) Based on the June 30, 2000, closing bid price of the Company's Common
Stock of $.50 per share.
(2) Richard Craven has disclaimed beneficial ownership of shares
beneficially owned by his son, Greg Craven, and therefore Greg Craven's
shares are excluded.
EMPLOYEE AGREEMENTS
On September 7, 1999, Mr. Lies resigned from the Company. Under the
terms of a severance agreement, Mr. Lies was to be paid a severance salary of
$200,000 in 12 equal monthly installments beginning September 8, 1999. The
severance agreement precluded Mr. Lies from competing with the Company until
August 31, 2000. In March, 2000 the Company and Mr. Lies renegotiated this
agreement to lower the total amount of severance pay. As of March, 2000 the
Company had paid all obligations due to its previous President and CEO, which
amounted to approximately $118,000 in fiscal year 2000.
23
<PAGE>
COMPENSATION OF DIRECTORS
The Board of Directors of the Company has established the following
compensation policies for non-employee directors of the Company. Non-employee
directors receive $100 for each meeting attended. Also, under the Company's 1994
Stock Plan, each non-employee director is granted, upon election to the Board,
an option to purchase 20,000 shares of Common Stock, exercisable at market value
on the date of grant, vesting in equal increments of 25% every three months and
expiring ten years from the date of grant. After the year of election, each
non-employee director will also receive annually an option to purchase 5,000
shares of Common Stock exercisable at market value on the date of grant, vesting
in equal increments of 25% every three months and expiring ten years from the
date of grant. During fiscal year 2000, options to acquire 45,000 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.
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 22, 2000, 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 5593 West 78th Street, Minneapolis, MN, 55439.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED OWNED PERCENTAGE
---- ------------------ ----------------
Eugene W. Courtney 20,000(1) *
Richard F. Craven 1,962,574(2) 22.4%
Byron G. Shaffer 469,000(3) 5.3%
S. Albert Hanser 70,000(4) *
Marti D. Miller 114,668(5) 1.3%
James D. Hanzlik 108,000(6) 1.2%
Donald C. Lies 315,000(7) 3.5%
All Current Executive
Officers and Directors
as a Group (6 persons) 2,744,242(8) 30.2%
Alan C. Phillips and
Delores V. Phillips Rev. Trust 823,478(9) 9.4%
--------------------
* Indicates ownership of less than 1%.
(1) Includes 20,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(2) Includes (i) 48,750 shares which may be acquired within 60 days upon
the exercise of stock options and warrants and (ii) 30,000 shares owned
by two of Mr. Craven's children. Richard Craven has disclaimed
beneficial ownership of shares beneficially owned by his son, Greg
Craven, and therefore Greg Craven's shares are excluded.
(3) Includes 62,500 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(4) Includes 20,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(5) Includes 114,668 shares which may be acquired within 60 days upon the
exercise of stock options.
(6) Includes 108,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(7) Includes 315,000 shares which may be acquired within 60 days upon the
exercise of stock options.
(8) Includes 373,918 shares which may be acquired within 60 days upon the
exercise of stock options and warrants.
(9) This Trust is affiliated with Altron, Inc., the Company's third party
manufacturer.
25
<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
$41,352, $148,371 and $108,405 during fiscal years 2000, 1999 and 1998
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, and again November 1999, certain members of the Board of
Directors of the Company purchased a total of 176,725 and 600,000 shares of the
Company's Common Stock, respectively.
During fiscal years 1998 and 2000, the Company's third party
manufacturer, Altron, Inc. was issued a total of 200,000 and 608,478 shares of
the common stock respectively, in connection with the exchange of the common
stock for certain accounts payable owed by the Company to Altron, Inc.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
See Exhibit Index on page 44 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
On June 30, 2000 the Company filed a Form 8K disclosing its
decision to dismiss its former independent auditors, KPMG LLP, and
hire new auditors, Lund Koehler Cox & Arkema LLP.
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of RSI Systems, Inc.:
We have audited the accompanying balance sheet of RSI Systems, Inc. as of June
30, 2000 and the related statements of operations, stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 2000 and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and has a working capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ LUND KOEHLER COX & ARKEMA, LLP
Minneapolis, Minnesota
September 7, 2000
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
RSI Systems, Inc.:
We have audited the accompanying balance sheet of RSI Systems, Inc. (the
Company) as of June 30, 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the two-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 the results of its operations and its cash flows for each of the
years in the two-year period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG, LLP
Minneapolis, Minnesota
August 12, 1999
27a
<PAGE>
RSI SYSTEMS, INC.
Balance Sheets
June 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,930 $ 418,863
Marketable securities -- 992,945
Accounts receivable, net of allowance for doubtful
accounts of $241,000 in 2000 and $228,000 in 1999 799,832 1,517,650
Inventories (note 3) 806,956 1,034,238
Prepaid expenses 65,010 86,566
----------- -----------
Total current assets 1,755,728 4,050,262
----------- -----------
Property and equipment:
Furniture and equipment 1,582,763 1,318,843
Leasehold improvements -- 56,279
Less accumulated depreciation and amortization (1,120,702) (852,016)
----------- -----------
Net property and equipment 462,061 523,106
----------- -----------
$ 2,217,789 $ 4,573,368
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (note 4) $ 573,801 $ 1,247,757
Current portion of capital lease obligations (note 5) 137,978 106,140
Accounts payable 792,786 1,332,154
Accrued expenses 265,149 183,569
Deferred revenue 75,759 77,800
----------- -----------
Total current liabilities 1,845,473 2,947,420
----------- -----------
Long-term liabilities:
Capital lease obligations, net of current portion (note 5) 72,053 139,565
----------- -----------
Total long-term liabilities 72,053 139,565
----------- -----------
Commitments and contingencies (note 6)
Stockholders' equity (note 8):
Common stock, par value $.01 per share, authorized 15,000,000
shares: 8,724,883 and 6,837,281 issued and outstanding at
June 30, 2000 and 1999, respectively 87,249 68,373
Additional paid-in capital 18,615,457 17,338,241
Accumulated deficit (18,402,443) (15,920,231)
----------- -----------
Total stockholders' equity 300,263 1,486,383
----------- -----------
$ 2,217,789 $ 4,573,368
=========== ===========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
RSI SYSTEMS, INC.
Statements of Operations
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 4,576,277 $ 9,199,135 $ 4,662,558
Cost of goods sold 2,346,015 4,447,943 2,123,553
Inventory writedown to lower of cost or
market (note 3) 341,846 -- --
----------- ----------- -----------
Gross profit 1,888,416 4,751,192 2,539,005
Research and development 819,733 1,281,718 993,525
Selling, general and administrative 3,327,248 4,268,296 3,478,665
----------- ----------- -----------
Operating loss (2,258,565) (798,822) (1,933,185)
----------- ----------- -----------
Other income (expense):
Other income 1,792 2,770 6,629
Interest income 41,945 68,946 53,249
Interest expense (267,384) (151,569) (86,649)
----------- ----------- -----------
Other expense, net (223,647) (79,853) (26,771)
----------- ----------- -----------
Net loss $(2,482,212) $ (878,675) $(1,959,956)
=========== =========== ===========
Basic loss per share $ (0.33) $ (0.13) $ (0.34)
=========== =========== ===========
Diluted loss per share $ (0.33) $ (0.13) $ (0.34)
=========== =========== ===========
Weighted average common shares outstanding:
Basic 7,443,507 6,695,859 5,706,145
=========== =========== ===========
Diluted 7,443,507 6,695,859 5,706,145
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
RSI SYSTEMS, INC.
Statements of Stockholders' Equity
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
UNEARNED
COMMON STOCK ADDITIONAL COMPENSATION--
------------------------- PAID-IN ACCUMULATED RESTRICTED
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
--------- ----------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 1,671,255 16,712 2,506,233 -- -- 2,522,945
Common stock warrant issued
to underwriter -- -- 100 -- -- 100
Restricted stock award 18,750 188 (188) -- 100,000 100,000
Common stock issued in
settlement of trade payables 210,011 2,100 373,796 -- -- 375,896
Net loss for the year -- -- -- (1,959,956) -- (1,959,956)
ended June 30, 1998
--------- ----------- ----------- ------------ --------- ----------
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 150,000 1,500 73,500 -- -- 75,000
Restricted stock award 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
Common stock warrant exercised 134,000 1,340 132,660 -- -- 134,000
Common stock issued in
settlement of trade payables 608,478 6,085 358,556 -- -- 364,641
Common stock sold to Directors 600,000 6,000 469,000 -- -- 475,000
Exercise of stock options 16,800 168 9,132 -- -- 9,300
Note payable and accrued interest
converted to common stock 528,324 5,283 307,868 -- -- 313,151
Net loss for the year
ended June 30, 2000 -- -- -- (2,482,212) -- (2,482,212)
--------- ----------- ----------- ------------ --------- ----------
Balances at June 30, 2000 8,724,883 $ 87,249 $18,615,457 $(18,402,443) $ -- $ 300,263
========= =========== =========== ============ ========= ==========
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
RSI SYSTEMS, INC.
Statements of Cash FlowS
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,482,212) $ (878,675) $(1,959,956)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 325,749 291,613 255,230
Inventory writedown to lower of cost
or market (note 3) 341,846 -- --
Compensation from restricted stock -- -- 100,000
Changes in operating assets and liabilities:
Accounts receivable, net 717,818 23,976 (794,199)
Inventories (114,564) (396,816) (92,809)
Prepaid expenses 21,556 (29,617) (15,393)
Accounts payable (174,727) 294,823 246,720
Accrued expenses 94,731 59,315 (238,911)
Deferred revenue (2,041) 37,136 (83,325)
----------- ----------- -----------
Net cash used in operating activities (1,271,844) (598,245) (2,582,643)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable securities 992,945 1,952,015 197,995
Purchase of marketable securities -- (1,964,770) (1,169,603)
Additions to property and equipment (176,788) (122,806) (227,218)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 816,157 (135,561) (1,198,826)
----------- ----------- -----------
Cash flows from financing activities:
Borrowing (repayment) on revolving
credit facility (673,956) 750,042 497,715
Proceeds from note payable 300,000 -- --
Repayments of capital lease obligations (123,590) (81,185) (9,869)
Proceeds from issuance of common stock 475,000 -- 2,522,945
Proceeds from exercise of common stock warrants 134,000 75,000 100
Proceeds from exercise of common stock options 9,300 26,719 --
----------- ----------- -----------
Net cash provided by
financing activities 120,754 770,576 3,010,891
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents (334,933) 36,770 (770,578)
Cash and cash equivalents at beginning of year 418,863 382,093 1,152,671
----------- ----------- -----------
Cash and cash equivalents at end of year $ 83,930 $ 418,863 $ 382,093
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 203,032 $ 126,068 $ 83,600
=========== =========== ===========
Cash paid during the year for income taxes $ -- $ -- $ --
=========== =========== ===========
Supplemental schedule of noncash investing
and financing activities:
Equipment acquired through capital
lease obligations $ 87,916 $ 146,307 $ 173,204
=========== =========== ===========
Common stock issued in settlement of
trade payables $ 364,641 $ -- $ 375,896
=========== =========== ===========
Note payable and accrued interest
converted to common stock $ 313,151 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
(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. The
Company extends unsecured credit to customers in the normal course
of business.
The Company experienced a significant decrease in sales as a
result of the loss of two key customers and had losses from
operations and negative cash flows for the year ended June 30,
2000. Together with a working capital deficit as of June 30, 2000,
these conditions raise concerns about the Company's ability to
generate positive cash flows and fund future operations.
Management plans to increase sales and improve operating results
through increased marketing and distribution of products through a
select number of stronger resellers and distributors, as well as
through OEM/private label partners and by selling direct to
preferred accounts. 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) 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 $0 and $413,743 at June
30, 2000 and 1999, respectively. The Company maintains its cash in
high quality financial institutions. The balances, at times, may
exceed federally insured limits.
(B) MARKETABLE SECURITIES
The Company has adopted the provisions of SFAS No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Marketable
securities had an original maturity of more than three months and
a remaining maturity of less than 1 year. These investments were
classified as held-to-maturity and were carried at cost in
accordance with SFAS No. 115. The cost of debt securities was
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 represented
investments in government bonds.
(C) INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in first-out (FIFO) method.
(D) 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. Leasehold
improvements are amortized over the lesser of their estimated
useful life or the term of the lease.
32
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
(E) CAPITALIZED SOFTWARE COSTS
Software costs have been 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 design 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. At June 30, 2000 and 1999, the Company had $185,146
and $85,961 of unamortized computer software costs. Amortization
of computer software costs was $70,154, $23,503 and $695 for the
years ended June 30, 2000, 1999 and 1998.
(F) REVENUE RECOGNITION
The Company recognizes revenue from system sales upon shipment.
Post sale customer support costs are insignificant and are
expensed as incurred.
(G) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when
incurred.
(H) ADVERTISING COSTS
All costs related to advertising the Company's products are
expensed in the period incurred. Advertising expense for the years
ended June 30, 2000, 1999 and 1998 was $38,604, $324,127 and
$167,408, respectively.
(I) NET LOSS PER SHARE
Basic and diluted loss per share is computed by dividing net loss
by the weighted average number of common shares outstanding during
each period. Dilutive common equivalent shares have not been
included in the computation of diluted loss per share because
their inclusion would be antidilutive. Antidilutive common
equivalent shares issuable based on future exercise of stock
options or warrants could potentially dilute basic and diluted
loss per share in subsequent years.
(J) 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.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for all financial instruments approximates
fair value. The carrying amount of cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short maturity of
these instruments. The fair
33
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
value of debt and capital lease obligations approximates the
current rates at which the Company could borrow funds with similar
remaining maturities and risks.
(3) INVENTORIES
Inventories consisted of the following at June 30:
2000 1999
-------------- --------------
Work in progress $ 26,312 $ 0
Components 618,847 683,279
Finished goods 161,797 350,959
-------------- --------------
$ 806,956 $ 1,034,238
============= =============
The fiscal year 2000 statement of operations reflects a $341,846
charge to reduce inventory to the lower of cost or market. The
write-down was associated with excess inventory resulting from the
Company's decision to discontinue production of certain previous
generation products.
(4) REVOLVING CREDIT FACILITY
In August 2000, the Company modified its commercial loan agreement
with a bank for a $2,500,000 committed line of credit facility
that matures in June 2001. This agreement amended and restated the
previous commercial loan agreement dated September 3, 1999. The
new facility is secured by all corporate assets and provides
working capital based on a borrowing base comprised of accounts
receivable, inventories and marketable securities. The new
facility also contains certain covenants and conditions, including
minimum net worth levels. Interest on outstanding borrowings
accrues at the prime rate plus 4% (13.5% at June 30, 2000).
Outstanding borrowings were $573,801 and $1,247,757 at June 30,
2000 and 1999, respectively.
(5) CAPITAL LEASE OBLIGATIONS
The following is a summary of leased equipment as of June 30,
2000:
Equipment $ 484,147
Less accumulated amortization (230,084)
----------
$ 254,063
==========
34
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
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, 2000:
<TABLE>
<S> <C>
Years ending June 30:
2001 $ 157,714
2002 66,360
2003 12,260
---------
Total minimum lease payments 236,334
Less amount representing interest from 9 % to 15 % (26,303)
---------
Present value of minimum lease payments 210,031
Less current portion (137,978)
---------
$ 72,053
=========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company leases office space and various equipment under
noncancelable operating leases with terms of monthly to three
years. One of the leases requires the Company to pay its prorata
share of operating expenses. Future minimum rental payments due
under noncancelable operating leases are as follows:
Fiscal year ending June 30:
2001 $102,751
2002 55,638
2003 7,800
2004 1,300
--------
$167,489
========
Total rental expense was $173,680, $177,677 and $204,223 for the
years ended June 30, 2000, 1999 and 1998, respectively.
(B) SOFTWARE LICENSE AGREEMENTS
During 1994, 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 $25.00 per unit of
videoconferencing systems containing the software. Royalty
expenses related
35
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
to this agreement for the years ended June 30, 2000, 1999 and 1998
were $23,850, $56,825 and $23,050, respectively.
During 1996, 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 $90,000, the
Company is to pay a royalty fee of up to $40.00 per unit of
videoconferencing systems containing the software. Royalty
expenses related to this agreement for the years ended June 30,
2000, 1999 and 1998 were $4,532, $12,749 and $32,560,
respectively.
During 1998, 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 up to $5.00 per unit of
videoconferencing systems containing the software. Royalty
expenses related to this agreement for the years ended June 30,
2000, 1999 and 1998 were $4,770, $11,315 and $1,580, respectively.
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 $5.00 per unit of
videoconferencing systems containing the software. The Company had
no sales of related systems containing the software during the
years ended June 30, 2000 and 1999.
(C) MANUFACTURING AGREEMENT
On August 28, 1996, the Company entered into a 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 months from the date the Company ships to the customer, or
fifteen 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, 2000, the
Company's commitment for material and work in progress for
products ordered was approximately $1,017,000.
(D) DISTRIBUTOR AND DEALER AGREEMENTS
The Company is a party to distributor and dealer agreements with
several companies. Certain distributors and dealers have 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.
36
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
(E) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Sales to two customers represented approximately 28% of net sales
for the year ended June 30, 2000 with accounts receivable from two
customers representing approximately 41% of total accounts
receivable as of June 30, 2000. During the year ended June 30,
1999, sales to three customers represented approximately 48% of
net sales, with accounts receivable from these three customers
representing approximately 32% of total accounts receivable as of
June 30, 1999. During the year ended June 30, 1998, sales to one
customer represented approximately 17% of net sales.
(F) LITIGATION
During 2000, the Company initiated a suit against a previous
customer for collection of certain unpaid invoices for equipment
ordered and shipped to the previous customer. In August 2000 the
previous customer filed a cross complaint against the Company for
alleged breach of contract and interference with prospective
economic advantage. The cross complaint did not specify an amount
of damages. The Company believes the counter claim is without
merit and believes this action will not have a material adverse
impact on the results of operations or financial position of the
Company.
(7) INCOME TAXES
The Company has adopted SFAS No. 109, "Accounting for Income
Taxes", under which deferred liabilities are recognized for the
temporary differences between the financial and income tax
reporting basis of assets and liabilities based on currently
enacted rates and laws. The Company has incurred cumulative net
operating losses for both financial statement and income tax
reporting purposes. At June 30, 2000, the Company had net
operating loss carryforwards of approximately $17,760,000 and
development credit carryforwards of approximately $200,000. If not
used, these carryforwards will begin to expire in 2010. During
1996, a change in ownership occurred pursuant to Section 382 of
the Internal Code that limits the use of loss carryforwards in any
one year. Subsequent ownership changes may further limit the use
of these net operating loss carryforwards. The Company has
recorded a full valuation allowance of $7,105,000 and $6,120,000
at June 30, 2000 and 1999 against the net deferred tax asset due
to the uncertainty of realizing the related benefits.
(8) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
In October 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 ($1.79 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.
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
37
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
($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.
In September 1999 the Company issued 134,000 shares of common
stock upon the exercise of a warrant held by a director. The
Company received proceeds of $134,000 upon the exercising of the
warrant ($1.00 per share). The shares have not been registered
with the Securities and Exchange Commission.
In November 1999 the Company sold 600,000 shares of common stock
to Company directors. The Company received $475,000 in exchange
for the 600,000 shares of common stock ($1.00 and $.50 per share).
The shares have not been registered with the Securities and
Exchange Commission.
In November 1999 and June 2000, the Company issued a total of
608,478 shares of common stock to its third party manufacturer as
payment on trade debt of $364,641 ($1.00 and $.40 per share). The
shares have not been registered with the Securities and Exchange
Commission.
In March 2000, the Company issued 16,800 shares of common stock
upon the exercise of stock options. The Company received proceeds
of $9,300 upon the exercise of the options ($.38 and $1.13 per
share). The shares have been registered with the Securities and
Exchange Commission and are freely tradable.
In June 2000, a director of the Company converted two $150,000
notes payable and accrued interest due from the Company into
common stock. The Company issued 528,324 shares of common stock
upon conversion of the notes payable which, together with accrued
interest at 10%, totaled $313,151. The notes payable were
converted into common stock at prices of $.53 and $.67 per share.
The shares have not been registered with the Securities and
Exchange Commission.
(B) STOCK WARRANTS
In July 1995, in connection with the Company's initial public
offering, the Company issued a warrant to the underwriter for the
purchase of 122,500 shares of common stock at an exercise price of
$7.50. The warrant was exercisable through July 2000 and expired.
In September 1996, in connection with the Company's private
offering of 1,500,000 of its common stock, the Company issued a
warrant to the placement agent for the purchase of 150,000 shares
of its common stock at an exercise price of $3.00. The warrant is
exercisable through September 2002.
In January 1998, in connection with the Company's private offering
of 1,671,255 shares of its common stock, the Company issued a
warrant to the placement agent for the purchase of 167,126 shares
of its common stock at an exercise price of $1.65. The warrant
expires January 2008.
As of June 30, 2000, there were outstanding warrants held by two
directors of the Company for the purchase of 15,000 shares of
common stock at an exercise price of $3.00 per share. During 2000,
warrants held by a director and other third parties for the
purchase of 141,000 shares of common stock expired.
38
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
(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).
The Company has reserved 2,000,000 shares of common stock for
issuance under the plan. At June 30, 2000, 924,200 shares remained
available for grant. Options issued become exercisable over
varying periods as provided in the individual plan agreements and
have a term of five or ten years.
39
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
A summary of changes in common stock options during the years
ended June 30, 2000, 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
Granted 487,000 .46
Exercised (16,800) .55
Canceled (627,150) 1.87
------------------ ------------------
Outstanding at June 30, 2000 1,075,800 $ 1.62
================== ==================
Exercisable at June 30, 2000 571,142 $ 2.21
================== ==================
</TABLE>
Options outstanding at June 30, 2000 have an exercise price per
share ranging from $.38 to $9.25 and a weighted average remaining
contractual life of 4.92 years.
The Company also has issued a total of 381,000 stock options
outside of the plan. The stock options have exercise prices of
$2.81 and $8.00 per share and 357,333 were fully vested and
exercisable as of June 30, 2000.
40
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
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
basic and diluted loss per share would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (2,482,212) $ (878,675) $ (1,959,956)
Pro forma (2,846,561) (1,346,890) (2,452,932)
Basic and Diluted loss per share:
As reported $ (.33) $ (.13) $ (.34)
Pro forma (.38) (.20) (.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 2000,
1999 and 1998, respectively; risk-free interest rates of 6.28%,
4.49% and 6.16%, expected option lives of 5.46 years, 4.02 years
and 6.77 years, expected volatility of 38.4%, 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 2000, 1999
and 1998 were as follows:
Fiscal 2000 grants $ .22
Fiscal 1999 grants 2.16
Fiscal 1998 grants 1.49
41
<PAGE>
RSI SYSTEMS, INC.
Notes to Financial Statements
June 30, 2000, 1999 and 1998
(9) RETIREMENT SAVINGS PLAN
The Company has a pre-tax salary reduction/profit-sharing plan
under the provisions of section 401(K) of the Internal Revenue
Code, which covers employees meeting certain eligibility
requirements. Profit sharing contributions by the Company are
completely discretionary. The Company made no contributions during
the years ended June 30, 2000, 1999 and 1998.
(10) RELATED PARTY TRANSACTIONS
During the years ended June 30, 2000, 1999 and 1998 the Company
purchased advertising and marketing services from a related party
totaling $41,352, $148,371 and $108,405, respectively. 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.
(11) SUBSEQUENT EVENT
In August 2000, the Company received $225,000 from a director in
exchange for a demand note payable. On February 28, 2001, the
maturity date of the note, the principal amount of the note
together with accrued interest at 10% per annum is convertible
into common stock at a price of $.34 per share, which was the
market price of the Company's common stock on the date the note
was signed.
42
<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 25, 2000 RSI SYSTEMS, INC.
By: /s/ Eugene W. Courtney
----------------------
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 25, 2000.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
James D. Hanzlik or Eugene W. Courtney 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/ Eugene W. Courtney Chief Executive Officer and
--------------------------------- President
Eugene W. Courtney
/s/ James D. Hanzlik Chief Financial Officer
---------------------------------
James D. Hanzlik
/s/ Richard F. Craven Chairman of the Board
---------------------------------
Richard F. Craven
/s/ Byron G. Shaffer Director
---------------------------------
Byron G. Shaffer
/s/ S. Albert Hanser Director
---------------------------------
S. Albert Hanser
43
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2000
<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
-------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or arrangements
44
<PAGE>
Exhibit No. Title of Document Method of Filing
----------- ----------------- ----------------
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 as exhibit 10.23 to the Company's
Credit & Security Agreement 1999 10-KSB and incorporated herein by reference
10.24 Third Amendment to Amended & Restated Filed as exhibit 10.24 to the Company's
Credit & Security Agreement 1999 10-KSB and incorporated herein by reference
10.25 First Amendment to Patent & Trademark Filed as exhibit 10.25 to the Company's
Security Agreement 1999 10-KSB and incorporated herein by reference
10.26 First Amendment to Patent & Trademark Filed as exhibit 10.26 to the Company's
Security Agreement 1999 10-KSB and incorporated herein by reference
10.27 Severance Agreement Between the Filed as exhibit 10.27 to the Company's
Company and Donald C. Lies 1999 10-KSB and incorporated herein by reference
10.28 Fourth Amendment to Amended and Restated Filed herewith electronically
Credit and Security Agreement and Waiver of
Defaults (Wells Fargo Business Credit, N.A.)
10.29 Second Amended and Restated Credit and Filed herewith electronically
Security Agreement (Wells Fargo Bank
Minnesota, N.A.)
10.30 Export Import Bank of the United States Filed herewith electronically
Working Capital Guarantee Program,
Borrower Agreement
10.31 Note Payable to Richard F. Craven Filed herewith electronically
10.32 Modified Separation and Severance Filed herewith electronically
Agreement between the Company and
Donald C. Lies
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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
23.2 Consent of Lund, Koehler, Cox, and Filed herewith electronically
Arkema, LLP.
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, RSI
Systems, Inc. at the executive offices of the Company.
------------------------
* Denotes an exhibit that covers management contracts or compensatory plans or
arrangements
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