<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
XXX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 FOR THE TRANSITION PERIOD FROM_____TO_____.
Commission File Number 0-27106
RSI SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1767211
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5555 WEST 78TH STREET, SUITE F, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)
(612) 896-3020
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO __
The Company had 7,737,531 shares of Common Stock, $ 0.01 par value per share,
outstanding as of February 11, 2000.
Transitional Small Business Disclosure Format (Check one): Yes __ No X
1
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RSI Systems, Inc.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - December 31, 1999 (unaudited)
and June 30, 1999 ............................................................ 3
Statements of Operations (unaudited) - Three
months and six months ended December 31, 1999 and 1998........................ 4
Statements of Cash Flows (unaudited) - Six
months ended December 31, 1999 and 1998 ...................................... 5
Notes to Financial Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 9
PART II OTHER INFORMATION ..................................................................... 17
Signatures ..................................................................................... 18
Exhibit Index .................................................................................. 19
</TABLE>
2
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RSI SYSTEMS, INC.
Balance Sheets
December 31, 1999 and June 30, 1999
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
Assets (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,058,516 418,863
Marketable securities - 992,945
Accounts receivable, net of allowance for doubtful
accounts of $271,000 and $228,000, respectively 744,982 1,517,650
Inventories 1,331,123 1,034,238
Prepaid expenses 67,110 86,566
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 3,201,731 4,050,262
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment:
Software 300,909 138,507
Furniture and equipment 1,253,084 1,180,336
Leasehold improvements 56,279 56,279
Less accumulated depreciation and amortization (988,265) (852,016)
- ----------------------------------------------------------------------------------------------------------------------
Net property and equipment 622,007 523,106
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 3,823,738 4,573,368
======================================================================================================================
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 696,847 1,332,154
Accrued expenses 293,706 183,569
Deferred revenue 77,486 77,800
Revolving credit facility 1,509,838 1,247,757
Note payable 150,000 -
Current portion of capital lease obligations 133,705 106,140
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,861,582 2,947,420
- ----------------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Capital lease obligations, net of current portion 138,543 139,565
- ----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 138,543 139,565
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock ($.01 par value per share, 10,000,000 shares
authorized, 7,737,531 and 6,837,281 issued and
outstanding, respectively) 77,375 68,373
Additional paid-in capital 18,104,489 17,338,241
Accumulated deficit (17,358,251) (15,920,231)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 823,613 1,486,383
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,823,738 4,573,368
======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
3
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RSI SYSTEMS, INC.
Statements of Operations
Three Months and Six Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, December 31,
1999 1998
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,124,626 2,592,594
Cost of goods sold 659,252 1,291,089
- --------------------------------------------------------------------------------------------------------
Gross profit 465,374 1,301,505
Research and development 215,245 342,231
Selling, general, and administrative 915,743 992,274
- --------------------------------------------------------------------------------------------------------
Operating loss (665,614) (33,000)
Other income (expense):
Interest income (expense), net (16,159) (6,472)
- --------------------------------------------------------------------------------------------------------
Other income (expense), net (16,159) (6,472)
- --------------------------------------------------------------------------------------------------------
Net loss $ (681,773) (39,472)
========================================================================================================
Net loss per common share - basic $ (0.09) (0.01)
Net loss per common share - diluted $ (0.09) (0.01)
========================================================================================================
Weighted average shares outstanding - basic 7,256,653 6,665,969
Weighted average shares outstanding - diluted 7,256,653 6,665,969
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, December 31,
1999 1998
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 2,748,754 4,955,545
Cost of goods sold 1,389,285 2,344,596
- --------------------------------------------------------------------------------------------------------
Gross profit 1,359,469 2,610,949
Research and development 485,356 615,886
Selling, general, and administrative 2,209,231 1,972,614
- --------------------------------------------------------------------------------------------------------
Operating income (loss) (1,335,118) 22,449
Other income (expense):
Interest income (expense), net (102,902) (14,914)
- --------------------------------------------------------------------------------------------------------
Other income (expense), net (102,902) (14,914)
- --------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,438,020) $ 7,535
========================================================================================================
Net earnings (loss) per common share - basic $ (0.20) 0.00
Net earnings (loss) per common share - diluted $ (0.20) 0.00
========================================================================================================
Weighted average shares outstanding - basic 7,113,967 6,664,750
Weighted average shares outstanding - diluted 7,113,967 7,161,956
========================================================================================================
</TABLE>
See accompanying notes to financial statements.
4
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RSI SYSTEMS, INC.
Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, December 31,
1999 1998
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,438,020) 7,535
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 136,249 170,636
Changes in operating assets and liabilities:
Accounts receivable 772,668 (1,307,540)
Inventories (296,885) (290,906)
Prepaid expenses 19,456 (37,810)
Accounts payable (469,057) 987,142
Accrued expenses 110,137 (39,789)
Deferred revenue (314) 27,523
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,165,766) (483,209)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 992,945 (10,300)
Purchases of software, furniture and equipment (235,150) (154,628)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 757,795 (164,928)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 609,000 5,906
Net proceeds from line of credit 262,081 668,671
Increase in note payable 150,000 -
Payments of capital lease obligations (58,657) (32,105)
Increase in capital lease obligations 85,200 65,027
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,047,624 707,499
- ---------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 639,653 59,362
Cash and cash equivalents at beginning of period $ 418,863 382,093
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 1,058,516 441,455
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
5
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RSI SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in the financial statements have been
omitted or condensed pursuant to such rules and regulations. The accompanying
unaudited financial statements should be read in conjunction with the Company's
June 30, 1999 financial statements and related notes included in the Company's
Annual Report on Form 10-KSB.
The financial statements reflect all adjustments, of a normally recurring
nature, necessary to fairly present the results of operations and financial
position of the Company for the interim periods.
2. NET EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share excludes any dilutive effects of options,
warrants, and convertible securities, and diluted earnings per share includes
such effects, if dilutive. Differences between basic and diluted weighted
average shares outstanding result from the dilutive effect of stock options and
warrants under the treasury stock method.
3. DEBT:
On September 3, 1999 the Company signed an amendment to a commercial loan
agreement with a bank for a committed line of credit facility. The amendment
increased the maximum line of credit from the previous level of $2,000,000 to
$2,500,000, modified the minimum net worth covenants and extended the maturity
date to June 26, 2001. The facility is secured by all corporate assets and
provides working capital based on a borrowing base comprised of accounts
receivable, inventory and marketable securities. The facility contains certain
covenants and conditions, including minimum net worth and tangible net worth
levels. Interest on outstanding borrowings accrues at the bank's base rate or
the base rate plus up to 4%, depending on the level of each component of the
Company's borrowing base and the outstanding amount on the line of credit. On
December 31, 1999, the base rate was 8.5% and outstanding borrowings on the
facility were $1,509,838 leaving $990,162 unused.
On December 31, 1999 the Company was in default on the net worth and tangible
net worth covenant. The Company has received a waiver of the default as of
December 31, 1999.
6
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In December 1999, the Company received $150,000 from a Director of the Company.
The Company signed a demand note for the funds, with interest payable monthly at
10%.
4. CAPITAL STOCK:
On September 6, 1999, the Company issued 134,000 shares of its common stock and
received $134,000 upon the exercise of warrants held by a director of the
Company.
On November 3, 1999 the Company received $350,000 from directors, net of
offering costs, and exchanged $166,250 in trade debt due to a key vendor as a
result of a private placement of 516,250 shares of common stock ($1.00 per
share).
On November 30, 1999, the Company received $125,000 from a director, net of
offering costs, as a result of a private placement of 250,000 shares of common
stock. ($.50 per common share).
5. NET SALES:
Net sales for the six-month period ended December 31, 1999 includes $290,540
from Philips Electronics, N.V. as part of an agreement to terminate its
OEM/private label relationship with the Company. Under terms of the agreement,
Philips paid the Company $290,540 for lost gross margin on videoconferencing
units ordered by Philips but not shipped by the Company.
7
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CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both
statements of historical facts and forward looking statements. Forward
looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those indicated by the
forward looking statements. Examples of forward looking statements include,
but are not limited to (i) projections of revenues, income or loss, earnings
or loss per share, capital expenditures, dividends, capital structure and
other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including the introduction
of new products, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements and statements about the Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ
materially from those indicated by the forward looking statements. These
risks and uncertainties include price competition, the decisions of
customers, the actions of competitors, the effects of government regulation,
possible delays in the introduction of new products, customer acceptance of
products and services, and other factors which are described herein and/or in
documents incorporated by reference herein. The cautionary statements made
pursuant to the Private Litigation Securities Reform Act of 1995 above and
elsewhere by the Company should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to
the effective date of such Act. Forward looking statements are beyond the
ability of the Company to control and in many cases the Company cannot
predict what factors would cause results to differ materially from those
indicated by the forward looking statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RSI Systems, Inc., (the "Company" or "RSI"), designs, manufactures and sells
high performance, business quality videoconferencing systems throughout a
worldwide network of resellers, distributors and private label partners. The
Company's fourth-generation product family, the MediaPro 384-TM- system, is a
cross-platform, multimedia videoconferencing engine, capable of operating
either with or without a host computer and displaying through a variety of
output devices. The Company was incorporated under the laws of Minnesota on
December 21, 1993.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1998
NET SALES. Net sales for the second quarter of fiscal year 2000 were
$1,124,626, down 57% from $2,592,594 in the second quarter of fiscal year
1999. The decrease in sales in the second quarter of fiscal year 2000
compared to the second quarter of fiscal year 1999 was a result of lower unit
volume associated with the Company's reduced distribution through OEM
relationships and direct sales. OEM and direct sales volume accounted for
more than 75% of net sales in the second quarter of fiscal year 1999, or
approximately $2,000,000. In the second quarter of fiscal year 2000, net
sales through OEM and direct sales accounted for approximately $390,000. The
decreased OEM sales volume was due to a lack of sales to Vtel, Inc. in the
second quarter of fiscal year 2000, compared to sales of approximately
$1,200,000 to this customer in the second quarter of fiscal year 1999. In the
second quarter of fiscal year 1999, Vtel Inc. purchased a certain quantity of
units as part of an agreement with the Company. In the second quarter of
fiscal year 2000, there was no such requirement, as Vtel had previously taken
delivery of all minimum purchase quantities required under the agreement.
As of September 30, 1999, Philips Electronics, N.A. and the Company
terminated their OEM relationship. The termination was a result of
Philips'overall decision to discontinue its involvement in the
settop/workgroup systems videoconferencing market. No sales were made to
Philips in the second quarter of fiscal year 2000.
As a result of both Vtel, Inc. and Philips Electronics, N.A. fullfilling
their minimum purchase commitments, the Company does not expect any
significant sales to these customers in the future. However, the Company does
have the right, and expects to manufacture and distribute videoconferencing
units in the future with a design similar to those formerly distributed by
Philips under its private label relationship with the Company.
In the second quarter of fiscal year 2000, Gentner Communications, Inc. took
delivery of all its minimum purchase commitments to the Company. The Company
expects Gentner to continue to purchase its products, although there is no
current contractural obligation to do so. The timing and amount of such
future expected purchases is uncertain.
9
<PAGE>
In the fourth quarter of fiscal year 1999, and continuing into the second
quarter of fiscal year 2000, the Company redirected a significant portion of
its North American sales efforts away from direct selling, and toward efforts
to establish, train and sell primarily through a stronger network of
independent third party resellers and distributors. The Company believes this
shift in distribution strategy for North America will enhance growth in the
longer term despite negatively affecting sales in the short term. In the
second quarter of fiscal year 2000, direct sales amounted to approximately
$100,000 compared to direct sales of approximately $600,000 for the second
quarter of fiscal year 1999.
GROSS PROFIT . Gross profit was $465,374 in the second quarter of fiscal year
2000 compared to a gross profit of $1,301,505 during the second quarter of
fiscal year 1999. The lower gross profit was a result of lower unit sales
volume. Cost of goods sold as a percentage of net sales were 59% in the
second quarter of fiscal year 2000 compared to 50% in the second quarter of
fiscal year 1999. The increased cost of sales as a percent of net sales
during the second quarter of fiscal year 2000 was primarily due to the write
off of certain inventory and the conversion of certain inventory to alternate
models.
In the second quarter of fiscal year 2000, the Company scrapped and wrote off
certain excess parts in inventory which were originally purchased in minimum
quantities, and were determined to be no longer necessary for the production
of current products. This inventory write off amounted to approximately
$46,000, or 4% of net sales for the period.
The Company also wrote off certain inventory previously utilized primarily
for demonstration purposes in its Amsterdam, The Netherlands sales office.
This sales office was moved to the United Kingdom in November, 1999. The
amount of such write off was approximately $30,000, or 3% of net sales.
During the second quarter of fiscal year 2000, the Company converted certain
videoconferencing units from one model to another to fullfill customer orders
without building additional units. Costs associated with this inventory
conversion were approximately $50,000, or 4% of net sales for the period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$215,245 for the second quarter of fiscal year 2000, or 19% of sales,
compared to research and development expenses of $342,231, or 13% of sales
for the second quarter of fiscal year 1999. The percentage increase in the
second quarter of fiscal year 2000 was due to lower sales as discussed above.
Actual spending was higher during the second quarter of fiscal year 1999 due
to a higher level of hardware and software development activity associated
with the Company's new Media Pro product as well as development in support of
OEM and private label partners. The Company also incurred recruiting costs
associated with new personnel in the second quarter of fiscal year 1999.
During the second quarter of fiscal year 2000 the Company's research and
development efforts were directed toward smaller scale enhancements to the
Media Pro product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $915,743 in the second quarter of fiscal year
2000, or 82% of sales, compared to $992,274 or 38% of sales for the second
quarter of fiscal year 1999. The percentage increase was due to
10
<PAGE>
lower sales in the second quarter of fiscal year 2000 as discussed above. The
decrease in actual expenditures during the second quarter of fiscal year 2000
was a result of decreased sales, marketing, technical support and
administrative expenses and activities associated with lower sales volume. In
November, 1999, the Company reduced non-critical headcount by 11, to a
remaining level of 24 employees, to reduce monthly operating expenses. The
Company currently believes it has maintained the needed resources to
effectively execute its opertating plan for the remainder of calander year
2000.
As a result of the foregoing, the net loss for the second quarter of fiscal
year 2000 was $(681,773) or $(.09) per common share compared to a net loss of
$(39,472), or $(.01) per common share in the second quarter of fiscal year
1999.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998
NET SALES. Net sales for the six-month period ended December 31, 1999 were
$2,478,754, down 50% from $4,955,545 for the six-month period ended December
31, 1998. The decrease in sales during the six-month period ended December
31, 1999 was a result of lower unit volume associated with the Company's
distribution through its OEM relationships and direct sales.
OEM and direct sales volume accounted for more than 70% of net sales in the
six-month period ended December 31, 1998, or approximately $3,700,000. In the
six-month period ended December 31, 1999, net sales through OEM relationships
and direct sales amounted to approximately $1,300,000. The decreased OEM
sales volume was due to a lack of sales to Vtel, Inc. in the six-month period
ended December 31, 1999, compared to sales of approximately $1,600,000 to
this customer during the six-months ended December 31, 1998. In the six-month
period ended December 31, 1998, Vtel Inc. purchased a certain quantity of
units as part of an agreement with the Company. In the six-month period ended
December 31, 1999, there was no such requirement, as Vtel had previously
taken delivery of all minimum purchase quantities required under the
agreement.
As of September 30, 1999, Philips Electronics, N.A. 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.
As a result of both Vtel, Inc. and Philips Electronics, N.A. fullfilling
their minimum purchase commitments, the Company does not expect any
significant sales to these customers in the future. However, the Company does
have the right, and expects to manufacture and distribute videoconferencing
units in the future with a design similar to those formerly distributed by
Philips under its private label relationship with the Company.
As of December 31, 1999, Gentner Communications, Inc. had taken delivery of
its minimum purchase commitments to the Company. The Company expects Gentner
to continue to purchase products although there is no current contractural
obligation to do so. The timing and amount of such purchases is uncertain.
11
<PAGE>
In the fourth quarter of fiscal year 1999, and continuing into the second
quarter of fiscal year 2000, the Company redirected a significant portion of
its North American sales efforts away from direct selling, and toward efforts
to establish, train and sell primarily through a stronger network of
independent third party resellers and distributors. The Company believes this
shift in distribution strategy for North America will enhance growth in the
longer term despite negatively affecting sales in the short term. In the
six-month period ended December 31, 1999, direct sales amounted to
approximately $300,000 compared to direct sales of approximately $1,500,000
during the six-month period ended December 31, 1998.
GROSS PROFIT. Gross profit was $1,359,469 for the six-month period ended
December 31, 1999, compared to a gross profit of $2,610,949 during the
six-month period ended December 31, 1998. The decreased gross profit was a
result of lower unit sales volume. Gross profit included $290,540 from
Philips as part of the agreement to discontinue its OEM/private label
relationship with the Company. Cost of goods sold as a percentage of sales,
excluding the $290,540 from Philips were 56% for the six-month period ended
December 31, 1999 compared to 47% during the six-month period ended December
31, 1998. The increased cost of goods sold as a percentage of sales during
the six-month period ended December 31, 1999 was due primarily to higher
costs associated with the write off of certain inventory and conversion of
certain inventory to alternate models.
During the second quarter of fiscal year 2000, the Company scrapped and wrote
off certain excess parts in inventory which were originally purchased in
minimum quantities, and were determined to be no longer necessary for the
production of current products. This inventory write off amounted to
approximately $46,000, or 2% of net sales for the six-month period ended
December 31, 1999.
The Company also wrote off certain inventory previously utilized primarily
for demonstration purposes. A large portion of this inventory was located in
its Amsterdam, The Netherlands sales office which was moved to the United
Kingdom in November, 1999. The amount of such write off was approximately
$30,000, or 1% of net sales for the six-month period ended December 31, 1999.
During the second quarter of fiscal year 2000, the Company converted certain
videoconferencing units from one model to another to fullfill customer orders
without building additional units. Costs associated with this inventory
conversion were approximately $50,000, or 2% of net sales for the six-month
period ended December 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$485,356, or 18% of sales for the six-month period ended December 31, 1999,
compared to research and development expenses of $615,886, or 12% of sales
for the six-month period ended December 31, 1998. The percentage increase in
the six-month period ended December 31, 1999 was due to lower sales as
discussed above. Actual dollar spending was higher during the six-month
period ended December 31, 1998 due to higher development activity associated
with the Company's new Media Pro product as well as development in support of
OEM and private label partners during the period. During the six-month period
ended December 31, 1999, the Company's research and development efforts were
directed primarily toward smaller scale enhancements to the Media Pro.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses were $2,209,231 for the six-month period ended
December 31, 1999 or 80% of sales, compared to $1,972,614 or 40% of sales the
six-month period ended December 31, 1998. The percentage increase was due to
lower sales during the six-month period ended December 31, 1999 as discussed
above. The higher level of actual expenditures during the six-month period
ended December 31, 1999 was due to expenses associated with a severence
arrangement between the Company and its former President and CEO, who
resigned from the Company on September 6, 1999. Under the severance
agreement, the Company is to pay the former President a total of $200,000
over a period of twelve months beginning in September 1999. The total amount
of the severance arrangement was expensed during the six-month period ended
December 31, 2000. The former President signed a non-disclosure and
non-compete agreement for a period of one year as part of the overall
severance agreement.
OTHER INCOME (EXPENSE). Other income (expense) was $(102,902) for the
six-month period ended December 31, 1999, compared to $(14,914) for the
six-month period ended December 31, 1998. The Company incurred higher
interest expense during the six-month period ended December 31, 1999 due to
higher levels of outstanding borrowings on both its line of credit and
capital lease obligations. The Company also earned a higher level of interest
income on investments during the six-month period ended December 31, 1998,
which offset a higher amount of interest expense during that period. The
higher level of investments were a result of a higher amount of funds
remaining from a private placement of the Company's common stock in January,
1998.
As a result of the foregoing, the net loss for the six-month period ended
December 31, 1999 was $(1,438,020), or $(0.20) per common share, compared to
a net loss of $(14,914), or $(.00) per common share in the six-month period
ended December 31, 1998.
OUTLOOK
The Company is pursuing a strategy of increasing sales by targeting specific
markets best suited to its product capabilities and increasing distribution
through a few carefully selected third party resellers and distributors. The
Company is also pursuing opportunities for increased distrubution by looking
for strategic partner arrangements. Finally, the Company is continuing to
enhance its product offerings to enhance value and competitive advantage.
Although the video conferencing industry remains very competitive and
continues to rapidly change, the Company believes its strategy will allow it
to increase revenues, and improve income from operations in the long term,
despite negatively impacting sales in the short term.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
CASH FLOWS FROM OPERATING ACTIVITIES
13
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Net cash used in operating activities was ($1,165,766) for the six-month
period ended December 31, 1999, which was primarily due to the net loss of
$(1,438,020), a reduction in accounts payable and an increase in inventory
during the period. This use of cash was partially offset by a reduction in
accounts receivable.
Accounts payable decreased during the six-month period ended December 31,
1999 due to Company efforts to pay the Company's third party manufacturer
within its net 30-day terms. The shorter payment cycle to this vendor was
implemented in order to support the manufacturer's ramp up in production of
MediaPro 384. The decrease in accounts payable was partially offset by an
increase in accrued expenses, which was largely a result of the severance
agreement between the Company and its former President.
Inventory increased during the six-month period ended December 31, 1999 as a
result of the introduction of the Company's new MediaPro 384 product in late
June 1999. The product went into full production in the first quarter of
fiscal year 2000, and inventory levels were increased in order to maintain
product availability. MediaPro 384 inventory represents an incremental
addition of overall inventory, as the Company continues to support its
previous product line, Video Flyer Plus.
Accounts receivable decreased during the six-month period ended December 31,
1999 due to decreased sales volume during the latter half of the second
quarter of fiscal year 2000, compared to the latter half of the fourth
quarter of fiscal year 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
During the six-month period ended December 31, 1999, the Company received
cash from investing activities of $992,995, primarily as a result of
maturities of government securities. The proceeds of these maturities were
reinvested in money market funds for increased liquidity during the period.
During the period ended December 31, 1999, the Company invested $235,150 in
capital assets. These assets were obtained in connection with the Company's
continued development, enhancement and support of its Media Pro product. The
primary portion of this investment is represented by $155,000 software
development costs associated with enhancements to Media Pro. These costs have
been capitalized in accordance with the Company's policy of capitalizing such
costs, if material, subsequent to the establishment of technological
feasibility. The Company financed approximately $80,000 of these costs under
a capital lease arrangement with a third party leasing company.
CASH FLOW FROM FINANCING ACTIVITIES
Through December 31, 1999, cash requirements of the Company have been funded
primarily by the issuance of common stock, a loan from a Director of the
Company and borrowings on a credit facility from its bank.
14
<PAGE>
To finance working capital during the six-month period ended December 31,
1999, the Company increased net outstanding borrowings on its line of credit
by $262,081. At December 31, 1999, the Company had a balance of $1,509,838
outstanding on its $2,500,000 credit facility, leaving $990,162 unused.
In September 1999, the Company received proceeds of $134,000 from the
exercise of warrants held by a director of the Company for the purchase of
134,000 shares of common stock at $1.00 per share. In addition, the Company
received proceeds of $350,000 on November 3, 1999 from the private placement
of 350,000 shares of common stock sold to directors of the Company for $1.00
per share. As part of the private placement, the Company also issued 166,250
shares of common stock as payment for $166,250 in trade accounts payable to a
key vendor.
On November 30, 1999 the Company received proceeds of $125,000 from the
private placement of 250,000 shares of common stock sold to a director of the
Company for $.50 per share.
In December 1999, the Company received a total of $150,000 in the form of a
demand note payable to a Director of the Company. The note is unsecured, and
carries an interest rate of 10% payable monthly.
LIQUIDITY
The Company believes that recent reductions in operating expenses and strong
management of accounts receivable, inventory and accounts payable and funds
available under its line of credit will allow it to minimize the use of cash
from operations until sales increase sufficiently to achieve a positive cash
flow from operations. Management plans to continue its strategy of increasing
sales through pursuit of stronger distrubution partners and to continue to
provide these partners with new product offerings and enhancements to
increase its competitive advantage. However, there can be no assurance that
sales increases will materialize, or that the timing of such increases, if
any, will be sufficient to permit the Company to operate without the need for
additional capital.
In the event the Company requires cash in excess of funds available from
operations or its line of credit, management would seek additional financing.
However, no formal arrangements have been made in this regard and no
assurance can be made that any such financing would be available on
reasonable terms, or at all.
NASDAQ DELISTING
In December, 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. On December 31, 1999, the
Company had a net tangible asset balance of $823,613 which was below the
Nasdaq requirement.
15
<PAGE>
The Company's shares are now traded on the over-the-counter market.
YEAR 2000 STATUS
The Company has completed what it believes to be the critical aspects of
preparing for Year 2000 issues relative to its business. The Company has
experienced no material adverse consequences of the year 2000 issue relative
to its business and it expects none in the future.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES.
A worst case scenario relative to the Year 2000 issue would be that
the Company needs to replace both its information technology and
non-information technology systems, and utilize alternate sources of supply
for its critical components and third party manufacturing due to unforseen
year 2000 issues. Because of its current size, the Company believes
replacement of its current information systems would not result in costs
material to the Company's financial condition or results of operations. In
the event key sources of supply were disrupted due to Y2K issues with
vendors, the Company believes it could implement suitable alternative sources
of supply but the situation could have a material impact on the Company's
business. The Company has analyzed these uncertainties and has a plan of
action to minimize the uncertainties and mitigate the potential costs
involved, should the worst case scenario occur.
CONTINGENCY PLANS.
The Company currently has a contingency plan to handle the worst
case scenario above. The Company believes it is not practical to implement
remediation efforts to remove the risks of the worst case scenario above, due
to the costs involved and the Company's belief that the likelihood of the
worst case scenario occurring is remote, especially in light of the time
elapsed since the change over to year 2000 with no known difficulties or
issues. The Company continues to monitor the Y2K situation carefully as is
relates to its business and expects to take appropriate measures to mitigate
the impact of a worst case scenario should signs of it become apparent.
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
On October 13, 1999, the Company appointed Eugene
W. Courtney as its new Chief Executive Officer to
replace Donald C. Lies, who resigned from the
Company as of September 7, 1999. In addition, on
September 23, 1999, the Company appointed Albert
Hanser and Byron Shaffer as new directors, to
replace David Stassen and Manfred Haiderer, who
resigned from the Company's Board of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RSI Systems, Inc.
Dated: February 11, 2000 /s/ Eugene W. Courtney
-------------------------------------
Eugene W. Courtney
Its President & Chief Executive Officer
By: /s/ James D. Hanzlik
-------------------------------------
James D. Hanzlik
Its Chief Financial Officer
18
<PAGE>
RSI SYSTEMS, INC.
EXHIBIT INDEX TO
FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Item No. Title of Document Method of Filing
- -------- ----------------- ----------------
<S> <C> <C>
27.1 Financial Data Schedule Filed herewith electronically
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,058,516
<SECURITIES> 0
<RECEIVABLES> 744,982
<ALLOWANCES> 271,000
<INVENTORY> 1,331,123
<CURRENT-ASSETS> 3,201,731
<PP&E> 622,007
<DEPRECIATION> 988,265
<TOTAL-ASSETS> 3,823,738
<CURRENT-LIABILITIES> 2,861,582
<BONDS> 0
0
0
<COMMON> 77,375
<OTHER-SE> 746,238
<TOTAL-LIABILITY-AND-EQUITY> 3,823,738
<SALES> 2,748,754
<TOTAL-REVENUES> 2,748,754
<CGS> 1,389,285
<TOTAL-COSTS> 1,389,285
<OTHER-EXPENSES> 2,694,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,902
<INCOME-PRETAX> (1,438,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,438,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,438,020)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
