CONFORMED
FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-20728
RIMAGE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1577970
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7725 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 944 - 8144
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
(Title of class)
Indicate by checkmark 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 preceeding 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___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. { }
As of March 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the last quoted price
at which such stock was sold on such date as reported by the Nasdaq Stock
Market, was $12,012,000.
As of March 25, 1998, there were outstanding 3,092,969 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the fiscal
year covered by this report, are incorporated by reference into Part III hereof.
GENERAL INFORMATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Rimage Corporation (together with its subsidiaries, "Rimage" or the "Company")
designs, manufactures and markets CD recordable ("CD-R") and computer diskette
duplication and production equipment and provides high volume data duplication
services on diskette, CD-R and CD-ROM. The Company's Producer line of CD-R
production systems provides turnkey premastering, recording and label printing
in a single machine that may be used alone or on a network to allow the user to
record and label large volumes of digital information for information
distribution, archiving and other applications. The Perfect Image(R) CD Printer
is a fast, affordable system for professional quality printing on the surface of
a CD. The Perfect Image Series 100 automatic disk duplicators provide high
capacity (up to 190 disks per hour) disk duplication capacity for software disk
production and other applications. The Perfect Image Automated Production Cells
have been a mainstay product for Rimage for over eight years that provide
completely automated floppy disk mastering, duplication, labeling, data
replacement and quality control capabilities.
The Rimage Services Division provides a range of high speed, high volume tape,
diskette and CD -ROM duplication services. The Company also provides turnkey
services that include packaging and distribution of customer products.
The Company was incorporated as IXI, Inc. in Minnesota in February 1987 and
changed its name to Rimage Corporation in April 1988. Rimage acquired the assets
of a company that produced diskette duplication equipment in 1987 and of a
California-based manufacturer of duplication equipment in 1988 and its
operations through 1995 consisted primarily of the design, manufacture and sale
of diskette and tape duplication equipment. In 1992, Rimage created a formal
presence in Europe, forming Rimage Europe GmbH as a wholly-owned subsidiary to
conduct sales and service. In December 1993, Rimage acquired Duplication
Technology, Inc., a company located in Boulder, Colorado that manufactures tape
and CD-R duplication equipment and provides duplication services. In September
1994, the Company acquired a company in California, Knowledge Access
International, that provides customized browser and archiving software. The
Company formed a separate division in early 1996, Rimage Optical Systems, to act
as a distributor of CD-ROM stamping presses manufactured by a European Company.
In September 1995 Rimage acquired Dunhill Software Services, Inc., an affiliated
corporation that was formed in 1988 and that offered diskette duplication and
production services. Dunhill was merged into the Company and, together with a
portion of Duplication Technology, represents most of the Company's Services
Division operations.
The Company's operations during the past five years have been affected by the
timing of the foregoing acquisitions, by the timing of new product introductions
and the expenses associated with development of such new products, by changes in
preferred formats for media storage, and by increasing competition in the
services businesses. The shift from diskette to CD-ROM storage technologies
affected the Company's product sales in 1995, as it worked to introduce its new
CD-R products. These new CD-R products have generated significant sales in 1996
and 1997 and represent the Company's most profitable business currently.
Although the services business benefited from increasing services revenue
through 1994, the declining use of diskettes negatively impacted both margins
and services revenue in 1995, 1996 and 1997. The reduced product sales in 1995
and the decreasing services revenues in 1996 caused the Company to report
substantial losses during those two years.
The Company responded in late 1996 by retaining new management and by planning
for the phasing out of unprofitable operations. In early 1997, the Company
shutdown Knowledge Access, which had been inactive since 1995. The operations of
Rimage Optical Systems, which had contributed approximately $6 million of
revenue but virtually no operating margin in 1996, were also terminated in early
1997. The Company also ceased operations in Asia in early 1997 and moved its
CD-ROM production equipment, which was not fully utilized at its location in
Wisconsin, to a third party contractor site during the winter of 1997. These
changes, together with substantial cost savings measures instituted at the end
of 1996 and increased distribution and market acceptance of its new CD-R
products, resulted in record earnings for the 1997 fiscal year.
PRODUCTS
The Company's Systems Division, through which all CD-R, CD-ROM and diskette
production equipment is manufactured and sold, generated 54%, 56% and 34% of the
Company's revenue during the 1997, 1996, and 1995 fiscal years, respectively.
The Company anticipates that the Systems Division will constitute a growing
portion of the business in the next few years.
The Systems Division's core products are the Perfect Image line of automated
CD-R publishing and duplication systems, the Perfect Image CD-R Printer, the
Perfect Image line of automated diskette duplication and publishing systems and
Duplication Technology's unique magnetic tape duplication equipment.
The Perfect Image CD-R product line, first introduced in 1995, consists of a
growing family of products that cover a broad range of requirements for the
publishing and duplication of CD-R's. The Systems Division has developed a
comprehensive line of CD-R hardware and software solutions specifically for
customers interested in publishing large amounts of information and data onto a
compact disc. The Rimage Perfect Image Producer product line gives customers the
capability to produce multiple CD-R's in minutes, using automated loading
systems, multiple recorders, and in line printing. This product line is intended
to serve a wide range of office networks, industry production and retail
environments.
The Perfect Image diskette duplication product line consists of a broad family
of products that cover requirements from relatively low to high volume
duplication with automated diskette finishing capabilities. This full product
range is intended to serve any user within the microcomputer industry, based
upon its specific needs, and is the main production equipment utilized by the
Services Division. Duplication Technology manufactures tape and CD-R duplication
systems. The systems utilize a patented computer technology which enables high
speed duplication of as many as nine copies simultaneously. The formats
supported by these systems include virtually all tape formats commonly used for
data distribution, compact disc technology replicated on CD-R media, and
magneto-optical disks. This product range is intended to serve any user within
the microcomputer industry based upon its specific needs, and is the main
production equipment utilized by Duplication Technology's service facility.
The Rimage CD-R Printer is a unique product in the industry which provides laser
quality printing on standard CD-R media for in-house, customized printing. The
CD-R Printer has allowed Rimage to better position itself in the rapidly
expanding and highly competitive CD marketplace. The Systems Division also
produces associated equipment which prints labels, applies labels to diskettes
and collates diskettes into multiple diskette sets.
The Systems Division products are designed to automate manual processes,
resulting in a reduction of labor and training costs for users of the products.
The principal benefits to users of the Systems Division's products are reduced
operational costs, higher throughput than alternative systems, and higher
quality. One of the key elements of the Systems Division's marketing and
development is to provide users with a path for upgrading to future enhancements
and additional capabilities. The Company has made a long term commitment to its
customers by providing maintenance service contracts, replacement parts, and
repair service to customers for current as well as past products.
SERVICES
The Services Division's core business includes the duplication of CD-ROM's,
CD-R's, diskettes, magnetic tapes and turnkey packaging services. The Services
Division provides CD-ROM duplication, diskette duplication and production
services to software developers and manufacturers, as well as publishing houses
and a broad cross section of industry users. Revenue from the Company's Services
Division constituted 46%, 44% and 66% of the Company's overall revenue during
the 1997, 1996, and 1995 fiscal years, respectively
The CD-ROM duplication and production requirements of the Services Division's
customers include the ability: to produce large volumes of CD-ROM's; to
precisely copy the optical image ensuring that it can be read by the end user's
computer; to provide precise customized silk screen color printing capabilities;
to provide turnkey packaging services; and for customers that distribute
information on CD-ROM, the ability to duplicate data from a centralized
database.
The diskette duplication and production requirements of the Services Division's
customers include the ability: to produce high volumes of diskettes; to
precisely copy the magnetic image ensuring that it can be read by the end user's
computer; to label and collate diskettes; to handle the various sizes and
formats of diskettes currently in use; to provide turnkey packaging services;
and for customers that distribute information on diskettes or tape, the ability
to duplicate data from a centralized database.
In addition to the CD-R and diskette duplication services, magnetic tape and
magneto-optical disk duplication and production are also offered by Duplication
Technology. The tape duplication and production requirements of Duplication
Technology's customers include the ability to: produce high volumes of magnetic
tapes; precisely copy the magnetic image ensuring that it can be read by the end
user's computer; provide turnkey packaging services; and support virtually all
magnetic tape formats. When major releases of software occur, there is a demand
for CD-ROM and diskette duplication and production services such as those
provided by the Services Division. The Services Division has the capability to
provide such services and to do so in a manner that satisfies the stringent
quality requirements imposed by ISO 9002 standards.
MARKETING AND DISTRIBUTION
The Company utilizes four principal means of distribution for its products: a
direct sales force, an international and domestic distributor network, a value
added reseller (VAR) network, and telesales.
The direct sales force focuses primarily on building and support of the
distribution channel; the distributor network sells to all size users; the VAR
network is used to distribute the new CD-R products within industry specific
environments; and telesales operations primarily sell entry level or low volume
systems in the United States. Two of the Company's direct sales force team
members focus primarily on the sales of services. The Company also utilizes its
existing channel relationships to obtain service sales.
The Company derived 0%, 6%, and 29% of its revenues from America Online during
1997, 1996, and 1995, respectively. The Company also derived 13%, 14%, and 18%
of its revenues from Banta Global Turnkey Group during 1997, 1996, and 1995,
respectively. The Company conducts foreign sales and services through its
subsidiary in Germany, Rimage Europe GmbH and, until February 1997, its
subsidiary in Singapore, Rimage (Singapore) PTE LTD. Foreign sales constituted
approximately 12% and 15% of the Company's revenue for the years ended December
31, 1997 and 1996, respectively. See Note 14 to the Company's Consolidated
Financial Statements included elsewhere herein for further information regarding
foreign operations.
COMPETITION
The Systems Division competes with a growing number of manufacturers of CD-R
production equipment and related products. Rimage is established as one of the
industry's leaders and is able to compete effectively in the sale of CD-R
production equipment on the basis of technological leadership in automated
solutions and its early start within the CD-R production equipment industry.
Rimage believes that the thermal quality printing capabilities for CD-R, its
transporter mechanisms and its software differentiate its products from those of
competitors.
The Systems Division competes with a limited number of manufacturers of diskette
duplication equipment and related products. The market consists of a few U.S.
and foreign manufacturers. This Division of smaller manufacturers sells to the
smaller volume duplicators and does not have the system capabilities of Rimage.
Rimage Systems Division competes in the sale of diskette duplication equipment
on the basis of its third generation automated solutions, and its high volume
duplicating/formatting systems.
Duplication Technology's tape duplication products are among the industry
leaders and enable its service bureau to compete effectively because of the
ability to handle the multitude of tape sizes and requirements.
The Services Division competes with a large number of service bureaus that
provide CD-ROM, CD-R and diskette duplication and production. In addition, many
hardware manufacturers, computer software publishers and software developers
have the capability to duplicate these media in high volumes internally.
However, the CD-ROM, CD-R and diskette duplication industry is highly
competitive and there is no single company or group of companies that is
dominant in the industry. The Company believes that the principal competitive
factors in providing duplication services are the volume and cost of media
produced, the quality of the media, and the ability to meet production
schedules.
The continued growth in sales of personal computers has resulted in a
corresponding demand for duplication services. CD-ROM usage continues to grow,
while diskette usage has slowed. Factors which affect the continued growth in
CD-ROM usage include: the continued increase in new and upgraded software
programs and the increased capabilities of computer hardware, along with utility
programs to support both; the continued increase in games used on personal
computers; and the increased usage of personal computers as they become more
affordable. Factors which limit CD-ROM usage include: the increased use of work
stations and networks whereby each microcomputer can access a file server or
central controller for software and data; the increased availability of software
through the internet; and the practice of software loading on the hard drives by
the microcomputer manufacturers. Additional factors which limit diskette usage
include: the increased usage of higher capacity alternative storage media such
as CD-ROM, optical cartridges, "flopticals" (which combine magnetic and optical
tracks), magnetic tape and direct telecommunications. CD-ROM drives and floppy
disk drives remain an industry standard as virtually every personal computer
that is sold includes both types of drives.
MANUFACTURING
The Systems Division's manufacturing operations consist primarily of the
assembly of products from components purchased from third parties. Some parts
are stock "off-the-shelf" components and others are manufactured to the
Company's specifications. Final assembly operations are conducted by the
Company's employees at its facilities in Edina, Minnesota and Boulder, Colorado.
Components include CD-R, diskette and tape drives, circuit boards, electric
motors, and machined and molded parts.
Although the Company believes it has identified alternative assembly contractors
for most of its subassemblies, an actual change in such contractors would likely
require a period of training and test. Accordingly, an interruption in a supply
relationship or the production capacity of one or more of such contractors could
result in the Company's inability to deliver one or more products for a period
of several months.
RESEARCH AND DEVELOPMENT
There are 15 people involved in research and development at the Company's
various locations. This staff, with software, electronic, mechanical and
drafting capabilities engages in research and development of new products, and
development of enhancements to existing products.
The microcomputer industry served by the Company is subject to rapid
technological changes. Alternate data storage media exist or are under
development, including high capacity hard drives, new diskette technologies,
file servers accessible through computer networks, and the Internet. All these
forces may affect the usage of CD-ROM, CD-R and diskette media. The Company
believes that it must continue to innovate and anticipate advances in the
storage media industry in order to remain competitive.
The Company's expenditures for engineering and development were approximately
$1,900,000, $2,700,000, and $3,400,000 in 1997, 1996 and 1995 (or 4.9%, 6.4%,
and 6.6% of consolidated revenues), respectively. The Company intends to
increase its level of investment in research and development to match the
percentages in 1996 and 1995.
PATENTS AND GOVERNMENT REGULATION
The Company is the owner of ten patents, has three patents pending and has
license rights to another six patents. In addition, the Company protects the
proprietary nature of its software primarily through copyright and license
agreements, and also through close integration with its hardware offerings. It
is the Company's policy to protect the proprietary nature of its new product
developments whenever they are likely to become significant sources of revenue.
No guarantee can be given that the Company will be able to obtain patent or
other protection for other products.
As the number of its products increases and the functionality of those products
expands, the Company believes that it may become increasingly subject to
attempts by others to duplicate its proprietary technology and to infringement
claims. The Company recently commenced litigation against a small manufacturer
that it believes has duplicated its new CD-R product. In addition, although the
Company does not
believe that any of its products infringe the rights of others, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertion will not require
the Company to enter into a royalty arrangement or result in litigation.
Some of the Company's equipment is required by the FCC to meet radio frequency
emission standards. The Company has the necessary certification.
EMPLOYEES
At December 31, 1997, the Company had 172 full-time employees, of whom 15 were
involved in research and development, 99 in manufacturing, assembly, testing and
customer service, and 58 in sales, administration and management. None of the
Company's employees are represented by a labor union or are covered by a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company headquarters and the Systems Division are located in a leased
facility of 29,000 square feet at 7725 Washington Avenue South, Edina, Minnesota
55439. In August 1992, the Company entered into a fifteen year capital lease for
this facility, which is owned by a related party (see note 11 to the
consolidated financial statements). Rent is $5.50 per square foot per year, plus
taxes and common area charges of $2.66 per square foot per year.
The Systems Division also leases facilities in Frankfurt, Germany and Boulder,
Colorado. These various facilities are used for manufacturing, engineering,
service and sales. The Services Division is headquartered in a leased facility
of 28,440 square feet at 9701 Penn Avenue South, Bloomington, Minnesota 55431.
In August 1992, the Services Division (formally Dunhill) entered into a fifteen
year capital lease for this facility, which is owned by a related party (see
note 11 to the consolidated financial statements). The lease provides for rent
at the rate of $3.29 per square foot per year, plus taxes and common area
charges which currently are approximately $1.90 per square foot per year. The
Services Division also leases facilities in Plover, Wisconsin; Provo, Utah and
Boulder, Colorado at which it provides duplication services.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that may have a material adverse
effect on the Company, its business or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
last quarter of the fiscal year covered by this report.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "RIMG". The following table sets forth, for the periods indicated, the
range of low and high prices for the Company's common stock as reported on the
NASDAQ System.
Low High
--- ----
Calendar Year 1996:
1st Quarter................ $4.500 $8.000
2nd Quarter............... 5.000 10.250
3rd Quarter............... 4.500 7.500
4th Quarter............... 2.750 5.750
Calendar Year 1997:
1st Quarter................ 2.500 3.500
2nd Quarter............... 2.375 4.125
3rd Quarter............... 2.625 6.000
4th Quarter............... 5.625 8.250
SHAREHOLDERS
At March 25, 1998, there were 62 record holders of the Company's common stock,
and management believes that there are approximately 1,100 beneficial holders of
the Company's common stock.
DIVIDENDS
The Company has never paid or declared any cash dividends on its common stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company presently expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's continued
earnings, financial condition, capital requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below and the Consolidated Financial Statements and the
Notes thereto included in Item 8 below. Amounts are shown in 1000's (except per
share data).
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Year ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $38,878 $41,782 $51,490 $40,694 $27,090
Cost of Revenues 27,559 32,420 38,836 28,156 17,169
Gross Profit 11,319 9,362 12,654 12,538 9,921
Operating Expenses 8,480 13,139 14,298 11,253 7,899
Operating Earnings (Loss) 2,839 (3,777) (1,644) 1,285 2,022
Other Expense, Net 794 651 660 384 225
Income tax Expense (Benefit) 120 751 (1,052) 360 681
Net Earnings (Loss) 1,925 (5,179) (1,252) 541 1,116
Diluted net Earnings (Loss) Per Share $.59 ($1.68) $(.41) $.18 $.39
Weighted Average Shares and Share
Equivalents Outstanding 3,277 3,075 3,050 3,043 2,826
CONSOLIDATED BALANCE SHEET INFORMATION:
Balances as of December 31
--------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Trade Accounts Receivables, Net $4,778 $5,071 $9,493 $5,791 $4,749
Inventories 2,266 4,028 4,690 5,833 4,937
Current Assets 8,196 10,545 16,451 13,960 12,461
Property and Equipment, Net 5,847 7,814 4,884 4,333 4,136
Total Assets 15,164 20,010 23,784 21,568 18,336
Current Liabilities 5,756 12,836 12,643 7,762 6,169
Long-Term Liabilities 3,411 3,032 1,881 2,522 2,261
Stockholders' Equity 5,938 4,084 9,202 11,227 9,906
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Rimage has two primary divisions: 1) The Systems Division designs, manufactures
and sells high performance, on-demand publishing and duplication systems for
CD-R's and diskettes and 2) The Service Division provides media duplication and
fulfillment services for most computer media types, including CD-ROM, diskette,
tape and other media such as Zip and Jazz disks. The Company's consolidated
revenues decreased by 7.0% and 18.9% from 1996 to 1997 and from 1995 to 1996,
respectively. The Company's consolidated net earnings (loss) were $1,925,000,
$(5,179,000), and $(1,383,000) in 1997, 1996, and 1995, respectively.
SYSTEMS DIVISION--1997 COMPARED TO 1996
The Systems Division's revenues (which include equipment sold from Rimage
Systems - Minneapolis, Rimage Europe, Duplication Technology, Rimage Asia,
Rimage Optical Systems, and Knowledge Access International) decreased by
$2,226,000 or 9.6% from 1996 to 1997. This decrease was primarily due to a
significant decrease in non-core business revenues of $5,508,000 after the
shut-downs of certain non-core business operations (Rimage Asia, Rimage Optical
Systems, and Knowledge Access International) in December 1996 and early 1997,
offset by significant increases in core business system revenues of $3,282,000.
The increase in core buisness revenues was primarily due to an increase in CD-R
equipment sales and related peripheral products.
Gross profit as a percentage of revenues was 45.5% and 32.0% during 1997 and
1996, respectively. This increase was due to the increased sales of higher
margin CD-R products and the discontinuation of lower margin products as a
result of the shut-down of non-core business operations.
Operating expenses (excluding severance and exit expenses of $0 in 1997 and
$968,000 in 1996, described in the next paragraph) as a percent of revenues were
28.2% and 39.6% during 1997 and 1996, respectively. The decrease in the percent
of operating expenses to revenues from 1996 to 1997 was primarily a result of
work force changes and, during the early part of 1997, the shut-down of certain
non-core business operations and facilities that were maintaining higher
operating expense to sales revenue ratios.
The Company discontinued the operations of its Asian and Knowledge Access
International subsidiaries and its Televaulting division during 1997, pursuant
to decisions made by the Company during the fourth quarters of 1996 and 1995.
Also, during 1996, the Company concluded the remaining capitalized licensing
fees paid for the rights to sell CD-ROM optical disc stamping presses and other
capitalized development costs that no longer had any value. The 1996 charges
associated with these shut-downs and license fee and capitalized development
cost write-offs were $947,000.
The operating earnings (loss) were $3,638,000 and $(2,732,000) during 1997 and
1996, respectively. This improvement was due to the aforementioned sales mix and
decreases in operating expenses.
SYSTEMS DIVISION--1996 COMPARED TO 1995
The Systems Division's revenues increased by $5,878,000 or 33.9% from 1995 to
1996. This increase is due to a net of the following: incremental revenues from
Rimage Optical Systems, a division created in 1996 for the resale of large
CD-ROM optical disc stamping presses; a significant increase in revenues from
the sale of CD-R duplication equipment and related peripheral products; and a
significant decrease in revenues from the sale of diskette and tape duplication
equipment and related peripheral products.
Gross profit, as a percentage of revenues, was 32.0% and 37.7% during 1996 and
1995, respectively. This decrease was due to a net of significantly lower
margins from the incremental CD-ROM optical disc stamping press and an increase
in margins from the sale of CD-R duplication products and related peripherals.
Operating expenses (excluding severance and exit expenses of $968,000 in 1996
and $1,661,000 in 1995, which are described in the next paragraph) as a percent
of revenues during 1996 and 1995 were 39.6% and 55.5%, respectively. The
decrease is attributable to a net of the following factors: engineering and
development costs decreased by approximately $700,000 from 1995 to 1996,
directly related to the 1995 shut down of ALF Products; selling and marketing
expenses maintained approximately the same level from 1995 to 1996, as decreased
sales and
marketing expenses at Knowledge Access were offset by incremental sales and
marketing expenses related to the sale of CD-ROM optical disc stamping presses;
and, general and administrative expenses increased by $275,000 from 1995 to
1996, as decreased general and administrative expenses at Knowledge Access and
Rimage Systems were offset by significant incremental general and administrative
expenses related to the sale of CD-ROM optical disc stamping presses.
During the fourth quarter of 1996, the Company made the decision to close its
Asian and KAI subsidiaries and to sell its Televaulting division. The Company
has also concluded that the remaining capitalized licensing fees paid for the
rights to sell CD-ROM optical disc stamping presses and other capitalized
development costs no longer had any value. The 1996 charges associated with
these shut downs and license fee and capitalized development cost write-offs
were $947,000. This compares to 1995 total severance and exit expenses totaling
$1,661,000 related to the Company's decision to close its Knowledge Access
subsidiary and its ALF Products division.
The operating losses were $2,732,000 and $4,749,000 during 1996 and 1995,
respectively. This improvement was due to a combination of the factors discussed
above.
SERVICES DIVISION--1997 COMPARED TO 1996
The Services Division's revenues (which include the revenues of the Rimage
Services Division, formerly "Dunhill," as well as the service business of
Duplication Technology) decreased by $678,000 or 3.7% from 1996 to 1997. This
decrease was primarily due to the loss of one customer during 1996 which
provided 14.2% of the Services Division's 1996 revenues offset by incremental
revenues from CD-ROM duplication.
Gross profit as a percentage of revenues was 9.9% and 10.3% during 1997 and
1996, respectively. The primary reasons for this slight decrease consisted of
increased depreciation in 1997 due to the Company's purchase of two CD-ROM lines
in the latter half of 1996 coupled with lower sales revenues in 1997 offset by
personnel and operation changes made during mid-year 1997 to improve those
margins.
Operating expenses as a percent of revenues were 14.3% and 16.0% during 1997 and
1996, respectively. The decrease in the percent of operating expenses to
revenues from 1996 to 1997 was primarily a result of work force changes made in
December 1996.
Operating losses were $799,000 and $1,045,000 during 1997 and 1996,
respectively. This decrease in net loss resulted from the aforementioned work
force changes offset by increased depreciation expnese and slightly lower sales.
SERVICES DIVISION--1996 COMPARED TO 1995
The Services Division's revenues decreased by $15,586,000 or 45.7% from 1995 to
1996. This decrease resulted primarily from the loss of America Online which
provided 44.3% and 14.2% of the Services Division's 1995 and 1996 revenues,
respectively, and a decrease in sales to Banta Global Turnkey Group of
approximately $3,400,000 from 1995 levels.
Gross profit, as a percentage of revenues, was 10.3% and 17.9% during 1996 and
1995, respectively. The primary causes of this decline consisted of
significantly decreased production volumes combined with only a slight decrease
in fixed costs and CD-ROM stamping press installation and start-up costs
incurred during the fourth quarter of 1996.
Operating expenses decreased by $48,000 from 1995 to 1996, but increased as a
percentage of revenues from 8.8% in 1995 to 16.0% in 1996. This increased
percentage was the result of Services Division's lower revenues with relatively
stable fixed operating costs.
Operating (loss) earnings were $(1,045,000) and $3,104,000 during 1996 and 1995,
respectively. The sharp decline resulted from the aforementioned reduced
revenues combined with relatively stable manufacturing and operating expenses
and CD-ROM stamping press installation and start-up costs incurred during the
fourth quarter of 1996.
CONSOLIDATED RESULTS--1997 COMPARED TO 1996
Revenues decreased $2,904,000 or 7.0% from 1996 to 1997. This decrease was
primarily due to a significant decrease in non-core Systems Division revenues
after the shut-downs of certain non-core business operations in December 1996
and early 1997, offset by significant increases in core Systems Division
revenues. The increase in core Systems Division revenues was primarily due to an
increase in CD-R equipment sales and related peripheral products.
Gross profit as a percentage of revenues was 29.1% and 22.4% during 1997 and
1996, respectively. The increase was primarily due to the increased sales of
higher margin CD-R
products and the discontinuation of lower margin products as a result of the
shut-down of non-core Systems Division operations.
Operating expenses as a percent of revenues were 21.8% and 31.4% during 1997 and
1996, respectively. This decrease was primarily due to no 1997 severance and
exit costs, work force changes and, during the early part of 1997, the shut-down
of certain non-core Systems Division operations and facilities that were
maintaining higher operating expense to sales revenue ratios.
Interest expense was $829,000 and $679,000 during 1997 and 1996, respectively.
The increase was due to increased credit line usage in 1997 for working capital
purposes.
Income tax expense was $120,000 and $751,000 in 1997 and 1996, respectively. The
1997 tax expense amount represents alternative minimum taxes. The 1996 tax
expense was a result of a deferred tax asset write-down of $751,000.
Net earnings (loss) was $1,925,000 and $(5,179,000) in 1997 and 1996,
respectively. Diluted net earnings (loss) per share was $0.59 and $(1.68) in
1997 and 1996, respectively. The decrease in loss is attributable to the
elimination of non-core Systems Division operations, an increase in CD-R
equipment sales and related peripheral products, and lower tax expense in 1997
compared to 1996.
CONSOLIDATED RESULTS--1996 COMPARED TO 1995
Revenues decreased $9,708,000 or 18.9% from 1995 to 1996. This decrease was a
result of the decline in the Services Division's revenues and was partially
offset by increases in the Systems Division's revenues that resulted from higher
demand for newly developed CD-R equipment and the resale of CD-ROM stamping
presses.
Gross profit as a percentage of revenues was 22.4% and 24.6% during 1996 and
1995, respectively. The decrease was due to a net of lower margin sales of the
incremental CD-ROM optical disc stamping press sales revenues with the increased
sales of higher margin systems sales such as CD-R duplication products and
related peripherals.
Operating expenses as a percent of revenues were 31.4% and 27.8% during 1996 and
1995, respectively. While Systems Division's operating expenses as a percent of
revenues decreased from 1995 to 1996, the Services Division more than offset
this due to significantly reduced revenues with relatively stable fixed
operating costs.
Interest expense was $679,000 and $588,000 during 1996 and 1995, respectively.
The increase was due to increased credit line usage in 1996 for capital
expenditure and working capital purposes.
Income tax expense (benefit) was $751,000 and $(921,000) in 1996 and 1995,
respectively. The 1996 tax expense was the direct result of a deferred tax asset
write-down of $751,000. Prior to the merger on September 30, 1995, Dunhill
Software was a Subchapter-S Corporation and was not subject to federal income
taxes.
Net loss was $5,179,000 and $1,383,000 in 1996 and 1995, respectively. Diluted
net loss per share was $1.68 and $.45 in 1996 and 1995, respectively. The
increase in loss is attributable to: the significant change in Services Division
operating earnings (loss) from 1995 to 1996 of $3,104,000 profit to $(1,045,000)
loss, respectively; a deferred tax asset write-down of $751,000; and, an offset
by decreased Systems Division losses from 1995 to 1996 of $4,749,000 to
$2,732,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5,244,000 and $1,395,000 during
1997 and 1996, respectively. The increase in cash flow from operating activities
in 1996 to 1997 was greatly impacted by the discontinuance of cash intensive
non-core businesses and increased sales of higher margin CD-R products.
The cash used in investing activities was $6,000 and $(2,702,000) during 1997
and 1996, respectively. Fixed assets of $2,941,000 were purchased during 1996,
primarily for the installation of two CD-ROM optical disc stamping presses and
for the purchase of a new operating system for the Services Division.
At December 31, 1997 the Company had no significant commitments to purchase
additional capital equipment.
The Company's working capital (deficit) was $2,440,000 and $(2,291,000) at
December 31, 1997 and 1996, respectively. This change in working capital was
significantly affected by the operating and investing activities discussed
above. The net cash (used in) provided by financing activities was $(4,662,000)
and $1,208,000 for 1997 and 1996, respectively. The Company was able to reduce
the outstanding borrowings on its line of credit to $0 as a result of improved
operations during 1997.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
The Company's internal computer systems and applications, those it is selling or
has sold in the past as well as those of third parties with whom the Company
does business will be affected when the year changes to 2000, commonly known as
the "Y2K" problem. The Company is currently conducting an internal study to
determine the full scope and related costs of modifying its products to ensure
proper processing of transactions into and beyond the year 2000. The Company
expects that it will begin to incur costs in 1998 to address the year 2000
issues identified during the internal study. The Company is unable to, at this
time, estimate the costs that will be incurred in connection with these
modifications. The Company anticipates completion of the project's assessment
phase within the next six months and completion of necessary modifications to
its systems and applications by March 31, 1999.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report and in the Company's press releases and
oral statements made by or with the approval of the Company's executive officers
constitute or will constitute "forward looking statements". All forward looking
statements involve risks and uncertainties, and actual results may be materially
different. The following factors are among those that could cause the Company's
actual results to differ materially from those set forth in such forward looking
statements. The Company's ability to succesfully identify and incorporate new
technologies into new and enhanced products and to develop and maintain
compatibility and interoperability with the products of others, as well as new
product introductions by competitors and the continuing availability of
intellectual property licenses on commercially available terms, may impact the
Company's ability to increase demand for its products. The success of the
Company's sales force to provide for broader account coverage through channel
partners, better utilization of existing resources and to control selling
expense may be impacted by the expertise and commitment of the affected
personnel, market acceptance of new and existing products and competitive market
conditions. The unanticipated need to enhance or modify products due to changing
market requirements, the success of current product programs, the need to meet
unanticipated product opportunities and the amount of total revenue in 1998 may
affect whether research and development expenditures will increase to the levels
experienced in 1996 and 1995 (approximately 7% of total revenues). The Company's
ability to generate revenue as presently expected, unexpected expenses and the
need for additional funds to react to changes in the marketplace, including
unexpected increases in personnel and product development expenses, may affect
whether the Company has sufficient cash resources to fund its operating plans
and capital requirements through at least 1998.
Other factors that could cause the results of the Company to differ materially
from those contained in any such forward looking statments include general
economic conditions, costs and availability of components and fluctuations in
exchange rates. In addition, the markets for the Company's products are
characterized by significant competition, and the Company's results may be
adversely affected by the actions of existing and future competitors, including
the development of new technologies, the introduction of new products and the
reduction of prices by such competitors to gain or retain market share. The
Company assumes no obligation to publicly release the results of any revision or
updates to these forward looking statements to reflect future events or
unanticipated occurrences.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page in
1997 Annual
Report to
Shareholders
------------
Independent Auditors' Report ............................. 14
Consolidated Balance Sheets, as of
December 31, 1997 and 1996 ............................... 15-16
Consolidated Statements of Operations,
for the years ended December 31, 1997,
1996 and 1995 ............................................ 17
Consolidated Statements of
Stockholders' Equity, for the years
ended December 31, 1997, 1996 and
1995 ..................................................... 18
Consolidated Statements of Cash Flow,
for the years ended December 31, 1997,
1996 and 1995 ........................................... 19-20
Notes to Consolidated Financial
Statements ............................................... 21-38
REPORT OF MANAGEMENT
The accompanying consolidated financial statements, including the notes thereto,
and other financial information presented in this Annual Report were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon our best estimates
and judgments.
Rimage Corporation maintains an effective system of internal accounting control.
We believe this system provides reasonable assurance that transactions are
executed in accordance with management authorization and are appropriately
recorded in order to permit preparation of financial statements in conformity
with generally accepted accounting principles and to adequately safeguard,
verify, and maintain accountability of assets. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
control should not exceed the benefits derived.
KPMG Peat Marwick LLP, independent certified public accountants, is retained to
audit the Company's financial statements. Their accompanying report is based on
an audit conducted in accordance with generally accepted auditing standards. The
audit includes a review of the internal accounting control structure to gain a
basic understanding of the accounting system in order to design an effective and
efficient audit approach and not for the purpose of providing assurance on the
system of internal control.
The Audit Committee of the Board of Directors is composed of two outside
directors, and is responsible for recommending the independent accounting firm
to be retained for the coming year, subject to shareholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.
/s/ Bernard P. Aldrich
Bernard P. Aldrich
President and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rimage Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rimage Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 6, 1998
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
- -------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 656,127 117,322
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $505,458 and $1,084,910,
respectively 4,778,055 5,070,738
Inventories (note 4) 2,265,867 4,027,553
Income tax receivable 23,350 818,790
Prepaid expenses and other current assets 378,306 293,037
Current installments of investment in sales-type
leases (note 5) 94,422 217,952
- -------------------------------------------------------------------------------------------------
Total current assets 8,196,127 10,545,392
- -------------------------------------------------------------------------------------------------
Property and equipment:
Building and leasehold improvements (note 11) 2,505,577 2,496,499
Manufacturing equipment (note 11) 8,574,347 8,348,627
Development equipment 758,888 694,673
Office furniture and equipment 1,971,155 2,233,349
Vehicle 0 22,699
- -------------------------------------------------------------------------------------------------
13,809,967 13,795,847
Less accumulated depreciation and amortization 7,963,014 5,981,417
- -------------------------------------------------------------------------------------------------
Net property and equipment 5,846,953 7,814,430
Investment in sales-type leases, net of current installments
(note 5) 12,013 182,332
Goodwill 848,692 929,407
Other noncurrent assets 259,727 537,944
- -------------------------------------------------------------------------------------------------
Total assets $ 15,163,512 20,009,505
=================================================================================================
See accompanying notes to consolidated financial statements.
Liabilities and Stockholders' Equity 1997 1996
- ----------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of notes payable (note 6) $ 900,000 6,029,598
Current installments of capital lease obligations (note 11) 356,053 311,343
Trade accounts payable 2,789,973 4,295,400
Accrued expenses (note 7) 1,069,315 1,770,023
Deferred income and customer deposits 640,725 429,822
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 5,756,066 12,836,186
Notes payable, less current portion (note 6) 750,000 0
Capital lease obligations, less current installments (note 11) 2,661,334 3,031,759
- ----------------------------------------------------------------------------------------------------------
Total liabilities 9,167,400 15,867,945
- ----------------------------------------------------------------------------------------------------------
Minority interest in inactive subsidiary 57,907 57,907
Stockholders' equity (note 9):
Common stock, $.01 par value, authorized 10,000,000 shares,
issued and outstanding 3,091,302 and 3,084,500, respectively 30,913 30,845
Additional paid-in capital 10,468,136 10,447,798
Accumulated deficit (4,405,218) (6,330,291)
Foreign currency translation adjustment (155,626) (64,699)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,938,205 4,083,653
Commitments and contingencies (notes 11 and 17)
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,163,512 20,009,505
==========================================================================================================
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Revenues $ 38,878,439 41,782,122 51,490,397
Cost of revenues 27,559,498 32,419,822 38,835,635
- ------------------------------------------------------------------------------------------------
Gross profit 11,318,941 9,362,300 12,654,762
- ------------------------------------------------------------------------------------------------
Operating expenses:
Engineering and development 1,904,490 2,693,390 3,399,130
Selling, general, and administrative
(note 16) 6,575,558 10,446,173 10,899,780
- ------------------------------------------------------------------------------------------------
Total operating expenses 8,480,048 13,139,563 14,298,910
- ------------------------------------------------------------------------------------------------
Operating earnings (loss) 2,838,893 (3,777,263) (1,644,148)
- ------------------------------------------------------------------------------------------------
Other (expense) income:
Interest expense (829,490) (678,805) (588,424)
Gain on currency exchange 58,294 38,749 63,965
Merger expense 0 0 (230,504)
Other, net (note 12) (22,481) (10,467) 95,450
- ------------------------------------------------------------------------------------------------
Total other expense, net (793,677) (650,523) (659,513)
- ------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 2,045,216 (4,427,786) (2,303,661)
Income taxes (note 8) 120,143 751,225 (1,052,000)
- ------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,925,073 (5,179,011) (1,251,661)
================================================================================================
Basic net earnings (loss) per common
share $ 0.62 (1.68) (0.41)
================================================================================================
Diluted net earnings (loss) per common
share and common share equivalents $ 0.59 (1.68) (0.41)
- ------------------------------------------------------------------------------------------------
Basic weighted average shares 3,086,292 3,074,837 3,050,140
================================================================================================
Diluted weighted average shares and
share equivalents outstanding 3,276,539 3,074,837 3,050,140
================================================================================================
See accompanying notes to consolidated financial statements.
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
Retained Foreign
Common Stock Additional Earnings currency
--------------------- paid-in (accumulated translation
Shares Amount capital Deficit) adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,050,000 $ 30,500 7,703,314 3,501,560 (8,446) 11,226,928
Registration fees from 1993 secondary offering 0 0 (18,400) 0 0 (18,400)
Cash dividends related to S-Corporation
earnings 0 0 0 (789,200) 0 (789,200)
Reclassification of S-Corporation accumulated
deficit to additional paid-in capital (note 9) 0 0 2,611,979 (2,611,979) 0 0
Foreign currency translation 0 0 0 0 29,698 29,698
Stock issued in stock option exercise 1,000 10 4,990 0 0 5,000
Net loss 0 0 0 (1,251,661) 0 (1,251,661)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,051,000 30,510 10,301,883 (1,151,280) 21,252 9,202,365
Foreign currency translation 0 0 0 0 (85,951) (85,951)
Stock issued in stock option exercise 33,500 335 145,915 0 0 146,250
Net loss 0 0 0 (5,179,011) 0 (5,179,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,084,500 30,845 10,447,798 (6,330,291) (64,699) 4,083,653
Foreign currency translation 0 0 0 0 (90,927) (90,927)
Stock issued in stock option exercise 6,802 68 20,338 0 0 20,406
Net earnings 0 0 0 1,925,073 0 1,925,073
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,091,302 $ 30,913 10,468,136 (4,405,218) (155,626) 5,938,205
===================================================================================================================================
See accompanying notes to consolidated financial statements.
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 1,925,073 (5,179,011) (1,251,661)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,466,519 1,982,839 1,644,802
Goodwill and other asset impairments 81,636 446,700 1,366,134
Change in reserve for excess and obsolete
inventories (142,000) (145,000) 355,500
Change in reserve for doubtful accounts (579,452) 440,334 430,641
Loss (gain) on sale of property and
equipment 1,089 111,624 (3,219)
Change in deferred taxes 0 1,065,000 (655,000)
Decrease in investment in sales-type leases 0 (176,588) (419,494)
Changes in operating assets and liabilities:
Trade accounts receivable 872,135 3,982,070 (4,133,139)
Inventories 1,903,686 807,773 787,136
Prepaid expenses and other current
assets (85,269) 37,938 (56,346)
Income tax receivable 795,440 (568,778) (100,031)
Trade accounts payable (1,505,427) (1,466,342) 2,048,812
Accrued expenses (700,708) 392,671 (77,035)
Deferred income and customer deposits 210,903 (335,955) 174,388
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 5,243,625 1,395,275 111,488
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (381,373) (2,941,123) (1,953,899)
Payment of Duplication Technology's earn-out 0 0 (103,428)
Proceeds from the sale of property and equipment 15,427 84,633 53,637
Other noncurrent assets 66,360 (188,738) (738,572)
Receipts from sales-type leases 293,849 343,612 403,324
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (5,737) (2,701,616) (2,338,938)
- --------------------------------------------------------------------------------------------------------------------
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock option exercise $ 20,406 146,250 5,000
Principal payments on capital lease obligations (325,715) (97,922) (23,053)
Net change in line of credit at bank (3,446,296) 144,407 2,525,000
Proceeds from other notes payable 1,650,000 2,816,702 1,500,000
Repayment of other notes payable (2,560,191) (1,801,324) (2,038,435)
Payment of registration fees 0 0 (18,400)
Subchapter-S dividends paid 0 0 (789,200)
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (4,661,796) 1,208,113 1,160,912
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (37,287) (14,464) 12,758
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 538,805 (112,692) (1,053,780)
Cash and cash equivalents, beginning of year 117,322 230,014 1,283,794
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 656,127 117,322 230,014
===================================================================================================================
Supplemental disclosures of cash paid during the period for:
Interest $ 842,950 697,296 594,539
Income taxes 23,350 172,992 63,200
Noncash investing and financing activities:
In September 1996, Rimage purchased manufacturing equipment and incurred
a capital lease obligation for $1,822,770.
On September 29, 1995, Rimage issued 1,100,000 shares of its common stock
in connection with the merger with Dunhill Software Services, Inc. On
September 8, 1994, Rimage issued 50,000 shares of its common stock in
connection with the acquisition of Knowledge Access.
See accompanying notes to consolidated financial statements.
RIMAGE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Nature of Business and Summary of Significant Accounting Policies
Basis of Presentation and Nature of Business
The consolidated financial statements include the accounts of Rimage
Corporation, Rimage Europe GmbH, A/G Systems Inc., d/b/a Duplication
Technology Inc. (Duplication Technology), Knowledge Access
International (Knowledge Access) and ALF Products Inc. d/b/a ALF/Rimage
(ALF Products); and operations of Rimage Services Division (formerly
Dunhill Software Services which merged with Rimage in 1995 using
pooling-of-interest accounting) collectively hereinafter referred to as
Rimage or the Company. All material intercompany accounts and
transactions have been eliminated upon consolidation.
During March 1997, the Company completed the shutdown of its Knowledge
Access Subsidiary. The Company also completed shutdowns of its Asia
facility and Televaulting division in February and June 1997,
respectively. See Note 16.
Effective September 29, 1995, Rimage Corporation and Dunhill Software
Services Inc. (Dunhill) completed a merger. Dunhill had been a
significant customer of Rimage. For financial reporting purposes, the
merger has been recorded using the pooling-of-interests method of
accounting under generally accepted accounting principles. Accordingly,
the historical consolidated financial statements of Rimage presented
for 1995 have been restated to include the historical accounts and
results of operations of Dunhill as if the merger had been consummated
as of January 1, 1995.
In connection with this merger, the Company now operates in two segments,
Rimage Systems Division and Rimage Services Division. The Rimage
Systems Division consists of substantially all of the former Rimage
companies. The Rimage Services Division consists of the former Dunhill
operation in addition to the existing service business at Duplication
Technology.
The Systems Division develops, manufactures and distributes high
performance CD-Recordable (CD-R) publishing and duplication systems,
and continues to support its long term involvement in diskette
duplication and publishing equipment. The Services Division provides
computer media duplication and production services to software
developers and manufacturers and information publishers.
(Contiuned)
RIMAGE CORPORATION AND SUBSIDIARIES
The Company extends unsecured credit to its customers, substantially all
of whom are computer hardware, software and service companies, software
developers and manufacturers or information publishers.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment on all equipment and service
orders. The Company provides maintenance services under long-term
maintenance contracts. Revenue associated with these contracts is
deferred and recognized on a straight-line basis over the terms of the
respective contracts. Income from sales-type leases is recognized by a
method which produces a constant periodic rate of return on the
underlying investment.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
All short-term investments with original maturities of three months or
less at date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a
straight-line basis over periods of two to seven years. Leasehold
improvements are amortized using the straight-line method over the
terms of the respective leases. Repairs and maintenance costs are
charged to operations as incurred.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR STOCKS
ISSUED TO EMPLOYEES. Accordingly, no compensation expense had been
recognized for its stock-based compensation plans. The Company has
adopted the disclosure requirements under Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING AND DISCLOSURE OF
STOCK-BASED COMPENSATION.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
capitalization of software development costs begins upon the
establishment of technological feasibility of the product. The
establishment of technological feasibility and the ongoing assessment
of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated
economic life, and changes in software and hardware technology.
The Company capitalizes software development costs between the date when
project technological feasibility is established (beta stage) and the
date when the product is ready for normal production release. Research
and development costs related to software development are expensed as
incurred. Software development costs are amortized over the estimated
economic life of the product which ranges from two to five years.
Amortization expense is included in cost of goods sold. Included in
other noncurrent assets are capitalized software costs as of December
31, 1997 and 1996 of $367,836 and $503,676, respectively. Accumulated
amortization at December 31, 1997 and 1996 was $204,069 and $188,745,
respectively.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated in accordance with SFAS No.
128 "Earnings Per Share". Basic earnings per share is calculated as
income (loss) available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing income (loss) available to
common stockholders by the weighted average number of dilutive common
share equivalents outstanding during each period. Common stock
equivalents result from dilutive stock options and warrants computed
using the treasury stock method. See Note 10.
TRANSLATION OF FINANCIAL STATEMENTS IN FOREIGN CURRENCIES
The assets and liabilities for the Company's international subsidiaries
and branches are translated into U.S. dollars using current exchange
rates. The resulting translation adjustments are recorded in the
foreign currency translation adjustment account in equity. Statement of
operations items are translated at average exchange rates prevailing
during the period. Foreign currency transaction gains or losses are
included in net earnings (loss).
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and is amortized on a straight-line basis over
15 years. Goodwill balances are reviewed periodically to determine that
the unamortized balances are recoverable. In evaluating the
recoverability, the following factors, among others, are considered: a
significant change in the factors used to determine the amortization
period, an adverse change in legal factors or in the business climate,
a transition to a new product or services strategy, a significant
change in the customer base, and/or a realization of failed marketing
efforts. If the unamortized balance is believed to be unrecoverable,
the Company recognizes an impairment charge necessary to reduce the
unamortized balance to the present value of cash flows expected to be
generated over the remaining life. The amount of impairment is charged
to earnings as a part of general and administrative expenses in the
current period.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments.
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Trade accounts receivables, sales type leases, accounts payable, and notes
payable: The carrying amount approximates fair value because of the
short maturity of those instruments.
Long-term debt: The carrying amount approximates fair value based on their
effective interest rates compared to current market rates.
(3) ACQUISITIONS
On September 29, 1995, and pursuant to the Agreement and Plan of
Reorganization (the Merger Agreement) dated June 6, 1995 by and between
Rimage Corporation and Dunhill, Rimage issued 1,100,000 shares of stock
to the former Dunhill shareholders and Dunhill was merged into Rimage.
This merger has been recorded using the pooling-of-interests method of
accounting. Accordingly, the 1995 consolidated financial statements of
Rimage have been restated to include the historical accounts and
results of operations of Dunhill for the year presented.
(4) INVENTORIES
Inventories consist of the following as of December 31:
1997 1996
- -------------------------------------------------------------------
Finished goods and demonstration
equipment $ 803,689 1,026,303
Work-in-process 234,177 527,378
Purchased parts and subassemblies 1,676,001 3,063,872
- -------------------------------------------------------------------
2,713,867 4,617,553
Less reserve for excess
inventories 448,000 590,000
- -------------------------------------------------------------------
$ 2,265,867 4,027,553
===================================================================
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(5) INVESTMENT IN SALES-TYPE LEASES
The Company sells some of its products under sales-type lease agreements.
All outstanding lease agreements expire by 1999. The net investment in
sales-type leases consists of the following as of December 31:
1997 1996
- -------------------------------------------------------------------
Total minimum lease payments
receivable $ 114,185 454,471
Less unearned income 7,750 54,187
- -------------------------------------------------------------------
Net investment in
sales-type leases 106,435 400,284
Less current installments 94,422 217,952
- -------------------------------------------------------------------
Investment in sales-type leases,
less current installments $ 12,013 182,332
===================================================================
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(6) NOTE PAYABLE TO BANK
On December 31, 1997, the Company entered into a term note agreement (the
Credit Agreement) with a bank. Borrowings under the Credit Agreement
are secured by substantially all Company assets and accrue interest at
LIBOR plus two and one-half percent (interest rate at December 31, 1997
was 8.22%). Principal amounts are payable in monthly installments of
$75,000 through September 30, 1999. Any remaining unpaid principal
and/or interest is due October 31, 1999. The outstanding amount as of
December 31, 1997 was $1,650,000.
Also available to the Company under the Credit Agreement are advances
under a revolving loan based on various percentages of qualified asset
(primarily accounts receivable and inventory) amounts, up to a maximum
advance of $5,000,000. There were no outstanding borrowings under this
revolving loan as of December 31, 1997.
The Credit Agreement contains various covenants pertaining to minimum
tangible net worth and current, leverage and fixed charge coverage
ratios. The Company was in compliance with these covenants at December
31, 1997.
As of December 31, 1996, the Company had an outstanding term note of
$2,583,302 and a revolving line of credit with an outstanding balance
of $3,446,296. In March 1997, the Company signed an amended credit
agreement with the bank which provided additional borrowing capacity
and which stated both the term note and line of credit outstanding
balances would be payable on demand. The outstanding balances under the
term note and line of credit as of December 31, 1997 were paid off with
the borrowings from the Credit Agreement discussed above.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(7) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31:
1997 1996
- -----------------------------------------------------------------------------
Salaries, wages, benefits, and commissions $ 654,008 1,422,519
Moving expense 103,200 0
Sales taxes 55,227 44,459
Interest 29,194 42,654
Other 227,686 260,391
- -----------------------------------------------------------------------------
$ 1,069,315 1,770,023
=============================================================================
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(8) INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
Year ended December 31
--------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Current:
U.S. Federal $ 95,000 (351,000) (338,000)
State 25,143 37,225 (59,000)
- ----------------------------------------------------------------------------
Total current 120,143 (313,775) (397,000)
- ----------------------------------------------------------------------------
Deferred:
U.S. Federal $ 0 979,000 (557,000)
State 0 86,000 (98,000)
- ----------------------------------------------------------------------------
Total deferred 0 1,065,000 (655,000)
- ----------------------------------------------------------------------------
$ 120,143 751,225 (1,052,000)
============================================================================
Total tax expense (benefit) differs from the expected tax expense
(benefit), computed by applying the federal statutory rate of 34% to
earnings (loss) before income taxes as follows:
Year ended December 31
--------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Expected income tax $ 696,000 (1,505,000) (783,000)
Goodwill amortization 25,000 25,000 457,000
(Decrease) increase in
deferred tax asset valuation
allowance (888,000) 2,181,000 68,000
State income taxes, net
of federal tax effect 17,000 82,000 (92,000)
Research and
experimental credits (85,000) (95,000) (180,000)
Tax on preacquisition
S-corporation earnings 0 0 (513,000)
Alternative minimum tax 95,000
Other, net 260,143 63,225 (9,000)
- ----------------------------------------------------------------------------
$ 120,143 751,225 (1,052,000)
============================================================================
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, are presented below:
1997 1996
- --------------------------------------------------------------------------
Net operating loss carryforward $ 0 596,000
Accounts receivable 182,000 317,000
Inventories 180,000 235,000
Accrued payroll 63,000 271,000
Net operating loss carryforward of
inactive subsidiary 0 100,000
Capital versus operating lease 147,000 120,000
Warranty accrual 20,000 20,000
Fixed assets 51,000 (17,000)
Gross margin recognition on sale to
foreign subsidiary 83,000 57,000
Tax credits 728,000 574,000
Foreign net operating
loss carryforward and future
deductible temporary differences 0 67,000
Other 7,000 9,000
- --------------------------------------------------------------------------
Total gross deferred tax
assets 1,461,000 2,349,000
Less valuation allowance (1,461,000) (2,349,000)
- --------------------------------------------------------------------------
Net deferred tax assets $ 0 0
==========================================================================
A reconciliation of the valuation allowance for deferred taxes as of
December 31 is as follows:
1997 1996
- --------------------------------------------------------------------------
Valuation allowance at beginning
of year $ 2,349,000 168,000
(Decrease) increase in valuation
allowance (888,000) 2,181,000
- --------------------------------------------------------------------------
$ 1,461,000 2,349,000
==========================================================================
A valuation allowance is provided when there is some likelihood that all
or a portion of the deferred tax asset may not be recognized. The net
deferred assets at December 31, 1997 and 1996 are fully offset by a
valuation allowance.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(9) STOCKHOLDERS' EQUITY
STOCK OPTIONS
Rimage adopted a stock option plan on September 24, 1992 which allows for
the granting of options to purchase shares of common stock to certain
key administrative, managerial and executive employees and the
automatic periodic grants of stock options to non-employee directors.
Options under this plan may be either incentive stock options or
non-qualified options. Pursuant to this plan, the following options are
currently issued and outstanding:
Weighted average
Shares available exercise
for grant Options outstanding price
- --------------------------------------------------------------------------------------------
Balance at December 31, 1994 270,995 229,005 $ 6.54
Granted (103,448) 103,448 6.87
Exercised - (1,000) 5.00
- --------------------------------------------------------------------------------------------
Balance at December 31, 1995 167,547 331,453 6.65
Exercised - (33,500) 4.37
Canceled 7,500 (7,500) 8.38
- --------------------------------------------------------------------------------------------
Balance at December 31, 1996 175,047 290,453 6.87
Additional shares available 500,000 - -
Granted (420,500) 420,500 3.03
Exercised - (6,802) 3.00
Canceled 56,854 (56,854) 7.38
- --------------------------------------------------------------------------------------------
Balance at December 31, 1997 311,401 647,297 $ 3.16
============================================================================================
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.50--$8.38 and
9.0 years, respectively. 508,141 of the outstanding options were
exercisable at December 31, 1997. At December 31, 1996, all outstanding
options were exercisable.
The per share weighted-average fair value of stock options granted during
1997 is estimated as $1.89, on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
volatility of 76%, risk-free interest rate of 6.9% and an expected life
of 7.0 years. No stock options were granted during 1996.
The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's 1997 net income and
basic and diluted earnings per share would have been decreased by
approximately $517,000, or $.17 and $.16 per share, respectively.
Proforma net income reflects only options granted in 1997 as no options
were granted in 1996. The full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the proforma
net income amounts presented because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
STOCK ISSUED IN ACQUISITION AND MERGER
On September 29, 1995, in connection with the merger between Rimage and
Dunhill Software Services, Inc. 1,100,000 shares of Rimage common stock
were issued (see note 3).
TERMINATION OF DUNHILL'S S-CORPORATION STATUS
On September 29, 1995, Dunhill Software Services, Inc. terminated its
S-Corporation election. Under SEC rules, Dunhill's accumulated retained
earnings of $2,611,979 as of the termination of the S-Corporation
election was reclassified to additional paid-in capital.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(10) NET EARNINGS (LOSS) PER SHARE
During 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") which the Company adopted as of December 31, 1997. Under SFAS
No. 128, basic net earnings (loss) per share is computed based on the
weighted average number of common shares outstanding while diluted net
earnings (loss) per share is computed based on the weighted average
number of common shares outstanding plus potential dilutive shares of
common stock. Potential dilutive shares of common stock include stock
options which have been granted to employees and directors. SFAS No.
128 also requires restatement of net earnings (loss) per share amounts
for all periods presented.
The components of net earnings (loss) per basic and diluted share are as
follows:
Net Earnings Weighted Average Per Share
(Loss) Shares Outstanding Amount
----------- ----------- -----------
1997: $ 1,925,073 3,086,292 $ .62
Basic
Dilutive effect of stock options -- 190,247 (.03)
----------- ----------- -----------
Diluted $ 1,925,073 3,276,539 $ .59
=========== ========= ===========
1996: $(5,179,011) 3,074,837 $ (1.68)
Basic
Dilutive effect of stock options -- -- --
----------- ----------- -----------
Diluted $(5,179,011) 3,074,837 $ (1.68)
=========== ========= ===========
1995: $(1,251,661) 3,050,140 $ (.41)
Basic
Dilutive effect of stock options -- -- --
----------- ----------- -----------
Diluted $(1,251,661) 3,050,140 $ (.41)
=========== ========= ===========
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(11) Leases
At December 31, 1997, the gross amount of building, leasehold
improvements, equipment, and accumulated amortization related to
capital leases were as follows:
Buildings under Manufacturing
capital leases Leasehold improvements equipment under capital
with related party to leased property lease with third party Total
- -------------------------------------------------------------------------------------------------------------
Cost $ 1,686,340 738,248 1,822,770 4,247,358
Less accumulated
Amortization 604,705 266,008 410,124 1,280,837
- -------------------------------------------------------------------------------------------------------------
$ 1,081,635 472,240 1,412,646 2,966,521
=============================================================================================================
Amortization of assets held under capital leases is included with
depreciation expense.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
The future minimum lease payments excluding operating expenses and real
estate taxes as of December 31, 1997 are:
Related Third Third
party party Total party
capital capital capital operating
Year ending December 31 leases leases leases leases
- -------------------------------------------------------------------------------------------------------------------
1998 $ 258,391 431,676 690,067 334,266
1999 273,308 431,676 704,984 228,802
2000 273,308 431,676 704,984 55,225
2001 273,308 506,034 779,342 -
2002 289,159 - 289,159 -
Later years, through 2007 1,435,045 - 1,435,045 -
- -------------------------------------------------------------------------------------------------------------------
Net minimum lease payments 2,802,519 1,801,062 4,603,581 618,293
=============
Less amount representing imputed interest 1,258,011 328,186 1,586,197
- --------------------------------------------------------------------------------------------------
Present value of net minimum capital
lease payments 1,544,508 1,472,876 3,017,384
- --------------------------------------------------------------------------------------------------
Less current installments of obligations
under capital leases 56,722 299,331 356,053
- --------------------------------------------------------------------------------------------------
Obligations under capital leases,
excluding current installments $ 1,487,786 1,173,545 2,661,334
- --------------------------------------------------------------------------------------------------
Rent expense under operating leases amounted to approximately $333,000,
$294,000, and $320,000, respectively, for the years ended December 31,
1997, 1996, and 1995.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(12) OTHER (EXPENSE) INCOME
Other (expense) income consists of the following:
Year ended December 31
--------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Interest income $ - 1,674 85,859
(Loss) gain on sale of
property and
equipment (1,089) (111,624) 3,219
Other, net (21,392) 99,483 6,372
- ------------------------------------------------------------------------------
$ (22,481) (10,467) 95,450
==============================================================================
(13) PROFIT SHARING AND SAVINGS PLAN
Effective January 1, 1991, Rimage adopted a profit sharing and savings
plan under Section 401(k) of the Internal Revenue Code. The plan
allowed employees to contribute up to 15% of their pretax compensation
to the plan. Dunhill also had a similar plan and the plans were merged
January 1, 1996. Also, effective January 1, 1996, the Company increased
its employees' allowable contribution to 16% of pretax compensation.
The Company's discretionary contributions totaled $137,150, $207,459,
and $132,865 in 1997, 1996, and 1995, respectively.
(14) SEGMENT REPORTING
The following table summarizes certain financial information for the
Systems, Service and foreign segments:
Year ended December 31
-----------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Revenues from
unaffiliated
customers:
Systems $ 21,011 23,237 17,359
Service 17,867 18,545 34,131
Operating earnings
(loss):
Systems 3,638 (2,732) (4,748)
Service (799) (1,045) 3,104
Net identifiable assets:
Systems 7,881 9,137 11,781
Service 7,283 10,873 12,003
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
As of and for the year ended December 31, 1997, foreign revenues from
unaffiliated customers, operating income, and net identifiable assets
were $4,800,000, $10,000, and $2,074,000, respectively. As of and for
the year ended December 31, 1996, foreign revenues from unaffiliated
customers, operating loss, and net identifiable assets were $6,300,000,
$(496,000), and $2,742,000, respectively.
(15) MAJOR CUSTOMERS
The Company derived more than 10% of its sales from the following
unaffiliated customers and had receivable balances from these customers
in the approximate amounts of:
Amount of net revenues for the
year ended December 31
------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Customer A $ 0 2,639,548 15,106,216
Customer B 5,138,942 5,966,891 9,326,585
Total receivable balance at December 31
---------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Customer A $ 0 0
Customer B 448,747 443,811
(16) RESTRUCTURING EXPENSES AND RELATED RESERVES
During 1996 and 1995, the Company refocused its strategic direction
resulting in changes to management, product transitions and subsidiary
consolidation. As a direct result of these changes, the following
general and administrative expenses were incurred:
Year ended December 31
----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Severance costs $ - 61,000 118,126
Plant shutdowns - 460,000 337,356
Goodwill and other asset impairments 81,636 446,700 1,366,134
As discussed above, during 1996, Rimage reserved for costs expected to be
incurred in connection with certain plant shutdowns occurring during
1997. As expenses were incurred during 1997 to shutdown these
operations, the reserve established in 1996 was utilized. After the
plant shutdowns were completed the remaining immaterial reserve balance
was reversed and included in general and administrative expenses for
fiscal year 1997.
(Continued)
RIMAGE CORPORATION AND SUBSIDIARIES
(17) COMMITMENTS AND CONTINGENCIES
The Company is exposed to a number of asserted and unasserted claims
encountered in the normal course of business. In the opinion of
management, the resolution of these matters will not have a material
adverse effect on the Company's financial position or results of
operations.
(18) SUPPLEMENTAL QUARTERLY DATA - UNAUDITED(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
1997 1996
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 9,270 8,444 10,338 10,827 8,710 12,122 9,900 11,050
Cost of revenues 6,099 5,758 7,440 8,262 7,478 9,334 7,726 7,882
- -------------------------------------------------------------------------------------------------------------------
Gross profit 3,171 2,686 2,898 2,565 1,232 2,788 2,174 3,168
Operating expenses:
Engineering and
development 394 426 528 557 639 587 690 777
Selling, general, and
administrative 1,531 1,606 1703 1736 3,906 2,059 2,270 2,211
- -------------------------------------------------------------------------------------------------------------------
Total operating
expenses 1,925 2,032 2,231 2,293 4,545 2,646 2,960 2,988
- -------------------------------------------------------------------------------------------------------------------
Operating earnings
(loss) 1,246 654 667 272 (3,313) 142 (786) 180
- -------------------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest (133) (184) (245) (267) (241) (167) (132) (139)
Gain (loss) on
currency exchange 30 (10) 41 (2) 12 39 (17) 5
Other, net (135) 97 3 12 (73) 23 14 25
- -------------------------------------------------------------------------------------------------------------------
Total other
expense (238) (97) (201) (257) (302) (105) (135) (109)
- -------------------------------------------------------------------------------------------------------------------
Earnings (loss)
before
income taxes 1,008 557 466 15 (3,615) 37 (921) 71
Income tax expense (benefit) 30 30 60 0 751 0 (24) 24
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 978 527 406 15 (4,366) 37 (897) 47
===================================================================================================================
Basic net earnings (loss) per
common share $ 0.32 0.17 0.13 0.01 (1.42) 0.01 (0.29) 0.02
===================================================================================================================
Diluted net earnings
(loss) per common share
and common share
equivalents $ 0.29 0.16 0.13 0.01 (1.42) 0.01 (0.29) 0.02
===================================================================================================================
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors, executive officers, promoters and control
persons of the Company is set forth under "Election of Directors" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998 and is incorporated herein by
reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 by the directors, executive officers and beneficial owners of more
than ten percent of the common stock of the Company is set forth under "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for its 1998 Annual Meeting of Shareholders, to be filed by
April 30, 1998, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers of the
Company is set forth in the section entitled "Board Committee and Actions" under
"Election of Directors" and the sections entitled "Summary Compensation Table,"
"Stock Options" and "Retirement Savings Plan" under "Executive Compensation" in
the Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998, and is incorporated herein by
reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under "Beneficial Ownership of Common Stock" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998, and is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth in the section entitled "Certain Transactions" under "Executive
Compensation" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, to be filed by April 30, 1998, and is incorporated
herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. See Part II, Item 8 of this report.
(2) FINANCIAL STATEMENT SCHEDULES.
Page in this
Form 10-K
---------
Independent Auditors' Report on Financial Statement Schedule .... 40
Schedule II - Valuation and Qualifying Accounts.................. 41
(3) EXHIBITS. See Index to Exhibits on page 43 of this report.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
last quarter of the fiscal year.
(c) See Exhibit Index and Exhibits.
(d) See the Financial Schedule included at the end of this report.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Rimage Corporation and Subsidiaries:
Under date of March 6, 1998, we reported on the consolidated balance sheets of
Rimage Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997, as
contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the annual report on
Form 10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 6, 1998
SCHEDULE II
RIMAGE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts Receivable: YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- --------------
Balance at beginning of year. . . . . . . . . . $ 1,084,910 644,576 213,935
Write-offs and other adjustments. . . . . (691,208) (183,391) (89,538)
Additions charged to costs and expenses . 111,756 623,725 498,562
Additions through acquisition . . . . . . - - 21,617
--------------- ---------------- --------------
Balance at end of year $ 505,458 1,084,910 644,576
=============== ================ ==============
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, thereto duly authorized.
RIMAGE CORPORATION
By: /s/ Bernard P. Aldrich
Bernard P. Aldrich
Chief Executive Officer
Dated: 3/31/98
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 and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Bernard P. Aldrich Chief Executive Officer, President, and 3/31/98
Bernard P. Aldrich Director (principal executive and
financial officer)
/s/ David J. Suden Chief Technical Officer & Director 3/31/98
David J. Suden
/s/ Robert M. Wolf Controller (principal accounting officer) 3/31/98
Robert M. Wolf
/s/ James L. Reissner Director 3/31/98
James L. Reissner
/s/ Ronald R. Fletcher Director 3/31/98
Ronald R. Fletcher
/s/ Richard F. McNamara Director 3/31/98
Richard F. McNamara
/s/ George E. Kline Director 3/31/98
George E. Kline
/s/ Joseph Miceli Director 3/31/98
Joseph Miceli
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
3.1 1992 Restated Articles of Incorporation of Rimage Corporation [Filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-22558) and incorporated herein by reference].
3.2 Bylaws of Rimage Corporation [Filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-22558) and
incorporated herein by reference].
3.3 Agreement and Plan of Reorganization dated June 6, 1995 by and between
Rimage Corporation and Dunhill Software Services, Inc. [Filed as
Appendix C to the Company's Annual Proxy statement for the fiscal year
ended December 31, 1994 (File No. 0-20728) and incorporated herein by
reference].
10.1 Rimage Corporation 1992 Stock Option Plan [Filed as Exhibit 10.5 to the
Company's Registration Statement on Form SB-2 (Registration No.
33-22558) and incorporated herein by reference].
10.2 Lease dated July 28, 1992, between Rimage Corporation and 7725
Washington Avenue Corporation [Filed as Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-22558) and
incorporated herein by reference].
10.3 Credit Agreement dated December 31, 1997 between Rimage Corporation and
First Bank, National Association.
10.4 1992 Stock Option Plan.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Rimage Corporation.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule for 1997 year end.
27.2 Financial Data Schedule for Restated 1995 and 1996 year ends.