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, 1998
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 10, 1999, 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 $79,829,000.
As of March 5, 1999, there were outstanding 4,997,586 shares of the registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1999 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 tape, 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, CD-R 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. The Company's
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. (Rimage Boulder); 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 and subsequent phasing out of unprofitable
operations, 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 worked to introduce the Company's
new CD-R products in 1995. These new CD-R products have generated significant,
increasing sales in 1996, 1997 and 1998 and currently represent the Company's
most profitable business. The declining use of diskettes negatively impacted
both margins and services revenue in 1996, 1997 and 1998. The decreasing
services revenues in 1996 caused the Company to report substantial losses during
that year.
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, and ceased
operations in Asia. The operations of Rimage Optical Systems, which had
contributed approximately $6 million of revenue but virtually no operating
margin in 1996, was also terminated in early 1997. During the third quarter of
1998, the Company ceased operations of its Bloomington, Minnesota Service
Division (previously known as Dunhill Software Services, Inc.) and sold the
equipment and inventory associated with its operations. These changes, together
with continued cost savings from measures instituted during 1997 and increased
distribution and market acceptance of its CD-R products, resulted in record
earnings for the 1998 calendar year.
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PRODUCTS
The Company's Systems Division, through which all CD-R, CD-ROM and diskette
production equipment is manufactured and sold, generated 76%, 54% and 56% of the
Company's revenue during the 1998, 1997, and 1996 fiscal years, respectively.
The Company anticipates that the Systems Division will continue to generate a
majority 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 and the
Perfect Image line of automated diskette duplication.
The Perfect Image CD-R product line 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 serves 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.
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 essential 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 24%, 46% and 44% of the Company's overall revenue during
the 1998, 1997, and 1996 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; precisely
copy the optical image ensuring that it can be read by the end user's computer;
provide precise customized silk screen color printing capabilities; 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; precisely
copy the magnetic image ensuring that it can be read by the end user's computer;
label and collate diskettes; handle the various sizes and formats of diskettes
currently in use; 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, the Services Division
also offers magnetic tape and magneto-optical disk duplication and production.
The tape duplication and production requirements of the Service Division's
customers include the ability to: produce high volumes of magnetic tapes;
3
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.
MARKETING AND DISTRIBUTION
The Company utilizes three principal means of distribution for its products: an
international and domestic distributor network, a value added reseller (VAR)
network, and inside sales.
The Company's sales force focuses primarily on building and supporting the
distribution channel; the distributor network sells to and supports all size
users; the VAR network is used to distribute the CD-R products within industry
specific environments; and inside sales focuses on the sale of maintenance
contracts and consumables.
The Company derived 13% and 14% of its revenues from a third party Services
division customer during 1997, and 1996, 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
23%, 12%, and 15% of the Company's revenue for the years ended December 31,
1998, 1997 and 1996, respectively. See Note 12 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 only a few
U.S. and foreign manufacturers. This small group of manufacturers sell to the
smaller volume duplicators and do not have the system capabilities of Rimage.
The Systems Division competes in the sale of diskette duplication equipment
based on its third generation automated solutions, and its high volume
duplicating/formatting systems.
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. Due to
the CD-ROM, CD-R and diskette duplication industry's highly competitive nature
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 includes 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. 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
currently sold includes both types of drives.
4
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. The Company's employees at its facility in Edina,
Minnesota conduct final assembly operations. Components include CD-R and
diskette 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, a sudden 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 20 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 CD and 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 $1,902,000,
$1,904,000, and $2,693,000 in 1998, 1997 and 1996 (or 5.1%, 4.9%, and 6.4% of
consolidated revenues), respectively. The Company intends to increase its level
of investment in research and development to match the percentage in 1996.
PATENTS AND GOVERNMENT REGULATION
The Company is the owner of eleven 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 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 the Company's products increase 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 continues to pursue litigation efforts which
began during the beginning of 1998 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.
The FCC requires some of the Company's equipment meet radio frequency emission
standards. The Company has the necessary certification.
EMPLOYEES
At December 31, 1998, the Company had 130 full-time employees, of whom 20 were
involved in research and development, 55 in manufacturing, assembly, testing and
customer service, and 55 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 43,000
5
square feet at 7725 Washington Avenue South, Edina, Minnesota 55439. In
September 1998, the Company restructured its existing capital lease into an
operating lease containing a sixty-two month term for this facility, which is
owned by a related party (see note 8 to the consolidated financial statements).
Rent is $6.75 per square foot per year, plus taxes and common area charges of
$2.98 per square foot per year. The Systems Division also leases a facility in
Frankfurt, Germany. These facilities are used for manufacturing, engineering,
service and sales.
The Services Division is headquartered in a leased facility of 19,928 square
feet at 4601 Nautilus Court South in Boulder, Colorado. In January 1995, the
Services Division entered into a five year operating lease for this facility.
The lease provides for rent at the rate of $9.90 per square foot per year in
addition to operating expenses, which currently are approximately $2.70 per
square foot per year.
The Company also leases a 28,440 square foot facility in Bloomington, Minnesota.
In September 1998, the Company restructured its existing capital lease into an
operating lease containing a sixty month term for this facility, which is owned
by a related party (see note 8 to the consolidated financial statements). Rent
is $4.40 per square foot per year, plus taxes and common area charges of $2.16
per square foot per year. It is the intent of the Company to sublease this
facility by the end of June 1999.
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.
6
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 1997:
1st Quarter ............. $ 1.667 $ 2.333
2nd Quarter ............. 1.583 2.750
3rd Quarter ............. 1.750 4.000
4th Quarter ............. 3.750 5.500
Calendar Year 1998:
1st Quarter ............. 3.666 5.166
2nd Quarter ............. 5.416 8.750
3rd Quarter ............. 6.750 11.083
4th Quarter ............. 7.666 14.500
SHAREHOLDERS
At March 10, 1999, 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.
7
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). Per share data has been restated to reflect 3 for 2 stock split on
November 28, 1998.
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Year ended December 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Revenues $ 37,383 $ 38,878 $ 41,782 $ 51,490 $ 40,694
Cost of Revenues 21,409 27,559 32,420 38,836 28,156
Gross Profit 15,974 11,319 9,362 12,654 12,538
Operating Expenses 9,657 8,480 13,139 14,298 11,253
Operating Earnings (Loss) 6,317 2,839 (3,777) (1,644) 1,285
Other Expense, Net 403 794 651 660 384
Income Tax Expense (Benefit) 862 120 751 (1,052) 360
Net Earnings (Loss) 5,053 1,925 (5,179) (1,251) 541
Basic Net Earnings (Loss) Per Share $ 1.06 $ .42 $ (1.12) $ (.27) $ .12
Diluted Net Earnings (Loss) Per Share $ .90 $ .39 $ (1.12) $ (.27) $ .12
Weighted Average Shares and Assumed
Conversion Shares:
Basic 4,769 4,629 4,612 4,577 4,565
Diluted 5,638 4,915 4,612 4,577 4,565
CONSOLIDATED BALANCE SHEET INFORMATION:
Balances as of December 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Cash and Cash Equivalents $ 7,350 $ 656 $ 117 $ 230 $ 1,284
Trade Accounts Receivables, Net 5,251 4,778 5,071 9,493 5,791
Inventories 2,043 2,266 4,028 4,690 5,833
Current Assets 15,364 8,196 10,545 16,451 13,960
Property and Equipment, Net 909 5,847 7,814 4,884 4,333
Total Assets 17,109 15,164 20,010 23,784 21,568
Current Liabilities 4,941 5,756 12,836 12,643 7,762
Long-Term Liabilities -- 3,411 3,032 1,881 2,522
Stockholders' Equity 12,168 5,938 4,084 9,202 11,227
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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 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 and 2) The Services Division provides
computer 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 3.8% and 7.0% from 1997
to 1998 and from 1996 to 1997, respectively. The Company's consolidated net
earnings (loss) were $5,053,000, $1,925,000, and $(5,179,000) in 1998, 1997, and
1996, respectively.
SYSTEMS DIVISION--1998 COMPARED TO 1997
The Systems Division's revenues (which include equipment sold from Rimage
Systems - Minneapolis, Rimage Europe, Rimage Boulder, Rimage Asia, Rimage
Optical Systems, and Knowledge Access International) increased by $7,519,000 or
35.8% from 1997 to 1998. This increase was primarily due to the implementation
of a distribution network during 1997 creating an increase in CD-R equipment
sales and related peripheral products. CD-R equipment sales totaled $19,493,000
during 1998 compared to $9,578,000 during 1997.
Gross margin as a percentage of revenues was 51.6% and 45.5% during 1998 and
1997, respectively. This increase was due to the continued increase in sales of
higher margin CD-R products. CD-R equipment sales as a percent of total revenues
increased from 45.6% during 1997 to 68.3% during 1998.
Operating expenses as a percent of revenues were 29.3% and 28.2% during 1998 and
1997, respectively. This increase was primarily a result of increased sales and
marketing expenses. During 1998, the Company continued to expand its
distribution network, both domestically and internationally, for its systems
CD-R related products and has focused efforts on the promotion of joint
marketing campaigns with distributors and value added resellers. These steps,
combined with the increasing percentage of overall sales from the Systems
Division (where products are sold through distribution) were primary causes of
Systems' sales and marketing expense to increase from $2,490,000 or 11.9% of
Systems' revenues during 1997 to $4,400,000 or 15.4% of Systems' revenues during
1998. Partially offsetting Systems' increased sales and marketing expense was a
decrease in its general and administrative expense due to the consolidation of
certain administrative duties. Systems' research and development expenses
remained relatively constant from 1997 to 1998, but decreased slightly as a
percentage of revenue due to higher Systems' sales in 1998.
Operating earnings were $6,366,000 and $3,638,000 during 1998 and 1997,
respectively. This improvement was primarily due to the increased sales of
higher margin CD-R related products.
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 margin 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
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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.
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.
SERVICES DIVISION--1998 COMPARED TO 1997
The Services Division's revenues (which include the revenues of its Bloomington,
Minnesota services operation, through August 1998, as well as the service
business of Rimage Boulder) decreased by $9,013,000 or 50.4% from 1997 to 1998.
This decrease was due to the divestiture of its Bloomington, Minnesota services
operation during the third quarter of 1998.
Gross margin as a percentage of revenues was 14.0% and 9.9% during 1998 and
1997, respectively. The primary reason for this increase is due to the
divestiture of its low margin Bloomington, Minnesota services operation during
the third quarter of 1998.
Operating expenses as a percent of revenues were 14.6% and 14.3% during 1998 and
1997, respectively. Operating loss was $48,000 and $799,000 during 1998 and
1997, respectively. This decrease in loss resulted from the aforementioned
divestiture of its low margin Bloomington operation.
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 expense and slightly lower sales.
CONSOLIDATED RESULTS--1998 COMPARED TO 1997
Revenues decreased $1,495,000 or 3.8% from 1997 to 1998. This decrease was
primarily due to a significant decrease in Services Division revenues after the
divestiture of the Company's Bloomington, Minnesota services operation during
the third quarter of 1998, 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 42.7% and 29.1% during 1998 and
1997, respectively. The increase was primarily due to the increased sales of
higher margin CD-R products coupled with the divestiture of the Bloomington
services operation.
Operating expenses as a percent of revenues were 25.8% and 21.8% during 1998 and
1997, respectively. This increase was primarily due to increased sales and
marketing expenses for its systems CD-R related products coupled with decreased
services revenues as a result of the divestiture of the Company's Bloomington
operation that was maintaining a lower operating expense to sales revenue ratio.
Net interest expense was $60,000 and $829,000 during 1998 and 1997,
respectively. The decrease was due to the extinguishment of the outstanding
balance of the Company's Term Note with the bank on June 30, 1998, the
elimination of the debt associated with a capital lease on certain CD-ROM
equipment during the third quarter of 1998
10
and the renegotiation of the Company's existing capital leases for both the
Edina and Bloomington Minnesota facilities, which resulted in their
reclassificaiton as operating leases and the elimination of future interest
expense.
The provision for income taxes represents federal, state, and foreign income
taxes on earnings before income taxes. Income tax expense was $862,000 and
$120,000 in 1998 and 1997, respectively. In accordance with FAS 109, the Company
periodically evaluates the need for a valuation allowance against its deferred
tax asset. As a result of expected continued earnings, the Company determined
its valuation allowance was no longer necessary. The additional tax benefit
realized as a result of this determination is $750,000 for 1998. Hereafter, the
Company's operating results will be reported on a fully taxed basis. The 1997
tax expense amount represents alternative minimum taxes.
Net earnings were $5,053,000 and $1,925,000 in 1998 and 1997, respectively.
During November 1998, the Company effected a 3 for 2 stock split in the form of
a 50% dividend. Diluted net earnings per share adjusted for the stock split was
$0.90 and $.39 in 1998 and 1997, respectively. The increase in earnings is
attributable to the significant change in mix of revenue to higher margin
product sales in the systems division, combined with only marginal increases in
operating expense to support those sales. In addition to the gain on the capital
lease restructurings coupled with the benefit from the elimination of the
valuation allowance against its deferred tax asset netted with the loss incurred
from the termination of the Company's Bloomington services operation.
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 an increase in the valuation allowance 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 $0.39 and $(1.12) 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to fund its anticipated cash requirements (including the
anticipated cash requirements of its capital expenditures) with internally
generated funds and, if required, from the Company's existing credit agreement.
On July 31, 1998, the Company completed the sale of a substantial portion of its
CD-ROM duplicating equipment and a portion of its diskette duplication equipment
used in its Bloomington, Minnesota services business to Advanced Duplication
Services, Inc. for $1,900,000 in cash.
Current assets are $15,364,000 as of December 31, 1998 as compared to $8,196,000
as of December 31, 1997, primarily reflecting the increase in cash from
increased sales of higher margin CD-R products and the Company's elimination of
its deferred tax valuation allowance. The allowance for doubtful accounts as a
percentage of receivable decreased from 10% as of December 31, 1997 to 4% as of
December 31, 1998. This decrease occurred as a result of the Systems Division's
shift from direct selling to selling through a distribution network. The change
in property and equipment principally reflects the proceeds from the disposition
of capital assets used in its Bloomington, Minnesota services operation and
depreciation expense of
11
$1,581,000. Current liabilities decreased approximately 14% to $4,941,000 as of
December 31, 1998 from $5,756,000 as of December 31, 1997, reflecting normal
reductions in accounts payable. Long-term debt, including current maturities,
decreased from $3,411,000 as of December 31, 1997 to $0 as of December 31, 1998,
as a result of the elimination of the Company's debt under their term note and
capital lease obligations.
Net cash provided by operating activities was $6,946,000 and $5,244,000 during
1998 and 1997, respectively. The increase in cash flow from operating activities
in 1997 to 1998 was greatly impacted by increased sales of higher margin CD-R
products.
Net cash provided by investing activities of $1,745,000 during 1998 primarily
reflect proceeds from the sale of a substantial portion of the equipment used in
its Bloomington, Minnesota services business. Net cash used in investing
activities of $6,000 during 1997 primarily reflect capital expenditures offset
by receipts from the Company's sales-type leases. At December 31, 1998 the
Company had no significant commitments to purchase additional capital equipment.
Net cash used in financing activities of $2,027,000 during 1998 primarily
reflected payment of its capital lease obligation associated with the capital
equipment sold, as mentioned above combined with the payment of the Company's
remaining long-term debt. Net cash used in financing activities of $4,662,000
during 1997 principally reflect borrowings and repayments of debt under the
credit agreement.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
YEAR 2000 READINESS
The Company believes the approach of the Year 2000 could have a material effect
on the Company's business, results of operations, and financial condition if it
were to avoid the related consequences. To mitigate these potential
consequences, the Company has identified the following areas as requiring
significant analysis: 1) manufactured products, 2) information technology
applications, 3) information technology end user supported applications, 4)
information technology infrastructure, 5) business partners - both vendors and
customers, 6) manufacturing equipment, 7) facility operations (non-information
technology systems). The Company has also identified five phases associated with
each area described above as follows: 1) awareness - educating all levels of the
Company about the importance of Year 2000 readiness; 2) assessment - identify
all electronic systems which are date-sensitive and assess which systems are not
Year 2000 ready; 3) renovation - develop a strategy to repair, replace or retire
the system; 4) validation - testing of changed programs and date files to ensure
they are Year 2000 ready; and 5) implementation - placing the renovated and
validated systems into everyday use. Currently, the Company is in the renovation
and validation phases of its plan to prepare itself for the Year 2000. The
following table describes the Company's estimated completion date for each
remaining phase:
Renovation May 1999
Validation July 1999
Implementation August 1999
Through December 31, 1998, the Company has incurred costs of approximately
$85,000 directly attributable to addressing Year 2000 issues. The Company is
unable to, at this time, estimate the remaining costs that will be incurred in
connection with its analysis of Year 2000 issues. The following are some of its
most reasonably likely worst case Year 2000 scenarios the Company has
identified: 1) The Company's manufacturing operations consist primarily of the
assembly of products from components purchased from third parties. While some
parts are stock "off the shelf" components, others are manufactured to the
Company's specifications. Although the Company believes it has identified
alternative assembly contractors for most of its subassemblies, an actual change
in such contractors, as a result of an inability to work with such contractor
due to Year 2000 consequences they face, would likely require a period of
training and testing. 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. 2) The Company sells most of its manufactured systems through a limited
number of authorized distributor wholesalers, who in turn provide warehousing,
distribution, and credit to a network of authorized value added resellers. The
interruption of product flow to one or more of these distributors due to their
inability to process date sensitive information could result in lower than
normal sales revenues. To alleviate this decrease, the
12
Company would redirect these sales to the remaining distributors and/or sell
directly to its value added resellers.
NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing currencies and the
euro, a new European currency, and adopted the euro as their common legal
currency (the "Euro Conversion"). Either the euro or a participating country's
present currency will be accepted as legal tender from January 1, 1999 to
January 1, 2002, from which date forward only the euro will be accepted.
The Company has customers located in European Union countries participating in
the Euro Conversion. Such customers will likely have to upgrade or modify their
computer systems and software to comply with the euro requirements. The amount
of money the Company anticipates spending in connection with product development
related to the Euro Conversion is not expected to have a material adverse effect
on the Company's results of operations or financial condition. The Euro
Conversion may also have competitive implications for the Company's pricing and
marketing strategies, which could be material in nature; however, any such
impact is not known at this time.
The Company has also modified its internal systems (such as payroll, accounting
and financial reporting) to deal with the Euro Conversion. There is no
assurance, however, that all problems related to the Euro Conversion will be
foreseen and corrected, or that no material disruptions of the Company's
business will occur.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), effective in 2000,
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measuring those instruments at fair value. At the present time,
the Company does not anticipate that SFAS No. 133 will have a material impact on
its financial position or results of operations.
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 1999 may
affect whether research and development expenditures will increase to the levels
experienced in 1996 (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 1999.
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.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1997, the Company was exposed to certain market risks based
on the outstanding long-term debt obligation totaling $750,000. As discussed in
note 4 to the consolidated financial statements, the obligation was paid in full
during the year ended December 31, 1998. The Company does not invest in any
derivative financial instruments.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page in
1998 Annual
Report to
Shareholders
------------
Report of Management................................................. 16
Independent Auditors' Report......................................... 17
Consolidated Balance Sheets, as of December 31, 1998 and 1997........ 18-19
Consolidated Statements of Operations, for the years ended
December 31, 1998, 1997 and 1996..................................... 20
Consolidated Statements of Stockholders' Equity and Comprehensive
Income, for the years ended December 31, 1998, 1997 and 1996......... 21
Consolidated Statements of Cash Flow, for the years ended
December 31, 1998, 1997 and 1996..................................... 22-23
Notes to Consolidated Financial Statements........................... 24-39
15
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
16
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 24, 1999
17
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
- -----------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 7,349,521 656,127
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $205,000 and
$505,000, respectively 5,251,185 4,778,055
Inventories 2,043,131 2,265,867
Income tax receivable -- 23,350
Prepaid expenses and other current assets 127,657 472,728
Deferred income taxes 593,000 --
- -----------------------------------------------------------------------------------------------
Total current assets 15,364,494 8,196,127
- -----------------------------------------------------------------------------------------------
Property and equipment:
Building and leasehold improvements 441,081 2,505,577
Manufacturing equipment 1,845,659 8,574,347
Development equipment 554,307 758,888
Office furniture and equipment 1,043,248 1,971,155
- -----------------------------------------------------------------------------------------------
3,884,295 13,809,967
Less accumulated depreciation and amortization 2,975,304 7,963,014
- -----------------------------------------------------------------------------------------------
Net property and equipment 908,991 5,846,953
Goodwill, net of accumulated amortization of $377,286 and
$296,571, respectively 767,977 848,692
Other noncurrent assets 67,427 271,740
- -----------------------------------------------------------------------------------------------
Total assets $17,108,889 15,163,512
===============================================================================================
See accompanying notes to consolidated financial statements.
18
Liabilities and Stockholders' Equity 1998 1997
- ----------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of notes payable $ -- 900,000
Current installments of capital lease obligations -- 356,053
Trade accounts payable 2,273,536 2,789,973
Income tax payable 236,728 --
Accrued compensation 899,247 654,008
Accrued other 818,109 415,307
Deferred income and customer deposits 712,982 640,725
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 4,940,602 5,756,066
Notes payable, less current portion -- 750,000
Capital lease obligations, less current installments -- 2,661,334
- ----------------------------------------------------------------------------------------------------------
Total liabilities 4,940,602 9,167,400
- ----------------------------------------------------------------------------------------------------------
Minority interest in inactive subsidiary -- 57,907
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares,
issued and outstanding 4,936,088 and 4,636,953, respectively 49,361 46,370
Additional paid-in capital 11,545,485 10,452,679
Retained earnings (accumulated deficit) 647,477 (4,405,218)
Accumulated other comprehensive income - foreign currency
translation adjustment (74,036) (155,626)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,168,287 5,938,205
Commitments and contingencies (notes 8 and 14)
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 17,108,889 15,163,512
==========================================================================================================
19
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Revenues $ 37,383,359 38,878,439 41,782,122
Cost of revenues 21,409,199 27,559,498 32,419,822
- -------------------------------------------------------------------------------------------------
Gross profit 15,974,160 11,318,941 9,362,300
- -------------------------------------------------------------------------------------------------
Operating expenses:
Engineering and development 1,901,777 1,904,490 2,693,390
Selling, general, and administrative 7,755,127 6,575,558 10,446,173
- -------------------------------------------------------------------------------------------------
Total operating expenses 9,656,904 8,480,048 13,139,563
- -------------------------------------------------------------------------------------------------
Operating earnings (loss) 6,317,256 2,838,893 (3,777,263)
- -------------------------------------------------------------------------------------------------
Other (expense) income:
Interest expense (255,098) (829,490) (678,805)
Interest income 195,463 -- --
Gain on currency exchange 80,389 58,294 38,749
Other, net (423,350) (22,481) (10,467)
- -------------------------------------------------------------------------------------------------
Total other expense, net (402,596) (793,677) (650,523)
- -------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 5,914,660 2,045,216 (4,427,786)
Income taxes 861,965 120,143 751,225
- -------------------------------------------------------------------------------------------------
Net earnings (loss) $ 5,052,695 1,925,073 (5,179,011)
- -------------------------------------------------------------------------------------------------
Basic net earnings (loss) per common
share $ 1.06 0.42 (1.12)
- -------------------------------------------------------------------------------------------------
Diluted net earnings (loss) per common
share and assumed conversion shares $ 0.90 0.39 (1.12)
- -------------------------------------------------------------------------------------------------
Basic weighted average shares 4,769,009 4,629,431 4,612,256
- -------------------------------------------------------------------------------------------------
Diluted weighted average shares and
assumed conversion shares 5,638,140 4,914,799 4,612,256
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
Retained Accumulated
Common Stock Additional earnings other
--------------------- paid-in (accumulated comprehensive
Shares Amount capital deficit) income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,576,491 $45,765 10,286,628 (1,151,280) 21,252 9,202,365
Stock issued in stock option exercise 50,250 503 145,747 -- -- 146,250
Comprehensive income:
Net loss -- -- -- (5,179,011) -- (5,179,011)
Translation adjustment, net of tax
effect of $0 -- -- -- -- (85,951) (85,951)
-----------
Total comprehensive income -- -- -- -- -- (5,264,962)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 4,626,741 46,268 10,432,375 (6,330,291) (64,699) 4,083,653
Stock issued in stock option exercise 10,203 102 20,304 -- -- 20,406
Comprehensive income:
Net earnings -- -- -- 1,925,073 -- 1,925,073
Translation adjustment, net of tax
effect of $0 -- -- -- -- (90,927) (90,927)
-----------
Total comprehensive income -- -- -- -- -- 1,834,146
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,636,944 46,370 10,452,679 (4,405,218) (155,626) 5,938,205
Stock issued in stock option and warrant
exercise 299,144 2,991 1,092,806 -- -- 1,095,797
Comprehensive income:
Net earnings -- -- -- 5,052,695 -- 5,052,695
Translation adjustment, net of tax
effect of $0 -- -- -- -- 81,590 81,590
-----------
Total comprehensive income -- -- -- -- -- 5,134,285
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,936,088 $49,361 11,545,485 647,477 (74,036) 12,168,287
===================================================================================================================================
See accompanying notes to consolidated financial statements.
21
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 5,052,695 1,925,073 (5,179,011)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Write off of minority interest in inactive
subsidiary 57,907 -- --
Depreciation and amortization 1,661,321 2,466,519 1,982,839
Goodwill and other asset impairments -- 81,636 446,700
Change in reserve for excess and obsolete
inventories 82,509 (142,000) (145,000)
Change in reserve for doubtful accounts (300,944) (579,452) 440,334
Loss on sale of property and equipment 870,494 1,089 111,624
Change in deferred taxes (750,000) -- 1,065,000
Decrease in investment in sales-type leases -- -- (176,588)
Gain on termination of capital leases (512,192) -- --
Changes in operating assets and liabilities:
Trade accounts receivable (172,186) 872,135 3,982,070
Inventories 140,227 1,903,686 807,773
Prepaid expenses and other current
assets 138,712 (85,269) 37,938
Income tax receivable 23,350 795,440 (568,778)
Trade accounts payable (516,437) (1,505,427) (1,466,342)
Accrued expenses 571,942 (700,708) 392,671
Income taxes payable 526,728 -- --
Deferred income and customer deposits 72,257 210,903 (335,955)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by
Operating activities 6,946,383 5,243,625 1,395,275
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (515,775) (381,373) (2,941,123)
Proceeds from the sale of property and equipment 2,094,904 15,427 84,633
Other noncurrent assets 67,803 66,360 (188,738)
Receipts from sales-type leases 98,372 293,849 343,612
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 1,745,304 (5,737) (2,701,616)
- ----------------------------------------------------------------------------------------------------------------------------
(Continued)
22
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock option exercise $ 1,095,797 20,406 146,250
Principal payments on capital lease obligations (1,472,877) (325,715) (97,922)
Net change in line of credit at bank -- (3,446,296) 144,407
Proceeds from other notes payable -- 1,650,000 2,816,702
Repayment of other notes payable (1,650,000) (2,560,191) (1,801,324)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (2,027,080) (4,661,796) 1,208,113
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 28,787 (37,287) (14,464)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 6,693,394 538,805 (112,692)
Cash and cash equivalents, beginning of year 656,127 117,322 230,014
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,349,521 656,127 117,322
============================================================================================================================
Supplemental disclosures of cash paid during the period for:
Interest $ 284,293 842,950 697,296
Income taxes 1,038,550 23,350 172,992
Supplemental disclosures of non-cash investing and financing activities:
Reduction of obligations under capital leases as a
result of conversions to operating leases $ 1,512,509 -- --
=========== ========== ==========
Reduction of net book value of facilities under
capital leases as a result of conversion to
operating leases $ 1,000,317 -- --
=========== ========== ==========
Purchase of manufacturing equipment under
capital lease $ -- -- 1,822,770
=========== ========== ==========
See accompanying notes to consolidated financial statements
23
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. (Rimage Boulder), Knowledge Access
International (Knowledge Access), and, through August 1998,
operations of its Bloomington, Minnesota services operation
(formerly Dunhill Software Services), collectively hereinafter
referred to as Rimage or the Company. All material intercompany
accounts and transactions have been eliminated upon
consolidation.
The Company 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 Company also
provides computer media duplication and production services to
software developers and manufacturers and information publishers.
In connection with the August 31, 1998 sale of a portion of the
Company's Services Division, the Company sold the fixed assets
and inventory used in its Bloomington, Minnesota services
operation (see note 9). 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.
The Company extends unsecured credit to its customers as well as
credit to a limited number of authorized distributor wholesalers,
who in turn provide warehousing, distribution, and credit to a
network of authorized value added resellers. These distributors
and value added resellers sell and service a variety of hardware
and software products.
(Continued)
24
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 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.
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.
(Continued)
25
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998 and 1997 of $367,836. Accumulated amortization at
December 31, 1998 and 1997 was $313,238 and $204,069,
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)
26
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Earnings (Loss) Per Share
Basic earnings (loss) 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 the weighted average
number of common and assumed conversion shares outstanding during
each period. Assumed conversion shares result from dilutive stock
options and warrants computed using the treasury stock method.
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, if any, is charged to earnings as a
part of general and administrative expenses in the current
period.
(Continued)
27
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130) which established standards for reporting and
presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of the
Company's net income (loss) and foreign currency translation
adjustment and is presented in the consolidated statements of
stockholders' equity and comprehensive income. SFAS No. 130 only
requires additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position
or results of operations. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
Segment Information
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) which requires
a new basis for determining reportable business segments based on
the management approach. SFAS No. 131 only requires additional
disclosures in the consolidated financial statements, it does not
affect the Company's financial position or results of operations.
Disclosures required under SFAS No. 131 have been provided for
all periods presented.
Reclassification
Certain prior year amounts have been reclassified to conform with
the current year presentation.
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, 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.
(Continued)
28
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3) Inventories
Inventories consist of the following as of December 31:
1998 1997
---------------------------------------------------------------------
Finished goods and demonstration equipment $ 900,839 693,689
Work-in-process 121,901 205,972
Purchased parts and subassemblies 1,020,391 1,366,206
---------------------------------------------------------------------
$2,043,131 2,265,867
=====================================================================
4) 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 were secured by substantially all Company
assets and accrued interest at LIBOR plus two and one-half
percent. The term note was paid in full during the year ended
December 31, 1998.
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, 1998.
TheCredit Agreement contains various covenants pertaining to
minimum tangible net worth and current, leverage and fixed charge
coverage ratios.
(Continued)
29
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5) Income Taxes
The provision for income tax expense consists of the following:
Year ended December 31
-------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Current:
U.S. Federal $ 834,000 95,000 (351,000)
State 320,965 25,143 37,225
Foreign 300,000 -- --
- -------------------------------------------------------------------------------
Total current 1,454,965 120,143 (313,775)
- -------------------------------------------------------------------------------
Deferred:
Change in valuation allowance $(1,461,000) -- --
U.S. Federal 777,000 -- 979,000
State 91,000 -- 86,000
- -------------------------------------------------------------------------------
Total deferred (593,000) -- 1,065,000
- -------------------------------------------------------------------------------
$ 861,965 120,143 751,225
===============================================================================
Total tax expense 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
-------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Expected income tax expense (benefit) $ 2,011,000 696,000 (1,505,000)
Goodwill amortization 27,000 25,000 25,000
(Decrease) increase in deferred tax
asset valuation allowance (1,461,000) (888,000) 2,181,000
State income taxes, net of federal tax
effect 233,000 17,000 82,000
Research and experimental credits -- (85,000) (95,000)
Alternative minimum tax -- 95,000 --
Other, net 51,965 260,143 63,225
- -------------------------------------------------------------------------------
$ 861,965 120,143 751,225
===============================================================================
(Continued)
30
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets as of December 31,
are presented below:
1998 1997
- -------------------------------------------------------------------------------
Accounts receivable $ 56,000 182,000
Inventories 165,000 180,000
Accrued payroll 56,000 63,000
Capital versus operating lease -- 147,000
Warranty accrual 20,000 20,000
Fixed assets 86,000 51,000
Gross margin recognition on sale to foreign subsidiary 142,000 83,000
Tax credits -- 728,000
Other 68,000 7,000
- -------------------------------------------------------------------------------
Total gross deferred tax assets 593,000 1,461,000
Less valuation allowance -- (1,461,000)
- -------------------------------------------------------------------------------
Net deferred tax assets $593,000 --
===============================================================================
A reconciliation of the valuation allowance for deferred taxes as
of December 31 is as follows:
1998 1997
- -------------------------------------------------------------------------------
Valuation allowance at beginning of year $1,461,000 2,349,000
Decrease in valuation allowance (1,461,000) (888,000)
- -------------------------------------------------------------------------------
$ -- 1,461,000
===============================================================================
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 asset at December 31, 1997 is fully
offset by a valuation allowance. The Company periodically
evaluates the need for the valuation allowance. As a result of
continued earnings and other positive business factors during
1998 the Company determined that it is now more likely than not
that the deferred tax asset will be realized. Therefore, the
valuation allowance of $1,461,000 was reduced to zero.
(Continued)
31
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6) Stockholders' Equity
Stock Split
On November 27, 1998, the Company effected a 3 for 2 stock split
in the form of a 50% dividend. All references in the financial
statements and related notes to per share information, stock
options, weighted average number of shares, as well as the number
of common shares outstanding for all prior years presented, have
been retroactively adjusted to reflect this stock split.
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
Shares average
available Options Exercise
for grant outstanding Price
- --------------------------------------------------------------------------------
Balance at December 31, 1995 251,325 497,175 $ 4.43
Exercised -- (50,250) 2.91
Canceled 11,250 (11,250) 5.59
- --------------------------------------------------------------------------------
Balance at December 31, 1996 262,575 435,675 4.58
Additional shares available 750,000 -- --
Granted (630,750) 630,750 2.02
Exercised -- (10,203) 2.00
Canceled 85,281 (85,281) 4.92
- --------------------------------------------------------------------------------
Balance at December 31, 1997 467,106 970,941 2.11
Granted (326,700) 326,700 4.51
Exercised -- (239,144) 2.42
Canceled 4,000 (4,000) 2.75
- --------------------------------------------------------------------------------
Balance at December 31, 1998 144,406 1,054,497 $ 2.78
================================================================================
At December 31, 1998, 940,797 of the options outstanding were
exercisable.
(Continued)
32
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the 326,700 stock options granted during 1998 is
estimated at $964,239 on the date of grant using the
Black-Scholes option pricing model with the following
assumptions: volatility ranging from 65.1% to 77.1%, risk-free
interest rate ranging from 4.37% to 5.62% and an expected life of
5.0 years. The fair value of the 420,500 stock options granted
during 1997 is estimated at $796,637 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
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 1998 and 1997 net income and basic and diluted earnings
per share would have been adjusted to the proforma amounts stated
below:
1998 1997
-----------------------------------------------------------------
Net earnings:
As reported $ 5,052,695 $ 1,925,073
Proforma $ 4,323,464 $ 1,408,073
-----------------------------------------------------------------
Basic net earnings per share:
As reported $ 1.06 $ 0.42
Proforma $ 0.91 $ 0.30
-----------------------------------------------------------------
Diluted net earnings per share:
As reported $ 0.90 $ 0.39
Proforma $ 0.77 $ 0.29
-----------------------------------------------------------------
Proforma net income reflects only options granted in 1998 and
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.
(Continued)
33
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7) Net Earnings (Loss) Per Share
The components of net earnings (loss) per basic and diluted share
are as follows:
Net Earnings Weighted Average Per Share
(Loss) Shares Outstanding Amount
----------- ------------------ ---------
1998:
Basic $ 5,052,695 4,769,009 $ 1.06
Dilutive effect of
stock options -- 869,131 (.16)
----------- --------- ------
Diluted $ 5,052,695 5,638,140 $ .90
=========== ========= ======
1997:
Basic $ 1,925,073 4,629,431 $ .42
Dilutive effect of
stock options -- 285,368 (.03)
----------- --------- ------
Diluted $ 1,925,073 4,914,799 $ .39
=========== ========= ======
1996:
Basic $(5,179,011) 4,612,246 $(1.12)
Dilutive effect of
stock options -- -- --
----------- --------- ------
Diluted $(5,179,011) 4,612,246 $(1.12)
=========== ========= ======
(Continued)
34
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8) Leases
During September 1998, the Company renegotiated its existing
capital leases for both the Edina and Bloomington Minnesota
facilities, which resulted in reclassification to operating
leases and a gain of $512,192.
Also, in connection with the August 31, 1998 sale of a portion of
the Company's services division, the Company paid $1,385,528 to
satisfy debt associated with a capital lease on certain CD-ROM
equipment.
The future minimum lease payments excluding operating expenses and
real estate taxes as of December 31, 1998 are:
Related Third
party party Total
operating operating operating
Year ending December 31 leases leases leases
-------------------------------------------------------------------
1999 $ 418,253 228,802 647,055
2000 426,996 55,225 482,221
2001 436,026 -- 436,026
2002 445,199 -- 445,199
2003 301,004 -- 301,004
-------------------------------------------------------------------
Net minimum lease payments $2,027,478 284,027 2,311,505
========== ======= =========
Rent expense under operating leases amounted to approximately
$214,000, $333,000, and $294,000, respectively, for the years
ended December 31, 1998, 1997, and 1996.
(Continued)
35
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9) Other (Expense) Income
Other (expense) income consists of the following:
Year ended December 31
----------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------
Loss on sale of property and equipment $(870,494) (1,089) (111,624)
Gain on termination of capital leases (Note 8) 512,192 -- --
Other, net (65,048) (21,392) 101,157
-----------------------------------------------------------------------------------
$(423,350) (22,481) (10,467)
===================================================================================
In connection with the August 31, 1998 sale of a portion of the
Company's services division, the Company sold the fixed assets
and inventory used in its Bloomington, Minnesota services
operation during the third quarter. The Company recognized a loss
on the sale of these assets totaling approximately $859,000 for
the year ended December 31, 1998.
10) Profit Sharing and Savings Plan
Rimage has a profit sharing and savings plan under Section 401(k)
of the Internal Revenue Code. The plan allows employees to
contribute up to 16% of pretax compensation. The Company's
discretionary contributions totaled $123,621, $137,150, and
$207,459 in 1998, 1997, and 1996, respectively.
11) Segment Reporting
The Company operates in two segments, Rimage Systems Division and
Rimage Services Division. The Rimage Systems Division consists of
Rimage Corporation, Rimage Europe GmbH, and Knowledge Access
International (Knowledge Access). The Rimage Services Division
consists of the Bloomington, Minnesota operation, through August
1998, in addition to Rimage Boulder.
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.
(Continued)
36
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accounting policies for the two reportable segments are the
same as those described in the summary of significant accounting
policies. The Company evaluates performance based on operating
profit or loss before income taxes.
Year ended December 31
--------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Systems $ 28,530 $ 21,011 $ 23,237
Services 8,853 17,867 18,545
-------- -------- --------
Total $ 37,383 $ 38,878 $ 41,782
======== ======== ========
Operating earnings (loss):
Systems $ 6,365 $ 3,638 $ (2,732)
Services (48) (799) (1,045)
-------- -------- --------
Total $ 6,317 $ 2,839 $ (3,777)
======== ======== ========
Depreciation and amortization:
Systems $ 505 $ 527 $ 610
Services 1,156 1,940 1,373
-------- -------- --------
Total $ 1,661 $ 2,467 $ 1,983
======== ======== ========
Expenditures for long-lived assets:
Systems $ 325 $ 103 $ 332
Services 191 278 2,609
-------- -------- --------
Total $ 516 $ 381 $ 2,941
======== ======== ========
Assets:
Systems $ 14,709 $ 7,881 $ 9,137
Services 2,400 7,283 10,873
-------- -------- --------
Total $ 17,109 $ 15,164 $ 20,010
======== ======== ========
Revenues:
United States $ 28,603 $ 34,066 $ 36,330
Germany 8,780 4,799 5,070
Other -- 13 382
-------- -------- --------
Total $ 37,383 $ 38,878 $ 41,782
======== ======== ========
Long-lived assets:
United States $ 859 $ 5,824 $ 7,750
Germany 50 23 13
Other -- -- 51
-------- -------- --------
Total $ 909 $ 5,847 $ 7,814
======== ======== ========
(Continued)
37
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) Major Customers
The Company derived approximately $5,139,000 of its 1997 sales
from an unaffiliated customer and had a receivable balance from
this customer in the approximate amount of $449,000 as of
December 31, 1997. The Company derived approximately $5,967,000
and $2,640,000 of its 1996 sales from two unaffiliated customers.
13) Restructuring Expenses and Related Reserves
During 1996, 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
during 1996: severance costs of $61,000, costs associated with
plant shutdowns totaling $460,000 and goodwill and other asset
impairments of $447,000. During 1997, the Company included costs
of $82,000 relating to other asset impairments in general and
administrative expenses.
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.
14) 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.
(Continued)
38
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15) Supplemental Quarterly Data - Unaudited (dollars in thousands, except per
share data)
1998 1997
------------------------------------------ -------------------------------------------
Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 9,668 9,226 8,841 9,649 9,270 8,444 10,338 10,827
Cost of revenues 4,970 5,477 5,131 5,832 6,099 5,758 7,440 8,262
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 4,698 3,749 3,710 3,817 3,171 2,686 2,898 2,565
Operating expenses:
Engineering and
development 434 551 407 510 394 426 528 557
Selling, general, and
administrative 2,120 1,687 1,906 2,042 1,531 1,606 1703 1736
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 2,554 2,238 2,313 2,552 1,925 2,032 2,231 2,293
- ---------------------------------------------------------------------------------------------------------------------------------
Operating earnings 2,144 1,511 1,397 1,265 1,246 654 667 272
- ---------------------------------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest, net 76 23 (66) (92) (133) (184) (245) (267)
Gain (loss) on
currency exchange 3 51 33 (6) 30 (10) 41 (2)
Other, net 42 (506) 31 9 (135) 97 3 12
- ---------------------------------------------------------------------------------------------------------------------------------
Total other (expense) 121 (432) (2) (89) (238) (97) (201) (257)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before
income taxes 2,265 1,079 1,395 1,176 1,008 557 466 15
Income tax expense (benefit) 936 (594) 347 173 30 30 60 0
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,329 1,673 1,048 1,003 978 527 406 15
=================================================================================================================================
Basic net earnings per
common share $ 0.27 0.35 0.22 0.22 0.21 0.11 0.09 0.00
=================================================================================================================================
Diluted net earnings
per common share
and common share
equivalents $ 0.23 0.30 0.19 0.19 0.19 0.11 0.09 0.00
=================================================================================================================================
39
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, 1999 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 1999 Annual Meeting of Shareholders, to be filed by
April 30, 1999, 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 1999 Annual Meeting of
Shareholders, to be filed by April 30, 1999, 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 1999 Annual Meeting of
Shareholders, to be filed by April 30, 1999, 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 1999 Annual
Meeting of Shareholders, to be filed by April 30, 1999, 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... 41
Schedule II - Valuation and Qualifying Accounts................ 42
(3) EXHIBITS. See Index to Exhibits on page 44 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.
40
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Rimage Corporation and Subsidiaries:
Under date of February 24, 1999, we reported on the consolidated balance sheets
of Rimage Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the 1998 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 1998. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in Item 14(a)(2).
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
Minneapolis, Minnesota
February 24, 1999
41
SCHEDULE II
RIMAGE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts Receivable:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
Balance at beginning of year $ 505,458 1,084,910 644,576
Write-offs and other adjustments (465,071) (691,208) (183,391)
Additions charged to costs and expenses 164,127 111,756 623,725
---------- ---------- ----------
Balance at end of year $ 204,514 505,458 1,084,910
========== ========== ==========
Reserve for Inventory Obsolescence:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
Balance at beginning of year $ 447,682 585,000 735,000
Write-offs and other adjustments (391,901) (264,497) (181,507)
Additions charged to costs of sales 474,728 127,179 31,507
---------- ---------- ----------
Balance at end of year $ 530,509 447,682 585,000
========== ========== ==========
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant 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: 3/15/99
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, 3/15/99
- ------------------------ Director (principal executive and
Bernard P. Aldrich financial officer)
/s/ David J. Suden Chief Technical Officer & Director 3/15/99
- ------------------------
David J. Suden
/s/ Robert M. Wolf Controller (principal accounting officer) 3/15/99
- ------------------------
Robert M. Wolf
/s/ James L. Reissner Director 3/15/99
- ------------------------
James L. Reissner
/s/ Ronald R. Fletcher Director 3/15/99
- ------------------------
Ronald R. Fletcher
/s/ Richard F. McNamara Director 3/15/99
- ------------------------
Richard F. McNamara
/s/ George E. Kline Director 3/15/99
- ------------------------
George E. Kline
43
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
21.1 Subsidiaries of Rimage Corporation.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedules for 1998, 1997 and 1996 Year Ends.
44
RIMAGE CORPORATION
7725 Washington Avenue South
Minneapolis, MN 55439
TEL: 612-944-8144
FAX: 612-944-7808
RIMAGE BOULDER RIMAGE EUROPE, GmbH
4601 Nautilus Court S. Hans - Boekler - Str. 7
Boulder, CO 80301 6057 Dietzenbach, Germany
TEL: 303-581-07000 TEL: 011-49-6074-8521-0
FAX: 303-581-9555 FAX: 011-49-6074-8521-21
45