UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
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 Identification No.)
incorporation or organization)
7725 WASHINGTON AVENUE SOUTH, EDINA, MN 55439
(Address of principal executive offices)
612-944-8144
(Registrant's telephone number, including area code)
NA
(Former name, former address, and former fiscal year, if changed
since last report.)
Common Stock outstanding at May 11, 1996 -- 3,069,000 shares
of $.01 par value Common Stock.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 1996
DESCRIPTION PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 (unaudited) and
December 31, 1995 3
Consolidated Statements of Operations
(unaudited) for the Three Months
Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
(unaudited) for the Three Months
Ended March 31, 1996 and 1995 5
Condensed Notes to Consolidated
Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II OTHER INFORMATION 13
Item 6. Exhibits 13
-2-
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(unaudited)
Current assets:
Cash................................................... $ 347,730 $ 230,014
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $604,138 and $644,576,
respectively.......................................... 6,005,397 9,493,142
Inventories (note 2)................................... 4,280,411 4,690,326
Income tax receivable.................................. 289,016 250,012
Prepaid expenses and other current assets.............. 642,701 330,975
Deferred income tax asset ............................. 1,196,000 1,196,000
Current installments of investment in sales-type leases 245,704 260,188
----------- -----------
Total current assets............................. 13,006,959 16,450,657
----------- -----------
Property, plant, and equipment, net........................ 4,708,000 4,883,766
Investment in sales-type leases, net of
current installments .................................... 249,764 307,120
Goodwill .................................................. 991,943 1,010,120
Other assets............................................... 1,098,663 1,132,547
----------- -----------
Total assets..................................... $20,055,329 $23,784,210
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable (note 6)................ $ 4,201,900 $ 4,725,400
Current installments of capital lease obligations ....... 37,338 35,750
Trade accounts payable................................... 2,536,562 5,761,742
Accrued expenses ........................................ 1,555,908 1,354,241
Deferred income and customer deposits.................... 679,527 765,777
----------- -----------
Total current liabilities.......................... 9,011,235 12,642,910
Notes payable, less current portion (note 6)............... 1,344 167,524
Deferred tax liability .................................... 131,000 131,000
Capital lease obligations, less current installments ...... 1,572,905 1,582,504
----------- -----------
Total liabilities.................................. 10,716,484 14,523,938
----------- -----------
Minority interest in inactive subsidiary................... 57,907 57,907
Stockholders' equity (note 4):
Common stock............................................. 30,690 30,510
Additional paid-in capital............................... 10,354,203 10,301,883
Accumulated Deficit (note 4)............................. (1,103,805) (1,151,280)
Equity adjustment from foreign currency translation...... (150) 21,252
----------- -----------
Total stockholders' equity......................... 9,280,938 9,202,365
Commitments and contingencies ............................. - -
----------- -----------
Total Liabilities and Stockholders' Equity............. $20,055,329 $23,784,210
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
-3-
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
------- ------
Revenues ............................................... $11,050,506 $12,533,886
Cost of revenues........................................ 7,881,997 9,290,434
----------- -----------
Gross Profit.................................. 3,168,509 3,243,452
----------- -----------
Operating expenses:
Engineering and development.......................... 776,848 798,978
Selling, general and administrative ................. 2,210,886 2,169,003
----------- -----------
Total operating expenses...................... 2,987,734 2,967,981
----------- -----------
Operating earnings ........................... 180,775 275,471
----------- -----------
Other (expense) income :
Interest............................................. (139,447) (118,904)
Gain on currency exchange............................ 5,093 119,292
Other, net .......................................... 25,054 12,639
----------- -----------
Total other expense, net...................... (109,300) (13,027)
----------- -----------
Earnings before income taxes.................. 71,475 288,498
Income tax expense ........................... 24,000 87,009
----------- -----------
Historical net earnings....................... $ 47,475 $ 201,489
----------- -----------
----------- -----------
Historical net earnings....................... $ 47,475 $ 201,489
Proforma income tax expense .................. 0 28,390
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Proforma net earnings ........................ $ 47,475 $ 173,099
----------- -----------
----------- -----------
Proforma net earnings per common and common
equivalent share............................ $ 0.02 $ 0.06
----------- -----------
----------- -----------
Weighted average shares and share equivalents 3,085,550 3,068,677
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
-4-
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1995
------ ------
Cash flows from operating activities:
Net earnings...................................... $ 47,475 $ 201,489
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 365,203 387,095
Change in reserve for excess and obsolete inventory 1,206 (73,337)
Change in reserve for doubtful accounts.......... (40,438) (6,304)
Gain on sale of property, plant, and equipment... 7,650 0
Deferred income tax.............................. 0 8,000
Increase in investment in sales-type leases...... 0 (143,808)
Changes in operating assets and liabilities:
Trade accounts receivable........................ 3,528,183 (169,709)
Inventories...................................... 408,709 214,592
Prepaid expenses and other current assets........ (311,726) (56,198)
Income tax receivable............................ (39,004) 88,580
Accounts payable................................. (3,225,174) (610,335)
Accrued expenses................................. 201,667 144,575
Deferred income and customer deposits............ (86,250) 52,265
----------- ----------
Net cash provided by operating activities..... 857,501 36,905
----------- ----------
Cash flows from investing activities:
Purchase of property, plant, and equipment......... (178,917) (509,710)
Other assets....................................... 33,884 (17,508)
Payments on investment in sales-type leases........ 71,841 74,951
----------- ----------
Net cash used in investing activities............ (73,192) (452,267)
----------- ----------
Cash flows from financing activities:
Payment of registration fees....................... 0 (18,400)
Proceeds from stock option exercise................ 52,500 0
Principal payments on capital lease obligation..... (8,011) (3,700)
Proceeds from other notes payable.................. 2,461,000 550,000
Repayment of other notes payable................... (3,150,680) (984,520)
Subchapter-S dividends paid........................ 0 (184,831)
----------- ----------
Net cash used in financing activities............ (645,191) (641,451)
----------- ----------
Effect of exchange rate changes on cash............... (21,402) 24,733
----------- ----------
Net increase (decrease) in cash....................... 117,716 (1,032,080)
Cash, beginning of period............................. 230,014 1,283,794
----------- ----------
Cash, end of period................................... $ 347,730 $ 251,714
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements
-5-
RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Rimage
Corporation, Rimage Europe Gmbh, A/G Systems Inc. d/b/a Duplication
Technology Inc. (Duplication Technology), ALF Products Inc. d/b/a
ALF/Rimage (ALF Products) and Knowledge Access Inc. (Knowledge Access),
collectively hereinafter referred to as the Company or Rimage. All
material intercompany accounts and transactions have been eliminated upon
consolidation.
Effective September 29, 1995, Rimage Corporation and Dunhill Software
Services Inc. (Dunhill) completed a merger. Dunhill, who had been a
significant customer of Rimage, is engaged in diskette duplication and
production services. For financial reporting purposes, the merger was
recorded using the pooling-of interests method of accounting under
generally accepted accounting principles. Accordingly, the historical
financial statements of Rimage presented in the first quarter of 1995
were restated to include the historical accounts and results of
operations of Dunhill.
As a result of this merger, Rimage operates in two segments. The Rimage
Systems segment consists of substantially all of the former Rimage
Companies. The Rimage Services segment consists of the former Dunhill
operation in addition to the service business at Duplication Technology.
Rimage Systems develops, manufactures and distributes diskette, tape and
CD-Recordable duplication equipment and related software products. Rimage
Services provides diskette duplication and production services to
software developers and manufacturers and information publishers.
The Company extends unsecured credit to its customers,
substantially all of whom are computer hardware, software and service
companies, software developers and manufacturers, and information
publishers.
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
Rimage believes that the disclosures are adequate to make the
information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the consolidated
financial position of the Company as of the dates and for the periods
presented, have been made. The results of operations for such
interim periods are not necessarily indicative of the results to be
expected for the entire year.
-6- (continued)
(2) INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(unaudited)
Finished goods and demonstration equipment $ 972,351 $1,297,788
Work-in-process 787,569 670,264
Purchased parts and subassemblies 3,256,697 3,457,274
---------- ----------
5,016,617 5,425,326
Less reserve for excess inventories 736,206 735,000
---------- ----------
Total inventories $4,280,411 $4,690,326
---------- ----------
---------- ----------
(3) SEGMENT REPORTING (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1996 1995
----------- ------------
Revenues from unaffiliated customers: (unaudited) (unaudited)
Systems $4,728 $4,189
Services 6,322 8,345
Operating earnings (loss):
Systems (135) (199)
Service 316 474
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
Net Identifiable Assets:
(unaudited)
Systems 10,551 11,781
Service 9,504 12,003
(4) STOCKHOLDERS' EQUITY
STOCK ISSUED IN ACQUISITION
On September 29, 1995, in connection with the merger between Rimage and
Dunhill Software Services, Inc., 1,100,000 shares of Rimage common stock were
issued. (see note 5.)
-7- (continued)
TERMINATION OF DUNHILL'S S-CORPORATION STATUS
On September 29, 1995, Dunhill Software Services, Inc. terminated its
S-Corporation election. Under SEC rules, Dunhill's accumulated retained
earnings of $2,611,979 as of the termination of the S-Corporation election
was reclassified against additional paid-in-capital.
STOCK OPTIONS
Rimage adopted a stock option plan on September 24, 1992 which allows for the
granting of options to purchase up to 250,000 shares of common stock to
certain key administrative, managerial and executive employees. Options under
this plan may be either incentive stock options or non-qualified options. In
1993, the Rimage board of directors increased the number of allowable shares
to 500,000. Pursuant to this plan, options to purchase 305,953 shares are
currently issued and outstanding.
(5) 1995 ACQUISITION
Effective at the close of business on September 29, 1995, and pursuant to the
Agreement and Plan of Reorganization (the Merger Agreement) dated June 6,
1995 by and between Rimage Corporation (Rimage), and Dunhill Software
Services Inc. (Dunhill), Rimage issued 1,100,000 shares of stock to the
former Dunhill shareholders and Dunhill was merged into Rimage. Dunhill
provides diskette duplication and production services to software developers
and manufacturers and information publishers, and historically was one of
Rimage's largest customers. Rimage intends to continue such business for the
foreseeable future. This merger was recorded using the pooling-of-interests
method of accounting. Accordingly the historical financial statements of
Rimage in the first quarter of 1995 were restated to include the historical
accounts and results of operations of Dunhill.
(6) NOTES PAYABLE TO BANK
On October 13, 1995, the Company signed a new Credit Agreement which
consolidated and redefined all previously outstanding Rimage and Dunhill
debt. This credit agreement covers all of the term and revolving notes
discussed below. The Company is required to maintain certain financial ratios
as a part of the agreement. The Company obtained waivers (and forbearance
through June 30, 1996) from the bank regarding the tangible capital base and
working capital ratios which were not in compliance as of and for the periods
ended March 31, 1996 and December 31, 1995.
The Company has a term note agreement with a bank. Borrowings under the
agreement are secured by substantially all Company assets, accrue interest at
the bank's reference rate plus 1/2 percent and are payable in 36 equal
monthly installments that commenced May 31, 1994. The interest rate was 8.75%
on March 31, 1996. The outstanding amount as of March 31, 1996 was $215,900.
The Company has another term note which expires on January 1, 1997. The term
note bears interest at 3/4% over the bank's reference rate and is secured by
substantially all Company assets. The interest rate was 9% on March 31, 1996.
The outstanding balance under this note on March 31, 1996 was $1,000,000.
-8- (continued)
The Company also has a revolving line of credit agreement with a bank that
expires on June 30, 1996. The line of credit provides for borrowing up to
$5,000,000. Borrowings under this agreement are secured by substantially all
Company assets and accrue interest at the bank's reference rate plus one-half
percent. Borrowings outstanding under this line were $2,986,000 on March 31,
1996.
(7) STATEMENTS OF CASH FLOWS
The following is additional information regarding cash flows and non-cash
investing and financing activities:
During the three months ended March 31, 1996 and 1995, cash paid for interest
was $140,049 and $111,671, respectively.
During the three months ended March 31, 1996 and 1995, cash paid for income
taxes was $28,950 and $115,274, respectively.
On September 29, 1995 Rimage issued 1,100,000 shares of its common stock in
connection with the merger with Dunhill Software Services, Inc.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's consolidated statements of operations, shown in thousands.
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
------- -------
Revenues from unaffiliated customers:
Systems.................................. $ 4,728 $ 4,189
Services................................. 6,322 8,345
------- -------
Total Revenues....................... 11,051 12,534
Cost of Revenues:
Systems.................................. 2,735 2,239
Service.................................. 5,147 7,051
------- -------
Total Cost of Revenues............... 7,882 9,290
Operating Expenses:
Systems.................................. 2,129 2,149
Service.................................. 859 820
------- -------
Total Operating Expenses............. 2,988 2,969
Operating Earnings (Loss):
Systems.................................. (135) (199)
Service.................................. 316 474
------- -------
Total Operating Earnings............. $181 $275
------- -------
------- -------
RESULTS OF OPERATIONS
Rimage designs, manufactures and sells computer media duplication and printing
systems, and also provides media duplication services. The Company's revenues
decreased by 12% in the first quarter of 1996 when compared to first quarter
of 1995. Consolidated net earnings for the quarter ended March 31, 1996 were
$47,475 compared to first quarter 1995 proforma net earnings of $173,099.
SYSTEMS SEGMENT -- THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Systems revenues (which include equipment sold from Rimage Systems --
Minneapolis, Rimage Europe, Duplication Technology, and Knowledge Access
International) for the quarter ended March 31, 1996 increased by
approximately $540,000 when compared to the first quarter of 1995. This
increase was due to
-10-
relatively stable diskette equipment sales, strong European sales, and
increased sales in CD-Recordable ("CD-R") equipment. The Company expects these
trends to continue, and also expects significantly more of its future
equipment revenues to occur in CD markets.
Gross profit in the first three months of 1996 as a percentage of revenues,
decreased to 42.2% from 46.5% during the same period of 1995. This decrease is
mainly due to the prevalence in the diskette equipment industry of
discounting sales prices for equipment, which has resulted from soft demand.
Operating expenses for the quarter ended March 31, 1996 decreased by
approximately $20,000 or 1.0% compared to the expenses in the same period of
1995.
Operating losses for the quarter ended March 31, 1995 decreased to
approximately ($136,000) from approximately ($199,000) during the same period
of 1995. This improvement was due to the aforementioned revenue increases,
operating expense decreases and was partially offset by the gross profit
deterioration.
SERVICE SEGMENT -- THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Service revenues (which include the revenues of the Rimage Service Group,
formerly "Dunhill", as well as the service business of Duplication
Technology) for the quarter ended March 31, 1996 decreased by approximately
$2,023,000 compared to the same period of 1995. This decrease resulted in
general from lower demand, and fell primarily due to one large 1995 software
release that did not recur in 1996.
Gross profit for the quarter ended March 31, 1996, as a percentage of
revenues, increased to 18.6% from 15.5% during the same period of 1995. This
increase is primarily attributable to reduced media costs.
Operating expenses for the quarter ended March 31, 1996 increased by
approximately $40,000 over the same period of 1995, and increased, as a
percentage of revenues, to 13.6% in 1996 from 9.8% in 1995. Fixed operating
costs were relatively stable on lower revenues. In addition, the Company
incurred approximately $122,000 of 1996 expenses for the set-up and operation
of its newly formed optical equipment division.
Operating earnings for the quarter ended March 31, 1996 declined to
approximately $316,000 from $474,000 for the same period of 1995. The
decrease results from the aforementioned revenue decline and the increased
operating expenses associated with the optical equipment division, and is
offset by the gross margin improvement.
CONSOLIDATED THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues for the three months ended March 31, 1996 decreased by approximately
$1,483,000 when compared to the same period of 1995. This decrease was a
result of the decline in Service revenues and was partially offset by the
improvement in Systems revenue. The Company had two significant customers
which accounted for 21% and 15% of revenues during the quarter ended March
31, 1996, and 2% and 47% of revenues during the quarter ended March 31, 1995.
-11-
Gross profit for the quarter ended March 31, 1996 as a percentage of
revenues, increased to 28.7% from 25.9% during the first quarter of 1995.
This increase was primarily due to substantially lower media costs at
Services revenues, and was also affected by the change in sales mix.
Operating expenses for the quarter ended March 31, 1996 increased by
approximately $20,000 compared to the same period of 1995 and, as a
percentage of sales, increased to 27.0% from 23.7% in the same period of
1995. This was due to the lower revenues generated on similar fixed costs.
Net other expenses were approximately $122,000 higher in the first quarter of
1996 versus the first quarter of 1995. This was primarily due to currency
exchange fluctuations and higher interest expense. Interest expense increased
by approximately $20,000, due to the increased credit line usage in 1996 for
working capital. Income tax expense was $24,000 for the quarter ended March
31, 1996 compared to proforma income tax expense of approximately $116,000 in
1995. Prior to the merger on September 29, 1995, Dunhill Software was a
Subchapter-S Corporation and thus was not subject to federal income taxes.
Net earnings were approximately $47,000 for the quarter ended March 31, 1996
versus proforma net earnings of approximately $173,000 for the same period of
1995. Net earnings per share were $.02 for the quarter ended march 31, 1996
versus proforma net earnings per share of $.06 for the same period of 1995.
The reasons for these decreases are detailed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $857,501 and $36,905 in the
first quarter of 1996 and 1995. The 1996 increase resulted primarily from the
reduction in accounts receivable of $3,528,183 and inventories of $408,709
and was partially offset by the decrease in accounts payables of $3,225,174.
The cash used in investing activities was $73,192 and $452,267 during the
first quarter of 1996 and 1995. At March 31, 1996 the Company had no
significant commitments to purchase additional capital equipment.
At March 31, 1996, the Company's working capital was approximately $3,996,000
compared to $3,808,000 at December 31, 1995. The net cash used in financing
activities was $645,191 and $641,451 for the quarters ended March 31, 1996
and 1995, respectively. The Company paid down approximately $690,000 of bank
debt during the first quarter of 1996. The Company has a line of credit
agreement totaling $5,000,000 with a bank, which expire June 30, 1996.
Advances under this line of credit are secured by substantially all the
Company's assets, are subject to borrowing base requirements, are due on
demand and bear interest at the bank's reference rate plus 1/2 percent. At
March 31, 1996, the Company had borrowings under this line totaling
$2,986,000. The Company also has term note agreements totaling $1,217,244
under various terms that are secured by substantially all the Company's
assets, and bear interest varying from the bank's reference rate plus 1/2
percent to plus 3/4 percent. The Company obtained waivers (and forbearance
through June 30, 1996) from the bank for any financial ratios on which it is
out of compliance at March 31, 1996 and December 31, 1995. The Company is
currently negotiating an extension of this line. The Company believes its
banking relationship is good and that satisfactory financing will be
available on terms acceptable to the Company for the foreseeable future.
-12-
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable.
Item 2. CHANGES IN SECURITIES
Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Item 5. OTHER INFORMATION
Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. 11. Calculation of Earnings Per Share.
(b) Reports on Form 8-K:
Not Applicable.
-13-
In accordance with the Exchange Act, this report has been signed below by
following persons on behalf of the registrant and on the dates indicated.
RIMAGE CORPORATE
-------------------------
Registrant
Date: May 10, 1996 By Ronald R. Fletcher
---------------- --------------------------
Ronald R. Fletcher
Chairman of the Board
Chief Executive Officer
Date: May 10, 1996 By Jon D. Wylie
---------------- --------------------------
Jon D. Wylie
Chief Financial Officer