<PAGE>
CONFORMED
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 September 30, 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
incorporation or organization) No.)
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 November 8, 1996 -- 3,084,500 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
----- -----
<PAGE>
RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE NINE MONTHS ENDED September 30, 1996
Description Page
----------- ----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 (unaudited) and
December 31, 1995 3
Consolidated Statements of Operations
(unaudited) for the Three Months and
Nine Months Ended September 30, 1996
and 1995 4
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months
Ended September 30, 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 10-13
PART II OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 6. Exhibits 14
-2-
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31,
1996 1995
------------- ------------
Current assets: (unaudited)
Cash . . . . . . . . . . . . . . . . . . . . . $ 24,712 $ 230,014
Trade accounts receivable, net of allowance
for doubtful accounts and sales returns
of $519,832 and $644,576 respectively . . . . 8,345,534 9,493,142
Inventories (note 2) . . . . . . . . . . . . . 4,818,850 4,690,326
Income tax receivable. . . . . . . . . . . . . 243,595 250,012
Prepaid expenses and other current assets. . . 422,878 330,975
Current portion of deferred income tax asset . 1,196,000 1,196,000
Current installments of investment in
sales-type leases . . . . . . . . . . . . . . 226,217 260,188
----------- -----------
Total current assets . . . . . . . . . . . 15,277,786 16,450,657
----------- -----------
Property, plant, and equipment, net. . . . . . . 8,966,721 4,883,766
Investment in sales-type leases, net of
current installments . . . . . . . . . . . . . 208,650 307,120
Goodwill . . . . . . . . . . . . . . . . . . . . 949,585 1,010,120
Deferred income tax asset net of current
portion. . . . . . . . . . . . . . . . . . . . 123,388 0
Other assets . . . . . . . . . . . . . . . . . . 872,972 1,132,547
----------- -----------
Total assets . . . . . . . . . . . . . . . $ 26,399,102 $ 23,784,210
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable (note 6). . . $ 6,820,000 $ 4,725,400
Current installments of capital lease
obligations . . . . . . . . . . . . . . . . . 316,894 35,750
Trade accounts payable . . . . . . . . . . . . 5,489,549 5,761,742
Accrued expenses . . . . . . . . . . . . . . . 1,518,079 1,354,241
Deferred income and customer deposits. . . . . 474,169 765,777
----------- -----------
Total current liabilities. . . . . . . . . 14,618,691 12,642,910
Notes payable, less current portion (note 6) . . 183 167,524
Deferred tax liability . . . . . . . . . . . . . 131,000 131,000
Capital lease obligations, less current
installments . . . . . . . . . . . . . . . . . 3,107,527 1,582,504
----------- -----------
Total liabilities. . . . . . . . . . . . . 17,857,401 14,523,938
----------- -----------
Minority interest in inactive subsidiary . . . . 57,907 57,907
Stockholders' equity (note 4):
Common stock . . . . . . . . . . . . . . . . . 30,845 30,510
Additional paid-in capital . . . . . . . . . . 10,447,798 10,301,883
Accumulated deficit (note 4) . . . . . . . . . (1,964,079) (1,151,280)
Equity adjustment from foreign currency
translation . . . . . . . . . . . . . . . . . (30,770) 21,252
----------- -----------
Total stockholders' equity . . . . . . . . 8,483,794 9,202,365
Commitments and contingencies . . . . . . . . . - -
Total Liabilities and Stockholders' Equity . . $ 26,399,102 $ 23,784,210
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements
-3-
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $12,121,699 $14,861,878 $33,072,107 $37,399,060
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . 9,333,752 11,284,929 24,941,683 27,819,388
----------- ----------- ----------- -----------
Gross Profit. . . . . . . . . . . . . . . . . . . . . . 2,787,947 3,576,949 8,130,424 9,579,672
----------- ----------- ----------- -----------
Operating expenses:
Engineering and development . . . . . . . . . . . . . . 587,113 852,590 2,054,242 2,508,012
Selling, general and administrative . . . . . . . . . . 2,058,406 2,517,899 6,539,688 6,880,474
----------- ----------- ----------- -----------
Total operating expenses. . . . . . . . . . . . . . . . 2,645,519 3,370,489 8,593,930 9,388,486
----------- ----------- ----------- -----------
Operating earnings (loss) . . . . . . . . . . . . . . . 142,428 206,460 (463,506) 191,186
----------- ----------- ----------- -----------
Other income (expense)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . (167,603) (157,367) (439,097) (413,403)
Gain(loss) on currency exchange. . . . . . . . . . . . . . 38,942 (34,419) 27,335 72,011
Merger expense . . . . . . . . . . . . . . . . . . . . . . 0 (156,238) 0 (156,238)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 23,318 37,273 62,469 26,760
----------- ----------- ----------- -----------
Total other expenses, net . . . . . . . . . . . . . . . (105,343) (310,751) (349,293) (470,870)
----------- ----------- ----------- -----------
Net earnings (loss) before income taxes . . . . . . . . 37,085 (104,291) (812,799) (279,684)
Income tax benefit. . . . . . . . . . . . . . . . . . . 0 (112,010) 0 (137,000)
----------- ----------- ----------- -----------
Historical net earnings (loss) . . . . . . . . . . . . $ 37,085 $ 7,719 $ (812,799) $ (142,684)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Historical net earnings (loss) . . . . . . . . . . . . $ 37,085 $ 7,719 $ (812,799) $ (142,684)
Proforma income tax expense . . . . . . . . . . . . . . 0 89,727 0 25,000
----------- ----------- ----------- -----------
Proforma net earnings (loss). . . . . . . . . . . . . . $ 37,085 $ (82,008) $ (812,799) $ (167,684)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Proforma net earnings (loss) per common
and common equivalent share . . . . . . . . . . . . . $0.01 ($0.03) ($0.26) ($0.05)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares and share
equivalents outstanding . . . . . . . . . . . . . . . 3,118,432 3,083,834 3,107,427 3,066,593
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying condensed notes to the consolidated financial statements
-4-
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
1996 1995
--------------- --------------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . $ (812,799) $ (142,684)
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation
and amortization. . . . . . . . . . . 1,120,775 1,108,297
Change in reserve for excess and
obsolete inventories. . . . . . . . . (110,000) 354,077
Change in reserve for doubtful
accounts. . . . . . . . . . . . . . . (124,744) 200,142
Gain on sale of property, plant,
and equipment . . . . . . . . . . . . (3,469) 0
Deferred income tax . . . . . . . . . (123,388) (104,000)
Increase in investment in
sales-type leases . . . . . . . . . . (73,452) (195,258)
Changes in operating assets and
liabilities:
Trade accounts receivable. . . . . . . 1,272,352 (3,468,361)
Inventories. . . . . . . . . . . . . . (18,524) (1,146,993)
Prepaid expenses and other
current assets. . . . . . . . . . . . (91,903) (115,806)
Income tax receivable. . . . . . . . . 6,417 (33,808)
Accounts payable . . . . . . . . . . . (272,193) 848,393
Accrued expenses . . . . . . . . . . . 163,838 1,172,213
Deferred income and customer
deposits. . . . . . . . . . . . . . . (291,608) 129,367
------------ -----------
Net cash provided by (used in)
operating activities . . . . . . . 641,302 (1,394,421)
------------ -----------
Cash flows from investing activities:. . . . .
Purchase of property, plant, and
equipment. . . . . . . . . . . . . . . . (5,160,376) (1,230,465)
Proceeds from the sale of property
and equipment. . . . . . . . . . . . . . 20,650 0
Other assets. . . . . . . . . . . . . . . 259,575 (262,528)
Payments on investment in sales-type
leases . . . . . . . . . . . . . . . . . 205,893 168,706
------------ -----------
Net cash used in investing
activities . . . . . . . . . . . . (4,674,258) (1,324,287)
------------ -----------
Cash flows from financing activities:
Payment of registration fees. . . . . . . 0 (18,400)
Proceeds from capital lease
equipment financing. . . . . . . . . . . 1,822,770 0
Proceeds from stock
option exercise. . . . . . . . . . . . . 146,250 0
Principal payments on capital
lease obligation . . . . . . . . . . . . (16,603) (26,973)
Proceeds from other notes payable . . . . 13,993,300 3,545,000
Repayment of other notes payable. . . . . (12,066,041) (1,296,207)
Subchapter-S dividends paid . . . . . . . 0 (718,468)
------------ -----------
Net cash provided by
financing activities . . . . . . . 3,879,676 1,484,952
------------ -----------
Effect of exchange rate changes on cash. . . . (52,022) 12,682
------------ -----------
Net decrease in cash . . . . . . . . . . . . . (205,302) (1,221,074)
Cash, beginning of period. . . . . . . . . . . 230,014 1,283,794
------------ -----------
Cash, end of period . . . . . . . . . . . . . $ 24,712 $ 62,720
------------ -----------
------------ -----------
See accompanying notes to the consolidated financial statements
-5-
<PAGE>
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, Rimage Singapore, 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 for the three and nine month
periods ended September 30, 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, plus the newly formed optical systems division and Rimage
Singapore subsidiary. 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, CD-
Recordable, and CD-ROM publishing and replication equipment, and related
software products. Rimage Services provides diskette, tape and CD-ROM
duplication and production services to software developers and
manufacturers and information publishers.
The Company extends unsecured credit to its customers, of which, the
majority 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)
<PAGE>
(2) INVENTORIES
Inventories consist of the following:
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
Finished goods and demonstration
equipment $1,242,429 $1,297,788
Work-in-process 709,572 670,264
Purchased parts and subassemblies 3,491,849 3,457,274
---------- ----------
5,443,850 5,425,326
Less reserve for excess inventories 625,000 735,000
---------- ----------
Total inventories $4,818,850 $4,690,326
---------- ----------
---------- ----------
(3) SEGMENT REPORTING (IN THOUSANDS)
Nine Months Ended
September 30,
1996 1995
----------- -----------
Revenues from unaffiliated customers: (unaudited) (unaudited)
Systems $18,524 $12,343
Services 14,548 25,056
Operating earnings (loss):
Systems (473) (1,916)
Service 9 2,107
September 30, December 31,
1996 1995
------------- ------------
Net Identifiable Assets: (unaudited)
Systems 11,878 11,781
Service 14,521 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)
<PAGE>
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
290,453 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 presented for the three and nine month
periods ended September 30, 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. On August 29, 1996 the Company renewed and amended its earlier
agreements. This credit agreement covers the term and revolving notes
discussed below. The Company is required to maintain certain financial
ratios as a part of the agreement. The Company's working capital and
leverage ratios were not in compliance as of and for the periods ended
September 30, 1996, and the Company is currently negotiating with the bank
to obtain the necessary waivers.
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 3/4 percent and is payable in 8 equal
monthly installments of $77,800 each that commenced on October 1, 1996 and
which will continue until June 30, 1997 when the remaining balance shall be
due. The interest rate was 9% on September 30, 1996. The outstanding
amount as of September 30, 1996 was $2,800,000.
-8- (continued)
<PAGE>
The Company also has a revolving line of credit agreement with a bank which
expires on June 30, 1997, and which 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 $4,020,000
on September 30, 1996.
(7) STATEMENTS OF CASH FLOWS
The following is additional information regarding cash flows and non-cash
investing and financing activities:
During the nine months ended September 30, 1996 and 1995, cash paid for
interest was $406,151 and $386,631, respectively.
During the nine months ended September 30, 1996 and 1995, cash (received)
paid for income taxes was ($3,028) and $1,337, 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-
<PAGE>
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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- -----
<S> <C> <C> <C> <C>
Revenues to unaffiliated customers:
Systems . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,562 $ 4,658 $18,524 $12,343
Services. . . . . . . . . . . . . . . . . . . . . . . . . 4,560 10,204 14,548 25,056
--------- -------- --------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . 12,122 14,862 33,072 37,399
Cost of Revenues:
Systems . . . . . . . . . . . . . . . . . . . . . . . . . 5,555 3,265 12,605 7,363
Service . . . . . . . . . . . . . . . . . . . . . . . . . 3,779 8,020 12,337 20,456
--------- -------- --------- ---------
Total Cost of. . . . . . . . . . . . . . . . . . . . . 9,334 11,285 24,942 27,819
Operating Expenses:
Systems . . . . . . . . . . . . . . . . . . . . . . . . . 1,903 2,459 6,392 6,896
Service . . . . . . . . . . . . . . . . . . . . . . . . . 743 912 2,202 2,492
--------- -------- --------- ---------
Total Operating. . . . . . . . . . . . . . . . . . . . 2,646 3,370 8,594 9,388
Operating Earnings (Loss):
System. . . . . . . . . . . . . . . . . . . . . . . . . . 104 (1,066) (473) (1,916)
Service . . . . . . . . . . . . . . . . . . . . . . . . . 38 1,272 9 2,107
--------- -------- --------- ---------
Total Operating Earnings (Loss). . . . . . . . . . . . 142 $ 206 (464) $ 192
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in media
or method used for distribution of software, technological changes in products
offered by the Company or its competitors and changes in general conditions in
the computer market.
-10-
<PAGE>
RESULTS OF OPERATIONS
Rimage designs, manufactures and sells computer media publishing, replication,
and printing systems, and also provides media duplication services. The
Company's revenues decreased by 18% and 12% in the three months and nine months
ended September 30, 1996 when compared to corresponding 1995 revenues.
Consolidated net earnings (loss) for the three and nine month periods ended
September 30, 1996 was $37,085 and ($812,799), respectively compared to
corresponding 1995 net loss of ($82,008) and ($167,684).
SYSTEMS SEGMENT - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Systems revenues (which include equipment sold from Rimage Systems -
Minneapolis, Rimage Europe, Duplication Technology, and Knowledge Access
International) for the three and nine months ended September 30, 1995 increased
by $2,904,238 and $6,181,173 respectively, when compared to the same periods of
1995. These increases were a result of the Company's transition to new
products, specifically away from diskette equipment and into CD-Recordable
("CDR") and CD-ROM equipment. The Company expects increasing revenue growth
from its optical products which are expected to exceed the declines of diskette
and equipment revenues.
Gross profit in the first three and six months of 1996 as a percentage of
revenues, decreased to 26.5% and 32.0% respectively, from 28.7% and 40.3% in
the same periods of 1995. These decreases result from two main reasons;
Sales mix changes resulting from revenues generated from the new CD-ROM
equipment division that are higher revenue and lower margin in nature. And
the prevalence in the diskette equipment industry of discounting sales prices
for equipment which has resulted from soft demand caused by the shift to
optical media products.
Operating expenses for three and nine months ended September 30, 1996 decreased
by $556,575 and $503,847 compared to the expenses in the same periods of 1995.
These decreases are attributable to staff reductions at the Minneapolis Systems
and KAI divisions and were partially offset by the new 1996 divisions created
for Optical equipment and the opening of Rimage Singapore. Operating expenses,
as a percentage of revenues decreased in the three and nine months ended
September 30, 1996 to 25.2% and 34.5% respectively, from 52.8% and 55.9% in the
same periods of 1995.
Operating earnings (loss) for the three and nine months ended September 30, 1996
improved to $104,598 and ($473,003) respectively, from ($1,118,384) and
($1,916,106) during the same periods of 1995. This improvement was due to the
aforementioned revenue increases and operating expense reductions, but was
offset by the gross profit deterioration.
-11-
<PAGE>
SERVICE SEGMENT - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 three and nine months ended September 30, 1996 decreased by $5,644,417
and $10,508,126 compared to the same periods of 1995. These decreases resulted
from the trend away from diskette and toward optical media, and also from the
decreased revenues associated with one large 1995 software release that did not
recur in 1996 and the reduced 1996 revenues from one other significant customer.
The Company had two significant customers that accounted for 32% and 17%,
respectively of service revenues in the first nine months of 1996.
Gross profit for the three and nine months ended September 30, 1996, as a
percentage of revenues, decreased to 17.1% and 15.2% respectively, from 21.4%
and 18.4% during the same periods of 1995. These decreases are mainly
attributable to the lower revenues and the fixed nature of some manufacturing
costs.
Operating expenses for the three and nine months ended September 30, 1996
decreased by $168,397 and $290,709 respectively, over operating expenses for the
same periods of 1995, but increased as a percentage of revenues to 16.3% and
15.1% in 1996 from 8.9% and 9.9% in 1995. Operating expenses were relatively
fixed when compared to the lower revenues.
Operating earnings for the three and nine months ended September 30, 1996
declined substantially to $37,830 and $9,497 respectively, from $1,272,676 and
$2,107,292 for the same periods of 1995. The declines result from the
aforementioned revenue reductions compared to cost of sales and operating
expenses that did not fall proportionally.
CONSOLIDATED THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues for the three and nine months ended September 30, 1996 decreased by
$2,740,179 and $4,326,953 when compared to the same periods of 1995. These
decreases were a result of the reduced service revenues and were partially
offset by the increase in systems revenues. The Company had one significant
customer which totaled 14% of revenues during the nine months ended September
30, 1996.
Gross profit for the three and nine months ended September 30, 1996 as a
percentage of revenues, decreased to 23.0% and 24.6% respectively, from 24.1%
and 25.6% during same periods of 1995. These decreases are mainly due to the
change in revenue mix (new CD-ROM revenues which are lower margin in nature),
the sales discounting prevalent on diskette systems revenues, and the lower
service revenues on relatively stable fixed manufacturing costs.
Operating expenses for the three and nine months ended September 30, 1996
decreased by $724,970 and $794,556 compared to the same periods of 1995.
Operating expenses, as a percentage of sales in the three and nine months ended
September 30, 1996 were 21.8% and 26.0% respectively, compared to 22.7% and
25.1% in the same periods of 1995. There were operating expense reductions in
existing businesses, which were partially offset by new expenses incurred in the
optical service, optical equipment, and Rimage Singapore divisions.
-12-
<PAGE>
Net other expenses were approximately $205,000 and $122,000 lower for the three
and nine month periods ended September 30, 1996 when compared to the same
periods of 1995, primarily due to currency exchange fluctuations, and 1995
merger expense of approximately $156,000. The Company has not booked any
income tax benefit related to the 1996 losses. Prior to the merger on September
30, 1995, Dunhill Software was a Subchapter-S Corporation and thus was not
subject to federal income taxes.
Net earnings (loss) was $37,085 and ($812,799) respectively, for the three and
nine month periods ended September 30, 1996 versus ($82,008) and ($167,684) for
the same periods of 1995. Net earnings (loss) per share was $.01 and ($.26)
respectively, for the three and nine months ended September 30, 1996 versus
($.03) and ($.05) for the same periods of 1995. The increases in both loss and
loss per share are attributable to the gross margin deterioration, the
unrecorded tax benefit in 1996, and the relatively stable fixed operating costs
incurred on smaller revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $641,302 and
($1,394,421) in the first nine months of 1996 and 1995, respectively. The 1996
increase resulted primarily from the reduction in accounts receivable of
$1,272,352 and was partially offset by the decrease in accounts payables of
$272,193 and the decrease in deferred income and customer deposits of $291,608.
The cash used in investing activities was $4,674,258 and $1,324,287 during
the first nine months of 1996 and 1995, respectively. In Third Quarter 1996,
the Company purchased approximately $4,100,000 in CD-ROM production equipment.
At September 30, 1996 the Company has no significant commitments to purchase
equipment.
At September 30, 1996, the Company's working capital was approximately
$659,000 compared to $3,808,000 at December 31, 1995. This difference results
primarily from capital equipment purchases, which have not yet been financed on
a long-term basis. The net cash provided by financing activities was
$3,879,676 and $1,484,952 for the nine months ended September 30, 1996 and 1995,
respectively, as the Company's note payable rose by $1,927,259 and it added
equipment lease financing of $1,822,770.
The Company has a line of credit agreement totaling $5,000,000 with a
bank, which expires on June 30, 1997. 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 3/4 percent. At September 30, 1996, the Company had borrowings under this
line totaling $4,020,000. The Company also has a term note agreement totaling
$2,800,000 that is secured by substantially all the Company's assets, and bears
interest at the bank's reference rate plus 1/2 percent. The Company is
currently negotiating with the bank to obtain waivers on the covenants and
requirements on which it was out of compliance on as of September 30, 1996. 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.
As of late September 1996, the Company has now added CD-ROM optical capacity
to transition into the optical service business. The Company has obtained
partial lease financing of $1,822,770 for its CD-ROM equipment purchases and
is currently negotiating to obtain further lease financing on an approximate
additional amount of $1,500,000.
-13-
<PAGE>
PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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
None.
Item 5. OTHER INFORMATION
Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. 10.1 Second Amendment to Loan Agreement
Exhibit No. 11. Calculation of Earnings Per Share.
Exhibit No. 27. Financial Data Schedule.
(b) Reports on Form 8-K:
Not Applicable.
-14-
<PAGE>
SIGNATURES
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 CORPORATION
Registrant
Date: November 12, 1996 By : /s/ Ronald R. Fletcher
-------------------- ----------------------
Ronald R. Fletcher
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 By: /s/ Jon D. Wylie
-------------------- -----------------
Jon D. Wylie
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
-15-
<PAGE>
EXHIBIT 11
RIMAGE CORPORATION
COMPUTATION OF NET EARNINGS PER SHARE OF COMMON STOCK
Net earnings per common share is determined by dividing the net earnings by
the weighted average number of shares of common stock and common share
equivalents outstanding. The following is a summary of the weighted average
common shares outstanding and common share equivalents:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Shares Outstanding at
beginning of period 3,084,500 1,950,000 3,051,000 1,950,000
Common stock issued in merger
with Dunhill Software Services 0 1,100,000 0 1,100,000
Shares Outstanding at
beginning of perod 3,084,500 3,050,000 3,051,000 3,050,000
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Common stock issued in stock
option exercise 0 0 33,500 0
Shares Outstanding at
end of period 3,084,500 3,050,000 3,084,500 3,050,000
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average shares
of common stock outstanding 3,084,500 3,050,000 3,071,505 3,050,000
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Common stock equivalents 397,453 391,455 397,453 306,455
Weighted average shares of
common stock equivalents 33,932 33,834 35,921 16,593
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average shares of
common stock and
stock equivalents 3,118,432 3,083,834 3,107,427 3,066,593
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net earnings (loss) $37,085 $ (82,008) $ (812,799) $ (167,684)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net earnings (loss) per share $0.01 $(0.03) $(0.26) $(0.05)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amendment to Amended and Restated Credit Agreement (this
"Second Amendment"), dated as of August 29, 1996, is entered into by and between
RIMAGE CORPORATION, a Minnesota corporation (the "Company") and FIRST BANK
NATIONAL ASSOCIATION, a national banking association (the "Bank").
RECITALS
WHEREAS, the Company and the Bank previously entered into that certain
Loan Agreement dated as of October 13, 1995, as amended by a First Amendment to
Amended and Restated Credit Agreement (as amended, the "Agreement");
WHEREAS, the Company and the Bank desire to amend the Agreement to
extend the maturity date of the Revolving Note and to add an additional term
loan thereto;
NOW, THEREFORE, in consideration of the premises and for good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, it is hereby agreed by and between the Company and the Bank as
follows:
1. DEFINED TERMS. All capitalized terms used in this Second
Amendment shall, except as otherwise defined herein or where the context
otherwise requires, have the meaning set forth in the Agreement.
2. AMENDMENT. The Agreement is hereby amended as follows:
2.1 AMENDMENT NUMBER ONE: Article I of the Agreement is amended
by amending the definitions of "Dunhill Term Note", "Note" and "Replacement Term
Note" in their entireties to provide as follows:
"DUNHILL TERM NOTE": As defined in Section 2.9.
"NOTE": The Revolving Note or the Term Note (together,
the "Notes").
"REPLACEMENT TERM NOTE": The promissory note defined in Section
2.9 and issued in replacement of the Dunhill Term Note.
<PAGE>
2.2 AMENDMENT NUMBER TWO: The definition of Maturity Date in
Section 2.1 of the Agreement is amended by deleting the date "August 15,
1996" and inserting in its place "June 30, 1997".
2.3 AMENDMENT NUMBER THREE: Section 2.4 of the Agreement is
amended in its entirety to provide as follows:
Section 2.4 INTEREST RATES, INTEREST PAYMENTS AND DEFAULT INTEREST.
Interest on the Revolving Note shall accrue and be payable at a floating
rate per annum equal to the sum of the Reference Rate plus one-half of one
percent (0.5%) per annum, provided that, upon the occurrence and during the
continuation of an Event of Default, all amounts outstanding under the
Revolving Note shall bear interest at the rate otherwise applicable
thereto, plus 2.0% per annum. Interest shall be payable monthly in arrears
on the first day of each month commencing September 1, 1996 and at the
Maturity Date.
2.4 AMENDMENT NUMBER FOUR: Section 2.9 of the Agreement is
amended in its entirety to provide as follows:
Section 2.09 TERM LOAN. The Bank has previously made term loans to
the Borrower as evidenced by that certain term note from the Borrower to
the Bank in the original principal amount of $600,000 dated March 18, 1994
(the "Prior Term Note") and by that certain Replacement Term Note in the
original principal amount of $1,500,000 dated as of October 13, 1995 (the
"Replacement Term Note") which replaced that certain term note from the
Bank to Dunhill Software Services, Inc. (which was acquired by the
Borrower) dated as of June 30, 1995 in the original principal amount of
$1,800,000 (the "Dunhill Term Note"). On the date of the Second Amendment
to this Agreement (the "Second Amendment") the Bank shall lend to the
Borrower the principal amount of $2,800,000 (the "Term Loan"). The
proceeds of the Term Loan shall be used in part to refinance the amounts
due under the Prior Term Note and the Replacement Term Note, each of which
shall be replaced by the term note, substantially in the form of Exhibit A
attached to the Second Amendment (the "Term Note"). The remaining proceeds
of the Term Loan shall be used to purchase equipment and to term out a
portion of the Borrower's indebtedness under the Revolving Note. The Term
Loan shall bear interest and shall be repaid in accordance with the
provisions of the Term Note.
2.5 AMENDMENT NUMBER FIVE: Section 2.10 of the Agreement is
amended in its entirety to provide as follows:
Section 2.10 INTENTIONALLY OMITTED.
-2-
<PAGE>
2.6 AMENDMENT NUMBER SIX: Section 5.1(a) of the Agreement is
amended in its entirety to provide as follows:
5.1(a) As soon as available and in any event within 120 days after the
end of each fiscal year of the Borrower, audited financial statements of
the Borrower consisting of at least statements of income, cash flow and
changes in stockholders' equity, and a balance sheet as at the end of such
year, setting forth in each case in comparative form corresponding figures
from the previous annual audit, certified without qualification by
independent certified public accountants of recognized national standing
selected by the Borrower and acceptable to the Bank, with computations
showing whether the Borrower is in compliance with all financial covenants
of this Agreement.
2.7 AMENDMENT NUMBER SEVEN: Section 5.1(b) of the Agreement is
amended by adding at the end thereof, prior to the period, the following:
", together with a covenant compliance certificate in a form
satisfactory to the Bank and including therewith such calculation
detail as the Bank may reasonably require"
2.8 AMENDMENT NUMBER EIGHT: Section 5.1(d) of the Agreement is
amended in its entirety to provide as follows:
5.1(d) As soon as practicable and in any event within 30 days after
the end of each month, an accounts receivable aging report signed by the
chief financial officer of the Borrower, as of the last day of the month
just ended.
2.9 AMENDMENT NUMBER TEN: There is added to the Agreement the
following new Section 5.12:
Section 5.12 FOREIGN CREDIT INSURANCE. The Borrower will secure
foreign credit insurance in form and substance satisfactory to the Bank and
covering the accounts of Rimage Europe GmbH by no later than November 30,
1996 and will provide proof of the same to the Bank.
2.10 AMENDMENT NUMBER TEN: Section 6.6 of the Agreement is
amended in its entirety to provide as follows:
Section 6.6 TANGIBLE CAPITAL BASE. The Borrower will not permit
its Tangible Capital Base to be less than $6,700,000 at any time through
December 30, 1996, and $8,500,000 on December 31, 1996 and at any time
thereafter.
-3-
<PAGE>
2.11 AMENDMENT NUMBER ELEVEN: Section 6.7 of the Agreement is
amended in its entirety to provide as follows:
Section 6.7 WORKING CAPITAL. The Borrower will not permit its Working
Capital (the excess of its current assets over its current liabilities) to
be less than $3,000,000 at any time.
2.12 AMENDMENT NUMBER TWELVE: Section 6.8 of the Agreement is
amended in its entirety to provide as follows:
Section 6.8 LEVERAGE RATIO. The Borrower will not permit its Leverage
Ratio (the ratio of its liabilities, excluding minority interests in any
subsidiary, to its Tangible Capital Base) to be more than 2.5 to 1.0 at any
time through December 30, 1996 and more than 2.0 to 1.0 on December 31,
1996 and at any time thereafter.
2.13 AMENDMENT NUMBER THIRTEEN: There is added to the Agreement
the following new Section 6.9:
Section 6.9 Net Income. The Borrower will not permit its net income
after taxes and after distributions to be less than $1,000,000 for the year
ending December 31, 1996.
3. CONDITIONS TO EFFECTIVENESS OF THIS SECOND AMENDMENT. This
Second Amendment shall not become effective until, and shall become effective
when, each of the following conditions precedent shall have been fulfilled:
(a) The Bank shall have received this Second Amendment, the
Term Note and such other documents as the Bank may require, each duly
executed by the Company;
(b) The Bank shall have received a copy of the
Resolutions of the Board of Directors of the Company authorizing
the execution, delivery and performance of this Second Amendment,
and the other documents required by the Bank with such resolutions
certified by the Secretary of the Company as accurate, not
rescinded or repealed and entered into the corporate minutes of the
Company;
(c) The Bank shall have received a certification by the
secretary of the Company (i) certifying that there has been no
amendment to the Articles of Incorporation or Bylaws of the Company
since the same were delivered to the Bank pursuant to the Agreement;
(ii) certifying that the Company remains in good standing as a
corporation under Minnesota law since the date of the Agreement; and
(iii) identifying the officers executing
-4-
<PAGE>
this Second Amendment and the other documents required by the Bank under
paragraph 3(a) above, and certifying as to their incumbency;
(d) The Bank shall have received a Collateral Assignment of
Patents in form satisfactory to the Bank, duly executed by the Company;
(e) The Bank shall have received a Third Party Security
Agreement in form satisfactory to the Bank duly executed by Rimage Europe,
GmbH. granting the Bank a security interest in the assets of Rimage Europe,
GmbH. as security for the indebtedness of the Company, together with a
certification of the secretary of Rimage Europe, GmbH. (or another officer)
of the resolutions of the Board of Directors of such company authorizing
the execution and delivery of the Third Party Security Agreement and
certifying the incumbency of the officer or officers executing such Third
Party Security Agreement.
(f) The Bank shall have received proof of the insurance required
under the Third Party Security Agreement in form and substance satisfactory
to the Bank.
(g) The Bank shall have received the Reaffirmation of Security
Interest in the forms of Exhibits B and C hereto, duly executed by the
parties thereto.
4. GENERAL. After this Second Amendment becomes effective, the
Agreement, as hereby amended, shall remain in full force and effect.
As of the date of this Second Amendment, the Company reaffirms all of
the representations and warranties made under the Agreement and such
representations and warranties are true and accurate as of the date hereof and
as amended hereby, and all covenants under the Agreement, as hereby amended,
are maintained in full.
The Company represents and warrants that it has the power to enter
into this Second Amendment and the other documents required by the Bank under
paragraph 3(a) above, and has duly authorized the execution and delivery of such
documents by proper corporate action, and none of such documents nor the
agreements contained herein or therein contravene or constitute a default under
any agreement, instrument, or indenture to which the Company is a party or a
signatory or any provision of its Articles of Incorporation, its Bylaws or,
to the best of its knowledge, any other agreement or requirement of law.
The Company hereby reaffirms the security interest granted to the Bank
under the Security Agreement executed in connection with the Agreement.
-5-
<PAGE>
Such security interest remains in full force and effect and secures all amounts
owed by the Company to the Bank, including, without limitation, all amounts owed
under the Agreement, as amended. Each reference to the "Agreement", "this
Agreement", "herein" or similar references in the Agreement, shall mean the
Agreement, as amended hereby.
The Company agrees to pay the Bank, upon demand, reasonable expenses,
including attorneys' fees and legal expenses, incurred by the Bank in connection
with this Second Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the date first above written.
RIMAGE CORPORATION
By /s/ David J. Suden
--------------------------------
David J. Suden, President
By /s/ Jon D. Wylie
--------------------------------
Jon D. Wylie, CFO, Systems Group
FIRST BANK NATIONAL ASSOCIATION
By
----------------------------------
Richard D. Hartman, Vice President
-6-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 8866
<ALLOWANCES> 520
<INVENTORY> 4819
<CURRENT-ASSETS> 15278
<PP&E> 14573
<DEPRECIATION> 5606
<TOTAL-ASSETS> 26399
<CURRENT-LIABILITIES> 14619
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 8453
<TOTAL-LIABILITY-AND-EQUITY> 26399
<SALES> 33072
<TOTAL-REVENUES> 33072
<CGS> 24942
<TOTAL-COSTS> 8594
<OTHER-EXPENSES> 349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 439
<INCOME-PRETAX> (813)
<INCOME-TAX> 0
<INCOME-CONTINUING> (813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (813)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
