CONFORMED
FORM 10-K405
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
{X} ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 {NO FEE REQUIRED}
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. { X }
As of March 25, 1997, 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 $3,641,000
As of March 25, 1997, there were outstanding 3,084,500 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1997 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.
<TABLE>
<CAPTION>
RIMAGE CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Information
(In Thousands Except Per Share Data)
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Year ended December 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $41,782 $51,490 $40,694 $27,090 $24,946
Cost of Revenues 32,420 38,836 28,156 17,169 16,249
Gross Profit 9,362 12,654 12,538 9,921 8,697
Operating Expenses 13,139 14,298 11,253 7,899 6,355
Operating (Loss) Earnings (3,777) (1,644) 1,285 2,022 2,342
Other Expense, Net 651 660 384 225 424
Proforma Income Tax (Benefit) Expense 751 (921) 360 681 339
Proforma Net (Loss) Earnings (5,179) (1,383) 541 1,116 1,579
Proforma Net (Loss) Earnings Per Share ($1.68) ($.45) $.18 $.39 $.83
Weighted Average Shares Outstanding
and Share equivalents 3,075 3,050 3,043 2,826 1,904
CONSOLIDATED BALANCE SHEET INFORMATION:
Balances as of December 31
--------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Trade Accounts Receivables $5,071 $9,493 $5,791 $4,749 $5,416
Inventories 4,028 4,690 5,833 4,937 3,617
Current Assets 10,545 16,451 13,960 12,461 9,547
Property and Equipment, Net 7,814 4,884 4,333 4,136 2,860
Total Assets 20,010 23,784 21,568 18,336 12,599
Current Liabilities 12,836 12,643 7,762 6,169 6,124
Long-Term Liabilities 3,032 1,881 2,522 2,261 2,089
Stockholders' Equity 4,084 9,202 11,227 9,906 4,386
</TABLE>
To Our Stockholders, Customers, and Fellow Employees:
The disappointing financial results of 1996 cannot be ignored. The ongoing
changes within our industry and the window of opportunity these changes present,
demonstrate the need for focus and flexibility on our part. With this in mind,
bold steps were taken during the fourth quarter of 1996 to meet these
challenges. In December of 1996, a significant number of administrative and
support positions were eliminated, and the Company initiated the sale and/or
closure of marginal operations. These actions were taken to help regain a
position of profitability and allow us to focus on our core competencies.
The continued emergence and growth of CD-ROM and CD-R (recordable), as a form of
media storage and delivery, confirm our belief that our products and services
are well positioned to serve the ever increasing demands of this market. Our
newly released multi-drive Perfect Image(TM) Producer provides users with the
capability of creating, duplicating, and labeling CD-R's in both production and
short run customized environments. Additionally, new developments in our
patented print technology will allow us to service the needs of the entire CD-R
labeling market. During the fourth quarter of 1996, we also completed the
installation of CD-ROM production lines at our Plover, Wisconsin site. This
further expands the capabilities of the Rimage Services Group and provides us
with opportunities beyond our traditional diskette duplication base.
The European market continues to offer significant growth opportunities for our
products and services. We have established a strong presence through our
subsidiary operation in Frankfurt, Germany. As is true in the United States, the
European market is rapidly migrating to CD media.
A return to profitability is our primary goal for 1997. We will continue to
strengthen our management team as we see necessary to achieve our profitability
goals in the near term. While we will continue to service the needs of our
historical diskette customer base, our future focus for product development, and
distribution, will be in the CD-R and CD-ROM market place. The continued
development of the CD market and the expanded capabilities of our Services Group
also provide us with confidence that our goals can be attained.
/s/ Bernard P. Aldrich
Bernard P. Aldrich
President and Chief Executive Officer
March 31, 1997
GENERAL INFORMATION
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Rimage Corporation and its wholly owned subsidiaries ("Rimage" or the Company)
deal with the movement of images with microprocessor technology.
Rimage commenced operations in 1987 after acquiring the assets of a company
which manufactured and sold diskette related equipment. In August 1988, the
principal stockholders of Rimage, acquired a majority of the common stock of
Media Systems Technology, Inc. ("MST"), a California-based manufacturer of
duplication equipment, and moved its operations to Minnesota. Rimage Europe
Gmbh, founded in 1992, is a wholly owned subsidiary located in Germany and
handles sales and service in Europe. Duplication Technology, acquired in
December 1993, is a wholly owned subsidiary located in Boulder, Colorado and
manufactures tape and CD-R duplication equipment and provides duplication
services. Knowledge Access International, acquired in September 1994, is a
wholly owned subsidiary located in Mountain View, California and provides
customized browser and archiving software. Rimage (Singapore) PTE LTD, founded
in 1996, is a wholly owned subsidiary located in Singapore and handles sales and
service in Asia. Rimage Optical Systems, a division of Rimage formed in 1996,
provides for the resale of CD-ROM stamping presses developed and manufactured by
a European company.
Dunhill Software Services, Inc. (Dunhill) was incorporated under the laws of the
State of Minnesota in January 1988 to provide diskette duplication and
production services to software developers and manufacturers and information
publishers. In 1990, Dunhill selected Rimage as its principal supplier of
diskette duplication equipment. Dunhill was a significant customer of Rimage in
each of the years from 1990 to 1995.
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), Dunhill was merged into Rimage, and Rimage issued 1,100,000 shares of
stock to the former Dunhill shareholders. Dunhill, along with a portion of
Duplication Technology, is now referred to as Rimage Services Group (Services
Group), while the former Rimage operations are now referred to as Rimage Systems
Group (Systems Group).
Rimage Systems Group principally operates in the market which involves the
design, manufacture, sale and service of computer CD-R (Compact Disc
Recordable), diskette and digital tape duplication and finishing systems. Rimage
Services Group provides CD-ROM (Compact Disc Read Only Memory), CD-R, diskette
and tape duplication and production services to software developers and
manufacturers.
Rimage Corporation was incorporated under the laws of the State of Minnesota in
February 1987. Rimage Corporation's principal office is located at 7725
Washington Avenue South, Minneapolis, Minnesota 55439. Its telephone number is
(612) 944-8144. Its facsimile number is (612) 944-7808.
PRODUCTS AND SERVICES
DUPLICATION SYSTEMS. The Systems Group's core products are the Perfect Image
line of automated CD-R duplication and publishing systems, the Perfect Image
line of automated diskette duplication and publishing systems and Duplication
Technology's unique magnetic tape and CD-R duplication equipment.
The Perfect Image CD-R duplication product line consists of a growing family of
products that cover the requirements of low volume duplication with automated
disc finishing capabilities. The Systems Group 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. Rimage CD-R solutions give customers the capability to produce multiple
CD-ROMs in minutes. Equipment includes up to six times (6X) speed recorders and
automated loading systems, or up to 16X speed recorders and automated loading
systems, using 2X and 4X increments. Software solutions include premastering,
multimedia authoring, archiving and multimedia full-text retrieval packages.
This product line is intended to serve a wide range of office networks and
industry production and retail environments.
The Perfect Image diskette duplication product line consists of a broad family
of products that cover requirements from relatively low to high volume
duplication with automated diskette finishing capabilities. This full product
range is intended to serve any user within the microcomputer industry, based
upon its specific needs, and is the main production equipment utilized by the
Services Group.
Duplication Technology manufactures tape and CD-R duplication systems. The
systems utilize a patented computer technology which enables high speed
duplication of as many as nine copies simultaneously. The formats supported by
these systems include virtually all tape formats commonly used for data
distribution, compact disc technology replicated on CD-R media, and
magneto-optical disks. This product range is intended to serve any user within
the microcomputer industry based upon its specific needs, and is the main
production equipment utilized by Duplication Technology's service facility.
LABELERS AND FINISHING EQUIPMENT. 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 Group also produces associated equipment which prints labels,
applies labels to diskettes and collates diskettes into multiple diskette sets.
The Systems Group products are designed for ease of operation, resulting in a
reduction of labor and training costs for users of the products. The principal
benefits to users of the Systems Group's duplication systems are reduced
operational costs, higher throughput than alternative systems, and higher
quality. One of the key elements of the Systems Group's marketing and
development is to provide users with a path for upgrading to future enhancements
and additional capabilities.
DUPLICATION SERVICES. The Services Group's core business includes the
duplication of CD-ROM's, CD-R's, diskettes, magnetic tapes and "turnkey"
packaging services. "Turnkey" service is defined as all elements of a finished
product obtained from a single source.
The CD-ROM duplication and production requirements of the Services Group's
customers include the ability: to produce large volumes of CD-ROM's; to
precisely copy the optical image ensuring that it can be read by the end user's
computer; to provide precise customized silk screen color printing capabilities;
to provide turnkey packaging services; and for customers that distribute
information on CD-ROM, the ability to duplicate data from a centralized
database. The Services Group provides CD-ROM duplication and production services
to software developers and manufacturers.
The diskette duplication and production requirements of the Services Group's
customers include the ability: to produce high volumes of diskettes; to
precisely copy the magnetic image ensuring that it can be read by the end user's
computer; to label and collate diskettes; to handle the various sizes and
formats of diskettes currently in use; to provide turnkey packaging services;
and for customers that distribute information on diskettes or tape, the ability
to duplicate data from a centralized database. The Services Group provides
diskette duplication and production services to software developers and
manufacturers.
In addition to the CD-R and diskette duplication services, magnetic tape and
magneto-optical disk duplication and production are also offered by Duplication
Technology. The tape duplication and production requirements of Duplication
Technology's customers include the ability to: produce high volumes of magnetic
tapes; precisely copy the magnetic image ensuring that it can be read by the end
user's computer; provide turnkey packaging services; and, support virtually all
magnetic tape formats.
When major releases of software occur, there is a demand for CD-ROM and diskette
duplication and production services such as those provided by the Services
Group. The Services Group has the capability to provide such services, and to do
so in a manner that satisfies the stringent quality requirements imposed by ISO
9002 standards.
The Services Group has, in some cases, established operations at customer sites
to facilitate the distribution of CD-Rom's and diskettes produced by the
Services Group. The Services Group is seeking to establish additional strategic
partnerships of this type.
MAINTENANCE SERVICE. 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.
OTHER PRODUCTS. The Company is conducting research with respect to other
potential products that could use its microcomputer technology, exploring the
inclusion of Zip drives, Travan and DVD technologies into existing product
lines.
MARKETING AND DISTRIBUTION - SYSTEMS
The Systems Group utilizes four principal means of distribution for its
products: a direct sales force, an international and domestic distributor
network, a value added reseller (VAR) network, and telesales.
The direct sales force focuses primarily on users of the higher end automated
systems; the distributor network sells to all size users; the VAR network is
used to distribute the new CD-R products within industry specific environments;
and telesale operations primarily sell entry level or low volume systems in the
United States.
MARKETING AND DISTRIBUTION - SERVICES
Duplication and production services are required by a variety of customers.
Computer hardware manufacturers typically provide their customers with certain
software needed to operate the hardware. Software publishers and developers
require duplication services to produce copies of their programs for retail
sales. The Services Group has established strategic partnerships, in which its
operations are located at the customer's site. These partners provide
fulfillment publishing services in their respective industries by arranging for
the duplication, production, packaging and distribution of software or other
information on diskettes. Pursuant to these strategic partnerships, the Services
Group provides diskette duplication and production services, and the customer
provides packaging and distribution services. The Services Group is seeking to
establish similar strategic partnerships with other parties.
The growth in sales of personal computers has resulted in a corresponding demand
for duplication services. CD-ROM usage continues to grow, while diskette usage
has slowed. Factors which affect the continued growth in CD-ROM usage include:
the continued increase in new and upgraded software programs and the increased
capabilities of computer hardware, along with utility programs to support both;
the continued increase in games used on personal computers; and the increased
usage of personal computers as they become more affordable. Factors which limit
CD-ROM usage include: the increased use of work stations and networks whereby
each microcomputer can access a file server or central controller for software
and data; the increased availability of software through the internet; and the
practice of software loading on the hard drives by the microcomputer
manufacturers. Additional factors which limit diskette usage include: the
increased usage of higher capacity alternative storage media such as CD-ROM,
optical cartridges, "flopticals" (which combine magnetic and optical tracks),
magnetic tape and direct telecommunications. CD-ROM drives and floppy disk
drives remain an industry standard as virtually every personal computer that is
sold includes both types of drives.
The Company has one service bureau established to promote the sale of tape
duplication services.
COMPETITION
The Systems Group competes with a growing number of manufacturers of CD-R
duplication 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
duplication equipment on the basis of technological similarities in automated
solutions to its diskette duplication equipment products and its early start
within the the CD-R duplication equipment industry. Rimage's thermal quality
printing capabilities for CD-R and its transporter mechanisms are unique
features that differentiate its products.
The Systems Group competes with a limited number of manufacturers of diskette
duplication equipment and related products. The Systems Group's largest
competitor is Trace Corporation, which is located in San Jose, California. The
remainder of the market consists of a few U.S. and foreign manufacturers. This
group of smaller manufacturers sells to the smaller volume duplicators and does
not have the system capabilities of the two industry leaders, Trace Corporation
and Rimage. Rimage Systems Group competes in the sale of diskette duplication
equipment on the basis of its third generation automated solutions, and its high
volume duplicating/formatting systems.
Duplication Technology's tape duplication products are among the industry
leaders and enable its service bureau to compete effectively because of the
ability to handle the multitude of tape sizes and requirements.
The Services Group 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 diskettes in high volumes internally. Many of the
Services Group competitors have greater financial and other resources than the
Company; however, the diskette duplication industry is highly competitive and
there is no single company or group of companies that is dominant in the
industry. The Company believes that the principal competitive factors in
providing duplication services are the volume and cost of diskettes produced,
the quality of those diskettes, and the ability to meet production schedules.
MANUFACTURING
The Systems Group's manufacturing operations consist primarily of the assembly
of products from components purchased from third parties. Some parts are stock
"off-the-shelf" components and others are manufactured to the Company's
specifications. Final assembly operations are conducted by the Company's
employees at its facilities in Edina, Minnesota and Boulder, Colorado.
Components include CD-R, diskette and tape drives, circuit boards, electric
motors, and machined and molded parts. The assembly process lasts approximately
four weeks between the date custom-made parts are ordered and the shipment of
the completed products.
RESEARCH AND DEVELOPMENT
At the Company's various locations there are 20 people involved in research and
development. 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, file servers accessible
through computer networks, and most recently, the Internet. All these forces may
affect the usage of CD-ROM, CD-R and diskette media, however, the Company
continues to be a leader in its industry in developing new technologies.
The Company's expenditures for engineering and development were approximately
$2,700,000, $3,400,000 and $2,800,000 in 1996, 1995 and 1994 (or 6.4%, 6.6% and
6.8% of consolidated revenues), respectively. The Company intends to maintain
this level of investment in research and development.
PATENTS AND GOVERNMENT REGULATION
The Company is the owner of nine patents, has two patents pending and has
license rights to another six patents. Some of the Company's equipment is
required by the FCC to meet radio frequency emission standards; the Company has
the necessary certification.
EMPLOYEES
At December 31, 1996, the Company had 260 full-time employees, of whom 20 were
involved in research and development, 149 in manufacturing, assembly, testing
and customer service, and 91 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 DESCRIPTION OF PROPERTY
The Company headquarters and the Systems Group are located in a leased facility
of 29,000 square feet at 7725 Washington Avenue South, Edina, Minnesota 55439.
In August 1992, the Company entered into a fifteen year capital lease for this
facility, which is owned by a related party (see note 10 to the consolidated
financial statements). Rent is $4.96 per square foot per year, plus taxes and
common area charges of $1.23 per square foot per year.
The Systems Group also leases facilities in Frankfurt, Germany; Boulder,
Colorado; and Mountain View, Campbell and Torrance, California. These various
facilities are used for manufacturing, engineering, service and sales.
The Systems Group also leases three U.S. sales offices.
The Services Group is headquartered in a leased facility of 28,440 square feet
at 9701 Penn Avenue South, Bloomington, Minnesota 55431. In August 1992, the
Services Group (formally Dunhill) entered into a fifteen year capital lease for
this facility, which is owned by a related party (see note 10 to the
consolidated financial statements). The lease provides for rent at the rate of
$3.29 per square foot per year, plus taxes and common area charges which
currently are approximately $1.97 per square foot per year.
The Services Group also leases facilities in Jessup, Maryland; Plover,
Wisconsin; Spanish Fork, Utah; Boulder, Colorado; and Sacramento and Irvine,
California at which it provides duplication services.
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to any litigation that may have a material adverse
effect on the Company or its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
last quarter of the fiscal year covered by this report.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "RIMG". The following table sets forth, for the periods indicated, the
range of low and high prices for the Company's common stock as reported on the
NASDAQ System.
Low High
--- ----
Calendar Year 1995:
1st Quarter............... $4.00 $5.75
2nd Quarter............... 4.88 6.75
3rd Quarter............... 5.75 7.75
4th Quarter............... 5.00 8.38
Calendar Year 1996:
1st Quarter............... 4.50 8.00
2nd Quarter............... 5.00 10.25
3rd Quarter............... 4.50 7.50
4th Quarter............... 2.75 5.75
SHAREHOLDERS
At March 25, 1997, there were 61 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 earnings,
financial condition, capital requirements and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected items from
the Company's consolidated statements of operations, shown in 1000's.
Year ended December 31,
1996 1995 1994
---- ---- ----
Revenues from
unaffiliated
customers:
Systems $23,237 $17,359 $19,378
Services 18,545 34,131 21,316
------- ------- -------
Total Revenues 41,782 51,490 40,694
Cost of
Revenues:
Systems 15,789 10,818 10,654
Services 16,631 28,018 17,502
------- ------- -------
Total Cost of
Revenues 32,420 38,836 28,156
------- ------- -------
Operating
Expenses:
Systems 10,179 11,289 8,430
Services 2,960 3,009 2,823
------- ------- -------
Total Operating
Expenses 13,139 14,298 11,253
------- ------- -------
Operating (Loss)
Profit:
Systems (2,732) (4,748) 294
Services (1,045) 3,104 991
------- ------- -------
Total Operating
(Loss) Profit $(3,777) $(1,644) $ 1,285
======= ======= =======
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company designs, manufactures and sells computer media duplication and
printing systems, and also provides media duplication services. The Company's
consolidated revenues decreased by 18.9% from 1995 to 1996 and increased by
26.5% from 1994 to 1995. The Company's consolidated proforma net (loss) earnings
were ($5,179,011), ($1,382,661) and $541,376 in 1996, 1995 and 1994,
respectively.
SYSTEMS GROUP SEGMENT--1996 COMPARED TO 1995
The Systems Group's revenues (which include equipment sold from Rimage Systems -
Minneapolis, Rimage Europe, Rimage Asia, Duplication Technology, Rimage Optical
Systems, and Knowledge Access International) increased by $5,877,818 or 33.9%
from 1995 to 1996. This increase is due to a net of the following: incremental
revenues from Rimage Optical Systems, a new division created in 1996 for the
resale of large CD-ROM optical disc stamping presses; a significant increase in
revenues from the sale of newly developed CD-R duplication equipment and related
peripheral products; and a significant decrease in revenues from the sale of
diskette and tape duplication equipment and related peripheral products.
Gross profit, as a percentage of revenues, was 32.0% and 37.7% during 1996 and
1995, respectively. This decrease was due to a net of significantly lower
margins from the incremental CD-ROM optical disc stamping press and an increase
in margins from the sale of newly developed CD-R duplication products and
related peripherals.
Operating expenses (excluding severance and exit expenses of $967,700 in 1996
and $1,661,268 in 1995, which are detailed in the next paragraph) decreased by
$417,308 or 4.3% from 1995 to 1996. This decrease is attributable to a net of
the following factors: engineering and development costs decreased by
approximately $700,000 from 1995 to 1996, directly related to the 1995 shut down
of ALF Products; selling and marketing expenses maintained approximately the
same level from 1995 to 1996, as decreased sales and marketing expenses at
Knowledge Access were offset by incremental sales and marketing expenses related
to the sale of CD-ROM optical disc stamping presses; and, general and
administrative expenses increased by approximately $275,000 from 1995 to 1996,
as decreased general and administrative expenses at Knowledge Access and Rimage
Systems were offset by significant incremental general and administrative
expenses related to the sale of CD-ROM optical disc stamping presses.
During the fourth quarter of 1996, the Company made the decision to close its
Asian subsidiary and to sell or close its Televaulting division. The Company has
also concluded that the remaining capitalized licensing fees paid for the rights
to sell CD-ROM optical disc stamping presses and other capitalized development
costs no longer had any value. The 1996 charges associated with these shut downs
and license fee and capitalized development cost write-offs were $946,700. This
compares to total severance and exit expenses of $1,661,268 in 1995.
The operating losses were $2,732,221 and $4,748,594 during 1996 and 1995,
respectively. This improvement was due to a combination of the factors discussed
above.
SYSTEMS GROUP SEGMENT--1995 COMPARED TO 1994
The Systems Group's revenues decreased by $2,019,057 or 10.4% from 1994 to 1995.
This decrease was due to the general softness in the duplication equipment
market and the resulting "out-sourcing" trend and also due to the Systems
Group's transition to new products, specifically away from diskette equipment to
CD-R equipment.
Gross profit, as a percentage of revenues, was 37.7% and 45.0% during 1995 and
1994, respectively. This decrease was mainly due to the prevalence in the
industry of discounting sales prices for equipment that has resulted from the
soft demand. Inventory write-downs of $1,010,742 were also taken during 1995
relating to inventory obsolescence resulting from two product transitions.
Operating expenses (excluding severance and exit expenses of $1,661,268 in 1995
and $792,197 in 1994, which are detailed in the next paragraph) increased by
$1,991,105 or 26.1% from 1994 to 1995. This increase was attributable to a
number of factors. First, the engineering and development costs associated with
the final stages of three major product releases resulted in research and
development expenses increasing by $582,593 in 1995. Second, selling, general
and administrative expenses were up $1,408,509 during 1995 due to increased
marketing costs for the new product releases and the expenses incurred at
Knowledge Access, which was acquired in September 1994. Finally, bad debt
expense increased by $300,213 primarily relating to one large problem receivable
balance, and the Company incurred 1995 patent legal expense of $290,000.
During the fourth quarter of 1995, the Company made the decision to close its
Knowledge Access subsidiary. The Company has also concluded that the remaining
goodwill that resulted from this acquisition no longer had any value. The 1995
charges associated with this shut down and goodwill write-off were $1,062,535.
The Company also concluded that the remaining goodwill of $598,733 associated
with the 1993 acquisition of ALF Products was fully impaired due to changing
markets and the facility shutdown in 1995. The total severance and exit expenses
in 1995 was $1,661,268 compared to similar expenses of $792,197 in 1994.
The operating (loss) earnings were ($4,748,594) and $294,006 during 1995 and
1994, respectively. This decline was due to the aforementioned revenue
reductions, gross profit declines, and operating and severance and exit expense
increases.
SERVICES GROUP SEGMENT--1996 COMPARED TO 1995
The Services Group's revenues (which include the revenues of the Rimage Services
Group, formerly "Dunhill," as well as the service business of Duplication
Technology) decreased by $15,586,093 or 45.7% from 1995 to 1996. This decrease
resulted primarily from the loss of one customer which provided 44.3% and 14.2%
of the Services Group's 1995 and 1996 revenues, respectively,and a decrease in
sales to another customer of approximately $3,400,000 from 1995 levels.
Gross profit, as a percentage of revenues, was 10.3% and 17.9% during 1996 and
1995, respectively. The primary causes of this decline were: significantly
decreased production volumes combined with only a slight decrease in fixed
costs; and, CD-ROM stamping press installation and start-up costs incurred
during the fourth quarter of 1996.
Operating expenses decreased by $48,471 from 1995 to 1996, but increased as a
percentage of revenues from 8.8% in 1995 to 16.0% in 1996. This was the result
of Services Group's lower revenues with relatively stable fixed operating costs.
Operating earnings (loss) were ($1,045,042) and $3,104,446 during 1996 and 1996,
respectively. The sharp decline resulted from the aforementioned reduced
revenues combined with relatively stable manufacturing and operating expenses,
and CD-ROM stamping press installation and start-up costs incurred during the
fourth quarter of 1996.
SERVICES GROUP SEGMENT--1995 COMPARED TO 1994
The Services Group's revenues increased by $12,815,738 or 60.1% from 1994 to
1995. This increase resulted from the general trend of out-sourcing, and is also
attributable to revenues attained from two large service customers.
Revenues to these two customers as a percentage of consolidated revenues
amounted to 29.3% and 18.1%, respectively, for 1995 compared to 1.2% and 24.6%
for 1994.
Gross profit, as a percentage of revenues, was 17.9% during 1995 and 1994.
Operating expenses increased by $185,954 from 1994 to 1995, but decreased as a
percentage of revenues from 13.2% in 1994 to 8.8% in 1995. The Services Group's
higher revenues were achieved with relatively stable fixed operating costs.
Operating earnings were $3,104,446 and $991,551 during 1996 and 1995,
respectively. The sharp improvement resulted from the aforementioned revenue
gains combined with a consistent gross profit percentage and relatively stable
operating expenses.
CONSOLIDATED RESULTS--1996 COMPARED TO 1995
Revenues decreased $9,708,275 or 18.9% from 1995 to 1996. This decrease was a
result of the decline in the Services Group's revenues and was partially offset
by increases in the Systems Group's revenues that resulted from higher demand
for newly developed CD-R equipment and the resale of CD-ROM stamping presses.
Gross profit as a percentage of revenues was 22.4% and 24.6% during 1996 and
1995, respectively. The decrease was due to a net of the following factors: the
change in revenue mix to lower service revenues (which is traditionally lower
margin business); lower margins from the incremental CD-ROM optical disc
stamping press revenues; and, the increase in margins from the sale of newly
developed CD-R duplication products and related peripherals.
Operating expenses decreased by $1,159,347 from 1995 to 1996. As previously
discussed, these decreases were primarily due to lower severance and exit costs,
decreased engineering and development expenses, offset by incremental general
and administrative expenses related to the sale of CD-ROM optical stamping
presses.
Interest expense was $678,805 and $588,424 during 1995 and 1994, respectively.
The increase was due to increased credit line usage in 1996 for capital
expenditure and working capital purposes.
Proforma Income tax expense (benefit) was $751,225 and $(921,000) in 1996 and
1995, respectively. The 1996 tax expense was the direct result of a deferred tax
asset write-down of $751,225. Prior to the merger on September 30, 1995, Dunhill
Software was a Subchapter-S Corporation and was not subject to federal income
taxes.
Proforma Net loss was $5,179,011 and $1,382,661 in 1996 and 1995, respectively.
Proforma Net loss per share was $1.68 and $.45 in 1996 and 1995, respectively.
The increase in loss in both earnings and earnings per share are attributable
to: the significant change in Services Group operating earnings (loss) from 1995
to 1996 of $3,104,446 profit to ($1,045,042) loss, respectively; a deferred tax
asset write-down of $751,225; and, an offset by decreased Systems Group losses
from 1995 to 1996 of $4,748,594 to $2,732,221, respectively.
CONSOLIDATED RESULTS--1995 COMPARED TO 1994
Revenues increased by $10,796,681 or 26.5% from 1994 to 1995. This increase was
a result of the improvement in the Services Group's revenues and was partially
offset by the Systems Group's revenue decline.
Gross profit as a percentage of revenues was 24.6% and 30.8% during 1995 and
1994, respectively. The decrease was mainly due to the change in revenue mix to
larger service revenues (which is traditionally lower margin business), and also
due to the price discounting prevalent in the industry on equipment sales.
Operating expenses increased by $3,046,130 from 1994 to 1995. As previously
discussed, these increases were primarily due to increased severance and exit
costs, increased engineering and development and marketing costs, increased bad
debt and patent legal expense, and the higher operating expenses in the Services
Group relating to higher revenues.
Interest expense was $588,424 and $414,929 during 1995 and 1994, respectively.
The increase was due to increased credit line usage in 1995 for working capital
purposes. Merger expenses were $230,504 during 1995 related to the Dunhill
merger.
Proforma Income tax (benefit) expense was ($921,000) and $360,000 in 1995 and
1994, respectively. Prior to the merger on September 30, 1995, Dunhill Software
was a Subchapter-S Corporation and was not subject to federal income taxes.
Proforma Net (loss) earnings was ($1,382,661) and $541,376 in 1995 and 1994,
respectively. Proforma Net (loss) earnings per share was ($.45) and $.18 in 1995
and 1994, respectively. The decreases in both earnings and earnings per share
are attributable to the loss incurred in the systems segment during a product
transition period, and were offset by the improvements in service segment
earnings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,395,275 and $111,488 during
1996 and 1995, respectively. The increase in cash flow from operating activities
in 1995 to 1996 was greatly impacted by significant decreases in accounts
receivable, inventory and deferred taxes, offset by the net loss from
operations. The accounts receivable decrease was primarily due to lower Services
Group revenues and activity. The inventory decrease was primarily due to Systems
Group's focus to reduce inventory levels and increase inventory turns. Other
significant factors affecting the increase in cash flow from operating
activities include a net of the following: a decrease in accounts payable due to
the decreased Services Group revenues and activity, a decrease in goodwill and
other asset impairments; and, an increase in income tax receivable realized
through 1996 loss carrybacks.
The cash used in investing activities was $2,701,616 and $2,338,938 during 1996
and 1995, respectively. Fixed assets of $2,941,123 were purchased during 1996,
primarily for the installation of two CD-ROM optical disc stamping presses and
for the purchase of a new operating system for the Services Group. At December
31, 1996 the Company had no significant commitments to purchase additional
capital equipment.
The Company's working (deficit) capital was ($2,290,794) and $3,807,747 at
December 31, 1996 and 1995, respectively. This change in working capital was
significantly affected by the operating and investing activities discussed
above. The net cash provided by financing activities was $1,208,113 and
$1,160,912 for 1996 and 1995, respectively. Additional bank borrowings, net of
payments, of $1,159,785 accounted for the majority of this increase. The Company
had line of credit agreements totaling $5,000,000 with a bank, which had an
expiration date of May 31, 1997. Advances under the line of credit were secured
by substantially all Company assets, were subject to borrowing base
requirements, were due on demand, and incurred interest at the bank's reference
rate plus two and one-half percent. On March 31, 1997, the Company signed an
amended agreement. Under this amended agreement, the Company has a line of
credit totaling $5,000,000 with a bank. Advances under the line of credit are
secured by substantially all Company assets, are subject to borrowing base
requirements, are due on demand, and bear interest at the bank's reference rate
plus two and one-half percent. At December 31, 1996, the Company had borrowings
outstanding under these lines totaling $3,469,407.
The Company also had term note agreements totaling $2,583,302 which had an
expiration date of May 31, 1997 that were secured by substantially all Company
assets, and incurred interest at the bank's reference rate plus two and
three-quarters percent. On March 31, 1997, the Company signed an amended
agreement. This amended agreement is secured by substantially all Company
assets, is due on demand, and, bears interest at the bank's reference rate plus
two and three-quarters percent. Monthly principle payments of $77,800 are
required with the balance due on expiration. 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.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
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 and 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 1997 may affect whether
research and development will continue to be approximately 7% of total revenues
in 1997. 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 1997.
Other factors that could cause the results of the Company to differ materially
from those contained in any such forward looking statments include general
economic conditions, costs and availability of components and fluctuations in
exchange rates. In addition, the markets for the Company's products are
characterized by significant competition, and the Company's results may be
adversely affected by the actions of existing and future competitors, including
the development of new technologies, the introduction of new products and the
reduction of prices by such competitors to gain or retain market share. The
Company assumes no obligation to publicly release the results of any revision or
updates to these forward looking statements to reflect future events or
unanticipated occurrences.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page in
1996 Annual
Report to
Stockholders
------------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Balance Sheets, as of December 31, 1996
and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . 16-17
Consolidated Statements of Operations, for the years ended December
31, 1996, December 31, 1995 and December 31, 1994. . . . . . . . . . . 18
Consolidated Statements of Stockholders' Equity, for the years
ended December 31, 1996, December 31, 1995 and
December 31, 1994 .. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Cash Flow, for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994 . . . . . . 20-21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 22-38
REPORT OF MANAGEMENT
The accompanying consolidated financial statements, including the notes thereto,
and other financial information presented in the 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 March 31, 1997
President and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rimage Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations, and their cash flows for each of the years in the two-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
We previously audited and reported on the consolidated statements of operations
and cash flows of Rimage Corporation and subsidiaries for the year ended
December 31, 1994, prior to their restatement for the 1995 pooling of interests.
The contribution of Rimage Corporation and subsidiaries to revenues and net
income represented 62 percent and 58 percent of the respective restated totals.
Separate financial statements of the other company included in the 1994 restated
consolidated statements of operations and cash flows were audited and reported
on separately by other auditors. We also audited the combination of the
accompanying consolidated statements of operations and cash flows for the year
ended December 31, 1994, after restatement for the 1995 pooling of interests; in
our opinion, such consolidated statements have been properly combined on the
basis described in note 1 of the notes to the consolidated financial statements.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 10, 1997, except as to note 6,
which is as of March 31, 1997
<TABLE>
<CAPTION>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 117,322 230,014
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,084,910 and $644,576,
respectively 5,070,738 9,493,142
Inventories (note 4) 4,027,553 4,690,326
Income tax receivable 818,790 250,012
Prepaid expenses and other current assets 293,037 330,975
Deferred income tax asset (note 8) 0 1,196,000
Current installments of investment in sales-type
leases (note 5) 217,952 260,188
- ------------------------------------------------------------------------------------------------------------------
Total current assets 10,545,392 16,450,657
- ------------------------------------------------------------------------------------------------------------------
Property and equipment:
Building and leasehold improvements (note 10) 2,496,499 2,122,453
Manufacturing equipment (note 10) 8,348,627 4,945,175
Development equipment 694,673 712,860
Office furniture and equipment 2,233,349 1,794,446
Vehicle 22,699 22,699
- ------------------------------------------------------------------------------------------------------------------
13,795,847 9,597,633
Less accumulated depreciation and amortization 5,981,417 4,713,867
- ------------------------------------------------------------------------------------------------------------------
Net property and equipment 7,814,430 4,883,766
Investment in sales-type leases, net of current installments
(note 5) 182,332 307,120
Goodwill 929,407 1,010,120
Other noncurrent assets 537,944 1,132,547
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 20,009,505 23,784,210
==================================================================================================================
See accompanying notes to consolidated financial statements.
Liabilities and Stockholders' Equity 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of notes payable (note 6) $ 6,052,709 4,725,400
Current installments of capital lease obligations (note 10) 311,343 35,750
Trade accounts payable 4,295,400 5,761,742
Accrued expenses (note 7) 1,746,912 1,354,241
Deferred income and customer deposits 429,822 765,777
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 12,836,186 12,642,910
Notes payable, less current portion (note 6) 0 167,524
Deferred tax liability (note 8) 0 131,000
Capital lease obligations, less current installments (note 10) 3,031,759 1,582,504
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 15,867,945 14,523,938
- -------------------------------------------------------------------------------------------------------------------
Minority interest in inactive subsidiary 57,907 57,907
Stockholders' equity (note 9):
Common stock 30,845 30,510
Additional paid-in capital 10,447,798 10,301,883
Accumulated deficit (6,330,291) (1,151,280)
Foreign currency translation adjustment (64,699) 21,252
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,083,653 9,202,365
Commitments and contingencies (notes 10 and 16)
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,009,505 23,784,210
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 41,782,122 51,490,397 40,693,716
Cost of revenues 32,419,822 38,835,635 28,155,379
- -------------------------------------------------------------------------------------------------------
Gross profit 9,362,300 12,654,762 12,538,337
- -------------------------------------------------------------------------------------------------------
Operating expenses:
Engineering and development 2,693,390 3,399,130 2,782,742
Selling, general, and administrative
(note 15) 10,446,173 10,899,780 8,470,038
- -------------------------------------------------------------------------------------------------------
Total operating expenses 13,139,563 14,298,910 11,252,780
- -------------------------------------------------------------------------------------------------------
Operating (loss) earnings (3,777,263) (1,644,148) 1,285,557
- -------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest (678,805) (588,424) (414,929)
Gain on currency exchange 38,749 63,965 66,006
Merger expense 0 (230,504) 0
Other, net (note 11) (10,467) 95,450 (35,258)
- -------------------------------------------------------------------------------------------------------
Total other expense, net (650,523) (659,513) (384,181)
- -------------------------------------------------------------------------------------------------------
(Loss) earnings before
income taxes (4,427,786) (2,303,661) 901,376
Income taxes (note 8) 751,225 (1,052,000) 47,000
- -------------------------------------------------------------------------------------------------------
Historical net (loss) earnings $ (5,179,011) (1,251,661) 854,376
=======================================================================================================
Historical net (loss) earnings (5,179,011) (1,251,661) 854,376
Proforma income taxes 0 131,000 313,000
- -------------------------------------------------------------------------------------------------------
Proforma net (loss) earnings $ (5,179,011) (1,382,661) 541,376
=======================================================================================================
Proforma net (loss) earnings per common
and common equivalent share $ (1.68) (0.45) 0.18
=======================================================================================================
Weighted average shares and share
equivalents outstanding 3,074,837 3,050,140 3,042,729
=======================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
Retained Foreign
Additional earnings currency
Common paid-in (accumulated translation
stock capital deficit) adjustment Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 19,000 7,392,314 1,677,128 6,154 9,094,596
Pooling of interest transaction (note 3) 11,000 (1,000) 1,150,056 0 1,160,056
Stock issued in acquisition (note 3) 500 312,000 0 0 312,500
Cash dividends related to S corporation
earnings 0 0 (180,000) 0 (180,000)
Foreign currency translation 0 0 0 (14,600) (14,600)
Net earnings 0 0 854,376 0 854,376
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 30,500 7,703,314 3,501,560 (8,446) 11,226,928
Registration fees from 1993 secondary offering 0 (18,400) 0 0 (18,400)
Cash dividends related to S-Corporation
earnings 0 0 (789,200) 0 (789,200)
Reclassification of S-Corporation accumulated
deficit to additional paid-in capital 0 2,611,979 (2,611,979) 0 0
(note 9)
Foreign currency translation 0 0 0 29,698 29,698
Stock issued in stock option exercise 10 4,990 0 0 5,000
Net loss 0 0 (1,251,661) 0 (1,251,661)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 30,510 10,301,883 (1,151,280) 21,252 9,202,365
Foreign currency translation 0 0 0 (85,951) (85,951)
Stock issued in stock option exercise 335 145,915 0 0 146,250
Net loss 0 0 (5,179,011) 0 (5,179,011)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 30,845 10,447,798 (6,330,291) (64,699) 4,083,653
=================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (5,179,011) (1,251,661) 854,376
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 1,982,839 1,644,802 1,310,170
Goodwill and other asset impairments 446,700 1,366,134 0
Change in reserve for excess and obsolete
inventories (145,000) 355,500 14,500
Change in reserve for doubtful accounts 440,334 430,641 (59,843)
Loss (gain) on sale of property and
equipment 111,624 (3,219) (9,884)
Change in deferred taxes 1,065,000 (655,000) (82,000)
Decrease in investment in sales-type leases (176,588) (419,494) (558,730)
Changes in operating assets and liabilities:
Trade accounts receivable 3,982,070 (4,133,139) (840,658)
Inventories 807,773 787,136 (910,702)
Prepaid expenses and other current
assets 37,938 (56,346) 2,994
Income tax receivable (568,778) (100,031) 209,019
Trade accounts payable (1,466,342) 2,048,812 846,600
Accrued expenses 392,671 (77,035) (9,530)
Income taxes payable 0 0 (33,258)
Deferred income and customer deposits (335,955) 174,388 59,820
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 1,395,275 111,488 792,874
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (2,941,123) (1,953,899) (1,387,713)
Purchase of businesses, net of cash acquired
and stock issued 0 0 (189,726)
Payment of Duplication Technology's earn-out 0 (103,428) (146,319)
Proceeds from the sale of property and equipment 84,633 53,637 79,372
Other noncurrent assets (188,738) (738,572) (468,614)
Receipts from sales-type leases 343,612 403,324 406,152
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (2,701,616) (2,338,938) (1,706,848)
- -----------------------------------------------------------------------------------------------------------------------
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock option exercise $ 146,250 5,000 0
Principal payments on capital lease obligations (97,922) (23,053) (24,779)
Net change in line of credit at bank 144,407 2,525,000 800,000
Proceeds from other notes payable 2,816,702 1,500,000 1,800,000
Repayment of other notes payable (1,801,324) (2,038,435) (1,421,850)
Repayments on notes payables to related parties 0 0 (666,499)
Payment of registration fees 0 (18,400) 0
Subchapter-S dividends paid 0 (789,200) (33,346)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 1,208,113 1,160,912 453,526
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (14,464) 12,758 13,221
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (112,692) (1,053,780) (447,227)
Cash, beginning of year 230,014 1,283,794 1,731,021
- -----------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 117,322 230,014 1,283,794
=======================================================================================================================
Supplemental disclosures of cash paid during the year for:
Interest $ 697,296 594,539 427,660
Income taxes 172,992 63,200 414,889
Noncash investing and financing activities:
In September 1996, Rimage purchased manufacturing equipment and incurred a
capital lease obligation for $1,822,770.
On September 29, 1995, Rimage issued 1,100,000 shares of its common stock
in connection with the merger with Dunhill Software Services, Inc. On
September 8, 1994, Rimage issued 50,000 shares of its common stock in
connection with the acquisition of Knowledge Access.
See accompanying notes to consolidated financial statements.
</TABLE>
RIMAGE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(1) Nature of Business and Summary of Significant Accounting Policies
Basis of Presentation and Nature of Business
The consolidated financial statements include the accounts of Rimage
Corporation, Rimage Europe GmbH, A/G Systems Inc., d/b/a
Duplication Technology Inc. (Duplication Technology), Knowledge
Access International (Knowledge Access) and ALF Products Inc.
d/b/a ALF/Rimage (ALF Products); and operations of Rimage Services
Group (formerly Dunhill Software Services which merged with Rimage
in 1995 using pooling-of-interest accounting), collectively
hereinafter referred to as Rimage or the Company. All material
intercompany accounts and transactions have been eliminated upon
consolidation.
Effective September 29, 1995, Rimage Corporation and Dunhill Software
Services Inc. (Dunhill) completed a merger. Dunhill had been a
significant customer of Rimage. For financial reporting purposes,
the merger has been recorded using the pooling-of-interests method
of accounting under generally accepted accounting principles.
Accordingly, the historical financial statements of Rimage
presented in this and future reports have been and will be
restated to include the historical accounts and results of
operations of Dunhill as if the merger had existed for all periods
presented.
Following this merger, the Company operates in two segments, Rimage
Systems Group and Rimage Services Group. The Rimage Systems Group
consists of substantially all of the former Rimage Companies. The
Rimage Services Group consists of the former Dunhill operation in
addition to the existing service business at Duplication
Technology.
The Systems Group develops, manufacturers and distributes duplication,
certification, and demagnetization equipment for computer media
and associated peripheral devices. The Services Group provides
computer media 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 or information publishers.
Revenue Recognition
Revenue is recognized at the time of shipment on all equipment and
service orders. The Company provides maintenance services under
long-term maintenance contracts. Revenue associated with these
contracts is deferred and recognized on a straight-line basis over
the terms of the respective contracts. Income from sales-type
leases is recognized by a method which produces a constant
periodic rate of return on the underlying investment.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
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.
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, 1996 and
1995 of $503,676 and $409,665, respectively. Accumulated
amortization at December 31, 1996 and 1995 was $188,745 and
$132,058, 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.
Proforma Net (Loss) Earnings Per Share
Proforma net (loss) earnings per common and common equivalent share is
determined by dividing the proforma net earnings (loss) by the
weighted average number of shares of common stock and common share
equivalents outstanding during the year. In 1996 and 1995, the
effect of the potential exercise of outstanding options and
warrants to purchase shares of common stock was not calculated as
the effect would be anti-dilutive. In 1994, the dilutive effect of
the potential exercise of outstanding options and warrants to
purchase shares of common stock was calculated 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 is
charged to earnings as a part of general and administrative
expenses in the current period.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments.
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Trade accounts receivables, sales type leases, accounts payable, and
notes payable: The carrying amount approximates fair value because
of the short maturity of those instruments.
(3) Acquisitions
On September 29, 1995, and pursuant to the Agreement and Plan of
Reorganization (the Merger Agreement) dated June 6, 1995 by and
between Rimage Corporation and Dunhill, Rimage issued 1,100,000
shares of stock to the former Dunhill shareholders and Dunhill was
merged into Rimage. This merger has been recorded using the
pooling-of-interests method of accounting. Accordingly, the
historical financial statements of Rimage have been restated to
include the historical accounts and results of operations of
Dunhill for all periods presented. In addition, the fixed asset
depreciation method of Dunhill was modified to conform with
Rimage's method. The impact of this change was to decrease
depreciation expense by $133,534 in 1994 and $78,248 for the nine
months ended September 30, 1995.
On September 9, 1994, Rimage acquired 100 percent of the stock of
Knowledge Access International of Mountain View, California.
Knowledge Access produces software for multimedia authoring and
retrieval. In consideration for the acquired stock, Rimage paid
$250,000 cash, issued 50,000 shares of Rimage common stock and
granted stock options (28,000 shares at $6.50 per share), which
resulted in goodwill of $654,693. This acquisition has been
accounted for under the purchase method. The Rimage consolidated
financial statements include the operations of Knowledge Access
since September 9, 1994.
(4) Inventories
Inventories consist of the following as of December 31:
1996 1995
- ---------------------------------------------------------
Finished goods and
demonstration
equipment $ 1,026,303 1,297,788
Work-in-process 527,378 670,264
Purchased parts and
subassemblies 3,063,872 3,457,274
- ---------------------------------------------------------
4,617,553 5,425,326
Less reserve for excess
inventories 590,000 735,000
- ---------------------------------------------------------
$ 4,027,553 4,690,326
=========================================================
(5) Investment in Sales-type Leases
The Company sells some of its products under sales-type lease
agreements. The net investment in sales-type leases consists of
the following as of December 31:
1996 1995
- -----------------------------------------------------
Total minimum lease
payments receivable $ 454,471 660,999
Less unearned income 54,187 93,691
- -----------------------------------------------------
Net investment
in sales-type
leases 400,284 567,308
Less current
installments 217,952 260,188
- -----------------------------------------------------
Investment in sales-type
leases, less current
installments $ 182,332 307,120
- -----------------------------------------------------
Approximate future minimum lease payments expected to be received
under investments in sales-type leases are as follows:
Year ending December 31 Amount
- -------------------------------------------------------
1997 $ 256,900
1998 153,400
1999 44,200
(6) Notes Payable To Bank
On October 13, 1995, Rimage signed a new Credit Agreement which
consolidated and redefined all previously outstanding Rimage and
Dunhill debt. This credit agreement covered all of the term and
revolving notes discussed below. The Company was required to
maintain certain financial ratios as a part of the agreement. The
Company obtained a waiver from the bank regarding the tangible
capital base, working capital amount, leverage ratio, and net
profit requirement which were not in compliance as of and for the
year ended December 31, 1996.
The Company had a term note agreement with a bank. Borrowings under
the agreement were secured by substantially all Company assets,
accrued interest at the bank's reference rate plus two and
one-half percent and were payable on demand. The interest rate was
11% on December 31, 1996. The outstanding amount as of December
31, 1996 was $2,583,302.
The Company also had a revolving line of credit agreement which was
payable on demand. The line of credit provided for borrowings up
to $5,000,000. Borrowings under this agreement were secured by
substantially all Company assets and accrued interest at the
bank's reference rate plus two and one-quarter percent. The
interest rate was 10.75% on December 31, 1996. Borrowings
outstanding under this line were $3,469,407 on December 31, 1996.
Effective March 31, 1997, Rimage signed an Amended and Restated Credit
Agreement which amended the October 13, 1995 Credit Agreement and
covers the term and revolving notes discussed above.
Under the Amended and Restated Credit Agreement, the term note
discussed above remains payable, subject to demand at any time, in
consecutive monthly installments of $77,800, plus accrued interest
at two and three-quarters percent above the bank's reference rate
until April 1, 1998 when the remaining principal balance and all
unpaid accrued interest is due.
Also available to the Company under the Amended and Restated Credit
Agreement are advances based on various percentages of qualified
asset amounts, up to a maximum advance of $5,000,000. Outstanding
advances are secured by substantially all Company assets and
accrue interest at a rate equal to the bank's reference rate plus
two and one-half percent. All advances are due and payable on
demand.
Due to the demand feature of the Amended and Restated Credit
Agreement, the Company has reflected all outstanding balances as
current liabilities. 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.
(7) Accrued Expenses
Accrued expenses consist of the following as of December 31:
1996 1995
------------------------------------------------------------------------------
Salaries, wages, benefits, and commissions $ 1,422,519 1,038,512
Interest 19,543 38,034
Duplication Technology earn-out 0 103,428
Other 304,850 174,267
------------------------------------------------------------------------------
$ 1,746,912 1,354,241
==============================================================================
(8) Income Taxes
The provision for income tax expense (benefit) consists of the
following:
Year ended December 31
----------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
Current:
U.S. Federal $ (351,000) (338,000) 109,000
State 37,225 (59,000) 20,000
- --------------------------------------------------------------------
Total current (313,775) (397,000) 129,000
- --------------------------------------------------------------------
Deferred:
U.S. Federal 979,000 (557,000) (69,000)
State 86,000 (98,000) (13,000)
- --------------------------------------------------------------------
Total deferred 1,065,000 (655,000) (82,000)
- --------------------------------------------------------------------
$ 751,225 (1,052,000) 47,000
====================================================================
Total tax expense (benefit) differs from the expected tax expense
(benefit), computed by applying the federal statutory rate of 34%
to earnings (loss) before income taxes as follows:
Year ended December 31
------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
Expected income tax $ (1,505,000) (783,000) 306,000
Goodwill amortization 25,000 457,000 43,000
Increase in deferred tax
asset valuation allowance 2,181,000 68,000 0
State income taxes, net of
federal tax effect 82,000 (92,000) 2,000
Research and experimental
credits (95,000) (180,000) (137,000)
Tax on preacquisition
S-corporation earnings 0 (513,000) (120,000)
Other, net 63,225 (9,000) (47,000)
- ----------------------------------------------------------------------------
$ 751,225 (1,052,000) 47,000
============================================================================
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, are presented
below:
1996 1995
- ----------------------------------------------------------
Net operating
loss carryforward $ 596,000 0
Accounts receivable 317,000 195,000
Inventories 235,000 253,000
Accrued payroll 271,000 258,000
Net operating loss
carryforward of inactive
subsidiary 100,000 100,000
Capital versus operating
lease1 20,000 91,000
Warranty accrual 20,000 18,000
Fixed assets (17,000) (131,000)
Gross margin recognition on
sale to foreign subsidiary 57,000 139,000
Tax credits 574,000 180,000
Foreign net operating loss
carryforward and future
deductible temporary
differences 67,000 68,000
Other 9,000 62,000
- ----------------------------------------------------------
Total gross deferred
tax assets 2,349,000 1,233,000
Less valuation allowance (2,349,000) (168,000)
- ----------------------------------------------------------
Net deferred tax assets $ 0 1,065,000
==========================================================
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 valuation allowance at December 31, 1996 and 1995 was
$2,349,000 and $168,000, respectively. The increase in the
valuation allowance for the years ended December 31, 1996 and 1995
was $2,181,000 and $68,000, respectively. The net deferred tax
assets as of December 31, 1996 are fully offset by a valuation
allowance. The Company's valuation allowance as of December 31,
1995 was established for deferred tax assets related to the net
operating loss carryforward of an inactive subsidiary and a
foreign net operating loss carryforward which are not expected to
offset against future taxable income.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management
considers its projected future taxable income and tax planning
strategies in making this assessment.
At December 31, 1996, an inactive subsidiary has a net operating loss
carryforward of approximately $270,000 which will begin to expire
in 1999. A substantial portion of this net operating loss
carryforward will be restricted under Section 382 of the Internal
Revenue Code. The amount available to reduce future federal
taxable income is not presently determinable.
The proforma income tax expense for the years ended December 31, 1995
and 1994 are included as a result of the merger of Dunhill, an
S-Corporation, with Rimage as discussed in note 3.
(9) Stockholders' Equity
Common Stock
Common stock consists of the following, as of December 31:
1996 1995
- -------------------------------------------------------------------------
Rimage Corporation common stock; $.01 par value.
Authorized 10,000,000 shares; issued and
outstanding 3,084,500 and 3,051,000 shares,
respectively $ 30,845 30,510
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, 1993 230,700 269,300 $ 5.29
Granted (100,005) 100,005 7.44
Canceled 140,300 (140,300) 4.78
- ----------------------------------------------------------------------
Balance at
December 31, 1994 270,995 229,005 6.54
Granted (103,448) 103,448 6.87
Exercised 0 (1,000) 5.00
- ----------------------------------------------------------------------
Balance at
December 31, 1995 167,547 331,453 6.65
Exercised 0 (33,500) 4.37
Canceled 7,500 (7,500) 8.38
- ----------------------------------------------------------------------
Balance at
December 31, 1996 175,047 290,453 $ 6.87
======================================================================
At December 31, 1996, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $2.50--$9.00 and 2.8 years, respectively. At December 31, 1996
and 1995, all outstanding options were exercisable.
The per share weighted-average fair value of stock options granted
during 1995 is estimated as $.64, on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
volatility of 43%, risk-free interest rate of 6.2% and an expected
life of 4.8 years. No stock options were granted during 1996.
The Company applies APB No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation. 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
Proforma net loss and net loss per share would have been increased
by approximately $66,000, or $.02 per share in 1995. 1996 net loss
would not have been increased under SFAS No. 123 as all options
granted in 1995 vested immediately.
Proforma net loss under SFAS No. 123 reflects only options granted in
1995 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 loss amounts presented
because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January
1, 1995 is not considered.
Stock Issued in Acquisition and Merger
On September 9, 1994, in connection with the Rimage acquisition of
Knowledge Access stock, 50,000 shares of Rimage common stock were
issued and valued at $6.25 per share which was the market value of
the stock on the transaction date (see note 3).
On September 29, 1995, in connection with the merger between Rimage
and Dunhill Software Services, Inc. 1,100,000 shares of Rimage
common stock were issued (see note 3).
Termination of Dunhill's S-Corporation Status
On September 29, 1995, Dunhill Software Services, Inc. terminated its
S-Corporation election. Under SEC rules, Dunhill's accumulated
retained earnings of $2,611,979 as of the termination of the
S-Corporation election was reclassified as additional paid-in
capital.
(10) Leases
At December 31, 1996, the gross amount of building, leasehold
improvements, equipment, and accumulated amortization related to
capital leases were as follows:
<TABLE>
<CAPTION>
Buildings
under Manufacturing
capital Leasehold Equipment under
leases with improvements to capital lease
related party leased property with third party Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost $ 1,686,340 738,248 1,822,770 4,247,358
Less accumulated
amortization 493,400 169,280 82,025 744,705
----------------------------------------------------------------------------------------------------
$ 1,192,940 568,968 1,740,745 3,502,653
====================================================================================================
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The future minimum lease payments excluding operating expenses and
real estate taxes as of December 31, 1996 are:
Related Third Third
party party Total party
Year ending capital capital capital operating
December 31 leases leases leases leases
- ----------------------------------------------------------------------------
1997 $ 247,738 431,676 679,414 333,049
1998 258,391 431,676 690,067 340,579
1999 273,308 431,676 704,984 352,691
2000 273,308 431,676 704,984 193,962
2001 273,308 506,034 779,342 79,503
Later years,
through 2007 1,724,204 0 1,724,204 0
- ----------------------------------------------------------------------------
Net minimum
lease
payments 3,050,257 2,232,738 5,282,995 $ 1,299,784
============
Less amount
representing
imputed
interest 1,465,659 474,234 1,939,893
- --------------------------------------------------------------
Present value of
net minimum
capital lease
payments 1,584,598 1,758,504 3,343,102
Less current
installments of
obligations
under capital
leases 40,090 271,253 311,343
- --------------------------------------------------------------
Obligations
under capital
leases,
excluding
current
installments $1,544,508 1,487,251 3,031,759
==============================================================
Rent expense under operating leases amounted to approximately
$294,000, $320,000, and $256,000, respectively, for the years
ended December 31, 1996, 1995, and 1994.
(11) Other (Expense) Income
Other (expense) income consists of the following:
Year ended December 31
----------------------------------------
1996 1995 1994
- -------------------------------------------------------------
Interest income $ 1,674 85,859 60,582
(Loss) gain on
sale of
property and
equipment (111,624) 3,219 9,884
Other, net 99,483 6,372 (105,724)
- -------------------------------------------------------------
$ (10,467) 95,450 (35,258)
=============================================================
(12) Profit Sharing and Savings Plan
Effective January 1, 1991, Rimage adopted a profit sharing and savings
plan under Section 401(k) of the Internal Revenue Code. The plan
allows employees to contribute up to 15% of their pretax
compensation to the plan. Dunhill also had a similar plan and the
plans were merged January 1, 1996. The Company's discretionary
contributions totaled $207,459, $132,865, and $113,561 in 1996,
1995, and 1994, respectively.
(13) Segment Reporting
The following table summarizes certain financial information for the
Systems and Service segments:
Year ended December 31
------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------
Revenues from
unaffiliated
customers:
Systems $ 23,237 17,359 19,378
Service 18,545 34,131 21,316
Operating (loss)
profit:
Systems (2,732) (4,748) 294
Service (1,045) 3,104 991
Net identifiable
assets:
Systems 9,137 11,781 13,681
Service 10,873 12,003 7,987
As of and for the year ended December 31, 1996, foreign revenues from
unaffiliated customers, operating loss, and net identifiable
assets were $6,300,348, $495,698 and $2,741,857, respectively.
(14) Major Customers
The Company derived more than 10% of its sales from the following
unaffiliated customers and had receivable balances from these
customers in the approximate amounts of:
Amount of net revenues
year ended December 31
-----------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
Customer A $ 2,639,548 15,106,216 470,905
Customer B 5,966,891 9,326,585 10,014,000
Total receivable balance at
December 31
--------------------------------
1996 1995
- ---------------------------------------------------------------------
Customer A $ 0 4,217,349
Customer B 443,811 396,624
(15) Severance and Exit Costs
The Company has refocused its strategic direction resulting in changes
to management, product transitions and subsidiary consolidation
during 1996, 1995, and 1994. As a direct result of these changes
the following general and administrative expenses were incurred:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance costs $ 61,000 118,126 570,652
Plant shutdowns 460,000 337,356 221,545
Goodwill and other asset impairments 446,700 1,366,134 0
</TABLE>
(16) 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.
(17) Supplemental Quarterly Data--Unaudited (dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 8,710 12,122 9,900 11,050 14,091 14,862 10,003 12,534
Cost of revenues 7,478 9,334 7,726 7,882 11,016 11,285 7,244 9,291
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 1,232 2,788 2,174 3,168 3,075 3,577 2,759 3,243
Operating expenses:
Engineering and
development 639 587 690 777 891 853 856 799
Selling, general, and
administrative 3,906 2,059 2,270 2,211 4,018 2,518 2,194 2,169
- -------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 4,545 2,646 2,960 2,988 4,909 3,371 3,050 2,968
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss)
earnings (3,313) 142 (786) 180 (1,834) 206 (291) 275
- -------------------------------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest (241) (167) (132) (139) (175) (157) (137) (119)
Gain (loss) on
currency exchange 12 39 (17) 5 (8) (34) (13) 119
Merger expense 0 0 0 0 (75) (156) 0 0
Other, net (73) 23 14 25 68 37 (23) 13
- -------------------------------------------------------------------------------------------------------------------------------
Total other
(expense)
income, net (302) (105) (135) (109) (190) (310) (173) 13
- -------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings
before
income taxes (3,615) 37 (921) 71 (2,024) (104) (464) 288
Income taxes 751 0 (24) 24 (915) (112) (112) 87
- -------------------------------------------------------------------------------------------------------------------------------
Historical net (loss)
earnings $ (4,366) 37 (897) 47 (1,109) 8 (352) 201
===============================================================================================================================
Historical net (loss)
earnings (4,366) 37 (897) 47 (1,109) 8 (352) 201
Proforma income taxes 0 0 0 0 106 90 (93) 28
- -------------------------------------------------------------------------------------------------------------------------------
Proforma net (loss)
earnings $ (4,366) 37 (897) 47 (1,215) (82) (259) 173
===============================================================================================================================
Proforma net (loss)
earnings per common
and common equivalent
share $ (1.42) 0.01 (0.29) 0.02 (0.40) (0.03) (0.08) 0.06
===============================================================================================================================
</TABLE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred within the
two-year period ended December 31, 1996, which required reporting on Form 8-K.
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 "Information Concerning Directors,
Nominees and Executive Officers" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders, to be filed by April 30, 1997 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
"Compliance with Section 16(a)" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders, to be filed by April 30, 1997 and is
incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers of the
Company is set forth under "Information Concerning Directors, Nominees, and
Executive Officers" in the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders, to be filed by April 30, 1997 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 1997 Annual Meeting of
Shareholders, to be filed by April 30, 1997 and is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth under "Information Concerning Directors, Nominees and Executive Officers"
in the Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders, to be filed by April 30, 1997 and is incorporated herein by
reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. See Part II, Item 8 of this report.
(2) FINANCIAL STATEMENT SCHEDULES.
Page in this
Form 10-K
---------
Independent Auditors'
Report on Financial
Statement Schedule . . . . . . . . . . . . . . . . . . . . . . 40
Schedule II - Valuation
and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . 41
(3) EXHIBITS. See Index to Exhibits on pages 43 and 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.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Rimage Corporation and Subsidiaries:
Under the date of March 10, 1997, except as to note 6 which is as of March 31,
1997, we reported on the consolidated balance sheets of Rimage Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, as contained in the 1996
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 1996.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 10, 1997, except as to note 6
which is as of March 31, 1997
SCHEDULE II
<TABLE>
<CAPTION>
RIMAGE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts Receivable: YEARS ENDED DECEMBER 31,
1996 1995 1994
---------------- ---------------- --------------
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . . . . . . $ 644,576 213,935 240,839
Write-offs and other adjustments. . . . . . . . . (183,391) (89,538) (66,293)
Additions charged to costs and expenses . . . . . 623,725 498,562 -
Additions through acquisition . . . . . . . . . . - 21,617 39,389
---------------- ---------------- --------------
Balance at end of year $ 1,084,910 644,576 213,935
================ ================ ==============
</TABLE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, 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: 3/31/97
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Bernard P. Aldrich Chief Executive Officer, President, 3/31/97
- ------------------------------- Principal Financial Officer & Principal
Bernard P. Aldrich Accounting Officer
/s/ David J. Suden Chief Technical Officer & Director 3/31/97
- -------------------------------
David J. Suden
/s/ Ronald R. Fletcher Director 3/31/97
- -------------------------------
Ronald R. Fletcher
/s/ Richard F. McNamara Director 3/31/97
- -------------------------------
Richard F. McNamara
Director and Secretary 3/31/97
- -------------------------------
Robert L. Hoffman
/s/ George E. Kline Director 3/31/97
- -------------------------------
George E. Kline
</TABLE>
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 Form of International Distributor Agreement [Filed as Exhibit 10.2 to
the Company's Registration Statement on Form SB-2 (Registration No.
33-22558) and incorporated herein by reference].
10.2 Form of Maintenance Agreement [Filed as Exhibit 10.3 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-22558) and
incorporated herein by reference].
10.3 Form of Software Maintenance Agreement [Filed as Exhibit 10.4 to the
Company's Registration Statement on Form SB-2 (Registration N.
33-22558) and incorporated herein by reference].
10.4 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].
10.5 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].
10.6 Purchase and Sale Agreements dated December 28, 1993 by and between the
Company and the shareholder of A/G Systems Inc. [Filed as Exhibits 99.1
through 99.6 to the Company's December 1, 1993 Form 8-K (File No.
0-20728) and incorporated herein by reference].
10.7 Loan Agreement dated March 18, 1994 between Rimage Corporation and
First Bank, National Association [Filed as Exhibit 99.1 to the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1994 (File No. 0-20728) and incorporated herein by
reference].
10.7.1 First Amendment to Loan Agreement dated June 14, 1995 between Rimage
Corporation and First Bank, National Association [Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended June 30, 1995 (File No. 0-20728) and incorporated herein by
reference].
10.7.2 Amended and Restated Credit Agreement dated October 13, 1995 between
Rimage Corporation and First Bank, National Association. [Filed as
Exhibit 10.9.2 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 (File number 0-20728) and
incorporated herein by reference].
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Rimage Corporation.
23.1 Independent Auditors' Consent.
27 Financial Data Schedule.
STOCKHOLDER INFORMATION
STOCK LISTING
The Company's common stock has been publicly traded since its initial public
offering on November 4, 1992. The common stock is traded on the over-the-counter
market and is quoted through the NASDAQ National Market System under the symbol
"RIMG." At March 25, 1997 there were 61 stockholders of record, excluding those
holding shares in nominee or street name through various brokerage firms
(approximately 1,100 holders in management's estimate).
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
P. O. Box 738
South St. Paul, MN 55075-0378
612/450-4064
LEGAL COUNSEL
Winthrop & Weinstine, P.A.
60 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
ANNUAL MEETING
Our Annual Meeting of Stockholders will be on June 11, 1997, at 3:30 p.m. at:
Minneapolis Marriott Southwest
5801 Opus Parkway
Minnetonka, MN
DIRECTORS AND OFFICERS
DIRECTORS
Ronald R. Fletcher
Chairman of the Board
Rimage Corporation
President,
Aurora Service Corporation
Richard F. McNamara
Owner,
Activar, Inc.
Robert L. Hoffman
Secretary,
Rimage Corporation
Partner,
Larkin, Hoffman, Daly & Lindgren, P.A.
George E. Kline
General Partner,
Bridgestone Capital, Ltd.
David J. Suden
Director and Chief Technology Officer
Rimage Corporation
CORPORATE OFFICERS
Bernard P. Aldrich
Chief Executive Officer, President,
Principal Finacial Officer and Principal
Accounting Officer
Dave J. Suden
Director and Chief Technology Officer
Konrad Rotermund
Vice President - Rimage Europe
RIMAGE CORPORATION
7725 Washington Avenue South
Minneapolis, MN 55439
TEL: 612-944-8144
FAX: 612-944-7808
RIMAGE SERVICES GROUP DUPLICATION TECHNOLOGY RIMAGE EUROPE, Gmbh
9701 Penn Avenue South 4601 Nautilus Court South Hans - Boekler - Str. 7
Minneapolis, MN 55431 Boulder, Co 80301 6057 Dietzenbach, Germany
TEL: 612-881-4207 TEL: 303-581-0700 TEL: 011-49-6074-8521-0
FAX: 612-881-4212 FAX: 303-581-9555 FAX: 011-49-6074-8521-21
EXHIBIT 11.1
RIMAGE CORPORATION
COMPUTATION OF NET EARNINGS PER SHARE OF COMMON STOCK
PROFORMA NET EARNINGS PER COMMON SHARE IS DETERMINED BY DIVIDING THE PROFORMA
NET LOSS BY THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON
SHARE EQUIVALENTS OUTSTANDING UNLESS THE RESULT IS ANTI-DILUTIVE. THE FOLLOWING
IS A SUMMARY OF THE WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND COMMON SHARE
EQUIVALENTS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Shares Outstanding at beginning of period (prior to merger) 3,050,000 1,950,000
Common stock issued in merger with Dunhill Software Services 0 1,100,000
--------------- ---------------
Shares Outstanding at beginning of period 3,050,000 3,050,000
--------------- ---------------
Common stock issued in stock option exercise 34,500 1,000
Shares Outstanding at end of period 3,084,500 3,051,000
=============== ===============
Weighted average shares of common stock outstanding 3,074,837 3,050,140
=============== ===============
Common stock equivalents - -
Weighted average shares of common stock equivalents - -
=============== ===============
Weighted average shares of common stock and stock equivalents 3,074,837 3,050,140
=============== ===============
Proforma net earnings (loss) ($5,179,011) ($1,382,661)
=============== ===============
Proforma net earnings (loss) per share ($1.68) ($0.45)
=============== ===============
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF RIMAGE CORPORATION
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation Percent Owned
- ---- ----------------------------- -------------
<S> <C> <C>
A/G Systems, Inc. d/b/a Duplication Colorado 100.0%
Technology
ALF Products Inc Colorado 99.9%
Knowledge Access International California 100.0%
Media Systems Technology, Inc. California 86.8%
(Inactive)
Rimage Europe Gmbh Germany 100.0%
</TABLE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Rimage Corporation
We consent to incorporation by reference in the Registration Statement (No.
33-71472 of Rimage Corporation on Form S-8 of our reports dated March 10, 1997,
except as to note 6, which is as of March 31, 1997, relating to the consolidated
balance sheets of Rimage Corporation and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended, and the related financial
statement schedule, which reports appear in the 1996 annual report on Form 10-K
of Rimage Corporation. Our report refers to the 1995 pooling-of-interests and
the report of other auditors relating to the 1994 financial statements of the
pooled company.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 117,322
<SECURITIES> 0
<RECEIVABLES> 5,070,738
<ALLOWANCES> 1,084,910
<INVENTORY> 4,027,553
<CURRENT-ASSETS> 10,545,392
<PP&E> 13,795,847
<DEPRECIATION> 5,981,417
<TOTAL-ASSETS> 20,009,505
<CURRENT-LIABILITIES> 12,836,186
<BONDS> 0
0
0
<COMMON> 30,845
<OTHER-SE> 4,052,808
<TOTAL-LIABILITY-AND-EQUITY> 20,009,505
<SALES> 41,782,122
<TOTAL-REVENUES> 41,782,122
<CGS> 32,419,822
<TOTAL-COSTS> 32,419,822
<OTHER-EXPENSES> 13,139,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678,805
<INCOME-PRETAX> (4,427,786)
<INCOME-TAX> (751,229)
<INCOME-CONTINUING> (5,179,011)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,179,011)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> (1.68)
</TABLE>
