CONFORMED
FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-20728
RIMAGE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1577970
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7725 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 944 - 8144
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceeding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES_X_ NO___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. { }
As of March 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the last quoted price
at which such stock was sold on such date as reported by the Nasdaq Stock
Market, was $12,012,000.
As of March 25, 1998, there were outstanding 3,092,969 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the fiscal
year covered by this report, are incorporated by reference into Part III hereof.
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GENERAL INFORMATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Rimage Corporation (together with its subsidiaries, "Rimage" or the "Company")
designs, manufactures and markets CD recordable ("CD-R") and computer diskette
duplication and production equipment and provides high volume data duplication
services on diskette, CD-R and CD-ROM. The Company's Producer line of CD-R
production systems provides turnkey premastering, recording and label printing
in a single machine that may be used alone or on a network to allow the user to
record and label large volumes of digital information for information
distribution, archiving and other applications. The Perfect Image(R) CD Printer
is a fast, affordable system for professional quality printing on the surface of
a CD. The Perfect Image Series 100 automatic disk duplicators provide high
capacity (up to 190 disks per hour) disk duplication capacity for software disk
production and other applications. The Perfect Image Automated Production Cells
have been a mainstay product for Rimage for over eight years that provide
completely automated floppy disk mastering, duplication, labeling, data
replacement and quality control capabilities.
The Rimage Services Division provides a range of high speed, high volume tape,
diskette and CD -ROM duplication services. The Company also provides turnkey
services that include packaging and distribution of customer products.
The Company was incorporated as IXI, Inc. in Minnesota in February 1987 and
changed its name to Rimage Corporation in April 1988. Rimage acquired the assets
of a company that produced diskette duplication equipment in 1987 and of a
California-based manufacturer of duplication equipment in 1988 and its
operations through 1995 consisted primarily of the design, manufacture and sale
of diskette and tape duplication equipment. In 1992, Rimage created a formal
presence in Europe, forming Rimage Europe GmbH as a wholly-owned subsidiary to
conduct sales and service. In December 1993, Rimage acquired Duplication
Technology, Inc., a company located in Boulder, Colorado that manufactures tape
and CD-R duplication equipment and provides duplication services. In September
1994, the Company acquired a company in California, Knowledge Access
International, that provides customized browser and archiving software. The
Company formed a separate division in early 1996, Rimage Optical Systems, to act
as a distributor of CD-ROM stamping presses manufactured by a European Company.
In September 1995 Rimage acquired Dunhill Software Services, Inc., an affiliated
corporation that was formed in 1988 and that offered diskette duplication and
production services. Dunhill was merged into the Company and, together with a
portion of Duplication Technology, represents most of the Company's Services
Division operations.
The Company's operations during the past five years have been affected by the
timing of the foregoing acquisitions, by the timing of new product introductions
and the expenses associated with development of such new products, by changes in
preferred formats for media storage, and by increasing competition in the
services businesses. The shift from diskette to CD-ROM storage technologies
affected the Company's product sales in 1995, as it worked to introduce its new
CD-R products. These new CD-R products have generated significant sales in 1996
and 1997 and represent the Company's most profitable business currently.
Although the services business benefited from increasing services revenue
through 1994, the declining use of diskettes negatively impacted both margins
and services revenue in 1995, 1996 and 1997. The reduced product sales in 1995
and the decreasing services revenues in 1996 caused the Company to report
substantial losses during those two years.
The Company responded in late 1996 by retaining new management and by planning
for the phasing out of unprofitable operations. In early 1997, the Company
shutdown Knowledge Access, which had been inactive since 1995. The operations of
Rimage Optical Systems, which had contributed approximately $6 million of
revenue but virtually no operating margin in 1996, were also terminated in early
1997. The Company also ceased operations in Asia in early 1997 and moved its
CD-ROM production equipment, which was not fully utilized at its location in
Wisconsin, to a third party contractor site during the winter of 1997. These
changes, together with substantial cost savings measures instituted at the end
of 1996 and increased distribution and market acceptance of its new CD-R
products, resulted in record earnings for the 1997 fiscal year.
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PRODUCTS
The Company's Systems Division, through which all CD-R, CD-ROM and diskette
production equipment is manufactured and sold, generated 54%, 56% and 34% of the
Company's revenue during the 1997, 1996, and 1995 fiscal years, respectively.
The Company anticipates that the Systems Division will constitute a growing
portion of the business in the next few years.
The Systems Division's core products are the Perfect Image line of automated
CD-R publishing and duplication systems, the Perfect Image CD-R Printer, the
Perfect Image line of automated diskette duplication and publishing systems and
Duplication Technology's unique magnetic tape duplication equipment.
The Perfect Image CD-R product line, first introduced in 1995, consists of a
growing family of products that cover a broad range of requirements for the
publishing and duplication of CD-R's. The Systems Division has developed a
comprehensive line of CD-R hardware and software solutions specifically for
customers interested in publishing large amounts of information and data onto a
compact disc. The Rimage Perfect Image Producer product line gives customers the
capability to produce multiple CD-R's in minutes, using automated loading
systems, multiple recorders, and in line printing. This product line is intended
to serve a wide range of office networks, industry production and retail
environments.
The Perfect Image diskette duplication product line consists of a broad family
of products that cover requirements from relatively low to high volume
duplication with automated diskette finishing capabilities. This full product
range is intended to serve any user within the microcomputer industry, based
upon its specific needs, and is the main production equipment utilized by the
Services Division. Duplication Technology manufactures tape and CD-R duplication
systems. The systems utilize a patented computer technology which enables high
speed duplication of as many as nine copies simultaneously. The formats
supported by these systems include virtually all tape formats commonly used for
data distribution, compact disc technology replicated on CD-R media, and
magneto-optical disks. This product range is intended to serve any user within
the microcomputer industry based upon its specific needs, and is the main
production equipment utilized by Duplication Technology's service facility.
The Rimage CD-R Printer is a unique product in the industry which provides laser
quality printing on standard CD-R media for in-house, customized printing. The
CD-R Printer has allowed Rimage to better position itself in the rapidly
expanding and highly competitive CD marketplace. The Systems Division also
produces associated equipment which prints labels, applies labels to diskettes
and collates diskettes into multiple diskette sets.
The Systems Division products are designed to automate manual processes,
resulting in a reduction of labor and training costs for users of the products.
The principal benefits to users of the Systems Division's products are reduced
operational costs, higher throughput than alternative systems, and higher
quality. One of the key elements of the Systems Division's marketing and
development is to provide users with a path for upgrading to future enhancements
and additional capabilities. The Company has made a long term commitment to its
customers by providing maintenance service contracts, replacement parts, and
repair service to customers for current as well as past products.
SERVICES
The Services Division's core business includes the duplication of CD-ROM's,
CD-R's, diskettes, magnetic tapes and turnkey packaging services. The Services
Division provides CD-ROM duplication, diskette duplication and production
services to software developers and manufacturers, as well as publishing houses
and a broad cross section of industry users. Revenue from the Company's Services
Division constituted 46%, 44% and 66% of the Company's overall revenue during
the 1997, 1996, and 1995 fiscal years, respectively
The CD-ROM duplication and production requirements of the Services Division's
customers include the ability: to produce large volumes of CD-ROM's; to
precisely copy the optical image ensuring that it can be read by the end user's
computer; to provide precise customized silk screen color printing capabilities;
to provide turnkey packaging services; and for customers that distribute
information on CD-ROM, the ability to duplicate data from a centralized
database.
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The diskette duplication and production requirements of the Services Division's
customers include the ability: to produce high volumes of diskettes; to
precisely copy the magnetic image ensuring that it can be read by the end user's
computer; to label and collate diskettes; to handle the various sizes and
formats of diskettes currently in use; to provide turnkey packaging services;
and for customers that distribute information on diskettes or tape, the ability
to duplicate data from a centralized database.
In addition to the CD-R and diskette duplication services, magnetic tape and
magneto-optical disk duplication and production are also offered by Duplication
Technology. The tape duplication and production requirements of Duplication
Technology's customers include the ability to: produce high volumes of magnetic
tapes; precisely copy the magnetic image ensuring that it can be read by the end
user's computer; provide turnkey packaging services; and support virtually all
magnetic tape formats. When major releases of software occur, there is a demand
for CD-ROM and diskette duplication and production services such as those
provided by the Services Division. The Services Division has the capability to
provide such services and to do so in a manner that satisfies the stringent
quality requirements imposed by ISO 9002 standards.
MARKETING AND DISTRIBUTION
The Company utilizes four principal means of distribution for its products: a
direct sales force, an international and domestic distributor network, a value
added reseller (VAR) network, and telesales.
The direct sales force focuses primarily on building and support of the
distribution channel; the distributor network sells to all size users; the VAR
network is used to distribute the new CD-R products within industry specific
environments; and telesales operations primarily sell entry level or low volume
systems in the United States. Two of the Company's direct sales force team
members focus primarily on the sales of services. The Company also utilizes its
existing channel relationships to obtain service sales.
The Company derived 0%, 6%, and 29% of its revenues from America Online during
1997, 1996, and 1995, respectively. The Company also derived 13%, 14%, and 18%
of its revenues from Banta Global Turnkey Group during 1997, 1996, and 1995,
respectively. The Company conducts foreign sales and services through its
subsidiary in Germany, Rimage Europe GmbH and, until February 1997, its
subsidiary in Singapore, Rimage (Singapore) PTE LTD. Foreign sales constituted
approximately 12% and 15% of the Company's revenue for the years ended December
31, 1997 and 1996, respectively. See Note 14 to the Company's Consolidated
Financial Statements included elsewhere herein for further information regarding
foreign operations.
COMPETITION
The Systems Division competes with a growing number of manufacturers of CD-R
production equipment and related products. Rimage is established as one of the
industry's leaders and is able to compete effectively in the sale of CD-R
production equipment on the basis of technological leadership in automated
solutions and its early start within the CD-R production equipment industry.
Rimage believes that the thermal quality printing capabilities for CD-R, its
transporter mechanisms and its software differentiate its products from those of
competitors.
The Systems Division competes with a limited number of manufacturers of diskette
duplication equipment and related products. The market consists of a few U.S.
and foreign manufacturers. This Division of smaller manufacturers sells to the
smaller volume duplicators and does not have the system capabilities of Rimage.
Rimage Systems Division competes in the sale of diskette duplication equipment
on the basis of its third generation automated solutions, and its high volume
duplicating/formatting systems.
Duplication Technology's tape duplication products are among the industry
leaders and enable its service bureau to compete effectively because of the
ability to handle the multitude of tape sizes and requirements.
The Services Division competes with a large number of service bureaus that
provide CD-ROM, CD-R and diskette duplication and production. In addition, many
hardware manufacturers, computer software publishers and software developers
have the capability to duplicate these media in high volumes internally.
However, the CD-ROM, CD-R and diskette duplication industry is highly
competitive and there is no single company or group of companies that is
dominant in the industry. The Company believes that the principal competitive
<PAGE>
factors in providing duplication services are the volume and cost of media
produced, the quality of the media, and the ability to meet production
schedules.
The continued growth in sales of personal computers has resulted in a
corresponding demand for duplication services. CD-ROM usage continues to grow,
while diskette usage has slowed. Factors which affect the continued growth in
CD-ROM usage include: the continued increase in new and upgraded software
programs and the increased capabilities of computer hardware, along with utility
programs to support both; the continued increase in games used on personal
computers; and the increased usage of personal computers as they become more
affordable. Factors which limit CD-ROM usage include: the increased use of work
stations and networks whereby each microcomputer can access a file server or
central controller for software and data; the increased availability of software
through the internet; and the practice of software loading on the hard drives by
the microcomputer manufacturers. Additional factors which limit diskette usage
include: the increased usage of higher capacity alternative storage media such
as CD-ROM, optical cartridges, "flopticals" (which combine magnetic and optical
tracks), magnetic tape and direct telecommunications. CD-ROM drives and floppy
disk drives remain an industry standard as virtually every personal computer
that is sold includes both types of drives.
MANUFACTURING
The Systems Division's manufacturing operations consist primarily of the
assembly of products from components purchased from third parties. Some parts
are stock "off-the-shelf" components and others are manufactured to the
Company's specifications. Final assembly operations are conducted by the
Company's employees at its facilities in Edina, Minnesota and Boulder, Colorado.
Components include CD-R, diskette and tape drives, circuit boards, electric
motors, and machined and molded parts.
Although the Company believes it has identified alternative assembly contractors
for most of its subassemblies, an actual change in such contractors would likely
require a period of training and test. Accordingly, an interruption in a supply
relationship or the production capacity of one or more of such contractors could
result in the Company's inability to deliver one or more products for a period
of several months.
RESEARCH AND DEVELOPMENT
There are 15 people involved in research and development at the Company's
various locations. This staff, with software, electronic, mechanical and
drafting capabilities engages in research and development of new products, and
development of enhancements to existing products.
The microcomputer industry served by the Company is subject to rapid
technological changes. Alternate data storage media exist or are under
development, including high capacity hard drives, new diskette technologies,
file servers accessible through computer networks, and the Internet. All these
forces may affect the usage of CD-ROM, CD-R and diskette media. The Company
believes that it must continue to innovate and anticipate advances in the
storage media industry in order to remain competitive.
The Company's expenditures for engineering and development were approximately
$1,900,000, $2,700,000, and $3,400,000 in 1997, 1996 and 1995 (or 4.9%, 6.4%,
and 6.6% of consolidated revenues), respectively. The Company intends to
increase its level of investment in research and development to match the
percentages in 1996 and 1995.
PATENTS AND GOVERNMENT REGULATION
The Company is the owner of ten patents, has three patents pending and has
license rights to another six patents. In addition, the Company protects the
proprietary nature of its software primarily through copyright and license
agreements, and also through close integration with its hardware offerings. It
is the Company's policy to protect the proprietary nature of its new product
developments whenever they are likely to become significant sources of revenue.
No guarantee can be given that the Company will be able to obtain patent or
other protection for other products.
As the number of its products increases and the functionality of those products
expands, the Company believes that it may become increasingly subject to
attempts by others to duplicate its proprietary technology and to infringement
claims. The Company recently commenced litigation against a small manufacturer
that it believes has duplicated its new CD-R product. In addition, although the
Company does not
<PAGE>
believe that any of its products infringe the rights of others, there
can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertion will not require
the Company to enter into a royalty arrangement or result in litigation.
Some of the Company's equipment is required by the FCC to meet radio frequency
emission standards. The Company has the necessary certification.
EMPLOYEES
At December 31, 1997, the Company had 172 full-time employees, of whom 15 were
involved in research and development, 99 in manufacturing, assembly, testing and
customer service, and 58 in sales, administration and management. None of the
Company's employees are represented by a labor union or are covered by a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company headquarters and the Systems Division are located in a leased
facility of 29,000 square feet at 7725 Washington Avenue South, Edina, Minnesota
55439. In August 1992, the Company entered into a fifteen year capital lease for
this facility, which is owned by a related party (see note 11 to the
consolidated financial statements). Rent is $5.50 per square foot per year, plus
taxes and common area charges of $2.66 per square foot per year.
The Systems Division also leases facilities in Frankfurt, Germany and Boulder,
Colorado. These various facilities are used for manufacturing, engineering,
service and sales. The Services Division is headquartered in a leased facility
of 28,440 square feet at 9701 Penn Avenue South, Bloomington, Minnesota 55431.
In August 1992, the Services Division (formally Dunhill) entered into a fifteen
year capital lease for this facility, which is owned by a related party (see
note 11 to the consolidated financial statements). The lease provides for rent
at the rate of $3.29 per square foot per year, plus taxes and common area
charges which currently are approximately $1.90 per square foot per year. The
Services Division also leases facilities in Plover, Wisconsin; Provo, Utah and
Boulder, Colorado at which it provides duplication services.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that may have a material adverse
effect on the Company, its business or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
last quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "RIMG". The following table sets forth, for the periods indicated, the
range of low and high prices for the Company's common stock as reported on the
NASDAQ System.
Low High
--- ----
Calendar Year 1996:
1st Quarter................ $4.500 $8.000
2nd Quarter............... 5.000 10.250
3rd Quarter............... 4.500 7.500
4th Quarter............... 2.750 5.750
Calendar Year 1997:
1st Quarter................ 2.500 3.500
2nd Quarter............... 2.375 4.125
3rd Quarter............... 2.625 6.000
4th Quarter............... 5.625 8.250
SHAREHOLDERS
At March 25, 1998, there were 62 record holders of the Company's common stock,
and management believes that there are approximately 1,100 beneficial holders of
the Company's common stock.
DIVIDENDS
The Company has never paid or declared any cash dividends on its common stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company presently expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors and will depend on the Company's continued
earnings, financial condition, capital requirements and other relevant factors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below and the Consolidated Financial Statements and the
Notes thereto included in Item 8 below. Amounts are shown in 1000's (except per
share data).
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Year ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $38,878 $41,782 $51,490 $40,694 $27,090
Cost of Revenues 27,559 32,420 38,836 28,156 17,169
Gross Profit 11,319 9,362 12,654 12,538 9,921
Operating Expenses 8,480 13,139 14,298 11,253 7,899
Operating Earnings (Loss) 2,839 (3,777) (1,644) 1,285 2,022
Other Expense, Net 794 651 660 384 225
Income tax Expense (Benefit) 120 751 (1,052) 360 681
Net Earnings (Loss) 1,925 (5,179) (1,252) 541 1,116
Diluted net Earnings (Loss) Per Share $.59 ($1.68) $(.41) $.18 $.39
Weighted Average Shares and Share
Equivalents Outstanding 3,277 3,075 3,050 3,043 2,826
CONSOLIDATED BALANCE SHEET INFORMATION:
Balances as of December 31
--------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Trade Accounts Receivables, Net $4,778 $5,071 $9,493 $5,791 $4,749
Inventories 2,266 4,028 4,690 5,833 4,937
Current Assets 8,196 10,545 16,451 13,960 12,461
Property and Equipment, Net 5,847 7,814 4,884 4,333 4,136
Total Assets 15,164 20,010 23,784 21,568 18,336
Current Liabilities 5,756 12,836 12,643 7,762 6,169
Long-Term Liabilities 3,411 3,032 1,881 2,522 2,261
Stockholders' Equity 5,938 4,084 9,202 11,227 9,906
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Rimage has two primary divisions: 1) The Systems Division designs, manufactures
and sells high performance, on-demand publishing and duplication systems for
CD-R's and diskettes and 2) The Service Division provides media duplication and
fulfillment services for most computer media types, including CD-ROM, diskette,
tape and other media such as Zip and Jazz disks. The Company's consolidated
revenues decreased by 7.0% and 18.9% from 1996 to 1997 and from 1995 to 1996,
respectively. The Company's consolidated net earnings (loss) were $1,925,000,
$(5,179,000), and $(1,383,000) in 1997, 1996, and 1995, respectively.
SYSTEMS DIVISION--1997 COMPARED TO 1996
The Systems Division's revenues (which include equipment sold from Rimage
Systems - Minneapolis, Rimage Europe, Duplication Technology, Rimage Asia,
Rimage Optical Systems, and Knowledge Access International) decreased by
$2,226,000 or 9.6% from 1996 to 1997. This decrease was primarily due to a
significant decrease in non-core business revenues of $5,508,000 after the
shut-downs of certain non-core business operations (Rimage Asia, Rimage Optical
Systems, and Knowledge Access International) in December 1996 and early 1997,
offset by significant increases in core business system revenues of $3,282,000.
The increase in core buisness revenues was primarily due to an increase in CD-R
equipment sales and related peripheral products.
Gross profit as a percentage of revenues was 45.5% and 32.0% during 1997 and
1996, respectively. This increase was due to the increased sales of higher
margin CD-R products and the discontinuation of lower margin products as a
result of the shut-down of non-core business operations.
Operating expenses (excluding severance and exit expenses of $0 in 1997 and
$968,000 in 1996, described in the next paragraph) as a percent of revenues were
28.2% and 39.6% during 1997 and 1996, respectively. The decrease in the percent
of operating expenses to revenues from 1996 to 1997 was primarily a result of
work force changes and, during the early part of 1997, the shut-down of certain
non-core business operations and facilities that were maintaining higher
operating expense to sales revenue ratios.
The Company discontinued the operations of its Asian and Knowledge Access
International subsidiaries and its Televaulting division during 1997, pursuant
to decisions made by the Company during the fourth quarters of 1996 and 1995.
Also, during 1996, the Company concluded the remaining capitalized licensing
fees paid for the rights to sell CD-ROM optical disc stamping presses and other
capitalized development costs that no longer had any value. The 1996 charges
associated with these shut-downs and license fee and capitalized development
cost write-offs were $947,000.
The operating earnings (loss) were $3,638,000 and $(2,732,000) during 1997 and
1996, respectively. This improvement was due to the aforementioned sales mix and
decreases in operating expenses.
SYSTEMS DIVISION--1996 COMPARED TO 1995
The Systems Division's revenues increased by $5,878,000 or 33.9% from 1995 to
1996. This increase is due to a net of the following: incremental revenues from
Rimage Optical Systems, a division created in 1996 for the resale of large
CD-ROM optical disc stamping presses; a significant increase in revenues from
the sale of CD-R duplication equipment and related peripheral products; and a
significant decrease in revenues from the sale of diskette and tape duplication
equipment and related peripheral products.
Gross profit, as a percentage of revenues, was 32.0% and 37.7% during 1996 and
1995, respectively. This decrease was due to a net of significantly lower
margins from the incremental CD-ROM optical disc stamping press and an increase
in margins from the sale of CD-R duplication products and related peripherals.
Operating expenses (excluding severance and exit expenses of $968,000 in 1996
and $1,661,000 in 1995, which are described in the next paragraph) as a percent
of revenues during 1996 and 1995 were 39.6% and 55.5%, respectively. The
decrease is attributable to a net of the following factors: engineering and
development costs decreased by approximately $700,000 from 1995 to 1996,
directly related to the 1995 shut down of ALF Products; selling and marketing
expenses maintained approximately the same level from 1995 to 1996, as decreased
sales and
<PAGE>
marketing expenses at Knowledge Access were offset by incremental sales and
marketing expenses related to the sale of CD-ROM optical disc stamping presses;
and, general and administrative expenses increased by $275,000 from 1995 to
1996, as decreased general and administrative expenses at Knowledge Access and
Rimage Systems were offset by significant incremental general and administrative
expenses related to the sale of CD-ROM optical disc stamping presses.
During the fourth quarter of 1996, the Company made the decision to close its
Asian and KAI subsidiaries and to sell its Televaulting division. The Company
has also concluded that the remaining capitalized licensing fees paid for the
rights to sell CD-ROM optical disc stamping presses and other capitalized
development costs no longer had any value. The 1996 charges associated with
these shut downs and license fee and capitalized development cost write-offs
were $947,000. This compares to 1995 total severance and exit expenses totaling
$1,661,000 related to the Company's decision to close its Knowledge Access
subsidiary and its ALF Products division.
The operating losses were $2,732,000 and $4,749,000 during 1996 and 1995,
respectively. This improvement was due to a combination of the factors discussed
above.
SERVICES DIVISION--1997 COMPARED TO 1996
The Services Division's revenues (which include the revenues of the Rimage
Services Division, formerly "Dunhill," as well as the service business of
Duplication Technology) decreased by $678,000 or 3.7% from 1996 to 1997. This
decrease was primarily due to the loss of one customer during 1996 which
provided 14.2% of the Services Division's 1996 revenues offset by incremental
revenues from CD-ROM duplication.
Gross profit as a percentage of revenues was 9.9% and 10.3% during 1997 and
1996, respectively. The primary reasons for this slight decrease consisted of
increased depreciation in 1997 due to the Company's purchase of two CD-ROM lines
in the latter half of 1996 coupled with lower sales revenues in 1997 offset by
personnel and operation changes made during mid-year 1997 to improve those
margins.
Operating expenses as a percent of revenues were 14.3% and 16.0% during 1997 and
1996, respectively. The decrease in the percent of operating expenses to
revenues from 1996 to 1997 was primarily a result of work force changes made in
December 1996.
Operating losses were $799,000 and $1,045,000 during 1997 and 1996,
respectively. This decrease in net loss resulted from the aforementioned work
force changes offset by increased depreciation expnese and slightly lower sales.
SERVICES DIVISION--1996 COMPARED TO 1995
The Services Division's revenues decreased by $15,586,000 or 45.7% from 1995 to
1996. This decrease resulted primarily from the loss of America Online which
provided 44.3% and 14.2% of the Services Division's 1995 and 1996 revenues,
respectively, and a decrease in sales to Banta Global Turnkey Group of
approximately $3,400,000 from 1995 levels.
Gross profit, as a percentage of revenues, was 10.3% and 17.9% during 1996 and
1995, respectively. The primary causes of this decline consisted of
significantly decreased production volumes combined with only a slight decrease
in fixed costs and CD-ROM stamping press installation and start-up costs
incurred during the fourth quarter of 1996.
Operating expenses decreased by $48,000 from 1995 to 1996, but increased as a
percentage of revenues from 8.8% in 1995 to 16.0% in 1996. This increased
percentage was the result of Services Division's lower revenues with relatively
stable fixed operating costs.
Operating (loss) earnings were $(1,045,000) and $3,104,000 during 1996 and 1995,
respectively. The sharp decline resulted from the aforementioned reduced
revenues combined with relatively stable manufacturing and operating expenses
and CD-ROM stamping press installation and start-up costs incurred during the
fourth quarter of 1996.
CONSOLIDATED RESULTS--1997 COMPARED TO 1996
Revenues decreased $2,904,000 or 7.0% from 1996 to 1997. This decrease was
primarily due to a significant decrease in non-core Systems Division revenues
after the shut-downs of certain non-core business operations in December 1996
and early 1997, offset by significant increases in core Systems Division
revenues. The increase in core Systems Division revenues was primarily due to an
increase in CD-R equipment sales and related peripheral products.
Gross profit as a percentage of revenues was 29.1% and 22.4% during 1997 and
1996, respectively. The increase was primarily due to the increased sales of
higher margin CD-R
<PAGE>
products and the discontinuation of lower margin products as a result of the
shut-down of non-core Systems Division operations.
Operating expenses as a percent of revenues were 21.8% and 31.4% during 1997 and
1996, respectively. This decrease was primarily due to no 1997 severance and
exit costs, work force changes and, during the early part of 1997, the shut-down
of certain non-core Systems Division operations and facilities that were
maintaining higher operating expense to sales revenue ratios.
Interest expense was $829,000 and $679,000 during 1997 and 1996, respectively.
The increase was due to increased credit line usage in 1997 for working capital
purposes.
Income tax expense was $120,000 and $751,000 in 1997 and 1996, respectively. The
1997 tax expense amount represents alternative minimum taxes. The 1996 tax
expense was a result of a deferred tax asset write-down of $751,000.
Net earnings (loss) was $1,925,000 and $(5,179,000) in 1997 and 1996,
respectively. Diluted net earnings (loss) per share was $0.59 and $(1.68) in
1997 and 1996, respectively. The decrease in loss is attributable to the
elimination of non-core Systems Division operations, an increase in CD-R
equipment sales and related peripheral products, and lower tax expense in 1997
compared to 1996.
CONSOLIDATED RESULTS--1996 COMPARED TO 1995
Revenues decreased $9,708,000 or 18.9% from 1995 to 1996. This decrease was a
result of the decline in the Services Division's revenues and was partially
offset by increases in the Systems Division's revenues that resulted from higher
demand for newly developed CD-R equipment and the resale of CD-ROM stamping
presses.
Gross profit as a percentage of revenues was 22.4% and 24.6% during 1996 and
1995, respectively. The decrease was due to a net of lower margin sales of the
incremental CD-ROM optical disc stamping press sales revenues with the increased
sales of higher margin systems sales such as CD-R duplication products and
related peripherals.
Operating expenses as a percent of revenues were 31.4% and 27.8% during 1996 and
1995, respectively. While Systems Division's operating expenses as a percent of
revenues decreased from 1995 to 1996, the Services Division more than offset
this due to significantly reduced revenues with relatively stable fixed
operating costs.
Interest expense was $679,000 and $588,000 during 1996 and 1995, respectively.
The increase was due to increased credit line usage in 1996 for capital
expenditure and working capital purposes.
Income tax expense (benefit) was $751,000 and $(921,000) in 1996 and 1995,
respectively. The 1996 tax expense was the direct result of a deferred tax asset
write-down of $751,000. Prior to the merger on September 30, 1995, Dunhill
Software was a Subchapter-S Corporation and was not subject to federal income
taxes.
Net loss was $5,179,000 and $1,383,000 in 1996 and 1995, respectively. Diluted
net loss per share was $1.68 and $.45 in 1996 and 1995, respectively. The
increase in loss is attributable to: the significant change in Services Division
operating earnings (loss) from 1995 to 1996 of $3,104,000 profit to $(1,045,000)
loss, respectively; a deferred tax asset write-down of $751,000; and, an offset
by decreased Systems Division losses from 1995 to 1996 of $4,749,000 to
$2,732,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5,244,000 and $1,395,000 during
1997 and 1996, respectively. The increase in cash flow from operating activities
in 1996 to 1997 was greatly impacted by the discontinuance of cash intensive
non-core businesses and increased sales of higher margin CD-R products.
The cash used in investing activities was $6,000 and $(2,702,000) during 1997
and 1996, respectively. Fixed assets of $2,941,000 were purchased during 1996,
primarily for the installation of two CD-ROM optical disc stamping presses and
for the purchase of a new operating system for the Services Division.
At December 31, 1997 the Company had no significant commitments to purchase
additional capital equipment.
The Company's working capital (deficit) was $2,440,000 and $(2,291,000) at
December 31, 1997 and 1996, respectively. This change in working capital was
significantly affected by the operating and investing activities discussed
above. The net cash (used in) provided by financing activities was $(4,662,000)
and $1,208,000 for 1997 and 1996, respectively. The Company was able to reduce
the outstanding borrowings on its line of credit to $0 as a result of improved
operations during 1997.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
<PAGE>
The Company's internal computer systems and applications, those it is selling or
has sold in the past as well as those of third parties with whom the Company
does business will be affected when the year changes to 2000, commonly known as
the "Y2K" problem. The Company is currently conducting an internal study to
determine the full scope and related costs of modifying its products to ensure
proper processing of transactions into and beyond the year 2000. The Company
expects that it will begin to incur costs in 1998 to address the year 2000
issues identified during the internal study. The Company is unable to, at this
time, estimate the costs that will be incurred in connection with these
modifications. The Company anticipates completion of the project's assessment
phase within the next six months and completion of necessary modifications to
its systems and applications by March 31, 1999.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report and in the Company's press releases and
oral statements made by or with the approval of the Company's executive officers
constitute or will constitute "forward looking statements". All forward looking
statements involve risks and uncertainties, and actual results may be materially
different. The following factors are among those that could cause the Company's
actual results to differ materially from those set forth in such forward looking
statements. The Company's ability to succesfully identify and incorporate new
technologies into new and enhanced products and to develop and maintain
compatibility and interoperability with the products of others, as well as new
product introductions by competitors and the continuing availability of
intellectual property licenses on commercially available terms, may impact the
Company's ability to increase demand for its products. The success of the
Company's sales force to provide for broader account coverage through channel
partners, better utilization of existing resources and to control selling
expense may be impacted by the expertise and commitment of the affected
personnel, market acceptance of new and existing products and competitive market
conditions. The unanticipated need to enhance or modify products due to changing
market requirements, the success of current product programs, the need to meet
unanticipated product opportunities and the amount of total revenue in 1998 may
affect whether research and development expenditures will increase to the levels
experienced in 1996 and 1995 (approximately 7% of total revenues). The Company's
ability to generate revenue as presently expected, unexpected expenses and the
need for additional funds to react to changes in the marketplace, including
unexpected increases in personnel and product development expenses, may affect
whether the Company has sufficient cash resources to fund its operating plans
and capital requirements through at least 1998.
Other factors that could cause the results of the Company to differ materially
from those contained in any such forward looking statments include general
economic conditions, costs and availability of components and fluctuations in
exchange rates. In addition, the markets for the Company's products are
characterized by significant competition, and the Company's results may be
adversely affected by the actions of existing and future competitors, including
the development of new technologies, the introduction of new products and the
reduction of prices by such competitors to gain or retain market share. The
Company assumes no obligation to publicly release the results of any revision or
updates to these forward looking statements to reflect future events or
unanticipated occurrences.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page in
1997 Annual
Report to
Shareholders
------------
Independent Auditors' Report ............................. 14
Consolidated Balance Sheets, as of
December 31, 1997 and 1996 ............................... 15-16
Consolidated Statements of Operations,
for the years ended December 31, 1997,
1996 and 1995 ............................................ 17
Consolidated Statements of
Stockholders' Equity, for the years
ended December 31, 1997, 1996 and
1995 ..................................................... 18
Consolidated Statements of Cash Flow,
for the years ended December 31, 1997,
1996 and 1995 ........................................... 19-20
Notes to Consolidated Financial
Statements ............................................... 21-38
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements, including the notes thereto,
and other financial information presented in this Annual Report were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon our best estimates
and judgments.
Rimage Corporation maintains an effective system of internal accounting control.
We believe this system provides reasonable assurance that transactions are
executed in accordance with management authorization and are appropriately
recorded in order to permit preparation of financial statements in conformity
with generally accepted accounting principles and to adequately safeguard,
verify, and maintain accountability of assets. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
control should not exceed the benefits derived.
KPMG Peat Marwick LLP, independent certified public accountants, is retained to
audit the Company's financial statements. Their accompanying report is based on
an audit conducted in accordance with generally accepted auditing standards. The
audit includes a review of the internal accounting control structure to gain a
basic understanding of the accounting system in order to design an effective and
efficient audit approach and not for the purpose of providing assurance on the
system of internal control.
The Audit Committee of the Board of Directors is composed of two outside
directors, and is responsible for recommending the independent accounting firm
to be retained for the coming year, subject to shareholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.
/s/ Bernard P. Aldrich
Bernard P. Aldrich
President and Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rimage Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rimage Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 6, 1998
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 656,127 117,322
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $505,458 and $1,084,910,
respectively 4,778,055 5,070,738
Inventories (note 4) 2,265,867 4,027,553
Income tax receivable 23,350 818,790
Prepaid expenses and other current assets 378,306 293,037
Current installments of investment in sales-type
leases (note 5) 94,422 217,952
- -------------------------------------------------------------------------------------------------
Total current assets 8,196,127 10,545,392
- -------------------------------------------------------------------------------------------------
Property and equipment:
Building and leasehold improvements (note 11) 2,505,577 2,496,499
Manufacturing equipment (note 11) 8,574,347 8,348,627
Development equipment 758,888 694,673
Office furniture and equipment 1,971,155 2,233,349
Vehicle 0 22,699
- -------------------------------------------------------------------------------------------------
13,809,967 13,795,847
Less accumulated depreciation and amortization 7,963,014 5,981,417
- -------------------------------------------------------------------------------------------------
Net property and equipment 5,846,953 7,814,430
Investment in sales-type leases, net of current installments
(note 5) 12,013 182,332
Goodwill 848,692 929,407
Other noncurrent assets 259,727 537,944
- -------------------------------------------------------------------------------------------------
Total assets $ 15,163,512 20,009,505
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable (note 6) $ 900,000 6,029,598
Current installments of capital lease obligations (note 11) 356,053 311,343
Trade accounts payable 2,789,973 4,295,400
Accrued expenses (note 7) 1,069,315 1,770,023
Deferred income and customer deposits 640,725 429,822
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 5,756,066 12,836,186
Notes payable, less current portion (note 6) 750,000 0
Capital lease obligations, less current installments (note 11) 2,661,334 3,031,759
- ----------------------------------------------------------------------------------------------------------
Total liabilities 9,167,400 15,867,945
- ----------------------------------------------------------------------------------------------------------
Minority interest in inactive subsidiary 57,907 57,907
Stockholders' equity (note 9):
Common stock, $.01 par value, authorized 10,000,000 shares,
issued and outstanding 3,091,302 and 3,084,500, respectively 30,913 30,845
Additional paid-in capital 10,468,136 10,447,798
Accumulated deficit (4,405,218) (6,330,291)
Foreign currency translation adjustment (155,626) (64,699)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,938,205 4,083,653
Commitments and contingencies (notes 11 and 17)
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,163,512 20,009,505
==========================================================================================================
</TABLE>
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 38,878,439 41,782,122 51,490,397
Cost of revenues 27,559,498 32,419,822 38,835,635
- ------------------------------------------------------------------------------------------------
Gross profit 11,318,941 9,362,300 12,654,762
- ------------------------------------------------------------------------------------------------
Operating expenses:
Engineering and development 1,904,490 2,693,390 3,399,130
Selling, general, and administrative
(note 16) 6,575,558 10,446,173 10,899,780
- ------------------------------------------------------------------------------------------------
Total operating expenses 8,480,048 13,139,563 14,298,910
- ------------------------------------------------------------------------------------------------
Operating earnings (loss) 2,838,893 (3,777,263) (1,644,148)
- ------------------------------------------------------------------------------------------------
Other (expense) income:
Interest expense (829,490) (678,805) (588,424)
Gain on currency exchange 58,294 38,749 63,965
Merger expense 0 0 (230,504)
Other, net (note 12) (22,481) (10,467) 95,450
- ------------------------------------------------------------------------------------------------
Total other expense, net (793,677) (650,523) (659,513)
- ------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 2,045,216 (4,427,786) (2,303,661)
Income taxes (note 8) 120,143 751,225 (1,052,000)
- ------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,925,073 (5,179,011) (1,251,661)
================================================================================================
Basic net earnings (loss) per common
share $ 0.62 (1.68) (0.41)
================================================================================================
Diluted net earnings (loss) per common
share and common share equivalents $ 0.59 (1.68) (0.41)
- ------------------------------------------------------------------------------------------------
Basic weighted average shares 3,086,292 3,074,837 3,050,140
================================================================================================
Diluted weighted average shares and
share equivalents outstanding 3,276,539 3,074,837 3,050,140
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Retained Foreign
Common Stock Additional Earnings currency
--------------------- paid-in (accumulated translation
Shares Amount capital Deficit) adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,050,000 $ 30,500 7,703,314 3,501,560 (8,446) 11,226,928
Registration fees from 1993 secondary offering 0 0 (18,400) 0 0 (18,400)
Cash dividends related to S-Corporation
earnings 0 0 0 (789,200) 0 (789,200)
Reclassification of S-Corporation accumulated
deficit to additional paid-in capital (note 9) 0 0 2,611,979 (2,611,979) 0 0
Foreign currency translation 0 0 0 0 29,698 29,698
Stock issued in stock option exercise 1,000 10 4,990 0 0 5,000
Net loss 0 0 0 (1,251,661) 0 (1,251,661)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,051,000 30,510 10,301,883 (1,151,280) 21,252 9,202,365
Foreign currency translation 0 0 0 0 (85,951) (85,951)
Stock issued in stock option exercise 33,500 335 145,915 0 0 146,250
Net loss 0 0 0 (5,179,011) 0 (5,179,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,084,500 30,845 10,447,798 (6,330,291) (64,699) 4,083,653
Foreign currency translation 0 0 0 0 (90,927) (90,927)
Stock issued in stock option exercise 6,802 68 20,338 0 0 20,406
Net earnings 0 0 0 1,925,073 0 1,925,073
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,091,302 $ 30,913 10,468,136 (4,405,218) (155,626) 5,938,205
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,925,073 (5,179,011) (1,251,661)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,466,519 1,982,839 1,644,802
Goodwill and other asset impairments 81,636 446,700 1,366,134
Change in reserve for excess and obsolete
inventories (142,000) (145,000) 355,500
Change in reserve for doubtful accounts (579,452) 440,334 430,641
Loss (gain) on sale of property and
equipment 1,089 111,624 (3,219)
Change in deferred taxes 0 1,065,000 (655,000)
Decrease in investment in sales-type leases 0 (176,588) (419,494)
Changes in operating assets and liabilities:
Trade accounts receivable 872,135 3,982,070 (4,133,139)
Inventories 1,903,686 807,773 787,136
Prepaid expenses and other current
assets (85,269) 37,938 (56,346)
Income tax receivable 795,440 (568,778) (100,031)
Trade accounts payable (1,505,427) (1,466,342) 2,048,812
Accrued expenses (700,708) 392,671 (77,035)
Deferred income and customer deposits 210,903 (335,955) 174,388
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 5,243,625 1,395,275 111,488
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (381,373) (2,941,123) (1,953,899)
Payment of Duplication Technology's earn-out 0 0 (103,428)
Proceeds from the sale of property and equipment 15,427 84,633 53,637
Other noncurrent assets 66,360 (188,738) (738,572)
Receipts from sales-type leases 293,849 343,612 403,324
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (5,737) (2,701,616) (2,338,938)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from stock option exercise $ 20,406 146,250 5,000
Principal payments on capital lease obligations (325,715) (97,922) (23,053)
Net change in line of credit at bank (3,446,296) 144,407 2,525,000
Proceeds from other notes payable 1,650,000 2,816,702 1,500,000
Repayment of other notes payable (2,560,191) (1,801,324) (2,038,435)
Payment of registration fees 0 0 (18,400)
Subchapter-S dividends paid 0 0 (789,200)
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (4,661,796) 1,208,113 1,160,912
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (37,287) (14,464) 12,758
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 538,805 (112,692) (1,053,780)
Cash and cash equivalents, beginning of year 117,322 230,014 1,283,794
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 656,127 117,322 230,014
===================================================================================================================
Supplemental disclosures of cash paid during the period for:
Interest $ 842,950 697,296 594,539
Income taxes 23,350 172,992 63,200
Noncash investing and financing activities:
In September 1996, Rimage purchased manufacturing equipment and incurred
a capital lease obligation for $1,822,770.
On September 29, 1995, Rimage issued 1,100,000 shares of its common stock
in connection with the merger with Dunhill Software Services, Inc. On
September 8, 1994, Rimage issued 50,000 shares of its common stock in
connection with the acquisition of Knowledge Access.
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Nature of Business and Summary of Significant Accounting Policies
Basis of Presentation and Nature of Business
The consolidated financial statements include the accounts of Rimage
Corporation, Rimage Europe GmbH, A/G Systems Inc., d/b/a Duplication
Technology Inc. (Duplication Technology), Knowledge Access
International (Knowledge Access) and ALF Products Inc. d/b/a ALF/Rimage
(ALF Products); and operations of Rimage Services Division (formerly
Dunhill Software Services which merged with Rimage in 1995 using
pooling-of-interest accounting) collectively hereinafter referred to as
Rimage or the Company. All material intercompany accounts and
transactions have been eliminated upon consolidation.
During March 1997, the Company completed the shutdown of its Knowledge
Access Subsidiary. The Company also completed shutdowns of its Asia
facility and Televaulting division in February and June 1997,
respectively. See Note 16.
Effective September 29, 1995, Rimage Corporation and Dunhill Software
Services Inc. (Dunhill) completed a merger. Dunhill had been a
significant customer of Rimage. For financial reporting purposes, the
merger has been recorded using the pooling-of-interests method of
accounting under generally accepted accounting principles. Accordingly,
the historical consolidated financial statements of Rimage presented
for 1995 have been restated to include the historical accounts and
results of operations of Dunhill as if the merger had been consummated
as of January 1, 1995.
In connection with this merger, the Company now operates in two segments,
Rimage Systems Division and Rimage Services Division. The Rimage
Systems Division consists of substantially all of the former Rimage
companies. The Rimage Services Division consists of the former Dunhill
operation in addition to the existing service business at Duplication
Technology.
The Systems Division develops, manufactures and distributes high
performance CD-Recordable (CD-R) publishing and duplication systems,
and continues to support its long term involvement in diskette
duplication and publishing equipment. The Services Division provides
computer media duplication and production services to software
developers and manufacturers and information publishers.
(Contiuned)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
The Company extends unsecured credit to its customers, substantially all
of whom are computer hardware, software and service companies, software
developers and manufacturers or information publishers.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment on all equipment and service
orders. The Company provides maintenance services under long-term
maintenance contracts. Revenue associated with these contracts is
deferred and recognized on a straight-line basis over the terms of the
respective contracts. Income from sales-type leases is recognized by a
method which produces a constant periodic rate of return on the
underlying investment.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
All short-term investments with original maturities of three months or
less at date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a
straight-line basis over periods of two to seven years. Leasehold
improvements are amortized using the straight-line method over the
terms of the respective leases. Repairs and maintenance costs are
charged to operations as incurred.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR STOCKS
ISSUED TO EMPLOYEES. Accordingly, no compensation expense had been
recognized for its stock-based compensation plans. The Company has
adopted the disclosure requirements under Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING AND DISCLOSURE OF
STOCK-BASED COMPENSATION.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
capitalization of software development costs begins upon the
establishment of technological feasibility of the product. The
establishment of technological feasibility and the ongoing assessment
of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated
economic life, and changes in software and hardware technology.
The Company capitalizes software development costs between the date when
project technological feasibility is established (beta stage) and the
date when the product is ready for normal production release. Research
and development costs related to software development are expensed as
incurred. Software development costs are amortized over the estimated
economic life of the product which ranges from two to five years.
Amortization expense is included in cost of goods sold. Included in
other noncurrent assets are capitalized software costs as of December
31, 1997 and 1996 of $367,836 and $503,676, respectively. Accumulated
amortization at December 31, 1997 and 1996 was $204,069 and $188,745,
respectively.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are calculated in accordance with SFAS No.
128 "Earnings Per Share". Basic earnings per share is calculated as
income (loss) available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share is calculated by dividing income (loss) available to
common stockholders by the weighted average number of dilutive common
share equivalents outstanding during each period. Common stock
equivalents result from dilutive stock options and warrants computed
using the treasury stock method. See Note 10.
TRANSLATION OF FINANCIAL STATEMENTS IN FOREIGN CURRENCIES
The assets and liabilities for the Company's international subsidiaries
and branches are translated into U.S. dollars using current exchange
rates. The resulting translation adjustments are recorded in the
foreign currency translation adjustment account in equity. Statement of
operations items are translated at average exchange rates prevailing
during the period. Foreign currency transaction gains or losses are
included in net earnings (loss).
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and is amortized on a straight-line basis over
15 years. Goodwill balances are reviewed periodically to determine that
the unamortized balances are recoverable. In evaluating the
recoverability, the following factors, among others, are considered: a
significant change in the factors used to determine the amortization
period, an adverse change in legal factors or in the business climate,
a transition to a new product or services strategy, a significant
change in the customer base, and/or a realization of failed marketing
efforts. If the unamortized balance is believed to be unrecoverable,
the Company recognizes an impairment charge necessary to reduce the
unamortized balance to the present value of cash flows expected to be
generated over the remaining life. The amount of impairment is charged
to earnings as a part of general and administrative expenses in the
current period.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments.
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Trade accounts receivables, sales type leases, accounts payable, and notes
payable: The carrying amount approximates fair value because of the
short maturity of those instruments.
Long-term debt: The carrying amount approximates fair value based on their
effective interest rates compared to current market rates.
(3) ACQUISITIONS
On September 29, 1995, and pursuant to the Agreement and Plan of
Reorganization (the Merger Agreement) dated June 6, 1995 by and between
Rimage Corporation and Dunhill, Rimage issued 1,100,000 shares of stock
to the former Dunhill shareholders and Dunhill was merged into Rimage.
This merger has been recorded using the pooling-of-interests method of
accounting. Accordingly, the 1995 consolidated financial statements of
Rimage have been restated to include the historical accounts and
results of operations of Dunhill for the year presented.
(4) INVENTORIES
Inventories consist of the following as of December 31:
1997 1996
- -------------------------------------------------------------------
Finished goods and demonstration
equipment $ 803,689 1,026,303
Work-in-process 234,177 527,378
Purchased parts and subassemblies 1,676,001 3,063,872
- -------------------------------------------------------------------
2,713,867 4,617,553
Less reserve for excess
inventories 448,000 590,000
- -------------------------------------------------------------------
$ 2,265,867 4,027,553
===================================================================
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(5) INVESTMENT IN SALES-TYPE LEASES
The Company sells some of its products under sales-type lease agreements.
All outstanding lease agreements expire by 1999. The net investment in
sales-type leases consists of the following as of December 31:
1997 1996
- -------------------------------------------------------------------
Total minimum lease payments
receivable $ 114,185 454,471
Less unearned income 7,750 54,187
- -------------------------------------------------------------------
Net investment in
sales-type leases 106,435 400,284
Less current installments 94,422 217,952
- -------------------------------------------------------------------
Investment in sales-type leases,
less current installments $ 12,013 182,332
===================================================================
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(6) NOTE PAYABLE TO BANK
On December 31, 1997, the Company entered into a term note agreement (the
Credit Agreement) with a bank. Borrowings under the Credit Agreement
are secured by substantially all Company assets and accrue interest at
LIBOR plus two and one-half percent (interest rate at December 31, 1997
was 8.22%). Principal amounts are payable in monthly installments of
$75,000 through September 30, 1999. Any remaining unpaid principal
and/or interest is due October 31, 1999. The outstanding amount as of
December 31, 1997 was $1,650,000.
Also available to the Company under the Credit Agreement are advances
under a revolving loan based on various percentages of qualified asset
(primarily accounts receivable and inventory) amounts, up to a maximum
advance of $5,000,000. There were no outstanding borrowings under this
revolving loan as of December 31, 1997.
The Credit Agreement contains various covenants pertaining to minimum
tangible net worth and current, leverage and fixed charge coverage
ratios. The Company was in compliance with these covenants at December
31, 1997.
As of December 31, 1996, the Company had an outstanding term note of
$2,583,302 and a revolving line of credit with an outstanding balance
of $3,446,296. In March 1997, the Company signed an amended credit
agreement with the bank which provided additional borrowing capacity
and which stated both the term note and line of credit outstanding
balances would be payable on demand. The outstanding balances under the
term note and line of credit as of December 31, 1997 were paid off with
the borrowings from the Credit Agreement discussed above.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(7) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31:
1997 1996
- -----------------------------------------------------------------------------
Salaries, wages, benefits, and commissions $ 654,008 1,422,519
Moving expense 103,200 0
Sales taxes 55,227 44,459
Interest 29,194 42,654
Other 227,686 260,391
- -----------------------------------------------------------------------------
$ 1,069,315 1,770,023
=============================================================================
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(8) INCOME TAXES
The provision for income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. Federal $ 95,000 (351,000) (338,000)
State 25,143 37,225 (59,000)
- ----------------------------------------------------------------------------
Total current 120,143 (313,775) (397,000)
- ----------------------------------------------------------------------------
Deferred:
U.S. Federal $ 0 979,000 (557,000)
State 0 86,000 (98,000)
- ----------------------------------------------------------------------------
Total deferred 0 1,065,000 (655,000)
- ----------------------------------------------------------------------------
$ 120,143 751,225 (1,052,000)
============================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax $ 696,000 (1,505,000) (783,000)
Goodwill amortization 25,000 25,000 457,000
(Decrease) increase in
deferred tax asset valuation
allowance (888,000) 2,181,000 68,000
State income taxes, net
of federal tax effect 17,000 82,000 (92,000)
Research and
experimental credits (85,000) (95,000) (180,000)
Tax on preacquisition
S-corporation earnings 0 0 (513,000)
Alternative minimum tax 95,000
Other, net 260,143 63,225 (9,000)
- ----------------------------------------------------------------------------
$ 120,143 751,225 (1,052,000)
============================================================================
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, are presented below:
1997 1996
- --------------------------------------------------------------------------
Net operating loss carryforward $ 0 596,000
Accounts receivable 182,000 317,000
Inventories 180,000 235,000
Accrued payroll 63,000 271,000
Net operating loss carryforward of
inactive subsidiary 0 100,000
Capital versus operating lease 147,000 120,000
Warranty accrual 20,000 20,000
Fixed assets 51,000 (17,000)
Gross margin recognition on sale to
foreign subsidiary 83,000 57,000
Tax credits 728,000 574,000
Foreign net operating
loss carryforward and future
deductible temporary differences 0 67,000
Other 7,000 9,000
- --------------------------------------------------------------------------
Total gross deferred tax
assets 1,461,000 2,349,000
Less valuation allowance (1,461,000) (2,349,000)
- --------------------------------------------------------------------------
Net deferred tax assets $ 0 0
==========================================================================
A reconciliation of the valuation allowance for deferred taxes as of
December 31 is as follows:
1997 1996
- --------------------------------------------------------------------------
Valuation allowance at beginning
of year $ 2,349,000 168,000
(Decrease) increase in valuation
allowance (888,000) 2,181,000
- --------------------------------------------------------------------------
$ 1,461,000 2,349,000
==========================================================================
</TABLE>
A valuation allowance is provided when there is some likelihood that all
or a portion of the deferred tax asset may not be recognized. The net
deferred assets at December 31, 1997 and 1996 are fully offset by a
valuation allowance.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(9) STOCKHOLDERS' EQUITY
STOCK OPTIONS
Rimage adopted a stock option plan on September 24, 1992 which allows for
the granting of options to purchase shares of common stock to certain
key administrative, managerial and executive employees and the
automatic periodic grants of stock options to non-employee directors.
Options under this plan may be either incentive stock options or
non-qualified options. Pursuant to this plan, the following options are
currently issued and outstanding:
<TABLE>
<CAPTION>
Weighted average
Shares available exercise
for grant Options outstanding price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 270,995 229,005 $ 6.54
Granted (103,448) 103,448 6.87
Exercised - (1,000) 5.00
- --------------------------------------------------------------------------------------------
Balance at December 31, 1995 167,547 331,453 6.65
Exercised - (33,500) 4.37
Canceled 7,500 (7,500) 8.38
- --------------------------------------------------------------------------------------------
Balance at December 31, 1996 175,047 290,453 6.87
Additional shares available 500,000 - -
Granted (420,500) 420,500 3.03
Exercised - (6,802) 3.00
Canceled 56,854 (56,854) 7.38
- --------------------------------------------------------------------------------------------
Balance at December 31, 1997 311,401 647,297 $ 3.16
============================================================================================
</TABLE>
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.50--$8.38 and
9.0 years, respectively. 508,141 of the outstanding options were
exercisable at December 31, 1997. At December 31, 1996, all outstanding
options were exercisable.
The per share weighted-average fair value of stock options granted during
1997 is estimated as $1.89, on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
volatility of 76%, risk-free interest rate of 6.9% and an expected life
of 7.0 years. No stock options were granted during 1996.
The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's 1997 net income and
basic and diluted earnings per share would have been decreased by
approximately $517,000, or $.17 and $.16 per share, respectively.
Proforma net income reflects only options granted in 1997 as no options
were granted in 1996. The full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the proforma
net income amounts presented because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
STOCK ISSUED IN ACQUISITION AND MERGER
On September 29, 1995, in connection with the merger between Rimage and
Dunhill Software Services, Inc. 1,100,000 shares of Rimage common stock
were issued (see note 3).
TERMINATION OF DUNHILL'S S-CORPORATION STATUS
On September 29, 1995, Dunhill Software Services, Inc. terminated its
S-Corporation election. Under SEC rules, Dunhill's accumulated retained
earnings of $2,611,979 as of the termination of the S-Corporation
election was reclassified to additional paid-in capital.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(10) NET EARNINGS (LOSS) PER SHARE
During 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") which the Company adopted as of December 31, 1997. Under SFAS
No. 128, basic net earnings (loss) per share is computed based on the
weighted average number of common shares outstanding while diluted net
earnings (loss) per share is computed based on the weighted average
number of common shares outstanding plus potential dilutive shares of
common stock. Potential dilutive shares of common stock include stock
options which have been granted to employees and directors. SFAS No.
128 also requires restatement of net earnings (loss) per share amounts
for all periods presented.
The components of net earnings (loss) per basic and diluted share are as
follows:
<TABLE>
<CAPTION>
Net Earnings Weighted Average Per Share
(Loss) Shares Outstanding Amount
----------- ----------- -----------
<S> <C> <C> <C>
1997: $ 1,925,073 3,086,292 $ .62
Basic
Dilutive effect of stock options -- 190,247 (.03)
----------- ----------- -----------
Diluted $ 1,925,073 3,276,539 $ .59
=========== ========= ===========
1996: $(5,179,011) 3,074,837 $ (1.68)
Basic
Dilutive effect of stock options -- -- --
----------- ----------- -----------
Diluted $(5,179,011) 3,074,837 $ (1.68)
=========== ========= ===========
1995: $(1,251,661) 3,050,140 $ (.41)
Basic
Dilutive effect of stock options -- -- --
----------- ----------- -----------
Diluted $(1,251,661) 3,050,140 $ (.41)
=========== ========= ===========
</TABLE>
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(11) Leases
At December 31, 1997, the gross amount of building, leasehold
improvements, equipment, and accumulated amortization related to
capital leases were as follows:
<TABLE>
<CAPTION>
Buildings under Manufacturing
capital leases Leasehold improvements equipment under capital
with related party to leased property lease with third party Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost $ 1,686,340 738,248 1,822,770 4,247,358
Less accumulated
Amortization 604,705 266,008 410,124 1,280,837
- -------------------------------------------------------------------------------------------------------------
$ 1,081,635 472,240 1,412,646 2,966,521
=============================================================================================================
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
The future minimum lease payments excluding operating expenses and real
estate taxes as of December 31, 1997 are:
<TABLE>
<CAPTION>
Related Third Third
party party Total party
capital capital capital operating
Year ending December 31 leases leases leases leases
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 258,391 431,676 690,067 334,266
1999 273,308 431,676 704,984 228,802
2000 273,308 431,676 704,984 55,225
2001 273,308 506,034 779,342 -
2002 289,159 - 289,159 -
Later years, through 2007 1,435,045 - 1,435,045 -
- -------------------------------------------------------------------------------------------------------------------
Net minimum lease payments 2,802,519 1,801,062 4,603,581 618,293
=============
Less amount representing imputed interest 1,258,011 328,186 1,586,197
- --------------------------------------------------------------------------------------------------
Present value of net minimum capital
lease payments 1,544,508 1,472,876 3,017,384
- --------------------------------------------------------------------------------------------------
Less current installments of obligations
under capital leases 56,722 299,331 356,053
- --------------------------------------------------------------------------------------------------
Obligations under capital leases,
excluding current installments $ 1,487,786 1,173,545 2,661,334
- --------------------------------------------------------------------------------------------------
</TABLE>
Rent expense under operating leases amounted to approximately $333,000,
$294,000, and $320,000, respectively, for the years ended December 31,
1997, 1996, and 1995.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(12) OTHER (EXPENSE) INCOME
Other (expense) income consists of the following:
Year ended December 31
--------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Interest income $ - 1,674 85,859
(Loss) gain on sale of
property and
equipment (1,089) (111,624) 3,219
Other, net (21,392) 99,483 6,372
- ------------------------------------------------------------------------------
$ (22,481) (10,467) 95,450
==============================================================================
(13) PROFIT SHARING AND SAVINGS PLAN
Effective January 1, 1991, Rimage adopted a profit sharing and savings
plan under Section 401(k) of the Internal Revenue Code. The plan
allowed employees to contribute up to 15% of their pretax compensation
to the plan. Dunhill also had a similar plan and the plans were merged
January 1, 1996. Also, effective January 1, 1996, the Company increased
its employees' allowable contribution to 16% of pretax compensation.
The Company's discretionary contributions totaled $137,150, $207,459,
and $132,865 in 1997, 1996, and 1995, respectively.
(14) SEGMENT REPORTING
The following table summarizes certain financial information for the
Systems, Service and foreign segments:
Year ended December 31
-----------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Revenues from
unaffiliated
customers:
Systems $ 21,011 23,237 17,359
Service 17,867 18,545 34,131
Operating earnings
(loss):
Systems 3,638 (2,732) (4,748)
Service (799) (1,045) 3,104
Net identifiable assets:
Systems 7,881 9,137 11,781
Service 7,283 10,873 12,003
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
As of and for the year ended December 31, 1997, foreign revenues from
unaffiliated customers, operating income, and net identifiable assets
were $4,800,000, $10,000, and $2,074,000, respectively. As of and for
the year ended December 31, 1996, foreign revenues from unaffiliated
customers, operating loss, and net identifiable assets were $6,300,000,
$(496,000), and $2,742,000, respectively.
(15) MAJOR CUSTOMERS
The Company derived more than 10% of its sales from the following
unaffiliated customers and had receivable balances from these customers
in the approximate amounts of:
Amount of net revenues for the
year ended December 31
------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Customer A $ 0 2,639,548 15,106,216
Customer B 5,138,942 5,966,891 9,326,585
Total receivable balance at December 31
---------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Customer A $ 0 0
Customer B 448,747 443,811
(16) RESTRUCTURING EXPENSES AND RELATED RESERVES
During 1996 and 1995, the Company refocused its strategic direction
resulting in changes to management, product transitions and subsidiary
consolidation. As a direct result of these changes, the following
general and administrative expenses were incurred:
Year ended December 31
----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Severance costs $ - 61,000 118,126
Plant shutdowns - 460,000 337,356
Goodwill and other asset impairments 81,636 446,700 1,366,134
As discussed above, during 1996, Rimage reserved for costs expected to be
incurred in connection with certain plant shutdowns occurring during
1997. As expenses were incurred during 1997 to shutdown these
operations, the reserve established in 1996 was utilized. After the
plant shutdowns were completed the remaining immaterial reserve balance
was reversed and included in general and administrative expenses for
fiscal year 1997.
(Continued)
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
(17) COMMITMENTS AND CONTINGENCIES
The Company is exposed to a number of asserted and unasserted claims
encountered in the normal course of business. In the opinion of
management, the resolution of these matters will not have a material
adverse effect on the Company's financial position or results of
operations.
(18) SUPPLEMENTAL QUARTERLY DATA - UNAUDITED(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,270 8,444 10,338 10,827 8,710 12,122 9,900 11,050
Cost of revenues 6,099 5,758 7,440 8,262 7,478 9,334 7,726 7,882
- -------------------------------------------------------------------------------------------------------------------
Gross profit 3,171 2,686 2,898 2,565 1,232 2,788 2,174 3,168
Operating expenses:
Engineering and
development 394 426 528 557 639 587 690 777
Selling, general, and
administrative 1,531 1,606 1703 1736 3,906 2,059 2,270 2,211
- -------------------------------------------------------------------------------------------------------------------
Total operating
expenses 1,925 2,032 2,231 2,293 4,545 2,646 2,960 2,988
- -------------------------------------------------------------------------------------------------------------------
Operating earnings
(loss) 1,246 654 667 272 (3,313) 142 (786) 180
- -------------------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest (133) (184) (245) (267) (241) (167) (132) (139)
Gain (loss) on
currency exchange 30 (10) 41 (2) 12 39 (17) 5
Other, net (135) 97 3 12 (73) 23 14 25
- -------------------------------------------------------------------------------------------------------------------
Total other
expense (238) (97) (201) (257) (302) (105) (135) (109)
- -------------------------------------------------------------------------------------------------------------------
Earnings (loss)
before
income taxes 1,008 557 466 15 (3,615) 37 (921) 71
Income tax expense (benefit) 30 30 60 0 751 0 (24) 24
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 978 527 406 15 (4,366) 37 (897) 47
===================================================================================================================
Basic net earnings (loss) per
common share $ 0.32 0.17 0.13 0.01 (1.42) 0.01 (0.29) 0.02
===================================================================================================================
Diluted net earnings
(loss) per common share
and common share
equivalents $ 0.29 0.16 0.13 0.01 (1.42) 0.01 (0.29) 0.02
===================================================================================================================
</TABLE>
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors, executive officers, promoters and control
persons of the Company is set forth under "Election of Directors" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998 and is incorporated herein by
reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 by the directors, executive officers and beneficial owners of more
than ten percent of the common stock of the Company is set forth under "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for its 1998 Annual Meeting of Shareholders, to be filed by
April 30, 1998, and is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers of the
Company is set forth in the section entitled "Board Committee and Actions" under
"Election of Directors" and the sections entitled "Summary Compensation Table,"
"Stock Options" and "Retirement Savings Plan" under "Executive Compensation" in
the Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998, and is incorporated herein by
reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under "Beneficial Ownership of Common Stock" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders, to be filed by April 30, 1998, and is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth in the section entitled "Certain Transactions" under "Executive
Compensation" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders, to be filed by April 30, 1998, and is incorporated
herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. See Part II, Item 8 of this report.
(2) FINANCIAL STATEMENT SCHEDULES.
Page in this
Form 10-K
---------
Independent Auditors' Report on Financial Statement Schedule .... 40
Schedule II - Valuation and Qualifying Accounts.................. 41
(3) EXHIBITS. See Index to Exhibits on page 43 of this report.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
last quarter of the fiscal year.
(c) See Exhibit Index and Exhibits.
(d) See the Financial Schedule included at the end of this report.
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Rimage Corporation and Subsidiaries:
Under date of March 6, 1998, we reported on the consolidated balance sheets of
Rimage Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997, as
contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the annual report on
Form 10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 6, 1998
<PAGE>
SCHEDULE II
RIMAGE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts Receivable: YEARS ENDED DECEMBER 31,
1997 1996 1995
--------------- ---------------- --------------
<S> <C> <C> <C>
Balance at beginning of year. . . . . . . . . . $ 1,084,910 644,576 213,935
Write-offs and other adjustments. . . . . (691,208) (183,391) (89,538)
Additions charged to costs and expenses . 111,756 623,725 498,562
Additions through acquisition . . . . . . - - 21,617
--------------- ---------------- --------------
Balance at end of year $ 505,458 1,084,910 644,576
=============== ================ ==============
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
RIMAGE CORPORATION
By: /s/ Bernard P. Aldrich
Bernard P. Aldrich
Chief Executive Officer
Dated: 3/31/98
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Bernard P. Aldrich Chief Executive Officer, President, and 3/31/98
Bernard P. Aldrich Director (principal executive and
financial officer)
/s/ David J. Suden Chief Technical Officer & Director 3/31/98
David J. Suden
/s/ Robert M. Wolf Controller (principal accounting officer) 3/31/98
Robert M. Wolf
/s/ James L. Reissner Director 3/31/98
James L. Reissner
/s/ Ronald R. Fletcher Director 3/31/98
Ronald R. Fletcher
/s/ Richard F. McNamara Director 3/31/98
Richard F. McNamara
/s/ George E. Kline Director 3/31/98
George E. Kline
/s/ Joseph Miceli Director 3/31/98
Joseph Miceli
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
3.1 1992 Restated Articles of Incorporation of Rimage Corporation [Filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-22558) and incorporated herein by reference].
3.2 Bylaws of Rimage Corporation [Filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-22558) and
incorporated herein by reference].
3.3 Agreement and Plan of Reorganization dated June 6, 1995 by and between
Rimage Corporation and Dunhill Software Services, Inc. [Filed as
Appendix C to the Company's Annual Proxy statement for the fiscal year
ended December 31, 1994 (File No. 0-20728) and incorporated herein by
reference].
10.1 Rimage Corporation 1992 Stock Option Plan [Filed as Exhibit 10.5 to the
Company's Registration Statement on Form SB-2 (Registration No.
33-22558) and incorporated herein by reference].
10.2 Lease dated July 28, 1992, between Rimage Corporation and 7725
Washington Avenue Corporation [Filed as Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-22558) and
incorporated herein by reference].
10.3 Credit Agreement dated December 31, 1997 between Rimage Corporation and
First Bank, National Association.
10.4 1992 Stock Option Plan.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Rimage Corporation.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule for 1997 year end.
27.2 Financial Data Schedule for Restated 1995 and 1996 year ends.
EXHIBIT 10.3
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of December 31, 1997, is by and
between RIMAGE CORPORATION, a Minnesota corporation ("Rimage"), A/G SYSTEMS,
INC., d/b/a DUPLICATION TECHNOLOGY ("Duplication Technology") (Rimage and
Duplication Technology are sometimes individually, the "Borrower" and
collectively, the "Borrowers"), and FIRST BANK NATIONAL ASSOCIATION, a national
banking association (the "Lender").
WHEREAS, the Lender and Rimage previously entered into that certain
Second Amended and Restated Credit Agreement and Amendment to Term Note, dated
as of March 31, 1997, as amended (as so amended, the "Prior Credit Agreement");
and
WHEREAS, pursuant to a Security Agreement dated as of March 18, 1994
Duplication Technology has granted to the Lender a security interest in its
assets to secure the obligations of Rimage to the Lender; and
WHEREAS, Rimage and Duplication Technology have requested that the
Lender amend certain provisions of the Prior Credit Agreement and the Lender is
willing to do so, upon the terms and subject to the conditions of this Credit
Agreement;
NOW, THEREFORE, in consideration of these premises and for other
good and valuable consideration, the parties agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 Defined Terms. As used in this Agreement the following
terms shall have the following respective meanings:
"Advance": As defined in the Supplement.
"Borrowing Base": As defined in Section 2.5.
"Borrowing Base Certificate": As defined in Section 2.5.
"Business Day": Any day (other than a Saturday, Sunday or legal
holiday in the State of Minnesota) on which national banks are permitted to be
open for business in Minneapolis, Minnesota.
"Closing Date": December 31, 1997.
"Commitments": The Revolving Commitment and the Term Loan
Commitment.
"Default": Any event which, with the giving of notice (whether such
notice is required under Section 7.1, or under some other provision of this
Agreement, or otherwise) or lapse of time, or both, would constitute an Event of
Default.
"Event of Default": Any event described in Section 7.1.
"Fixed Charge Coverage Ratio": For any period of determination with
respect to the Borrowers on a consolidated basis, the ratio of
<PAGE>
(a) Net earnings after taxes plus depreciation and interest less (i) any
dividends or other distributions, and (ii) actual expenditures for
fixed and capital assets,
to
(b) the sum of interest expense and all mandatory principal payments
with respect to long term indebtedness (including but not limited to
all payments with respect to capitalized lease obligations of the
Borrower),
in each case determined for said period in accordance with GAAP.
"GAAP": Generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of any date of
determination.
"Leverage Ratio": As defined in Section 6.8.
"Loan Documents": This Agreement, the Notes, and any documents
described in Section 3.1(a)(vii).
"Lien": With respect to any Person, any security interest, mortgage,
pledge, lien, charge, encumbrance, title retention agreement or analogous
instrument or device (including the interest of each lessor under any
capitalized lease), in, of or on any assets or properties of such Person, now
owned or hereafter acquired, whether arising by agreement or operation of law.
"Notes": The Revolving Note and the Term Note.
"Person": Any natural person, corporation, partnership, limited
partnership, joint venture, firm, association, trust, unincorporated
organization, government or governmental agency or political subdivision or any
other entity, whether acting in an individual, fiduciary or other capacity.
"Regulatory Change": Any change after the date of this Agreement in
federal, state or foreign laws or regulations or the adoption or making after
such date of any interpretations, directives or requests applying to a class of
banks including the Lender under any federal, state or foreign laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Revolving Commitment": The obligation of the Lender to make
Advances to the Borrower on the Revolving Loan in an aggregate principal amount
outstanding at any time not to exceed the Revolving Commitment Amount upon the
terms and subject to the conditions and limitations of this Agreement.
"Revolving Commitment Amount": As defined in Section 2.1.
"Revolving Loan": As defined in Section 2.1.
"Revolving Maturity Date": As defined in Section 2.1.
"Revolving Note": As defined in Section 2.3.
<PAGE>
"Services Group": Those divisions of the Borrowers reflected in the
Borrowers' accounting records as the Services Group division, which operates the
business formerly owned and operated by Dunhill Software Services, Inc. plus the
operation of duplication services of Duplication Technology.
"Supplement": The Supplement attached hereto and made a part hereof.
"Systems Group": Those divisions of the Borrowers reflected in the
Borrowers' accounting records as the Systems Group division, which designs,
manufactures and sells duplication equipment and CD-R printers.
"Tangible Net Worth": As defined in Section 6.6.
"Term Loan": As defined in Section 2.1.
"Term Loan Commitment": The obligation of the Lender to make a term
loan to the Borrower in the Term Loan Commitment Amount upon the terms and
subject to the conditions and limitations of this Agreement.
"Term Loan Commitment Amount": As defined in Section 2.1.
"Term Note": As defined in Section 2.3.
"Total Liabilities": At the time of any determination, the amount of
all items of indebtedness of the Borrowers that would constitute "liabilities"
for balance sheet purposes in accordance with GAAP.
Section 1.2 Accounting Terms and Calculations. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be interpreted and all accounting determinations hereunder shall be made
in accordance with GAAP.
Section 1.3 Other Definitional Terms,Terms of Construction. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole, including the
Supplement, and not to any particular provision of this Agreement. References to
Sections, Exhibits, Schedules and the like references are to Sections, Exhibits,
Schedules and the like of this Agreement unless otherwise expressly provided.
The words "include", "includes" and "including" shall be deemed to be followed
by the phrase "without limitation". Unless the context in which used herein
otherwise clearly requires, "or" has the inclusive meaning represented by the
phrase "and/or". All incorporations by reference of covenants, terms,
definitions or other provisions from other agreements are incorporated into this
Agreement as if such provisions were fully set forth herein, and include all
necessary definitions and related provisions from such other agreements. All
covenants, terms, definitions and other provisions from other agreements
incorporated into this Agreement by reference shall survive any termination of
such other agreements until the obligations of the Borrowers under this
Agreement and the Notes are irrevocably paid in full and the Revolving
Commitment is terminated.
ARTICLE II
TERMS OF LENDING
Section 2.1 The Commitments. On the terms and subject to the
conditions hereof, the Lender agrees to make the following lending facilities
available to the Borrowers:
<PAGE>
2.1 (a) Revolving Credit. A revolving loan (the
"Revolving Loan") to the Borrowers, or either of them, available as
Advances as specified in the Supplement at any time and from time to
time from the Closing Date to June 30, 1998 (the "Revolving Maturity
Date"), during which period the Borrowers may borrow, repay and
reborrow in accordance with the provisions hereof, provided, that
the unpaid principal amount of revolving Advances shall not at any
time exceed $5,000,000 (the "Revolving Commitment Amount"); and
provided, further, that no revolving Advance will be made if, after
giving effect thereto, the unpaid principal amount of the Revolving
Note would exceed the Borrowing Base.
2.1 (b) Term Loan. A term loan (the "Term Loan") from
the Lender to the Borrowers on the Closing Date in the amount of
$1,650,000 (the "Term Loan Commitment Amount").
2.1(c) Joint and Several Obligations. The obligations of
each Borrower hereunder and under the Notes and any other documents
executed by it in connection with loans made under this Agreement
shall be joint and several; provided, that each Borrower hereunder
shall be unconditionally and irrevocably obligated hereunder to pay
when due (i) all unpaid advances, the proceeds of which shall have
been received directly or indirectly by such Borrower, and all
accrued and unpaid interest thereon, and fees and other amounts
related thereto, and (ii) all unpaid advances, the proceeds of which
shall not have been received directly or indirectly by such
Borrower, and all accrued and unpaid interest thereon and fees and
other amounts related thereto; provided, further, that in no event
shall the amount payable by any such Borrower under clause (ii)
above exceed an aggregate amount equal to the largest amount that
would not render such Borrower's obligations under such clause (ii)
subject to avoidance under Section 548 of the United States
Bankruptcy Code or any applicable provision of comparable state law.
Section 2.2 Procedure for Advances on the Revolving Loan. Any
request by a Borrower for an Advance on the Revolving Loan shall be in writing,
or by telephone. Each request for an Advance shall be irrevocable and shall be
deemed a representation by the Borrowers that on the requested Advance date and
after giving effect to such Advance the applicable conditions specified in
Article III have been and will continue be satisfied. The Supplement specifies
time limits for any request for an Advance and the information that must be
included in such request. Unless the Lender determines that any applicable
condition specified in Article III has not been satisfied, the Lender will make
available to a Borrower at the Lender's office in Edina, Minnesota in
immediately available funds not later than 3:00 p.m. (Minneapolis time) on the
requested Advance date the amount of the requested Advance.
Section 2.3 The Notes. The Advances on the Revolving Loan shall be
evidenced by a single promissory note (the "Revolving Note"), substantially in
the form of Exhibit 2.3 (a) hereto, in the amount of the Revolving Commitment
Amount originally in effect. The Term Loan shall be evidenced by a promissory
note (the "Term Note"), substantially in the form of Exhibit 2.3 (b) hereto, in
an amount equal to the Term Loan Commitment Amount. The Lender shall enter in
its ledgers and records the payments made on the Term Loan and Advances made and
the payments made thereon, and the Lender is authorized by the Borrowers to
enter on schedules attached to the Notes a record of such Advances and
repayments.
Section 2.4 Interest. The Supplement sets forth the terms of the
interest rates applicable to Advances on the Revolving Loan and the Term Loan
under this Agreement.
Section 2.5 Borrowing Base and Mandatory Prepayment. The Borrowing
Base shall be equal to the sum of (1) the lesser of (w) 30% of the lower of
wholesale cost or replacement cost of Eligible Systems Group Inventory or (x)
$800,000, plus (2) the lesser of (y) 50% of the lower of wholesale cost or
replacement cost of Eligible Services Group Inventory or (z) $600,000, plus (3)
70% of
<PAGE>
the face value of Eligible Systems Group Receivables, plus (4) 75% of the face
value of Eligible Services Group Receivables. "Eligible Systems Group
Inventory", "Eligible Services Group Inventory", "Eligible Services Group
Receivables" and "Eligible Systems Group Receivables" are defined on Schedule 1
hereto. The Borrower shall deliver to the Lender borrowing base certificates in
a form satisfactory to the Lender (a "Borrowing Base Certificate") (i) dated as
of the last day of each month, within 30 days after the end of each month and
(ii) dated as of the date the Lender requests such a Certificate within 10 days
of the Lender's request for the certificate. Each such Certificate shall state
the amount of the Borrowing Base as of the end of the previous month or the date
of the Lender's request, as appropriate. Any limitations on Advances or required
prepayments relating to the Borrowing Base shall be based on the latest
Borrowing Base Certificate the Borrower shall have delivered to the Lender. If
the principal balance of the Revolving Note at any time exceeds the Borrowing
Base, the Borrower shall immediately prepay the Revolving Note by the amount of
that excess.
Section 2.6 Repayment and Prepayment.
2.6(a) Repayment of the Revolving Note. Principal of the
Revolving Note shall be payable in full on the Revolving Maturity
Date. Terms governing prepayment of the Revolving Note are set forth
in the Supplement.
2.6(b) Repayment of the Term Note. Principal of the Term
Note is payable as provided in the Term Note. Terms governing
prepayment of the Term Note are set forth in the Supplement.
Section 2.7 Optional Reduction of Revolving Commitment Amount or
Termination of Commitment. The Borrower may, at any time, upon not less than
five Business Days prior written notice to the Lender, reduce the Revolving
Commitment Amount, with any such reduction in a minimum amount of $100,000, or,
if more, in an integral multiple of $100,000; provided, however, the Borrower
may not at any time reduce the Revolving Commitment Amount below the then unpaid
principal balance of the Revolving Note. The Borrower may, at any time, upon not
less than five Business Days prior written notice to the Lender, terminate the
Revolving Commitment in its entirety.
Section 2.8 Intentionally Omitted.
Section 2.9 Computation. Interest on the Notes shall be computed on
the basis of actual days elapsed and a year of 360 days.
Section 2.10 Capital Adequacy. In the event that any Regulatory
Change reduces or shall have the effect of reducing the rate of return on the
Lender's capital or the capital of its parent corporation (by an amount the
Lender deems material) as a consequence of the Commitments and/or the Advances
to a level below that which the Lender or its parent corporation could have
achieved but for such Regulatory Change (taking into account the Lender's
policies and the policies of its parent corporation with respect to capital
adequacy), then the Borrowers shall, within five days after written notice and
demand from the Lender, pay to the Lender additional amounts sufficient to
compensate the Lender or its parent corporation for such reduction. Any
determination by the Lender under this Section and any certificate as to the
amount of such reduction given to the Borrowers by the Lender shall be final,
conclusive and binding for all purposes, absent error.
Section 2.11 Use of Proceeds. The proceeds of the initial Revolving
Advance shall be used first for refinancing any amount outstanding on the
revolving loan under the Prior Credit Agreement. Any remaining balance of the
initial Revolving Advance and the proceeds of any subsequent Revolving Advance
shall be used for the Borrower's general business purposes in a manner not in
conflict with any of the Borrower's covenants in this Agreement. The proceeds of
the Term Loan
<PAGE>
shall be used for refinancing the outstanding principal balance of the Term Note
as defined in the Prior Credit Agreement.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 Conditions of Initial Revolving Advance and Term Loan.
The obligation of the Lender to make the initial Advance on the Revolving Loan
and the Term Loan hereunder shall be subject to the prior or simultaneous
fulfillment of each of the following conditions:
3.1(a) Documents. The Lender shall have received the
following:
(i) The Notes executed by a duly authorized
officer (or officers) of the Borrowers and dated the
Closing Date.
(ii) A copy of the corporate resolutions of
the Borrowers authorizing the execution, delivery and
performance of this Agreement and the Notes and
containing an incumbency certificate showing the names
and titles, and bearing the signatures of, the officers
of the Borrowers authorized to execute this Agreement
and the Notes, certified as of the Closing Date by the
Secretary or an Assistant Secretary of each Borrower.
(iii) A copy of the Articles of
Incorporation of the Borrowers with all amendments
thereto, certified by the appropriate governmental
official of the jurisdiction of its incorporation as of
a date not more than 30 days prior to the Closing Date
(or a certificate of the Secretary of each Borrower
certifying that the Articles of Incorporation of each
Borrower have not changed since the same were last
certified to the Lender.
(iv) A certificate of good standing for each
Borrower in the jurisdiction of its incorporation,
certified by the appropriate governmental officials as
of a date not more than 30 days prior to the Closing
Date.
(v) A copy of the bylaws of each Borrower,
certified as of the Closing Date by the Secretary or an
Assistant Secretary of the Borrower or a certificate of
such Secretary certifying that the bylaws of each
Borrower have not changed since the same were last
certified to the Lender.
(vi) An initial Borrowing Base Certificate
in a form satisfactory to the Lender.
(vii) A Security Agreement (each a "Security
Agreement") in form and substance satisfactory to the
Lender and duly executed by each Borrower.
(vii) A Reaffirmation of Security Agreement
from Rimage Europe, GmbH. in form and substance
satisfactory to the Lender.
3.1(b) Other Matters. All organizational and legal
proceedings relating to the Borrowers and all instruments and
agreements in connection with the transactions contemplated by this
Agreement shall be satisfactory in scope, form and substance to the
Lender and its counsel, and the Lender shall have received all
information and copies of all documents, including records of
corporate proceedings, which it may reasonably have requested in
connection therewith, such documents where appropriate to be
certified by proper Borrower or governmental authorities.
<PAGE>
3.1(c) Fees and Expenses. The Lender shall have received
all fees and other amounts due and payable by the Borrowers on or
prior to the Closing Date, including the reasonable fees and
expenses of counsel to the Lender payable pursuant to Section 8.2.
3.1(d) Perfection. The Security Agreements (or financing
statements with respect thereto) shall have been appropriately filed
to the satisfaction of the Lender and the priority and perfection of
the Lien created thereby shall have been established to the
satisfaction of the Lender.
Section 3.2 Conditions Precedent to all Advances. The Lender shall
not have any obligation to make the Term Loan or any Advance on the Revolving
Loan (including Advances after the initial Advance) hereunder unless all
representations and warranties of the Borrowers made in this Agreement remain
true and correct and no Default or Event of Default exists.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants to the Lender:
Section 4.1 Organization, Standing, Etc. The Borrower is a
corporation duly incorporated and validly existing and in good standing under
the laws of the jurisdiction of its incorporation and has all requisite
corporate power and authority to carry on its business as now conducted, to
enter into this Agreement and to issue the Notes and to perform its obligations
hereunder and thereunder. This Agreement and the Notes have been duly authorized
by all necessary corporate action and when executed and delivered will be the
legal and binding obligations of the Borrowers. The execution and delivery of
this Agreement and the Notes will not violate a Borrower's Articles of
Incorporation or bylaws or any law applicable to the Borrowers. No governmental
consent or exemption is required in connection with each Borrower's execution
and delivery of this Agreement and the Notes.
Section 4.2 Financial Statements and No Material Adverse Change.
Rimage's audited financial statements as at December 31, 1996 and the Borrowers'
unaudited financial statements as at September 30, 1997, as heretofore furnished
to the Lender, have been prepared in accordance with GAAP. The Borrowers have no
material obligation or liability not disclosed in such financial statements, and
there has been no material adverse change in the condition of the Borrowers
since the dates of such financial statements.
Section 4.3 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrowers, threatened against or affecting a
Borrower which, if determined adversely to a Borrower, would have, a material
adverse effect on the condition of a Borrower. The Borrowers are not in
violation of any law or regulation (including environmental laws and regulations
and laws relating to employee benefit plans) where such violation could
reasonably be expected to impose a material liability on a Borrower.
Section 4.4 Taxes. Each Borrower has filed all federal, state and
local tax returns required to be filed and has paid or made provision for the
payment of all taxes due and payable pursuant to such returns and pursuant to
any assessments made against it or any of its property (other than taxes, fees
or charges the amount or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Borrowers).
<PAGE>
Section 4.5 Subsidiaries. Rimage has no active subsidiaries except
Duplication Technology and Rimage Europe GmbH.
ARTICLE V
AFFIRMATIVE COVENANTS
Until the Revolving Commitment shall have expired or been terminated
and the Notes and all of the Borrowers' other obligations to the Lender under
this Agreement shall have been paid in full, unless the Lender shall otherwise
consent in writing:
Section 5.1 Financial Statements and Reports. The Borrowers will
furnish to the Lender:
5.1(a) As soon as available and in any event within 120
days after the end of each fiscal year of the Borrowers,
consolidated financial statements of the Borrowers consisting of at
least statements of income, cash flow and changes in stockholders'
equity, and a balance sheet as at the end of such year, setting
forth in each case in comparative form corresponding figures from
the previous annual audit, certified without qualification by
independent certified public accountants of recognized national
standing selected by the Borrowers and acceptable to the Lender with
computations showing whether the Borrowers are in compliance with
all financial covenants of this Agreement.
5.1(b) As soon as available and in any event within 45
days after the end of each month, unaudited consolidated and
consolidating financial statements for the Borrowers for such month
and for the period from the beginning of such fiscal year to the end
of such month, substantially similar to the annual audited
statements.
5.1(c) As soon as practicable and in any event within 60
days after the end of each fiscal quarter, a copy of the Borrowers'
10Q quarterly report as filed with the Securities Exchange
Commission.
5.1(d) Immediately upon any officer of the Borrower
becoming aware of any Default or Event of Default, a notice
describing the nature thereof and what action the Borrower proposes
to take with respect thereto.
5.1(e) As soon as practicable and in any event within 45
days after the end of each month, a covenant compliance certificate
in the form supplied by the Lender, with covenant calculation detail
certified by the Chief Financial Officer or other responsible of the
Borrowers.
5.1(f) As soon as practicable and in any event within 30
days after the end of each month, a Borrowing Base Certificate
together with an accounts receivable summary (detailing
ineligibles), in form and substance satisfactory to the Lender.
5.1(g) As soon as practicable and in any event within 30
days after the end of each calendar quarter an accounts receivable
detail in form and substance satisfactory to the Lender.
5.1(h) From time to time, such other information
regarding the business, operation and financial condition of the
Borrower as the Lender may reasonably request.
Section 5.2 Corporate Existence. Each Borrower will maintain its
corporate existence in good standing under the laws of its jurisdiction of
incorporation and its qualification to transact business in each jurisdiction
where failure so to qualify would permanently preclude such Borrower from
<PAGE>
enforcing its rights with respect to any material asset or would expose such
Borrower to any material liability.
Section 5.3 Insurance. The Borrowers will maintain with financially
sound and reputable insurance companies such insurance as may be required by law
and such other insurance in such amounts and against such hazards as is
customary in the case of reputable corporations engaged in the same or similar
business and similarly situated.
Section 5.4 Payment of Taxes and Claims. Each Borrower will file all
tax returns and reports which are required by law to be filed by it and will pay
before they become delinquent, all taxes, assessments and governmental charges
and levies imposed upon it or its property and all claims or demands of any kind
(including those of suppliers, mechanics, carriers, warehousemen, landlords and
other like Persons) which, if unpaid, might result in the creation of a Lien
upon its property.
Section 5.5 Inspection. Each Borrower will permit any Person
designated by the Lender to visit and inspect any of the properties, books and
financial records of the Borrowers, to examine and to make copies of the books
of accounts and other financial records of the Borrowers, and to discuss the
affairs, finances and accounts of the Borrowers with its officers at such
reasonable times and intervals as the Lender may designate. The Borrowers shall
also allow the Lender and its agents to conduct periodic collateral audits of
each Borrower's accounts and inventory at such intervals as the Lender may
choose, and the Borrowers shall pay the Lender's costs of such audits.
Section 5.6 Maintenance of Properties. Each Borrower will maintain
its properties in good condition, repair and working order, and supplied with
all necessary equipment, and make all necessary repairs, renewals, replacements,
betterments and improvements thereto, all as may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times.
Section 5.7 Books and Records. Each Borrower will keep adequate and
proper records and books of account in which full and correct entries will be
made of its dealings, business and affairs.
Section 5.8 Compliance. Each Borrower will comply in all material
respects with all laws, rules and regulations to which it may be subject.
Section 5.9 Notice of Litigation. Each Borrower will give prompt
written notice to the Lender of the commencement of any action, suit or
proceeding affecting a Borrower in which the damages claimed exceed $25,000.
Section 5.10 Plans. Each Borrower will maintain any employee benefit
plans in compliance with all material requirements of applicable laws and
regulations.
Section 5.11 Systems Group and Services Group. The Borrowers will
maintain complete and accurate books and records relating to the Systems Group
and its business and properties, will continue to account for the business and
properties of the Systems Group on a separate basis in the same manner as used
as of the Closing Date, and will not transfer or reclassify or otherwise change
its accounting methods regarding items relevant to the Borrowing Base and will
permit the Lender to inspect the Borrowers' books and records and to audit or
inspect the properties of the Systems Group on the same basis as all other
books, records and properties of the Borrowers. The Borrowers will maintain
complete and accurate books and records relating to the Services Group and its
business and properties, will continue to account for the business and
properties of the Services Group on a separate basis in the same manner as used
as of the Closing Date, and will not transfer or reclassify or otherwise change
its accounting methods regarding items relevant to the Borrowing Base and will
permit the
<PAGE>
Lender to inspect the Borrowers' books and records and to audit or inspect the
properties of the Services Group on the same basis as all other books, records
and properties of the Borrower.
ARTICLE VI
NEGATIVE COVENANTS
Until the Revolving Commitment shall have expired or been terminated
and the Notes and all of the Borrowers' other obligations to the Lender under
this Agreement shall have been paid in full, unless the Lender shall otherwise
consent in writing:
Section 6.1 Merger. Each Borrower will not merge or consolidate or
enter into any analogous reorganization or transaction with any Person or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution); provided that Duplication Technology may be merged into Rimage.
Section 6.2 Sale of Assets. Each Borrower will not sell, transfer,
lease or otherwise convey all or any substantial part of its assets except for
sales and leases of inventory in the ordinary course of business.
Section 6.3 Indebtedness. Each Borrower will not borrow any money or
issue any bonds, debentures or other debt securities or otherwise become
obligated on any interest-bearing indebtedness except for the Term Loan and
Advances under this Agreement and except as listed on Schedule 6.3.
Section 6.4 Liens. Each Borrower will not create, incur, assume or
suffer to exist any Lien, or enter into any arrangement for the acquisition of
any property through conditional sale, lease-purchase or other title retention
agreements except:
6.4(a) Liens granted to the Lender.
6.4(b) Liens existing on the date of this Agreement and
disclosed on Schedule 6.4(b) hereto.
6.4(c) Deposits or pledges to secure payment of workers'
compensation, unemployment insurance, old age pensions or other
social security obligations arising in the ordinary course of
business of the Borrower.
6.4(d) Liens for taxes, fees, assessments and
governmental charges not delinquent.
6.4(e) Liens of carriers, warehousemen, mechanics and
materialmen, and other like Liens arising in the ordinary course of
business, for sums not due.
6.4(f) Liens incurred or deposits or pledges made or
given in connection with, or to secure payment of, indemnity,
performance or other similar bonds.
6.4(g) Encumbrances in the nature of zoning
restrictions, easements and rights or restrictions of record on the
use of real property and landlord's Liens under leases on the
premises rented, which do not materially detract from the value of
such property or impair the use thereof in the business of the
Borrower.
Section 6.5 Contingent Obligations. Each Borrower will not guarantee
or otherwise become liable on the indebtedness of any other Person.
<PAGE>
Section 6.6 Tangible Net Worth. The Borrowers will not permit their
Tangible Net Worth (the excess of their assets, excluding intangible assets,
over their liabilities, each on a consolidated basis) at any time to be less
than (a) $3,800,000 as of December 31, 1997, (b) $4,000,000 as of March 31,
1998, (c) $4,300,000 as of June 30, 1998, (d) $4,800,000 as of September 30,
1998, and (e) $5,800,000 on and after December 31, 1998.
Section 6.7 Current Ratio. The Borrowers will not permit the ratio
of their current assets to their current liabilities on a consolidated basis to
be less than 1.15 to 1 at the end of any fiscal quarter.
Section 6.8 Leverage Ratio. The Borrowers will not permit their
Leverage Ratio (the ratio of their Total Liabilities to their Tangible Net
Worth, each on a consolidated basis) to be more than 3.25 to 1 at any time
through December 30, 1998 and more than 2.25 to 1 on December 31, 1998 and at
any time thereafter.
Section 6.9 Fixed Charge Coverage Ratio. The Borrowers will not
permit their Fixed Charge Coverage Ratio, as of the last day of any fiscal
quarter for the four consecutive fiscal quarters ending on that date to be less
than 1.4 to 1.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
Section 7.1 Events of Default. The occurrence of any one or more of
the following events shall constitute an Event of Default:
7.1(a) The Borrowers shall fail to make when due,
whether by acceleration or otherwise, any payment of principal of or
interest on the Notes or any other obligations of any Borrower to
the Lender pursuant to this Agreement.
7.1(b) Any representation or warranty made by or on
behalf of a Borrower in this Agreement or by or on behalf of a
Borrower in any certificate, statement, report or document herewith
or hereafter furnished to the Lender pursuant to this Agreement
shall prove to have been false or misleading in any material respect
on the date as of which the facts set forth are stated or certified.
7.1(c) The Borrowers shall fail to comply with Sections
5.2 or 5.3 or any Section of Article VI.
7.1(d) The Borrowers shall fail to comply with any other
agreement, covenant, condition, provision or term contained in this
Agreement (other than those hereinabove set forth in this Section
7.1) and such failure to comply shall continue for 30 calendar days
after whichever of the following dates is the earliest: (i) the date
the Borrower gives notice of such failure to the Lender, (ii) the
date the Borrower should have given notice of such failure to the
Lender pursuant to Section 5.1, or (iii) the date the Lender gives
notice of such failure to the Borrower.
7.1(e) A Borrower shall become insolvent or shall
generally not pay its debts as they mature or shall apply for, shall
consent to, or shall acquiesce in the appointment of a custodian,
trustee or receiver of such Borrower or for a substantial part of
the property thereof or, in the absence of such application, consent
or acquiescence, a custodian, trustee or receiver shall be appointed
for a Borrower or for a substantial part of the property thereof and
shall not be discharged within 45 days, or a Borrower shall make an
assignment for the benefit of creditors.
<PAGE>
7.1(f) Any bankruptcy, reorganization, debt arrangement
or other proceedings under any bankruptcy or insolvency law shall be
instituted by or against a Borrower and, if instituted against a
Borrower, shall have been consented to or acquiesced in by such
Borrower or shall remain undismissed for 60 days, or an order for
relief shall have been entered against a Borrower.
7.1(g) Any dissolution or liquidation proceeding shall
be instituted by or against a Borrower and, if instituted against a
Borrower, shall be consented to or acquiesced in by such Borrower or
shall remain for 45 days undismissed.
7.1(h) A judgment or judgments for the payment of money
in excess of the sum of $50,000 in the aggregate shall be rendered
against a Borrower and either (i) the judgment creditor executes on
such judgment or (ii) such judgment remains unpaid or undischarged
for more than 90 days from the date of entry thereof or such longer
period during which execution of such judgment shall be stayed
during an appeal from such judgment.
7.1(i) The maturity of any material indebtedness of a
Borrower (other than indebtedness under this Agreement) shall be
accelerated, or a Borrower shall fail to pay any such material
indebtedness when due (after the lapse of any applicable grace
period) or any event shall occur or condition shall exist and shall
continue for more than the period of grace, if any, applicable
thereto and shall have the effect of causing, or permitting the
holder of any such indebtedness to cause, such material indebtedness
to become due prior to its stated maturity or to realize upon any
collateral given as security therefor. For purposes of this Section,
indebtedness of a Borrower shall be deemed "material" if it exceeds
$50,000 as to any item of indebtedness or in the aggregate for all
items of indebtedness with respect to which any of the events
described in this Section has occurred.
7.1(j) Any execution or attachment shall be issued
whereby any substantial part of the property of a Borrower shall be
taken or attempted to be taken and the same shall not have been
vacated or stayed within 30 days after the issuance thereof.
7.1(k) Any default shall occur under any other Loan
Document.
Section 7.2 Remedies. If (a) any Event of Default described in
Sections 7.1 (e), (f) or (g) shall occur with respect to the Borrower, the
Revolving Commitment shall automatically terminate and the Notes and all other
obligations of the Borrowers to the Lender under this Agreement shall
automatically become immediately due and payable, or (b) any other Event of
Default shall occur and be continuing, then the Lender may (i) declare the
Revolving Commitment terminated, whereupon the Commitment shall terminate, and
(ii) declare the Notes and all other obligations of the Borrowers to the Lender
under this Agreement to be forthwith due and payable, whereupon the same shall
immediately become due and payable, in each case without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived,
anything in this Agreement or in the Notes to the contrary notwithstanding. Upon
the occurrence of any of the events described in clauses (a) or (b) of the
preceding sentence the Lender may exercise all rights and remedies under this
Agreement, the Notes and any related agreements and under any applicable law.
Section 7.3 Offset. In addition to the remedies set forth in Section
7.2, upon the occurrence of any Event of Default and thereafter while the same
be continuing, each Borrower hereby irrevocably authorizes the Lender to set off
all sums owing by the Borrowers to the Lender against all deposits and credits
of a Borrower with, and any and all claims of a Borrower against, the Lender.
ARTICLE VIII
MISCELLANEOUS
<PAGE>
Section 8.1 Modifications. Notwithstanding any provisions to the
contrary herein, any term of this Agreement may be amended with the written
consent of the Borrowers; provided that no amendment, modification or waiver of
any provision of this Agreement or consent to any departure by the Borrowers
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modifications, waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.
Section 8.2 Costs and Expenses. Whether or not the transactions
contemplated hereby are consummated, the Borrowers agree to reimburse the Lender
upon demand for all reasonable out-of-pocket expenses paid or incurred by the
Lender (including filing and recording costs and fees and expenses of Dorsey &
Whitney LLP, counsel to the Lender) in connection with the negotiation,
preparation, approval, review, execution, delivery, amendment, modification,
interpretation, collection and enforcement of this Agreement and the Notes. The
obligations of the Borrowers under this Section shall survive any termination of
this Agreement.
Section 8.3 Waivers, etc. No failure on the part of the Lender or
the holder of either Note to exercise and no delay in exercising any power or
right hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any power or right preclude any other or further exercise
thereof or the exercise of any other power or right. The rights and remedies of
the Lender hereunder are cumulative and not exclusive of any right or remedy the
Lender otherwise has.
Section 8.4 Notices. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
on the signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex or facsimile transmission, from
the first Business Day after the date of sending if sent by overnight courier,
or from four days after the date of mailing if mailed; provided, however, that
any notice to the Lender under Article II hereof or the Supplement shall be
deemed to have been given only when received by the Lender.
Section 8.5 Successors and Assigns; Disposition of Loans. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrowers may not
assign their rights or delegate its obligations hereunder without the prior
written consent of the Lender. The Lender may at any time sell, assign,
transfer, grant participations in, or otherwise dispose of any portion of the
Revolving Commitment and the Term Loan and/or Advances to banks or other
financial institutions. The Lender may disclose any information regarding the
Borrowers in the Lender's possession to any prospective buyer or participant.
Section 8.6 Waiver of Certain Defenses. The obligations of each
Borrower hereunder are absolute, unconditional, complete and continuing and
shall not be released, in whole or in part, by any action or thing which might,
but for this provision, be deemed a legal or equitable discharge of a surety or
guarantor, other than irrevocable payment and performance in full of the
Obligations hereunder. No notice of the Obligations or of any renewal or
extension thereof need be given to a Borrower and none of the foregoing acts
shall release any Borrower from liability hereunder. Each Borrower hereby
expressly waives (a) demand of payment, presentment, protest, notice of
dishonor, nonpayment or nonperformance on any and all forms of the Obligations;
(b) notice of acceptance of the Notes and notice of any liability to which it
may apply; (c) all other notices and demands of any kind and description
relating to the Obligations now or hereafter provided for by any agreement,
statute, law, rule or regulation; and (d) any and all defenses of any other
Borrower pertaining to the
<PAGE>
Obligations except for the defense of discharge by payment. No Borrower shall be
exonerated with respect to its liabilities under the Notes or this Agreement by
any act or thing except irrevocable payment and performance of the Obligations.
The Lender is expressly authorized to amend, modify, extend or
supplement the Notes, any note or other instrument evidencing the Obligations or
any part thereof and any other agreement with respect to the Obligations, waive
compliance by a Borrower or any other Person with the respective terms thereof
and settle or compromise any of the Obligations without notice to any other
Borrower and without in any manner affecting the absolute liabilities of any
other Borrower hereunder. The liabilities of each Borrower hereunder shall not
be affected or impaired by any failure, delay, neglect or omission on the part
of the Lender to realize upon any of the Obligations of any Borrower to the
Lender. No act or omission of the Lender, whether or not such action or failure
to act varies or increases the risk of, or affects the rights or remedies of a
Borrower, shall affect or impair the obligations of the any other Borrower
hereunder.
Each Borrower hereby waives any and all right to cause a marshalling
of the assets of any Borrower or any other action by any court or other
governmental body with respect thereto and further waives any and all
requirements that the Lender institute any action or proceeding at law or in
equity, or obtain any judgment, against any other Borrower or any other Person
for the Obligations, as a condition precedent to making demand on or bringing an
action or obtaining and/or enforcing a judgment against, any Borrower hereunder.
Any remedy or right hereby granted which shall be found to be unenforceable as
to any Person or under any circumstance, for any reason, shall in no way limit
or prevent the enforcement of such remedy or right as to any other Person or
circumstance, nor shall such unenforceability limit or prevent enforcement of
any other remedy or right hereby granted.
Notwithstanding any payment or payments made by a Borrower hereunder
or any setoff or application of funds of a Borrower by the Lender, no Borrower
shall be entitled to be subrogated to any of the rights of the Lender against
another Borrower or right of offset held by the Lender for the payment of the
Obligations, nor shall any Borrower seek or be entitled to seek any contribution
or reimbursement from another Borrower in respect of payments made by a Borrower
hereunder until the Obligations have been irrevocably paid in full. References
in this Agreement to amounts "irrevocably paid" or to "irrevocable payment"
refer to payments that cannot be set aside, recovered, rescinded or required to
be returned for any reason.
Each Borrower expressly agrees that its liabilities and obligations
under this Agreement shall not in any way be impaired or otherwise affected by
the institution by or against another Borrower or any other Person of any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings,
or any other similar proceedings for relief under any bankruptcy law or similar
law for the relief of debtors and that any discharge of any of the Obligations
pursuant to any such bankruptcy or similar law or other law shall not diminish,
discharge or otherwise affect in any way the obligations of such Borrower under
this Agreement, and that upon the institution of any of the above actions, such
obligations shall be enforceable against the remaining Borrower.
SECTION 8.7 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY,
CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT
TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE
UNITED STATES APPLICABLE TO NATIONAL BANKS.
SECTION 8.8 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER,
THIS AGREEMENT AND THE NOTE MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA
STATE COURT SITTING IN HENNEPIN COUNTY; AND THE BORROWERS CONSENT TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
<PAGE>
VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT A BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE
OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
SECTION 8.9 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE
LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE AND ANY OTHER
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
Section 8.10 Captions. The captions or headings herein and any table
of contents hereto are for convenience only and in no way define, limit or
describe the scope or intent of any provision of this Agreement.
Section 8.11 Entire Agreement. This Agreement and the other Loan
Documents embody the entire agreement and understanding between the Borrowers
and the Lender with respect to the subject matter hereof and thereof. This
Agreement supersedes all prior agreements and understandings relating to the
subject matter hereof, including, without limitation the Prior Credit Agreement,
which is hereby terminated. Notwithstanding the taking of the Security
Agreements under this Agreement, all prior security agreements from each
Borrower to the Lender, and the security interests thereunder, remain in full
force and effect and secure the indebtedness of the Borrowers hereunder. Each
reference in any such security agreement to a credit agreement shall, as of the
date hereof, be deemed a reference to this Agreement.
Section 8.12 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
RIMAGE CORPORATION
By /s/ BERNARD P. ALDRICH
--------------------------------------
Bernard P. Aldrich, President & CEO
Borrower's Address:
7725 Washington Ave. S.
Edina, MN 55439
A/G SYSTEMS, INC., d/b/a Duplication
Technology
By /s/ BERNARD P. ALDRICH
--------------------------------------
Bernard P. Aldrich, President & CEO
Borrower's Address:
7725 Washington Ave. S.
Edina, MN 55439
FIRST BANK NATIONAL ASSOCIATION
By RICHARD D. HARTMAN
--------------------------------------
Richard D. Hartman, Vice President
Lender's Address:
First Bank National Association
7001 France Ave. S.
Edina, MN 55435
Fax (612) 927-1268
<PAGE>
EXHIBIT 2.3 (a) TO
CREDIT AGREEMENT
REVOLVING NOTE
$5,000,000
December 31, 1997
Minneapolis, Minnesota
FOR VALUE RECEIVED, RIMAGE CORPORATION, a Minnesota corporation, and
A/G SYSTEMS, INC. d/b/a Duplication Technology hereby jointly and severally
promises to pay to the order of FIRST BANK NATIONAL ASSOCIATION (the "Lender")
at its main office in Minneapolis, Minnesota, in lawful money of the United
States of America in immediately available funds on the Maturity Date (as such
term and each other capitalized term used herein are defined in the Credit
Agreement hereinafter referred to) the principal amount of FIVE MILLION AND
NO/100 DOLLARS ($5,000,000) or, if less, the aggregate unpaid principal amount
of all Revolving Advances made by the Lender under the Credit Agreement, and to
pay interest (computed on the basis of actual days elapsed and a year of 360
days) in like funds on the unpaid principal amount hereof from time to time
outstanding at the rates and times set forth in the Credit Agreement including
the Supplement thereto. The Maturity Date is June 30, 1998.
This note is the Revolving Note referred to in the Credit Agreement
dated as of December 31, 1997 (as the same may be hereafter from time to time
amended, restated or modified, the "Credit Agreement") between the undersigned
and the Lender. This note is secured, it is subject to certain permissive and
mandatory prepayments and its maturity is subject to acceleration, in each case
upon the terms provided in said Credit Agreement.
In the event of default hereunder, the undersigned agrees to pay all
costs and expenses of collection, including reasonable attorneys' fees. The
undersigned waives demand, presentment, notice of nonpayment, protest, notice of
protest and notice of dishonor.
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO
THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF
THE UNITED STATES APPLICABLE TO NATIONAL BANKS.
RIMAGE CORPORATION
By _______________________________
Bernard P. Aldrich, President & CEO
<PAGE>
A/G SYSTEMS, INC. d/b/a Duplication
Technology
By _______________________________
Bernard P. Aldrich, President & CEO
<PAGE>
EXHIBIT 2.3 (b) TO
CREDIT AGREEMENT
TERM NOTE
$1,650,000
December 31, 1997
Minneapolis, Minnesota
FOR VALUE RECEIVED, RIMAGE CORPORATION, a Minnesota corporation, and
A/G SYSTEMS, INC. d/b/a Duplication Technology hereby jointly and severally
promise to pay to the order of FIRST BANK NATIONAL ASSOCIATION (the "Lender") at
its main office in Minneapolis, Minnesota, in lawful money of the United States
of America in immediately available funds (as such term and each other
capitalized term used herein are defined in the Credit Agreement hereinafter
referred to), the principal amount of ONE MILLION SIX HUNDRED FIFTY THOUSAND AND
NO/100 DOLLARS ($1,650,000), and to pay interest (computed on the basis of
actual days elapsed and a year of 360 days) in like funds on the unpaid
principal amount hereof from time to time at the rates and times set forth in
the Credit Agreement, including the Supplement thereto.
The principal hereof is payable as follows: in equal consecutive
monthly installments of $75,000 each commencing on the last day of January, 1998
and continuing on the last day of each month thereafter through September 30,
1999 and with one final payment in the amount of the entire remaining unpaid
principal balance plus accrued and unpaid interest on October 31, 1999.
This note may be prepaid in accordance with the provisions of the
Credit Agreement, including the Supplement thereto.
This note is the Term Note referred to in the Credit Agreement dated
as of December 31, 1997 (as the same may hereafter be from time to time amended,
restated or otherwise modified, the "Credit Agreement") between the undersigned
and the Lender. This note is secured and its maturity is subject to
acceleration, in each case upon the terms provided in said Credit Agreement.
In the event of default hereunder, the undersigned agrees to pay all
costs and expenses of collection, including reasonable attorneys' fees. The
undersigned waives demand, presentment, notice of nonpayment, protest, notice of
protest and notice of dishonor.
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO
THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF
THE UNITED STATES APPLICABLE TO NATIONAL BANKS.
RIMAGE CORPORATION
By ______________________________
Bernard P. Aldrich, President & CEO
A/G SYSTEMS, INC., d/b/a Duplication
Technology
By ________________________
Bernard P. Aldrich, President & CEO
<PAGE>
SCHEDULE 1 TO
CREDIT AGREEMENT
BORROWING BASE DEFINITIONS
"Affiliate": When used with reference to any Person, (a) each Person
that, directly or indirectly, controls, is controlled by or is under common
control with, the Person referred to, (b) each Person which beneficially owns or
holds, directly or indirectly, five percent or more of any class of voting stock
of the Person referred to (or if the Person referred to is not a corporation,
five percent or more of the equity interest), (c) each Person, five percent of
more of the voting stock (or if such Person is not a corporation, five percent
or more of the equity interest) of which is beneficially owned or held, directly
or indirectly, by the Person referred to, and (d) each of such Person's
officers, directors, joint venturers and partners. The term control (including
the terms "controlled by" and "under common control with") means the possession,
directly, of the power to direct or cause the direction of the management and
policies of the Person in question.
"Eligible Systems Group Inventory" means Inventory of the Borrowers
(excluding Inventory of the Services Group) which meets the following
requirements: (a) it is owned by a Borrower, is subject to a first priority
perfected security interest in favor of the Lender, and is not subject to any
assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii)
Liens consented to by the Lender in writing; (b) consists of raw materials or
finished products (not including work in process and supplies); (c) if held for
sale or lease or furnishing under contracts of service, it is (except as the
Lender may otherwise consent in writing) new and unused; (d) except as the
Lender may otherwise consent, it is not stored with a bailee, warehouseman or
similar party; if so stored with the Lender's consent, such bailee, warehouseman
or similar party has issued and delivered to the Lender, in form and substance
acceptable to the Lender, such documents and agreements as the Lender may
require, including, without limitation, warehouse receipts therefor in the
Lender's name; (e) the Lender has determined, in its sole and absolute
discretion, that it is not unacceptable due to age, type, category,
obsolescence,quality and/or quantity; (f) it is not held by a Borrower for
demonstration; and (g) the warranties, representations and covenants contained
in any security agreement or other agreement of a Borrower with or given to the
Lender relating directly or indirectly to a Borrower's Inventory are applicable
to it without exception.
"Eligible Services Group Inventory" means Inventory accounted for by
the Borrowers as Inventory of the Services Group which meets the following
requirements: (a) it is owned by a Borrower, is subject to a first priority
perfected security interest in favor of the Lender, and is not subject to any
assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii)
Liens consented to by the Lender in writing; (b) is located in the United
States; (c) consists of raw materials (and excludes work in process and finished
goods); (d) the Lender has determined in its sole and absolute discretion that
it is not unacceptable due to age, type, category, obsolescence, quality and/or
quantity; and (e) the warranties, representations and covenants contained in any
security agreement or other agreement of a Borrower with or given to the Lender
relating directly or indirectly to a Borrower's Inventory are applicable to it
without exception.
"Eligible Services Group Receivables" means all Receivables that
meet all requirements of Eligible Systems Group Receivables except that they are
owed to or are accounted for by the Borrowers as Receivables of the Services
Group.
"Eligible Systems Group Receivables" means the Receivables owned by
the Borrowers, excluding Receivables owed to or that are accounted for by the
Borrowers as Receivables of the Services Group, which are subject to a first
priority perfected security interest in favor of the Lender and not subject to
any assignment, claim or Lien other than the Lien in favor of the Lender and
other Liens consented to by the Lender in writing, but excluding (a) Receivables
which are not earned; (b) Receivables which are unpaid more than ninety (90)
days after the original invoice date;
<PAGE>
(c) Receivables owed by debtors 10% or more of whose Receivables owed are
otherwise ineligible; (d) Receivables representing progress billings, or
retainages, or for work covered by any payment or performance bond; (e)
Receivables owed by Rimage Europe GmbH. and any of a Borrower's Affiliates; (f)
Receivables owed by debtors not located in the United States; (g) Receivables as
to which any warranty or representation contained in any security agreement or
other agreement of a Borrower with or given to the Lender with respect to any
such Receivable is untrue in any material respect; (h) Receivables as to which
the account debtor has disputed liability, or made any claim with respect to any
other Receivable due from such account debtor to a Borrower; (i) Receivables
subject to setoff; (j) Receivables as to which the account debtor has filed a
petition for bankruptcy or any other petition for relief under the Bankruptcy
Code, assigned any assets for the benefit of creditors, or if any petition or
other application for relief under the Bankruptcy Code has been filed against
the account debtor, or if the account debtor has failed, suspended business,
become insolvent, or has had or suffered a receiver or a trustee to be appointed
for all or a significant portion of its assets or affairs; (k) Receivables owed
by any government or government agency; (l) Receivables evidenced by a
promissory note or other instrument; and (m) Receivables as to which the Lender
believes that collection of any such Receivable is insecure or that any such
Receivable may not be paid by reason of the account debtor's financial inability
to pay.
"Inventory" means any and all of the Borrowers goods, including,
without limitation, goods in transit, wherever located which are or may at any
time be leased by a Borrower to a lessee, held for sale or lease, furnished
under any contract of service or held as raw materials, work in process, or
supplies or materials used or consumed in a Borrower's business, or which are
held for use in connection with the manufacture, packing, shipping, advertising,
selling or finishing of such goods, and all goods, the sale or other disposition
of which has given rise to a Receivable, which are returned to and/or
repossessed and/or stopped in transit by a Borrower, or the Lender, or at any
time hereafter in the possession or under the control of a Borrower, or the
Lender, or any agent or bailee of either thereof, and all documents of title or
other documents representing the same.
"Receivables" means each and every right to payment of Borrowers,
whether such right to payment arises out of a sale or lease of goods by a
Borrower or or other disposition of goods or other property of a Borrower, out
of a rendering of services by a Borrower, out of a loan by a Borrower, out of
damage to or loss of goods in the possession of a railroad or other carrier or
any other bailee, out of overpayment of taxes or other liabilities of a
Borrower, or which otherwise arises under any contract or agreement, or from any
other cause, whether such right to payment now exists or hereafter arises and
whether such right to payment is or is not yet earned by performance and
howsoever such right to payment may be evidenced, together with all other rights
and interest (including all liens and security interests) which a Borrower may
at any time have by law or agreement against any account debtor (as defined in
the Minnesota Uniform Commercial Code) or other obligor obligated to make any
such payment or against any of the property of such account debtor or other
obligor; specifically (but without limitation), the term includes all present
and future instruments, documents, chattel papers, accounts and contract rights
of a Borrower.
<PAGE>
SCHEDULE 6.3 TO CREDIT AGREEMENT
List of Indebtedness
Creditor Type Amount as of 11/30/97
7725 Washington Ave. Corp. Cap. Bldg Lease $1,045,307
Venture III Cap. Bldg Lease $501,545
Phoenixcorp. Equipment Lease $1,496,514
<PAGE>
SUPPLEMENT
TO
CREDIT AGREEMENT
(Reference and Eurodollar Rates)
THIS SUPPLEMENT, dated as of December 31, 1997, is entered into by
and between RIMAGE CORPORATION and A/G SYSTEMS, INC., d/b/a Duplication
Technology (collectively, the "Borrower") and FIRST BANK NATIONAL ASSOCIATION
(the "Lender") and provides additional terms which are applicable to the Credit
Agreement between the Borrower and the Lender of even date.
Section S1. Defined Terms. Terms which are defined in the Credit
Agreement are used herein with the respective meanings attributed thereto in the
Credit. As used herein, the following terms shall have the following respective
meanings:
"Adjusted Eurodollar Rate": With respect to each Interest Period
applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary,
to the next one hundredth of one percent) determined by dividing the Eurodollar
Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage.
"Advance": Any portion of the outstanding Revolving Loan or Term
Loan as to which one of the available interest rate options and, if pertinent,
an Interest Period, is applicable. An Advance may be a Eurodollar Rate Advance
or a Reference Rate Advance.
"Applicable Margin": With respect to:
(a) Reference Rate Advances: That percentage that will make
the interest rate on the Reference Rate Advances on the first day such Advances
are available equal to the interest rate on Advances that were Eurodollar Rate
Advances on the last day Eurodollar Rate Advances were available. The Applicable
Margin for Reference Rate Advances will be maintained throughout the period
Reference Rate Advances are available. (Reference Rate Advances are available
only if Eurodollar Rate Advances are no longer available as set forth in
Sections S6 and S8 hereof).
(b) Eurodollar Rate Advances: 2.25%.
"Applicable Term Margin": With respect to:
(a) Reference Rate Advances: That percentage that will make
the interest rate on the Reference Rate Advances on the first day such Advances
are available equal to the interest rate on Advances that were Eurodollar Rate
Advances on the last day Eurodollar Rate Advances were available. The Applicable
Margin for Reference Rate Advances will be maintained throughout the period
Reference Rate Advances are available. (Reference Rate Advances are available
only if Eurodollar Rate Advances are no longer available as set forth in
Sections S6 and S8 hereof).
(b) Eurodollar Rate Advances: 2.50%.
"Board": The Board of Governors of the Federal Reserve System or any
successor thereto.
"Eurodollar Business Day": A Business Day which is also a day for
trading by and between banks in United States dollar deposits in the interbank
Eurodollar market and a day on which banks are open for business in New York
City.
<PAGE>
"Eurodollar Rate": With respect to each Interest Period applicable
to a Eurodollar Rate Advance, the average offered rate for deposits in United
States dollars (rounded upward, if necessary, to the nearest 1/16 of 1%) for
delivery of such deposits on the first day of such Interest Period, for the
number of days in such Interest Period, which appears on the Reuters Screen LIBO
page as of 11:00 a.m., London time (or such other time as of which such rate
appears) two Eurodollar Business Days prior to the first day of such Interest
Period, or the rate for such deposits determined by the Lender at such time
based on such other published service of general application as shall be
selected by the Lender for such purpose; provided, that in lieu of determining
the rate in the foregoing manner, the Lender may determine the rate based on
rates at which United States dollar deposits are offered to the Lender in the
interbank Eurodollar market at such time for delivery in Immediately Available
Funds on the first day of such Interest Period in an amount approximately equal
to the Advance by the Lender to which such Interest Period is to apply (rounded
upward, if necessary, to the nearest 1/16 of 1%). "Reuters Screen LIBO page"
means the display designated as page "LIBO" on the Reuters Monitor Money Rate
Screen (or such other page as may replace the LIBO page on such service for the
purpose of displaying London interbank offered rates of major banks for United
States dollar deposits).
"Eurodollar Rate Advance": An Advance with respect to which the
interest rate is determined by reference to the Adjusted Eurodollar Rate.
"Eurodollar Reserve Percentage": As of any day, that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board for determining the maximum reserve requirement (including any basic,
supplemental or emergency reserves) for a member Lender of the Federal Reserve
System, with deposits comparable in amount to those held by the Lender, in
respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of
the Board. The rate of interest applicable to any outstanding Eurodollar Rate
Advances shall be adjusted automatically on and as of the effective date of any
change in the Eurodollar Reserve Percentage.
"Interest Period": With respect to each Eurodollar Rate Advance, the
period commencing on the date of such Advance or on the last day of the
immediately preceding Interest Period, if any, applicable to an outstanding
Advance and ending one, two, three, four or six months thereafter, as the
Borrower may elect in the applicable notice of borrowing, continuation or
conversion; provided that:
(1) Any Interest Period that would otherwise end on a
day which is not a Eurodollar Business Day shall be extended to the
next succeeding Eurodollar Business Day unless such Eurodollar
Business Day falls in another calendar month, in which case such
Interest Period shall end on the next preceding Eurodollar Business
Day;
(2) Any Interest Period that begins on the last
Eurodollar Business Day of a calendar month (or a day for which
there is no numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last Eurodollar
Business Day of a calendar month; and
(3) Any Interest Period that would otherwise end after
the Revolving Maturity Date shall end on the Revolving Maturity Date
and any Interest Period that would otherwise end after the maturity
of the Term Note shall end on the maturity date of the Term Note.
"Reference Rate": The rate of interest from time to time publicly
announced by the Lender as its "reference rate." The Lender may lend to its
customers at rates that are at, above or below the Reference Rate. For purposes
of determining any interest rate hereunder or under the Revolving Note which is
based on the Reference Rate, such interest rate shall change as and when the
Reference Rate shall change.
<PAGE>
"Reference Rate Advance": An Advance with respect to which the
interest rate is determined by reference to the Reference Rate. Reference Rate
Advances are available only if Eurodollar Rate Advances are no longer allowed as
per sections S6 and S8 of this Supplement.
Section S2. Procedure for Advances. Any request for an Advance must
be given so as to be received by the Lender not later than 2:00 p.m.
(Minneapolis time) two Eurodollar Business Days prior to the date of the
requested Advance if the Advance is requested as a Eurodollar Rate Advance and
not later than 2:00 p.m. on the date of the requested Advance if the Advance is
requested as a Reference Rate Advance. Each request for an Advance shall specify
(i) the date of the Advance, (ii) the amount of the Advance to be made on such
date which shall be in a minimum amount of $10,000 or, if more, an integral
multiple thereof, (iii) whether such Advance is to be funded as a Reference Rate
Advance or a Eurodollar Rate Advance (Reference Rate Advances are available only
if Eurodollar Rate Advances are no longer available), and (iv) in the case of a
Eurodollar Rate Advance, the duration of the initial Interest Period applicable
thereto.
Section S3. Interest Rates, Interest Payments and Default Interest.
Interest shall accrue and be payable on the Advances as follows:
S3 (a) Each Eurodollar Rate Advance on the Revolving Loan
shall bear interest on the unpaid principal amount thereof during the Interest
Period applicable thereto at a rate per annum equal to the sum of (i) the
Adjusted Eurodollar Rate for such Interest Period, plus (ii) the Applicable
Margin.
S3 (b) Each Reference Rate Advance on the Revolving Loan
shall bear interest on the unpaid principal amount thereof at a varying rate per
annum equal to the sum of (i) the Reference Rate, plus (ii) the Applicable
Margin.
S3 (c) Upon the happening of any Event of Default, each
Advance on the Revolving Loan shall, at the option of the Lender, bear interest
until paid in full (i) during the balance of any Interest Period applicable to
such Advance, at a rate per annum equal to the sum of the rate applicable to
such Advance during such Interest Period plus 2.0%, and (ii) otherwise, at a
rate per annum equal to the sum of (A) the Reference Rate, plus (B) the
Applicable Margin for Reference Rate Advances, plus (C) 2.0%.
S3 (d) Interest on the Revolving Loan shall be payable (i)
with respect to each Eurodollar Rate Advance having an Interest Period of three
months or less, on the last day of the Interest Period applicable thereto; (ii)
with respect to any Eurodollar Rate Advance having an Interest Period greater
than three months, on the last day of the Interest Period applicable thereto and
on each day that would have been the last day of the Interest Period for such
Advance had successive Interest Periods of three months duration been applicable
to such Advance; (iii) with respect to any Reference Rate Advance, on the last
day of each month; (iv) with respect to all Advances, upon any permitted
prepayment (on the amount prepaid); and (v) with respect to all Advances on the
Revolving Maturity Date; provided that interest under Section S3 (c) shall be
payable on demand.
Section S4. Interest Rates, Interest Payments and Default Interest
on Term Loan. Interest shall accrue and be payable on the Advances on the Term
Loan as follows:
S4 (a) Each Eurodollar Rate Advance shall bear interest on
the unpaid principal amount thereof during the Interest Period applicable
thereto at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate
for such Interest Period, plus (ii) the Applicable Term Margin.
<PAGE>
S4 (b) Each Reference Rate Advance shall bear interest on the
unpaid principal amount thereof at a varying rate per annum equal to the sum of
(i) the Reference Rate, plus (ii) the Applicable Term Margin.
S4 (c) Upon the happening of any Event of Default, each
Advance shall, at the option of the Lender, bear interest until paid in full (i)
during the balance of any Interest Period applicable to such Advance, at a rate
per annum equal to the sum of the rate applicable to such Advance during such
Interest Period plus 2.0%, and (ii) otherwise, at a rate per annum equal to the
sum of (A) the Reference Rate, plus (B) the Applicable Term Margin, plus (C)
2.0%.
S4 (d) Interest on the Term Loan shall be payable (i) with
respect to each Eurodollar Rate Advance having an Interest Period of three
months or less, on the last day of the Interest Period applicable thereto; (ii)
with respect to any Eurodollar Rate Advance having an Interest Period greater
than three months, on the last day of the Interest Period applicable thereto and
on each day that would have been the last day of the Interest Period for such
Advance had successive Interest Periods of three months duration been applicable
to such Advance; (iii) with respect to any Reference Rate Advance, on the last
day of each month; (iv) with respect to all Advances, upon any permitted
prepayment (on the amount prepaid); and (v) with respect to all Advances on the
maturity date of the Term Loan; provided that interest under Section S4 (c)
shall be payable on demand.
Section S5. Optional Prepayments. The Borrower may prepay Reference
Rate Advances, in whole or in part, at any time, without premium or penalty. Any
such prepayment must be accompanied by accrued and unpaid interest on the amount
prepaid. Each partial prepayment shall be in a minimum amount of $10,000 or, if
more, an integral multiple thereof. Except upon an acceleration following an
Event of Default or upon termination of the Revolving Commitment in whole (and
then only with respect to the Revolving Loan), the Borrower may pay Eurodollar
Rate Advances only on the last day of the Interest Period applicable thereto.
Amounts paid (unless following an acceleration or upon termination of the
Commitment in whole) or prepaid on Advances on the Revolving Loan under this
Section S5 may be reborrowed upon the terms and subject to the conditions and
limitations of the Credit Agreement. Amounts prepaid on the Term Loan may not be
reborrowed.
Section S6. Interest Rate Not Ascertainable, Etc. If, on or prior to
the date for determining the Adjusted Eurodollar Rate in respect of the Interest
Period for any Eurodollar Rate Advance, the Lender determines (which
determination shall be conclusive and binding, absent error) that:
(a) deposits in dollars (in the applicable amount) are
not being made available to the Lender in the relevant market for
such Interest Period, or
(b) the Adjusted Eurodollar Rate will not adequately and
fairly reflect the cost to the Lender of funding or maintaining
Eurodollar Rate Advances for such Interest Period, the Lender shall
forthwith give notice to the Borrower of such determination,
whereupon the obligation of the Lender to make or continue, or to
convert any Advances to, Eurodollar Rate Advances, as the case may
be, shall be suspended until the Lender notifies the Borrower that
the circumstances giving rise to such suspension no longer exist.
While any such suspension continues, all further Advances by the
Lender shall be made as Reference Rate Advances. No such suspension
shall affect the interest rate then in effect during the applicable
Interest Period for any Eurodollar Rate Advance outstanding at the
time such suspension is imposed.
Section S7. Increased Cost. If any Regulatory Change:
<PAGE>
(a) shall subject the Lender to any tax, duty or other
charge with respect to its Eurodollar Rate Advances, the Notes, its
obligation to make Eurodollar Rate Advances or shall change the
basis of taxation of payment to the Lender of the principal of or
interest on Eurodollar Rate Advances or any other amounts due under
this Agreement in respect of Eurodollar Rate Advances or its
obligation to make Eurodollar Rate Advances (except for changes in
the rate of tax on the overall net income of the Lender imposed by
the jurisdiction in which the Lender's principal office is located);
or
(b) shall impose, modify or deem applicable any reserve,
special deposit, capital requirement or similar requirement
(including, without limitation, any such requirement imposed by the
Board, but excluding with respect to any Eurodollar Rate Advance any
such requirement to the extent included in calculating the
applicable Adjusted Eurodollar Rate) against assets of, deposits
with or for the account of, or credit extended by, the Lender or
shall impose on the Lender or on the interbank Eurodollar market any
other condition affecting its Eurodollar Rate Advances, the Notes or
its obligation to make Eurodollar Rate Advances;
and the result of any of the foregoing is to increase the cost to the Lender of
making or maintaining any Eurodollar Rate Advance, or to reduce the amount of
any sum received or receivable by the Lender under this Agreement or under the
Revolving Note or the Term Note, then, within 30 days after demand by the
Lender, the Borrower shall pay to the Lender such additional amount or amounts
as will compensate the Lender for such increased cost or reduction. The Lender
will promptly notify the Borrower of any event of which it has knowledge,
occurring after the date hereof, which will entitle the Lender to compensation
pursuant to this Section. A certificate of the Lender claiming compensation
under this Section, setting forth the additional amount or amounts to be paid to
it hereunder and stating in reasonable detail the basis for the charge and the
method of computation, shall be conclusive in the absence of error. In
determining such amount, the Lender may use any reasonable averaging and
attribution methods. Failure on the part of the Lender to demand compensation
for any increased costs or reduction in amounts received or receivable with
respect to any Interest Period shall not constitute a waiver of the Lender's
rights to demand compensation for any increased costs or reduction in amounts
received or receivable in any subsequent Interest Period.
Section S8. Illegality. If any Regulatory Change shall make it
unlawful or impossible for the Lender to make, maintain or fund any Eurodollar
Rate Advances, the Lender shall notify the Borrower, whereupon the obligation of
the Lender to make or continue, or to convert any Advances to, Eurodollar Rate
Advances shall be suspended until the Lender notifies the Borrower that the
circumstances giving rise to such suspension no longer exist. If the Lender
determines that it may not lawfully continue to maintain any Eurodollar Rate
Advances to the end of the applicable Interest Periods, all of the affected
Advances shall be automatically converted to Reference Rate Advances as of the
date of the Lender's notice, and upon such conversion the Borrower shall
indemnify the Lender in accordance with Section S9.
Section S9. Funding Losses; Eurodollar Rate Advances. The Borrower
shall compensate the Lender, upon its written request, for all losses, expenses
and liabilities (including any interest paid by the Lender to lenders of funds
borrowed by it to make or carry Eurodollar Rate Advances to the extent not
recovered by the Lender in connection with the re-employment of such funds and
including loss of anticipated profits) which the Lender may sustain: (i) if for
any reason, other than a default by the Lender, a funding of a Eurodollar Rate
Advance does not occur on the date specified therefor in the Borrower's request
or notice as to such Advance under Section S2 or S3, or (ii) if, for whatever
reason (including, but not limited to, acceleration of the maturity of Advances
following an Event of Default), any repayment of a Eurodollar Rate Advance, or a
conversion pursuant to Section S8, occurs on any day other than the last day of
the Interest Period applicable thereto. The Lender's request for compensation
shall set forth the basis for the amount requested and shall be final,
conclusive and binding, absent error.
<PAGE>
Section S10. Discretion of Lender as to Manner of Funding. The
Lender shall be entitled to fund and maintain its funding of Eurodollar Rate
Advances in any manner it may elect, it being understood, however, that for the
purposes of this Agreement all determinations hereunder (including, but not
limited to, determinations under Section S9, but excluding determinations that
the Lender may elect to make from the Reuters screen) shall be made as if the
Lender had actually funded and maintained each Eurodollar Rate Advance during
the Interest Period for such Advance through the purchase of deposits having a
maturity corresponding to the last day of the Interest Period and bearing an
interest rate equal to the Eurodollar Rate for such Interest Period.
RIMAGE CORPORATION
By
------------------------------------
Bernard P. Aldrich, President & CEO
A/G SYSTEMS, INC., d/b/a Duplication
Technology
By
------------------------------------
Bernard P. Aldrich, President & CEO
FIRST BANK NATIONAL ASSOCIATION
By
------------------------------------
Richard D. Hartman, Vice President
<PAGE>
CERTIFICATE OF ASSISTANT SECRETARY OF
RIMAGE CORPORATION
I, James L. Reissner, hereby certify to First Bank National Association that I
am the Assistant Secretary of Rimage Corporation, a Minnesota corporation (the
"Company") and that the following resolutions have been duly adopted by the
Board of Directors of the Company in a manner authorized by the laws of the
State of Minnesota:
"WHEREAS, the Company wishes to borrow money from First
Bank National Association (the "Lender"), and for that purpose
intends to enter into a Credit Agreement with the Lender.
RESOLVED, the Company shall enter into a Credit
Agreement with the Lender under which the Company and A/G Systems,
Inc., d/b/a Duplication Technology may obtain revolving loans up to
$5,000,000 in aggregate amount and a Term Loan of $1,650,000; and
the President and CEO or the Assistant Secretary of the Company is
hereby authorized at any time and from time to time to execute and
deliver to the Lender such Credit Agreement and any promissory
notes, security agreements, mortgages, subordination agreements,
pledge agreements, assignments of life insurance, reimbursement
agreements, or amendments to any of the foregoing as may be
contemplated or required pursuant to such Credit Agreement or
otherwise, all in such form as such officer may determine and
approve (such determination and approval to be established
conclusively by such officer's execution and delivery of such Credit
Agreement and any such related documents and instruments).
FURTHER RESOLVED, that the President and CEO or the
Assistant Secretary of the Company is hereby authorized at any time
and from time to time to sell, assign, transfer, mortgage, create
security interests in and pledge to the Lender the real property,
goods, instruments, documents, securities, chattel paper, accounts,
contract rights and other intangibles and any other property now
owned or hereafter acquired by the Company, either absolutely for
such consideration as such officer may determine to be appropriate
or as security for the payment or performance of any or all debts,
liabilities and obligations of every type and description now or at
any time hereafter owed to the Lender by the Company, on such terms
as such officer may approve, and to do such other acts or things in
connection therewith or pursuant thereto as such officer may
determine to be appropriate (such determination and approval to be
established conclusively by the instrument executed or action taken
by such officer).
FURTHER RESOLVED, it is hereby acknowledged that each
and every note, guaranty, security agreement and other instrument
made pursuant to the foregoing resolutions is and will be made and
given for the corporate purposes of this Company.
FURTHER RESOLVED, the Secretary or Assistant Secretary
shall certify to the Lender the names and signatures of the persons
who presently are duly elected, qualified and acting as the officers
authorized to act under the foregoing resolutions, and the Secretary
or Assistant Secretary shall from time to time hereafter, upon a
change in the facts so certified, immediately certify to the Lender
the names and signatures of the persons then authorized to sign or
to act; the Lender shall be fully protected in relying on such
certificates and on the obligation of the Secretary or an Assistant
Secretary immediately to certify to the Lender any change in any
fact certified, and the Lender shall be indemnified and saved
harmless by the Company from any and all claims, demands, expenses,
costs and damages resulting from or growing out of honoring or
relying on the signature or other authority (whether or not properly
<PAGE>
used) of any officer whose name and signature was so certified, or
refusing to honor any signature or authority not so certified."
I further certify that the foregoing resolutions have not been amended or
revoked and are in full force and effect on the date hereof.
I further certify that the Board of Directors of the Company has, and at the
time of adoption of the foregoing resolutions had, full power and lawful
authority to adopt the foregoing resolutions and to confer the powers therein
granted upon the officers designated, and that such officers have full power and
authority to exercise the same.
I further certify that the officers whose names appear below have been duly
elected to and now hold the offices in the Company set forth opposite their
respective names and that the signature appearing opposite the name of each of
such officer is authentic and official:
Name Title Specimen Signature
Bernard P. Aldrich President & CEO ____________________
James L. Reissner Assistant Secretary ____________________
I further certify that shareholder approval of the foregoing resolutions is not
required and said resolutions are effective and binding on the Company without
approval by its shareholders.
I further certify that the Articles of Incorporation and bylaws of the Company
have not been amended or modified since the same were last certified to the
Lender.
Dated December 31, 1997
------------------------
Assistant Secretary
- ------------------------------
Attest by President & CEO
<PAGE>
CERTIFICATE OF ASSISTANT SECRETARY OF
A/G SYSTEMS, INC.
I, James L. Reissner , hereby certify to First Bank National Association that I
am the Assistant Secretary of A/G Systems, Inc. (the "Company") and that the
following resolutions have been duly adopted by the Board of Directors of the
Company in a manner authorized by the laws of the State of the Company's
incorporation:
"WHEREAS, the Company wishes to borrow money from First
Bank National Association (the "Lender"), and for that purpose
intends to enter into a Credit Agreement with the Lender.
RESOLVED, the Company shall enter into a Credit
Agreement with the Lender under which the Company and its affiliate
Rimage Corporation may obtain revolving loans up to $5,000,000 in
aggregate amount and a Term Loan of $1,650,000; and the President
and CEO or the Assistant Treasurer of the Company is hereby
authorized at any time and from time to time to execute and deliver
to the Lender such Credit Agreement and any promissory notes,
security agreements, mortgages, subordination agreements, pledge
agreements, assignments of life insurance, reimbursement agreements,
or amendments to any of the foregoing as may be contemplated or
required pursuant to such Credit Agreement or otherwise, all in such
form as such officer may determine and approve (such determination
and approval to be established conclusively by such officer's
execution and delivery of such Credit Agreement and any such related
documents and instruments).
FURTHER RESOLVED, that the President and CEO or the
Assistant Secretary of the Company is hereby authorized at any time
and from time to time to sell, assign, transfer, mortgage, create
security interests in and pledge to the Lender the real property,
goods, instruments, documents, securities, chattel paper, accounts,
contract rights and other intangibles and any other property now
owned or hereafter acquired by the Company, either absolutely for
such consideration as such officer may determine to be appropriate
or as security for the payment or performance of any or all debts,
liabilities and obligations of every type and description now or at
any time hereafter owed to the Lender by the Company, on such terms
as such officer may approve, and to do such other acts or things in
connection therewith or pursuant thereto as such officer may
determine to be appropriate (such determination and approval to be
established conclusively by the instrument executed or action taken
by such officer).
FURTHER RESOLVED, it is hereby acknowledged that each
and every note, guaranty, security agreement and other instrument
made pursuant to the foregoing resolutions is and will be made and
given for the corporate purposes of this Company.
FURTHER RESOLVED, the Secretary or Assistant Secretary
shall certify to the Lender the names and signatures of the persons
who presently are duly elected, qualified and acting as the officers
authorized to act under the foregoing resolutions, and the Secretary
or Assistant Secretary shall from time to time hereafter, upon a
change in the facts so certified, immediately certify to the Lender
the names and signatures of the persons then authorized to sign or
to act; the Lender shall be fully protected in relying on such
certificates and on the obligation of the Secretary or an Assistant
Secretary immediately to certify to the Lender any change in any
fact certified, and the Lender shall be indemnified and saved
harmless by the Company from any and all claims, demands, expenses,
costs and damages resulting from or growing out of honoring or
relying on the signature or other authority (whether or not properly
used) of any officer whose name and signature was so certified, or
refusing to honor any signature or authority not so certified."
<PAGE>
I further certify that the foregoing resolutions have not been amended or
revoked and are in full force and effect on the date hereof.
I further certify that the Board of Directors of the Company has, and at the
time of adoption of the foregoing resolutions had, full power and lawful
authority to adopt the foregoing resolutions and to confer the powers therein
granted upon the officers designated, and that such officers have full power and
authority to exercise the same.
I further certify that the officers whose names appear below have been duly
elected to and now hold the offices in the Company set forth opposite their
respective names and that the signature appearing opposite the name of each of
such officer is authentic and official:
Name Title Specimen Signature
Bernard P. Aldrich President & CEO ____________________
James L. Reissner Assistant Secretary ____________________
I further certify that shareholder approval of the foregoing resolutions is not
required and said resolutions are effective and binding on the Company without
approval by its shareholders.
I further certify that attached hereto as Exhibits A and B, respectively, are
true, correct and complete copies of the Articles of Incorporation and bylaws of
the Company, including all amendments thereto.
Dated December 31, 1997
------------------------
Assistant Secretary
- ------------------------------
Attest by President & CEO
Exhibit 10.4
RIMAGE CORPORATION
1992 STOCK OPTION PLAN
As amended March 20, 1997
The purpose of the Rimage Corporation 1992 Stock Option Plan (the
"Plan") is to promote the growth and profitability of Rimage Corporation (the
"Company") and its Affiliates by providing its employees and directors with an
incentive to achieve long-term corporate objectives, to attract and retain
employees and directors of outstanding competence, and to provide such employees
and directors with an equity interest in the Company.
1. STOCK SUBJECT TO PLAN. An aggregate of 1,000,000 shares (the
"Shares") of the Common Stock, $.01 par value, of the Company ("Common Stock")
may be subject to options granted under the Plan. Such Shares may be authorized
but unissued Common Stock or authorized and issued Common Stock that has been or
may be acquired by the Company. Shares that are subject to an option which
expires or is terminated unexercised shall again be available for issuance under
the Plan.
2. ADMINISTRATION.
a. COMMITTEE. The Plan shall be administered by the
Stock Option Committee (the "Committee") of the Board of Directors
of the Company (the "Board"). The Committee shall be comprised of
two or more members of the Board, each of whom shall be a
"disinterested person" within the meaning of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended.
b. POWERS AND DUTIES. The Committee shall have the
authority to make rules and regulations governing the administration
of the Plan; to select the eligible employees to whom options shall
be granted; to determine the type, amount, size, and terms of
options; to determine the time when options shall be granted; to
determine whether any restrictions shall be placed on Shares
purchased pursuant to any option; and to make all other
determinations necessary or advisable for the administration of the
Plan. The Committee's determinations need not be uniform, and may be
made by it selectively among persons who are eligible to receive
options under the Plan, whether or not such persons are similarly
situated. All interpretations, decisions, or determinations made by
the Committee pursuant to the Plan shall be final and conclusive.
3. ELIGIBILITY. Any employee, director or consultant of the Company
or of any of its Affiliates shall be eligible to receive options under the Plan.
A persons who has been granted an option under this Plan, or under any
predecessor plan, may be granted additional options if the Committee shall so
determine. Except to the extent otherwise provided in the agreement evidencing
an option, the granting of an option under this Plan shall not affect any
outstanding option previously granted under this Plan or under any other plan of
the Company or any Affiliate. For purposes of the Plan, the term "Affiliate"
shall mean any "parent corporation" or "subsidiary corporation" of the Company,
as those terms are defined in Sections 425(e) and 425(f) of the Internal Revenue
Code of 1986, as amended.
4. EMPLOYEE STOCK OPTIONS. The Committee may grant to eligible
employees stock options which are intended to qualify as "Incentive Stock
Options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and may grant to employees, directors or consultants stock options
which are not intended to so qualify ("Nonqualified Options"), or any
combination thereof. A stock option granted pursuant to the Plan shall entitle
the optionee, upon exercise, to purchase Shares at a specified price during a
specified period. Options shall be subject to such terms and conditions as
<PAGE>
the Committee shall from time to time approve; provided, that each option shall
be subject to the following requirements:
a. TYPE OF OPTION. Each option shall be identified in
the agreement pursuant to which it is granted as an Incentive Stock
Option or as a Nonqualified Option, as the case may be.
b. TERM. No option shall be exercisable
more than 121 months after the date on which it is
granted.
c. PAYMENT. The purchase price of Shares subject to an
option shall be payable in full at the time the option is exercised.
Payment may be made in cash, in shares of Common Stock having an
aggregate fair market value on the date of exercise which is not
less than the option price, or by a combination of cash and such
shares, as the Committee may determine, and subject to such terms
and conditions as the Committee deems appropriate.
d. OPTIONS NOT TRANSFERABLE. Options shall not be
transferable except to the extent permitted by the agreement
evidencing such option; provided, that in no event shall any option
be transferable by the optionee, other than by will or the laws of
descent and distribution. Options shall be exercisable during an
optionee's lifetime only by such optionee. If, pursuant to the
agreement evidencing any option, such option remains exercisable
after the optionee's death, it may be exercised, to the extent
permitted by such agreement, by the personal representative of the
optionee's estate or by any person who acquired the right to
exercise such option by bequest, inheritance, or otherwise by reason
of the optionee's death.
e. INCENTIVE STOCK OPTIONS. If an option is an Incentive
Stock Option, it shall be subject to the following additional
requirements:
i. The purchase price of Shares that are
subject to an Incentive Stock Option shall not be less
than 100% of the fair market value of such Shares at the
time the option is granted, as determined in good faith
by the Committee.
ii. The aggregate fair market value
(determined at the time the option is granted) of the
Shares with respect to which Incentive Stock Options are
exercisable by the optionee for the first time during
any calendar year, under this Plan or any other plan of
the Company or any Affiliate, shall not exceed $100,000.
iii. An Incentive Stock Option shall not be
exercisable more than ten years after the date on which
it is granted.
iv. The purchase price of Shares that are
subject to an Incentive Stock Option granted to an
employee who, at the time such option is granted, owns
10% or more of the total combined voting power of all
classes of stock of the Company or of any Affiliate
shall not be less than 110% of the fair market value of
such Shares on the date such option is granted, and such
option may not be exercisable more than five years after
the date on which it is granted. For the purposes of
this subparagraph, the rules of Section 425(d) of the
Code shall apply in determining the stock ownership of
any employee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, upon the fulfillment of
certain conditions, or upon such other terms and conditions as the Committee
shall determine.
5. AGREEMENTS. Each option granted pursuant to the Plan shall be
evidenced by an agreement setting forth the terms and conditions upon which it
is granted. Multiple options may be evidenced by a
<PAGE>
single agreement. Subject to the limitations set forth in the Plan, the
Committee may, with the consent of the person to whom an option has been
granted, amend any such agreement to modify the terms or conditions governing
the option evidenced thereby.
6. ADJUSTMENTS. In the event of any change in the outstanding shares
of Common Stock by reason of any stock dividend or split, recapitalization,
reclassification, combination, or exchange of shares or other similar corporate
change, then if the Committee shall determine, in its sole discretion, that such
change necessarily or equitably requires an adjustment in the number of Shares
subject to an option, in the option price or value of an option, or in the
maximum number of Shares subject to this Plan, such adjustments shall be made by
the Committee and shall be conclusive and binding for all purposes of this Plan.
No adjustment shall be made in connection with the issuance by the Company of
any warrants, rights, or options to acquire additional Common Stock or of
securities convertible into Common Stock.
7. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC. Subject
to the provisions of the agreement evidencing any option, if the Company shall
become a party to any corporate merger, consolidation, major acquisition of
property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable with
respect to outstanding options and in the number of Shares subject to this Plan,
which shall be binding for all purposes of this Plan, including, but not limited
to, the substitution of new options for any options then outstanding, the
assumption of any such options, and the termination of such options.
8. EXPENSES OF PLAN. The expenses of administering this Plan shall
be borne by the Company and its Affiliates.
9. RELIANCE ON REPORTS. Each member of the Committee and each member
of the Board of Directors shall be fully justified in relying or acting in good
faith upon any report made by the independent public accountants of the Company
and its Affiliates and upon any other information furnished in connection with
this Plan by any person or persons other than himself. In no event shall any
person who is or shall have been a member of the Committee or of the Board of
Directors be liable for any determination made or other action taken or omitted
in reliance upon any such report or information, or for any action taken or
omitted, including the furnishing of information, in good faith.
10. RIGHTS AS STOCKHOLDER. Except to the extent otherwise
specifically provided hereon, no recipient of any option shall have any rights
as a stockholder with respect to Shares sold or issued pursuant to the Plan
until certificates for such Shares have been issued to such person.
11. GENERAL RESTRICTIONS. Each option granted pursuant to the Plan
shall be subject to the requirement that if, in the opinion of the Committee:
a. the listing, registration, or qualification of any
Shares related thereto upon any securities exchange or under any
state or federal law;
b. the consent or approval of any regulatory body; or
c. an agreement by the recipient with respect to the
disposition of any such Shares;
is necessary or desirable as a condition of the issuance or sale of such Shares,
such option shall not be consummated unless and until such listing,
registration, qualification, consent, approval, or agreement is effected or
obtained in form satisfactory to the Committee.
12. EMPLOYMENT RIGHTS. Nothing in this Plan, or in any agreement
entered into hereunder, shall confer upon any employee or director the right to
continue to serve as an employee or director of
<PAGE>
the Company or an Affiliate, or affect the right of the Company or an Affiliate
to terminate such employee's or director's services at any time, with or without
cause.
13. WITHHOLDING. If the Company proposes or is required to issue
Shares pursuant to the Plan, it may require the recipient to remit to it, or may
withhold from such option or from the recipient's other compensation, an amount,
in the form of cash or Shares, sufficient to satisfy any applicable federal,
state, or local tax withholding requirements prior to the delivery of any
certificates for such Shares.
14. AMENDMENTS. The Board of Directors of the Company may at any
time, and from time to time, amend the Plan in any respect, except that no
amendment:
a. increasing the number of Shares available for
issuance or sale pursuant to the Plan (other than as permitted by
paragraphs 6 and 7);
b. changing the classification of persons eligible to
participate in the Plan or the definition of an "Affiliate"; or
c. materially increasing the benefits accruing to
participants under the Plan;
shall be made without the affirmative vote of stockholders holding at least a
majority of the voting stock of the Company represented in person or by proxy at
a duly held stockholders' meeting.
15. EFFECTIVE DATE; DURATION. The Plan initially become effective
with respect to 250,000 shares on September 24, 1992, upon its adoption by the
Board of Directors of the Company and approval by the shareholders of the
Company. The increase in the number of shares subject to the Plan from 250,000
shares to 500,000 shares became effective on December 31, 1993, and was approved
by the shareholders on June 5, 1994. The increase in the number of shares
subject to the Plan from 500,000 shares to 1,000,000 shares, shall become
effective on March 20, 1997, subject to shareholder approval of such amendments
on or before March 20, 1998. No options shall be granted under the Plan after
the earlier of: (a) the date on which the Plan is terminated by the Board of
Directors of the Company; or (b) September 24, 2002. Options outstanding at the
termination or expiration of the Plan may continue to be exercised in accordance
with their terms after such termination or expiration.
EXHIBIT 11.1
RIMAGE CORPORATION
COMPUTATION OF NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
DILUTED NET EARNINGS PER COMMON SHARE IS DETERMINED BY DIVIDING THE DILUTED NET
EARNINGS (LOSS) 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,
1997 1996
----------- -----------
<S> <C> <C>
Shares Outstanding at beginning of period 3,084,500 3,051,000
Common stock issued in stock option exercise 6,802 33,500
----------- -----------
Shares Outstanding at end of period 3,091,302 3,084,500
=========== ===========
Weighted average shares of common stock outstanding 3,086,292 3,074,837
=========== ===========
Common stock equivalents 775,853 --
Weighted average shares of common stock equivalents 190,247 --
=========== ===========
Weighted average shares of common stock and stock equivalents 3,276,539 3,074,837
=========== ===========
Diluted net earnings (loss) $ 1,925,073 ($5,179,011)
=========== ===========
Diluted net earnings (loss) per share $ 0.59 ($ 1.68)
=========== ===========
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF RIMAGE CORPORATION
Name Jurisdiction of Incorporation Percent Owned
- ---- ----------------------------- -------------
A/G Systems, Inc. d/b/a
Duplication Technology Colorado 100.0%
Media Systems Technology, Inc.
(Inactive) California 86.8%
Rimage Europe GmbH Germany 100.0%
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 6, 1998,
relating to the consolidated balance sheets of Rimage Corporation and
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended, and the related financial statement schedule, which reports appear in the
1997 annual report on Form 10-K of Rimage Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 656
<SECURITIES> 0
<RECEIVABLES> 5,283
<ALLOWANCES> 505
<INVENTORY> 2,266
<CURRENT-ASSETS> 8,196
<PP&E> 13,810
<DEPRECIATION> 7,963
<TOTAL-ASSETS> 15,164
<CURRENT-LIABILITIES> 5,756
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 5,907
<TOTAL-LIABILITY-AND-EQUITY> 15,164
<SALES> 38,878
<TOTAL-REVENUES> 38,878
<CGS> 27,559
<TOTAL-COSTS> 27,559
<OTHER-EXPENSES> 794
<LOSS-PROVISION> 11
<INTEREST-EXPENSE> 829
<INCOME-PRETAX> 2,045
<INCOME-TAX> 120
<INCOME-CONTINUING> 1,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,925
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 117 230
<SECURITIES> 0 0
<RECEIVABLES> 6,156 10,138
<ALLOWANCES> 1,085 645
<INVENTORY> 4,028 4,690
<CURRENT-ASSETS> 10,545 16,451
<PP&E> 13,796 9,598
<DEPRECIATION> 5,981 4,714
<TOTAL-ASSETS> 20,010 23,784
<CURRENT-LIABILITIES> 12,836 12,643
<BONDS> 0 0
0 0
0 0
<COMMON> 31 31
<OTHER-SE> 4,053 9,172
<TOTAL-LIABILITY-AND-EQUITY> 20,010 23,784
<SALES> 41,782 51,490
<TOTAL-REVENUES> 41,782 51,490
<CGS> 32,420 38,836
<TOTAL-COSTS> 32,420 38,836
<OTHER-EXPENSES> 651 660
<LOSS-PROVISION> 624 499
<INTEREST-EXPENSE> 679 588
<INCOME-PRETAX> (4,428) (2,304)
<INCOME-TAX> 751 (1,052)
<INCOME-CONTINUING> (5,179) (1,252)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,179) (1,252)
<EPS-PRIMARY> (1.68) (0.45)
<EPS-DILUTED> (1.68) (0.45)
</TABLE>
