UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO _______________.
COMMISSION FILE NUMBER: 0-20728
-------
RIMAGE CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-1577970
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7725 Washington Avenue South, Edina, MN 55439
---------------------------------------------
(Address of principal executive offices)
612-944-8144
----------------------------------------------------
(Registrant's telephone number, including area code)
NA
-----------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report.)
Common Stock outstanding at July 31, 1998 -- 3,234,599 shares
of $.01 par value Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___
<PAGE>
RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
Description Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and
December 31, 1997 ................................3-4
Consolidated Statements of Operations
(unaudited) for the Three and Six Months
Ended June 30, 1998 and 1997 .......................5
Consolidated Statements of Cash Flows
(unaudited) for the Six Months
Ended June 30, 1998 and 1997 .....................6-7
Condensed Notes to Consolidated
Financial Statements (unaudited) ................8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..12-16
PART II OTHER INFORMATION .......................................17-19
Items 1-3. None
Item 4. Submission of Matters to Vote of Security Holders
Item 5. None
Item 6. Exhibits
SIGNATURES...................................................................20
2
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
- ----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,187,705 $ 656,127
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns of $328,738 and $505,458,
respectively 5,053,008 4,778,055
Inventories (note 2) 2,520,098 2,265,867
Income tax receivable 518,400 23,350
Prepaid expenses and other current assets 331,303 472,728
- ----------------------------------------------------------------------------------------------
Total current assets 11,610,514 8,196,127
- ----------------------------------------------------------------------------------------------
Property and equipment, net 5,139,572 5,846,953
Goodwill, net 808,335 848,692
Other noncurrent assets 139,573 271,740
- ----------------------------------------------------------------------------------------------
Total assets $17,697,994 $15,163,512
==============================================================================================
</TABLE>
See accompanying condensed notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current liabilities:
Current portion of notes payable $ 900,000 $ 900,000
Current installments of capital lease obligations 388,190 356,053
Trade accounts payable 2,553,666 2,789,973
Accrued expenses (Note 4) 1,532,575 1,069,315
Income taxes payable 492,680 --
Deferred income and customer deposits 683,393 640,725
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 6,550,504 5,756,066
Notes payable, less current portion 300,000 750,000
Capital lease obligations, less current installments 2,461,064 2,661,334
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 9,311,568 9,167,400
- ---------------------------------------------------------------------------------------------------------------
Minority interest in inactive subsidiary 57,907 57,907
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares,
issued and outstanding 3,159,871 and 3,091,302, respectively 31,599 30,913
Additional paid-in capital 10,781,157 10,468,136
Accumulated deficit (2,354,208) (4,405,218)
Foreign currency translation adjustment (130,029) (155,626)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,328,519 5,938,205
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 17,697,994 $ 15,163,512
===============================================================================================================
</TABLE>
4
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 8,841,289 $ 10,337,931 $ 18,489,889 $ 21,164,704
Cost of revenues 5,131,110 7,440,193 10,962,842 15,702,276
- -------------------------------------------------------------------------------------------------------------------
Gross profit 3,710,179 2,897,738 7,527,047 5,462,428
- -------------------------------------------------------------------------------------------------------------------
Operating expenses:
Engineering and development 407,466 527,974 916,877 1,084,667
Selling, general and administrative 1,905,681 1,702,394 3,947,931 3,438,312
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,313,147 2,230,368 4,864,808 4,522,979
- -------------------------------------------------------------------------------------------------------------------
Operating earnings 1,397,032 667,370 2,662,239 939,449
- -------------------------------------------------------------------------------------------------------------------
Other (expense) income:
Interest expense, net (66,239) (244,927) (157,878) (512,065)
Gain on currency exchange 32,453 41,159 26,770 38,740
Other, net 31,289 2,591 40,079 15,099
- -------------------------------------------------------------------------------------------------------------------
Total other expense, net (2,497) (201,177) (91,029) (458,226)
- -------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,394,535 466,193 2,571,210 481,223
Income taxes 347,000 60,143 520,200 60,143
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,047,535 $ 406,050 $ 2,051,010 $ 421,080
===================================================================================================================
Basic net earnings per common share $ 0.33 $ 0.13 $ 0.66 $ 0.14
- -------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share
and common share equivalents $ 0.29 $ 0.13 $ 0.57 $ 0.14
- -------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 3,142,384 3,084,500 3,118,012 3,084,500
===================================================================================================================
Diluted weighted average shares and
common share equivalents outstanding 3,619,456 3,088,833 3,572,562 3,088,833
===================================================================================================================
</TABLE>
See accompanying condensed notes to the consolidated financial statements
5
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,051,010 $ 421,080
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,064,688 1,394,694
Change in reserve for excess and obsolete inventories 73,953 13,895
Change in reserve for allowance for doubtful accounts (176,720) (49,000)
Loss on sale of property, plant, and equipment 21,501 69,424
Changes in operating assets and liabilities:
Trade accounts receivable (98,233) (1,086,742)
Inventories (328,184) 1,503,841
Income tax receivable (495,050) 147,924
Prepaid expenses and other current assets 95,231 (126,628)
Trade accounts payable (236,307) (810,264)
Accrued expenses 463,260 (410,918)
Income taxes payable 492,680 --
Deferred income and customer deposits 42,668 148,390
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,970,497 1,215,696
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (262,941) (237,916)
Proceeds from the sale of property and equipment 8,644 16,000
Other noncurrent assets 64,812 121,724
Receipts from sales-type leases 58,207 211,337
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (131,278) 111,145
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
6
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from stock option exercise 313,707 --
Principal payments on capital lease obligation (168,133) (152,727)
Proceeds from other notes payable -- 18,107,751
Repayment of other notes payable (450,000) (19,304,032)
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (304,426) (1,349,008)
- ----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3,215) (70,086)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,531,578 (92,253)
Cash and cash equivalents, beginning of period 656,127 117,322
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,187,705 $ 25,069
==========================================================================================================
Supplemental disclosures of net cash paid during the period for:
Interest $ 219,285 $ 513,388
Income taxes $ 495,050 $ 18,186
</TABLE>
See accompanying condensed notes to the consolidated financial statements
7
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION AND NATURE OF BUSINESS
The consolidated financial statements include the accounts of Rimage
Corporation, Rimage Europe GmbH, A/G Systems Inc., d/b/a Duplication
Technology Inc. (Rimage Boulder), Knowledge Access International
(Knowledge Access) and Rimage Services, collectively hereinafter referred
to as Rimage or the Company. All material intercompany accounts and
transactions have been eliminated upon consolidation.
The Company operates in two divisions, 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 Rimage Services in addition to the existing service business at Rimage
Boulder.
The Systems Division develops, manufactures and distributes high
performance CD-Recordable (CD-R) publishing and duplication systems, and
continues to support its long term involvement in diskette duplication and
publishing equipment. The Services Division provides computer media
duplication and production services to software developers and
manufacturers and information publishers.
The accompanying unaudited consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and
Exchange Commission. These financial statements should be read in
conjunction with the more detailed financial statements and notes thereto
included in the Company's most recent annual report on Form 10-K.
The Company extends unsecured credit to its customers as well as credit to
a limited number of authorized distributor wholesalers, who in turn
provide warehousing, distribution, and credit to a network of authorized
value added resellers. These distributors and value added resellers sell
and service a variety of hardware and software products.
In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the financial position
and results of operations and cash flows of the Company for the periods
presented. Certain previously reported amounts have been reclassified to
conform with the current presentation.
(Continued)
8
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION AND NATURE OF BUSINESS (CONTINUED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
(2) INVENTORIES
Inventories consist of the following as of:
June 30, December 31,
1998 1997
(unaudited)
- --------------------------------------------------------------------------------
Finished goods and demonstration equipment $ 885,659 $ 578,689
Work-in-process 230,033 234,177
Purchased parts and subassemblies 1,926,359 1,901,001
- --------------------------------------------------------------------------------
3,042,051 2,713,867
Less reserve for excess inventories 521,953 448,000
- --------------------------------------------------------------------------------
$ 2,520,098 $ 2,265,867
================================================================================
(Continued)
9
<PAGE>
(3) SEGMENT REPORTING
The following table summarizes certain financial information for the
Systems and Service segments:
Six Months Ended June 30,
(unaudited)
-------------------------
(in thousands) 1998 1997
--------------------------------------------------------------------------
Revenues from unaffiliated customers:
Systems $ 12,733 $ 10,548
Service 5,757 10,617
-------- --------
18,490 21,165
Operating earnings (loss):
Systems 2,668 1,228
Service (6) (288)
-------- --------
$ 2,662 $ 940
June December
30, 31,
1998 1997
(unaudited)
--------------------------------------------------------------------------
Net identifiable assets:
Systems $ 10,915 $ 7,031
Service 5,975 7,283
-------- --------
$ 16,890 $ 14,314
As of and for the six months ended June 30, 1998, foreign revenues from
unaffiliated customers, operating earnings, and net identifiable assets
were $3,786,000, $588,000 and $2,333,000, respectively. As of and for the
six months ended June 30, 1997, foreign revenues from unaffiliated
customers, operating loss, and net identifiable assets were $1,991,000,
$(58,000), and $2,029,000, respectively.
(4) NOTES PAYABLE TO BANK
On July 30, 1998, the Company paid $1,200,000 to extinguish the
outstanding balance of its Term Note with the bank.
(Continued)
10
<PAGE>
RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. This statement requires companies
to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet, and is
effective for the Company's year ending December 31, 1998. The Company's
only item of other comprehensive income relates to foreign currency
translation adjustments, and is presented separately on the balance sheet
as required. If presented on the statement of operations for the three and
six months ended June 30, 1998, comprehensive income would be $25,597 more
than reported net income, due to foreign currency translation adjustments.
(6) SUBSEQUENT EVENTS
In connection with the planned divestiture of a portion of the Company's
services division, on July 30, 1998, the Company paid $1,385,528 to
eliminate debt associated with a capital lease on certain CD-ROM
equipment. The Company then sold a substantial portion of its CD-ROM
equipment to a third party for $1,904,102 cash through a Bill of Sale
agreement dated July 31, 1998. The Company will recognize a loss on the
sale of the assets in its third quarter financial statements totaling
approximately $460,000.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's consolidated statements of operations, shown in
thousands.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Systems ....................... $ 6,602 $ 5,816 $ 12,733 $ 10,548
Services ...................... 2,239 4,522 5,757 10,617
-------- -------- -------- --------
Total Revenues ............. 8,841 10,338 18,490 21,165
Cost of Revenues:
Systems ....................... 3,102 3,467 6,029 6,261
Services ...................... 2,029 3,973 4,934 9,441
-------- -------- -------- --------
Total Cost of Revenues ..... 5,131 7,440 10,963 15,702
Operating Expenses:
Systems ....................... 1,979 1,546 4,036 3,059
Services ...................... 334 684 829 1,464
-------- -------- -------- --------
Total Operating Expenses ... 2,313 2,230 4,865 4,523
Operating Earnings:
Systems ....................... 1,521 803 2,668 1,228
Services ...................... (124) (135) (6) (288)
-------- -------- -------- --------
Total Operating Earnings ... $ 1,397 $ 668 $ 2,662 $ 940
======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in media
or method used for distribution of software, technological changes in products
offered by the Company or its competitors and changes in general conditions in
the computer market.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Rimage operates through two primary divisions: (1) the systems division designs,
manufactures and sells high performance, on-demand publishing and duplication
equipment for CD-R's, diskettes and tapes, and (2) the services 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. Results of operations during the three and six months ended June 30, 1998
reflected the continued trend of substantial growth and profitability in the
systems division and lower contribution from the services division.
REVENUE. Revenue decreased 14.5% from $10.3 million during the second quarter of
1997 to $8.8 million during the second quarter of 1998. All of the decrease,
however, occurred in the services division, which recorded a 50.5% decline in
revenue from $4.5 million in the second quarter of 1997 to $2.2 million in the
second quarter of 1998. Revenue in the services division was affected by
decreasing demand for diskette duplication services and as a result of the
Company's ongoing intent to focus its sales efforts more heavily towards
expanding the systems division current distribution network. Increasing sales of
its CD-R products, resulting from expanded market penetration, caused revenue in
the systems division to increase 13.5% to $6.6 million during the second quarter
of 1998 from $5.8 in the second quarter of 1997.
For the six months ended June 30, 1998, revenues of $18.5 million represented a
12.6% decrease as compared to revenues of $21.2 million during the same period
in 1997. Services division revenues decreased 45.8% from $10.6 million during
the six months ended June 30, 1997 to $5.8 million during the same period in
1998. Revenue in the services division was affected by the loss of a customer
that provided 11.0% of services sales during the first quarter of 1997, by
decreasing demand for diskette duplication services, and as a result of the
Company's ongoing intent to focus its sales efforts more heavily towards
expanding the systems division current distribution network. Primarily as a
result of continued increasing demand of CD-R related products, systems division
revenues increased 20.7% from $10.5 million during the six months ended June 30,
1997 to $12.7 million during the same period in 1998.
On July 31, 1998, the Company sold a substantial portion of the assets,
consisting primarily of CD-ROM production equipment, associated with its
Minnesota services operations and terminated services operations in Minnesota.
The Company recognized a $460,000 loss on such sale, which will be reflected in
other expense during the quarter ended September 30, 1998. The Minnesota
operations, which contributed $3.7 million to revenue during the six month
period, were operating at a $50,000 loss. Although the Company anticipates
generating increasing revenue in its systems division over the next few
quarters, it is unlikely that such revenues will offset the decrease in revenue
from discontinuation of the Minnesota services operation.
GROSS PROFIT. Gross profit as a percent of sales during the second quarter of
1998 was 42.0% compared to 28.0% during the same period of 1997. The increase
was due to the greater proportion of high margin systems sales in the 1998
quarter, primarily sales of CD-R equipment. Services division gross profit as a
percent of sales remained relatively constant comparing the second quarter
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
of 1997 to the second quarter of 1998. Systems division gross profit as a
percent of sales during the second quarter of 1998 was 53.0% compared to 40.4%
during the same period of 1997. This increase is due to higher margin CD-R
products contributing a greater percentage of sales and due to manufacturing
efficiencies instituted during the latter half of 1997.
Gross profit as a percent of sales during the six month period ended June 30,
1998 was 40.7% compared to 25.8% during the same period of 1997. Systems
division gross profit as a percent of sales during the six month period ended
June 30, 1998 was 52.7% compared to 40.6% during the same period of 1997. The
increase in total and systems division gross profit as a percent of sales is due
to a larger mix of high margin CD-R product sales during the 1998 period and due
to manufacturing efficiencies instituted during the latter half of 1997.Services
division gross profit as a percent of sales remained relatively constant
comparing the second quarter of 1997 to the second quarter of 1998. With the
termination of Minnesota services operations and the resulting increase in the
proportion of revenue from the Company's systems division, margins should
continue to improve over the next several quarters.
OPERATING EXPENSE. Operating expense remained relatively constant comparing the
second quarter of 1997 to the second quarter of 1998 but increased as a
percentage of revenue from 21.6% in the second quarter of 1997 to 26.2% in the
second quarter of 1998. All of the increase in operating expense related to
increased sales and marketing expenses. During the second quarter of 1998, the
Company continued to expand its distribution network, both domestically and
internationally, for its systems products and has intensified the promotion of
joint marketing campaigns with distributors and value added resellers. These
steps, combined with the increasing percentage of overall sales from the systems
division (where products are sold through distribution) as opposed to services
(where services are generated primarily through contacts and advertisement) were
primary causes of sales and marketing expense to increase from $987,000 or 9.6%
of revenue in the second quarter of 1997 to $1,338,000 or 15.1% of revenue in
the second quarter of 1998. Partially offsetting the increased sales and
marketing expense was a decrease in general and administrative expense both in
terms of dollars (from $715,000 in the second quarter of 1997 to $568,000 in the
second quarter of 1998) and as a percentage of revenue (from 6.9% in the second
quarter of 1997 to 6.4% in the first quarter of 1998). Research and development
expense remained relatively constant between the periods. One of the Company's
principal objectives is to continue to reduce expenditures in administration as
a percentage of revenue and direct more resources to revenue producing
activities through selling and marketing expense. Accordingly, the Company
intends to continue spending in sales and marketing.
Operating expense increased from $4.5 million, or 21.3% of revenue, during the
six month period ended June 30, 1997 to $4.9 million, or 26.3% of revenue,
during the same period of 1998. All of the increase in operating expense related
to increased sales and marketing expenses. During the six months ended June 30,
1998, the Company expanded its distribution network to include 73 value added
resellers, both domestically and internationally, for its systems products and
has focused efforts to promote joint marketing campaigns with distributors and
value added resellers. These
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
steps, combined with the increasing percentage of overall sales from the systems
division (where products are sold through distribution) as opposed to services
(where services are generated primarily through contacts and advertisement) were
primary causes of sales and marketing expense to increase from $2.0 million or
9.3% of revenue during the six months ended June 30, 1997 to $2.6 million or
13.9% of revenue during the same period of 1998. General and administrative and
research and development expense remained relatively constant between the
periods. One of the Company's principal objectives is to continue to reduce
expenditures in administration as a percentage of revenue and direct more
resources to revenue producing activities through selling and marketing expense.
Accordingly, the Company intends to continue spending in sales and marketing.
With the disposition of the assets related to the Minnesota services operations,
the Company anticipates that both general and administrative expenses and sales
and marketing expenses will increase as a percent of revenues.
INTEREST EXPENSE. The Company repaid all outstanding borrowings under its line
of credit during the fourth quarter of 1997, substantially reducing net interest
expense from $245,000 in the second quarter of 1997 to $66,000 in the second
quarter of 1998. The Company's cash position at June 30 enabled it to extinguish
the outstanding balance of its Term Note with the bank in the amount of $1.2
million and to eliminate debt associated with a capital lease on certain CD-ROM
equipment in the amount of $1.4 million. As a result of these transactions, the
Company anticipates net interest expense will remain lower for the balance of
the year.
INCOME TAXES. The provision for income taxes represents federal, state, and
foreign income taxes on earnings before income taxes. Income tax expense for the
second quarter of 1998 amounted to $347,000 as compared to $60,000 for the
second quarter of 1997. The Company is currently using an estimated effective
tax rate of 25% to record income taxes during 1998, primarily representing
federal alternative minimum tax and state taxes. In accordance with FAS 109, the
Company periodically evaluates the need for a valuation allowance against its
deferred tax asset. As a result of expected continued earnings, the Company
expects to reduce the valuation allowance related to its deferred tax asset and
recognize a corresponding tax benefit in the third quarter of 1998. Thereafter,
the Company's operating results will be reported on a fully taxed basis.
NET EARNINGS. The significant change in mix of revenue to higher margin product
sales in the system division, combined with only marginal increases in operating
expense to support those sales, caused net earnings to increase dramatically to
over $1 million in the second quarter of 1998 and over $2 million for the six
month period ended June 30, 1998. The Company expects to continue to emphasize
and devote much of its resources to its systems business in coming quarters.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $3.0 million of cash during the six months ended
June 30, 1998. This amount consisted of $3.1 million of cash generated from net
earnings after adjustment for non-cash
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
items (primarily depreciation and amortization). Cash used to finance increased
inventories was offset by an increase in accrued expenses.
The Company invested approximately $263,000 in additional equipment primarily
for manufacturing purposes. Financing activities consumed $304,000 of cash
primarily as a result of monthly payments under a term note agreement with its
bank. The remaining balance of the term note was subsequently paid off in July
of 1998.
The Company also maintains a revolving credit agreement with the same bank that
provides for borrowings of up to $5,000,000 based on qualifying balances of
varying assets. The Company estimates that it had available borrowing authority
of approximately $3.2 million under such line at June 30, 1998, but had no
outstanding advances under the line at that date.
The Company believes that the $3.2 million cash balance at June 30, 1998 and
available borrowings under its credit line will be more than adequate to finance
operations through the remainder of the calendar year.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders' was held on May 21,
1998. The following members were elected to the Company's Board of
Directors to hold office for the ensuing year:
Nominee In Favor Withheld
------- --------- --------
Bernard Aldrich 2,141,523 10,325
Ronald Fletcher 2,140,223 11,625
George Kline 2,140,273 11,575
Richard McNamara 2,140,273 11,575
James Reissner 2,142,273 9,575
David Suden 2,141,623 10,225
The results of the voting on the following additional items were as
follows:
(a) Ratification of the selection of KPMG Peat Marwick LLP as
independent accountants to audit the consolidated financial statements
of Rimage Corporation for the year ending December 31, 1998. The votes
of the stockholders on this ratification were as follows:
In Favor Opposed Abstained Broker Non-Vote
--------- ------- --------- ---------------
2,140,887 3,091 7,870 -0-
17
<PAGE>
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 11.1 Calculation of Earnings Per Share.
Exhibit No. 27.1 Financial Data Schedule
Exhibit No. 27.2 Financial Data Schedule-Restated
(b) Reports on Form 8-K:
Not Applicable.
18
<PAGE>
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
following persons on behalf of the registrant and on the dates indicated.
RIMAGE CORPORATION
---------------------------------
Registrant
Date: August 8, 1998 By: /s/ Bernard P. Aldrich
-------------- ---------------------------------
Bernard P. Aldrich
Director,
Chief Executive Officer,
and President
(Principal Executive Officer)
(Principal Financial Officer)
Date: August 8, 1998 By: /s/ Robert M. Wolf
-------------- ---------------------------------
Robert M. Wolf
Controller
(Principal Accounting Officer)
19
EXHIBIT 11.1
RIMAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER SHARE OF COMMON STOCK
Basic net earnings per common share is determined by dividing net earnings by
the weighted average number of shares of common stock outstanding, unless the
result is anti-dilutive. Diluted net earnings per common share is determined by
dividing net earnings by the weighted average number of shares of common stock
and common share equivalents outstanding, unless the result is anti-dilutive.
The following is a summary of the weighted average common shares outstanding and
common share equivalents:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares Outstanding at
beginning of period 3,104,471 3,084,500 3,091,302 3,084,500
Common stock issued in stock
option exercise 55,400 -- 68,569 --
---------- ---------- ---------- ----------
Shares Outstanding at
end of period 3,159,871 3,084,500 3,159,871 3,084,500
========== ========== ========== ==========
Weighted average shares
of common stock outstanding 3,142,384 3,084,500 3,118,012 3,084,500
========== ========== ========== ==========
Common stock equivalents 889,797 764,599 889,797 764,599
Weighted average shares of
common stock equivalents 477,072 4,333 454,550 4,333
========== ========== ========== ==========
Weighted average shares of
common stock and
stock equivalents 3,619,456 3,088,833 3,572,562 3,088,833
========== ========== ========== ==========
Net earnings $1,047,535 $ 406,050 $2,051,010 $ 421,080
========== ========== ========== ==========
Basic net earnings per share $ 0.33 $ 0.13 $ 0.66 $ 0.14
========== ========== ========== ==========
Diluted net earnings per share $ 0.29 $ 0.13 $ 0.57 $ 0.14
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000892482
<NAME> RIMAGE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,188
<SECURITIES> 0
<RECEIVABLES> 5,382
<ALLOWANCES> 329
<INVENTORY> 2,520
<CURRENT-ASSETS> 11,611
<PP&E> 12,729
<DEPRECIATION> 7,589
<TOTAL-ASSETS> 17,698
<CURRENT-LIABILITIES> 6,551
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 8,297
<TOTAL-LIABILITY-AND-EQUITY> 17,698
<SALES> 18,490
<TOTAL-REVENUES> 18,490
<CGS> 10,963
<TOTAL-COSTS> 10,963
<OTHER-EXPENSES> 4,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> 2,571
<INCOME-TAX> 520
<INCOME-CONTINUING> 2,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,051
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.57
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000892482
<NAME> RIMAGE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 6,635
<ALLOWANCES> 429
<INVENTORY> 2,510
<CURRENT-ASSETS> 9,972
<PP&E> 13,675
<DEPRECIATION> 7,062
<TOTAL-ASSETS> 17,939
<CURRENT-LIABILITIES> 10,586
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 4,404
<TOTAL-LIABILITY-AND-EQUITY> 17,939
<SALES> 21,165
<TOTAL-REVENUES> 21,165
<CGS> 15,702
<TOTAL-COSTS> 15,702
<OTHER-EXPENSES> 4,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 512
<INCOME-PRETAX> 481
<INCOME-TAX> 60
<INCOME-CONTINUING> 421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 421
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
