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Annual Report: 2004 (Form 10-K)
Qumu Corp - Annual Report: 2004 (Form 10-K)
Rimage Corporation Form 10-K dated 12-31, 2004
FORM
10-K
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2004
or
o 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, |
|
|
55439 |
| (Address
of principal executive offices) |
|
|
(Zip
Code) |
| |
|
|
|
| Registrant’s
telephone number: |
|
|
(952)
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 |
|
| |
|
|
| |
Preferred
Stock Purchase Rights |
|
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
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 o
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. o
Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes x
No o
The
aggregate market value of common 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 as of the last business day of
the registrant’s most recently completed second fiscal quarter was approximately
$137,464,000.
As of
February 28, 2005, 9,454,587 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for its 2005 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.
1
General
Information
Rimage
Corporation (“Rimage”) is a leading provider of CD recordable (“CD-R”) and DVD
recordable (“DVD-R”) publishing systems required for producing discs with
customized digital content on an on-demand basis. Rimage’s publishing systems,
which include equipment to handle a full range of low-to-high production
volumes, incorporate robotics, software and custom printing technology for disc
labeling. Rimage focuses its CD-R and DVD-R publishing solutions on a set of
vertical markets with special needs for customized, on-demand digital
information, including digital photography, medical imaging, banking and
finance, government, and business offices.
Incorporated
as IXI, Inc. in Minnesota in February 1987, Rimage has focused on digital
storage production equipment since its inception. From 1987 until the
introduction of its first CD-R production equipment in 1995, most of Rimage’s
products consisted of diskette and tape duplication equipment. Rimage also
generated a significant portion of its revenue from CD-ROM and diskette
duplication and production services from 1993 until 1999. From 1994 to 1997,
Rimage also engaged in other lines of business, including development of browser
and archiving software and distribution of CD-ROM stamping presses.
Since
1995, Rimage has focused its business on development and sale of its CD-R
publishing systems, and since 2000, its DVD-R publishing systems. In 1997,
Rimage ceased distribution activities for CD-ROM stamping presses and terminated
browser and archiving software development. During the third quarter of 1998,
Rimage ceased operations of its Minnesota services business and sold the
equipment and inventory associated with that business. On June 30, 1999, Rimage
ceased operations of its Colorado services business and sold all the assets
associated with that business. The resources previously applied to these
businesses were instead applied to development and sales of CD-R and DVD-R
products for commercial applications.
On March
1, 2000, Rimage acquired Cedar Technologies, Inc. (“Cedar”) and issued 497,496
shares of its common stock for all of the outstanding shares of Cedar. Cedar had
developed and manufactured CD-R publishing and duplication equipment for desktop
applications that sold at a lower price point than the higher volume systems
sold by Rimage. Cedar products formed the basis for the introduction of Rimage’s
desktop line of products.
Rimage’s
products are designed to enable the automation of data distribution and
archiving processes. In some cases this results in a reduction of labor and
training costs for users of the products, in other cases it enables totally new
and innovative applications. Rimage products provide compelling solutions for
distribution and archiving of information on CDs and DVDs for just-in-time,
on-demand and mass customization applications.
The
principal benefits to users of Rimage’s products include unattended operation,
reduced labor costs, higher throughput than alternative systems and higher
quality. One of the essential elements of Rimage’s marketing and development is
to provide users with a path for future product upgrades for improved products
or products with additional capabilities, such as drives with faster recording
speeds. Rimage 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.
Sales of
CD-R/DVD-R production equipment comprised 62%, 70%, and 74% of Rimage’s revenue
from operations during the 2004, 2003, and 2002 calendar years, respectively.
Rimage’s other major sources of revenue are recurring in nature and consist of
consumables (ribbons, ink cartridges and Rimage-branded blank CD-R and DVD-R
media), parts and maintenance contract sales.
Since the
acquisition of Cedar, Rimage’s CD-R and DVD-R hardware products have been
divided into two primary product lines: the Producer line of higher volume
equipment for CD-R and DVD-R production, and the Desktop line of lower-cost
products for office and other desktop applications. The Producer line of
products continue to generate the majority of Rimage’s revenue, contributing
$36,186,000 and $31,133,000, or 51% and 58% of Rimage’s revenue during the years
ended December 31, 2004 and 2003, respectively. The Desktop line contributed
$7,887,000 or 11% of revenue during 2004, compared to $6,403,000, or 12% of
revenue during 2003. The balance of revenue in each year was generated through
sale of Rimage-branded blank CD-R/DVD-R media, ribbons, ink cartridges, parts,
repair services and
maintenance contracts. Such
recurring revenues contributed $26,775,000 or 38% of total revenue for 2004, compared to
$16,261,000 or 30% of revenue, in 2003. The growth in recurring revenues has been spurred
by the expansion of the Company’s worldwide installed base of CD-R/DVD-R publishing
systems as well as the Company’s introduction in 2004 of its new consumable supplies
strategy involving media kits. Through this strategy, the Company assembles
Rimage-branded blank CD-R and DVD-R discs with replacement printer ribbons and cartridges
into kits to simplify the customer’s purchase and use of these consumable products
in the production process.
The
Producer II Series. The
Producer II Series of CD-R/DVD-R publishing systems represents the current
generation of the Producer line and consists of a growing family of products
that cover a broad range of applications for the publishing and duplication of
CD-R’s and DVD-R’s. Each Producer II product incorporates CD-R or DVD-R
recorders, or both, with customized robotics, a thermal or thermal re-transfer
printer for on-disc color printing, software, and computer hardware
components.
Rimage
offers its Producer II line of products in four basic configurations to meet the
varying needs of its commercial customers. The Autostar II provides industry
leading speed and throughput for on-demand CD-R/DVD-R production, utilizing up
to four simultaneous data streams. The Autostar can contain any combination of
CD-R/DVD-R recorders and provides for a capacity of 300 discs. The Protégé II
system comes standard with two CD-R recorders that may be interchanged with
DVD-R recorders and the Amigo II comes with one recorder. The Autostar II,
Protégé II and Amigo II are all available with either Rimage’s Everest or Prism
printers. The DiscLab system was introduced in 2004, replacing its predecessor,
the Endeavor. Designed as a network attached publishing system, the DiscLab
features an embedded host PC, two CD-R or DVD-R recorders, an Everest printer
and a small product size and footprint. The markets served by Rimage’s Producer
line of products include the digital photography, medical, banking and
government industries. Prices of the Producer II line of products range from
$10,000 to $30,000.
The
Everest printer was developed to meet the need of customers for an on-demand
surface printer able to produce color and monochrome labels with quality similar
to offset and silkscreen printing systems. Everest produces images on CD-R and
DVD-R media that are indelible and cover the full surface of the media. Rimage’s
Prism Printer provides high-speed, laser quality monochrome and spot color
printing on standard CD-R/DVD-R media for in-house, customized printing. The
Producer line also includes Autoprinters that incorporate either an Everest or
Prism printer.
The
Desktop Series.
Originally established through the acquisition of Cedar Technologies, Inc.,
Rimage’s Desktop Series of CD-R/DVD-R products features economical pricing, a
compact “desktop” design, software, network compatibility and stand-alone,
plug-and-play technology ideal for office environments. For low-volume users,
the Desktop line of products offers a two-drive recorder unit. Complete
four-drive publishing systems are available for higher-volume users. In June
2004, the Company introduced its next-generation Desktop product line, the
Rimage 2000i publishing system and Rimage 480i inkjet printer. Co-developed by
the Company and Hewlett-Packard, the Rimage 480i inkjet printer features 4800
dpi resolution for high clarity color printing on CD-R/DVD-R discs.
Rimage
utilizes the following principal means of distributing its products: Direct
sales using its own sales force, primarily in Europe; a two tier distribution
system of distributors to value added resellers in Europe, the U.S. and Latin
America; and a distributor to end-user system in Asia Pacific and in some areas
in Europe. Rimage’s channel partners, primarily consisting of distributors, value added resellers and other strategic partners,
currently generate the majority of the Company’s sales.
Rimage
has historically focused its sales and marketing efforts on high-volume CD-R and
DVD-R publishing solutions for its Producer product line in such areas as
banking and finance and wholesale photo processing labs. Rimage plans to
continue to expand its position in many of its traditional markets.
Additionally, Rimage is focusing on new applications with high-growth potential
in retail photography, medical imaging and business offices. This has led to the
expansion of the Company’s sales and marketing organization during 2004 to help
penetrate these targeted markets and strengthen marketing support for new
products.
During
2004, Rimage derived approximately 13% and 12% of its revenues from one of its
distributors and a strategic partner, respectively. Two distributors generated
more than 10% of revenues in 2003, at 16% and 12% of revenues, respectively. In
2002, two distributors also generated more than 10% of revenues, at 17% and 16%,
respectively.
Rimage
conducts foreign sales through its U.S. operation and its subsidiary in Germany,
Rimage Europe GmbH. Foreign sales constituted approximately 38%, 42%, and 39% of
Rimage’s revenue for the years ended December 31, 2004, 2003, and 2002,
respectively.
Rimage
competes with a number of manufacturers of CD-R/DVD-R production equipment and
related products. Primary competitors of the Company currently include Primera Technology,
Inc., Microtech Systems, Inc. and LSK Data Systems GmbH. Rimage is able to compete effectively
in the sale of CD-R/DVD-R production equipment because of technological leadership in automated
solutions and its early start within the CD-R/DVD-R production equipment
industry. Rimage believes that the quality printing capabilities for CD-R/DVD-R,
its transporter mechanisms and its software differentiate its products from
those of competitors. Rimage also competes with alternative technologies in the
storage media industry such as high
capacity hard drives, new CD-R/DVD-R technologies, file servers accessible
through computer networks and the Internet, and additional media is under
development. Rimage believes its technology has advantages over these
alternative technologies in terms of reliability, high performance, cost and
ease of use.
Rimage’s
manufacturing operations consist primarily of the assembly of products from
components purchased from third parties. Some parts are standard components and
others are manufactured to Rimage’s specifications. Rimage’s employees at its
facility in Edina, Minnesota conduct assembly and testing operations. Components
include CD-R/DVD-R drives, circuit boards, electric motors, machined and molded
parts, precision sheet metal assemblies, and other mechanical
parts.
Although
Rimage 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 testing. Accordingly, a sudden interruption in a supply
relationship or the production capacity of one or more of such contractors could
result in Rimage’s inability to deliver one or more products for a period of
several months.
At
December 31, 2004, 29 employees were involved in research and development at
Rimage. This staff, with software, electrical, mechanical and drafting
capabilities, engages in research and development of new products, and
development of enhancements to existing products.
The
industries served by Rimage are subject to rapid technological changes.
Alternate data storage media exist or are under development, including high
capacity hard drives, new CD-R/DVD-R technologies, file servers accessible
through computer networks, and the Internet. All these forces may affect the
usage of CD-R and DVD-R media. Rimage believes that it must continue to innovate
and anticipate advances in the storage media industry in order to remain
competitive.
Rimage’s
expenditures for research and development were $4,529,000, $3,766,000, and
$3,602,000 in 2004, 2003 and 2002, representing 6.4%, 7.0% and 7.7% of revenues,
respectively. Rimage anticipates maintaining its expenditures in research and
development within the range of 7% to 8% of revenues during 2005.
Rimage
currently maintains fourteen U.S.
patents and has a total of fifteen U.S. and foreign patents pending. In
addition, Rimage protects the proprietary nature of its software primarily
through copyright and license agreements and through close integration with its
hardware offerings. It is Rimage’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 Rimage will be able to obtain
patent or other protection for its products.
As the
number of Rimage’s products increase and the functionality of those products
expands, Rimage believes that it may become increasingly subject to attempts by
others to duplicate its proprietary technology and to the possibility of
infringement of Rimage patents. In addition,
although
Rimage does not believe that any of its products infringe the rights of others,
third parties may nonetheless assert infringement claims against Rimage in the
future. Rimage may litigate such infringement claims or settle such claims
through license or other royalty arrangement.
The FCC
requires some of Rimage’s equipment meet radio frequency emission standards.
Rimage takes steps to ensure proper compliance of all products.
At
December 31, 2004, Rimage had 184 full-time employees, of which 29 were involved
in research and development, 88 in assembly, testing, repair and customer
service, and 67 in sales, marketing, administration and management. None of
Rimage’s employees are represented by a labor union or covered by a collective
bargaining agreement. Rimage believes it maintains good relations with its
employees.
Rimage
headquarters are located in a leased facility of 58,500 square feet at 7725
Washington Avenue South, Edina, Minnesota 55439. The Company rents this facility
under a noncancellable 48-month lease initiated August 1, 2004, from a
corporation owned by two former directors of the Company. Monthly base rent is
$33,394 for the first year, with 2% inflationary increases each subsequent year
of the lease. This facility is used for manufacturing, engineering, service,
sales, marketing and administration. Rimage also leases a facility of
approximately 2,400 square feet in Dietzenbach, Germany used for service, sales
and light assembly. The current term of the lease in Germany expires in December
2007. The lease of a small facility in Campbell, CA used for engineering was
allowed to lapse as of February 28, 2005. Rimage believes its current facilities
will accommodate operations through 2005, and continues to assess options to
meet its future space requirements.
Rimage
may become involved in various legal actions in the ordinary course of its
business. Although the outcome of any such legal actions cannot be
predicted, management believes that there are no pending legal proceedings
against or involving Rimage for which the outcome is likely to have a material
adverse effect upon its financial position or results of
operations.
Rimage
did not submit any matters to a vote of security holders during the last quarter
of the fiscal year covered by this report.
Rimage’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 Rimage’s common stock as reported on The Nasdaq Stock
Market.
| |
|
Low |
|
High |
|
Calendar
Year 2003: |
|
|
|
|
|
|
1st
Quarter |
|
$ |
7.86 |
|
$ |
9.30 |
|
|
2nd
Quarter |
|
|
8.95 |
|
|
12.99 |
|
|
3rd
Quarter |
|
|
12.02 |
|
|
15.68 |
|
|
4th
Quarter |
|
|
13.03 |
|
|
16.20 |
|
|
Calendar
Year 2004: |
|
|
|
|
|
|
|
|
1st
Quarter |
|
|
13.56 |
|
|
17.50 |
|
|
2nd
Quarter |
|
|
13.11 |
|
|
17.40 |
|
|
3rd
Quarter |
|
|
12.02 |
|
|
15.21 |
|
|
4th
Quarter |
|
|
13.06 |
|
|
16.29 |
|
As of
February 28, 2005, there were 90 shareholders of record of Rimage’s common
stock.
Rimage
has never paid or declared any cash dividends on its common stock. Rimage
presently expects to retain its earnings to finance the development and
expansion of its business. The payment by Rimage 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 Rimage’s continued earnings, financial condition,
capital requirements and other relevant factors.
The
selected consolidated financial data below 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 000’s (except per
share data).
Consolidated
Statements of Operations Information:
| |
|
Year ended December 31 |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
70,848 |
|
$ |
53,797 |
|
$ |
46,581 |
|
$ |
38,894 |
|
$ |
49,792 |
|
|
Cost
of revenues |
|
|
38,027 |
|
|
27,399 |
|
|
23,986 |
|
|
19,669 |
|
|
23,254 |
|
|
Gross
profit |
|
|
32,821 |
|
|
26,398 |
|
|
22,595 |
|
|
19,225 |
|
|
26,538 |
|
|
Operating
expenses |
|
|
19,386 |
|
|
14,841 |
|
|
13,176 |
|
|
12,760 |
|
|
14,250 |
|
|
Operating
income |
|
|
13,435 |
|
|
11,557 |
|
|
9,419 |
|
|
6,465 |
|
|
12,288 |
|
|
Other
income, net |
|
|
608 |
|
|
515 |
|
|
760 |
|
|
972 |
|
|
1,017 |
|
|
Income
tax expense |
|
|
4,971 |
|
|
4,406 |
|
|
3,715 |
|
|
2,628 |
|
|
5,056 |
|
|
Net
income |
|
|
9,072 |
|
|
7,666 |
|
|
6,464 |
|
|
4,809 |
|
|
8,249 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share |
|
$ |
0.98 |
|
$ |
0.86 |
|
$ |
0.74 |
|
$ |
0.55 |
|
$ |
0.98 |
|
|
Diluted
net income per share |
|
$ |
0.91 |
|
$ |
0.79 |
|
$ |
0.68 |
|
$ |
0.51 |
|
$ |
0.85 |
|
|
Weighted
average shares and assumed conversion shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
9,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
9,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Information:
| |
|
Balances as of December 31 |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
13,321 |
|
$ |
26,742 |
|
$ |
17,339 |
|
$ |
14,767 |
|
$ |
21,225 |
|
|
Marketable
securities |
|
|
39,175 |
|
|
21,855 |
|
|
18,998 |
|
|
13,343 |
|
|
— |
|
|
Trade
accounts receivables, net |
|
|
10,184 |
|
|
6,243 |
|
|
6,644 |
|
|
5,008 |
|
|
9,013 |
|
|
Inventories |
|
|
7,396 |
|
|
3,334 |
|
|
3,042 |
|
|
3,625 |
|
|
2,936 |
|
|
Current
assets |
|
|
71,665 |
|
|
59,849 |
|
|
47,337 |
|
|
38,783 |
|
|
35,744 |
|
|
Property
and equipment, net |
|
|
2,386 |
|
|
1,137 |
|
|
1,314 |
|
|
1,608 |
|
|
652 |
|
|
Total
assets |
|
|
74,138 |
|
|
61,024 |
|
|
48,709 |
|
|
40,454 |
|
|
36,555 |
|
|
Current
liabilities |
|
|
11,277 |
|
|
9,013 |
|
|
6,552 |
|
|
5,151 |
|
|
5,594 |
|
|
Long-term
liabilities |
|
|
139 |
|
|
— |
|
|
— |
|
|
68 |
|
|
— |
|
|
Stockholders’
equity |
|
|
62,721 |
|
|
52,011 |
|
|
42,157 |
|
|
35,235 |
|
|
30,961 |
|
The
percentage relationships to revenues of certain income and expense items for the
three years ended December 31, 2004 and the percentage changes in these income
and expense items between years are contained in the following
table:
|
|
Percentage (%) of Revenues |
|
|
Percent
(%) Increase (Decrease) Between Period |
|
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2004
vs. 2003 |
|
|
2003
vs. 2002 |
|
|
Revenues |
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
31.7
|
|
|
15.5
|
|
|
Cost
of revenues |
|
|
(53.7 |
) |
|
(50.9 |
) |
|
(51.5 |
) |
|
38.8
|
|
|
14.2
|
|
|
Gross
profit |
|
|
46.3
|
|
|
49.1
|
|
|
48.5
|
|
|
24.3
|
|
|
16.8
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
(6.4 |
) |
|
(7.0 |
) |
|
(7.7 |
) |
|
20.3
|
|
|
4.5
|
|
|
Selling,
general and administrative |
|
|
(20.9 |
) |
|
(20.6 |
) |
|
(20.6 |
) |
|
34.1
|
|
|
15.7
|
|
|
Operating
income |
|
|
19.0
|
|
|
21.5
|
|
|
20.2
|
|
|
16.2
|
|
|
22.7
|
|
|
Other
income, net |
|
|
0.8
|
|
|
0.9
|
|
|
1.7
|
|
|
18.1
|
|
|
(32.2 |
) |
|
Income
before income taxes |
|
|
19.8
|
|
|
22.4
|
|
|
21.9
|
|
|
16.3
|
|
|
18.6
|
|
|
Income
tax expense |
|
|
(7.0 |
) |
|
(8.2 |
) |
|
(8.0 |
) |
|
12.8
|
|
|
18.6
|
|
|
Net
income |
|
|
12.8
|
|
|
14.2
|
|
|
13.9
|
|
|
18.3
|
|
|
18.6
|
|
Rimage
develops, manufactures and distributes CD-Recordable (CD-R) and DVD-Recordable
(DVD-R) publishing and duplication systems from its operations in the United
States and Germany. These systems allow customers to benefit from cost savings
by eliminating their manual labor efforts in industries such as photography,
medical, banking and government. Rimage anticipates increased sales and
marketing expenditures as a result of increased resources focused on developing
these markets. As Rimage’s sales within North America and Europe have averaged
94% of total sales over the past three years, the strength of the economies in
these regions plays an important role in determining the success of
Rimage.
Rimage
earns revenues through the sale of equipment, consumables (ribbons, ink
cartridges and Rimage-branded blank CD-R and DVD-R media), maintenance
contracts, parts and repair services. Rimage’s recurring revenues (consumables,
maintenance contracts, parts and service) comprised approximately 38% of its
consolidated revenues in 2004, compared to 30% in 2003. Rimage has no long-term
debt and does not require significant capital investment as all fabrication of
its products is outsourced to vendors.
Revenues. Revenues
were $70.8 million, $53.8 million, and $46.6 million for 2004, 2003, and 2002,
respectively, reflecting increases of 31.7%, 15.5%, and 19.8%, respectively,
over the prior years. The growth in revenues from 2003 to 2004 was primarily
impacted by an increase of 65% or $10.5 million in the volume of recurring
revenues, including sales of blank CD-R and DVD-R media, printer ribbons and ink
cartridges, parts and maintenance contracts. The strong growth in recurring
revenues was particularly impacted by $6.5 million in sales of Rimage-branded
media kits, which the Company began to sell in 2004, and the continued expansion
of the Company’s worldwide installed base of CD-R and DVD-R publishing systems.
Also contributing to 2004 revenue growth was an increase in the volume of
Producer product line equipment sales of $4.8 million, largely impacted by the
introduction of the DiscLab system in 2004. International sales rose 18% in 2004
and comprised 38% of total sales, compared to 42% in 2003 and 39% in 2002. The
impact of currency fluctuations on the Company’s European operations increased
reported 2004 revenues by approximately $2.1 million, or 3% of consolidated
revenues.
The
increase in revenues from 2002 to 2003 was due to an increased volume of
recurring sales totaling $4.1 million, increased Producer line equipment sales
totaling $2.6 million and increased Desktop line equipment sales, impacted by a
new product release during the year, totaling $.5 million. The growth was in
part facilitated by the addition of fifty-five value added resellers (VARs) to
the worldwide distribution channel during 2003. The increase in sales was
partially offset by an increase in the allowance for sales returns of $.3
million due to increased sales return activity as a result of planned new
product introductions. The impact of currency fluctuations on the Company’s
European operations increased
reported 2003 revenues by approximately $3.3 million, or 6% of consolidated revenues.
The
Company expects to achieve continued revenue growth in 2005, the rate at which
will be dependent upon many factors, including the effectiveness of the
Company’s channel partners, the timing of new product introductions, the rate of
adoption of new applications for the Company’s products in its targeted markets
and the impact of foreign currency exchange rate fluctuations.
Gross
Profit. Gross
profit as a percentage of revenues was 46.3% for the year ended December 31,
2004, compared to 49.1%, and 48.5% for the years ended December 31, 2003, and
2002, respectively.
The
decline in gross profit as a percentage of revenues from 2003 to 2004 primarily
reflects increased sales of, as well as a higher concentration of, consumable
products, particularly CD-R and DVD-R media, which generally carry lower margins
than equipment sales. Sales of CD-R and DVD-R media and related media kits
increased to approximately 15% of total revenues in 2004, compared to 6% in
2003. Additionally, Producer equipment sales, which generally carry the highest
margins among all product offerings, declined to 51% of total revenues from 58%
in the prior year. The decline was also impacted by additional manufacturing
costs associated with the Company’s introduction of its new Desktop product
line, and inventory costs associated with the discontinuation of the previous
Desktop product line.
The
increase in gross profit as a percentage of revenues from 2002 to 2003 was
primarily due to an increased volume of sales of Producer line equipment and
consumable products such as printer ribbons and parts. Rimage generates slightly
higher margins on these products as compared to its Desktop line of products.
Also, Rimage’s European operation increased sales within Germany by 48% from
2002 to 2003. Sales within Germany are made directly to customers instead of
through distributors, thus generating higher gross profits. The impact of
foreign currency exchange rate fluctuations partially offset the noted
improvements in 2003 gross profit.
Rimage
anticipates that its gross profit percentage in 2005 will be in the low to
mid-40% range. Actual margins will continue to be affected by many factors,
including product mix, the timing of new product introductions, manufacturing
volume, foreign currency exchange rate fluctuations and levels of sales
returns.
Operating
Expenses. Research
and development expenses were $4.5 million, $3.8 million, and $3.6 million for
the years ended December 31, 2004, 2003, and 2002, respectively, representing
6.4%, 7.0%, and 7.7% of revenues, respectively.
The
dollar increase in research and development spending in 2004 relative to 2003
was due to increased costs for materials and resources to support a higher level
of new product development related to the Company’s Desktop and Producer product
lines. Such development activities led to the Company’s introduction during 2004
of the Rimage 2000i, part of its next-generation Desktop Series, and the DiscLab
system, a new addition to its Producer Series of products. Additionally, the
Company continued development work on other new-generation products, with
product introductions anticipated in 2005.
The
dollar increase from 2002 to 2003 was primarily due to software enhancements
made to the Company’s entire product line and materials and resources required
to develop its Desktop line of products, including development of a new thermal
inkjet CD-R/DVD-R label printer launched during June 2003.
Rimage
anticipates its research and development expenditures to be within the range of
7% to 8% of revenues during 2005. These expenditures will be made to support new
product development initiatives and improve existing products.
Selling,
general and administrative expenses for the years ended December 31, 2004, 2003,
and 2002 were $14.9 million, $11.1 million, and $9.6 million, respectively,
representing 20.9%, 20.6%, and 20.6% of revenues, respectively.
The
dollar growth in selling, general and administrative expenses in 2004 relative
to 2003 primarily reflects the implementation of sales and marketing initiatives
to support new product introductions and expansion of the Company’s sales and
marketing organization. Sales and marketing expenses grew $2.7 million in 2004,
affected by a 21% increase in average headcount between periods, increased
travel related costs and increased costs associated
with product marketing and
promotion, including expenses associated with the Company’s co-op marketing program.
The Company expects continued growth in spending on sales and product marketing during
2005. General and administrative expenses contributed the remaining $1.1 million of
growth in expenses, impacted primarily by incremental expenses associated with
Sarbanes-Oxley related compliance, an increase in management compensation and increased
costs for expanded coverage under the Company’s Directors’ and Officers’ liability
insurance.
The
dollar increase from 2002 to 2003 reflects an increase in sales and marketing
costs of $.9 million and an increase in general and administrative costs of $.6
million. The growth in sales and marketing expenses primarily reflect costs to
support the Company’s revenue growth, including increased commissions and costs
to support the Company’s co-op marketing program. The rise in general and
administrative expenses was impacted by additional services obtained to ensure
compliance with new corporate governance requirements under Sarbanes-Oxley
regulations.
Other
Income, Net. For 2004,
2003, and 2002, Rimage recognized interest income on cash investments of
$657,000, $519,000, and $780,000, respectively. While average cash and
investment balances increased each successive year, average effective yields
decreased from 2002 to 2003, followed by a slight increase from 2003 to 2004,
creating the variation in interest income levels. See “Liquidity and Capital
Resources” below for a discussion of cash levels. Other income in each year was
affected by the impact of gains or losses on foreign currency transactions, with
net gains of $18,000 and $30,000 in 2004 and 2003, respectively, and a net loss
of $28,000 in 2002. Other net expense in 2004 includes a loss on disposal of
property and equipment of approximately $100,000.
Income
Before Income Taxes. For
2004, 2003, and 2002, income before income taxes was $14.0 million, $12.1
million, and $10.2 million, respectively, representing 19.8%, 22.4%, and 21.9%
of revenues, respectively.
The
dollar growth in income before taxes in 2004 from 2003 was primarily attributed
to an increase in recurring revenues and Producer line equipment sales.
Partially offsetting the impact of the revenue growth was a decline in gross
margin impacted by the higher concentration of lower margin consumable product
sales and increased operating expenses to support the Company’s development and
introduction of new products and expansion of its sales and marketing
organization.
The
increase from 2002 to 2003 is primarily due to an increase in Producer line
equipment sales and recurring revenues, which also generated slightly higher
margins relative to the mix of products sold in 2002.
Income
Taxes. The
provision for income taxes represents federal, state, and foreign income taxes
on income. For the years ended December 31, 2004, 2003, and 2002, income tax
expense amounted to $5.0 million, $4.4 million and $3.7 million, respectively,
representing 35.4%, 36.5%, and 36.5% of income before income taxes,
respectively. The lower effective tax rate in 2004 reflects the impact of
adjustments to the tax provision made as a result of a reassessment of the
Company’s tax exposures as of December 31, 2004. The Company anticipates its
effective tax rate will range between 35% and 36% for the full year
2005.
Net
Income / Net Income Per Share.
Resulting net income for the years ended December 31, 2004, 2003 and 2002
amounted to $9.1 million, $7.7 million and $6.5 million, representing 12.8%,
14.2% and 13.9% of revenues, respectively. Related net income per diluted share
amounts were $.91 in 2004, $.79 in 2003 and $.68 in 2002.
The
Company expects it will be able to maintain current operations, including
anticipated capital expenditure requirements, through its internally generated
funds and, if required, from Rimage’s existing credit agreement. This agreement
allows for advances under an unsecured revolving loan up to a maximum advance of
$10 million. At December 31, 2004, no amounts were outstanding under the credit
agreement.
Current
assets increased to $71.7 million as of December 31, 2004 from $59.8 million as
of December 31, 2003, primarily reflecting an increase in levels of cash and
marketable securities ($3.9 million), accounts receivable ($3.9 million), and
inventory ($4 million) stemming from strong sales growth during the year. The
growth in accounts receivable was further impacted by a concentration of fourth
quarter sales in December 2004, and the related timing of cash collections from
customers. The allowance for doubtful accounts and sales returns as a percentage
of receivables was 6% at December 31, 2004, compared to 14% at the prior
year-end. The reduction in 2004 reserve levels is primarily due to decreased
sales return activity and an improvement in the aging of the Company’s
receivables. The increase in inventories also reflects a build-up of inventory
for long lead-time parts as well as a
need to stock additional inventory
of CD-R and DVD-R media, printer ribbons and cartridges as a result of expected growth in
consumable product sales. The Company intends on utilizing its current assets primarily
for its continued organic growth. In addition, the Company may use its available cash for
potential future acquisitions or strategic alliances. Current liabilities increased to
$11.3 million as of December 31, 2004 from $9.0 million as of December 31, 2003,
primarily reflecting an increase in accounts payable, impacted largely by the increase in
inventories described above.
Net cash
provided by operating activities was $5.0 million, $11.9 million, and $8.2
million for the years ended December 31, 2004, 2003, and 2002, respectively. The
decline from 2003 to 2004 was primarily impacted by significant increases in
accounts receivable and inventories, partially offset by an increase in accounts
payable, described above. The increase from 2002 to 2003 was primarily due to
the timing of cash collections from customers, impacted by a reduction in day’s
sales outstanding from 57 to 48 days, and lower quarterly estimated tax
payments.
Net cash
used in investing activities amounted to $19.5 million, $3.6 million, and $6.1
million for the years ended December 31, 2004, 2003, and 2002, respectively.
Cash used in investing activities for each year primarily reflects purchases of
marketable securities, net of maturities of marketable securities. Investing
activities also include purchases of property and equipment of $2.2 million in
2004, $.8 million in 2003 and $.5 million in 2002. Purchases in 2004 consisted
primarily of tooling for the Company’s Desktop Series of products, leasehold
improvements and computer related equipment. In 2005, the Company expects total
capital expenditures to range between $1 million and $2 million, primarily
reflecting investments to support the Company’s information technology
requirements, the product development and production processes and leasehold
improvements.
Net cash
provided by financing activities totaled $1.0 million in both 2004 and 2003 and
$.4 million in 2002. Amounts in each year reflect proceeds from stock option
exercises.
A summary
of Rimage’s contractual cash obligations at December 31, 2004 is as
follows:
| |
|
Payments
due by period |
|
|
Contractual
Obligations |
|
Total |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
|
Operating
leases |
|
|
2,411,726 |
|
|
818,051 |
|
|
697,983 |
|
|
580,423 |
|
|
286,477 |
|
|
28,792 |
|
|
Capital
leases (1) |
|
|
25,869 |
|
|
8,623 |
|
|
8,623 |
|
|
8,623 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations |
|
|
2,437,595 |
|
|
826,674 |
|
|
706,606 |
|
|
589,046 |
|
|
286,477 |
|
|
28,792 |
|
(1)
Amounts include principal and interest.
Management
utilizes its technical knowledge, cumulative business experience, judgment and
other factors in the selection and application of the Company’s accounting
policies. The following accounting policies are considered by management to be
the most critical to the presentation of the consolidated financial statements
because they require the most difficult, subjective and complex
judgments:
Revenue
Recognition. Revenue
for product sales, which do not include any requirement for installation or
training, is recognized on shipment, at which point the following criteria of
SAB Topic 13(A)(1) have been satisfied:
| · |
Persuasive
evidence of an arrangement exists. Orders are received for all sales and
sales invoices are mailed on shipment. |
| · |
Delivery
has occurred. Product has been transferred to the customer or the
customer’s designated delivery agent. |
| · |
The
vendor’s price is fixed or determinable. All sales prices are fixed at the
time of the sale (shipment). |
| · |
Collectibility
is probable. All sales are made on the basis that collection is expected
in line with the Company’s standard payment terms, which are consistent
with industry practice in the geographies in which the Company markets its
products. |
A
standard product sale by the Company does not require a commitment on the
Company’s part to provide installation, set-up or training. When such services
are requested, value-added resellers generally arrange and
perform the service directly with
the customer, with no financial interest or obligation on the part of the Company. In the
limited situations in which the Company does provide installation or training services
for customers, the Company charges separately for the service based upon its published
list prices, and recognizes revenue upon the successful completion of the service.
Revenue
for maintenance agreements is recognized on a straight-line basis over the life
of the contracts (commencing once the period covered by standard warranty
expires).
EITF
00-21, “Revenue Arrangements with Multiple Deliverables” provides revenue
recognition guidance for arrangements with multiple deliverables, and the
criteria to determine if items in a multiple deliverable agreement should be
accounted for separately. In some arrangements, the different revenue-generating
activities are sufficiently separable and there exists sufficient evidence of
their fair values to separately account for some or all of the activities. This
issue does not change otherwise applicable revenue recognition criteria. The
adoption of EITF 00-21 did not have any impact on the financial position or
results of operations of the Company, because the elements of the Company’s sale
transactions are clearly and separately stated and sufficient evidence of their
fair value exists to account for the elements.
Allowance
For Doubtful Accounts And Sales Returns. The
Company records a reserve for accounts receivable that are potentially
uncollectible due to customer default. The reserve is estimated based on a
review of customer accounts, the age of the receivables, customers’ financial
condition, and general economic conditions. The Company also records a reserve
for sales returns from its customers. The amount of the reserve is based upon
historical trends, timing of new product introductions and allowances given to
VARs for demo products. Distributors are provided strict guidelines for the
return of product that limits returns. The Company reviews the distributor’s
inventory to insure compliance to the Company’s return policy.
Inventory
Reserves. The
Company records reserves for inventory shrinkage and for potentially excess,
obsolete and slow moving inventory. The amounts of these reserves are based upon
historical loss trends, inventory levels, physical inventory and cycle count
adjustments, expected product lives and forecasted sales demand. Results could
be materially different if demand for the Company’s products decreased because
of economic or competitive conditions, or if products became obsolete because of
technical advancements in the industry or by the Company.
Deferred
Tax Assets. The
Company recognizes deferred tax assets for the expected future tax impact of
temporary differences between book and taxable income. A valuation allowance and
income tax charge are recorded when, in management’s judgment, realization of a
specific deferred tax asset is uncertain. Income tax expense could be materially
different from actual results because of changes in management’s expectations
regarding future taxable income, the relationship between book and taxable
income and tax planning strategies employed by the Company.
Warranty
Reserves. The
Company’s non-consumable products are warranted to the end-user to ensure
end-user confidence in design, workmanship, and overall quality. Warranty
lengths vary by product type, ranging from periods of six to twelve months.
Warranty covers parts, labor, and other associated expenses. The Company
performs the majority of warranty work, while authorized distributors and
dealers also perform some warranty work. Warranty expense is accrued at the time
of sale based on analysis of historical claims experience, which includes labor
and parts costs and the proportion of parts that can be re-used.
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), “Share-Based
Payment.” SFAS No 123R is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation” and supersedes Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees” and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective for the Company
beginning July 1, 2005. While the Company cannot precisely determine the impact
on net earnings as a result of the adoption of SFAS No 123R, estimated
compensation expense related to prior periods can be found in Note 1 in the
Consolidated Financial Statements included in this Form 10-K. The ultimate
amount of increased compensation expense will be dependent on whether the
Company adopts SFAS
123R using the modified prospective
or retrospective method, the number of option shares granted during the year, their
timing and vesting period, and the method used to calculate the fair value of the awards,
among other factors.
FIN 46,
“Consolidation of Variable Interest Entities”, was issued by the FASB in January
2003, and the interpretation was revised in December 2003 (“FIN 46-R”). FIN 46-R
provides accounting requirements for business enterprises to consolidate related
entities in which they are determined to be the primary beneficiary as a result
of their variable economic interests. The interpretation provides guidance in
judging multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation is effective for all such interests entered into
after December 31, 2003, and for all others at the beginning of the fiscal year
commencing after December 15, 2004. Adoption of the interpretation has not
affected, and is not expected to affect, the Company’s consolidated financial
statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling charges and spoilage. This statement
requires that those items be recognized as current period charges regardless of
whether they meet the criterion of “so abnormal” which was the criterion
specified in ARB No. 43. In addition, this Statement requires that allocation of
fixed production overheads to the cost of production be based on normal capacity
of the production facilities. The provisions under SFAS No. 151 are effective
for the Company beginning January 1, 2006, and shall be applied prospectively.
The Company does not expect that the adoption of this pronouncement will have a
significant impact on its consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.”
The guidance in APB No. 29 is based on the principle that exchanges of
nonmonetary assets should be measured based upon the fair value of the assets
exchanged. SFAS No. 153 amends APB No. 29 to eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. This Statement is effective for the Company for
nonmonetary asset exchanges beginning July 1, 2005. The provisions of this
Statement shall be applied prospectively. The Company does not expect the
adoption of this pronouncement to have a significant impact on its consolidated
financial statements.
Rimage
maintains a website at www.rimage.com. Its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, are available on its website, as soon as reasonably
practicable after these documents are filed with the SEC. To obtain copies of
these reports, go to www.rimage.com and
click on “Investor Relations,” then click on “EDGAR Filings.” A copy of any
report filed by the Company with the SEC will also be furnished without charge
to any shareholder who requests it in writing to: Secretary, Rimage Corporation
7725 Washington Avenue South, Minneapolis, Minnesota 55439.
We make
written and oral statements from time to time regarding our business and
prospects, such as projections of future performance, statements of management’s
plans and objectives, forecasts of market trends, and other matters that are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Statements containing the words or phrases “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimates,” “projects,”
“believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”
“objective,” “should” or similar expressions identify forward-looking
statements, which may appear in documents, reports, filings with the Securities
and Exchange Commission, news releases, written or oral presentations made by
our authorized officers or other representatives. For such statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement made by or on behalf of us speaks only as of the date
on which such statement is made. We do not undertake any obligation to update or
keep current either (i) any forward-looking statement to reflect events or
circumstances arising after the date of such statement, or (ii) the
important factors that could cause our future results to differ materially from
historical results or trends, results anticipated or planned by us, or which are
reflected from time to time in any forward-looking statement which may be made
by or on behalf of us.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement that may be made by or on behalf of us. Some of
these important factors include the following:
Technology
in our industry evolves rapidly, potentially causing our products to become
obsolete, and we must continue to enhance existing systems and develop new
systems or we will lose sales.
Rapid
technological advances, rapidly changing customer requirements and fluctuations
in demand characterize the current market for our products. Further, there are
alternative data storage media and additional media is under development,
including high capacity hard drives, new CD-R/DVD-R technologies, file servers
accessible through computer networks and the Internet. Our existing and
development-stage products may become obsolete if our competitors introduce
newer or more appealing technologies. If these technologies are patented or
proprietary to our competitors, we may not be able to access these technologies.
We believe that we must continue to innovate and anticipate advances in the
storage media industry in order to remain competitive. If we fail to anticipate
or respond to technological developments or customer requirements, or if we are
significantly delayed in developing and introducing products, our business will
suffer lost sales.
Our
market is becoming more competitive. Competition may result in price reductions,
lower gross profits and loss of market share.
The
storage media industry is becoming more competitive and we face the potential
for increased competition in developing and selling our CD-R and DVD-R
publishing systems in both the U.S. and in foreign markets. Our competitors may have or could develop
or acquire significant marketing, financial, development and personnel resources. Our current primary
competitors include Primera Technology, Inc., Microtech Systems, Inc. and LSK
Data Systems GmbH. To remain competitive, we believe that we must continue to
provide:
| § |
technologically
advanced systems that satisfy the demands of
end-users; |
| § |
continuing
advancements in our CD-R and DVD-R
products; |
| § |
a
dependable and efficient distribution and reseller
network; |
| § |
superior
customer service; and |
| § |
high
levels of quality and reliability. |
We cannot
assure you that we will be able to compete successfully against our current or
future competitors. The storage media industry has increased visibility, which
may lead to large, well-known, well-financed companies entering into this
market. Increased competition from manufacturers of systems or consumable
supplies may result in price reductions, lower gross profit margins, increased
discounts to distribution and loss of market share and could require increased
spending by us on research and development, sales and marketing and customer
support.
If
our products fail to compete successfully with other existing publishing systems
or newly-developed products for the storage media industry, our business will
suffer.
The
success of our products depends upon our end users choosing our CD-R and DVD-R
technology for their storage media needs. However, alternative data storage
media exist, such as high capacity hard drives, new CD-R/DVD-R technologies,
file servers accessible through computer networks and the Internet, and
additional media is under development. If end users perceive any technology that
is competing with ours as more reliable, higher performing, less expensive or
having other advantages over our technology, the demand for our CD-R and DVD-R
products could decrease. Further, some of our competitors may make strategic
acquisitions or establish cooperative relationships with suppliers or companies
that produce complementary products such as cameras, computer equipment,
software or biometric applications. Competition from other publishing systems or
other storage media is likely to increase. If our products do not compete
successfully with existing or new competitive products, our business will
suffer.
We
sell a significant portion of our products internationally, which exposes us to
risks associated with foreign operations.
We sell a
significant amount of our products to customers outside the United States,
particularly in Europe, Asia and Latin America. International sales accounted
for 38%, 42%, and 39% of our revenue for the years ended December 31, 2004, 2003
and 2002, respectively. We expect that shipments to international customers,
including customers in Europe, Asia and Latin America, will continue to account
for a significant portion of our net sales. Sales outside the United States
involve the following risks, among others:
| § |
foreign
governments may impose tariffs, quotas and
taxes; |
| § |
the
demand for our products will depend, in part, on local economic
health; |
| § |
political
and economic instability may reduce demand for our
products; |
| § |
restrictions
on the export or import of technology may reduce or eliminate our ability
to sell in certain markets; |
| § |
potentially
limited intellectual property protection in certain countries may limit
our recourse against infringing products or cause us to refrain from
selling in certain markets; |
| § |
we
may face difficulties in managing our international
operations; |
| § |
the
burden and cost of complying with a variety of foreign
laws; |
| § |
we
may decide to price our products in foreign currency
denominations; |
| § |
our
contracts with foreign distributors and resellers cannot fully protect us
against political and economic instability; |
| § |
we
may face difficulties in collecting receivables;
and |
| § |
we
may not be able to control our international distributors’ efforts on our
behalf. |
The
financial results of our German subsidiary, Rimage Europe, are translated into
U.S. dollars for consolidation with our overall financial results. Additionally,
we hedge against currency fluctuations associated with foreign currency
denominated transactions (principally European Euro) with Rimage Europe. Despite
our hedging activity, currency fluctuations may adversely affect the financial
performance of our consolidated operations. Currency fluctuations also may
increase the relative price of our product in foreign markets and thereby could
also cause our products to become less affordable or less price competitive than
those of foreign manufacturers. These risks associated with foreign operations
may have a material adverse effect on our revenue from or costs associated with
international sales.
If
our domestic or international intellectual property rights are not adequately
protected, others may offer products similar to ours which could depress our
product selling prices and gross profit margins or result in loss of market
share.
We
believe that protecting our proprietary technology is important to our success
and competitive positioning. In addition to common law intellectual property
rights, we rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. However, these legal means afford us only limited
protection and may not adequately protect our rights or remedies to gain or keep
any advantages we may have over our competitors.
We
cannot assure you that others may not independently develop the same or similar
technologies or otherwise obtain access to our technology and trade secrets. Our
competitors, who may have or could develop or acquire significant resources, may make substantial
investments in competing technologies, may
apply for and obtain patents that will prevent, limit, or interfere with our
ability to manufacture or market our products. Further, while we do not believe
that any of our products or processes interfere with the rights of others, third
parties may nonetheless assert patent infringement claims against us in the
future.
Costly
litigation may be necessary to enforce patents issued to us, to protect trade
secrets or “know-how” we own, to defend us against claimed infringement of the
rights of others or to determine the ownership, scope, or validity of our
proprietary rights and the rights of others. Any claim of infringement against
us may involve significant liabilities to third parties, could require us to
seek licenses from third parties, and could prevent us from manufacturing,
selling, or using our products. The
occurrence of this litigation, or the
effect of an adverse determination in any of
this type of litigation, could
have a material adverse effect on our business, financial condition and results
of operations. Further,
the laws of some of the countries in which our systems are or may be sold may
not protect our systems and intellectual property to the same extent as the
United States or at all. Our failure to protect or enforce our intellectual
property rights could have a material adverse effect on our business, results of
operations and financial condition.
Our
sales will decline and our business will be materially harmed if our key channel
partners do not effectively market or sell our products or if there is a
significant reduction, delay or cancellation of orders from such channel
partners.
We
distribute our products to end users through our own sales force, through
distributors and through a two-tier system of distributors and resellers.
Although certain distributors and resellers have made certain contractual
commitments to us, they are independent businesses that we do not control.
We cannot be certain that our distribution channel will continue to market or
sell our systems effectively. Our agreements with distributors and resellers do
not contain requirements that a certain percentage of such parties’ sales are of
our products nor do the agreements restrict their ability to choose alternative
sources for CD-R or DVD-R publishing systems.
During
2004, we derived approximately 13% and 12% of our revenues from a single
distributor and a strategic partner, respectively. Two of our distributors
generated more than 10% of revenues in 2003, at 16% and 12% of our revenues for
2003, respectively. In 2002, two distributors also generated more than 10% of
our revenues, at 17% and 16% of our revenues for 2002, respectively. A
significant reduction, delay or cancellation of orders from our key channel
partners or the loss of any of them could have a negative impact upon our
operating results. Further,
some of our channel partners are small organizations with limited capital and
our success in distributing our products to end users will depend upon the
continued viability and financial stability of these entities. These channel
partners may choose to devote their efforts to other products in different
markets or reduce or fail to devote the necessary resources to provide effective
sales and marketing support of our product. We believe that our future growth
and success will continue to depend in large part upon the success of our
channel partners in operating their businesses.
If
we do not maintain adequate inventories of component parts or finished goods or
if we fail to adequately forecast demand, the likely resulting delays in
producing our publishing systems products would damage our
business.
Because
most of our systems are built upon order, we do not maintain a significant
inventory of completed systems. We assemble the Producer II Series and Desktop
Series systems as they are ordered, which causes us to forecast production based
on past sales and our estimates of future demand. In the event that we
significantly underestimate our needs or encounter an unexpectedly high level of
demand for our systems or our suppliers are unable to deliver our orders of
components in a timely manner, we may be unable to fill our product orders on
time which could harm our reputation and result in reduced sales.
We
rely on single-source suppliers, which could cause delays, increases in costs or
prevent us from completing customer orders, all of which could materially harm
our business.
We
assemble our Producer II Series and Desktop Series products using materials and
components supplied by various subcontractors and suppliers. We purchase
critical components for our systems, including CD-R/DVD-R drives, circuit
boards, electric motors, machined and molded parts, precision sheet metal
assemblies and mechanical parts, from third parties, some of whom are
single-source suppliers of these components. If any of our suppliers is unable
to ship critical components, we would be unable to manufacture and ship products
to our end-users, distributors or resellers. If the price of these components
increases for any reason, or if these suppliers are unable or unwilling to
deliver, we may have to find another source, which could result in
interruptions, increased costs, delays, loss of sales and quality control
problems.
The
termination or interruption of any of these relationships, or the failure of
these manufacturers or suppliers to supply products or components to us on a
timely basis or in sufficient quantities, likely would cause us to be unable to
meet orders for our products and harm our reputation and our business.
Identifying and qualifying alternative suppliers of components would take time,
involve significant additional costs and may delay the production of our
products. Further, if we obtain a new supplier for a component or assemble our
product using an alternative component, we may need to conduct additional
testing of our products to ensure the product meets our quality and performance
standards. Any delays in delivery of our product to end-users, distributors or
resellers could be extended and our costs associated with the change in product
manufacturing could increase.
The
failure of our third-party manufacturers to manufacture the products for us, and
the failure of our components suppliers to supply us with the components,
consistent with our requirements as to quality, quantity and timeliness could
materially harm our business by causing delays, loss of sales, increases in
costs and lower gross profit margins.
Our
products must be compatible with products designed and manufactured by others
and, in the event of design changes or the introduction of new products by them
or us, our products must continue to be compatible with products of
others.
Our
Producer II Series and Desktop Series of our CD-R/DVD-R publishing systems
incorporate computer and related computer equipment, hardware and software
manufactured by others. Our products are designed to provide end users with a
fully-integrated publishing system, and therefore, our products must operate
with the computer and related equipment of others to function properly for end
users. Problems with the products of others may adversely affect the performance
and reliability of our publishing system products and damage our reputation with
end users. Further, if there are changes in our products, changes in the
computer or computer related equipment integrated into our products or if we
offer new products, we must maintain compatibility and interoperability of our
products with the products of others. We cannot assure you that we will be able
to adapt our products to be compatible with any newly designed product of
another party. We would likely incur substantial costs to test and “de-bug” any
newly designed product that we integrate into our products. Further, our new
product development efforts may be hampered by our need to maintain
compatibility with the products of others and we may incur additional expense
designing for compatibility.
Our
publishing systems may have manufacturing or design defects that we discover
after shipment, which could negatively affect our revenues, increase our costs
and harm our reputation.
Our
publishing systems are complex and may contain undetected and unexpected
defects, errors or failures. If these product defects are substantial, the
result could be product recalls, an increased amount of product returns, loss of
market acceptance and damage to our reputation, all of which could increase our
costs and cause us to lose sales. We carry general commercial liability
insurance covering our products with policy limits per occurrence and in the
aggregate that we have deemed to be sufficient. We cannot predict, however,
whether this insurance is sufficient, or if not, whether we will be able to
obtain sufficient insurance to cover the risks associated with our business or
whether such insurance will be available at premiums that are commercially
reasonable. In addition, these insurance policies must be renewed annually.
Although we have been able to obtain liability insurance, such insurance may not
be available in the future on acceptable terms, if at all. A successful claim
against us or settlement by us in excess of our insurance coverage or our
inability to maintain insurance in the future could have a material adverse
effect on our business, results of operations, liquidity and financial
condition.
If
our systems fail to comply with domestic and international government
regulations, or if these regulations result in a barrier to our business, we
could lose sales.
Our
systems must comply with various domestic and international laws, regulations
and standards. In the event that we are unable or unwilling to comply with any
such laws, regulations or standards, we may decide not to conduct business in
certain markets. Particularly in international markets, we may experience
difficulty in securing required licenses or permits on commercially reasonable
terms, or at all. Failure to comply with existing or evolving laws or
regulations, including export and import restrictions and barriers, or to obtain
timely domestic or foreign regulatory approvals or certificates could result in
lost sales.
Fluctuations
in our future operating results may negatively affect the market price of our
common stock.
We have
experienced fluctuations in our quarterly operating results and we expect those
fluctuations to continue due to a variety of factors. Some of the factors that
influence our quarterly operating results include:
| § |
the
number and mix of products sold in the
quarter; |
| § |
the
timing of major projects; |
| § |
the
availability and cost of components and
materials; |
| § |
timing,
costs and benefits of new product
introductions; |
| § |
customer
order size and shipment timing; |
| § |
seasonal
factors affecting timing of purchase
orders; |
| § |
promotions
by ourselves or competitors, and the timing of the promotion;
|
| § |
the
impact to the marketplace of competitive products and pricing;
and |
| § |
the
timing and level of operating expenses. |
Because
of these factors, our quarterly operating results are difficult to predict and
are likely to vary in the future. If our operating results are below financial
analysts’ or investors’ expectations, the market price of our common stock may
fall abruptly and significantly.
If
we fail to retain and attract highly skilled managerial and technical personnel,
we may fail to remain competitive.
Our
future success depends, in significant part, upon the continued service and
performance of our senior management and other key personnel. The loss of the
services of our management team, some of whom have significant experience in our
industry, and other key personnel, could impair our ability to effectively
manage our company and to carry out our business plan. We do not carry key
person life insurance on any of our executive officers. In addition,
competition for skilled employees in our industry is intense. Our future success
also depends on our continuing ability to attract, retain and motivate highly
qualified managerial, technical and sales personnel. Our inability to retain or
attract qualified personnel could have a significant negative effect and thereby
materially harm our business and financial condition.
Our
stock price may be volatile and a shareholder’s investment could decline in
value.
Our stock
price has fluctuated in the past and may continue to fluctuate significantly,
making it difficult for an investor to resell shares or to resell shares at an
attractive price. The market prices for securities of emerging companies have
historically been highly volatile. Future events concerning us or our
competitors could cause such volatility, including:
| § |
actual
or anticipated variations in our operating
results, |
| § |
technological
innovations or new commercial products introduced by us or our
competitors, |
| § |
developments
concerning proprietary rights, |
| § |
changes
in senior management, |
| § |
investor
perception of us and our industry, |
| § |
general
economic and market conditions including market
uncertainty |
| § |
national
or global political events, and |
| § |
public
confidence in the securities markets and regulation by or of the
securities markets. |
In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small-capitalization,
high-technology companies in particular, which are often unrelated to the
operating performance of these companies. Any failure by us to meet or exceed
estimates of financial analysts is likely to cause a decline in our common stock
price.
Future
sales of shares of our common stock in the public market may negatively affect
our stock price.
Future
sales of our common stock, or the perception that these sales could occur, could
have a significant negative effect on the market price of our common stock. In
addition, upon exercise of outstanding options and warrants, the number of
shares outstanding of our common stock could increase substantially. This
increase, in turn, could dilute future earnings per share, if any, and could
depress the market value of our common stock. Dilution and potential dilution,
the availability of a large amount of shares for sale, and the possibility of
additional issuances and sales of our common stock may negatively affect both
the trading price of our common stock and the liquidity of our common stock.
These sales also might make it more difficult for us to sell equity securities
or equity-related securities in the future at a time and price that we would
deem appropriate.
Provisions
of Minnesota law, our bylaws and other agreements may deter a change of control
of our company and may have a possible negative effect on our stock
price.
Certain
provisions of our Minnesota law, our bylaws and other agreements may make it
more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of our company, including:
| § |
the
provisions of Minnesota law relating to business combinations and control
share acquisitions; |
| § |
the
provisions of our bylaws regarding the business properly brought before
shareholders; |
| § |
the
right of our board of directors to establish more than one class or series
of shares and to fix the relative rights and preferences of any such
different classes or series; |
| § |
our
shareholder rights plan, which would cause substantial dilution to any
person or group attempting to acquire our company on terms not approved in
advance by our board of directors; and |
| § |
the
provisions of our stock option plans allowing for the acceleration of
vesting or payments of awards granted under the plans in the event of
specified events that result in a “change in control.”
|
These
measures could discourage or prevent a takeover of our company or changes in our
management, even if an acquisition or such changes would be beneficial to our
shareholders. This may have a negative effect on the price of our common
stock.
Compliance
with changing regulation of corporate governance and public disclosure may
result in additional expenses.
Keeping
abreast of, and in compliance with, changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and in particular Section 404 of that act relating to
management certification of internal controls, the regulations of the Securities
and Exchange Commission and the rules of the Nasdaq Stock Market, have required
an increased amount of management attention and external resources. We intend to
invest all reasonably necessary resources to comply with evolving corporate
governance and public disclosure standards, and this investment may result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance activities.
Foreign
Currency Translation. The
Company is exposed to market risk from foreign exchange rate fluctuations of the
European Euro to the U.S. dollar as the financial position and operating results
of the Company’s German subsidiary, Rimage Europe, are translated into U.S.
dollars for consolidation. Resulting translation adjustments are recorded as a
separate component of stockholders’ equity.
Derivative
financial instruments. The
Company enters into forward exchange contracts principally to hedge the eventual
dollar cash flow of foreign currency denominated transactions (principally
European Euro) with Rimage Europe. Gains or losses on forward exchange contracts
are recognized in income on a current basis over the term of the contracts. The
Company records the fair value of its open forward foreign exchange contracts in
other current assets
or other current liabilities
depending on whether the net amount is a gain or a loss. The Company does not utilize
financial instruments for trading or other speculative purposes.
Exchange
Rate Sensitivity. The table
below summarizes information on foreign currency forward exchange agreements
that are sensitive to foreign currency exchange rates. For these foreign
currency forward exchange agreements, the table presents the notional amounts
and weighted average exchange rates by expected (contractual) maturity dates.
These notional amounts generally are used to calculate the contractual payments
to be exchanged under the contract.
| |
|
Expected Maturity or Transaction
Date |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
There-
after |
|
Total |
|
Fair
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Anticipated
Transactions and |
|
(US$ Equivalent in Thousands) |
|
|
Related Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Receive
$US/Pay €) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Amount |
|
|
3,623 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,623 |
|
|
(210 |
) |
|
Average
Contractual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
Rate |
|
|
1.2796 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
1.2796 |
|
|
|
|
|
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA |
Financial
Statements
| |
Page in Annual
Report on Form 10-K
For Year Ended
December 31, 2004 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
The Board
of Directors and Stockholders
Rimage
Corporation:
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the
Securities Exchange Act of 1934. The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that:
|
|
(i) |
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company; |
|
|
(ii) |
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and |
|
|
(iii) |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the
supervision of our chief executive officer and our chief financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control—Integrated
Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of December
31, 2004.
KPMG LLP,
the independent registered public accounting firm that audited the financial
statements in this Form 10-K, has issued an attestation report on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting, which report is included in this Form 10-K.
The Board
of Directors and Stockholders
Rimage
Corporation:
We have
audited the accompanying consolidated balance sheets of Rimage Corporation and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Rimage Corporation’s
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 14, 2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG
LLP
Minneapolis,
Minnesota
March 14,
2005
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Rimage
Corporation:
We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting,
that
Rimage Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Rimage
Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, management’s assessment that Rimage Corporation maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also, in
our opinion, Rimage Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on
criteria
established in Internal
Control—Integrated Framework issued
by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 14, 2005 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG
LLP
Minneapolis,
Minnesota
March 14,
2005
RIMAGE
CORPORATION AND SUBSIDIARIES
December
31, 2004 and 2003
| |
|
|
|
|
|
| |
|
December
31, |
|
December
31, |
|
|
Assets |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
13,320,681 |
|
$ |
26,741,627 |
|
|
Marketable
securities |
|
|
39,174,799
|
|
|
21,855,434
|
|
|
Trade
accounts receivable, net of allowance for doubtful
accounts |
|
|
|
|
|
|
|
|
and
sales returns of $600,000 and $887,000, respectively |
|
|
10,183,814
|
|
|
6,242,516
|
|
|
Inventories |
|
|
7,395,689
|
|
|
3,334,370
|
|
|
Prepaid
expenses and other current assets |
|
|
462,214
|
|
|
473,053
|
|
|
Deferred
income taxes-current |
|
|
1,127,642
|
|
|
1,202,329
|
|
|
Total
current assets |
|
|
71,664,839
|
|
|
59,849,329
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
2,386,494
|
|
|
1,137,446
|
|
|
Deferred
income taxes - non-current |
|
|
— |
|
|
36,676
|
|
|
Other
non-current assets |
|
|
86,667
|
|
|
906
|
|
|
Total
assets |
|
$ |
74,138,000 |
|
$ |
61,024,357 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Trade
accounts payable |
|
$ |
4,717,073 |
|
$ |
2,365,213 |
|
|
Accrued
compensation |
|
|
2,300,009
|
|
|
1,658,741
|
|
|
Other
accrued expenses |
|
|
1,121,370
|
|
|
1,102,925
|
|
|
Income
taxes payable |
|
|
1,100,257
|
|
|
1,768,710
|
|
|
Deferred
income and customer deposits |
|
|
1,821,057
|
|
|
1,793,725
|
|
|
Other
current liabilities |
|
|
217,640
|
|
|
323,915
|
|
|
Total
current liabilities |
|
|
11,277,406
|
|
|
9,013,229
|
|
| |
|
|
|
|
|
|
|
|
Long-term
liabilities: |
|
|
|
|
|
|
|
|
Deferred
taxes |
|
|
122,932
|
|
|
— |
|
|
Other
non-current liabilities |
|
|
16,317
|
|
|
— |
|
|
Total
long-term liabilities |
|
|
139,249
|
|
|
— |
|
|
Total
liabilities |
|
|
11,416,655
|
|
|
9,013,229
|
|
| |
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, authorized 250,000 shares, |
|
|
|
|
|
|
|
|
no
shares issued and outstanding |
|
|
— |
|
|
— |
|
|
Common
stock, $.01 par value, authorized 29,750,000 shares, |
|
|
|
|
|
|
|
|
issued
and outstanding 9,365,479 and 9,110,246, respectively |
|
|
93,655
|
|
|
91,102
|
|
|
Additional
paid-in capital |
|
|
19,677,692
|
|
|
18,156,735
|
|
|
Retained
earnings |
|
|
42,871,670
|
|
|
33,799,709
|
|
|
Accumulated
other comprehensive income (loss) |
|
|
78,328
|
|
|
(36,418 |
) |
|
Total
stockholders’ equity |
|
|
62,721,345
|
|
|
52,011,128
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies (notes 8 and 12) |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity |
|
$ |
74,138,000 |
|
$ |
61,024,357 |
|
| |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements |
|
|
|
|
|
|
|
RIMAGE
CORPORATION AND SUBSIDIARIES
Years
Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
70,847,930 |
|
$ |
53,797,164 |
|
$ |
46,581,069 |
|
|
Cost
of revenues |
|
|
38,027,320
|
|
|
27,399,219
|
|
|
23,985,704
|
|
|
Gross
profit |
|
|
32,820,610
|
|
|
26,397,945
|
|
|
22,595,365
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
4,529,324
|
|
|
3,765,556
|
|
|
3,602,117
|
|
|
Selling,
general and administrative |
|
|
14,856,217
|
|
|
11,075,879
|
|
|
9,574,110
|
|
|
Total
operating expenses |
|
|
19,385,541
|
|
|
14,841,435
|
|
|
13,176,227
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
13,435,069
|
|
|
11,556,510
|
|
|
9,419,138
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest,
net |
|
|
657,468
|
|
|
518,846
|
|
|
780,273
|
|
|
Gain
(loss) on currency exchange |
|
|
17,983
|
|
|
30,331
|
|
|
(27,658 |
) |
|
Other,
net |
|
|
(67,236 |
) |
|
(33,836 |
) |
|
7,326
|
|
|
Total
other income, net |
|
|
608,215
|
|
|
515,341
|
|
|
759,941
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
14,043,284
|
|
|
12,071,851
|
|
|
10,179,079
|
|
|
Income
tax expense |
|
|
4,971,323
|
|
|
4,406,226
|
|
|
3,715,364
|
|
|
Net
income |
|
$ |
9,071,961 |
|
$ |
7,665,625 |
|
$ |
6,463,715 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share |
|
$ |
0.98 |
|
$ |
0.86 |
|
$ |
0.74 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share |
|
$ |
0.91 |
|
$ |
0.79 |
|
$ |
0.68 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding |
|
|
9,289,553
|
|
|
8,931,084
|
|
|
8,702,552
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares and |
|
|
|
|
|
|
|
|
|
|
|
assumed
conversion shares |
|
|
9,931,687
|
|
|
9,743,104
|
|
|
9,496,723
|
|
See
accompanying notes to consolidated financial statements
RIMAGE
CORPORATION AND SUBSIDIARIES
Years
Ended December 31, 2004, 2003, and 2002
| |
|
|
|
|
|
Additional |
|
|
|
Accumulated
other |
|
|
|
| |
|
Common
Stock |
|
paid-in |
|
Retained |
|
comprehensive |
|
|
|
| |
|
Shares |
|
Amount |
|
capital |
|
earnings |
|
income
(loss) |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2001 |
|
|
8,635,537
|
|
$ |
86,355 |
|
$ |
15,779,533 |
|
$ |
19,670,369 |
|
$ |
(301,616 |
) |
$ |
35,234,641 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued in warrant and stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
exercises |
|
|
83,874
|
|
|
839
|
|
|
377,726
|
|
|
|
|
|
|
|
|
378,565
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
— |
|
|
|
|
|
|
|
|
6,463,715
|
|
|
|
|
|
6,463,715
|
|
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,278
|
|
|
158,278
|
|
|
Unrealized
loss from available- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,067 |
) |
|
(78,067 |
) |
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,543,926
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002 |
|
|
8,719,411
|
|
|
87,194
|
|
|
16,157,259
|
|
|
26,134,084
|
|
|
(221,405 |
) |
|
42,157,132
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued in warrant and stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
option
exercises |
|
|
390,835
|
|
|
3,908
|
|
|
947,999
|
|
|
|
|
|
|
|
|
951,907
|
|
|
Income
tax benefit arising from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercising
non-qualifying stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options |
|
|
|
|
|
|
|
|
1,051,477
|
|
|
|
|
|
|
|
|
1,051,477
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
7,665,625
|
|
|
|
|
|
7,665,625
|
|
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,298
|
|
|
178,298
|
|
|
Unrealized
gain from available- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,689
|
|
|
6,689
|
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,850,612
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 |
|
|
9,110,246
|
|
|
91,102
|
|
|
18,156,735
|
|
|
33,799,709
|
|
|
(36,418 |
) |
|
52,011,128
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued in stock option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercises |
|
|
255,233
|
|
|
2,553
|
|
|
991,131
|
|
|
|
|
|
|
|
|
993,684
|
|
|
Income
tax benefit arising from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercising
non-qualifying stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options |
|
|
|
|
|
|
|
|
521,679
|
|
|
|
|
|
|
|
|
521,679
|
|
|
Accelerated
vesting of stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options |
|
|
|
|
|
|
|
|
8,147
|
|
|
|
|
|
|
|
|
8,147
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
9,071,961
|
|
|
|
|
|
9,071,961
|
|
|
Translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,500
|
|
|
170,500
|
|
|
Unrealized
loss from available- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,754 |
) |
|
(55,754 |
) |
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,186,707
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
|
9,365,479
|
|
$ |
93,655 |
|
$ |
19,677,692 |
|
$ |
42,871,670 |
|
$ |
78,328 |
|
$ |
62,721,345 |
|
See
accompanying notes to consolidated financial
statements.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2004, 2003, and 2002
| |
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
9,071,961 |
|
$ |
7,665,625 |
|
$ |
6,463,715 |
|
|
Adjustments
to reconcile net income to net cash |
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
918,945
|
|
|
930,480
|
|
|
794,745
|
|
|
Deferred
income tax expense (benefit) |
|
|
234,295
|
|
|
(254,452 |
) |
|
136,023
|
|
|
Change
in allowance for doubtful accounts and sales returns |
|
|
(286,774 |
) |
|
251,446
|
|
|
(79,561 |
) |
|
Loss
(gain) on sale of property and equipment |
|
|
106,291
|
|
|
28,404
|
|
|
(3,370 |
) |
|
Stock-based
compensation |
|
|
8,147
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable |
|
|
(3,654,524 |
) |
|
149,651
|
|
|
(1,555,876 |
) |
|
Inventories |
|
|
(4,061,319 |
) |
|
(292,542 |
) |
|
582,873
|
|
|
Prepaid
income taxes |
|
|
|
|
|
|
|
|
764,523
|
|
|
Prepaid
expenses and other current assets |
|
|
10,839
|
|
|
(87,848 |
) |
|
(173,264 |
) |
|
Other
non-current assets |
|
|
(160,275 |
) |
|
33,535
|
|
|
(17,995 |
) |
|
Trade
accounts payable |
|
|
2,351,860
|
|
|
(111,086 |
) |
|
488,121
|
|
|
Income
taxes payable |
|
|
(146,774 |
) |
|
2,625,214
|
|
|
194,973
|
|
|
Accrued
compensation |
|
|
641,268
|
|
|
371,156
|
|
|
192,031
|
|
|
Other
accrued expenses and other current liabilities |
|
|
(95,302 |
) |
|
156,304
|
|
|
235,139
|
|
|
Other
non-current liabilities |
|
|
|
|
|
|
|
|
(68,750 |
) |
|
Deferred
income and customer deposits |
|
|
27,332
|
|
|
470,996
|
|
|
290,867
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
|
4,965,970
|
|
|
11,936,883
|
|
|
8,244,194
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchases
of marketable securities |
|
|
(194,300,156 |
) |
|
(52,470,170 |
) |
|
(30,285,191 |
) |
|
Maturity
of marketable securities |
|
|
176,980,791
|
|
|
49,612,723
|
|
|
24,630,342
|
|
|
Purchase
of property and equipment |
|
|
(2,206,336 |
) |
|
(781,650 |
) |
|
(497,532 |
) |
|
Proceeds
from the sale of property and equipment |
|
|
80
|
|
|
1,347
|
|
|
3,425
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
|
(19,525,621 |
) |
|
(3,637,750 |
) |
|
(6,148,956 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises |
|
|
993,684
|
|
|
951,907
|
|
|
378,565
|
|
|
Net
cash provided by financing activities |
|
|
993,684
|
|
|
951,907
|
|
|
378,565
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash |
|
|
145,021
|
|
|
151,452
|
|
|
98,206
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents |
|
|
(13,420,946 |
) |
|
9,402,492
|
|
|
2,572,009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year |
|
|
26,741,627
|
|
|
17,339,135
|
|
|
14,767,126
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year |
|
$ |
13,320,681 |
|
$ |
26,741,627 |
|
$ |
17,339,135 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of net cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
$ |
4,883,801 |
|
$ |
1,808,754 |
|
$ |
2,619,846 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
-
The Company entered into capital lease obligations of $23,789 for the year
ended December 31, 2004. |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial
statements. |
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 and
its subsidiaries, collectively hereinafter referred to as “Rimage” or the
“Company.” All material intercompany accounts and transactions have been
eliminated upon consolidation.
The
Company develops, manufactures and distributes high performance CD-Recordable
(CD-R) and DVD-Recordable (DVD-R) publishing and duplication
systems.
Revenue
Recognition
Revenue
for product sales, which do not include any requirement for installation or
training, is recognized on shipment, at which point the following criteria of
SAB Topic 13(A)(1) have been satisfied:
| · |
Persuasive
evidence of an arrangement exists. Orders are received for all sales and
sales invoices are mailed on shipment. |
| · |
Delivery
has occurred. Product has been transferred to the customer or the
customer’s designated delivery agent. |
| · |
The
vendor’s price is fixed or determinable. All sales prices are fixed at the
time of the sale (shipment). |
| · |
Collectibility
is probable. All sales are made on the basis that collection is expected
in line with the Company’s standard payment terms, which are consistent
with industry practice in the geographies in which the Company markets its
products. |
A
standard product sale by the Company does not require a commitment on the
Company’s part to provide installation, set-up or training. When such services
are requested, value-added resellers generally arrange and perform the service
directly with the customer, with no financial interest or obligation on the part
of the Company. In the limited situations in which the Company does provide
installation or training services for customers, the Company charges separately
for the service based upon its published list prices, and recognizes revenue
upon the successful completion of the service.
Revenue
for maintenance agreements is recognized on a straight-line basis over the life
of the contracts (commencing once the period covered by standard warranty
expires).
EITF
00-21, “Revenue Arrangements with Multiple Deliverables” provides revenue
recognition guidance for arrangements with multiple deliverables, and the
criteria to determine if items in a multiple deliverable agreement should be
accounted for separately. In some arrangements, the different revenue-generating
activities are sufficiently separable and there exists sufficient evidence of
their fair values to separately account for some or all of the activities. This
issue does not change otherwise applicable revenue recognition criteria. The
adoption of EITF 00-21 did not have any impact on the financial position or
results of operations of the Company, because the elements of the Company’s sale
transactions are clearly and separately stated and sufficient evidence of their
fair value exists to account for the elements.
Sales
Returns
An
allowance for sales returns is recorded by the Company based upon an analysis of
new product introductions, historical trends, and other factors. A return policy
is in place with the Company’s distributors to restrict the volume of returned
products.
Cash
Equivalents
All
short-term investments with original maturities of three months or less at date
of purchase are considered cash equivalents.
Marketable
Securities
Marketable
securities generally consist of U.S. Treasury and money market securities,
municipal securities and corporate securities with long-term credit ratings of
AAA and short-term credit ratings of A-1. Marketable securities are classified
as short-term or long-term in the balance sheet based on their effective
maturity date. All marketable securities have maturities of twelve months or
less and are classified as available-for-sale. Available-for-sale securities are
recorded at fair value and any unrealized holding gains and losses, net of the
related tax effect, are excluded from earnings and are reported as a separate
component of accumulated other comprehensive income (loss) until
realized.
Sources
of Supply
Many of
the purchased components used to assemble the Company’s products are standard
parts and are readily available. Other components and subassemblies are
manufactured to the Company’s specifications. 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, a sudden 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.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined primarily on a
first-in, first-out (FIFO) basis. The Company records reserves for potentially
excess, obsolete and slow moving inventory based upon historical loss trends,
expected product lives and forecasted sales demand.
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 shorter of the property’s useful life or term of
the underlying lease. Repairs and maintenance costs are charged to operations as
incurred.
Product
Warranty
The
Company’s non-consumable products are warranted to the end-user to ensure
end-user confidence in design, workmanship and overall quality. Warranty lengths
vary by product type, ranging from periods of six to twelve months. Warranty
covers parts, labor and other associated expenses. The Company performs the
majority of warranty work, while authorized distributors and dealers also
perform some warranty work. Warranty expense is accrued at the time of sale
based on an analysis of historical claims experience, which includes labor and
parts costs and the proportion of parts that can be re-used.
The
warranty reserve rollforward, including provisions and claims, is as follows for
the years ended December 31, 2004 and 2003:
|
Years
ended: |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004 |
|
$ |
172,000 |
|
$ |
510,000 |
|
$ |
(498,000 |
) |
$ |
3,000 |
|
$ |
187,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2003 |
|
$ |
170,000 |
|
$ |
283,000 |
|
$ |
(287,000 |
) |
$ |
6,000 |
|
$ |
172,000 |
|
Stock
Based Compensation
As
permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the
Company applies the intrinsic-value method prescribed in Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to
account for the issuance of stock incentives to employees and directors.
Accordingly, no compensation expense related to employees’ and directors’ stock
incentives has been recognized in the financial statements as all options
granted under stock incentive plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had compensation
costs for the Company’s stock incentive plans been determined based on the fair
value of the awards on the date of grant, consistent with the provisions of SFAS
No. 123, the Company’s 2004,
2003 and 2002 net income and basic and diluted earnings per share would have been
adjusted to the proforma amounts stated in the following table:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
income: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
9,071,961 |
|
$ |
7,665,625 |
|
$ |
6,463,715 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation, net of tax |
|
|
(663,753 |
) |
|
(443,720 |
) |
|
(572,720 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Proforma |
|
$ |
8,408,208 |
|
$ |
7,221,905 |
|
$ |
5,890,995 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share: |
|
$ |
0.98 |
|
$ |
0.86 |
|
$ |
0.74 |
|
|
As
reported |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation, net of tax |
|
|
(0.07 |
) |
|
(0.05 |
) |
|
(0.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Proforma |
|
$ |
0.91 |
|
$ |
0.81 |
|
$ |
0.68 |
|
|
Diluted
net income per share: |
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.91 |
|
$ |
0.79 |
|
$ |
0.68 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation, net of tax |
|
|
(0.05 |
) |
|
(0.05 |
) |
|
(0.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Proforma |
|
$ |
0.86 |
|
$ |
0.74 |
|
$ |
0.62 |
|
The
following table calculates the fair market value of options granted on the date
of grant using the Black-Scholes option pricing model:
| |
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Number
of options granted |
|
|
213,500
|
|
|
177,000
|
|
|
45,500
|
|
| |
|
|
|
|
|
|
|
|
|
|
Fair
market value of options
granted |
|
$ |
997,167 |
|
$ |
618,480 |
|
$ |
188,645 |
|
| |
|
|
|
|
|
|
|
|
|
|
Per
share weighted average fair
value |
|
$ |
4.67 |
|
$ |
3.49 |
|
$ |
4.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Volatility
range |
|
|
26.9
to 34.6 |
% |
|
34.8
to 39.2 |
% |
|
37.0
to 56.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate range |
|
|
2.96
to 3.93 |
% |
|
2.30
to 2.98 |
% |
|
2.78
to 4.50 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Expected
life of options in years |
|
|
5.0 |
|
|
5.0 |
|
|
5.0 |
|
Research
and Development Costs
Research
and development costs relate to hardware and software development and
enhancements to existing products. All such costs are expensed as incurred.
Income
Taxes
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.
Net
Income Per Share
Basic
income per share is calculated as income available to common stockholders
divided by the weighted average number of common shares outstanding for the
period. Diluted income per share is calculated by dividing income by the
weighted average number of common and assumed conversion shares outstanding
during each period. Assumed conversion shares result from dilutive stock options
and are computed using the treasury stock method.
Foreign
Currency Translation / Transactions
The
assets and liabilities of the Company’s international subsidiary are translated
into U.S. dollars using period-end exchange rates. Statement of operations items
are translated at average exchange rates prevailing during the period. The
resulting translation adjustments are recorded as a separate component of
stockholders’ equity in accumulated other comprehensive income
(loss).
The
Company enters into forward foreign exchange contracts to hedge inter-company
receivables denominated in Euros arising from sales to its subsidiary in
Germany. Gains or losses on forward foreign exchange contracts are calculated at
each period end and are recognized in net income in the period in which they
arose. The fair value of forward foreign exchange contracts is recorded in other
current assets or other current liabilities depending on whether the net amount
is a gain or a loss.
Comprehensive
Income
Comprehensive
income consists of the Company’s net income, foreign currency translation
adjustment, and unrealized holding gains (losses) from available-for-sale
investments and is presented in the consolidated statements of stockholders’
equity and comprehensive income.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires 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 reporting period. Actual results could differ from estimates on items
such as allowance for doubtful accounts and sales returns, inventory reserves,
deferred tax assets, and warranty reserves.
New
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), “Share-Based
Payment.” SFAS No 123R is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation” and supersedes Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees” and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective for the Company
beginning July 1, 2005. While the Company cannot precisely determine the impact
on net earnings as a result of the adoption of SFAS No 123R, estimated
compensation expense related to prior periods can be found in Note 1 in the
Consolidated Financial Statements included in this Form 10-K. The ultimate
amount of increased compensation expense will be dependent on whether the
Company adopts SFAS 123R using the modified prospective or retrospective method,
the number of option shares granted during the year, their timing and vesting
period, and the method used to calculate the fair value of the awards, among
other factors.
FIN 46,
“Consolidation of Variable Interest Entities”, was issued by the FASB in January
2003, and the interpretation was revised in December 2003 ("FIN 46-R"). FIN 46-R
provides accounting requirements for business enterprises to consolidate related
entities in which they are determined to be the primary beneficiary as a result
of their variable economic interests. The interpretation provides guidance in
judging multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation is effective for all such interests entered into
after December 31, 2003, and for all others at the beginning of the fiscal year
commencing
after December 15, 2004. Adoption of
the interpretation has not affected, and is not expected to affect, the Company’s
consolidated financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling charges and spoilage. This statement
requires that those items be recognized as current period charges regardless of
whether they meet the criterion of “so abnormal” which was the criterion
specified in ARB No. 43. In addition, this Statement requires that allocation of
fixed production overheads to the cost of production be based on normal capacity
of the production facilities. The provisions under SFAS No. 151 are effective
for the Company beginning January 1, 2006, and shall be applied prospectively.
The Company does not expect that the adoption of this pronouncement will have a
significant impact on its consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.”
The guidance in APB No. 29 is based on the principle that exchanges of
nonmonetary assets should be measured based upon the fair value of the assets
exchanged. SFAS No. 153 amends APB No. 29 to eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. This Statement is effective for the Company for
nonmonetary asset exchanges beginning July 1, 2005. The provisions of this
Statement shall be applied prospectively. The Company does not expect the
adoption of this pronouncement to have a significant impact on its consolidated
financial statements.
2) Marketable Securities
The
amortized cost, gross unrealized holding gains, gross unrealized holding losses
and fair value of available-for-sale securities by major security type and class
of security at December 31, 2004 and 2003 are reflected in the following table.
Unrealized holding gains and losses are included in accumulated other
comprehensive income (loss) until realized.
| |
|
Amortized
cost |
|
Gross
unrealized
holding
gains |
|
Gross
unrealized
holding
losses |
|
Fair
value |
|
|
At
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities |
|
$ |
13,772,973 |
|
|
— |
|
|
(55,678 |
) |
|
13,717,295 |
|
|
Municipal
securities |
|
|
10,223,926 |
|
|
651 |
|
|
(10,502 |
) |
|
10,214,074 |
|
|
Money
market securities |
|
|
13,246,027 |
|
|
82 |
|
|
(4,670 |
) |
|
13,241,440 |
|
|
Corporate
securities |
|
|
2,003,907 |
|
|
|
|
|
(1,917 |
) |
|
2,001,990 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,246,833 |
|
|
733 |
|
|
(72,767 |
) |
|
39,174,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities |
|
$ |
14,541,370 |
|
|
4,876 |
|
|
(1,367 |
) |
|
14,544,879 |
|
|
Asset-backed
securities |
|
|
2,033,326 |
|
|
1,678 |
|
|
(19,448 |
) |
|
2,015,556 |
|
|
Commercial
paper |
|
|
998,472 |
|
|
|
|
|
|
|
|
998,472 |
|
|
Corporate
securities |
|
|
4,298,251 |
|
|
774 |
|
|
(2,498 |
) |
|
4,296,527 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,871,419 |
|
|
7,328 |
|
|
(23,313 |
) |
|
21,855,434 |
|
3) Inventories
Inventories
consist of the following as of December 31:
| |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
Finished
goods and demonstration equipment |
|
$ |
1,385,148 |
|
$ |
899,962 |
|
|
Work-in-process |
|
|
479,787 |
|
|
362,645 |
|
|
Purchased
parts and subassemblies |
|
|
5,530,754 |
|
|
2,071,763 |
|
| |
|
$ |
7,395,689 |
|
$ |
3,334,370 |
|
| |
|
|
|
|
|
|
|
4) Credit Agreement
On March
29, 2004, the Company entered into a term note agreement (the Credit Agreement)
with a bank. The Credit Agreement allows for advances under an unsecured
revolving loan up to a maximum advance of $10 million and a foreign exchange
facility which allows for foreign exchange contracts up to an aggregate of $5
million. The Credit Agreement is effective until June 30, 2005. The outstanding
principal balance of the note bears interest at a fluctuating rate per annum at
one and one-half percent (1.50%) above LIBOR in effect from time to time. No
amounts were outstanding under the Credit Agreement at December 31,
2004.
The
Credit Agreement contains various covenants pertaining to minimum tangible net
worth, minimum EBITDA and minimum unencumbered liquid assets
ratios.
5) Income Taxes
The
provision for income tax expense (benefit) consists of the
following:
| |
|
Year
ended December 31 |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
U.S.
Federal |
|
$ |
3,816,759 |
|
|
3,685,766 |
|
|
2,887,333 |
|
|
State |
|
|
611,351 |
|
|
690,146 |
|
|
524,696 |
|
|
Foreign |
|
|
308,918 |
|
|
284,766 |
|
|
167,312 |
|
|
Total
current |
|
|
4,737,028 |
|
|
4,660,678 |
|
|
3,579,341 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal |
|
|
192,754 |
|
|
(205,053 |
) |
|
117,789 |
|
|
State |
|
|
41,541 |
|
|
(49,399 |
) |
|
18,234 |
|
|
Total
deferred |
|
|
234,295 |
|
|
(254,452 |
) |
|
136,023 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,971,323 |
|
|
4,406,226 |
|
|
3,715,364 |
|
Actual
current tax liabilities are lower than the associated expense reflected for 2004
and 2003 by $521,679 and $1,051,477, respectively, due to the impact of stock
option deduction benefits recorded as credits to additional paid-in capital in
equity.
Total tax
expense differs from the expected tax expense, computed by applying the federal
statutory rate of 35% to earnings before income taxes as follows:
| |
|
Year
ended December 31 |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Expected
income tax expense |
|
$ |
4,915,149 |
|
|
4,225,148 |
|
|
3,562,678 |
|
|
State
income taxes, net of federal tax effect |
|
|
424,380 |
|
|
422,893 |
|
|
358,334 |
|
|
Extraterritorial
income exclusion |
|
|
(153,687 |
) |
|
(138,201 |
) |
|
(102,000 |
) |
|
Foreign
operation |
|
|
31,342 |
|
|
27,734 |
|
|
(42,239 |
) |
|
Benefit
of lower federal tax bracket |
|
|
(113,150 |
) |
|
(120,719 |
) |
|
(101,791 |
) |
|
Other,
net |
|
|
(132,711 |
) |
|
(10,629 |
) |
|
40,382 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,971,323 |
|
|
4,406,226 |
|
|
3,715,364 |
|
The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets (liabilities) as of December 31, are presented
below:
| |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
Inventory
reserves |
|
$ |
262,000 |
|
|
330,000 |
|
|
Accounts
receivable reserves |
|
|
203,000 |
|
|
290,000 |
|
|
Gross
margin recognition on sale to foreign subsidiary |
|
|
292,000 |
|
|
273,000 |
|
|
Unrealized
foreign exchange loss |
|
|
81,000 |
|
|
122,000 |
|
|
Deferred
maintenance revenue |
|
|
76,000 |
|
|
71,000 |
|
|
Accrued
payroll |
|
|
88,000 |
|
|
66,000 |
|
|
Warranty
accrual |
|
|
53,000 |
|
|
50,000 |
|
|
Amortization |
|
|
16,000 |
|
|
10,000 |
|
|
Fixed
assets |
|
|
(138,000 |
) |
|
6,000 |
|
|
Other |
|
|
72,000 |
|
|
21,000 |
|
|
Total
net deferred tax assets |
|
$ |
1,005,000 |
|
|
1,239,000 |
|
The
Company believes that is more likely than not that the results of future
operations will generate sufficient taxable income to realize the net deferred
tax assets.
6) Stockholders’ Equity
Stock
Options
Rimage
has a stock option plan that provides for the grant of incentive stock options,
non-qualified stock options or restricted stock awards to certain key
administrative, managerial and executive employees and the automatic periodic
grants of stock options to non-employee directors. Pursuant to this plan, the
following options are currently issued and outstanding:
| |
|
Shares
available
for
grant |
|
Options
outstanding |
|
Weighted
average
exercise
price |
|
| |
|
|
|
|
|
|
|
|
Balance
at December 31, 2001 |
|
|
231,736 |
|
|
1,500,366 |
|
$ |
4.69 |
|
|
Granted |
|
|
(45,500 |
) |
|
45,500 |
|
|
8.40 |
|
|
Exercised |
|
|
— |
|
|
(14,724 |
) |
|
4.44 |
|
|
Canceled |
|
|
107,272 |
|
|
(107,272 |
) |
|
5.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002 |
|
|
293,508 |
|
|
1,423,870 |
|
$ |
4.76 |
|
|
Additional
shares available |
|
|
400,000 |
|
|
— |
|
|
— |
|
|
Shares
eliminated due to plan consolidation |
|
|
(25,000 |
) |
|
|
|
|
|
|
|
Granted |
|
|
(177,000 |
) |
|
177,000 |
|
|
9.62 |
|
|
Exercised |
|
|
|
|
|
(355,901 |
) |
|
2.15 |
|
|
Canceled |
|
|
9,733 |
|
|
(9,733 |
) |
|
9.89 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 |
|
|
501,241 |
|
|
1,235,236 |
|
$ |
6.17 |
|
|
Granted |
|
|
(213,500 |
) |
|
213,500 |
|
|
14.09 |
|
|
Exercised |
|
|
|
|
|
(164,739 |
) |
|
3.67 |
|
|
Canceled |
|
|
3,999 |
|
|
(3,999 |
) |
|
13.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
|
291,740 |
|
|
1,279,998 |
|
$ |
7.79 |
|
The
following table summarizes exercise prices of all outstanding options as of
December 31, 2004:
| |
|
|
|
|
Weighted |
|
| |
|
|
Number
|
|
Average
|
|
|
Exercise Price Range |
|
|
Of
Options |
|
Exercise
Price |
|
|
$
1.33 —
$ 1.33 |
|
|
|
192,175
|
|
$ |
1.33 |
|
| |
|
|
|
|
|
|
|
|
|
$
2.08 —
$ 2.67 |
|
|
|
197,065
|
|
$ |
2.66 |
|
| |
|
|
|
|
|
|
|
|
|
$
6.50 —
$ 9.00 |
|
|
|
366,591
|
|
$ |
7.86 |
|
| |
|
|
|
|
|
|
|
|
|
$
10.00 —
$13.60 |
|
|
|
330,500
|
|
$ |
10.62 |
|
| |
|
|
|
|
|
|
|
|
|
$
14.09 —
$17.00 |
|
|
|
193,667
|
|
$ |
14.47 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
1,279,998
|
|
$ |
7.79 |
|
| |
|
|
|
|
|
|
|
|
The
outstanding options have a weighted average contractual life of 6.6
years.
In
connection with the acquisition of Cedar Technologies in March 2000, the Company
assumed sponsorship of Cedar’s employee stock option plan. The plan was not
approved by Rimage’s shareholders and no additional grants were issued from the
plan subsequent to the acquisition. As of December 31, 2004, the plan was
inactive and no shares were outstanding under the plan. Exercises of options and
warrants originally issued and outstanding under the plan totaled 69,113 shares
in 2004, 8,628 shares in 2003 and 37,078 shares in 2002. Additionally, 312 and
3,628 shares expired unexercised in 2004 and 2002, respectively.
Employee
Stock Purchase Plan
In
February 2001, the Company’s board of directors adopted, and in May 2001 the
shareholders approved, the Employee Stock Purchase Plan (the “Plan”). A total of
300,000 common shares were reserved for issuance under the Plan. After a minimum
six-month waiting period, the Plan allows employees to elect, at one year
intervals, to contribute between 1 and 10% of their compensation, subject to
certain limitations, to purchase shares of common stock at 85% of the lower of
fair market value of such shares on the first or last business day of each one
year period. As of December 31, 2004, 89,809 shares have been issued under the
Plan.
Preferred
Stock Purchase Rights
On
September 16, 2003, the Company’s Board of Directors adopted a shareholder
rights plan and declared a dividend of one preferred share purchase right (a
“Right”) for each share of common stock of the Company outstanding on
October 6, 2003 and with respect to each share of common stock issued
thereafter. The rights become exercisable only after any person or group (the
“Acquiring Person”) becomes or would become the beneficial owner of 15% or more
of the Company’s outstanding common stock.
Each
Right entitles the registered holder to purchase from the Company 1/100 of a
Series A Junior Participating Preferred Share at a price of $100.00 per 1/100 of
a Preferred Share, subject to adjustment. In the event that any person or group
becomes an Acquiring Person, each holder of a Right, other than Rights that are
or were beneficially owned by the Acquiring Person (which will thereafter be
void), will thereafter have the right to receive, upon exercise thereof at the
then current exercise price of the Right, that number of Common Shares having a
market value of two times the exercise price of the Right, subject to certain
possible adjustments. If the Company is acquired in certain mergers or other
business combination transactions, or 50% or more of the assets or earning power
of the Company and its subsidiaries (taken as a whole) are sold, each holder of
a Right (other than Rights that have become void under the terms of the Rights
Agreement) will thereafter have the right to receive, upon exercise of the Right
at the then current exercise price of the Right, the number of common shares of
the acquiring company (or, in certain cases, on of its affiliates) having a
market value of two times the exercise price of the Right. At any time prior to
the time that a person or group has become an Acquiring Person, the Company’s
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $.001 per Right, subject to adjustment, payable in cash. The Rights will
expire at the close of business on September 16, 2013, unless extended or
earlier redeemed by the Company.
7) Net Income Per Share
The
following table identifies the components of net income per basic and diluted
share. A total of 2,743, 6,274, and 58,519 assumed conversion shares during
2004, 2003, and 2002, respectively, were excluded from the net income per share
computation as their effect was anti-dilutive.
| |
|
Net
Income |
|
Weighted
Average
Shares
Outstanding |
|
Per
Share
Amount |
|
|
2004: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
9,071,961 |
|
|
9,289,553 |
|
$ |
0.98 |
|
|
Dilutive
effect of stock options |
|
|
— |
|
|
642,134 |
|
|
(.07 |
) |
|
Diluted |
|
$ |
9,071,961 |
|
|
9,931,687 |
|
$ |
0.91 |
|
|
2003: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
7,665,625 |
|
|
8,931,084 |
|
$ |
0.86 |
|
|
Dilutive
effect of stock options |
|
|
|
|
|
812,020 |
|
|
(.07 |
) |
|
Diluted |
|
$ |
7,665,625 |
|
|
9,743,104 |
|
$ |
0.79 |
|
|
2002: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
6,463,715 |
|
|
8,702,552 |
|
$ |
0.74 |
|
|
Dilutive
effect of stock options |
|
|
|
|
|
794,171 |
|
|
(.06 |
) |
|
Diluted |
|
$ |
6,463,715 |
|
|
9,496,723 |
|
$ |
0.68 |
|
The
Company leases its facilities and some of its equipment under non-cancelable
operating lease arrangements. The rental payments under these leases are charged
to expense as incurred. The following is a schedule of future minimum lease
payments, excluding property taxes and other operating expenses, required under
all non-cancelable operating leases:
|
Year
ending December 31 |
|
Total
operating
leases |
|
| |
|
|
|
|
2005 |
|
$ |
818,051 |
|
|
2006 |
|
|
697,983 |
|
|
2007 |
|
|
580,423 |
|
|
2008 |
|
|
286,477 |
|
|
2009 |
|
|
28,792 |
|
| |
|
|
|
|
|
Net
minimum lease payments |
|
$ |
2,411,726 |
|
| |
|
|
|
|
Rent
expense under operating leases amounted to approximately $687,000, $673,000, and
$567,000 for the years ended December 31, 2004, 2003, and 2002, respectively,
which includes rent expense to a corporation owned by two former directors of
$357,000, $326,000, and $326,000, respectively. The rent expense with the former
directors relates to the lease of the Company’s corporate headquarters facility
(see note 11).
9) Profit Sharing and
Savings Plan
Rimage
has a profit sharing and savings plan under Section 401(k) of the Internal
Revenue Code. The plan allows employees to contribute up to 16% of pretax
compensation. The Company matches a percentage of employees’ contributions.
Matching contributions totaled $235,250, $191,086, and $171,290 in 2004, 2003,
and 2002, respectively.
10) Business Segment
Information / Major Customers
The
Company has identified one reportable operating segment consisting of CD-R and
DVD-R publishing systems required for producing discs with customized digital
content on an on-demand basis. The Company’s publishing systems, which include
equipment to handle a full range of low-to-high production volumes, incorporate
robotics, software and custom printing technology for disc labeling. The
Company’s hardware products consist of two primary product lines: The Producer
line, which accommodates higher volume CD-R and DVD-R production requirements,
and the Desktop line of lower-cost products for office and other desktop
applications. Rimage focuses its CD-R and DVD-R publishing solutions on a set of
vertical markets with special needs for customized, on-demand digital
information, including digital photography, medical imaging, banking and
finance, government and business offices. Rimage utilizes the following
principal means of distributing its products: Direct sales using its own sales
force, primarily in Europe; a two tier distribution system of distributors to
value added resellers in Europe, the U.S. and Latin America; and a distributor
to end-user system in Asia Pacific and in some areas in Europe. The Company’s
hardware products are assembled from components purchased from third party
suppliers. Components include CD-R/DVD-R drives, circuit boards, electric
motors, machined and molded parts, precision sheet metal assemblies, and other
mechanical parts.
Two of
the Company’s unaffiliated customers provided more than 10% of consolidated
revenues in 2004, generating approximately $8,914,000 and $8,793,000 of sales,
respectively. Accounts receivable balances at December 31, 2004 from these
customers amounted to $1,442,000 and $1,332,000, respectively. Two unaffiliated
customers also generated more than 10% of consolidated revenues in 2003,
generating approximately $8,379,000 and $6,276,000 of sales. Related accounts
receivable balances with these customers totaled $652,000 and $402,000,
respectively, as of December 31, 2003. The Company derived approximately
$7,971,000 and $7,273,000 of its 2002 sales from two unaffiliated customers.
Customers generating more than 10% of the Company’s revenues each year were
distributors or strategic partners of the Company.
The
Company’s revenues from each of its principal geographic regions were as follows
(in thousands):
| |
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, |
| |
|
2004 |
|
2003 |
|
2002 |
|
|
North
America |
|
$ |
43,864 |
|
$ |
30,938 |
|
$ |
28,612 |
|
|
Europe |
|
|
23,144
|
|
|
19,888
|
|
|
14,818
|
|
|
Other
(primarily Asia Pacific and Latin America) |
|
|
3,840
|
|
|
2,971
|
|
|
3,151
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
70,848 |
|
$ |
53,797 |
|
$ |
46,581 |
|
The
Company’s revenues from each of its principal products and services were as
follows (in thousands):
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Equipment: |
|
|
|
|
|
|
|
|
Producer |
|
$ |
36,186 |
|
$ |
31,133 |
|
$ |
28,385 |
|
|
Desktop |
|
|
7,887 |
|
|
6,403 |
|
|
6,066 |
|
|
Total |
|
|
44,073 |
|
|
37,536 |
|
|
34,451 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Consumables,
parts and repairs |
|
|
23,628 |
|
|
13,606 |
|
|
9,902 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Maintenance
Contracts |
|
|
3,147 |
|
|
2,655 |
|
|
2,228 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
70,848 |
|
$ |
53,797 |
|
$ |
46,581 |
|
Long-lived
assets of the Company were located as follows (in thousands):
| |
|
December
31, 2004 |
|
December
31, 2003 |
|
|
North
America |
|
$ |
2,151 |
|
$ |
954 |
|
|
Germany |
|
|
235
|
|
|
183
|
|
|
Total |
|
$ |
2,386 |
|
$ |
1,137 |
|
11) Related Party
Transactions
One of
the Company’s non-employee directors is also a director of one of the Company’s
vendors, a supplier of printed circuit boards used in the assembly of the
Company’s CD-R and DVD-R publishing systems. The Company purchased component
parts from this supplier approximating $1.5 million, $1.1 million and $.6
million for the years ended December 31, 2004, 2003 and 2002, respectively.
Outstanding accounts payable with this supplier totaled approximately $206,000
and $178,000 at December 31, 2004 and 2003, respectively, payable under standard
30-day payment terms.
Over the
past several years, the Company has rented its corporate headquarters facility
from a corporation owned by two former directors of the Company. Both directors
retired from the Company’s Board effective May 2003. One of the directors
beneficially owned 9%, 11.5% and 12.9% of the Company’s outstanding common stock
as of April 2004, 2003 and 2002, respectively. As of December 31, 2004, this
director’s beneficial ownership had declined to 6.4%. The other director’s
beneficial ownership in the Company’s outstanding common stock was 4% or less
during each reporting period.
The
Company currently rents its 58,500 square foot headquarters facility under a
noncancellable 48-month lease initiated August 1, 2004 with the corporation
owned by the former directors. Monthly base rent is $33,394 for the first year,
with 2% inflationary increases each subsequent year of the lease. Rent expense
paid to these parties amounted to $357,000 for the year ended December 31, 2004
and $326,000 in each of the years ended December 31, 2003 and 2002. No amounts
were payable to these parties as of December 31, 2004 and 2003.
12) 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.
13) 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.
Marketable
securities: The fair values are determined using quoted market
prices.
Foreign
currency forward exchange contracts: The fair value is the amount the Company
would receive or pay to terminate the contracts at the reporting date. The fair
value of foreign currency forward exchange contracts at December 31, 2004 and
2003 was a net loss of $210,000 and $324,000 respectively, recorded in other
current liabilities.
Trade
accounts receivable and accounts payable: The carrying amount approximates fair
value because of the short maturity of those instruments.
14) Supplemental
Quarterly Data - Unaudited (dollars in thousands, except per share data)
| |
|
2004 |
|
2003 |
|
| |
|
Fourth |
|
Third |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
20,895 |
|
|
17,879 |
|
|
17,631 |
|
|
14,444 |
|
|
15,671 |
|
|
13,791 |
|
|
12,791 |
|
|
11,544 |
|
|
Cost
of revenues |
|
|
11,064 |
|
|
10,029 |
|
|
9,564 |
|
|
7,370 |
|
|
8,023 |
|
|
7,109 |
|
|
6,459 |
|
|
5,809 |
|
|
Gross
profit |
|
|
9,831 |
|
|
7,850 |
|
|
8,067 |
|
|
7,074 |
|
|
7,648 |
|
|
6,682 |
|
|
6,332 |
|
|
5,735 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
1,168 |
|
|
1,010 |
|
|
1,227 |
|
|
1,125 |
|
|
1,123 |
|
|
867 |
|
|
926 |
|
|
848 |
|
|
Selling,
general and administrative |
|
|
4,279 |
|
|
3,708 |
|
|
3,658 |
|
|
3,211 |
|
|
2,821 |
|
|
2,798 |
|
|
2,823 |
|
|
2,634 |
|
|
Total
operating expenses |
|
|
5,447 |
|
|
4,718 |
|
|
4,885 |
|
|
4,336 |
|
|
3,944 |
|
|
3,665 |
|
|
3,749 |
|
|
3,482 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
4,384 |
|
|
3,132 |
|
|
3,182 |
|
|
2,738 |
|
|
3,704 |
|
|
3,017 |
|
|
2,583 |
|
|
2,253 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
net |
|
|
215 |
|
|
174 |
|
|
124 |
|
|
143 |
|
|
121 |
|
|
127 |
|
|
134 |
|
|
138 |
|
|
Gain
(loss) on currency exchange |
|
|
42 |
|
|
— |
|
|
(14 |
) |
|
(10 |
) |
|
55 |
|
|
(12 |
) |
|
9 |
|
|
(22 |
) |
|
Other,
net |
|
|
(4 |
) |
|
17 |
|
|
(93 |
) |
|
13 |
|
|
2 |
|
|
(14 |
) |
|
(21 |
) |
|
(1 |
) |
|
Total
other income, net |
|
|
253 |
|
|
191 |
|
|
17 |
|
|
146 |
|
|
178 |
|
|
101 |
|
|
122 |
|
|
115 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
4,637 |
|
|
3,323 |
|
|
3,199 |
|
|
2,884 |
|
|
3,882 |
|
|
3,118 |
|
|
2,705 |
|
|
2,368 |
|
|
Income
tax expense |
|
|
1,538 |
|
|
1,213 |
|
|
1,168 |
|
|
1,052 |
|
|
1,417 |
|
|
1,138 |
|
|
987 |
|
|
864 |
|
|
Net
income |
|
$ |
3,099 |
|
|
2,110 |
|
|
2,031 |
|
|
1,832 |
|
|
2,465 |
|
|
1,980 |
|
|
1,718 |
|
|
1,504 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share |
|
$ |
0.33 |
|
|
0.23 |
|
|
0.22 |
|
|
0.20 |
|
|
0.27 |
|
|
0.22 |
|
|
0.20 |
|
|
0.17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share |
|
$ |
0.31 |
|
|
0.21 |
|
|
0.20 |
|
|
0.18 |
|
|
0.25 |
|
|
0.20 |
|
|
0.18 |
|
|
0.16 |
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
a) Evaluation
of Disclosure Controls and Procedures
The
Company’s Chief Executive Officer, Bernard P. Aldrich, and the Company’s Chief
Financial Officer, Robert M. Wolf, have evaluated the Company’s disclosure
controls and procedures as of the end of the period covered by this report.
Based upon such review, they have concluded that these disclosure controls and
procedures are effective.
(b) Changes
in Internal Control Over Financial Reporting
There
have been no changes in internal controls over financial reporting
that occurred during the fiscal quarter covered by this report that have
materially affected, or are reasonable likely to materially affect, the
registrant’s internal control over financial reporting.
On March 2, 2005, the Company filed a Current Report on Form 8-K reporting that on February 24, 2005, the Compensation
Committee of the Board of Directors approved salaries for 2005 for the Company's executive officers. In the Form 8-K, the
2005 salary for Konrad Rotermund, the Company's Vice President, European Operations, should have been stated in Euros at
148,000€.
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
OF THE REGISTRANT |
The
information required by this item is incorporated herein by reference to the
following sections of the Company’s Proxy Statement for its 2005 Annual Meeting
of Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the close of the
fiscal year for which this report is filed (the “Proxy Statement”):
| — |
Ownership
of Voting Securities by Principal Holders and
Management; |
| — |
Proposal 1—Election
of Directors; |
| — |
Nominees
for Election of Directors; |
| — |
Executive
Officers of the Company; |
| — |
Executive
Compensation; |
| — |
Section 16(a)
Beneficial Ownership Reporting Compliance; |
| — |
Corporate
Governance; and |
The
information required by this item is incorporated herein by reference to the
section of the Company’s Proxy Statement entitled “Executive
Compensation.”
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER
MATTERS |
The
information required by this item is incorporated herein by reference to the
section of the Company’s Proxy Statement entitled “Ownership of Voting
Securities by Principal Holders and Management.”
|
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS |
The
information required by this item is incorporated herein by reference to the
section of the Company’s Proxy Statement entitled “Certain Relationships and
Related Transactions.”
|
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
The
information required by this item is incorporated herein by reference to the
section of the Company’s Proxy Statement entitled “Relationship with Independent
Accountants.”
|
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a) |
(1)
Financial
Statements. See
Part II, Item 8 of this report. |
|
| |
|
|
| |
(2)
Financial
Statement Schedules. |
|
| |
|
Page
in this
Form
10-K |
| |
|
|
| |
Report of Independent Registered Public
Accounting Firm |
|
| |
on Financial Statement Schedule
|
|
| |
|
|
| |
(3)
Exhibits.
See Index to Exhibits on page 45 of this report. |
|
| |
|
|
|
(b) |
See
Index to Exhibits on page 45 of this report. |
|
The Board
of Directors and Stockholders
Rimage
Corporation:
Under
date of March 14, 2005, we reported on the consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2004, as contained in the 2004 Annual Report to
shareholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 2004.
In connection with our audits of the aforementioned consolidated financial
statements, we also 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 this 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, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG
LLP
Minneapolis,
Minnesota
March 14,
2005
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
| |
|
|
| |
RIMAGE
CORPORATION |
|
|
|
| Date: March 16,
2005 |
By: |
/s/ Bernard P.
Aldrich |
| |
Bernard P. Aldrich |
| |
Chief Executive
Officer |
| |
|
|
| |
|
| |
By: |
/s/ Robert M.
Wolf |
| |
Robert M. Wolf |
| |
Chief Financial
Officer |
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. Each
person whose signature appears below constitutes and appoints Bernard P. Aldrich
and Robert M. Wolf as his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and re-substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the U.S.
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
| Signature |
|
Title |
Date |
|
|
|
|
| /s/ Bernard P. Aldrich |
|
Chief Executive
Officer, President and Director |
March 16,
2005 |
| Bernard P. Aldrich |
|
(principal
executive officer) |
|
| |
|
|
|
| |
|
|
|
| /s/ David J.
Suden |
|
Chief Technical
Officer & Director |
|
| David J. Suden |
|
|
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ Robert M. Wolf |
|
Chief Financial Officer (principal financial |
|
| Robert M. Wolf |
|
and
accounting officer) and Corporate Secretary |
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ James L.
Reissner |
|
Director, Chairman of
the Board |
|
| James L. Reissner |
|
|
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ Thomas F.
Madison |
|
Director |
|
| Thomas F. Madison |
|
|
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ Steven M.
Quist |
|
Director |
|
| Steven M. Quist |
|
|
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ Lawrence M.
Benveniste |
|
Director |
|
| Lawrence M. Benveniste |
|
|
March 16, 2005 |
| |
|
|
|
| |
|
|
|
| /s/ Philip D.
Hotchkiss |
|
Director |
|
| Philip D. Hotchkiss |
|
|
March 16, 2005 |
| |
|
|
|
44
INDEX
TO EXHIBITS
|
Exhibit
No.
|
|
Description
|
|
3.1
|
|
1992
Restated Articles of Incorporation of Rimage Corporation (Incorporated
herein by reference to Exhibit 3.1 to the Company’s Registration Statement
on Form SB-2 (File No. 33-22558)).
|
|
3.2
|
|
Articles
of Amendment to 1992 Restated Articles of Incorporation of Rimage
Corporation (Incorporated herein by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form S-8 (File No.
333-69550)).
|
|
3.3
|
|
Bylaws
of Rimage Corporation (Incorporated herein by reference to Exhibit 3.2 to
the Company’s Registration Statement on Form SB-2 (File No.
33-22558)).
|
|
3.4
|
|
Rights
Agreement dated as of September 17, 2003 between Rimage Corporation and
Wells Fargo Bank, as Rights Agent (Incorporated by reference to Exhibit 1
to the Company’s Registration Statement on Form 8-A (File No.
000-20728)).
|
|
10.1
|
|
Rimage
Corporation Amended and Restated 1992 Stock Option Plan * (Incorporated by
reference to Exhibit 4.2 to the Company’s Registration Statement on Form
S-8 (File No. 333-106901)).
|
|
10.2
|
|
Rimage
Corporation 2001 Stock Option Plan for Non-Employee Directors *
(Incorporated by reference to exhibit of same number to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2001).
|
|
10.3
|
|
Rimage
Corporation 2001 Employee Stock Purchase Plan * (Incorporated by reference
to exhibit of same number to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001).
|
|
10.4
|
|
Lease
dated July 31, 2004, between Rimage Corporation and 7725 Washington Avenue
Corporation (Incorporated by reference to Exhibit 10.1 of the Company’s
Quarterly Report on Form 10Q for the quarter ended June 30,
2004).
|
|
10.5
|
|
Form
of Severance/Change in Control Letter Agreement dated November 5, 2004,
between the Company and certain executive officers * (Incorporated by
reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004).
|
|
10.6
|
|
Credit
Agreement, dated March 29, 2004, by and between the Company and Wells
Fargo Bank, National Association.
|
|
10.7
|
|
Revolving
Line of Credit Note, dated March 29, 2004, in the principal amount of
$10,000,000 issued to the Company by Wells Fargo Bank, National
Association.
|
|
21.1
|
|
Subsidiaries
of Rimage Corporation.
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Certificate
of Chief Executive Officer pursuant to Rules 13d-14(a) and 15d-14(a) of
the Exchange Act.
|
|
31.2
|
|
Certificate
of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of
the Exchange Act.
|
|
32
|
|
Certification
Pursuant to 18 U.S.C. §1350
|
*
Indicates a management contract or compensatory plan or arrangement
Schedule
II
RIMAGE
CORPORATION
Valuation
and Qualifying Accounts
| Allowance for
Doubtful Accounts |
|
|
|
| Receivable and Sales
Returns: |
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Balance
at beginning of year |
|
$ |
886,828 |
|
$ |
635,382 |
|
$ |
714,943 |
|
| |
|
|
|
|
|
|
|
|
|
|
Write-offs
and other adjustments |
|
|
(165,795 |
) |
|
1,282 |
|
|
(95,672 |
) |
Recoveries |
|
|
(158,456 |
) |
|
(151,549 |
) |
|
(90,551 |
) |
|
Additions
charged to costs and expenses |
|
|
37,476 |
|
|
401,713 |
|
|
106,662 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year |
|
$ |
600,053 |
|
$ |
886,828 |
|
$ |
635,382 |
|
| |
|
|
|
|
|
|
|
|
|
|
See
accompanying report of Independent Registered Public Accounting Firm on page
44.
