UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED September 30, 2005; OR
x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO __________.
Commission File Number: 0-20728
RIMAGE CORPORATION
(Exact name of Registrant as specified in its charter)
| Minnesota |
|
41-1577970 |
|
| (State or other jurisdiction of | |
(I.R.S. Employer Identification No.) | |
| incorporation or organization) | |
7725 Washington Avenue South, Edina, MN 55439
(Address of principal executive offices)
952-944-8144
(Registrant’s telephone number, including area code)
NA
(Former name, former address, and former fiscal year, if changed since last report.)
Common Stock outstanding at October 31, 2005 – 9,580,873 shares
of $.01 par value Common Stock.
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x
No o
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes o
No x
RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
2
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(unaudited)
| Assets | | |
September 30,
2005 | |
December 31,
2004 |
|
| Current assets: |
|
|
| |
|
| |
|
| Cash and cash equivalents | | |
$ | 29,751,750 |
|
$ | 13,320,681 |
|
| Marketable securities | | |
| 31,899,732 |
|
| 39,174,799 |
|
| Trade accounts receivable, net of allowance for doubtful accounts | | |
| and sales returns of $564,000 and $600,000, respectively | | |
| 14,801,909 |
|
| 10,183,814 |
|
| Inventories | | |
| 6,153,775 |
|
| 7,395,689 |
|
| Prepaid expenses and other current assets | | |
| 996,770 |
|
| 462,214 |
|
| Deferred income taxes – current | | |
| 1,086,023 |
|
| 1,127,642 |
|
|
| Total current assets | | |
| 84,689,959 |
|
| 71,664,839 |
|
|
| |
| Property and equipment, net | | |
| 2,668,793 |
|
| 2,386,494 |
|
| Deferred income taxes – long term | | |
| 28,785 |
|
| — |
|
| Other non-current assets | | |
| 37,917 |
|
| 86,667 |
|
|
| Total assets | | |
$ | 87,425,454 |
|
$ | 74,138,000 |
|
|
| Liabilities and Stockholders’ Equity |
|
|
| Current liabilities: | | |
| Trade accounts payable | | |
$ | 6,311,680 |
|
$ | 4,717,073 |
|
| Accrued compensation | | |
| 2,484,307 |
|
| 2,300,009 |
|
| Other accrued expenses | | |
| 1,396,829 |
|
| 1,121,370 |
|
| Income taxes payable | | |
| 1,496,118 |
|
| 1,100,257 |
|
| Deferred income and customer deposits | | |
| 2,349,572 |
|
| 1,821,057 |
|
| Other current liabilities | | |
| 11,687 |
|
| 217,640 |
|
|
| Total current liabilities | | |
| 14,050,193 |
|
| 11,277,406 |
|
| |
| Long-term liabilities: | | |
| Deferred income taxes | | |
| — |
|
| 122,932 |
|
| Other non-current liabilities | | |
| 16,256 |
|
| 16,317 |
|
|
| Total long-term liabilities | | |
| 16,256 |
|
| 139,249 |
|
|
| |
| Total liabilities | | |
| 14,066,449 |
|
| 11,416,655 |
|
| |
| 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 9,579,873 and 9,365,479, respectively | | |
| 95,799 |
|
| 93,655 |
|
| Additional paid-in capital | | |
| 21,471,900 |
|
| 19,677,692 |
|
| Retained earnings | | |
| 51,935,507 |
|
| 42,871,670 |
|
| Accumulated other comprehensive income (loss) | | |
| (144,201 |
) |
| 78,328 |
|
|
| Total stockholders' equity | | |
| 73,359,005 |
|
| 62,721,345 |
|
|
| |
| Commitments and contingencies | | |
| |
| Total liabilities and stockholders' equity | | |
$ | 87,425,454 |
|
$ | 74,138,000 |
|
|
See accompanying notes to condensed consolidated financial statements
3
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
|
Three Months Ended
September 30, | |
Nine Months Ended
September 30, |
|
2005 | |
2004 | |
2005 | |
2004 |
|
| Revenues |
|
|
$ | 27,961,714 |
|
$ | 17,878,930 |
|
$ | 71,143,875 |
|
$ | 49,953,357 |
|
| Cost of revenues | | |
| 14,571,180 |
|
| 10,028,948 |
|
| 38,497,835 |
|
| 26,963,084 |
|
|
| Gross profit | | |
| 13,390,534 |
|
| 7,849,982 |
|
| 32,646,040 |
|
| 22,990,273 |
|
|
| |
| Operating expenses: | | |
| Research and development | | |
| 1,399,064 |
|
| 1,009,431 |
|
| 4,177,093 |
|
| 3,361,361 |
|
| Selling, general and administrative | | |
| 5,936,565 |
|
| 3,708,137 |
|
| 15,083,202 |
|
| 10,577,183 |
|
|
| Total operating expenses | | |
| 7,335,629 |
|
| 4,717,568 |
|
| 19,260,295 |
|
| 13,938,544 |
|
|
| |
| Operating income | | |
| 6,054,905 |
|
| 3,132,414 |
|
| 13,385,745 |
|
| 9,051,729 |
|
|
| |
| Other income (expense): |
| Interest, net | | |
| 400,448 |
|
| 174,582 |
|
| 1,006,961 |
|
| 442,007 |
|
| Loss on currency exchange | | |
| (40,050 |
) |
| (345 |
) |
| (113,005 |
) |
| (24,313 |
) |
| Other, net | | |
| (210 |
) |
| 16,749 |
|
| 804 |
|
| (62,882 |
) |
|
| Total other income, net | | |
| 360,188 |
|
| 190,986 |
|
| 894,760 |
|
| 354,812 |
|
|
| |
| Income before income taxes | | |
| 6,415,093 |
|
| 3,323,400 |
|
| 14,280,505 |
|
| 9,406,541 |
|
| Income taxes | | |
| 2,330,062 |
|
| 1,213,041 |
|
| 5,216,668 |
|
| 3,433,387 |
|
|
| Net income | | |
$ | 4,085,031 |
|
$ | 2,110,359 |
|
$ | 9,063,837 |
|
$ | 5,973,154 |
|
|
| |
| Net income per basic share | | |
$ | 0.43 |
|
$ | 0.23 |
|
$ | 0.95 |
|
$ | 0.64 |
|
|
| |
| Net income per diluted share | | |
$ | 0.39 |
|
$ | 0.21 |
|
$ | 0.88 |
|
$ | 0.60 |
|
|
| |
| Basic weighted average shares outstanding | | |
| 9,553,208 |
|
| 9,339,208 |
|
| 9,506,540 |
|
| 9,265,451 |
|
|
| |
| Diluted weighted average shares and | | |
| assumed conversion shares | | |
| 10,379,935 |
|
| 9,919,571 |
|
| 10,249,552 |
|
| 9,911,003 |
|
|
See accompanying notes to condensed consolidated financial statements
4
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
Nine months ended
September 30, |
|
2005 | |
2004 |
|
| Cash flows from operating activities: |
|
|
| |
|
| |
|
| Net income | | |
$ | 9,063,837 |
|
$ | 5,973,154 |
|
| Adjustments to reconcile net income to net cash |
| provided by operating activities: |
| Depreciation and amortization | | |
| 867,489 |
|
| 689,107 |
|
| Loss on disposal of property and equipment | | |
| 38,319 |
|
| 107,245 |
|
| Stock-based compensation | | |
| — |
|
| 8,147 |
|
| Changes in operating assets and liabilities: |
| Trade accounts receivable | | |
| (4,618,095 |
) |
| (2,524,710 |
) |
| Inventories | | |
| 1,241,914 |
|
| (2,991,597 |
) |
| Prepaid expenses and other current assets | | |
| (534,556 |
) |
| 52,683 |
|
| Deferred income taxes | | |
| (110,098 |
) |
| — |
|
| Trade accounts payable | | |
| 1,594,607 |
|
| 1,506,889 |
|
| Accrued compensation | | |
| 184,298 |
|
| 145,000 |
|
| Other accrued expenses and other current liabilities | | |
| 65,756 |
|
| (391,069 |
) |
| Income taxes payable | | |
| 862,419 |
|
| (1,265,366 |
) |
| Deferred income and customer deposits | | |
| 528,515 |
|
| (120,720 |
) |
|
| |
| Net cash provided by operating activities | | |
| 9,184,405 |
|
| 1,188,763 |
|
|
| |
| Cash flows from investing activities: | | |
| Purchases of marketable securities | | |
| (84,350,619 |
) |
| (126,154,129 |
) |
| Maturities of marketable securities | | |
| 91,676,000 |
|
| 123,562,143 |
|
| Purchases of property and equipment | | |
| (1,132,938 |
) |
| (1,350,896 |
) |
| Proceeds from sale of property and equipment | | |
| 5,480 |
|
| 60 |
|
| Other non-current assets | | |
| (119,234 |
) |
| (135,091 |
) |
|
| |
| Net cash provided by (used in) investing activities | | |
| 6,078,689 |
|
| (4,077,913 |
) |
|
| |
| Cash flows from financing activities: |
| Principal payments on capital lease obligations | | |
| (8,210 |
) |
| — |
|
| Proceeds from stock option exercises | | |
| 1,329,794 |
|
| 908,641 |
|
|
| |
| Net cash provided by financing activities | | |
| 1,321,584 |
|
| 908,641 |
|
|
| |
| Effect of exchange rate changes on cash | | |
| (153,609 |
) |
| (20,572 |
) |
|
| |
| Net increase (decrease) in cash and cash equivalents | | |
| 16,431,069 |
|
| (2,001,081 |
) |
| |
| Cash and cash equivalents, beginning of period | | |
| 13,320,681 |
|
| 26,741,627 |
|
|
| |
| Cash and cash equivalents, end of period | | |
$ | 29,751,750 |
|
$ | 24,740,546 |
|
|
| |
| Supplemental disclosures of net cash paid during the period for: |
| Income taxes | | |
$ | 4,464,347 |
|
$ | 4,930,435 |
|
| |
| Supplemental disclosures of non cash financing activities during the period for: |
| Tax effect of disqualifying disposition of stock options | | |
$ | 466,588 |
|
$ | 494,579 |
|
The Company entered into capital lease obligations of $11,899 during the nine
months ended September 30, 2005.
The Company recorded unrealized gains on marketable securities of $50,314 in
other comprehensive income during the nine months ended September 30, 2005.
See accompanying notes to condensed consolidated financial statements
5
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| (1) |
|
Basis of Presentation and Nature of Business |
| |
Rimage Corporation (the Company) develops, manufactures and
distributes high performance CD Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems from its
operations in the United States and Germany, and effective June 2005, in Japan. The Company also distributes related consumables
for use with its systems, consisting of media kits, ribbons, ink cartridges and blank CD-R and DVD-R media. |
| |
The accompanying condensed consolidated financial statements of
Rimage Corporation are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted
in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and
Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally
included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial
statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations and cash flows of the interim periods presented. Certain previously reported amounts have been
reclassified to conform with the current presentation. Operating results for these interim periods are not necessarily indicative
of results to be expected for the entire year, due to seasonal, operating and other factors. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004. |
| |
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 at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| |
The Company applies APB No. 25 and related interpretations in
accounting 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 accompanying condensed consolidated 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 net income
and basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 would have been adjusted
to the proforma amounts reflected in the following table: |
6
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|
Three Months
Ended
Sept 30, 2005 | |
Three Months
Ended
Sept 30, 2004 | |
Nine Months
Ended
Sept 30, 2005 | |
Nine Months
Ended
Sept 30, 2004 |
|
| Net income: |
|
|
| |
|
| |
|
| |
|
| |
|
| As reported | | |
$ | 4,085,031 |
|
$ | 2,110,359 |
|
$ | 9,063,837 |
|
$ | 5,973,154 |
|
| Stock based employee |
| compensation, net of tax | | |
| (415,673 |
) |
| (136,242 |
) |
| (976,607 |
) |
| (408,726 |
) |
| |
| |
| |
| |
| |
| Proforma | | |
$ | 3,669,358 |
|
$ | 1,974,117 |
|
$ | 8,087,230 |
|
$ | 5,564,428 |
|
|
| Basic net income per share: |
| As reported | | |
$ | 0.43 |
|
$ | 0.23 |
|
$ | 0.95 |
|
$ | 0.64 |
|
| Stock based employee |
| compensation, net of tax | | |
$ | (0.05 |
) |
$ | (0.02 |
) |
$ | (0.10 |
) |
$ | (0.04 |
) |
| |
| |
| |
| |
| |
| Proforma | | |
$ | 0.38 |
|
$ | 0.21 |
|
$ | 0.85 |
|
$ | 0.60 |
|
|
| Diluted net income per share: |
| As reported | | |
$ | 0.39 |
|
$ | 0.21 |
|
$ | 0.88 |
|
$ | 0.60 |
|
| Stock based employee |
| compensation, net of tax | | |
$ | (0.03 |
) |
$ | (0.01 |
) |
$ | (0.08 |
) |
$ | (0.04 |
) |
| |
| |
| |
| |
| |
| Proforma | | |
$ | 0.36 |
|
$ | 0.20 |
|
$ | 0.80 |
|
$ | 0.56 |
|
|
| |
The per share weighted-average fair value of stock options granted
under the Company’s stock option plan was $6.15 for the nine months ended September 30, 2005, compared to $4.80 for the same
period in 2004. These per share values were determined using the Black Scholes option-pricing model. Key valuation assumptions for
the year-to-date period in 2005 included an average volatility rate of 28%, an average risk-free interest rate of 4%, an expected
life of five years and no dividends. Assumptions for the same period in 2004 included an average volatility rate of 32%, an
average risk-free interest rate of 3.4%, an expected life of five years and no dividends. |
| (2) |
|
Marketable Securities |
| |
Marketable securities primarily consist of U.S. Treasury, money
market and municipal securities with long-term credit ratings of AAA and short-term credit ratings of A-1. 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. |
| |
Inventories consist of the following as of: |
|
September 30,
2005 | |
December 31,
2004 |
|
| Finished goods and demonstration equipment |
|
|
$ | 1,554,897 |
|
$ | 1,385,148 |
|
| Work-in-process | | |
| 399,730 |
|
| 479,787 |
|
| Purchased parts and subassemblies | | |
| 4,199,148 |
|
| 5,530,754 |
|
|
| | | |
$ | 6,153,775 |
|
$ | 7,395,689 |
|
|
7
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| |
Comprehensive income consists of the Company’s net income,
foreign currency translation adjustments and unrealized holding gains (losses) from available for sale investments. The components
of and changes in other comprehensive income (loss) are as follows: |
|
Three Months Ended
September 30, | |
Nine Months Ended
September 30, |
|
2005 | |
2004 | |
2005 | |
2004 |
|
| Net income |
|
|
$ | 4,085,031 |
|
$ | 2,110,359 |
|
$ | 9,063,837 |
|
$ | 5,973,154 |
|
| Other comprehensive income (loss): | | |
| Foreign currency translation adjustment | | |
| (12,417 |
) |
| 34,127 |
|
| (272,843 |
) |
| (21,968 |
) |
| Net unrealized gains (losses) on securities | | |
| 36,984 |
|
| (1,692 |
) |
| 50,314 |
|
| (3,695 |
) |
|
| Total comprehensive income | | |
$ | 4,109,598 |
|
$ | 2,142,794 |
|
$ | 8,841,308 |
|
$ | 5,947,491 |
|
|
| (5) |
|
Foreign Currency Contracts |
| |
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. |
| |
As of September 30, 2005, the Company had fifteen outstanding
foreign currency contracts totaling $3,176,000. These contracts mature during 2005 and early 2006 and bear rates ranging from
1.2003 to 1.2501 U.S. Dollars per Euro. As of September 30, 2005, the fair value of foreign currency contracts was a net gain
position of $21,654, recorded in other current assets. |
| (6) |
|
Recent Accounting Developments |
| |
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. In April 2005, the Securities and Exchange Commission
amended the compliance dates for SFAS No. 123R, with the result that the effective date for the Company’s implementation of
SFAS No. 123R is deferred from July 1, 2005 to January 1, 2006. In April 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 107, “Share-Based Payment,” confirming the latitude in SFAS No. 123R’s provisions on
selecting models for valuing share options and clarifying other positions on accounting and disclosure for share-based-payment
arrangements. SAB 107 permits registrants to choose from different valuation models to estimate the fair value of share options,
assuming consistent application, and also provides guidance on developing assumptions used in valuing employee share options and
on related MD&A disclosures. While the Company cannot precisely determine the impact on net earnings that may result from the
adoption of SFAS No 123R, estimated compensation expense related to prior annual periods can be found in the notes to the
Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2004, and for interim
periods, note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10Q. The ultimate
amount of increased compensation expense will be dependent on whether the Company adopts SFAS No. 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. The Company has not completed its evaluation of the
impact of adopting SFAS No. 123R, but expects the adoption to have an adverse impact on net earnings and net income per
share. |
8
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| |
FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations,” was issued in March 2005, and provides clarification on certain provisions of SFAS No. 143,
“Accounting for Asset Retirement Obligations.” Under Interpretation No. 47, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The fair value of a liability for a conditional asset retirement obligation should be recognized when incurred,
generally upon acquisition, construction, development or through the normal operation of the asset. This Interpretation also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. Interpretation No. 47 is effective for the Company no later than December 31, 2005, and is not expected to have a
significant impact on 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 May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3,
“Reporting Changes in Interim Financial Statements.” SFAS No. 154 requires retrospective application to prior
period’s financial statements of voluntary changes in accounting principle unless it is impracticable to do so. Retrospective
application refers to the application of a different accounting principle to previously issued financial statements as if that
principle had always been used. Statement No. 154‘s retrospective-application requirement replaces APB 20‘s requirement
to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement is effective for the Company for accounting changes and
corrections of errors made beginning January 1, 2006. The Company does not currently expect the adoption of this pronouncement to
have a significant impact on its consolidated financial statements. |
9
Table of Contents
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| |
In September 2005, the Emerging Issues Task Force approved EITF
04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 defines when a
purchase and a sale of inventory with the same party that operates in the same line of business should be considered a single
nonmonetary transaction subject to APB Opinion 29, “Accounting for Nonmonetary Transactions.” According to this Issue,
two or more inventory transactions with the same party should be combined if they are “entered in contemplation of one
another.” Issue No. 04-13 also differentiates those nonmonetary exchanges of inventory in the same line of business that
should be recognized at fair value from those that should be recognized at their carrying amounts. Issue No. 04-13 is effective
for the Company for new arrangements entered into, or modifications or renewals of existing arrangements, beginning in the second
quarter 2006. The Company does not expect the adoption of this Issue to have a significant impact on its consolidated financial
statements. |
| |
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, freight and parts costs, with
consideration of the proportion of parts that can be re-used. |
| |
The warranty reserve rollforward, including provisions and claims,
is as follows: |
| Nine Months Ended: |
Beginning
Balance | |
Warranty
Provisions | |
Warranty
Claims | |
Foreign
Exchange Impact | |
Ending
Balance |
| |
|
| September 30, 2005 |
|
|
$ | 187,000 |
|
$ | 699,000 |
|
$ | (583,000 |
) |
$ | (6,000 |
) |
$ | 297,000 |
|
| |
| September 30, 2004 | | |
$ | 172,000 |
|
$ | 331,000 |
|
$ | (330,000 |
) |
$ | (1,000 |
) |
$ | 172,000 |
|
| |
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. |
10
Table of Contents
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
| |
The following table sets forth, for the periods indicated,
selected items from the Company’s consolidated statements of operations. |
|
|
Percentage (%)
of Revenues
Three Months Ended
September 30, | |
Percentage (%)
Increase
Between
Periods | |
Percentage (%)
of Revenues
Nine Months Ended
September 30, | |
Percentage (%)
Increase
Between
Periods |
|
|
2005 | |
2004 | |
2005 vs. 2004 | |
2005 | |
2004 | |
2005 vs. 2004 |
|
| Revenues |
|
|
| 100 |
|
| 100 |
|
| 56 |
|
| 100 |
|
| 100 |
|
| 42 |
|
| Cost of revenues | | |
| (52 |
) |
| (56 |
) |
| 45 |
|
| (54 |
) |
| (54 |
) |
| 43 |
|
|
| Gross profit | | |
| 48 |
|
| 44 |
|
| 71 |
|
| 46 |
|
| 46 |
|
| 42 |
|
| Operating expenses: | | |
| Research and development | | |
| (5 |
) |
| (6 |
) |
| 39 |
|
| (6 |
) |
| (7 |
) |
| 24 |
|
| Selling, general and admin | | |
| (21 |
) |
| (21 |
) |
| 60 |
|
| (21 |
) |
| (21 |
) |
| 43 |
|
|
| Operating income | | |
| 22 |
|
| 18 |
|
| 93 |
|
| 19 |
|
| 18 |
|
| 48 |
|
| Other income, net | | |
| 1 |
|
| 1 |
|
| 89 |
|
| 1 |
|
| 1 |
|
| 152 |
|
|
| Income before income taxes | | |
| 23 |
|
| 19 |
|
| 93 |
|
| 20 |
|
| 19 |
|
| 52 |
|
| Income tax expense | | |
| (8 |
) |
| (7 |
) |
| 94 |
|
| (7 |
) |
| (7 |
) |
| 53 |
|
|
| Net income | | |
| 15 |
|
| 12 |
|
| 92 |
|
| 13 |
|
| 12 |
|
| 51 |
|
|
| |
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, Germany, and effective
June 2005, in Japan. These systems allow customers to benefit from cost savings by eliminating their manual labor efforts in
industries such as banking, medical, retail and government. Rimage anticipates continued investments in sales and marketing to
further penetrate 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 each of 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 37% and 39% of
consolidated revenues during the nine months ended September 30, 2005 and 2004, respectively. Exclusive of a small amount of
capital lease obligations, Rimage has no long-term debt and does not require significant capital investments as all fabrication of
its products is outsourced to vendors. |
| |
Revenues. Revenues increased 56% to $28.0
million and 42% to $71.1 million for the three and nine months ended September 30, 2005, respectively, from $17.9 million and
$50.0 million for the same prior-year periods. The growth in revenues for both the quarterly and year-to-date periods was
primarily impacted by an increase in sales of producer product line equipment of $7.3 million and $11.4 million, respectively.
Producer product line sales include the shipment in the third quarter of a $6 million equipment order related to the
Company’s product rollout into the U.S. retail market. Recurring revenues, including sales of CD-R and DVD-R media, printer
ribbons and ink cartridges, parts and maintenance contracts, also contributed significantly to sales growth, with increases of
$2.4 million and $7.1 million for the three and nine months ended September 30, 2005, respectively. The strong growth in recurring
revenues is primarily due to the continued expansion of the Company’s worldwide installed base of CD-R and DVD-R publishing
systems and sales of Rimage-branded media kits, which the Company began to sell in 2004. Sales of desktop product line equipment
increased $0.4 million and $2.7 million during the third quarter and year-to-date periods in 2005, compared to the same prior year
periods. |
11
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
International sales rose 29% and 24% for the three and nine months
ended September 30, 2005 over the same prior year periods, and comprised 28% and 33% of total sales, compared to 34% and 37%,
respectively. The decline in the concentration of international sales relative to total sales was impacted by the $6 million sale
of producer product line equipment into the U.S. retail market in the third quarter. Currency fluctuations primarily affecting the
Company’s European operations increased reported revenues for the three and nine months ended September 30, 2005 by less than
1%. |
| |
As of and for the nine months ended September 30, 2005, foreign
revenues from unaffiliated customers generated by the Company’s German and Japanese operations and the operating income and
net identifiable assets of such operations were $19,260,000, $559,000 and $6,898,000, respectively. These amounts relate primarily
to the Company’s German operations, as the establishment of subsidiary operations in Japan did not occur until June 2005.
Comparable amounts for the Company’s German operations as of and for the nine months ended September 30, 2004 were revenues
of $16,015,000, operating income of $634,000 and net identifiable assets of $5,187,000. The growth is due to increasing
penetration in foreign markets of sales of CD-R and DVD-R products. |
| |
Gross profit. Gross profit as a percentage
of revenues was 48% and 46% for the three and nine months ended September 30, 2005, respectively, compared to 44% and 46% for the
same prior-year periods. Favorably impacting gross profit as a percentage of revenues in both current year periods was an increase
in both the volume and concentration of producer product line equipment sales, which generally carry higher margins than desktop
product line equipment or recurring revenues, including consumable product sales. Producer product line sales comprised 57% and
52% of total sales in the three and nine months ended September 30, 2005, compared to 47% and 51% in the same prior year periods.
Partially offsetting the favorable impact in both the quarterly and year-to-date periods of the higher volume and concentration of
producer product line sales were increased costs for service and manufacturing labor and overhead stemming from increased
investments in these areas to support the introduction of the Rimage 360i desktop product in the second quarter and an expected
continued growth in total sales. |
| |
Rimage anticipates that its gross profit percentage for the full
year 2005 will be in the 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 totaled $1.4 million and $4.2 million for the three and nine months ended September 30, 2005, representing 5%
and 6% of revenues, respectively. Expenses for the same prior year periods totaled $1.0 million and $3.4 million, representing 6%
and 7% of revenues, respectively. The 39% and 24% respective increases in 2005 expenses reflect continued development of next
generation products, and additionally, for the year-to-date period, materials and resources required to complete development work
on the Rimage 360i desktop product released in the second quarter 2005. |
| |
Rimage expects its research and development expenditures to
approximate 6% of revenues for the full year 2005. These expenditures will be made to support new product development initiatives
and improve existing products. |
12
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
Selling, general and administrative expenses for the three and
nine months ended September 30, 2005 were 21% of revenues at $5.9 million and $15.1 million, respectively, compared to expenses in
the same prior year periods at 21% of revenues, or $3.7 million and $10.6 million, respectively. Sales and marketing expenses
increased approximately $0.6 million and $1.9 million for the three and nine months ended September 30, 2005, respectively,
reflecting implementation of programs to support the second quarter launch of the Rimage 360i desktop product and other marketing
initiatives and promotional activities, as well as a 7% and 11% respective increase in average sales and marketing
headcount relative to the same prior year periods. General and administrative expenses contributed the remaining $1.6 million and
$2.6 million growth in expenses in the second quarter and year-to-date period, respectively, impacted largely by $1.1 million of
consulting expenses incurred in the third quarter for a strategic study. Also contributing to the expense growth in the third
quarter and year-to-date period were increased costs associated with a 26% and 19% respective increase in average headcount
and increased management compensation costs. |
| |
Other income, net. The Company recognized
net interest income on cash investments of $0.4 million and $1 million for the three and nine months ended September 30, 2005,
respectively, compared to $0.2 million and $0.4 million for the same prior year periods. The increase in the quarterly and
year-to-date periods was due to a $9 million and $8 million respective increase in average cash equivalent and marketable
securities balances and a small increase in effective yields. Other income for the three and nine months ended September 30, 2005
was negatively affected by net losses on foreign currency transactions, amounting to $40,000 in the third quarter and $113,000 in
the year-to-date period.
|
| |
Income taxes. The provision for income
taxes represents federal, state, and foreign income taxes on income. Income tax expense for the three and nine months ended
September 30, 2005 amounted to $2.3 million and $5.2 million, or 36.3% and 36.5% of income before taxes, respectively. Income tax
expense for the three and nine months ended September 30, 2004 was $1.2 million and $3.4 million or 36.5% of income before taxes
for each period. The Company anticipates its effective tax rate will range between 36% and 37% for the full year 2005.
|
| |
Net income / net income per
share. Resulting net income for the three and nine months ended September 30, 2005 was $4.1 million, or 14.6%
of revenues, and $9.1 million, or 12.7% of revenues, respectively. This compares to net income of $2.1 million, or 11.8% of
revenues, and $6.0 million, or 12.0% of revenues for the same prior year periods. Related net income per diluted share amounts for
the three and nine months ended September 30, 2005 were $0.39 and $0.88, respectively, compared to $0.21 and $0.60 per diluted
share for the same prior year periods. |
| |
Liquidity and Capital Resources |
| |
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 credit agreement allows for advances under an unsecured revolving loan up to a
maximum advance of $10 million. At September 30, 2005, no amounts were outstanding under the credit agreement. |
| |
Current assets increased to $84.7 million as of September 30, 2005
from $71.7 million at December 31, 2004, primarily reflecting increased cash and cash equivalents and marketable securities ($9.2
million) and accounts receivable ($4.6 million), partially offset by a decline in inventories ($1.2 million). The increase
in cash and marketable securities and accounts receivable was impacted largely by revenue growth during the nine months ended
September 30, 2005. Inventory levels at September 30, 2005 decreased by 16% from December 31, 2004, due to increased sales in the
third quarter and improved inventory management. Inventories remain high relative to historic levels due to the need to stock long
lead-time parts and additional inventory of CD-R and DVD-R media, printer ribbons and cartridges as a result of expected continued
growth in consumable product sales. Current liabilities increased to $14.1 million as of September 30, 2005 from $11.3 million as
of December 31, 2004, primarily due to increased accounts payable ($1.6 million), accrued expenses ($0.5 million), income taxes
payable ($0.4 million) and deferred income and customer deposits ($0.5 million). The increase in accounts payable primarily
reflects the accrual of fees due to a third party consulting firm for a strategic study and also the timing of vendor payments.
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. |
13
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
Net cash provided by operating activities was $9.2 million for the
nine months ended September 30, 2005, compared to $1.2 million in the same prior year period. The approximate $8 million increase
in cash generated from operations was primarily impacted by a $3.2 million increase in net income adjusted for non-cash items and
a $4.8 million favorable net impact from changes in operating assets and liabilities. Primarily contributing to the change in
operating assets and liabilities was the $4.2 million impact of inventories declining by $1.2 million during the nine months ended
September 30, 2005, compared to a $3 million increase in the same prior year period. The prior year increase in inventories was
primarily the result of a build-up of inventory for long lead-time materials. As noted above, inventories declined in the current
year period due to a high level of sales in the third quarter and improved inventory management. Other net favorable changes in
operating assets and liabilities during the nine months ended September 30, 2005 were largely offset by the impact of a high level
of sales in the third quarter resulting in a $2.1 million larger increase in trade accounts receivable during the current period
compared to the same prior year period. |
| |
Net cash provided by investing activities was $6.1 million for the
nine months ended September 30, 2005, compared to a net use of cash of $4.1 million during the same period in 2004. The increase
in cash provided by investing activities was primarily the result of a $9.9 million decrease in purchases of marketable
securities, net of related maturities of marketable securities, and a $0.2 million decrease in capital expenditures. |
| |
Net cash provided by financing activities totaled $1.3 million and
$0.9 million for the nine months ended September 30, 2005 and 2004, respectively. Amounts in both periods primarily reflect
proceeds from stock option exercises. |
| |
Critical Accounting Policies. |
| |
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 (including hardware and consumables), 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. |
14
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| • |
|
Delivery has occurred. Product has been transferred
to the customer or the customer’s designated delivery agent, at which time title and the risk of loss transfers.
|
| • |
|
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. |
| |
The Company accrues for warranty costs and sales returns at the
time of shipment based upon historical experience and known trends in the business. |
| |
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) based on
renewal prices. |
| |
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. In other arrangements, some or all of the deliverables are not independently
functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and
how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change
otherwise applicable revenue recognition criteria. |
| |
Allowance for Doubtful Accounts and Sales
Returns. The Company records a reserve for accounts receivable that are potentially uncollectible. The
reserve is established based on a specific assessment of accounts with known collection exposure, based upon a review of the age
of the receivable, the customer’s payment history, the customer’s financial condition and industry and general economic
conditions, as well as a general assessment of collection exposure in the remaining receivable population based upon bad debt
history. Actual bad debt exposure could differ significantly from management’s estimates if economic conditions worsened for
the Company’s customers. 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 other factors. |
| |
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. |
15
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
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. The Company records a liability for warranty claims at the time of sale. The amount of the liability is based
on an analysis of historical claims experience, which includes labor, parts and freight costs and consideration of the proportion
of parts that can be re-used. Also considered are the anticipated impact of changes in product quality, releases of new products
and other factors. Claims experience could be materially different from actual results because of the introduction of new, more
complex products; a change in the Company’s warranty policy in response to industry trends, competition or other external
forces; or manufacturing changes that could impact product quality. |
| |
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. In April 2005, the Securities and Exchange Commission
amended the compliance dates for SFAS No. 123R, with the result that the effective date for the Company’s implementation of
SFAS No. 123R is deferred from July 1, 2005 to January 1, 2006. In April 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 107, “Share-Based Payment,” confirming the latitude in SFAS No. 123R’s provisions on
selecting models for valuing share options and clarifying other positions on accounting and disclosure for share-based-payment
arrangements. SAB 107 permits registrants to choose from different valuation models to estimate the fair value of share options,
assuming consistent application, and also provides guidance on developing assumptions used in valuing employee share options and
on related MD&A disclosures. While the Company cannot precisely determine the impact on net earnings that may result from the
adoption of SFAS No 123R, estimated compensation expense related to prior annual periods can be found in the notes to the
Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2004, and for interim
periods, note 1 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10Q. The ultimate
amount of increased compensation expense will be dependent on whether the Company adopts SFAS No. 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. The Company has not completed its evaluation of the
impact of adopting SFAS No. 123R, but expects the adoption to have an adverse impact on net earnings and net income per share.
|
| |
FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations,” was issued in March 2005, and provides clarification on certain provisions of SFAS No. 143,
“Accounting for Asset Retirement Obligations.” Under Interpretation No. 47, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The fair value of a liability for a conditional asset retirement obligation should be recognized when incurred,
generally upon acquisition, construction, development or through the normal operation of the asset. This Interpretation also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. Interpretation No. 47 is effective for the Company no later than December 31, 2005, and is not expected to have a
significant impact on the Company’s consolidated financial statements. |
16
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
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 May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3,
“Reporting Changes in Interim Financial Statements.” SFAS No. 154 requires retrospective application to prior
period’s financial statements of voluntary changes in accounting principle unless it is impracticable to do so. Retrospective
application refers to the application of a different accounting principle to previously issued financial statements as if that
principle had always been used. Statement No. 154‘s retrospective-application requirement replaces APB 20‘s requirement
to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement is effective for the Company for accounting changes and
corrections of errors made beginning January 1, 2006. The Company does not currently expect the adoption of this pronouncement to
have a significant impact on its consolidated financial statements. |
| |
In September 2005, the Emerging Issues Task Force approved EITF
04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 defines when a
purchase and a sale of inventory with the same party that operates in the same line of business should be considered a single
nonmonetary transaction subject to APB Opinion 29, “Accounting for Nonmonetary Transactions.” According to this Issue,
two or more inventory transactions with the same party should be combined if they are “entered in contemplation of one
another.” Issue No. 04-13 also differentiates those nonmonetary exchanges of inventory in the same line of business that
should be recognized at fair value from those that should be recognized at their carrying amounts. Issue No. 04-13 is effective
for the Company for new arrangements entered into, or modifications or renewals of existing arrangements, beginning in the second
quarter 2006. The Company does not expect the adoption of this Issue to have a significant impact on its consolidated financial
statements. |
| |
Cautionary Note Regarding Forward-Looking Statements |
| |
This report contains forward-looking statements that involve risks
and uncertainties. For this purpose, any statements contained in this report that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable
terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and
uncertainties. The Company’s actual results could differ significantly from those discussed in the forward-looking
statements. |
17
Table of Contents
| |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued) |
| |
Factors that could cause or contribute to such differences
include, but are not limited to, the following, as well as other factors not now identified: the Company’s ability to keep
pace with changes in technology in the computer and storage media industries as well as technology changes in the retail, medical,
banking, government and office markets; increasing competition and the ability of the Company’s products to successfully
compete with products of competitors and newly developed media storage products; the ability of the Company’s newly developed
products to gain acceptance and compete against products in their markets, including the ability of the Company’s 360i
desktop product to gain acceptance and compete in the retail market; the significance of the Company’s international
operations and the risks associated with international operations including currency fluctuations, local economic health and
management of these operations over long distances; the Company’s ability to protect its intellectual property and to defend
claims of others relating to its intellectual property; the Company’s dependence upon the selling efforts of the
Company’s key channel partners; the Company’s ability to maintain adequate inventory of products; the Company’s
reliance on single source suppliers; the ability of the Company’s products to operate effectively with the computer products
developed and to be developed by other manufacturers; the negative effect upon the Company’s business from manufacturing or
design defects; the effect of U.S. and international regulation, including the costs of implementing and complying with new
regulations enacted in various countries requiring the reduction of hazardous substances in electrical and electronic equipment,
including the European Union Waste Electrical and Electronic Equipment Directive and Restriction of Hazardous Substances
Directive; fluctuations in the Company’s operating results; the Company’s dependence upon its key personnel; the
volatility of the price of the Company’s common stock; provisions governing the Company relating to a change of control,
compliance with corporate governance and securities disclosures rules and other risks, including those set forth in the
Company’s reports filed with the Securities and Exchange Commission, including its annual report on Form 10-K for the year
ended December 31, 2004. These forward-looking statements are made as of the date of this report and the Company assumes no
obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from
those anticipated in such forward-looking statements. |
| |
The Company is exposed to market risk from foreign exchange rate
fluctuations of the European Euro and the Japanese Yen to the U.S. dollar as the financial position and operating results of the
Company’s German and Japanese subsidiaries, Rimage Europe and Rimage Japan, respectively, are translated into U.S. dollars
for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
|
| |
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.
The primary objective of these hedging activities is to maintain an approximately balanced position in foreign currencies so that
exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. 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. |
18
Table of Contents
| |
(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 evaluation, 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 control over financial
reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting. |
| Item 2. |
|
Changes in Securities, Use of Proceeds and Issuer Purchases of Securities |
| Item 3. |
|
Defaults Upon Senior Securities |
| Item 4. |
|
Submission of Matters to a Vote of Security Holders
|
| Item 5. |
|
Other Information |
| |
(a) The following exhibits are included
herein: |
| |
|
11.1 |
|
Calculation of Earnings per Share. |
| |
|
31.1 |
|
Certificate of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act. |
| |
|
31.2 |
|
Certificate of Chief Financial Officer pursuant to Rules 13a-14
and 15d-14 of the Exchange Act. |
| |
|
32 |
|
Certifications pursuant to 18 U.S.C. §1350. |
19
Table of Contents
SIGNATURES
In accordance with the Exchange Act, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereto duly authorized.
| |
|
RIMAGE CORPORATION
Registrant |
| |
| |
| Date: |
November 4, 2005 |
By: |
/s/ Bernard P. Aldrich |
| |
|
|
|
| |
|
Bernard P. Aldrich
Director, Chief Executive Officer,
and President
(Principal Executive Officer) |
| |
| |
| Date: |
November 4, 2005 |
By: |
/s/ Robert M. Wolf |
| |
|
|
|
| |
|
Robert M. Wolf
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer) |
20
