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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-20728
RIMAGE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1577970
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7725 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (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 [ ]
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. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). YES [X] NO [ ]
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 $84,282,467.
As of March 17, 2004, there were outstanding 9,257,682 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2003 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
TABLE OF CONTENTS
PAGE
----
PART..........................................................................3
Item 1. Description of Business..............................................3
General..............................................................3
Products.............................................................3
Marketing and Distribution...........................................4
Competition..........................................................4
Manufacturing........................................................4
Research and Development.............................................5
Patents and Government Regulation....................................5
Employees............................................................5
Item 2. Properties...........................................................5
Item 3. Legal Proceedings....................................................5
Item 4. Submission Of Matters To A Vote Of Security Holders..................6
PART II .....................................................................6
Item 5. Market For Common Equity And Related Stockholder Matters.............6
Shareholders.........................................................6
Dividends............................................................7
Information Regarding Equity Compensation Plans......................7
Item 6. Selected Financial Data..............................................8
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations............................................9
Overview.............................................................9
Results of Operations................................................9
Liquidity and Capital
Resources...........................................................11
Critical Accounting Policies........................................11
New Accounting Pronouncements.......................................12
Available Information...............................................13
Cautionary Note Regarding Forward-Looking Statements................13
Item 7A. Quantitative And Qualitative Disclosures About Market Risk..........14
Item 8. Financial Statements And Supplementary Data.........................15
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure.................................30
Item 9A. Controls And Procedures.............................................30
PART III ....................................................................31
Item 10. Directors And Executive Officers Of The Registrant..................31
Item 11. Executive Compensation..............................................31
Item 12. Security Ownership Of Certain Beneficial Owners And Management......31
Item 13. Certain Relationships And Related Transactions......................31
Item 14. Principal Accountant Fees And Services..............................31
PART IV ....................................................................32
Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K.....32
SIGNATURES................................................................ 35
2
GENERAL INFORMATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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. 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.
PRODUCTS
Rimage's products are designed to enable the automation of data distribution
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 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 70%, 74%, and 74% of Rimage's
revenue from operations during the 2003, 2002, and 2001 calendar years,
respectively. Rimage's other major sources of revenue consist of consumables and
maintenance contract sales.
Since the acquisition of Cedar, Rimage's CD-R and DVD-R products have been
divided into two 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 $31,133,000 or 58% of
Rimage's revenue during the year ended December 31, 2003. The Desktop line
contributed $6,403,000 or 12% of revenue during 2003. The balance of revenue was
generated through sale of consumables, consisting of media, ribbons, and parts,
and maintenance contract services. Consumables and services contributed
$13,606,000 or 25% of revenue and $2,655,000 or 5% of revenue, in the years
ended December 31, 2003 and 2002, respectively.
3
THE PRODUCER LINE. The Producer CD-R/DVD-R product line 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 Product incorporates CD-R
or DVD-R recorders, or both, with customized robotics, a thermal or re-transfer
thermal printer for on-disc color printing, software, and computer hardware
components.
Rimage offers its Producer line of products in four basic configurations to meet
the varying needs of its commercial customers. The Producer Autostar 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 Protege system comes standard with two CD-R recorders that may be
interchanged with DVD-R recorders and the Amigo comes with one recorder. The
Autostar, Protege and Amigo are all available with either Rimage's Everest or
Prism printers. The Endeavor, introduced during 2003, combines Everest printing
technology with a new robotic solution, a small product size and footprint, and
a unique media sorting capability. The markets served by Rimage's Producer line
of products include the banking, photography, medical and government industries.
Prices of the Producer 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 and DVD
media that are permanent, 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 LINE. Acquired through the acquisition of Cedar Technologies, Inc.,
Rimage's Desktop line 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. The Desktop
line also includes an Autoprinter and a 4800dpi inkjet printer capable of full
color printing on CD-R/DVD-R discs.
MARKETING AND DISTRIBUTION
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 reseller both in Europe and
the U.S.; and distributor to end-user system in Asia Pacific and in some areas
in Europe.
During 2003, Rimage derived 16% and 12% of its revenues from Distributors:
Optical Laser, Inc. (Huntington Beach, CA) and New Wave Technologies, Inc.
(Gaithersburg, MD), respectively. During 2002, Rimage derived 17% and 16% of its
revenues from Optical Laser and New Wave Technologies, respectively. During
2001, Rimage derived 18% and 13% of its revenues from Optical Laser and New Wave
Technologies, respectively.
Rimage conducts foreign sales through its U.S. operation and its subsidiary in
Germany, Rimage Europe GmbH. Foreign sales constituted approximately 42%, 39%,
and 40% of Rimage's revenue for the years ended December 31, 2003, 2002, and
2001, respectively.
COMPETITION
Rimage competes with a number of manufacturers of CD-R/DVD-R production
equipment and related products. 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/DVD, its transporter mechanisms and its software differentiate its products
from those of competitors.
MANUFACTURING
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.
4
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 test. 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.
RESEARCH AND DEVELOPMENT
There are 28 people 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/DVD 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 $3,766,000, $3,602,000,
and $3,901,000 in 2003, 2002, and 2001 (or 7.0%, 7.7%, and 10.0% of revenues,
respectively). Rimage anticipates maintaining its expenditures in research and
development within the range of 7% to 8% of revenues during 2004.
PATENTS AND GOVERNMENT REGULATION
Rimage is the owner of thirteen patents and has thirteen 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 our 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.
EMPLOYEES
At December 31, 2003, Rimage had 157 full-time employees, of which 28 were
involved in research and development, 67 in assembly, testing, repair and
customer service, and 62 in sales, administration and management. None of
Rimage's employees are represented by a labor union or covered by a collective
bargaining agreement. Rimage believes its relationship with employees is good.
ITEM 2. PROPERTIES
Rimage headquarters are located in a leased facility of 43,000 square feet at
7725 Washington Avenue South, Edina, Minnesota 55439. The Company rents this
facility on a month-to-month basis, from a corporation owned by two former
directors of the Company. Rent is $28,022 per month plus taxes and common area
charges of $13,939 per month. This facility is used for manufacturing,
engineering, service and sales. Rimage is currently assessing options to meet
its demand for future space requirements. Rimage also leases a facility in
Dietzenbach, Germany used for manufacturing, service and sales and a facility in
Campbell, CA used for engineering.
ITEM 3. LEGAL PROCEEDINGS
Rimage is not a party to any litigation. However, Rimage may become subject to
claims encountered in the normal course of business.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Rimage did not submit any matters to a vote of security holders during the last
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 System.
Low High
----- -----
Calendar Year 2002:
1st $7.30 $9.59
Quarter................
2nd 7.36 9.60
Quarter...............
3rd 7.60 9.38
Quarter...............
4th 7.80 10.60
Quarter...............
Calendar Year 2003:
1st 7.86 9.30
Quarter................
2nd 8.95 12.99
Quarter...............
3rd 12.02 15.68
Quarter...............
4th 13.03 16.20
Quarter...............
SHAREHOLDERS
At March 29, 2004, there were 82 record holders of Rimage's common stock.
6
DIVIDENDS
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.
INFORMATION REGARDING EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation
plans in effect as of December 31, 2003. Each of our equity compensation plans
is an "employee benefit plan" as defined by Rule 405 of Regulation C of the
Securities Act of 1933.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of shares of common
stock to be issued upon Weighted-average exercise Number of shares of common
exercise of outstanding price of outstanding stock remaining available
options, warrants and options, warrants and for future issuance under
PLAN CATEGORY rights(1) rights(1) equity compensation plans(2)
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
stockholders: 1,304,661 $5.99 739,205
Equity compensation plans
not approved by
stockholders: -- -- --
(1) Does not include shares to be issued on June 30, 2004 under the
Company's Employee Stock Purchase Plan which has as its purchase
period July 1 to June 30 of each year. The purchase price for shares
under the Employee Stock Purchase Plan is the lesser of (a) 85% of
the fair market value of the common shares on the first business day
of the purchase period or (b) 85% of the fair market value of the
common shares on the last business day of the purchase period.
(2) Excludes shares of common stock listed in the first column.
7
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below and the Consolidated Financial Statements and the
Notes thereto included in Item 8 below. Amounts are shown in 000's (except per
share data).
CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Year ended December 31
----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $53,797 $46,581 $38,894 $49,792 $41,355
Cost of Revenues 27,399 23,986 19,669 23,254 20,305
Gross Profit 26,398 22,595 19,225 26,538 21,050
Operating Expenses 14,841 13,176 12,760 14,250 12,189
Operating Income From
Continuing operations 11,557 9,419 6,465 12,288 8,861
Other Income, Net 515 760 972 1,017 490
Income Tax Expense 4,406 3,715 2,628 5,056 3,389
Income From Continuing Operations 7,666 6,464 4,809 8,249 5,962
Income (Loss) From Discontinued
Operations -- -- -- -- 490
Net Income 7,666 6,464 4,809 8,249 6,452
Basic Net Income Per Share $ 0.86 $ 0.74 $ 0.55 $ 0.98 $ 0.81
Diluted Net Income Per Share $ 0.79 $ 0.68 $ 0.51 $ 0.85 $ 0.68
Weighted Average Shares and Assumed
Conversion Shares:
Basic 8,931 8,703 8,701 8,417 7,974
Diluted 9,743 9,497 9,509 9,673 9,477
CONSOLIDATED BALANCE SHEET INFORMATION:
Balances as of December 31
--------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Cash and Cash Equivalents $26,742 $17,339 $14,767 $21,225 $13,539
Marketable Securities 21,855 18,998 13,343 -- --
Trade Accounts Receivables, Net 6,243 6,644 5,008 9,013 6,190
Inventories 3,334 3,042 3,625 2,936 2,644
Current Assets 59,849 47,337 38,783 35,744 23,333
Property and Equipment, Net 1,137 1,314 1,608 652 902
Total Assets 61,024 48,709 40,454 36,555 24,623
Current Liabilities 9,013 6,552 5,151 5,594 5,546
Long-Term Liabilities -- -- 68 -- --
Stockholders' Equity 52,011 42,157 35,235 30,961 19,077
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The percentage relationships to revenues of certain income and expense items for
the three years ended December 31, 2003 and the percentage changes in these
income and expense items between years are contained in the following table:
- -----------------------------------------------------------------------------------------------------
Percent (%)
Increase (Decrease)
Percentage (%) of Revenues Between Periods
- -----------------------------------------------------------------------------------------------------
2003 vs. 2002 vs.
2003 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------
Revenues 100.0 100.0 100.0 15.5 19.8
Cost of revenues (50.9) (51.5) (50.6) 14.2 21.9
- -----------------------------------------------------------------------------------------------------
Gross profit 49.1 48.5 49.4 16.8 17.5
Operating expenses:
Research and development (7.0) (7.7) (10.0) 4.5 (7.7)
Selling, general and administrative (20.6) (20.6) (22.8) 15.7 8.1
- -----------------------------------------------------------------------------------------------------
Operating income 21.5 20.2 16.6 22.7 45.7
Other income, net 0.9 1.7 2.5 (32.2) (21.8)
- -----------------------------------------------------------------------------------------------------
Income before income taxes 22.4 21.9 19.1 18.6 36.9
Income tax expense (8.2) (8.0) (6.7) 18.6 41.4
- -----------------------------------------------------------------------------------------------------
Net income 14.2 13.9 12.4 18.6 34.4
=====================================================================================================
OVERVIEW
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
banking, medical, photography and government. Rimage anticipates increased sales
and marketing expenditures as a result of increased resources focused on
developing these markets. As approximately 94% of Rimage's sales occur within
North America and Europe, 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 and
ink cartridges), maintenance contracts, blank CD-R and DVD-R media, and parts.
Rimage's aftermarket sales (consumables, maintenance contracts, blank media,
parts and service) represent approximately 30% of its consolidated revenues.
Rimage has no long-term debt and does not require significant capital investment
as all fabrication of its products is outsourced to vendors.
RESULTS OF OPERATIONS
REVENUES. Revenues were $53.8 million, $46.6 million, and $38.9 million for
2003, 2002, and 2001, respectively, reflecting changes of 15.5%, 19.8%, and
(21.9)%, respectively, over the prior years. The increase in revenues from 2002
to 2003 was due to increased volume of aftermarket sales totaling $4.1 million,
increased Producer line equipment sales totaling $2.6 million and increased
Desktop line equipment sales, due to new product release during the year,
totaling $464,000. The increase is offset by an increase in allowance for sales
returns of $335,000 due to increased sales return activity as a result of
planned new product introductions. Geographically, Rimage's European operation
accounted for $5.1 million of the increase in consolidated sales from 2002 to
2003, of which $3.3 million (6% of consolidated revenues for 2003) related to
the positive impact of the continued weakening dollar during 2003. 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 revenues from 2001 to 2002 was primarily due to the increased
producer line equipment sales of $4.9 million and increased volume of
aftermarket sales totaling $1.7 million. Rimage's U.S. operation accounted for
$5.8 million of the increase in consolidated sales from 2001 to 2002. The growth
was in part facilitated by the addition of three distributors and thirty-eight
VARs to the worldwide distribution channel and approximately $2 million of
equipment sold to Kodak/Qualex during the second quarter 2002.
9
GROSS PROFIT. Gross profit as a percentage of revenues was 49.1%, 48.5%, and
49.4% during 2003, 2002, and 2001, respectively. The increase in gross profit as
a percentage of revenues from 2002 to 2003 was primarily due to increased volume
of sales of aftermarket products and Producer line equipment. Rimage generates
slightly higher margins on these products as compared to our 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
increase was partially offset by foreign currency exchange rate fluctuations
comparing 2003 to 2002.
The Desktop line of products, which carries lower gross profit levels compared
to the Producer line of products, represented 13% of total sales during 2002
compared to 12% of total sales during 2001. This percentage increase coupled
with reduced pricing of the desktop products during 2002 was the primary cause
of the decrease in gross profit as a percentage of revenues from 2001 to 2002.
The decrease was partially offset by foreign currency exchange rate fluctuations
comparing 2002 to 2001.
Rimage anticipates that its future gross profit percentages 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 $3.8 million, $3.6
million, and $3.9 million for 2003, 2002, and 2001, respectively, representing
7.0%, 7.7%, and 10.0% of revenues, respectively. 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 our new Desktop
line of products that included development of a new thermal inkjet CD/DVD label
printer launched during June 2003.
The dollar decrease from 2001 to 2002 is primarily due to costs incurred to
develop our Everest thermal retransfer CD/DVD label printer during 2001,
partially offset by increased development materials needed to manage the
increased number of projects Rimage undertook during 2002. One of the most
significant of these projects included the development of the DiscLab product
introduced in March 2003.
Rimage anticipates its research and development expenditures to be within the
range of 7% to 8% of revenues during 2004. These expenditures will be made to
develop new products and improve existing products.
Selling, general and administrative expenses for 2003, 2002, and 2001 were $11.1
million, $9.6 million, and $8.9 million, respectively, representing 20.6%,
20.6%, and 22.8% of revenues, respectively. The dollar increase from 2002 to
2003 was primarily due to an increase in expenses of $748,000 resulting from
increased expenses such as commissions and co-op marketing funds relating to
increased sales. The increase was also a result of additional services obtained
to ensure compliance with the Sarbanes-Oxley regulation.
The increase in dollars from 2001 to 2002 was primarily the result of increased
advertising expenses of $359,000 related to the Desktop line of products and
increased management bonuses totaling $359,000.
OTHER INCOME, NET. For 2003, 2002, and 2001 Rimage recognized interest income on
cash investments of $519,000, $780,000, and $1,111,000, respectively. While cash
levels continued to increase from 2001 to 2003, effective yields have decreased
creating declining interest income levels. See "Liquidity and Capital Resources"
below for a discussion of cash levels. Other income was positively impacted by
net foreign currency transaction gains during 2003 and negatively impacted by
currency translation losses during 2002 and 2001 of ($28,000) and ($139,000),
respectively.
INCOME BEFORE INCOME TAXES. For 2003, 2002, and 2001, income before income taxes
were $12.1 million, $10.2 million, and $7.4 million, respectively, representing
22.4%, 21.9%, and 19.1% of revenues, respectively. The increase from 2002 to
2003 is primarily due to increased aftermarket and Producer line equipment
sales, which also generated slightly higher margins as described above.
The increase from 2001 to 2002 was primarily due to increased sales from new and
existing distribution partners partially offset by slightly lower gross profit
levels from sales of the Desktop line of products.
10
INCOME TAXES. The provision for income taxes represents federal, state, and
foreign income taxes on income. For 2003, 2002, and 2001, income tax expense
amounted to $4.4 million, $3.7 million and $2.6 million, respectively,
representing 36.5%, 36.5%, and 35.3% of income before income taxes,
respectively. The Company recognized increased benefits from research and
development and foreign tax credits during 2001. The Company anticipates an
effective tax rate of between 36.5% and 37% during 2004.
LIQUIDITY AND CAPITAL RESOURCES
Rimage anticipates it will be able to maintain current operations including the
anticipated cash requirements of its capital expenditures through its internally
generated funds and, if required, from Rimage's existing credit agreement.
Current assets increased to $59.8 million as of December 31, 2003 from $47.3
million as of December 31, 2002, primarily reflecting increased cash levels. 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. Current liabilities increased to $9.0 million as
of December 31, 2003 from $6.6 million as of December 31, 2002 reflecting timing
of tax payments and increased deferred income as a result of added maintenance
contract sales.
Net cash provided by operating activities was $11.9 million, $8.2 million, and
$9.2 million during 2003, 2002, and 2001, respectively. The increase from 2002
to 2003 was primarily due to the timing of cash collections from our customers
by reducing our days sales outstanding from 57 to 48 days and lower amounts
being paid for our quarterly payments of estimated tax. The decrease from 2001
to 2002 was primarily due to the timing of cash collections from our customers
and a conscious effort to reduce inventory.
Net cash used in investing activities was $3.6 million, $6.1 million, and $14.9
million during 2003, 2002, and 2001, respectively. Cash used in investing
activities during 2003, 2002 and 2001 primarily reflected purchases of
short-term investments. Investing activities during 2001 also included payments
made towards tooling for the Everest printer. At December 31, 2003, Rimage had
no significant commitments to purchase additional capital equipment.
Net cash provided by (used in) financing activities was $952,000, $379,000, and
$(700,000) during 2003, 2002, and 2001, respectively. Cash provided by financing
activities during 2003 and 2002 reflected proceeds from stock option exercises.
Cash used in financing activities during 2001 primarily reflected cash payments
to repurchase Company stock under a stock repurchase program approved by the
Company's directors netted with proceeds from stock option exercises.
A summary of Rimage's contractual cash obligations at December 31, 2003 is as
follows:
-----------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Operating leases 781,496 326,742 278,165 176,589 -- --
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
TOTAL CONTRACTUAL CASH OBLIGATIONS
781,496 326,742 278,165 176,589 -- --
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
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:
11
REVENUE RECOGNITION. Revenue for product sales, which does 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:
o Persuasive evidence of an arrangement exists. Orders are received for
all sales and sales invoices are mailed on shipment.
o Delivery has occurred. Product has been transferred to the customer or
the customer's designated delivery agent.
o The vendor's price is fixed or determinable. All sales prices are
fixed at the time of the sale (shipment).
o Collectibility is probable. All sales are made on the basis that
collection is expected in line with our standard net 30 days' terms in
the U.S. and Asia and net 60 days' terms in Europe.
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 sale 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 distributors 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. During 2003, obsolescence charges of approximately $118,000 were
taken on Desktop inventory due to the introduction of the new Desktop line of
products at the end of the second quarter of fiscal year 2003. 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.
NEW ACCOUNTING PRONOUNCEMENTS
FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others", requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company plans to adopt
FIN 45 for guarantees
12
issued or modified after December 31, 2002. The Company does not expect the
adoption of FIN45 to have any impact on the financial position or results of
operations of the Company.
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. The adoption of EITF 00-21 on July 1, 2003 did not
have any impact on the financial position or results of operations of the
Company.
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.
AVAILABLE INFORMATION
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.
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. The following factors are among those that could
cause the Company's actual results to differ materially from those set forth in
such forward looking statements.
o The markets for computer and associated storage media have
historically changed rapidly and a reduction in industry prominence
from CD-R or DVD-R media, or the introduction of superior media, would
significantly negatively impact the Company's operations and
prospects.
o Approximately 40% of the Company's revenue is attributable to foreign
operations, primarily in Europe, and a majority of these sales are
invoiced in foreign currencies. Such operations are subject to the
affects of currency fluctuations, factors affecting local economic
health, and the difficulties of managing operations from long
distances.
o Although the Company has obtained patent protection on some of its
products, it has periodically been subject to competition from others
who have copied its products or otherwise used technology that may
infringe the Company's rights. There are a number of companies that
claim intellectual property rights in the industry in which the
Company competes and the Company cannot predict in advance that it
will be able to protect its products from the competing claims of
others or will not be required to pay others for use of technology for
which they claim rights.
13
o The Company sells its products through a large number of distributors,
value added resellers and dealers and its quarterly operations may be
affected by the operating results of some of these channel partners
and by its ability to keep its channel partners properly trained and
actively selling its products.
o The Company's products must operate with a number of other computer
and related equipment and the Company must maintain compatibility and
interoperability with the products of others, as well as new product
introductions.
o The Company's operations are periodically affected by introductions of
new products by competitors.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, a
German based subsidiary. Gains or losses on forward exchange contracts are
recognized in income on a current basis over the term of the contracts. 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
-------------------------------------
There- Fair
2004 2005 2006 2007 after Total Value
---- ---- ---- ---- ----- ----- -----
ANTICIPATED TRANSACTIONS AND
RELATED DERIVATIVES (US $ Equivalent in Thousands)
Forward Exchange Agreements
(Receive $US/Pay (euro))
Contract Amount 3,731 -- -- -- -- 3,731 324
Average Contractual
Exchange Rate 1.1602 -- -- -- -- 1.1602
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page in Annual
Report on Form 10-K
For Year Ended
December 31, 2003
-----------------
Independent Auditors' Report ................ 16
Consolidated Balance Sheets, as of
December 31, 2003 and 2002................... 17
Consolidated Statements of Operations,
for the years ended December 31, 2003,
2002 and 2001................................ 18
Consolidated Statements of Stockholders'
Equity, and Comprehensive Income for the
years ended December 31, 2003, 2002 and
2001 ........................................ 19
Consolidated Statements of Cash Flows,
for the years ended December 31, 2003,
2002 and 2001 ............................... 20
Notes to Consolidated Financial
Statements .................................. 21-30
15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Rimage Corporation:
We have audited the accompanying consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Minneapolis, Minnesota
February 13, 2004 except as to note 4, which is as of March 29, 2004.
16
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
December 31, December 31,
Assets 2003 2002
- ------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 26,741,627 $ 17,339,135
Marketable securities 21,855,434 18,997,987
Trade accounts receivable, net of allowance for doubtful accounts
and sales returns of $887,000 and $635,000, respectively 6,242,516 6,643,613
Inventories 3,334,370 3,041,828
Prepaid expenses and other current assets 473,053 385,205
Deferred income taxes-current 1,202,329 929,279
- ------------------------------------------------------------------------------------------------------------
Total current assets 59,849,329 47,337,047
- ------------------------------------------------------------------------------------------------------------
Property and equipment, net 1,137,446 1,313,922
Deferred income taxes - non-current 36,676 55,274
Other non-current assets 906 3,011
- ------------------------------------------------------------------------------------------------------------
Total assets $ 61,024,357 $ 48,709,254
============================================================================================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------
Current liabilities:
Trade accounts payable $ 2,365,213 $ 2,590,299
Accrued compensation 1,658,741 1,287,585
Accrued other 1,426,840 1,156,536
Income taxes payable 1,768,710 194,973
Deferred income and customer deposits 1,793,725 1,322,729
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 9,013,229 6,552,122
Stockholders' equity:
Common stock, $.01 par value, authorized 30,000,000 shares,
issued and outstanding 9,110,246 and 8,719,411, respectively 91,102 87,194
Additional paid-in capital 18,156,735 16,157,259
Retained earnings 33,799,709 26,134,084
Accumulated other comprehensive loss (36,418) (221,405)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 52,011,128 42,157,132
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 61,024,357 $ 48,709,254
============================================================================================================
See accompanying notes to consolidated financial statements
17
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
- -------------------------------------------------------------------------------------------
Revenues $ 53,797,164 $ 46,581,069 $ 38,894,000
Cost of revenues 27,399,219 23,985,704 19,669,148
- -------------------------------------------------------------------------------------------
Gross profit 26,397,945 22,595,365 19,224,852
- -------------------------------------------------------------------------------------------
Operating expenses:
Research and development 3,765,556 3,602,117 3,901,147
Selling, general and administrative 11,075,879 9,574,110 8,858,804
- -------------------------------------------------------------------------------------------
Total operating expenses 14,841,435 13,176,227 12,759,951
- -------------------------------------------------------------------------------------------
Operating income 11,556,510 9,419,138 6,464,901
- -------------------------------------------------------------------------------------------
Other income (expense):
Interest, net 518,846 780,273 1,110,745
Gain (loss) on currency exchange 30,331 (27,658) (139,094)
Other, net (33,836) 7,326 349
- -------------------------------------------------------------------------------------------
Total other income, net 515,341 759,941 972,000
- -------------------------------------------------------------------------------------------
Income before income taxes 12,071,851 10,179,079 7,436,901
Income tax expense 4,406,226 3,715,364 2,627,756
- -------------------------------------------------------------------------------------------
Net income $ 7,665,625 $ 6,463,715 $ 4,809,145
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Net income per basic share $ 0.86 $ 0.74 $ 0.55
===========================================================================================
- -------------------------------------------------------------------------------------------
Net income per diluted share $ 0.79 $ 0.68 $ 0.51
===========================================================================================
Basic weighted average shares outstanding 8,931,084 8,702,552 8,701,248
===========================================================================================
Diluted weighted average shares and
assumed conversion shares 9,743,104 9,496,723 9,509,155
===========================================================================================
See accompanying notes to consolidated financial statements
18
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2003, 2002, and 2001
Accumulated
Common Stock Additional other
-------------------------- paid-in Retained comprehensive
Shares Amount capital earnings loss Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,653,285 $ 86,533 $ 16,319,613 $ 14,861,224 ($ 306,431) $ 30,960,939
Stock issued in warrant and stock
option exercise 121,247 1,212 258,512 -- -- 259,724
Repurchases of Company stock (138,995) (1,390) (958,816) -- -- (960,206)
Income tax benefit arising from
exercising non-qualifying stock
options -- -- 160,224 -- -- 160,224
Comprehensive income:
Net income -- -- -- 4,809,145 -- 4,809,145
Translation adjustment -- -- -- -- (50,578) (50,578)
Unrealized gain from available-
for-sale securities -- -- -- -- 55,393 55,393
-----------
Total comprehensive income 4,813,960
- ----------------------------------------------------------------------------------------------------------------------------------
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 exercise 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 stock option
exercise 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
==================================================================================================================================
See accompanying notes to consolidated financial statements.
19
RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,665,625 $ 6,463,715 $ 4,809,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 930,480 794,745 570,824
Deferred income tax expense (benefit) (254,452) 136,023 (36,049)
Change in allowance for doubtful accounts and sales returns 251,446 (79,561) 175,545
Loss (gain) on sale of property and equipment 28,404 (3,370) 30,977
Changes in operating assets and liabilities:
Trade accounts receivable 149,651 (1,555,876) 3,829,486
Inventories (292,542) 582,873 (688,582)
Prepaid income taxes -- 764,523 814,199
Prepaid expenses and other current assets (87,848) (173,264) 625
Other non-current assets 33,535 (17,995) 42,491
Trade accounts payable (111,086) 488,121 (186,611)
Income taxes payable 2,625,214 194,973 --
Accrued compensation 371,156 192,031 (350,573)
Accrued other 156,304 235,139 68,745
Other non-current liabilities -- (68,750) 68,750
Deferred income and customer deposits 470,996 290,867 24,905
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,936,883 8,244,194 9,173,877
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (52,470,170) (30,285,191) (17,374,496)
Maturity of marketable securities 49,612,723 24,630,342 4,031,358
Purchase of property and equipment (781,650) (497,532) (1,550,907)
Proceeds from the sale of property, equipment and intangibles 1,347 3,425 --
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,637,750) (6,148,956) (14,894,045)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock option exercise 951,907 378,565 259,724
Cash payments to purchase treasury stock -- -- (960,206)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 951,907 378,565 (700,482)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 151,452 98,206 (37,676)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,402,492 2,572,009 (6,458,326)
Cash and cash equivalents, beginning of year 17,339,135 14,767,126 21,225,452
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 26,741,627 $ 17,339,135 $ 14,767,126
=====================================================================================================================
Supplemental disclosures of net cash paid during the period for:
Income taxes $ 1,808,754 $ 2,619,846 $ 1,849,606
See accompanying notes to the consolidated financial statements
20
RIMAGE CORPORATION AND SUBSIDIARIES
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 does 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:
o Persuasive evidence of an arrangement exists. Orders are received for
all sales and sales invoices are mailed on shipment.
o Delivery has occurred. Product has been transferred to the customer or
the customer's designated delivery agent.
o The vendor's price is fixed or determinable. All sales prices are
fixed at the time of the sale (shipment).
o Collectibility is probable. All sales are made on the basis that
collection is expected in line with our standard net 30 days' terms in
the U.S. and Asia and net 60 days' terms in Europe.
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).
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, asset-backed 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 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.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over periods of two to seven years. Leasehold improvements are amortized
using the straight-line method over the terms of the respective leases. Repairs
and maintenance costs are charged to operations as incurred.
(Continued)
21
STOCK BASED COMPENSATION
The Company applies APB No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's 2003, 2002 and 2001 net income and basic and diluted earnings
per share would have been adjusted to the proforma amounts stated below:
2003 2002 2001
=========================================================================================================
Net income:
As reported $ 7,665,625 $ 6,463,715 $ 4,809,145
Stock based employee compensation, net of tax
Proforma (394,044) (529,565) (762,616)
------------- ------------- -------------
7,271,581 5,934,150 4,046,529
- ---------------------------------------------------------------------------------------------------------
Basic net income per share:
As reported $ 0.86 $ 0.74 $ 0.55
Stock based employee compensation, net of tax
Proforma $ (0.04) $ (0.06) $ (0.08)
------------- ------------- -------------
$ 0.82 $ 0.68 $ 0.47
- ---------------------------------------------------------------------------------------------------------
Diluted net income per share:
As reported $ 0.79 $ 0.68 $ 0.51
Stock based employee compensation, net of tax
Proforma $ (0.04) $ (0.06) $ (0.08)
------------- ------------- -------------
$ 0.75 $ 0.62 $ 0.43
- ---------------------------------------------------------------------------------------------------------
The following table calculates the fair market value of options granted on the
date of grant using the Black-Scholes option pricing model:
========================================================================================
2003 2002 2001
------------- --------------- ---------------
Number of Options Granted 177,000 45,500 229,500
Fair Market Value of
Options Granted $618,480 $188,645 $ 950,485
Volatility Range 34.8 to 39.2% 37.0 to 56.0% 54.4 to 94.6%
Risk-free Interest Rate Range 2.30 to 2.98% 2.78 to 4.50% 3.76 to 5.07%
Expected Life of Options in Years 5.0 5.0 5.0
- -----------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including software development costs, are
expensed at the time they are 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
(Continued)
22
the weighted average number of common and assumed conversion shares outstanding
during each period. Assumed conversion shares result from dilutive stock options
and computed using the treasury stock method.
FOREIGN CURRENCIES
The assets and liabilities for the Company's international subsidiary are
translated into U.S. dollars using current exchange rates. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account in stockholders' equity. Statement of operations items are
translated at average exchange rates prevailing during the period.
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 require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from estimates on items
such as allowance for doubtful accounts and sales returns, inventory reserves,
deferred tax assets, and warranty reserves.
NEW ACCOUNTING PRONOUNCEMENTS
FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others", requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company plans to adopt
FIN 45 for guarantees issued or modified after December 31, 2002. The Company
does not expect the adoption of FIN45 to have any impact on the financial
position or results of operations of the Company.
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. The adoption of EITF 00-21 on July 1, 2003 did not
have any impact on the financial position or results of operations of the
Company.
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.
(Continued)
23
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, 2003 and 2002 were as follows:
AMORTIZED GROSS GROSS
COST UNREALIZED UNREALIZED
HOLDING GAINS HOLDING LOSSES FAIR VALUE
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
=========== =========== =========== ===========
At December 31, 2002
U.S. Treasury securities $10,849,707 22,526 -- 10,872,233
Asset-backed securities 4,131,074 -- (47,743) 4,083,331
Commercial paper 1,944,038 -- -- 1,944,038
Corporate securities 2,095,842 2,900 (357) 2,098,385
----------- ----------- ----------- -----------
Total $19,020,661 25,426 (48,100) 18,997,987
=========== =========== =========== ===========
3. INVENTORIES
Inventories consist of the following as of December 31:
2003 2002
----------------------------------------------------------------------
Finished goods and demonstration equipment $ 899,962 $ 668,154
Work-in-process 362,645 480,293
Purchased parts and subassemblies 2,071,763 1,893,381
----------------------------------------------------------------------
$3,334,370 $3,041,828
======================================================================
24
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. At December 31, 2003, the Credit Agreement was not in place. On March 29,
2004, there was no balance outstanding under this Credit Agreement.
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
------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------
Current:
U.S. Federal $ 3,685,766 2,887,333 2,074,550
State 690,146 524,696 419,876
Foreign 284,766 167,312 169,379
- ------------------------------------------------------------------------------
Total current 4,660,678 3,579,341 2,663,805
- ------------------------------------------------------------------------------
Deferred:
U.S. Federal (205,053) 117,789 (17,682)
State (49,399) 18,234 (18,367)
- ------------------------------------------------------------------------------
Total deferred (254,452) 136,023 (36,049)
- ------------------------------------------------------------------------------
$ 4,406,226 3,715,364 2,627,756
==============================================================================
Total tax expense differs from the expected tax expense, computed by applying
the federal statutory rate of 34% for 2003 and 35% for 2002 and 2001 to earnings
before income taxes as follows:
Year ended December 31
-------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------
Expected income tax expense $ 4,225,148 3,562,678 2,602,915
State income taxes, net of federal tax effect 422,893 358,334 264,996
Extraterritorial income exclusion (138,201) (102,000) (136,000)
Foreign operation 27,734 (42,239) (94,970)
Benefit of lower federal tax bracket (120,719) (101,791) (74,369)
Other, net (10,629) 40,382 65,184
- --------------------------------------------------------------------------------------------
$ 4,406,226 3,715,364 2,627,756
============================================================================================
25
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets as of December 31, are presented below:
2003 2002
- ----------------------------------------------------------------------------------
Inventories $ 330,000 316,000
Accounts receivable 290,000 214,000
Gross margin recognition on sale to foreign subsidiary 273,000 252,000
Unrealized foreign exchange loss 122,000 --
Deferred maintenance 71,000 50,000
Accrued payroll 66,000 56,000
Warranty accrual 50,000 40,000
Amortization 10,000 11,000
Fixed assets 6,000 24,000
Other 21,000 22,000
- ----------------------------------------------------------------------------------
Total deferred tax assets $1,239,000 985,000
- ----------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY
STOCK OPTIONS
Rimage has a stock option plan that allows for the granting of options to
purchase shares of common stock to certain key administrative, managerial and
executive employees and the automatic periodic grants of stock options to
non-employee directors. Options under these plans may be either incentive stock
options or non-qualified options. Pursuant to this plan, the following options
are currently issued and outstanding:
Weighted
Shares average
available Options exercise
for grant outstanding price
- -------------------------------------------------------------------------------------
Balance at December 31, 2000 192,008 1,511,061 $4.04
Additional shares available 245,000 -- --
Granted (229,500) 229,500 7.28
Exercised -- (99,749) 2.03
Canceled 20,600 (21,687) 9.19
- -------------------------------------------------------------------------------------
Balance at December 31, 2001 228,108 1,619,125 $4.55
Additional shares available -- -- --
Granted (45,500) 45,500 8.40
Exercised -- (51,802) 3.29
Canceled 110,900 (110,900) 5.28
- -------------------------------------------------------------------------------------
Balance at December 31, 2002 293,508 1,501,923 $4.66
Additional shares available 400,000 -- --
Shares eliminated due to plan
consolidation (25,000) -- --
Granted (177,000) 177,000 9.62
Exercised -- (364,529) 2.16
Canceled 9,733 (9,733) 9.89
- -------------------------------------------------------------------------------------
Balance at December 31, 2003 501,241 1,304,661 $5.99
26
The following table summarizes exercise prices of all outstanding options as of
December 31, 2003:
==================================================================
Weighted
Number Average
Exercise Price Range Of Options Exercise Price
------------------------------------------------------------------
$ 1.33 $ 1.33 243,675 $ 1.33
$ 2.08 $ 2.75 336,045 $ 2.67
$ 6.50 $ 9.00 398,441 $ 7.83
$ 10.00 $ 17.00 326,500 $ 10.63
----------------- ---------------
1,304,661 $ 5.99
==================================================================
The outstanding options have a weighted average contractual life of 6.6 years.
EMPLOYEE STOCK PURCHASE PLAN
In February 2001, the Company's board of directors adopted, and our shareholders
approved in May 2001, the Employee Stock Purchase Plan (ESPP). A total of
300,000 common shares were reserved for issuance under the ESPP. The ESPP 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 the lower of 85% of the fair market value on the first day or last day
of each one year period. At December 31, 2003, 62,036 shares have been issued
under this plan.
7. NET INCOME PER SHARE
The following table identifies the components of net income per basic and
diluted share. A total of 6,274, 58,519, and 98,306 assumed conversion shares
during 2003, 2002, and 2001, respectively, were excluded from the net income per
share computation as their effect is anti-dilutive.
Weighted
Average Shares Per Share
Net Income Outstanding Amount
---------- ---------- ----------
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 -- 794,170 (.06)
---------- ---------- ----------
Diluted $6,463,715 9,496,722 $ 0.68
========== ========== ==========
2001:
Basic $4,809,145 8,701,248 $ 0.55
Dilutive effect of stock options -- 807,907 (.04)
---------- ---------- ----------
Diluted $4,809,145 9,509,155 $ 0.51
========== ========== ==========
27
8. LEASES
The future minimum lease payments excluding operating expenses and real estate
taxes as of December 31, 2003 are:
Total
operating
Year ending December 31 leases
----------------------------------------------------
2004 $ 326,742
2005 278,165
2006 176,589
----------------------------------------------------
Net minimum lease payments $ 781,496
===============
Rent expense under operating leases amounted to approximately $840,000,
$689,000, and $642,000 for the years ended December 31, 2003, 2002, and 2001,
respectively, which includes rent expense to two former directors of $494,000,
$450,000, and $439,000, respectively. The related party amounts represent rental
payments for a facility. Effective January 1, 2004, the Company began making
rental payments on a month-to-month basis. The Company is currently assessing
options to meet its demand for future space requirements.
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 $191,086, $171,290, and $167,715
in 2003, 2002, and 2001, respectively.
10. MAJOR CUSTOMERS/SEGMENT INFORMATION
The Company only had two customers that provided 10% or greater revenue. The
Company derived approximately $8,379,000 and $6,276,000 of its 2003 sales from
two unaffiliated customers and had receivable balances of $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 and
had receivable balances of $967,000 and $560,000, respectively as of December
31, 2002.
The Company's revenues from each of its principal geographic regions were as
follows (in thousands):
Year Ended December 31,
-----------------------------
2003 2002 2001
----------------------------------------------
North America $30,938 $28,612 $23,525
Europe 19,888 14,818 12,912
Other 2,971 3,151 2,457
----------------------------------------------
Total $53,797 $46,581 $38,894
==============================================
28
The Company's revenues from each of its principal products and services were as
follows (in thousands):
Year Ended December 31,
-----------------------------
2003 2002 2001
------------------------------------------------------
Equipment:
Producer $31,133 $28,385 $23,499
Desktop 6,403 6,066 4,708
------- ------- -------
Total 37,536 34,451 28,207
Consumables 13,606 9,902 8,436
Maintenance Contracts 2,655 2,228 2,251
------------------------------------------------------
Total $53,797 $46,581 $38,894
======================================================
Long-lived assets of the Company were located as follows (in thousands):
December 31, 2003 December 31, 2002
----------------- -----------------
North America $ 954 $ 1,192
Germany 183 122
----------------- -----------------
Total $ 1,137 $ 1,314
================= =================
11. 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.
12. 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 forwards is ($324,000) and ($220,000) at
December 31, 2003 and 2002, respectively, and is 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.
29
RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL QUARTERLY DATA - UNAUDITED (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
2003 2002
------------------------------------------ ------------------------------------------
Fourth Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $15,671 13,791 12,791 11,544 11,830 12,555 12,310 9,886
Cost of revenues 8,023 7,109 6,459 5,809 6,237 6,407 6,203 5,139
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 7,648 6,682 6,332 5,735 5,593 6,148 6,107 4,747
- ----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,123 867 926 848 860 852 1,013 878
Selling, general and administrative 2,821 2,798 2,823 2,634 2,270 2,502 2,503 2,298
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,944 3,665 3,749 3,482 3130 3,354 3,516 3,176
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 3,704 3,017 2,583 2,253 2,463 2,794 2,591 1,571
Other income (expense):
Interest, net 121 127 134 138 155 189 223 213
Gain (loss) on currency exchange 55 (12) 9 (22) (20) (29) 21 --
Other, net 2 (14) (21) (1) -- 5 1 2
- ----------------------------------------------------------------------------------------------------------------------------------
Total other income, net 178 101 122 115 135 165 245 215
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,882 3,118 2,705 2,368 2,598 2,959 2,836 1,786
Income tax expense 1,417 1,138 987 864 948 1,080 1,035 652
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,465 1,980 1,718 1,504 1,650 1,879 1,801 1,134
==================================================================================================================================
Net income per basic share $ 0.27 0.22 0.20 0.17 0.19 0.22 0.21 0.13
==================================================================================================================================
Net income per diluted share $ 0.25 0.20 0.18 0.16 0.17 0.20 0.19 0.12
==================================================================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 in ensuring that material information related to the
Company is made known to them by others within the Company.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant 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.
(Continued)
30
PART III
ITEM 10. 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 2004 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 Board of Directors;
- Nominees for Election of Directors;
- Executive Officers of the Company;
- Executive Compensation;
- Section 16(a) Beneficial Ownership Reporting Compliance;
- Corporate Governance; and
- Code of Ethics.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
section of the Company's Proxy Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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."
ITEM 13. 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."
ITEM 14. 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."
(Continued)
31
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. See Part II, Item 8 of this report.
(2) FINANCIAL STATEMENT SCHEDULES.
Page in this
Form 10-K
-----------
Independent Auditors' Report on Financial Statement Schedule..... 33
(3) EXHIBITS. See Index to Exhibits on page 36 of this report.
(b) REPORTS ON FORM 8-K.
In the fourth quarter, Rimage furnished a Form 8-K dated October 22, 2003
reporting under Items 7 and 12 a press release disclosing material non-public
information regarding its results of operations for the quarter ended September
30, 2003 and statements of the Company's Chief Executive Officer and Chief
Financial Officer relating to these quarterly results.
(c) See Exhibit Index and Exhibits.
(Continued)
32
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Rimage Corporation:
Under date of February 13, 2004, except as to note 4, which is as of March 29,
2004, we reported on the consolidated balance sheets of Rimage Corporation and
subsidiaries as of December 31, 2003 and 2002, 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, 2003, as
included in Rimage Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in Item 15(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
February 13, 2004
33
SCHEDULE II
RIMAGE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Receivable and Sales Returns:
YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- --------- ---------
Balance at beginning of year $ 635,382 $ 714,943 $ 539,398
Write-offs and other adjustments 1,282 (95,672) (133,233)
Recoveries (151,549) (90,551) (2,508)
Additions charged to costs and expenses 401,713 106,662 311,286
--------- --------- ---------
Balance at end of year $ 886,828 $ 635,382 $ 714,943
========= ========= =========
34
SIGNATURES
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.
Dated: March 29, 2004 RIMAGE CORPORATION
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 March 29, 2004
- --------------------------- Director (principal executive officer)
Bernard P. Aldrich
/s/ David J. Suden Chief Technical Officer & Director March 29, 2004
- ---------------------------
David J. Suden
/s/ Robert M. Wolf Chief Financial Officer (principal financial March 29, 2004
- --------------------------- and accounting officer) and Corporate
Robert M. Wolf Secretary
/s/ James L. Reissner Director, Chairman of the Board March 29, 2004
- ---------------------------
James L. Reissner
/s/ Thomas F. Madison Director March 29, 2004
- ---------------------------
Thomas F. Madison
/s/ Steven M. Quist Director March 29, 2004
- ---------------------------
Steven M. Quist
/s/ Lawrence M. Benveniste Director March 29, 2004
- ---------------------------
Lawrence M. Benveniste
/s/ Philip D. Hotchkiss Director March 29, 2004
- ---------------------------
Philip D. Hotchkiss
35
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)).
10.1 Rimage Corporation 1992 Stock Option Plan, as amended * (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).
10.2 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 September 1, 1998, between Rimage Corporation and 7725
Washington Avenue Corporation (Incorporated by reference to exhibit of
same number to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
21.1 Subsidiaries of Rimage Corporation.
23.1 Independent Auditors' Consent.
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. ss. 1350
* Indicates a management contract or compensatory plan or arrangement
36
RIMAGE CORPORATION
7725 Washington Avenue South
Minneapolis, MN 55439
TEL: 952-944-8144
FAX: 952-944-7808
RIMAGE EUROPE, GMBH
Hans - Boekler - Str. 7
6057 Dietzenbach, Germany
TEL: 011-49-6074-8521-0
FAX: 011-49-6074-8521-21