| RIMAGE CORP ITEM 1A RISK FACTORS If any of the following risks actually occur, our results of operations, cash flows and the market price of our common stock could be negatively impacted |
| Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition |
| Technology in our industry evolves rapidly, potentially causing our products to become obsolete, and we must continue to enhance existing systems and develop new systems or we will lose sales |
| Rapid technological advances, rapidly changing customer requirements and fluctuations in demand characterize the current market for our products |
| Further, there are alternative data storage media and additional media is under development, including high capacity hard drives, flash memory, new CD-R/DVD-R technologies, file servers accessible through computer networks and the Internet |
| Our existing and development-stage products may become obsolete if our competitors introduce newer or more appealing technologies |
| If these technologies are patented or proprietary to our competitors, we may not be able to access these technologies |
| We believe that we must continue to innovate and anticipate advances in the storage media industry in order to remain competitive |
| If we fail to anticipate or respond to technological developments or customer requirements, or if we are significantly delayed in developing and introducing products, our business will suffer lost sales |
| 6 ______________________________________________________________________ Our market is becoming more competitive |
| Competition may result in price reductions, lower gross profits and loss of market share |
| The storage media industry is becoming more competitive and we face the potential for increased competition in developing and selling our CD-R and DVD-R publishing systems in both the US and in foreign markets |
| Our competitors may have or could develop or acquire significant marketing, financial, development and personnel resources |
| Our current primary competitors include Primera Technology, Inc, Microtech Systems, Inc |
| and LSK Data Systems GmbH To remain competitive, we believe that we must continue to provide: § technologically advanced systems that satisfy the demands of end-users; § continuing advancements in our CD-R and DVD-R products; § a dependable and efficient distribution and reseller network; § superior customer service; and § high levels of quality and reliability |
| We cannot assure you that we will be able to compete successfully against our current or future competitors |
| The storage media industry has increased visibility, which may lead to large, well-known, well-financed companies entering into this market |
| Increased competition from manufacturers of systems or consumable supplies may result in price reductions, lower gross profit margins, increased discounts to distribution and loss of market share and could require increased spending by us on research and development, sales and marketing and customer support |
| If our products fail to compete successfully with other existing publishing systems or newly-developed products for the storage media industry, our business will suffer |
| The success of our products depends upon our end users choosing our CD-R and DVD-R technology for their storage media needs |
| However, alternative data storage media exist, such as high capacity hard drives, flash memory, new CD-R/DVD-R technologies, file servers accessible through computer networks and the Internet, and additional media is under development |
| If end users perceive any technology that is competing with ours as more reliable, higher performing, less expensive or having other advantages over our technology, the demand for our CD-R and DVD-R products could decrease |
| Further, some of our competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products such as cameras, computer equipment, software or biometric applications |
| Competition from other publishing systems or other storage media is likely to increase |
| If our products do not compete successfully with existing or new competitive products, our business will suffer |
| We sell a significant portion of our products internationally, which exposes us to risks associated with foreign operations |
| We sell a significant amount of our products to customers outside the United States, particularly in Europe, Asia and Latin America |
| International sales accounted for 34prca, 38prca and 42prca of our revenue for the years ended December 31, 2005, 2004 and 2003, respectively |
| We expect that shipments to international customers, including customers in Europe, Asia and Latin America, will continue to account for a significant portion of our net sales |
| Sales outside the United States involve the following risks, among others: § foreign governments may impose tariffs, quotas and taxes; § the demand for our products will depend, in part, on local economic health; § political and economic instability may reduce demand for our products; § restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain markets; § potentially limited intellectual property protection in certain countries may limit our recourse against infringing products or cause us to refrain from selling in certain markets; § we may face difficulties in managing our international operations; § the burden and cost of complying with a variety of foreign laws; § we may decide to price our products in foreign currency denominations; § our contracts with foreign distributors and resellers cannot fully protect us against political and economic instability; § we may face difficulties in collecting receivables; and § we may not be able to control our international distributors’ efforts on our behalf |
| 7 ______________________________________________________________________ The financial results of our German and Japanese subsidiaries are translated into US dollars for consolidation with our overall financial results |
| Additionally, we hedge against currency fluctuations associated with foreign currency denominated transactions (principally European Euro) with Rimage Europe |
| Despite our hedging activity, currency translations and fluctuations may adversely affect the financial performance of our consolidated operations |
| Currency fluctuations also may increase the relative price of our product in foreign markets and thereby could also cause our products to become less affordable or less price competitive than those of foreign manufacturers |
| These risks associated with foreign operations may have a material adverse effect on our revenue from or costs associated with international sales |
| If our domestic or international intellectual property rights are not adequately protected, others may offer products similar to ours which could depress our product selling prices and gross profit margins or result in loss of market share |
| We believe that protecting our proprietary technology is important to our success and competitive positioning |
| In addition to common law intellectual property rights, we rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights |
| However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors |
| We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets |
| Our competitors, who may have or could develop or acquire significant resources, may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products |
| Further, although we do not believe that any of our products infringe the rights of others, third parties have claimed, and may in the future claim, our products infringe on their rights and these third parties may assert infringement claims against us in the future |
| Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others |
| Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products |
| The occurrence of this litigation, or the effect of an adverse determination in any of this type of litigation, could have a material adverse effect on our business, financial condition and results of operations |
| Further, the laws of some of the countries in which our systems are or may be sold may not protect our systems and intellectual property to the same extent as the United States or at all |
| Our failure to protect or enforce our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition |
| Our sales will decline and our business will be materially harmed if our key channel partners do not effectively market or sell our products or if there is a significant reduction, delay or cancellation of orders from such channel partners or our direct OEM customers |
| We distribute our products to end users through our own sales force, through distributors and through a two-tier system of distributors and resellers |
| Although certain distributors and resellers have made certain contractual commitments to us, they are independent businesses that we do not control |
| We cannot be certain that our distribution channel will continue to market or sell our systems effectively |
| Our agreements with distributors and resellers do not contain requirements that a certain percentage of such parties’ sales are of our products nor do the agreements restrict their ability to choose alternative sources for CD-R or DVD-R publishing systems |
| During 2005 and 2004, we derived approximately 12prca and 13prca of our respective revenues from a single distributor, and 11prca and 12prca of respective revenues from a strategic partner |
| Two of our distributors generated more than 10prca of revenues in 2003, at 16prca and 12prca of revenues, respectively |
| A significant reduction, delay or cancellation of orders from our key channel partners or our direct OEM customers, or the loss of any of them, could have a negative impact upon our operating results |
| Further, some of our channel partners are small organizations with limited capital and our success in distributing our products to end-users will depend upon the continued viability and financial stability of these entities |
| These channel partners may choose to devote their efforts to other products in different markets or reduce or fail to devote the necessary resources to provide effective sales and marketing support of our product |
| We believe that our future growth and success will continue to depend in large part upon the success of our channel partners in operating their businesses and our relationships with our direct OEM customers |
| 8 ______________________________________________________________________ If we do not maintain adequate inventories of component parts or finished goods or if we fail to adequately forecast demand, the likely resulting delays in producing our publishing systems products would damage our business |
| Because most of our systems are built upon order, we do not maintain a significant inventory of completed systems |
| We assemble the Producer II Series and Desktop Series systems as they are ordered, which causes us to forecast production based on past sales and our estimates of future demand |
| In the event that we significantly underestimate our needs or encounter an unexpectedly high level of demand for our systems or our suppliers are unable to deliver our orders of components in a timely manner, we may be unable to fill our product orders on time which could harm our reputation and result in reduced sales |
| We rely on single-source suppliers, which could cause delays, increases in costs or prevent us from completing customer orders, all of which could materially harm our business |
| We assemble our Producer II Series and Desktop Series products using materials and components supplied by various subcontractors and suppliers |
| We purchase critical components for our systems, including CD-R/DVD-R drives, circuit boards, electric motors, machined and molded parts, precision sheet metal assemblies and mechanical parts, from third parties, some of whom are single-source suppliers of these components |
| If any of our suppliers is unable to ship critical components, we would be unable to manufacture and ship products to our end-users, distributors or resellers |
| If the price of these components increases for any reason, or if these suppliers are unable or unwilling to deliver, we may have to find another source, which could result in interruptions, increased costs, delays, loss of sales and quality control problems |
| The termination or interruption of any of these relationships, or the failure of these manufacturers or suppliers to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet orders for our products and harm our reputation and our business |
| Identifying and qualifying alternative suppliers of components would take time, involve significant additional costs and may delay the production of our products |
| Further, if we obtain a new supplier for a component or assemble our product using an alternative component, we may need to conduct additional testing of our products to ensure the product meets our quality and performance standards |
| Any delays in delivery of our product to end-users, distributors or resellers could be extended and our costs associated with the change in product manufacturing could increase |
| The failure of our third-party manufacturers to manufacture the products for us, and the failure of our components suppliers to supply us with the components, consistent with our requirements as to quality, quantity and timeliness could materially harm our business by causing delays, loss of sales, increases in costs and lower gross profit margins |
| Our products must be compatible with products designed and manufactured by others and, in the event of design changes or the introduction of new products by them or us, our products must continue to be compatible with products of others |
| Our Producer II Series and Desktop Series of our CD-R/DVD-R publishing systems incorporate computer and related computer equipment, hardware and software manufactured by others |
| Problems with the products of others may adversely affect the performance and reliability of our publishing system products and damage our reputation with end users |
| Further, if there are changes in our products, changes in the computer or computer related equipment integrated into our products or if we offer new products, we must maintain compatibility and interoperability of our products with the products of others |
| We cannot assure you that we will be able to adapt our products to be compatible with any newly designed product of another party |
| We would likely incur substantial costs to test and “de-bug” any newly designed product that we integrate into our products |
| Further, our new product development efforts may be hampered by our need to maintain compatibility with the products of others and we may incur additional expense designing for compatibility |
| 9 ______________________________________________________________________ Our publishing systems may have manufacturing or design defects that we discover after shipment, which could negatively affect our revenues, increase our costs and harm our reputation |
| Our publishing systems are complex and may contain undetected and unexpected defects, errors or failures |
| If these product defects are substantial, the result could be product recalls, an increased amount of product returns, loss of market acceptance and damage to our reputation, all of which could increase our costs and cause us to lose sales |
| We carry general commercial liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient |
| We cannot predict, however, whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable |
| In addition, these insurance policies must be renewed annually |
| Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all |
| A successful claim against us or settlement by us in excess of our insurance coverage or our inability to maintain insurance in the future could have a material adverse effect on our business, results of operations, liquidity and financial condition |
| If our systems fail to comply with domestic and international government regulations, or if these regulations result in a barrier to our business, we could lose sales |
| Our systems must comply with various domestic and international laws, regulations and standards |
| Additionally, new regulations enacted in various countries provide standards on waste management and recovery (the European Union Waste, Electrical and Electronic Equipment Directive) and the reduction of hazardous substances in electrical and electronic equipment (the European Union Restriction of Hazardous Substances Directive) |
| In the event that we are unable or unwilling to comply with any such laws, regulations or standards, we may decide not to conduct business in certain markets |
| Particularly in international markets, we may experience difficulty in securing required licenses or permits on commercially reasonable terms, or at all |
| Failure to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain timely domestic or foreign regulatory approvals or certificates could result in lost sales |
| Fluctuations in our future operating results may negatively affect the market price of our common stock |
| We have experienced fluctuations in our quarterly operating results and we expect those fluctuations to continue due to a variety of factors |
| Some of the factors that influence our quarterly operating results include: § the number and mix of products sold in the quarter; § the timing of major projects; § the availability and cost of components and materials; § timing, costs and benefits of new product introductions; § customer order size and shipment timing; § seasonal factors affecting timing of purchase orders; § promotions by ourselves or competitors, and the timing of the promotion; § the impact to the marketplace of competitive products and pricing; and § the timing and level of operating expenses |
| Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the future |
| If our operating results are below financial analysts’ or investors’ expectations, the market price of our common stock may fall abruptly and significantly |
| If we fail to retain and attract highly skilled managerial and technical personnel, we may fail to remain competitive |
| Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel |
| The loss of the services of our management team, some of whom have significant experience in our industry and other key personnel, could impair our ability to effectively manage our company and to carry out our business plan |
| We do not carry key person life insurance on any of our executive officers |
| In addition, competition for skilled employees in our industry is intense |
| Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel |
| Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition |
| 10 ______________________________________________________________________ Our stock price may be volatile and a shareholder’s investment could decline in value |
| Our stock price has fluctuated in the past and may continue to fluctuate significantly, making it difficult for an investor to resell shares or to resell shares at an attractive price |
| The market prices for securities of emerging companies have historically been highly volatile |
| Future events concerning us or our competitors could cause such volatility, including: § actual or anticipated variations in our operating results, § investments required in infrastructure and/or personnel to meet long-term strategic objectives § technological innovations or new commercial products introduced by us or our competitors, § developments concerning proprietary rights, § changes in senior management, § investor perception of us and our industry, § general economic and market conditions including market uncertainty § national or global political events, and § public confidence in the securities markets and regulation by or of the securities markets |
| In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology companies in particular, which are often unrelated to the operating performance of these companies |
| Any failure by us to meet or exceed estimates of financial analysts is likely to cause a decline in our common stock price |
| Future sales of shares of our common stock in the public market may negatively affect our stock price |
| Future sales of our common stock, or the perception that these sales could occur, could have a significant negative effect on the market price of our common stock |
| In addition, upon exercise of outstanding options and warrants, the number of shares outstanding of our common stock could increase substantially |
| This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our common stock |
| Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price of our common stock and the liquidity of our common stock |
| These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate |
| Provisions of Minnesota law, our bylaws and other agreements may deter a change of control of our company and may have a possible negative effect on our stock price |
| Certain provisions of our Minnesota law, our bylaws and other agreements may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of our company, including: § the provisions of Minnesota law relating to business combinations and control share acquisitions; § the provisions of our bylaws regarding the business properly brought before shareholders; § the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series; § our shareholder rights plan, which would cause substantial dilution to any person or group attempting to acquire our company on terms not approved in advance by our board of directors; and § the provisions of our stock option plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control |
| ” These measures could discourage or prevent a takeover of our company or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders |
| This may have a negative effect on the price of our common stock |
| 11 ______________________________________________________________________ Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses |
| Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and in particular Section 404 of that act relating to management certification of internal controls, the regulations of the Securities and Exchange Commission and the rules of the Nasdaq Stock Market, have required an increased amount of management attention and external resources |
| We intend to invest all reasonably necessary resources to comply with evolving corporate governance and public disclosure standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |