10-Q 1 rimage033523_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003; OR ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________. COMMISSION FILE NUMBER: 0-20728 RIMAGE CORPORATION --------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-1577970 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7725 Washington Avenue South, Edina, MN 55439 --------------------------------------------- (Address of principal executive offices) 952-944-8144 --------------------------------------------- (Registrant's telephone number, including area code) NA --------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report.) Common Stock outstanding at August 7, 2003 - 9,063,712 shares of $.01 par value Common Stock. Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ___ NO _X_ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ RIMAGE CORPORATION FORM 10-Q TABLE OF CONTENTS FOR THE QUARTER ENDED JUNE 30, 2003 Description Page ----------- ---- PART I FINANCIAL INFORMATION ------ Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 ...................................... 3 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2003 and 2002 ............................... 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2003 and 2002 ............................... 5 Condensed Notes to Consolidated Financial Statements (unaudited) .......................... 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 10-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................................ 15 Item 4. Controls and Procedures ...................................... 15 PART II OTHER INFORMATION ............................................ 16 ------- Item 1-3. None Item 4. Submission of Matters to a Vote of Security Holders .......... 16 Item 5. None Item 6. Exhibits ..................................................... 17 SIGNATURES ................................................................. 18 2 RIMAGE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2003 and December 31, 2002 (Unaudited)
June 30, December 31, Assets 2003 2002 ------------------------------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 17,914,896 $ 17,339,135 Marketable securities 22,109,441 18,997,987 Trade accounts receivable, net of allowance for doubtful accounts and sales returns of $741,000 and $635,000, respectively 6,425,854 6,643,613 Inventories 4,045,484 3,041,828 Prepaid expenses and other current assets 316,284 385,205 Prepaid income taxes 279,001 -- Deferred income taxes-current 929,279 929,279 ------------------------------------------------------------------------------------------------------ Total current assets 52,020,239 47,337,047 ------------------------------------------------------------------------------------------------------ Property and equipment, net 1,266,533 1,313,922 Deferred income taxes-noncurrent 55,274 55,274 Other noncurrent assets 1,958 3,011 ------------------------------------------------------------------------------------------------------ Total assets $ 53,344,004 $ 48,709,254 ====================================================================================================== Liabilities and Stockholders' Equity ------------------------------------------------------------------------------------------------------ Current liabilities: Trade accounts payable $ 2,289,501 $ 2,476,299 Accrued compensation 1,267,780 1,287,585 Accrued other 1,287,250 1,270,536 Income tax payable -- 194,973 Deferred income and customer deposits 1,508,555 1,322,729 ------------------------------------------------------------------------------------------------------ Total current liabilities 6,353,086 6,552,122 ------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock, $.01 par value, authorized 30,000,000 shares, issued and outstanding 9,017,785 and 8,719,411, respectively 90,178 87,194 Additional paid-in capital 17,667,768 16,157,259 Retained earnings 29,355,310 26,134,084 Accumulated other comprehensive loss (122,338) (221,405) ------------------------------------------------------------------------------------------------------ Total stockholders' equity 46,990,918 42,157,132 ------------------------------------------------------------------------------------------------------ Commitments and contingencies Total liabilities and stockholders' equity $ 53,344,004 $ 48,709,254 ======================================================================================================
See accompanying condensed notes to consolidated financial statements 3 RIMAGE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Revenues $ 12,791,163 $ 12,309,527 $ 24,334,897 $ 22,195,898 Cost of revenues 6,458,778 6,202,666 12,267,525 11,341,964 ------------------------------------------------------------------------------------------------------- Gross profit 6,332,385 6,106,861 12,067,372 10,853,934 ------------------------------------------------------------------------------------------------------- Operating expenses: Research and development 926,506 1,012,523 1,775,036 1,890,247 Selling, general and administrative 2,822,941 2,503,244 5,456,699 4,801,267 ------------------------------------------------------------------------------------------------------- Total operating expenses 3,749,447 3,515,767 7,231,735 6,691,514 ------------------------------------------------------------------------------------------------------- Operating income 2,582,938 2,591,094 4,835,637 4,162,420 ------------------------------------------------------------------------------------------------------- Other income (expense): Interest, net 133,501 223,347 271,329 435,822 Gain (loss) on currency exchange 9,190 21,007 (12,592) 21,158 Other, net (21,080) 494 (21,577) 2,691 ------------------------------------------------------------------------------------------------------- Total other income, net 121,611 244,848 237,160 459,671 ------------------------------------------------------------------------------------------------------- Income before income taxes 2,704,549 2,835,942 5,072,797 4,622,091 Income taxes 987,160 1,035,119 1,851,571 1,687,063 ------------------------------------------------------------------------------------------------------- Net income $ 1,717,389 $ 1,800,823 $ 3,221,226 $ 2,935,028 ======================================================================================================= Net income per basic share $ 0.20 $ 0.21 $ 0.37 $ 0.34 ======================================================================================================= Net income per diluted share $ 0.18 $ 0.19 $ 0.34 $ 0.31 ======================================================================================================= Basic weighted average shares outstanding 8,757,138 8,705,099 8,742,033 8,690,880 ======================================================================================================= Diluted weighted average shares and assumed conversion shares 9,644,499 9,496,105 9,555,873 9,561,222 =======================================================================================================
See accompanying condensed notes to the consolidated financial statements 4 RIMAGE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2003 2002 --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,221,226 $ 2,935,028 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 455,908 375,387 Change in reserve for allowance for doubtful accounts 105,579 (21,999) Loss on sale of property and equipment 25,475 550 Changes in operating assets and liabilities: Trade accounts receivable 112,180 (1,275,607) Inventories (1,003,656) 462,510 Prepaid income taxes 745,178 764,523 Prepaid expenses and other current assets 68,921 (82,227) Trade accounts payable (186,798) 635,082 Accrued compensation (19,805) (308,939) Accrued other 16,714 470,171 Income taxes payable (194,973) 369,267 Deferred income and customer deposits 185,826 139,464 --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,531,775 4,463,210 --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of marketable securities (21,006,217) (12,249,168) Maturity of marketable securities 17,894,763 2,000,000 Purchase of property and equipment (432,941) (139,232) Other noncurrent assets 14,794 (19,569) --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,529,601) (10,407,969) --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities- Proceeds from stock option/warrant exercises 489,314 326,535 Other non current liabilites -- (68,750) --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 489,314 257,785 --------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 84,273 47,679 --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 575,761 (5,639,295) Cash and cash equivalents, beginning of period 17,339,135 14,767,126 --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 17,914,896 $ 9,127,831 =============================================================================================================== Supplemental disclosures of net cash paid during the period for: Income taxes $ 1,170,827 $ 481,796 Supplemental disclosures of non cash financing activities during the period for: Tax effect of disqualifying disposition of stock options $ 1,024,179 $ --
See accompanying condensed notes to the consolidated financial statements 5 RIMAGE CORPORATION AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND NATURE OF BUSINESS Rimage Corporation (the Company) develops, manufactures and distributes high performance CD-Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems. The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission. These financial statements should be read in conjunction with the more detailed financial statements and notes thereto included in the Company's most recent annual report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows of the Company for the periods presented. Certain previously reported amounts have been reclassified to conform with the current presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (Continued) 6 RIMAGE CORPORATION AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company applies APB No. 25 and related interpretations in accounting for its stock based compensation 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 three months ended and six month ended June 30, 2003 and 2002 net income and basic and diluted earnings per share would have been adjusted to the proforma amounts stated below:
Three Months Three Months Six Six Ended Ended Months Ended Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 ======================================================================================================================= Net income: As reported $1,717,389 $1,800,823 $3,221,226 $2,935,028 Stock based employee compensation, net of tax (99,158) (132,392) (167,410) (264,783) ---------------------------------------------------------------------------------------------------------------------- Proforma 1,618,231 1,668,431 3,053,816 2,670,245 ---------------------------------------------------------------------------------------------------------------------- Basic net income per share: As reported $ 0.20 $ 0.21 $ 0.37 $ 0.34 Stock based employee compensation, net of tax $ (0.01) $ (0.02) $ (0.02) $ (0.03) ---------------------------------------------------------------------------------------------------------------------- Proforma $ 0.19 $ 0.19 $ 0.35 $ 0.31 ---------------------------------------------------------------------------------------------------------------------- Diluted net income per share: As reported $ 0.18 $ 0.19 $ 0.34 $ 0.31 Stock based employee compensation, net of tax $ (0.01) $ (0.01) $ (0.02) $ (0.03) ---------------------------------------------------------------------------------------------------------------------- Proforma $ 0.17 $ 0.18 $ 0.32 $ 0.28 ----------------------------------------------------------------------------------------------------------------------
(2) INVENTORIES Inventories consist of the following as of:
June 30, December 31, 2003 2002 ------------------------------------------------------------------------------------- Finished goods and demonstration equipment $ 1,082,849 $ 668,154 Work-in-process 412,721 480,293 Purchased parts and subassemblies 2,549,915 1,893,381 -------------------------------------------------------------------------------------- $ 4,045,484 $ 3,041,828 ======================================================================================
(Continued) 7 RIMAGE CORPORATION AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (3) COMPREHENSIVE INCOME Comprehensive income is defined as net income and other changes in shareholders' equity from transactions and other events from sources other than shareholders. The components of and changes in other comprehensive income (loss) are as follows (in 000's):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net income $ 1,717 $ 1,801 $ 3,221 $ 2,935 Other comprehensive income (loss): Foreign currency translation adjustment 65 110 96 100 Net unrealized gains (losses) on securities (16) (21) 3 (72) ------- ------- ------- ------- Total other comprehensive income $ 1,766 $ 1,890 $ 3,320 $ 2,963 ======= ======= ======= =======
(4) FOREIGN CURRENCY CONTRACTS The Company enters into forward foreign exchange contracts to hedge inter-company receivables denominated in Euros arising from sales to its subsidiary in Germany. Gains or losses on forward foreign exchange contracts are calculated at each period end and are recognized in net income(loss) in the period in which they arose. The fair value of forward foreign exchange contracts is recorded in other current assets or other current liabilities depending on whether the net amount is a gain or a loss. As of June 30, 2003, the Company had thirty-two outstanding foreign currency contracts totaling $3,576,000. These contracts mature in 2003 and bear rates between 1.0498 and 1.1801 U.S. Dollars per Euro. As of June 30, 2003, the fair value of foreign currency contracts is $141,000 and is recorded in other current liabilities. (Continued) 8 RIMAGE CORPORATION AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (5) RECENT ACCOUNTING DEVELOPMENTS EITF 00-21, "Revenue Arrangements with Multiple Deliverables" provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. In some arrangements, the different revenue-generating activities are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the activities. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 to have a material effect on its financial statements, as it does not lead to a change in the allocation of revenue between the different elements of a sale, when applied to the Company. (6) WARRANTY RESERVE Warranty reserve rollforward is as follows:
Beginning Warranty Warranty Changes In Ending Six Months Ended: Balance Provisions Claims Estimates Balance June 30, 2003 $ 170,000 $ 177,000 $ (159,000) $ (29,000) $ 159,000 June 30, 2002 $ 110,000 $ 224,000 $ (224,000) $ 2,000 $ 112,000
9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected items from the Company's consolidated statements of operations. Percentage amounts may not total due to rounding.
------------------------------------------------------------------------- ------------------------------------- Percent (%) Percent (%) Percent (%) Percent (%) of Revenues Incr/(Decr) of Revenues Incr/(Decr) Three Months Ended Between Six Months Ended Between June 30, Periods June 30, Periods ------------------------------------------------------------------------- ------------------------------------- 2003 2002 2003 vs. 2002 2003 2002 2003 vs. 2002 ------------------------------------------------------------------------- ------------------------------------- Revenues 100.0 100.0 3.9 100.0 100.0 9.6 Cost of revenues (50.5) (50.4) 4.1 (50.4) (51.1) 8.2 ------------------------------------------------------------------------- ------------------------------------- Gross profit 49.5 49.6 3.7 49.6 48.9 11.2 Operating expenses: Research and development (7.2) (8.2) (8.5) (7.3) (8.5) (6.1) Selling, general and admin (22.1) (20.3) 12.8 (22.4) (21.6) 13.7 ------------------------------------------------------------------------- ------------------------------------- Operating income 20.2 21.0 (0.3) 19.9 18.8 16.2 Other income, net 1.0 2.0 (50.3) 1.0 2.1 (48.4) ------------------------------------------------------------------------- ------------------------------------- Income before income taxes 21.1 23.0 (4.6) 20.8 20.8 9.8 Income tax expense (7.7) (8.4) (4.6) (7.6) (7.6) 9.8 ------------------------------------------------------------------------- ------------------------------------- Net income 13.4 14.6 (4.6) 13.2 13.3 9.8 ------------------------------------------------------------------------- -------------------------------------
CRITICAL ACCOUNTING POLICIES. ----------------------------- Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The following accounting policies are considered by management to be the most critical to the presentation of the consolidated financial statements because they require the most difficult, subjective and complex judgments: REVENUE RECOGNITION. Revenue for product sales, including hardware and consumables, which are bundled together for shipment to the customer, 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. We accrue for warranty costs and sales returns at the time of shipment based upon past experiences. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Revenue for maintenance agreements is recognized on a straight line basis over the life of the contracts (commencing once the period covered by standard warranty expires) based on renewal prices. REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES. EITF 00-21, "Revenue Arrangements with Multiple Deliverables" provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. In some arrangements, the different revenue-generating activities are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the activities. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 to have a material effect on its financial statements, as it does not lead to a change in the allocation of revenue between the different elements of a sale, when applied to the Company. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS. The Company records a reserve for accounts receivable that are potentially uncollectible. The reserve is established by estimating the amounts that are potentially uncollectible based on a review of customer accounts, the age of the receivable, the customer's financial condition and industry, 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 other factors. Results could be materially different if economic conditions worsened for the Company's customers. 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 the three- and six-month periods ended June 30, 2003, obsolescence charges of approximately $25,000 and $140,000, respectively, were taken on Desktop inventory due to the anticipated introduction of the new Desktop line of products. 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 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. RESULTS OF OPERATIONS --------------------- REVENUES. Revenues increased 3.9% to $12.8 million and 9.6% to $24.3 million for the three- and six-month periods ended June 30, 2003, respectively, from $12.3 million and $22.2 million for the same prior-year periods. The increase in revenues was primarily due to increased volume of producer line sales totaling $1.3 million and $2.4 million for the three- and six-month periods ended June 30, 2003 from our European operation offset by decreased desktop line sales of $115,000 and $634,000 for the three- and six-month periods ended June 30, 2003, respectively. The percentage increase for the three-month period ended June 30, 2003 was impacted by the $2.0 million sale to Kodak's Qualex wholesale photo finishing labs during the three-month period ended June 30, 2002. Without this sale, the percentage increase would have been 24.1% for the three-month period ended June 30, 2003. The increase in revenues was also due to the positive impact on our European operations of the weakening U.S. dollar. As of and for the six months ended June 30, 2003, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $8,992,000, $306,000 and $5,462,000, respectively. As of and for the six months ended June 30, 2002, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $6,453,000, $214,000 and $3,699,000, respectively. The growth is due to increasing penetration in the European markets of sales of CD-R and DVD-R products. GROSS PROFIT. Gross profit as a percent of revenues was 49.5% and 49.6% for the three- and six- month periods ended June 30, 2003, respectively, compared to 49.6% and 48.9% for the same prior- year periods. The increase during the six-month period ended June 30, 2003 was primarily due to the larger percentage of producer line product sales, which generally carry a slightly higher margin than our desktop line of products. OPERATING EXPENSES. Selling, general and administrative expenses during the three- and six-month periods ended June 30, 2003 were $2.8 million or 22.1% of revenues and $5.5 million or 22.4% of revenues, respectively compared to $2.5 million or 20.3% of revenues and $4.8 million or 21.6% of revenues during the same prior year periods. These increases in expense are due to increased legal expenses, increased wages due to increased commissions paid on sales and increased co-op marketing program expenses offset by a decrease in advertising expenses during the three- and six-month periods ended June 30, 2003. Research and development expense during the three- and six-month periods ended June 30, 2003 were $927,000 or 7.2% of revenues and $1.8 million or 7.3% of revenues, respectively compared to $1.0 million or 8.2% of revenues and $1.9 million or 8.5% of revenues during the same periods of 2002. This decrease is due to lower development cost related to new product development during 2003 versus 2002. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER INCOME/(EXPENSE). The Company recognized net interest income on cash investments of $134,000 and $271,000 during the three- and six-month periods ended June 30, 2003 compared to $223,000 and $436,000 during the same prior year periods. This decrease is due to a decrease in interest rates. Also included in other income, the Company recognized a $9,000 gain and $13,000 loss on foreign currency exchange for both the three- and six-month periods ended June 30, 2003 compared to a gain of $21,000 during the same prior year periods. INCOME BEFORE INCOME TAXES. Income before income taxes during the three- and six-month periods ended June 30, 2003 were $2.7 million or 21.1% of revenues and $5.1 million or 20.8% of revenues, respectively compared to $2.8 million or 23.0% of revenues and $4.6 million or 20.8% of revenues during the same prior year periods. The decrease for the three-month period ended June 30, 2003 is due primarily to the decrease in net interest income earned on cash investments. The increase for the six-month period ended June 30, 2003 is due to increased U.S. and European channel sales of equipment and consumables and the positive effect of the strengthening Euro on our European operation offset by the decrease in net interest income earned on cash investments. INCOME TAXES. The provision for income taxes represents federal, state, and foreign income taxes on earnings before income taxes. Income tax expense for the three- and six-month periods ended June 30, 2003 amounted to $1.0 million and $1.9 million or 36.5% of income before income taxes, respectively. The Company anticipates an effective tax rate of 36.5% for the remainder of 2003. Income tax expense for the three- and six-month periods ended June 30, 2002 amounted to $1.0 million and $1.7 million or 36.5%, of income before income taxes, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company expects to fund its anticipated cash requirements (including the anticipated cash requirements of its capital expenditures) with internally generated funds and, if required, from the Company's existing credit agreement. This credit agreement allows for advances under a revolving loan up to a maximum advance of $5,000,000. At June 30, 2003, there were no amounts outstanding under the credit agreement. Current assets are $52.0 million as of June 30, 2003 compared to $47.3 million as of December 31, 2002. The allowance for doubtful accounts as a percentage of receivables was 10% and 9% as of June 30, 2003 and December 31, 2002, respectively. Current liabilities remained relatively unchanged at $6.4 million as of June 30, 2003 compared to $6.6 million as of December 31, 2002. Net cash provided by operating activities was $3.5 million and $4.5 million for the six months ended June 30, 2003 and 2002, respectively. This decrease was primarily the result of stocking increased inventories to prepare for the release of the new Desktop Line of products and a decrease in accounts payables due to the timing of payments offset by a decrease in accounts receivables due to improved collection of receivables. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash used in investing activities was $3.5 million and $10.4 million for the six months ended June 30, 2003 and 2002, respectively. This decrease was primarily due to greater sales of marketable securities offsetting increased purchases of marketable securities and increased capital expenditures related to tooling and production setup for the new Desktop products during the first six months of 2003. Net cash provided by financing activities of $489,000 and $258,000 during the six months ended June 30, 2003 and 2002, respectively, reflected proceeds from stock option and warrant exercises. The Company believes that inflation has not had a material impact on its operations or liquidity to date. 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. Factors that could cause or contribute to such differences include, but are not limited to, changes in media or method used for distribution of software, technological changes in products offered by the Company or its competitors and changes in general conditions in the computer market, as well as other factors not now identified. 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. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has a policy of using forward exchange contracts to hedge net exposures related to its foreign currency-denominated monetary assets and liabilities. The primary objective of these hedging activities is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. (See footnote 4.) ITEM 4. 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 control 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. 15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not Applicable. Item 2. Changes in Securities --------------------- Not Applicable. Item 3. Defaults Upon Senior Securities ------------------------------- Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Company's Annual Meeting of Stockholders' was held on May 21, 2003. Of the 8,740,190 shares outstanding and entitled to vote at the meeting, 7,582,420 shares were present, either in person or by proxy. The following describes the matters considered by the Company's shareholders at the Annual Meeting, as well as the results of the votes cast at the meeting: 1. To elect six (6) directors of the Company for the coming year. Nominee In Favor Withheld ------- -------- -------- Bernard Aldrich 7,499,214 83,206 Lawrence Benveniste 7,512,514 69,906 Thomas Madison 7,455,164 127,256 Steven Quist 7,460,514 121,906 James Reissner 7,447,164 135,256 David Suden 7,512,514 69,906 2. Approval of the Amended and Restated 1992 Stock Option Plan. In Favor Against Withheld Broker Non-Vote -------- ------- -------- --------------- 3,355,062 472,783 8,801 3,745,774 Item 5. Other Information ----------------- Not Applicable. 16 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 11.1 Calculation of Earnings Per Share. 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). 32 Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350). (b) Reports on Form 8-K: On April 23, 2003, the Company furnished a Form 8-K reporting under Items 7 and 12 the issuance of a press release and statements of certain of its officers relating to the results of operations of the Company for the quarter ended March 31, 2003. 17 SIGNATURES ---------- In accordance with the Exchange Act, this report has been signed below by following persons on behalf of the registrant and on the dates indicated. RIMAGE CORPORATION Registrant Date: August 14, 2003 By: /s/ Bernard P. Aldrich ------------------- ---------------------- Bernard P. Aldrich Director, Chief Executive Officer, and President (Principal Executive Officer) Date: August 14, 2003 By: /s/ Robert M. Wolf ------------------- ------------------ Robert M. Wolf Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) 18