UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2003; OR

o   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 Number)
incorporation or organization)
 
7725 Washington Avenue South, Edina, MN 55439
 
  (Address of principal executive offices)
 
952-944-8144
 
  (Registrant’s telephone number, including area code)
 
NA
 
  (Former name, former address, and former fiscal year, if changed since last report.)

Common Stock outstanding at October 30, 2003 - 9,108,446 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 SEPTEMBER 30, 2003



Description Page

PART I
  FINANCIAL INFORMATION        

    Item 1.
 
Financial Statements
 
  
    Consolidated Balance Sheets
 
           (unaudited) as of September 30, 2003 and 
           December 31, 2002     3  
  
    Consolidated Statements of Operations
 
           (unaudited) for the Three and Nine Months 
           Ended September 30, 2003 and 2002     4  
  
    Consolidated Statements of Cash Flows
 
           (unaudited) for the Three and Nine Months 
           Ended September 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.
 
None
 

    Item 2.
 
Changes in Securities and Use of Proceeds
 

    Item 3-5.
 
None
 

    Item 6.
 
Exhibits and Report on Form 8-K
 

SIGNATURES
   18  

2



RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

Assets September 30,
2003
  December 31,
2002

Current assets:            
    Cash and cash equivalents   $ 20,467,551   $ 17,339,135  
    Marketable securities    22,968,387    18,997,987  
    Trade accounts receivable, net of allowance for doubtful accounts
           and sales returns of $868,000 and $635,000, respectively    7,463,803    6,643,613  
    Inventories    4,128,258    3,041,828  
    Prepaid expenses and other current assets    207,264    385,205  
    Deferred income taxes-current    929,279    929,279  

              Total current assets    56,164,542    47,337,047  
Property and equipment, net    1,143,585    1,313,922  
Deferred income taxes-noncurrent    55,274    55,274  
Other noncurrent assets    1,432    3,011  

                        Total assets   $ 57,364,833   $ 48,709,254  

      Liabilities and Stockholders' Equity  

Current liabilities:  
    Trade accounts payable   $ 2,547,629   $ 2,476,299  
    Accrued compensation    1,718,254    1,287,585  
    Accrued other    1,188,903    1,270,536  
    Income tax payable    772,681    194,973  
    Deferred income and customer deposits    1,747,648    1,322,729  

              Total current liabilities    7,975,115    6,552,122  
Stockholders' equity:  
    Common stock, $.01 par value, authorized 30,000,000 shares,  
           issued and outstanding 9,093,712 and 8,719,411 respectively    90,937    87,194  
    Additional paid-in capital    18,074,764    16,157,259  
    Retained earnings    31,334,889    26,134,084  
    Accumulated other comprehensive loss    (110,872 )  (221,405 )

              Total stockholders' equity    49,389,718    42,157,132  

Commitments and contingencies  
                        Total liabilities and stockholders' equity   $ 57,364,833   $ 48,709,254  

                                See accompanying condensed notes to consolidated financial statements

3



RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

Three Months Ended
September 30,
  Nine Months Ended
September 30,
2003 2002 2003 2002

Revenues     $ 13,791,009   $ 12,555,084   $ 38,125,906   $ 34,750,982  
Cost of revenues    7,108,991    6,406,799    19,376,516    17,748,763  

          Gross profit    6,682,018    6,148,285    18,749,390    17,002,219  

   
Operating expenses:  
   Research and development    867,125    851,679    2,642,161    2,741,926  
   Selling, general and administrative    2,797,940    2,502,621    8,254,639    7,303,888  

          Total operating expenses    3,665,065    3,354,300    10,896,800    10,045,814  

   
          Operating income    3,016,953    2,793,985    7,852,590    6,956,405  

   
Other income (expense):  
   Interest    126,570    189,330    397,899    625,152  
   Loss on currency exchange    (12,414 )  (29,023 )  (25,006 )  (7,865 )
   Other, net    (13,662 )  4,931    (35,239 )  7,622  

          Total other income, net    100,494    165,238    337,654    624,909  

   
Income before income taxes    3,117,447    2,959,223    8,190,244    7,581,314  
Income taxes    1,137,868    1,080,117    2,989,439    2,767,180  

          Net income   $ 1,979,579   $ 1,879,106   $ 5,200,805   $ 4,814,134  

   
Net income per basic share   $ 0.22   $ 0.22   $ 0.59   $ 0.55  

   
Net income per diluted share   $ 0.20   $ 0.20   $ 0.54   $ 0.51  

   
Basic weighted average shares outstanding    9,066,835    8,712,285    8,872,558    8,698,020  

   
Diluted weighted average shares and  
    assumed conversion shares    9,834,627    9,521,289    9,669,881    9,495,190  

                                        See accompanying condensed notes to consolidated financial statements

4



RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(unaudited)

Nine months ended
September 30,
2003  2002

Cash flows from operating activities:            
        Net income   $ 5,200,805   $ 4,814,134  
        Adjustments to reconcile net income to net cash  
           provided by operating activities:  
            Depreciation and amortization    696,611    576,363  
            Change in reserve for allowance for doubtful accounts
              and sales returns    232,733    (35,040 )
            Loss on sale of property and equipment    41,401    1,622  
            Changes in operating assets and liabilities:  
                  Trade accounts receivable    (1,052,923 )  (2,055,508 )
                  Inventories    (1,086,430 )  659,104  
                  Prepaid income taxes        764,523  
                  Prepaid expenses and other current assets    177,941    (57,390 )
                  Trade accounts payable    71,330    263,124  
                  Accrued compensation    430,669    301,288  
                  Accrued other    (81,633 )  61,407  
                  Income taxes payable    1,601,887    490,945  
                  Deferred income and customer deposits    424,919    265,998  

   
                              Net cash provided by operating activities    6,657,310    6,050,570  

   
Cash flows from investing activities:  
        Purchases of marketable securities    (43,083,123 )  (20,161,384 )
        Maturity of marketable securities    39,112,723    9,967,986  
        Purchase of property and equipment    (566,096 )  (340,510 )
        Other noncurrent assets    14,749    (64,172 )

   
                              Net cash used in investing activities    (4,521,747 )  (10,598,080 )

   
Cash flows from financing activities:  
        Proceeds from stock option and warrant exercises    897,069    335,635  
        Other noncurrent liabilities        (68,750 )

   
                              Net cash provided by financing activities    897,069    266,885  

   
Effect of exchange rate changes on cash    95,784    62,773  

   
Net increase (decrease) in cash and cash equivalents    3,128,416    (4,217,852 )
   
Cash and cash equivalents, beginning of period    17,339,135    14,767,126  

   
Cash and cash equivalents, end of period   $ 20,467,551   $ 10,549,274  

Supplemental disclosures of net cash paid during the period for:  
        Income taxes   $ 1,202,806   $ 1,394,381  

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.

(2)   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.

(Continued)

6



RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(3)   Stock Based Compensation

  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 nine months ended September 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
Ended
September 30,
2003
Three Months
Ended
September 30,
2002
Nine
Months Ended
September 30,
2003
Nine
Months Ended
September 30,
2002

Net income:                    
  As reported   $ 1,979,579   $ 1,879,106   $ 5,200,805   $ 4,814,134  
  Stock based employee  
     compensation, net of tax    (128,586 )  (132,392 )  (295,996 )  (397,175 )




  Proforma    1,850,993    1,746,714    4,904,809    4,416,959  

Basic net income per share:  
  As reported   $ 0.22   $ 0.22   $ 0.59   $ 0.55  
  Stock based employee  
     compensation, net of tax   $ (0.02 ) $ (0.02 ) $ (0.04 ) $ (0.04 )




  Proforma   $ 0.20   $ 0.20   $ 0.55   $ 0.51  

Diluted net income per share:  
  As reported   $ 0.20   $ 0.20   $ 0.54   $ 0.51  
  Stock based employee  
     compensation, net of tax   $ (0.01 ) $ (0.02 ) $ (0.03 ) $ (0.04 )




  Proforma   $ 0.19   $ 0.18   $ 0.51   $ 0.47  

(4)   Inventories

  Inventories consist of the following as of:

September 30,
2003
December 31,
2002

Finished goods and demonstration equipment     $ 1,131,300   $ 668,154  
Work-in-process    432,824    480,293  
Purchased parts and subassemblies    2,564,134    1,893,381  

    $ 4,128,258   $ 3,041,828  

(Continued)

7



RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(5)   Comprehensive Income

  Comprehensive income is defined as the change in equity of a business during a period from transactions and other events from sources other than from shareholders. The components of and changes in other comprehensive income (loss) are as follows (in 000‘s):

Three Months Ended
September 30,
Nine Months Ended
September 30,


2003 2002 2003 2002




Net income     $ 1,979,579   $ 1,879,106   $ 5,200,805   $ 4,814,134  
Other comprehensive income (loss):  
   Foreign currency translation adjustment    20,873    (10,241 )  116,829    90,034  
   Net unrealized gains (losses) on securities    (9,407 )  (19,268 )  (6,296 )  (91,433 )




Total comprehensive income   $ 1,991,045   $ 1,849,597   $ 5,311,338   $ 4,812,735  




(6)   Foreign Currency Contracts

  The Company enters into forward foreign exchange contracts to hedge inter-company receivables denominated in Euros arising from sales to its subsidiary in Germany. Gains or losses on forward foreign exchange contracts are calculated at each period end and are recognized in net income in the period in which they arose. The fair value of forward foreign exchange contracts is recorded in other current assets or other current liabilities depending on whether the net amount is a gain or a loss.

  As of September 30, 2003, the Company had twenty-three outstanding foreign currency contracts totaling $3,392,000. These contracts mature in 2003 and 2004 and bear rates between 1.0783 and 1.1801 U.S. Dollars per Euro. As of September 30, 2003, the fair value of foreign currency contracts is $86,000 and is recorded in other current liabilities.

(7)   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 adoption of EITF 00-21 did not have any impact on the financial position or results of operations of the Company.

(Continued)

8



RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(8)   Warranty Reserve

  Warranty reserve rollforward is as follows:

Nine Months Ended: Beginning
Balance
Warranty
Provisions
Warranty
Claims
Changes In
Estimates
Ending
Balance






     September 30, 2003     $ 170,000   $ 233,000   $ (205,000 ) $ (29,000 ) $ 169,000  
     September 30, 2002   $ 110,000   $ 331,000   $ (331,000 ) $ 2,000   $ 112,000  

(9)   Litigation

  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.

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 (%)
of Revenues
Three Months Ended
September 30,
Percent (%)
Incr/(Decr)
Between
Periods
Percent (%)
of Revenues
Nine Months Ended
September 30,
Percent (%)
Incr/(Decr)
Between
Periods


2003 2002 2003 vs. 2002 2003 2002 2003 vs. 2002


Revenues   100.0   100.0   9.8   100.0   100.0   9.7  
Cost of revenues  (51.5 ) (51.0 ) 11.0   (50.8 ) (51.1 ) 9.2  


Gross profit  48.5   49.0   8.7   49.2   48.9   10.3  
Operating expenses: 
     Research and development  (6.3 ) (6.8 ) 1.8   (6.9 ) (7.9 ) (3.6 )
     Selling, general and admin  (20.3 ) (19.9 ) 11.8   (21.7 ) (21.0 ) 13.0  


Operating income  21.9   22.3   8.0   20.6   20.0   12.9  
Other income, net  0.7   1.3   (39.2 ) 0.9   1.8   (46.0 )


Income before income taxes  22.6   23.6   5.3   21.5   21.8   8.0  
Income taxes  (8.3 ) (8.6 ) 5.3   (7.8 ) (7.9 ) 8.0  


Net income  14.4   15.0   5.3   13.6   13.9   8.0  


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:

RevenueRecognition. 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:

     Persuasive evidence of an arrangement exists. Orders are received for all sales and sales invoices are mailed on shipment.

     Delivery has occurred. Product has been transferred to the customer or the customer’s designated delivery agent.

     The vendor’s price is fixed or determinable. All sales prices are fixed at the time of the sale (shipment).

     Collectibility is probable. All sales are made on the basis that collection is expected in line with 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 adoption of EITF 00-21 did not have any impact on the financial position or results of operations of 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 nine-month periods ended September 30, 2003, obsolescence charges of approximately $24,000 and $118,000, respectively, 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.

11



Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Warranty Reserves. The Company’s non-consumable products are warranted to the end-user to ensure end-user confidence in design, workmanship, and overall quality. Warranty lengths vary by product type, ranging from periods of six to twelve months. Warranty covers parts, labor, and other associated expenses. The Company performs the majority of warranty work, while authorized distributors and dealers also perform some warranty work. 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 9.8% to $13.8 million for the three-month period ended September 30, 2003 from $12.6 million for the same prior-year period. The increase in revenues was primarily due to increased volume of desktop line equipment sales totaling $769,000, increased volume of producer line equipment sales totaling $516,000 from our European operations and increased volume of aftermarket products sales totaling $487,000 offset by a decrease in volume of domestic producer line equipment sales of $292,000. Revenues increased 9.7% to $38.1 million for the nine-month period ended September 30, 2003 from $34.8 million for the same prior-year period. The increase in revenues was primarily due to the increased volume of aftermarket products sales totaling $2.5 million and increased volume of producer line equipment sales of $1.6 million from our European operations. 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 nine months ended September 30, 2003, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $13,735,000, $471,000 and $5,438,000, respectively. As of and for the nine months ended September 30, 2002, foreign revenues from unaffiliated customers, operating earnings, and net identifiable assets were $10,050,000, $342,000 and $4,014,000, respectively. The growth is due to increasing penetration in the foreign markets of sales of CD-R and DVD-R products.

Gross profit.    Gross profit as a percent of revenues was 48.5% and 49.2% for the three- and nine- month periods ended September 30, 2003, respectively, compared to 49.0% and 48.9% for the same prior-year periods. The decrease in gross profit as a percentage of revenues for the three-month period ended September 30, 2003 was primarily due to the increased sales of our Desktop line of products, which carries a slightly lower margin than our producer line of products. The increase in gross profit as a percentage of revenues for the nine-month period ended September 30, 2003 was primarily due to increased sales of producer line products and aftermarket consumable products.

Operating expenses.    Selling, general and administrative expenses during the three- and nine-month periods ended September 30, 2003 were $2.8 million or 20.3% of revenues and $8.3 million or 21.7% of revenues, respectively compared to $2.5 million or 19.9% of revenues and $7.3 million or 21.0% of revenues during the same prior year periods. These increases in expense are due to increased wages due to increased commissions paid on sales, increased legal expenses and

12



Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

increased co-op marketing program expenses offset by a decrease in advertising expenses during the three- and nine-month periods ended September 30, 2003. Research and development expense during the three- and nine-month periods ended September 30, 2003 were $867,000 or 6.3% of revenues and $2.6 million or 6.9% of revenues, respectively compared to $852,000 or 6.8% of revenues and $2.7 million or 7.9% of revenues during the same periods of 2002.

Other income/(expense).     The Company recognized interest income on cash investments of $127,000 and $398,000 during the three- and nine-month periods ended September 30, 2003 compared to $189,000 and $625,000 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 loss on currency exchange of $12,000 and $25,000 during the three- and nine-month periods ended September 30, 2003 compared to losses of $29,000 and $8,000 during the same prior year periods.

Income before income taxes.     Income before income taxes during the three- and nine-month periods ended September 30, 2003 were $3.1 million or 22.6% of revenues and $8.2 million or 21.5% of revenues, respectively compared to $3.0 million or 23.6% of revenues and $7.6 million or 21.8% of revenues during the same prior year periods. The increase during the three- and nine-month period ended September 30, 2003 was primarily due to increased European channel sales and increased demand for DVD-R publishing equipment.

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 nine-month periods ended September 30, 2003 amounted to $1.1 million and $3.0 million, respectively, or 36.5% of income before income taxes. The Company anticipates an effective tax rate of 36.5% for the remainder of 2003. Income tax expense for the three- and nine-month periods ended September 30, 2002 amounted to $1.1 million and $2.8 million, respectively, or 36.5% of income before income taxes.

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 September 30, 2003, there were no amounts outstanding under the credit agreement.

Current assets are $56.2 million as of September 30, 2003 compared to $47.3 million as of December 31, 2002. The allowance for doubtful accounts and sales returns as a percentage of receivables was 10% and 9% as of September 30, 2003 and December 31, 2002, respectively. Current liabilities are $8.0 million as of September 30, 2003 compared to $6.6 million as of December 31, 2002. This increase primarily reflects increased accruals for income tax and payroll.

Net cash provided by operating activities was $6.7 million and $6.1 million for the nine months ended September 30, 2003 and 2002, respectively. This increase was primarily the result of timing

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

of collection of trade accounts receivables offset by increased stocking of inventories for future orders and service requirements.

Net cash used in investing activities was $4.5 million and $10.6 million for the nine months ended September 30, 2003 and 2002, respectively. This decrease was primarily due to greater maturities 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 nine months of 2003. Net cash provided by financing activities of $897,000 and $267,000 during the nine months ended September 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.

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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 6.)

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 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.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

  Not Applicable.

Item 2. Change in Securities and Use of Proceeds

  At the meeting of the Company’s Board of Directors on September 16, 2003, the Board of Directors adopted resolutions declaring a dividend of one preferred share purchase right (a “Right”) for each outstanding Common Share of the par value of $.01 per share of the Company. The dividend was payable on October 6, 2003 to shareholders of record on that date.

  Each Right entitles the registered holder to purchase from the Company one one-hundredth of a Series A Junior Participating Preferred Share, $.01 par value (the “Preferred Share”), of the Company at a price of $100.00 per one one-hundredth of a Preferred Share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of September 17, 2003 between the Company and Wells Fargo Bank, National Association, as Rights Agent.

Item 3. Defaults Upon Senior Securities

  Not Applicable.

Item 4. Submission of Matters to a Vote of Securities Holders

  Not Applicable.

Item 5. Other Information

  Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

    (a)   The following exhibits are included herein:

        11.1 Calculation of Earnings Per Share  

        31.1 Certificate of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.  

        31.2 Certificate of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.  

        32 Certifications pursuant to 18 U.S.C. ss.1350.  

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    (b)   Reports on Form 8-K:

  In the quarter covered by this report, the Company filed a Form 8-K dated September 17, 2003 reporting under Items 5 and 7 that the Company’s Board of Directors had declared a dividend of one preferred share purchase right for each share of the Company’s common stock outstanding as of October 6, 2003 and that the Company had entered into a Rights Agreement dated as of September 17, 2003 with Wells Fargo Bank, National Association, as Rights Agent.

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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:   November 12, 2003
 

/s/   Bernard P. Aldrich
 

Bernard P. Aldrich
Director, Chief Executive Officer,
and President
(Principal Executive Officer)
(Principal Financial Officer)
 


Date:   November 12, 2003
 

/s/   Robert M. Wolf
 

Robert M. Wolf
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
 


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