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 June 30, 2004; 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 July 31, 2004 – 9,332,395 shares
of $.01 par value Common Stock.

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   
Yes _X_   No ___

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, 2004

PART I   FINANCIAL INFORMATION    
 
Item 1.   Financial Statements 
 
     Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003  3  
 
     Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2004 and 2003  4  
 
     Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2004 and 2003  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  16-17  
 
Item 1-3.   None 
 
Item 4.   Submission of Matters to a Vote of Security Holders 
 
Item 5.   None 
 
Item 6.   Exhibits 
 
SIGNATURES  18  






2


PART 1 FINANCIAL INFORMATION

Item 1.   Unaudited Financial Statements

RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Unaudited)

Assets June 30,
2004
December 31,
2003

Current assets:            
    Cash and cash equivalents   $ 35,429,629   $ 26,741,627  
    Marketable securities    13,956,228    21,855,434  
    Trade accounts receivable, net of allowance for doubtful accounts
           and sales returns of $699,000 and $887,000, respectively    9,205,772    6,242,516  
    Inventories    4,742,129    3,334,370  
    Prepaid expenses and other current assets    525,034    473,053  
    Deferred income taxes-current    1,202,329    1,202,329  

              Total current assets    65,061,121    59,849,329  

Property and equipment, net    1,246,076    1,137,446  
Deferred income taxes-noncurrent    36,676    36,676  
Other noncurrent assets    119,311    906  

                        Total assets   $ 66,463,184   $ 61,024,357  


Liabilities and Stockholders’ Equity
  

Current liabilities:  
    Trade accounts payable   $ 4,073,188   $ 2,365,213  
    Accrued compensation    1,552,712    1,658,741  
    Accrued other    1,183,384    1,426,840  
    Income taxes payable    1,726,494    1,768,710  
    Deferred income and customer deposits    1,694,076    1,793,725  

              Total current liabilities    10,229,854    9,013,229  


Stockholders’ equity:
  
    Common stock, $.01 par value, authorized 30,000,000 shares,  
           issued and outstanding 9,304,622 and 9,110,246, respectively    93,046    91,102  
    Additional paid-in capital    18,572,296    18,156,735  
    Retained earnings    37,662,504    33,799,709  
    Accumulated other comprehensive loss    (94,516 )  (36,418 )

              Total stockholders’ equity    56,233,330    52,011,128  


Commitments and contingencies
  

                        Total liabilities and stockholders’ equity
   $ 66,463,184   $ 61,024,357  


See accompanying condensed notes to consolidated financial statements





3


RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2004 2003 2004 2003

Revenues     $ 17,630,729   $ 12,791,163   $ 32,074,427   $ 24,334,897  
Cost of revenues    9,563,962    6,458,778    16,934,136    12,267,525  

          Gross profit    8,066,767    6,332,385    15,140,291    12,067,372  

Operating expenses:  
   Research and development    1,227,038    926,506    2,351,930    1,775,036  
   Selling, general and administrative    3,658,327    2,822,941    6,869,046    5,456,699  

          Total operating expenses    4,885,365    3,749,447    9,220,976    7,231,735  

          Operating income    3,181,402    2,582,938    5,919,315    4,835,637  

Other income (expense):  
   Interest, net    124,124    133,501    267,425    271,329  
   Gain (loss) on currency exchange    (14,293 )  9,190    (23,968 )  (12,592 )
   Other, net    (92,578 )  (21,080 )  (79,631 )  (21,577 )

          Total other income, net    17,253    121,611    163,826    237,160  

Income before income taxes    3,198,655    2,704,549    6,083,141    5,072,797  
Income taxes    1,167,509    987,160    2,220,346    1,851,571  

          Net income   $ 2,031,146   $ 1,717,389   $ 3,862,795   $ 3,221,226  

Net income per basic share   $ 0.22   $ 0.20   $ 0.42   $ 0.37  

Net income per diluted share   $ 0.20   $ 0.18   $ 0.39   $ 0.34  

Basic weighted average shares outstanding    9,313,162    8,757,138    9,255,964    8,742,033  

Diluted weighted average shares and  
    assumed conversion shares    9,941,572    9,644,499    9,942,095    9,555,873  


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,
2004 2003

Cash flows from operating activities:            
        Net income   $ 3,862,795   $ 3,221,226  
        Adjustments to reconcile net income to net cash  
           provided by operating activities:  
            Depreciation and amortization    494,433    455,908  
            Change in reserve for excess and obsolete inventories    31,210    101,500  
            Change in reserve for allowance for doubtful accounts    (187,437 )  105,579  
            Loss on disposal of property and equipment    100,896    25,475  
            Changes in operating assets and liabilities:  
                  Trade accounts receivable    (2,775,819 )  112,180  
                  Inventories    (1,438,969 )  (1,105,156 )
                  Prepaid income taxes        745,178  
                  Prepaid expenses and other current assets    (51,981 )  68,921  
                  Trade accounts payable    1,707,975    (186,798 )
                  Accrued compensation    (106,029 )  (19,805 )
                  Accrued other    (243,456 )  16,714  
                  Income taxes payable    (42,216 )  (194,973 )
                  Deferred income and customer deposits    (99,649 )  185,826  


                              Net cash provided by operating activities
    1,251,753    3,531,775  


Cash flows from investing activities:
  
        Purchase of marketable securities    (6,020,335 )  (21,006,217 )
        Maturity of marketable securities    13,919,541    17,894,763  
        Purchase of property and equipment    (692,364 )  (432,941 )
        Other noncurrent assets    (151,293 )  14,794  


                              Net cash provided by (used in) investing activities
    7,055,549    (3,529,601 )


Cash flows from financing activities:
  
        Proceeds from stock option/warrant exercises    417,505    489,314  


Effect of exchange rate changes on cash
    (36,805 )  84,273  


Net increase (decrease) in cash and cash equivalents
    8,688,002    575,761  

Cash and cash equivalents, beginning of period
    26,741,627    17,339,135  


Cash and cash equivalents, end of period
   $ 35,429,629   $ 17,914,896  


Supplemental disclosures of net cash paid during the period for:
  
        Income taxes   $ 2,126,448   $ 1,170,827  

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. 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 six month ended June 30, 2004 and 2003 net income and basic and diluted earnings per share would have been adjusted to the proforma amounts stated below:

Three Months
Ended
June 30, 2004
Three Months
Ended
June 30, 2003
Six Months
Ended
June 30, 2004
Six Months
Ended
June 30, 2003

Net income:                    
    As reported   $ 2,031,146   $ 1,717,389   $ 3,862,795   $ 3,221,226  
    Stock based employee  
       compensation, net of tax    (264,636 )  (99,158 )  (420,323 )  (167,410 )
 



    Proforma   $ 1,766,510   $ 1,618,231   $ 3,442,472   $ 3,053,816  

Basic net income per share:  
    As reported   $ 0.22   $ 0.20   $ 0.42   $ 0.37  
    Stock based employee  
       compensation, net of tax   $ (0.03 ) $ (0.01 ) $ (0.05 ) $ (0.02 )
 



    Proforma   $ 0.19   $ 0.19   $ 0.37   $ 0.35  

Diluted net income per share:  
    As reported   $ 0.20   $ 0.18   $ 0.39   $ 0.34  
    Stock based employee  
      compensation, net of tax   $ (0.03 ) $ (0.01 ) $ (0.04 ) $ (0.02 )
 



    Proforma   $ 0.17   $ 0.17   $ 0.35   $ 0.32  


(4)   Inventories
  Inventories consist of the following as of:

June 30,
2004
December 31,
2003

Finished goods and demonstration equipment     $ 1,126,211   $ 899,962  
Work-in-process    415,458    362,645  
Purchased parts and subassemblies    3,200,461    2,071,763  

    $ 4,742,129   $ 3,334,370  





(Continued)



7



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

(5)   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
June 30,

Six Months Ended
June 30,

2004
2003
2004
2003
Net income     $ 2,031   $ 1,717   $ 3,863   $ 3,221  
Other comprehensive income (loss):  
   Foreign currency translation adjustment    (11 )  65    (56 )  96  
   Net unrealized gains (losses) on securities    (5 )  (16 )  (2 )  3  




Total other comprehensive income   $ 2,015   $ 1,766   $ 3,805   $ 3,320  





(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(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, 2004, the Company had fourteen outstanding foreign currency contracts totaling $2,409,000. These contracts mature in 2004 and bear rates between 1.1763 and 1.2266 U.S. Dollars per Euro. As of June 30, 2004, the fair value of foreign currency contracts is $36,000 and is recorded in other current liabilities.

(7)   Recent Accounting Developments
  FIN 46, “Consolidation of Variable Interest Entities”, was issued by the FASB in January 2003, and the interpretation was revised in December 2003 (“FIN 46-R”). FIN 46-R provides accounting requirements for business enterprises to consolidate related entities in which they are determined to be the primary beneficiary as a result of their variable economic interests. The interpretation provides guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation is effective for all such interests entered into after December 31, 2003, and for all others at the beginning of the fiscal year commencing after December 15, 2004. Adoption of the interpretation has not affected, and is not expected to affect, the Company’s consolidated financial statements.  



(Continued)



8



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

(8)   Warranty Reserve
  Warranty reserve rollforward is as follows:

  Beginning
Balance

Warranty
Provisions

Warranty
Claims

Changes In
Estimates

Ending
Balance

Six Months Ended:
     June 30, 2004     $ 172,000   $ 273,000   $ (246,000 ) $ (2,000 ) $ 197,000  
     June 30, 2003   $ 170,000   $ 177,000   $ (159,000 ) $ (29,000 ) $ 159,000  

(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.

(10)   Subsequent Event
  On July 31, 2004, the Company entered into an operating lease associated with its Edina, Minnesota facility. The lease is effective August 1, 2004 expiring July 31, 2008 with an option to renew for an additional four years. Future minimum lease payments excluding operating expenses and real estate taxes as of August 1, 2004 are as follows:

Year ending December 31 Edina facility
operating
lease

2004     $ 166,969  
2005    404,138  
2006    412,328  
2007    420,518  
2008    248,089  

Net minimum lease payments   $ 1,652,042  





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
June 30,
Percent (%)
Incr/(Decr)
Between
Periods
Percent (%)
of Revenues
Six Months Ended
June 30,
Percent (%)
Incr/(Decr)
Between
Periods
2004 2003 2004 vs. 2003 2004 2003 2004 vs. 2003

Revenues      100.0    100.0    37.8    100.0    100.0    31.8  
Cost of revenues    (54.2 )  (50.5 )  48.1    (52.8 )  (50.4 )  38.0  

Gross profit    45.8    49.5    27.4    47.2    49.6    25.5  
Operating expenses:  
     Research and development    (7.0 )  (7.2 )  24.5    (7.3 )  (7.3 )  32.5  
     Selling, general and admin    (20.7 )  (22.1 )  29.6    (21.4 )  (22.4 )  25.9  

Operating income    18.0    20.2    23.2    18.5    19.9    22.4  
Other income, net    0.1    1.0    (85.8 )  0.5    1.0    (30.9 )

Income before income taxes    18.1    21.1    18.3    19.0    20.8    19.9  
Income tax expense    (6.6 )  (7.7 )  18.3    (6.9 )  (7.6 )  19.9  

Net income    11.5    13.4    18.3    12.0    13.2    19.9  


Overview

Rimage develops, manufactures and distributes CD-Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems from its operations in the United States and Germany. These systems allow customers to benefit from cost savings by eliminating their manual labor efforts in industries such as banking, medical, photography and government. Rimage anticipates increased sales and marketing expenditures as a result of increased resources focused on developing these markets. As approximately 94% of Rimage’s sales occur within North America and Europe, the strength of the economies in each of these regions plays an important role in determining the success of Rimage.

Rimage earns revenues through the sale of equipment, consumables (media kits, ribbons, ink cartridges and blank CD-R and DVD-R media), maintenance contracts, parts and service. Rimage’s aftermarket sales (consumables, maintenance contracts, parts and service) represent approximately 39% of its consolidated revenues. Rimage has no long-term debt and does not require significant capital investment as all fabrication of its products is outsourced to vendors.

Results of Operations

Revenues.   Revenues increased 37.8% to $17.6 million and 31.8% to $32.1 million for the three- and six-month periods ended June 30, 2004, respectively, from $12.8 million and $24.3 million for the same prior-year periods. The increase in revenues was primarily due to sales of Rimage-branded media kits totaling $1.8 million and $2.4 million, increased producer line sales of $1.2 million and $2.1 million, and increased consumable sales of $948,000 and $1.7 million for the three- and six-



10



Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

month periods ended June 30, 2004, respectively. 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, 2004, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $10,934,000, $459,000 and $5,136,000, respectively. 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. The growth is due to increasing penetration in the European markets of sales of CD-R and DVD-R products in 2004 versus 2003.

Gross profit.   Gross profit as a percent of revenues was 45.8% and 47.2% for the three- and six-month periods ended June 30, 2004, respectively, compared to 49.5% and 49.6% for the same prior-year periods. The decrease during the three- and six-month period ended June 30, 2004 was primarily due to the incremental sales of lower margin Rimage branded media kits which the Company began to sell in 2004, additional manufacturing costs related to the June introduction of the next-generation Desktop product line, and inventory costs associated with the discontinuation of the previous Desktop product line.

Operating expenses.   Selling, general and administrative expenses during the three- and six-month periods ended June 30, 2004 were $2.8 million or 20.7% of revenues and $6.9 million or 21.4% of revenues, respectively compared to $2.8 million or 22.1% of revenues and $5.5 million or 22.4% of revenues during the same prior year periods. The increase of $1.4 million during the six-month period ended June 30, 2004 primarily related to focused efforts to strengthen the Company’s sales and marketing organization. Research and development expense during the three- and six-month periods ended June 30, 2004 were $1.2 million or 7.2% of revenues and $2.4 million or 7.3% of revenues, respectively compared to $927,000 or 7.2% of revenues and $1.8 million or 7.3% of revenues during the same periods of 2003. This increase is due to increased development cost related to new product development during 2004 versus 2003.

Other income/(expense).   The Company recognized net interest income on cash investments of $124,000 and $267,000 during the respective three- and six-month periods ended June 30, 2004 compared to $134,000 and $271,000 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 $14,000 loss and $24,000 loss on foreign currency exchange for both the three- and six-month periods ended June 30, 2004 compared to a $9,000 gain and $13,000 loss during the same prior year periods.

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 $1.2 million and $2.2 million, or 36.5% of income before income taxes, respectively. The Company anticipates an effective tax rate of 36.5% for the remainder of 2004. 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.



11



Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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 an unsecured revolving loan up to a maximum advance of $10,000,000. At June 30, 2004, there were no amounts outstanding under the credit agreement.

Current assets increased to $65.1 million as of June 30, 2004 compared to $59.8 million as of December 31, 2003, primarily reflecting increased accounts receivable and inventory levels. The increase in accounts receivable is due to a significant portion of the Company’s sales occurring during June 2004. The increase in inventory is due to the buildup of inventory for long lead-time materials and newly released products including the new Desktop products. The Company intends on utilizing its current assets primarily for its continued organic growth. In addition, the Company may use its available cash for potential future acquisitions. The allowance for doubtful accounts and sales returns as a percentage of receivables was 7% and 10% as of June 30, 2004 and 2003, respectively. This reduction is primarily due to decreased sales returns activity. Current liabilities increased to $10.2 million as of June 30, 2004 compared to $9.0 million as of December 31, 2003 primarily reflecting timing of accounts payable payments.

Net cash provided by operating activities was $1.3 million and $3.5 million for the six months ended June 30, 2004 and 2003, respectively. This decrease was primarily the result of increased inventory levels of long lead-time items and newly released products including the new Desktop products and an increase in accounts receivables due to the timing of collection of receivables offset by an increase in accounts payables due to timing of payments.

Net cash provided by (used in) investing activities was $7.1 million and $(3.5) million for the six months ended June 30, 2004 and 2003, respectively. This increase was primarily due to fewer purchases of short-term investments during the six months ended June 30, 2004. Net cash provided by financing activities of $418,000 and $489,000 during the six months ended June 30, 2004 and 2003, respectively, represented proceeds from stock option exercises.

Critical Accounting Policies.

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies. The following accounting policies are considered by management to be the most critical to the presentation of the consolidated financial statements because they require the most difficult, subjective and complex judgments:









12



Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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:

We accrue for warranty costs and sales returns at the time of shipment based upon past experiences.

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. 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.



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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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 records a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, anticipated releases of new products and other factors. Claims experience could be materially different from actual results because of the introduction of new, more complex products; a change in the Company’s warranty policy in response to industry trends, competition or other external forces; or manufacturing changes that could impact product quality.

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 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.












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PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

  Not Applicable.

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of 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 19, 2004. Of the 9,267,982 shares outstanding and entitled to vote at the meeting, 8,874,049 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 seven (7) directors of the Company to serve until the next Annual Meeting of Shareholders or until their respective successors have been elected and qualified.

Nominee
In Favor
Withheld
Bernard Aldrich   8,460,142   413,907  
Lawrence Benveniste  8,387,042   487,007  
Philip Hotchkiss  8,387,292   486,757  
Thomas Madison  8,386,492   487,557  
Steven Quist  8,460,592   413,457  
James Reissner  8,386,942   487,107  
David Suden  8,459,717   414,332  

Item 5.   Other Information

  Not Applicable.







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Item 6.   Exhibits and Reports on Form 8-K

  (a)   The following exhibits are included herein:

    10.1   Lease dated July 31, 2004, between Rimage Corporation and 7725 Washington Avenue Corporation
    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

  (b)   Reports on Form 8-K:

  In the second quarter, Rimage furnished a Form 8-K dated April 21, 2004, reporting under Items 7 and 12 a press release disclosing material non-public information regarding its results of operations for the quarter ended March 31, 2004 and statements of the Company’s Chief Financial Officer relating to these quarterly results.







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SIGNATURES

In accordance with the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

  RIMAGE CORPORATION
Registrant
 
 
Date:      August 5, 2004      By:                  /s/   Bernard P. Aldrich                     
Bernard P. Aldrich
Director, Chief Executive Officer,
and President
(Principal Executive Officer)
Date:      August 5, 2004      By:                  /s/   Robert M. Wolf                     
Robert M. Wolf
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)











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