Qumu Corp - Quarter Report: 2007 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Commission File Number: 0-20728

RIMAGE CORPORATION

(Exact name of Registrant as specified in its charter)

Common Stock outstanding at April 30, 2007 – 10,099,667 shares
of $.01 par value Common Stock.

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 o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large Accelerated Filer o  Accelerated Filer x  Non-Accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No x

RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2007

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RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited - in thousands, except share data)

See accompanying notes to condensed consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited - in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)

See accompanying notes to condensed consolidated financial statements

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

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

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

Other information pertaining to stock options is as follows:

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

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

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

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

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The following table sets forth, for the periods indicated, selected items from the Company’s condensed consolidated statements of income.

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, Germany and Japan. These systems allow customers to benefit from cost savings by reducing their manual labor efforts in industries such as digital photography, medical imaging, banking and finance, government and business services. Rimage anticipates increased sales and marketing expenditures in 2007 as a result of increased resources focused on developing these markets. As Rimage’s sales within North America and Europe have averaged 94% of total sales over the past three years, the strength of the economies in each of these regions plays an important role in determining the success of Rimage.

Rimage earns revenues through the sale of equipment, consumables (ribbons, ink cartridges, Rimage-branded blank CD-R and DVD-R media), maintenance contracts, parts and repair services. Rimage’s recurring revenues (consumables, maintenance contracts, parts and service) comprised 51% and 48% of consolidated revenues during the three months ended March 31, 2007 and 2006, respectively. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does not require significant capital investments as all fabrication of its products is outsourced to vendors.

Results of Operations

Revenues. Revenues decreased 5% to $21.5 million for the three months ended March 31, 2007 from $22.6 million for the same prior year period. The reduction in revenues resulted from a decline in the volume of Desktop and Producer product line equipment sales of $0.8 million and $0.4 million, respectively. The overall decline in the volume of equipment sales was primarily due to reduced sales in the Company’s U.S. distribution channel. While the volume of Producer product

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

line equipment sales declined in the aggregate, revenues for higher-end systems within the Producer product line increased approximately 7% relative to the same prior year period. The resulting higher concentration of high-end Producer equipment sales contributed to higher average selling prices which partially offset the impact of reduced sales volume. Also partially offsetting the reduction in the volume of equipment sales was an increased volume of recurring revenues of $0.2 million, consisting of sales of printer ribbons, ink cartridges, media kits, blank CD-R and DVD-R media, parts and maintenance contracts. The growth in recurring revenues was primarily due to the continued expansion of the Company’s worldwide installed base of CD-R and DVD-R publishing systems, and the Company’s increased emphasis on promoting this portion of its business. Recurring revenues comprised 51% of total revenues for the three months ended March 31, 2007, compared to 48% in the same prior year period. Sales of Producer product line equipment comprised 38% of total revenues in both the current and prior year quarters, and sales of desktop product line equipment represented 11% of revenues in the first quarter of 2007, compared to 14% in the first quarter of 2006.

International sales rose 3% in this year’s first quarter compared to the same period last year, and comprised 41% of total sales, compared to 38% in last year’s first quarter. The European market continued to generate the majority of international sales. Sales in Asian markets, however, generated most of the increase in international sales during the quarter, increasing 34% from the prior year’s first quarter. The increase in sales in Asian markets reflects increased sales efforts in this region with the establishment of a subsidiary operation in Japan in 2005. Currency fluctuations affecting the Company’s European and Japanese operations increased reported consolidated revenues for the three months ended March 31, 2007 by 3% relative to the same prior year period.

As of and for the three months ended March 31, 2007, foreign revenues from unaffiliated customers generated by the Company’s German and Japanese operations and the operating income and net identifiable assets of such operations were $7.6 million, $0.1 million and $9.7 million, respectively. These amounts related primarily to the Company’s German operations, as the establishment of subsidiary operations in Japan occurred in June 2005. Comparable amounts for the Company’s German and Japanese operations as of and for the three months ended March 31, 2006 were revenues of $7.3 million, operating income of $0.1 million and net identifiable assets of $7.1 million. The growth in revenues and assets is due to increasing penetration in foreign markets of sales of CD-R and DVD-R products.

The Company is estimating that second quarter 2007 consolidated revenues will range between $25 million and $27 million.

Gross profit. Gross profit as a percentage of revenues was 45% for the three months ended March 31, 2007, compared to 43% for the same period in 2006. The improvement in gross profit as a percentage of revenues primarily resulted from a shift in the distribution of sales to higher margin products. Producer product line equipment sales generally carry higher margins than desktop product line equipment or recurring revenues. While the aggregate volume of Producer product line equipment sales decreased in this year’s first quarter, sales of higher-end systems within the Producer product line increased by 7% from the prior year’s quarter, contributing to higher average

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

selling prices. Additionally, sales of desktop product line equipment, media and media kits, which generally carry the lowest margins of all product offerings, comprised in the aggregate a smaller proportion of total revenues, at 24% for the three months ended March 31, 2007, compared to 30% in the same prior year period. Stock-based compensation expense included in cost of revenue for the three months ended March 31, 2007 and 2006 had a minimal impact on gross profit as a percentage of revenues for each period, and amounted to $28,000 and $15,000, respectively.

Future gross profit margins will continue to be affected by many factors, including product mix, the timing of new product introductions, changes in material costs, manufacturing volume, the rate of growth of service related revenues relative to associated service support costs and foreign currency exchange rate fluctuations.

Operating expenses. Research and development expenses totaled $1.6 million or 7% of revenues for both quarterly periods ended March 31, 2007 and 2006. Expenses in the current period reflect continued development of new products and enhancements to existing products. Research and development expenses for the three months ended March 31, 2007 and 2006 were minimally impacted by stock-based compensation expenses of $39,000 and $43,000, respectively. Rimage anticipates continued expenditures in research and development in 2007 to support new product development initiatives and to improve existing products.

Selling, general and administrative expenses for the three months ended March 31, 2007 and 2006 were 27% of revenues for both periods, at $5.8 million and $6.1 million, respectively. The $0.3 million decline in selling, general and administrative expenses for the three months ended March 31, 2007 primarily reflects a reduction in general and administrative expenses. The current period decrease in expenses occurred primarily as a result of $1.2 million of consulting expenses incurred in the prior year’s first quarter for the completion of a strategic analysis of the Company’s operations. General and administrative expenses in the first quarter 2007 also include a $0.1 million benefit for the reversal of previously established reserves in the allowance for doubtful accounts stemming primarily from an improvement in collection history. Partially offsetting the impact of the described expense reductions was the incurrence of approximately $0.5 million in expenses in the current period associated with the implementation of a new enterprise resource planning (“ERP”) system. Management completed the initial phase of its ERP system implementation in the first quarter, and is evaluating the potential for implementation of additional modules to support sales and marketing activities. Also partially offsetting the reduction in general and administrative expenses were increased costs associated with a 16% increase in average headcount between periods. Stock-based compensation expenses included in selling, general and administrative expenses amounted to $145,000 and $143,000 for the three months ended March 31, 2007 and 2006, respectively.

Other income, net. The Company recognized net interest income on cash and marketable securities of $0.8 million for the three months ended March 31, 2007, compared to $0.6 million for the same prior year period. The current period increase was due primarily to a $15.0 million increase in average cash equivalent and marketable securities balances for the three months ended March 31, 2007 compared to the same period in the prior year.

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

Income taxes. The provision for income taxes represents federal, state and foreign income taxes on income. Income tax expense for the three months ended March 31, 2007 and 2006 amounted to approximately $1.0 million in each period, or 33% and 37% of income before taxes, respectively. The decrease in the effective tax rate for the three months ended March 31, 2007 primarily reflects the benefit of increased tax-exempt interest income.

The Company implemented the provisions of FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” effective January 1, 2007. As part of its assessment of tax positions under FIN 48, the Company reduced its tax contingency reserve by $36,000 in the first quarter of 2007.

The Company anticipates its effective tax rate will range between 34% and 35% for the full year 2007.

Net income / net income per share. Resulting net income for the three months ended March 31, 2007 was $2.1 million, or 9.9% of revenues. This compares to net income of $1.6 million, or 7.2% of revenues for the same prior year period. Related net income per diluted share amounts were $0.20 and $0.16 for the three months ended March 31, 2007 and 2006, respectively. The Company expects second quarter 2007 net income to range from $0.25 to $0.30 per diluted share.

Liquidity and Capital Resources

The Company expects it will be able to maintain current operations, including anticipated capital expenditure requirements, through its internally generated funds and, if required, from Rimage’s existing credit agreement. This credit agreement allows for advances under an unsecured revolving loan up to a maximum advance of $10 million. At March 31, 2007, no amounts were outstanding under the credit agreement.

At March 31, 2007, the Company had working capital of $67.8 million, an increase of $13.9 million from working capital reported at December 31, 2006. The increase was primarily the result of first quarter net income of $2.1 million, proceeds from employee stock plans of $1.3 million and the change in classification of $8.9 million of marketable securities from non-current as of December 31, 2006 to current as of March 31, 2007 as the remaining term to maturity for these securities is twelve months or less as of March 31, 2007. The Company intends on utilizing its current assets primarily for its continued organic growth. Additionally, the Company may use its available cash for potential future strategic initiatives or alliances.

Net cash provided by operating activities totaled $4.5 million for the three months ended March 31, 2007, compared to $0.8 million in the same prior year period. The $3.7 million increase in cash generated from operations was primarily impacted by a $0.5 million increase in net income adjusted for non-cash items and a $3.4 million increase in cash from changes in operating assets and liabilities. Primarily contributing to the change in operating assets and liabilities compared to the prior year’s period was a $5.5 million larger reduction in receivables, partially offset by a $1.6 million variation in the change in inventories and a $0.7 million larger reduction in trade accounts payable, accrued compensation and accrued expenses. The larger decrease in accounts receivable in the current year’s period was primarily impacted by a $4.5 million reduction in revenue in March

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

2007 relative to December 2006 (last month of the consecutive quarters), compared to a $1.0 million increase in revenue between the comparable prior year periods. Also contributing to the larger decrease in accounts receivable in the first quarter of 2007 compared to the same period in the prior year was a $1.1 million reduction in revenue quarter over quarter. The change in inventories resulted from a $1.2 million increase in inventories during the current year’s first quarter, compared to a $0.3 reduction in the same prior year period. The current period’s increase in inventories resulted from lower sales and a larger build-up of finished goods inventory for expected second quarter sales. The larger current period reduction in accounts payable, accrued compensation and accrued expense accounts is primarily due to the timing of vendor and payroll payments.

Investing activities resulted in a net use of cash of $1.8 million for the three months ended March 31, 2007 and provided a net increase in cash of $2.4 million for the same prior year period. The decrease in cash from investing activities was the result of $1.2 million in purchases of marketable securities, net of related maturities, during the three months ended March 31, 2007, compared to $3.2 million in maturities of marketable securities, net of related purchases, in the same prior year period. Partially offsetting the impact of this change was a $0.2 million reduction in capital expenditures. Capital expenditures for three months ended March 31, 2007 totaled $0.6 million, and consisted primarily of costs capitalized as part of the implementation of an enterprise resource planning system and purchases of manufacturing tooling. Costs capitalized during the quarter for the enterprise resource planning system amounted to $0.2 million, and consisted primarily of software development costs.

Net cash provided by financing activities totaled $2.3 million and $1.7 million for the three months ended March 31, 2007 and 2006, respectively. Financing activities in each period included proceeds from employee stock plans of $1.3 million and $0.9 million, respectively. Additionally, each period includes excess tax benefits recognized as an addition to the APIC (additional paid-in capital) pool of $0.9 million and $0.8 million, respectively. Such amounts are required to be reported as an addition to financing activities and a reduction in operating activities in the Statements of Cash Flows under the provisions of SFAS 123R.

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 accounting policies described below 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. Management made no changes to the Company’s critical accounting policies during the first quarter of 2007.

In applying the critical accounting policies described below, management reassesses its estimates each reporting period based on available information. Changes in such estimates did not have a significant impact on earnings for the three months ended March 31, 2007.

Revenue Recognition. Revenue for product sales (including hardware and consumables), which do not include any requirement for installation or training, is recognized on shipment, at which point the following criteria of SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” Topic 13(A)(1) have been satisfied:

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

A standard product sale by the Company does not require a commitment on the Company’s part to provide installation, set-up or training. When such services are requested, value-added resellers generally arrange and perform the service directly with the customer, with no financial interest or obligation on the part of the Company. In the limited situations in which the Company does provide installation or training services for customers, the Company charges separately for the service based upon its published list prices, and recognizes the associated service revenue upon the successful completion of the service.

The Company 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. A return policy is in place with the Company’s distributors to restrict the volume of returned products, and the Company reviews the distributor’s inventory to insure compliance with the return policy.

Revenue for maintenance agreements is recognized on a straight-line basis over the life of the contracts, in accordance with FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.”

Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. The elements of the Company’s sales transactions are clearly and separately stated and sufficient evidence of their fair value exists to separately account for the elements.

Allowance for Doubtful Accounts and Sales Returns. The Company records a reserve for accounts receivable that are potentially uncollectible. The reserve is established based on a specific assessment of accounts with known collection exposure, based upon a review of the age of the receivable, the customer’s payment history, the customer’s financial condition and industry and general economic conditions, as well as a general assessment of collection exposure in the remaining receivable population based upon bad debt history. Actual bad debt exposure could differ significantly from management’s estimates if economic conditions worsened for the Company’s customers. As described above under “Revenue Recognition,” 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.

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

Inventory Reserves. The Company records reserves for inventory shrinkage and for potential excess, obsolete and slow moving inventory. The amounts of these reserves are based upon usage, historical loss trends, inventory levels, 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.

Deferred Tax Assets. The Company recognizes deferred tax assets for the expected future tax impact of temporary differences between book and taxable income. A valuation allowance and income tax charge are recorded when, in management’s judgment, realization of a specific deferred tax asset is uncertain. Income tax expense could be materially different from actual results because of changes in management’s expectations regarding future taxable income, the relationship between book and taxable income and tax planning strategies employed by the Company.

Warranty Reserves. The Company’s non-consumable products are warranted to the end-user to ensure end-user confidence in design, workmanship and overall quality. Warranty lengths vary by product type, ranging from periods of six to twelve months. Warranty covers parts, labor and other associated expenses. The Company performs the majority of warranty work, while authorized distributors and dealers also perform some warranty work. The Company records a liability for estimated future warranty claims during the warranty period. The amount of the liability is based on an analysis of historical claims experience, which includes labor, parts and freight costs and consideration of the proportion of parts that can be re-used. Also considered are the anticipated impact of product improvements, 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.

Stock-Based Compensation. The Company implemented the fair value recognition provisions of SFAS No. 123R effective January 1, 2006 using the modified prospective method. Under this method, the Company recognizes compensation expense on a straight-line basis over the vesting period for all stock-based awards granted on or after January 1, 2006, and for previously granted awards not yet vested as of January 1, 2006. The Company recognized stock-based compensation costs of approximately $0.2 million in each of the three months ended March 31, 2007 and 2006.

The Company utilizes a Black-Scholes option pricing model to estimate the fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and the Company’s stock price volatility. Additionally, the Company is required to estimate the expected forfeiture rate of unvested awards and recognize expense for only those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management’s best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of future awards or their estimated rate of forfeiture. If factors change and the Company uses different assumptions in the application of SFAS 123R in future periods, the compensation expense recorded under SFAS 123R may differ significantly from the expense recorded in the current period. See

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

Note 2 under the Notes to Condensed Consolidated Financial Statements in this Form 10Q for additional information on stock-based compensation.

Impairment of Long-lived Assets. Long-lived assets at March 31, 2007 consisted of property and equipment. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the Company reviews the carrying amount of its long-lived assets when events or changes in circumstances such as market value, asset utilization, physical change, legal factors or other matters indicate that the carrying amount of the assets may not be recoverable. When this review indicates the carrying amount of an asset or asset group exceeds the sum of the future undiscounted cash flows expected to be generated by the assets, the Company recognizes an asset impairment charge against operations for the amount by which the carrying amount of the impaired asset exceeds its fair value. Considerable judgment is required in the evaluation of whether certain events or circumstances lead to an indication of impairment, and in the assumptions used in determining the amount and period over which future revenues are expected to be earned, related costs, terminal values and discount rates.

Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. This Statement applies only to fair-value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This Statement is expected to increase the consistency of fair value measurements, but imposes no requirements for additional fair-value measures in financial statements. The provisions under SFAS No. 157 are effective for the Company beginning January 1, 2008, and are expected to be applied prospectively. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements and related disclosures.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain warranty and insurance contracts at fair value on a contract-by-contract basis. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 includes financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements and related disclosures.

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

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, the following, as well as other factors not now identified: the Company’s ability to keep pace with changes in technology in the computer and storage media industries as well as technology changes in the retail, medical, banking, government and business services markets; increasing competition and the ability of the Company’s products to successfully compete with products of competitors and newly developed media storage products; the ability of the Company’s newly developed products to gain acceptance and compete against products in their markets, the significance of the Company’s international operations and the risks associated with international operations including currency fluctuations, local economic health and management of these operations over long distances; the Company’s ability to protect its intellectual property and to defend claims of others relating to its intellectual property; the Company’s dependence upon the selling efforts of the Company’s key channel partners; the Company’s ability to maintain adequate inventory of products; the Company’s reliance on single source suppliers; the ability of the Company’s products to operate effectively with the computer products developed and to be developed by other manufacturers; the negative effect upon the Company’s business from manufacturing or design defects; the effect of U.S. and international regulation; fluctuations in the Company’s operating results; the Company’s dependence upon its key personnel; the volatility of the price of the Company’s common stock; provisions governing the Company relating to a change of control, compliance with corporate governance and securities disclosures rules and other risks, including those set forth in the Company’s reports filed with the Securities and Exchange Commission, including Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from foreign exchange rate fluctuations of the European Euro and Japanese Yen to the U.S. dollar as the financial position and operating results of the Company’s German and Japanese subsidiaries, Rimage Europe GmbH and Rimage Japan Co., Ltd., respectively, are translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.

The Company enters into forward exchange contracts principally to hedge inter-company receivables denominated in Euros arising from sales to its subsidiary in Germany. Gains or losses on forward exchange contracts are calculated at each period end and are recognized in net income in the period in which they arose. The Company records the fair value of its open forward foreign

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exchange contracts in other current assets or other current liabilities depending on whether the net amount is a gain or a loss. The Company does not utilize financial instruments for trading or other speculative purposes.

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 evaluation, they have concluded that these disclosure controls and procedures are effective.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

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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.