Acquisition Of Qumu, Inc.

6 Months Ended

Jun. 30, 2012

Acquisition Of Qumu, Inc. [Abstract]

Acquisition of Qumu, Inc.

(2)	Acquisition of Qumu, Inc.
	On October 10, 2011, the Company entered into an Agreement and Plan of Merger ("the Merger Agreement") to acquire 100% of the outstanding stock of Qumu, a leading supplier of enterprise video communication solutions and social enterprise applications for business. Based in San Bruno, California, Qumu's products are expected to complement Rimage's Signal online publishing solution introduced in the second quarter of 2012, and each company is expected to benefit from the other's existing customer base. The acquisition was made to accelerate the Company's growth potential in the global content delivery market.
	After inclusion of working capital and other adjustments required under the Merger Agreement, the aggregate purchase price totaled approximately $53 million, consisting of a net cash outlay of approximately $39 million and approximately 1,000,000 shares of Rimage's common stock. For the purposes of calculating the number of shares of common stock issuable in the merger, the parties agreed upon a value of $13.1865 per share. Pursuant to the terms of a lock-up agreement, the shares issued in the merger will be restricted from transfer, subject to certain exceptions. The restrictions will lapse for one-third of the shares at each of 180 days, 270 days and 365 days following the effective date of the merger. Following the acquisition, Qumu's liabilities consisted of trade payables, accrued operating expenses and deferred income related primarily to active software maintenance contracts. Of the cash amounts payable in the merger, $5.2 million is subject to escrow for a one-year period to secure a possible working capital adjustment and the indemnification obligations to Rimage. The acquisition was funded through the use of cash held by Rimage at the acquisition date and Rimage common stock.

The acquisition was accounted for under the provisions of ASC 805, Business Combinations. The aggregate purchase price was allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed. Management engaged the services of an independent qualified third party appraiser to assist with establishing fair values. The fair values assigned to intangible assets were determined through the use of forecasted cash inflows and outflows and applying a relief-from royalty and a multi-period excess earnings method. These valuation methods were based on management's estimates as of the acquisition date of October 10, 2011. The excess of the purchase price over the net tangible and identifiable intangible assets acquired was recorded as goodwill, which is non-deductible for tax purposes. Transaction costs of approximately $1.7 million were expensed as incurred and were included in the Company's selling, general and administrative expenses.

The following table summarizes the preliminary purchase accounting allocation of the total purchase price to Qumu's net tangible and intangible assets, with the residual allocated to goodwill (in thousands).

Aggregate purchase price	$	51,275
Less: discount applied to Rimage stock for trade restrictions		(1,955	)
Net transaction consideration	$	49,320
Current assets	$	5,213
Property and equipment		390
Intangible assets		18,900
Goodwill		22,218
Net deferred tax assets		7,229
Current liabilities		(4,630	)
Total net assets acquired	$	49,320

The aggregate purchase price for purchase accounting of $51,275,000 reflects the cash consideration plus the valuation of issued Rimage stock at the closing price per share of $11.50 on the date of the acquisition. The purchase price allocation is considered preliminary and is subject to change pending finalization primarily of the value of tax benefits of acquired loss and tax credit carryforwards. As such, amounts subject to potential change in the purchase accounting allocation include goodwill and net deferred tax assets.

The guidance under ASC 805 provides that intangible assets with finite lives be amortized over their estimated remaining useful lives, while goodwill and other intangible assets with indefinite lives will not be amortized, but rather tested for impairment on at least an annual basis. Useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.

The Company is amortizing the acquired intangible assets on a straight-line basis over their expected economic lives. Amortization expense related to the intangibles is reflected in cost of revenues ($0.2 million and $0.4 million for the three and six months ended June 30, 2012, respectively) and operating expenses – amortization of purchased intangibles ($0.3 million and $0.5 million for the three and six months ended June 30, 2012, respectively) in the consolidated statements of operations. The Company established deferred tax assets amounting to approximately $14.2 million for the future benefit of utilization of acquired net operating losses and other tax credits, as well as the impact of cumulative temporary book to tax differences on Qumu's opening balance sheet. A deferred tax liability was established for approximately $7.0 million, for the estimated future impact of the difference in the book vs. tax basis of the purchased intangible assets.

Qumu operating results are included in the Company's condensed consolidated statements of operations in the Company's online publishing segment from the date of acquisition. The following table contains unaudited pro forma results for the three and six months ended June 30, 2012 and 2011, as if the Qumu acquisition had occurred on January 1, 2010 (in thousands, except per share data).

	Three Months Ended June 30,							Six Months Ended June 30,
	2012			2011				2012			2011
	Reported			Reported		Pro Forma (unaudited)		Reported			Reported		Pro Forma (unaudited)
Net sales	$	18,284		$	20,194	$	23,271	$	37,745		$	41,650	$	48,125
Net income (loss)		(2,750	)		1,206		448		(4,455	)		2,704		1,219
Net earnings per share:
Basic		(0.27	)		0.12		0.04		(0.44	)		0.28		0.12
Diluted		(0.27	)		0.12		0.04		(0.44	)		0.28		0.12

The above pro forma financial information is based on the historical financial results of Rimage and Qumu after giving effect to the acquisition and certain pro forma adjustments, summarized below.

Pro forma adjustments for the three and six months ended June 30, 2011 relate primarily to 1) amortization of identified intangible assets ($0.5 million and $1.0 million, respectively), 2) elimination of Qumu's interest expense and bank fees associated with debt that was retired with acquisition proceeds ($0.3 million and $0.5 million, respectively), and certain other adjustments together with related income tax effects ($0.5 million and $0.9 million, respectively).

The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor do they claim to be indicative of the results that will be obtained in the future. In addition, the pro forma results do not reflect the realization of any cost savings that may have been achieved from operating efficiencies, synergies or other restructuring activities that may result from the acquisition.