Arcadia’s move comes a few months after Schacht Value Investors called for Rimage to focus on its core business, cease looking for acquisition targets, declare a special dividend and investigate selling the company.
Unedited press release follows:
Arcadia Capital Advisors Asks for Restraint on Acquisitions, and Return of Value to Shareholders
“We believe Rimage is on a dangerous path, and should immediately implement a share buyback program or a large special dividend,” says Managing Director Richard Rofé.
NEW YORK, June 22, 2011 — Arcadia Capital Advisors, LLC (“Arcadia”), a shareholder of Rimage Corporation (“RIMG” or the “Company”) (Nasdaq:RIMG), and its Managing Director, Richard S. Rofé (“Rofé”), have released an open letter to shareholders of Rimage Corporation to highlight some of the concerns Arcadia has regarding the current strategy of the Company’s senior management team (“Management”) and the Board of Directors of Rimage (“Board”). Arcadia’s letter outlined the dangers of the Company pursuing a virtual publishing solution using the cash on its balance sheet, and advocated instead that the Company’s cash should be returned to shareholders through a large share buyback program, a special dividend, or combination of the two.
“We think the senior management team is asking shareholders to fund a startup, using shareholder money as their own venture capital fund,” stated Rofé. “Trying to supply a virtual publishing solution is a complete shift away from their core skills of building and selling equipment that makes CDs and DVDs, with very little synergies between the two businesses.”
“We think the management team is underestimating the number of competitors that exist or can enter the market tomorrow,” Rofé continued. “Management will be richly rewarded on the slim chance they pull this off, so they will keep trying at any cost. However, if they fail, shareholders will be the only ones suffering. Look at the punishment the stock price has taken, and you have a good indication of what the public thinks of Management’s plan.”
“We strongly urge the Board to limit the resources used to pursue this strategy to only $15M, which is enough for Management to see if their plan will be viable, while at the same time limiting risk to shareholders,” Rofé said. “This leaves cash of $85M after factoring for working capital and other needs, which should be used to implement a large share buyback program or special dividend.”
“We implore the Board to fulfill their obligation of protecting shareholders,” concluded Rofé. “We believe that Arcadia, shareholders, Management, and the Board can work constructively to create a winning and acceptable situation for all.”
About Arcadia Capital Advisors, LLC
Arcadia Capital Advisors, LLC is a private investment firm based in New York that employs a value-oriented investment philosophy in the management of long/short hedge funds focused on small and micro-cap companies. The firm is led by Richard Rofé and is sponsored by M.D.
June 22, 2011
7725 Washington Avenue South
Minneapolis, MN 55439
OPEN LETTER TO SHAREHOLDERS OF RIMAGE CORPORATION
Arcadia Capital Advisors, LLC, through its affiliated funds (“Arcadia” or “we”), is the beneficial owner of Common Stock of Rimage Corporation (“Rimage” or the “Company”) (NasdaqGS:RIMG). We disagree with the Company’s senior management team (“Management”) regarding their stated strategy of investing into the virtual publishing space, and urge the Board of Directors of Rimage (“Board”) to consider alternative strategies in order to protect shareholder value. In this open letter to shareholders, we will identify crucial issues surrounding the Company’s decision to develop a virtual publishing solution, and discuss why we believe such a course of action has been and will continue to be destructive to shareholder value. We believe a superior path—for both the Company itself and, in turn, its shareholders—would be to limit unwarranted risk by allocating only a portion of available cash for this development strategy, and to make a distribution to shareholders from the remainder.
No Confidence in Current Strategy
Management, recognizing that the CD/DVD publishing industry has reached a mature stage, has expressed an interest in pursuing online publishing and distribution by developing a virtual publishing solution. A shift in corporate strategy in this direction was first mentioned in the Company’s Q3 2010 press release on October 28, 2010, and further detail was provided in its Q4 2010 press release on February 25, 2011. Management has indicated a desire to spend part of the cash on the Company’s balance sheet to make acquisitions of companies and technology platforms needed to pursue this path. The Company’s Q4 earnings release reports that the Company has “engaged an investment banker to help [Rimage] evaluate acquisition opportunities for augmenting and accelerating [the Company’s] technology development and go-to-market plans.”
It is Arcadia’s opinion that this new strategy is in many ways similar to venturing down the path of a startup, and should be evaluated with due diligence questions that any rational investor would ask of such an undertaking. We believe that Management is vastly underestimating the risks involved in these pursuits. First, we see tremendous execution risk, as this effort is not one of simply layering on another service, and it is unlikely meaningful synergies with the Company’s present business would be realized. Second, we are aware of substantial competition in this sector, which would make it difficult for a new entrant to dominate. Finally, because of conflicts often inherent in choosing employment of cash, we perceive severe misalignment of interests between Management and the Company’s shareholders.
Rimage’s core business is in the production, marketing, and servicing of equipment to produce CDs, DVDs, and Blu-Rays. Virtual publishing is a whole new ball game. Instead of producing the machines for clients who then create their CDs or DVDs, Rimage wants to move downstream and become a player in the transferring and processing steps. They are going from manufacturing, testing, and distributing of heavy equipment and hardware, to creating, selling, and supporting software and online services. The CD and DVD business does not translate well into this new business, and the only positive overlap we see might potentially be the customer base. It is as if the Company had been building movie projectors and selling them to theaters, but suddenly decided it wants to become a movie studio and create and distribute the actual films. At the surface, both jobs involve movies, but the skills and experience required to be successful are vastly different.
Moreover, because Rimage does not yet have the proven technology to ensure this effort is successful, they must build or acquire the platform to do so, which involves a tremendous amount of execution risk. Indeed, on the Q1 2011 earnings call, the CEO Sherman Black acknowledged that, “…the selling process… is a very different sale than what we do. … [I]t’s going to be a different type of selling model.” The operations and logistics will be different as well. On that same call, the CEO further stated that “the operational model for a cloud-based offering is also very different.” Management has not had any prior experience creating or operating a virtual content services or solutions company; at the same time, we are aware of no formal presentation which sets forth a viable, convincing game plan to succeed in this direction.
Furthermore, we believe that Management is underestimating the competition it will face, both now and in the future. For example, Akamai Technologies (NasdaqGS:AKAM) (“Akamai”), is a public company with a market cap of over $5.5B and quarterly revenues of $276M. Akamai spends $54M a year on research and development, and has a long-term goal of generating $2B in revenues from in the Media Cloud, Mobile, Security, and Data space. Akamai offers High-Definition video and electronic software delivery as part of their services, with a client list which includes CBS, Viacom, Apple, Victoria’s Secret, and Warner Music. Revenue from the media and entertainment segments were 43% of their total revenues for last twelve months, or approximately $460M. Another would-be competitor, Open Text Corp. (NasdaqGS:OTEX), purchased Vignette Corporation in July 2009, has a $3.5B market capitalization and generates nearly $1B in annual revenues with their enterprise content management solutions. Open Text has begun focusing on opportunities in the Cloud and Social Media/Mobility space as well. They announced new projects and clients, including U-Haul, a Canadian provincial government agency, and a global fast food chain, in these verticals on their Q3 2011 earnings call. There are constantly new threats from new players like Amazon.com (NasdaqGS:AMZN) with their CloudFront and Apple (NasdaqGS:AAPL) with iCloud, or from telecommunication companies like AT&T or Verizon if they too decide to join the fray. Rimage is not inventing anything new, but trying to elbow its way into a crowded space, despite having little prior experience, let alone expertise, in this specific area.
Repercussions of the New Strategy
We do not need to look further than the Company’s stock price to see what the market thinks of the new strategy. The fear and indication of no confidence should be clearly apparent with a stock price that is at 52-week lows. Since the Company announced this new online publishing initiative on October 28, 2010, the stock has fallen 20% from the $16.73/share price at that time, to its close of $13.38 on June 21, 2011. Since Sherman Black stepped into the role of Chief Executive Officer in January 2010, the stock is down 23%. For a stock with $12.39/share in net cash and generating over $0.75/share in free cash flow annually, this price would not make any sense unless the perception was that Management is proceeding down a path that will destroy a tremendous amount of value in the near term. We believe that the market is pricing the stock as if Management will burn through the cash on a misguided and unfruitful journey for growth.
There is very little value attributed to the Company’s core operations, which, while in a declining industry, can continue generating significant cash. In our opinion, Rimage should instead, first and foremost, focus on extracting as much value as possible out of the remaining life of the CD and DVD publishing business. As stated in their latest earnings call for Q1 2011, recurring revenues “accounted for 67% of [Rimage’s] total first quarter sales.” This revenue category includes consumables such as printer ribbons and cartridges, as well as service contracts. We believe that the recurring nature of this revenue stream can produce stable and steady cashflow for years to come.
We believe shareholders would be better served if the Board and Management showed restraint and discipline in its pursuit of developing this cloud and virtual publishing offering. The Company can attempt to reinvent itself, but should do so with prudence and due diligence, and guided by its responsibility to shareholders. Additionally, once the Rimage Board and Management demonstrates a palpable commitment to pursuing its core business, and so long as shareholder value is the beacon by which the Company is guided, we would be supportive of a disciplined effort to seek growth in areas outside of the Company’s core business, including the virtual marketplace. To this end, we note that the Company reported in its most recent 10-Q on May 9, 2011, that it has $117M in cash and short term investments on its balance sheet, or approximately $12.39/share. We believe that spending $15M or less to pursue this new business model would be acceptable. Exclude working capital needs and other cash needs, this leaves approximately $85M that is available to shareholders. Future annual cashflows, which we estimate to be $7M and declining, should be sufficient to further fund the growth initiatives and operations. The allocated cash and future cash flows should be enough to pursue research and development efforts or to acquire the technology needed. The folly of using potentially the Company’s full $100M+ cash would be both distracting to core operations and also put shareholder value at risk.
We encourage the Board to return value to shareholders through such methods as a one-time stock buyback or special dividend, with the excess $85M cash available.
In conclusion, Management and Board must be guided by responsibility to the Company’s shareholders. Stubbornly moving ahead in an undisciplined manner, and in directions the Company acknowledges will present substantial shifts away from core operations, presenting severe downside risk, and is not an acceptable use of cash. Instead, we view staying committed to and exploiting current assets, preserving shareholder value, and rewarding shareholders with a one-time share buyback and/or special dividend, as necessary and sensible prerequisites to any new initiative.
Richard S. Rofé, Managing Director
Arcadia Capital Advisors, LLC
The analyses and conclusions of Arcadia contained in this letter are based on publicly available information. Arcadia recognizes that there may be confidential or otherwise non‐public information in the possession of the companies discussed in this letter that could lead these companies or others to disagree with Arcadia’s conclusions.
The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Arcadia concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein, and no decision or action should be made relying solely on information herein or the accuracy thereof. Arcadia disclaims any obligation to update this letter.
Funds managed by Arcadia and/or its affiliates own Rimage common stock as of the date of this letter. Arcadia manages funds that are in the business of actively trading ‐ buying and selling ‐ securities and other financial instruments. Arcadia has, and in the future may, change its investment position in Rimage and possibly increase, decrease, dispose of, or change the form of its investment for any or no reason.
This letter should not be considered a recommendation to buy, sell, or hold any investment. In addition, this letter is neither an offer to purchase nor a solicitation of an offer to sell any securities of the companies. This letter is not a solicitation of proxies. Arcadia and its affiliates retain the right to vote on any matters relating to each or any of the companies discussed herein including, without limitation, for or against any transaction.