**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark  One)** |
|-----------------|
|            |   |   |
|            | **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|            |   |   |
|            |   |   | **For  The Quarterly Period Ended:    February 28, 2003** |
|            |   |   |
|            | **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: 0-14779** |

 

| **MEDIA 100 INC.**                                               |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **DELAWARE**                                                     |   | **04-2532613** |
| (State or other  jurisdiction of organization  or incorporation) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |   |
| **450  DONALD LYNCH BOULEVARD  MARLBOROUGH, MASSACHUSETTS**      |
| (Address of  principal executive offices)                        |
|                                                             |   |   |
| **01752-4748**                                                   |
| (Zip code)                                                       |
|                                                             |   |   |
| **(508)  460-1600**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes    ý       No    o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Common  Stock, par value $.01 per share** |   | **13,083,019  shares**        |
|---------------------------------------------|--------|-------------------------------|
| Class                                       |   | Outstanding at  April 7, 2003 |

 

 

----

 

MEDIA 100 INC.

 

INDEX TO FORM 10-Q

 
| PART I - FINANCIAL  INFORMATION |
|---------------------------------|
|                            | ITEM 1 | Consolidated Financial  Statements: |
|                            |   | Consolidated Balance Sheets  as of February 28, 2003 and November 30, 2002 |
|                            |   |   |
|                            |   | Consolidated  Statements of Operations for the three months ended February 28, 2003  and  February 28, 2002 |
|                            |   |   |
|                            |   | Consolidated  Statements of Cash Flows for the three months ended February 28, 2003 and  February 28, 2002 |
|                            |   |   |
|                            |   | Notes to  Consolidated Financial Statements |
|                            |   |   |
|                            | ITEM  2 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                            |   |   |
|                            | ITEM  3 | Quantitative  and Qualitative Disclosures About Market Risk |
|                            |   |   |
| PART II - OTHER INFORMATION     |
|                            | ITEM  1 | Legal  Proceedings |
|                            |   |   |
|                            | ITEM 6 | Exhibits and  Reports on Form 8-K |
|                            |   |   |
| SIGNATURES                      |
|                            |   |   |
| CERTIFICATIONS                  |
|                            |   |   |
| EXHIBIT INDEX                   |

 

2

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PART I - FINANCIAL INFORMATION

 

MEDIA 100 INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 
|                                                                                                                                                               |   | **February  28,  2003** |   | **November  30,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| ASSETS                                                                                                                                                             |   |                    |   |                    |   |
| Current  assets:                                                                                                                                                   |   |                    |   |                    |   |
| Cash  and cash equivalents                                                                                                                                         |   | $                       | 3,344  |                    | $      | 4,573 |   |
| Available  for sale securities, at fair value                                                                                                                      |   | 44                      |   | 126                     |   |
| Restricted  Cash                                                                                                                                                   |   | 3,191                   |   | 3,184                   |   |
| Accounts  receivable, net of allowance for doubtful accounts of $407 in 2003 and $409  in 2002                                                                     |   | 2,135                   |   | 2,435                   |   |
| Inventories,  net                                                                                                                                                  |   | 1,953                   |   | 2,447                   |   |
| Prepaid  expenses and other current assets                                                                                                                         |   | 781                     |   | 516                     |   |
| Total  current assets                                                                                                                                              |   | 11,448                  |   | 13,281                  |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| Property  and equipment, net                                                                                                                                       |   | 1,687                   |   | 1,870                   |   |
| Intangible  assets, net                                                                                                                                            |   | 135                     |   | 145                     |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| Total  assets                                                                                                                                                      |   | $                       | 13,270 |                    | $      | 15,296 |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                         |   |                    |   |                    |   |
| Current  liabilities:                                                                                                                                              |   |                    |   |                    |   |
| Accounts  payable                                                                                                                                                  |   | $                       | 996    |                    | $      | 1,295 |   |
| Accrued  expenses                                                                                                                                                  |   | 5,766                   |   | 5,588                   |   |
| Deferred  revenue                                                                                                                                                  |   | 3,910                   |   | 4,504                   |   |
| Total  current liabilities                                                                                                                                         |   | 10,672                  |   | 11,387                  |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| Contingencies  (Note 9)                                                                                                                                            |   |                    |   |                    |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| Stockholders’  equity:                                                                                                                                        |   |                    |   |                    |   |
| Preferred  stock, $.01 par value  Authorized - 1,000 shares, none issued                                                                                           |   |                    |   |                    |   |
| Common  stock, $.01 par value,  Authorized - 25,000 shares  13,113 and 12,977 issued and 13,083 and 12,947 outstanding at  February 28, 2003 and November 30, 2002 |   | 131                     |   | 130                     |   |
| Capital  in excess of par value                                                                                                                                    |   | 218,393                 |   | 218,319                 |   |
| Accumulated  deficit                                                                                                                                               |   | (215,671                | )      | (214,319                | )      |
| Treasury  stock, 30 shares at cost                                                                                                                                 |   | (78                     | )      | (78                     | )      |
| Accumulated  other comprehensive loss                                                                                                                              |   | (177                    | )      | (143                    | )      |
| Total  stockholders’ equity                                                                                                                                   |   | 2,598                   |   | 3,909                   |   |
|                                                                                                                                                               |   |                    |   |                    |   |
| Total  liabilities and stockholders’ equity                                                                                                                   |   | $                       | 13,270 |                    | $      | 15,296 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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MEDIA 100 INC. 

CONSOLIDATED STATEMENTSOF OPERATIONS

(in thousands,except per share data)

(unaudited)

 
|                                                                |   | **Three  Months Ended** |   |
|---------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                |   | **February  28,  2003** |   | **February  28,  2002** |   |
| Net  sales:                                                         |   |                    |   |   |   |
| Products                                                            |   | $                       | 3,557  |   | $ | 2,852 |   |
| Services                                                            |   | 1,240                   |   | 1,646 |   |
| Total  net sales                                                    |   | 4,797                   |   | 4,498 |   |
|                                                                |   |                    |   |   |   |
| Cost  of sales                                                      |   | 2,462                   |   | 2,238 |   |
| Accelerated  depreciation and amortization of fixed assets (Note 6) |   | —                  |   | 248 |   |
| Gross  profit                                                       |   | 2,335                   |   | 2,012 |   |
|                                                                |   |                    |   |   |   |
| Operating  expenses:                                                |   |                    |   |   |   |
| Research  and development                                           |   | 1,773                   |   | 2,567 |   |
| Selling  and marketing                                              |   | 1,465                   |   | 2,248 |   |
| General  and administrative                                         |   | 645                     |   | 1,106 |   |
| Amortization  and write-off of intangible assets                    |   | —                  |   | 492 |   |
| Accelerated  depreciation and amortization of fixed assets (Note 6) |   | —                  |   | 634 |   |
| Settlement  of litigation (Note 7 and 9)                            |   | —                  |   | 924 |   |
| Total  operating expenses                                           |   | 3,883                   |   | 7,971 |   |
| Operating  loss                                                     |   | (1,548                  | )      | (5,959 | ) |
|                                                                |   |                    |   |   |   |
| Interest  income, net                                               |   | 24                      |   | 78 |   |
| Other  income (expense), net                                        |   | 172                     |   | (84 | ) |
| Loss  from operations before benefit from income taxes              |   | (1,352                  | )      | (5,965 | ) |
| Benefit  from income taxes                                          |   | —                  |   | (102 | ) |
| Net  loss                                                           |   | $                       | (1,352 | ) | $ | (5,863 | ) |
|                                                                |   |                    |   |   |   |
| Loss  per share:                                                    |   |                    |   |   |   |
|                                                                |   |                    |   |   |   |
| Basic                                                               |   | $                       | (0.10  | ) | $ | (0.46 | ) |
| Diluted                                                             |   | $                       | (0.10  | ) | $ | (0.46 | ) |
|                                                                |   |                    |   |   |   |
| Weighted  average common shares outstanding:                        |   |                    |   |   |   |
| Basic                                                               |   | 13,039                  |   | 12,636 |   |
| Diluted                                                             |   | 13,039                  |   | 12,636 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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MEDIA 100 INC. 

CONSOLIDATED STATEMENTSOF CASH FLOWS

(in thousands)

(unaudited)

 
|                                                                                          |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                          |   | **February  28,  2003** |   | **February  28,  2002** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                    |   |   |   |
| Net  loss                                                                                     |   | $                       | (1,352 | ) | $ | (5,863 | ) |
| Adjustments  to reconcile net loss from operations to net cash used in operating  activities: |   |                    |   |   |   |
| Depreciation  and amortization                                                                |   | 363                     |   | 1,455 |   |
| Non-cash  settlement of litigation                                                            |   | —                  |   | 924 |   |
| Amortization  and write-off of intangible assets                                              |   | —                  |   | 492 |   |
| Changes  in assets and liabilities:                                                           |   |                    |   |   |   |
| Restricted  cash                                                                              |   | (7                      | )      | — |   |
| Accounts  receivable                                                                          |   | 300                     |   | 767 |   |
| Inventories                                                                                   |   | 494                     |   | (708 | ) |
| Prepaid  expenses and other current assets                                                    |   | (265                    | )      | (242 | ) |
| Accounts  payable                                                                             |   | (299                    | )      | (36 | ) |
| Accrued  expenses                                                                             |   | 178                     |   | (780 | ) |
| Deferred  revenue                                                                             |   | (594                    | )      | (191 | ) |
| Net  cash used in operating activities                                                        |   | (1,182                  | )      | (4,182 | ) |
|                                                                                          |   |                    |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                    |   |   |   |
| Net  purchases of equipment                                                                   |   | (152                    | )      | (312 | ) |
| Purchase  of intangible assets                                                                |   | (18                     | )      | (10 | ) |
| Net  proceeds from sales of marketable securities                                             |   | 82                      |   | 8 |   |
| Net  cash used in investing activities                                                        |   | (88                     | )      | (314 | ) |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                    |   |   |   |
| Proceeds  from issuance of common stock                                                       |   | 75                      |   | 272 |   |
| Net  cash provided by financing activities                                                    |   | 75                      |   | 272 |   |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH                                                      |   | (34                     | )      | 30 |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                                    |   | (1,229                  | )      | (4,194 | ) |
| CASH  AND CASH EQUIVALENTS, beginning of period                                               |   | 4,573                   |   | 17,369 |   |
| CASH  AND CASH EQUIVALENTS, end of period                                                     |   | $                       | 3,344  |   | $ | 13,175 |   |
|                                                                                          |   |                    |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                            |   |                    |   |   |   |
| Cash  (received) paid for income taxes                                                        |   | $                       | — |   | $ | (102 | ) |
| OTHER  TRANSACTIONS NOT USING CASH:                                                           |   |                    |   |   |   |
| Change  in value of marketable securities                                                     |   | $                       | 7      |   | $ | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

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MEDIA 100 INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED, EXCEPTFOR NOVEMBER 30, 2002 AMOUNTS)

 

1.   Basisof Presentation

 

The accompanying interimunaudited consolidated financial statements include the accounts of Media 100Inc. (“the Company”), a Delaware corporation, and its wholly ownedsubsidiaries.  In the opinion ofmanagement, the interim consolidated financial statements and disclosuresreflect all adjustments necessary for fair presentation. Interim results arenot necessarily indicative of results expected for a full year or for any otherinterim period.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission. These consolidated condensed financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s latest auditedfinancial statements, which are included in the Company’s Annual Report on Form10-K for the fiscal year ended November 30, 2002, filed with the Securities andExchange Commission.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

Media 100 Inc., andsubsidiaries (the Company) design and sell advanced media systems for contentdesign.  In the case of the Company’snewest and most advanced development, 844/XTM, we have integrated the previouslyseparate workflows of real-time video editing and the compositing of layers ofvideo, computer graphics, audio, and metadata. We believe this workflow integration is a technical breakthrough thatover time will attract existing and new video editing users who wish to be ableto design more complex content that comprises dozens, even hundreds of distinctcontent layers.  The Company hasdeveloped new technology—integrated software and hardware, includingApplication-Specific Integrated Circuits (“ASICs”)—to perform compositing inreal time or at high speed to allow compositing operations to be performedwithin an editing environment and execute at high speed without host-basedrendering, which is slow and impedes productivity.

 

The Company’s productsare personal computer-based workstations configured with proprietary softwareand hardware that we engineer and manufacture. In some cases, particularly with 844/X, we sell our products as fullyintegrated systems, meaning we configure and ship the system to an end user, orreseller, with a host personal computer, our software and hardware, andoptional disk storage; in other cases, we deliver only our software andhardware (“unbundled”), typically to an independent value-added reseller thatconfigures the turnkey system themselves on behalf of an end user.

 

TheCompany has incurred an operating loss during the quarter ended February 28,2003 and operating losses in the past five fiscal years. In addition, it hasexperienced negative cash flow from ongoing operations during fiscal 2003, andexpects to incur operating losses and negative cash flows for at least thefirst half of fiscal 2003. The Company incurred a net loss of approximately$1.4 million for the quarter ended February 28, 2003 and as of February 28,2003, the Company had an accumulated deficit of approximately $215.7 million.

 

TheCompany has already taken a series of actions to reduce the negativecash flow it experienced in thepast fiscal year including the termination of employees, reductions in thesalaries paid to executives and certain other employees, relocation of itsfacility to lower cost space and a reduction in the marketing expenses forexisting products.  However, theseexpense reductions will not be enough to return the Company to profitabilitywithout revenue growth.  The Company’scurrent operating plan and cashflow projections assume a certain levelof revenue growth and operating expenses. If the Company fails to achieve its revenue plan then management willrealign operating expenses consistent with the revised revenue expectations atthat time in order to conserve cash. The current cash flow projections also assume the Company will not requiresubstantial cash for capital purchases or to fund substantial increases ininventory, accounts receivable or other assets and the projections assume the Company will be able to continueto collect accounts receivables and will not incur substantial bad debts as aresult of the failure of customers to pay.

 

TheCompany may need to raise additional capital within the next twelvemonths through the sale of debt or equity securities to fund future operations,develop new and enhance existing products and services, or acquirecomplementary products, businesses or technologies. At this time, the Company is in the process of seeking additionalcapital.  However, additional capitalmight not be available on terms favorable to the Company, or at all.

 

6

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Atthis time, management believes that the Company will be able to operate as agoing concern through at least the next twelve months based upon the amount ofits existing available capital, its current operating plan and management’scommitment to reduce operating expenses further if the Company does not achievethe revenues anticipated in its current operating plan.

 

2.   Principlesof Consolidation

 

The accompanying interimunaudited consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries after elimination of significant intercompanytransactions and balances.  Theseconsolidated financial statements reflect the use of the following significantaccounting policies, as described below and elsewhere in the notes to theinterim unaudited consolidated financial statements.  These interim unaudited consolidated financial statements areprepared in accordance with accounting principles generally accepted in theUnited States.

 

3.   Reclassifications

 

Certain amounts in theprior period’s financial statements have been reclassified to conform to thecurrent period’s presentation.

 

4.   Cash,Cash Equivalents and Available for Sale Securities

 

Cash equivalents arecarried at cost, which approximates fair market value, and have originalmaturities of less than 90 days.  Cashequivalents include money market accounts and repurchase agreements withovernight maturities.

 

As part of the McRobertslitigation discussed in Note 9, the Company has placed approximately $2.8million in an escrow account while the case is on appeal. This amount isincluded as restricted cash in the accompanying balance sheet at February 28,2003 and November 30, 2002. Approximately $388,000 of the cash and cash equivalents was restrictedunder various letters of credit at February 28, 2003 and November 30,2002.   Subsequent to February 28, 2003,one of the letters of credit was amended in amount and duration which resultedin a reduction of restricted cash and cash equivalents by $173,000.

 

The Company accounts forsecurities in accordance with Statement of Financial Accounting Standards(SFAS) No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.  Under this standard, the Company is requiredto classify all investments in debt and equity securities into one or more ofthe following three categories: held-to-maturity, available-for-sale ortrading.  Available-for-sale securitiesare recorded at fair market value with unrealized gains and losses excludedfrom earnings and included as a component of stockholders’ equity.  All of the Company’s securities areclassified as available for sale.

 

Securities held as ofFebruary 28, 2003 and November 30, 2002 consists of the following (inthousands):

 
|                                  |   | **Maturity**     |   | **February  28,  2003** |   | **November  30,  2002** |   |
|---------------------------------------|--------|------------------|--------|-------------------------|--------|-------------------------|--------|
| Investments available for sale:       |   |             |   |                    |   |                    |   |
|                                  |   |             |   |                    |   |                    |   |
| Equity  securities                    |   |             |   | $                       | 44     |                    | $      | 44 |   |
|                                  |   |             |   |                    |   |                    |   |
| Corporate  Obligations                |   | Less than 1 year |   | —                  |   | 82                      |   |
|                                  |   |             |   |                    |   |                    |   |
| Total  investments available for sale |   |             |   | $                       | 44     |                    | $      | 126 |   |

 

Securities had a cost of$40 and $116, and a market value of $44 and $126 at February 28, 2003 andNovember 30, 2002, respectively.

 

7

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5.   Inventories

 

Inventories are stated atthe lower of first-in, first-out (FIFO) cost or market and consist of thefollowing (in thousands): 

 
|            |   | **February  28,  2003** |   | **November  30,  2002** |   |
|-----------------|--------|-------------------------|--------|-------------------------|--------|
| Raw  materials  |   | $                       | 612    |                    | $      | 846 |   |
| Work-in-process |   | 297                     |   | 403                     |   |
| Finished  goods |   | 1,044                   |   | 1,198                   |   |
|            |   | $                       | 1,953  |                    | $      | 2,447 |   |

 

Work-in-process andfinished goods inventories include material, labor and manufacturingoverhead.  Management performs periodicreviews of inventory and disposes of items not required by their manufacturingplan.  Our reserve for excess and obsoleteinventory is primarily based upon forecasted demand for our products.  The Company writes down its inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions. If actual future demandor market conditions are less favorable than those projected by management,additional inventory write-downs may be required.

 

6.   Propertyand Equipment, net

 

Property and equipment,net, at February 28, 2003 and November 30, 2002 is stated at cost, lessaccumulated depreciation and amortization, and consists of the following (inthousands):

 
|                                            |   | **February  28,  2003** |   | **November  30,  2002** |   |
|-------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Machinery  and equipment                        |   | $                       | 4,568  |                    | $      | 4,445 |   |
| Purchased  software                             |   | 1,677                   |   | 1,677                   |   |
| Furniture  and fixtures                         |   | 60                      |   | 59                      |   |
| Leasehold  improvements                         |   | 681                     |   | 653                     |   |
|                                            |   | $                       | 6,986  |                    | $      | 6,834 |   |
| Less  accumulated depreciation and amortization |   | (5,299                  | )      | (4,964                  | )      |
|                                            |   | $                       | 1,687  |                    | $      | 1,870 |   |

 

In connection with the signingof the lease amendment for the Company’s principal facility in January 2002,the Company revised the estimated useful life of leasehold improvements andcertain furniture and fixtures that would not be moved to the new facility.  The charge has been reflected as accelerateddepreciation and amortization of fixed assets in the accompanying ConsolidatedStatements of Operations for the three months ended February 28, 2002.  Amounts classified as leasehold improvementsare additions related to the Company’s new principal facility.

 

7.   IntangibleAssets

 

Intangible assets, net atFebruary 28, 2003 and November 30, 2002 consist of the following (inthousands):

 
|                           |   | **February  28,  2003** |   | **November  30,  2002** |   |
|--------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Patents  and Trademarks        |   | $                       | 566    |                    | $      | 548 |   |
| Less  accumulated amortization |   | (431                    | )      | (403                    | )      |
|                           |   | $                       | 135    |                    | $      | 145 |   |

 

Patents and trademarksare being amortized over three years.

 

8

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During the first quarterended February 28, 2002, the Company settled litigation brought against it bythe former shareholders of Wired, Inc. (“Wired”), a Company acquired by theCompany in December 1999 (See Note 9 Contingencies).  As part of the settlement, the Company assigned all rights to theWired product line, intellectual property relating to Wired products andon-hand inventory related to the Wired product line to the formershareholders.  Wired agreed that nofurther action will be taken related to the lawsuit previously filed againstthe Company as noted in Note 9 Contingencies.  Wired granted the Company an irrevocable license to use the source code,technology, know how and intellectual property; provided, however, the licensedoes not include the right to sell Wired products or any equivalent productsincorporating the source code, technology, know how and intellectualproperty.  In addition, Wired agreed topay the Company a royalty of 5% of adjusted gross sales of the assignedproducts, not to exceed $1.2 million, plus the cost of the inventoryassigned.  Litigation settlement includedin the Consolidated Statements of Operations for the three months endedFebruary 28, 2002 represents the cost of inventory transferred, the net bookvalue of remaining intangible assets associated with the acquisition, and legalfees associated with the settlement.

 

8.   NetLoss Per Common Share

 

The Company computesearnings per share pursuant to SFAS No. 128, *Earnings Per Share*.  In accordance with SFAS No. 128, basic netincome (loss) per share is computed using the weighted-average number of commonshares outstanding.  Diluted income pershare is computed using the weighted-average number of common sharesoutstanding and potential common shares from the assumed exercise of stockoptions and warrants outstanding during the period, if any, using the treasurystock method.

 

The Company excludespotentially dilutive securities from its diluted net income (loss) per sharecomputation when either the exercise price of the securities exceeds the fairvalue of the Company’s common stock or when the Company reports a net loss andthe effect of including such securities would be antidilutive.   Options to purchase approximately 3,029,000and 3,373,000 weighted average shares of common stock have been excluded fromthe computation of diluted average shares outstanding at February 28, 2003 andFebruary 28, 2002, respectively, as the effect of their inclusion would havebeen antidilutive.

 

9.   Contingencies

 

The Company providesaccruals for all direct costs associated with the estimated resolution of knowncontingencies.  The accrual isestablished at the earliest date at which it is deemed probable that aliability has been incurred and the amount of such liability can be reasonablyestimated.

 

On June 7, 1995, alawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in theUnited States District Court for the District of Massachusetts.  The complaint generally alleges patentinfringement by the Company arising from the manufacture, sale, and use of theCompany’s Media 100 products.  Thecomplaint includes requests for injunctive relief, treble damages, interest,costs and fees.  In July 1995, theCompany filed an answer and counterclaim denying any infringement and assertingthat the Avid patent in question is invalid. The Company is vigorously defendingthis lawsuit. In addition, Avid is seeking reissue of the patent, includingclaims that it asserts are broader than in the existing patent, and thesereissue proceedings remain pending before the U.S. Patent and Trademark Office.  On January 16, 1998, the court dismissed thelawsuit without prejudice to either party moving to restore it to the docketupon completion of all matters pending before the U.S. Patent and TrademarkOffice.

 

On August 16, 2000, theU.S. Patent and Trademark Office issued an Office Action rejecting all of theclaims made by Avid in their latest request for reexamination of the patentrelated to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Officedesignated the action as “final”.  Avidfiled a Notice of Appeal of the Examiner’s rejections to the U.S. Patent andTrademark Office Board of Patent Appeals and Interferences.  On February 20, 2003, oral argumentregarding the reexamination of Avid’s U.S. Patent No. 5,045,940 occurred and onMarch 21, 2003 a decision was rendered rejecting all of Avid’s claims andsustaining the Examiner’s rejection of all claims made on appeal.   The litigation remains dismissed pendingthe outcome of the consolidated reissue/reexamination proceedings, and therecan be no assurance that the Company will prevail in the appeal by Avid or thatthe expense or other effects of the appeal, whether or not the Companyprevails, will not have a material adverse effect on the Company’s business,operating results and financial condition.

 

9

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On October 12, 1999, alawsuit was filed against the Company by McRoberts Software, Inc. (“MSI”) inthe United States District Court for the Southern District of Indiana.  The complaint alleges copyrightinfringement, breach of contract, and trade secret misappropriation.  The complaint includes requests forunspecified monetary damages and enhanced damages, interest, costs and fees.  An unfavorable verdict was filed on February25, 2002 against the Company in the amount of $2.5 million.  The Company and MSI filed post-trialmotions.  Those motions were ruled uponwith the trial court reducing the total amount awarded by the jury butassessing prejudgment interest and attorney’s fees.  The Company appealed the entire judgment, which approximates $2.8million, and a hearing before the****UnitedStates Court of Appeals for the Seventh Circuit****occurred on December 12, 2002.  The appeal remains outstanding and the Company is awaiting theverdict.  The entire amount of the awardhas been placed in an escrow account pending judgment from the appellate courtand approximately $2.8 million is included as restricted cash in theaccompanying balance sheet at November 20, 2002.

 

The Company had recordeda liability in the amount of $2.6 million that included estimated legal feesassociated with the litigation at November 30, 2001 and the entire amount wasexpensed in the three months ended November 30, 2001.  During the year ended November 30, 2002, the Company recorded anadditional liability and expense of $397,000 for the adjusted judgment whichincluded prejudgment interest and attorney’s fees as well as estimated legalfees associated with the appeal.

 

During the year endedNovember 30, 2002, the Company settled litigation with the former shareholdersof Wired, which was acquired by the Company in fiscal 2000.  As part of the settlement, the Companyassigned all rights to the Wired product line, intellectual property relatingto Wired products and on-hand inventory related to the Wired product line tothe former shareholders.   In return,Wired granted the Company an irrevocable license to use the source code,technology, know how and intellectual property.  In addition, Wired promised to pay the Company a royalty of 5% ofadjusted gross sales of the assigned products, not to exceed $1.2 million, plusthe cost of the inventory assigned. Litigation settlement included in the Consolidated Statements ofOperations for the three months ended February 28, 2002 represents the cost ofinventory transferred, the net book value of remaining intangible assetsassociated with the acquisition, and legal fees associated with the settlement.

 

From time to time theCompany is involved in other disputes and/or litigation encountered in itsnormal course of business.  The Companydoes not believe that the ultimate impact of the resolution of such otheroutstanding matters will have a material effect on the Company’s business, operatingresults or financial condition.

 

Under the terms of theCompany’s standard product license and sale contracts, the Company indemnifiesits customers for the potential liability associated with the infringement ofother parties’ technology based upon the Company’s products.  There is a possibility that the Company maybe liable to one of its customers in the event that there is infringementoccurring.  The Company is not aware ofany infringement related to the Company’s technology, and therefore has notaccrued any amounts for the replacement or refund of any software products soldthrough February 28, 2003.

 

10.   IncomeTaxes

 

The Company recorded anincome tax benefit of $102,000 during the three months ended February 28, 2002as the Company received a refund from the U.S. Government related to a priorperiod payment.

 

10

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11.   AccruedExpenses

 

Accrued expenses atFebruary 28, 2003 and November 30, 2002 consist of the following (inthousands):

 
|                                    |   | **February  28,  2003** |   | **November  30,  2002** |   |
|-----------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| Payroll,  payroll taxes and other taxes |   | $                       | 886    |                    | $      | 838 |   |
| Accrued  warranty                       |   | 525                     |   | 525                     |   |
| Accrued  restructuring                  |   | —                  |   | 14                      |   |
| Accrued  inventory                      |   | 288                     |   | 241                     |   |
| Accrued  legal                          |   | 3,039                   |   | 3,015                   |   |
| Accrued  selling and marketing          |   | 222                     |   | 205                     |   |
| Accrued  other                          |   | 806                     |   | 750                     |   |
|                                    |   | $                       | 5,766  |                    | $      | 5,588 |   |

 

12.   Comprehensiveloss

 

The Company records itemsof comprehensive income or loss in accordance with SFAS No.130*, ReportingComprehensive Income*, and presents such information in the statementof stockholders’ equity.  The componentsof accumulated other comprehensive loss are as follows (in thousands):

 
|                                                             |   | **Three  months ended** |   |
|------------------------------------------------------------------|--------|-------------------------|--------|
|                                                             |   | **February  28,  2003** |   | **February  28,  2002** |   |
| Net  loss                                                        |   | $                       | (1,352 | ) | $ | (5,863 | ) |
| Cumulative  translation adjustment                               |   | (27                     | )      | 30 |   |
| Unrealized  holding gain (loss) on Available-for-sale securities |   | (7                      | )      | — |   |
| Total  comprehensive loss                                        |   | $                       | (1,386 | ) | $ | (5,833 | ) |

 

13.   SegmentInformation

 

The Company applies theprovisions of SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information,* which establishes standards for publiccompanies to report operating segment information in annual and interimfinancial statements.  Operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefdecision maker, or decision making group, in deciding how to allocate resourcesand in assessing performance.  TheCompany’s chief operating decision-making group is composed of the ChiefExecutive Officer and members of senior management.  The Company’s reportable operating segments are digital videosystems and services.

 

11

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Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies. Revenues are attributed to geographic areas based on where the customeris located.  Segment information for thequarters ended February 28, 2003 and February 28, 2002 is as follows:

 
|                               |   | **Digital  Video  Systems** |   | **Services** |   | **Corporate** |   | **Total** |   |
|------------------------------------|--------|-----------------------------|--------|--------------|--------|---------------|--------|-----------|--------|
| ***February 28, 2003***            |   |                        |   |         |   |          |   |      |   |
| Net  sales from external customers |   | $                           | 3,557  |         | $      | 1,240         |   | $         | — |   | $ | 4,797 |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Gross  profit                      |   | 1,318                       |   | 1,017        |   | —        |   | 2,335     |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Depreciation  and amortization     |   | 354                         |   | 9            |   | —        |   | 363       |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Interest  income, net              |   | —                      |   | —       |   | 24            |   | 24        |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Net  sales from external customers |   | $                           | 2,852  |         | $      | 1,646         |   | $         | — |   | $ | 4,498 |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Gross  profit                      |   | 669                         |   | 1,343        |   | —        |   | 2,012     |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Depreciation  and amortization     |   | 1,440                       |   | 15           |   | —        |   | 1,455     |   |
|                               |   |                        |   |         |   |          |   |      |   |
| Interest  income, net              |   | $                           | — |         | — |          | 78     |      | 78     |   |

 

Interest income isconsidered a corporate level activity and is, therefore, not allocated tosegments.  Management believes transfersbetween geographic areas are accounted for on an arms length basis.

 

Net sales by geographicarea for the quarters ended February 28, 2003 and 2002 were as follows (inthousands):

 
|                                        |   | **February  28,  2003** |   | **February  28,  2002** |   |
|---------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| North  America                              |   | $                       | 2,618  |                    | $      | 2,779 |   |
| United  Kingdom, Sweden, Denmark and Norway |   | 791                     |   | 473                     |   |
| France,  Spain and Benelux                  |   | 476                     |   | 237                     |   |
| Germany,  Austria and Switzerland           |   | 279                     |   | 188                     |   |
| Asia,  Japan and other foreign countries    |   | 633                     |   | 821                     |   |
|                                        |   |                    |   |                    |   |
|                                        |   | $                       | 4,797  |                    | $      | 4,498 |   |

 

Long-lived tangibleassets by geographic area for the quarters ended February 28, 2003 and November30, 2002 consist of the following (in thousands):

 
|            |   | **February  28,  2003** |   | **November  30,  2002** |   |
|-----------------|--------|-------------------------|--------|-------------------------|--------|
|            |   |                    |   |                    |   |
| United  States  |   | $                       | 1,581  |                    | $      | 1,741 |   |
| United  Kingdom |   | 51                      |   | 63                      |   |
| Germany         |   | 19                      |   | 19                      |   |
| France          |   | 36                      |   | 47                      |   |
|            |   |                    |   |                    |   |
|            |   | $                       | 1,687  |                    | $      | 1,870 |   |

 

12

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14.   NewAccounting Standards

 

In July 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets”.  This statement applies to goodwill andintangible assets acquired after June 30, 2001, as well as goodwill andintangible assets previously acquired. Under this statement goodwill as well as certain other intangibleassets, determined to have an indefinite life, will no longer beamortized.  These assets will bereviewed for impairment on a periodic basis. This statement is effective forthe Company in the first quarter of fiscal year 2003.  The adoption of this standard did not have a material impact onthe Company’s financial statements.

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations”.  This statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  This statement applies to all entities.  It applies to legal obligations associatedwith the retirement of long-lived assets that result from the acquisition,construction, development and (or) the normal operation of a long-lived asset,except for certain obligation of lessees. This statement amends FASB Statement No. 19 and is effective forfinancial statements issued for fiscal years beginning after June 15,2002.  The adoption of this standard didnot have a material impact on the Company’s financial statements.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”, which supercedes SFAS 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144further refines the requirements of SFAS No. 121 that companies (1) recognizean impairment loss only if the carrying amount of a long-lived asset is notrecoverable based on its undiscounted future cash flows and (2) measure animpairment loss as the difference between the carrying amount and fair value ofthe asset.  In addition, SFAS No. 144provides guidance on accounting and disclosure issues surrounding long-livedassets to be disposed of by sale.  Thisstatement is effective for the Company in the first quarter of fiscal year2003. The adoption of this standard did not have a material impact on theCompany’s financial statements.

 

In July 2002, the FASBissued SFAS No. 146, "Accounting for Exit or DisposalActivities."  SFAS No. 146addresses the accounting for costs associated with restructuring activities andother disposal activities.  Thisstatement supersedes EITF Issue No. 94-3, Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit and Activity.  This statement will be effective fordisposal activities initiated after December 31, 2002, and the Company willadopt this statement for any costs relating to restructuring or disposalactivities initiated after the effective date.

 

On December 31, 2002,SFAS No. 148, "Accounting for Stock-Based Compensation – Transition andDisclosure" was issued.  SFAS No.148 amends SFAS No. 123, "Accounting for Stock-Based Compensation",to provide alternative methods of transition to the fair value method ofaccounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure provisions ofSFAS No. 123 to require disclosure in the summary of significant accountingpolicies of the effects of an entity’s accounting policy with respect tostock-based employee compensation on reported net income and earnings per sharein annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to accountfor their employee stock-based awards using the fair value method.  However, the disclosure provisions arerequired for all companies with stock-based employee compensation, regardlessof whether they utilize the fair method of accounting described in SFAS No. 123or the intrinsic value method described in APB Opinion No. 25, "Accountingfor Stock Issued to Employees." SFAS No. 148’s amendment of the transition and annual disclosureprovisions of SFAS No. 123 are effective for fiscal years ending after December15, 2002.  The Company has adopted theannual disclosure provisions of SFAS No. 123. The Company does not believe that the adoption of this standard willhave a material impact on the Company’s financial statements.

 

In November 2002, theFASB issued Interpretation No. (FIN) 45, "Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others"**(theInterpretation). The Interpretation will significantly change current practicein the accounting for, and disclosureof, guarantees. The Interpretation requires certain guarantees to be recordedat fair value, which is different from current practice, which is generally torecord a liability only when a loss is probable and reasonably estimable, asthose terms are defined in FASB SFAS No. 5, "Accounting forContingencies." The Interpretation also requires a guarantor to make significantnew disclosures, even when the likelihood of making any payments under theguarantee is remote, which is another change from current practice.  The Interpretation applies to public andnon-public entities, and its disclosure requirements are effective for financialstatements of interim or annual periods ending after December 15, 2002. Theadoption of the interpretation does not have a material impact on its financialstatements.

 

13

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ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

**Overview**

 

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our interim unauditedconsolidated financial statements and the related notes appearing elsewhere inthis report. The discussion and analysis contains forward-looking statementsthat involve risks, uncertainties and assumptions.  The preparation of these requires management to make estimatesand judgements that affect the reported amounts of assets, liabilities, revenueand expenses, and the related disclosure of contingent assets andliabilities.  On an on-going basis, weevaluate our estimates including those related to product returns, bad debts,inventories, contingencies and litigation. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances. Ouractual results may differ materially from those anticipated in these forward-lookingstatements as a result of a number of factors, including those set forth under“Cautionary Statements” and elsewhere in this report.

 

We design and selladvanced media systems for content design. In the case of our newest and most advanced development, 844/XTM, we haveintegrated the previously separate workflows of real-time video editing and thecompositing of layers of video, computer graphics, audio, and metadata.  We believe this workflow integration is atechnical breakthrough that over time will attract existing and new videoediting users who wish to be able to design more complex content that comprisesdozens, even hundreds of distinct content layers.  Our Company has developed new technology—integrated software andhardware, including Application-Specific Integrated Circuits (“ASICs”)—toperform compositing in real time or at high speed to allow compositingoperations to be performed within an editing environment and execute at highspeed without host-based rendering, which is slow and impedes productivity.

 

Our products are personalcomputer-based workstations configured with proprietary software and hardwarethat we engineer and manufacture.  Insome cases, particularly with 844/X, we sell our products as fully integratedsystems, meaning we configure and ship the system to an end user, or reseller,with a host personal computer, our software and hardware, and optional diskstorage; in other cases, we deliver only our software and hardware(“unbundled”), typically to an independent value-added reseller that configuresthe turnkey system themselves on behalf of an end user.

 

**CriticalAccounting Policies and Estimates**

 

Thismanagement’s discussions and analysis of financial condition and results ofoperations discuss our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, management evaluatesits estimates and judgements, including those related to revenue recognition,inventories, the impairment of long lived assets, legal contingencies anddiscontinued operations.  Managementbases its estimates and judgements on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgements about the carrying values ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Webelieve the following critical accounting policies most significantly affectthe portrayal of our financial condition and require management’s mostdifficult and subjective judgements.

 

RevenueRecognition

 

Werecognize revenue in accordance with Statement of Position 97-2*, SoftwareRevenue Recognition* as amended by SOP 98-9*, Modification of SOP 97-2, SoftwareRevenue Recognition, with respect to Certain Transactions*.  Net sales are recognized followingestablishment of persuasive evidence of an arrangement, provided that thelicense fee is fixed or determinable, delivery of product has occurred viaphysical shipment or electronically, a determination has been made bymanagement that collection is probable and the Company has no remainingobligations. Revenues under multiple element arrangements, which typicallyinclude products and maintenance sold together, are allocated to each elementusing the residual method in accordance with SOP 98-9.  The Company provides for estimated returnsat the time of shipment. The Company recognizes maintenance revenue from thesale of post-contract support services ratably over the life of the contract.We maintain allowances for estimated losses resulting from the inability of ourcustomers to make required payments, however, if the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, allowances would be required.

 

14

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Inventories

 

Our reserve for excessand obsolete inventory is primarily based upon forecasted demand for ourproducts and any change to the reserve arising from forecast revisions isreflected in cost of sales in the period the revision is made. The Companywrites down its inventory for estimated obsolescence or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions. Ifactual future demand or market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required.

 

Long-livedAssets

 

Propertyand equipment, including leasehold improvements, are depreciated over theiruseful lives.  Useful lives are based onmanagement’s estimates of the period that the Company will realize the benefitof these assets.

 

LegalContingencies

 

Weare currently involved in legal proceedings. As discussed in Note 9 of the consolidated financial statements, as ofFebruary 28, 2003, we have provided accruals for all direct costs associatedwith the estimated resolution of known contingencies.  The accrual is established at the earliest date at which it isdeemed probable that a liability has been incurred and the amount of suchliability can be reasonably estimated. This litigation could take several years to complete.  Accordingly, actual legal fees and, possibly,damages awards or settlements, could differ significantly from our estimates.  It is possible, however, that future resultsof operations for any particular quarterly or annual period could be materiallyaffected by changes in our assumptions, or the effectiveness of our strategies,related to these proceedings.

 

**Results of Operations**

 

The following table showscertain consolidated statements of operations data as a percentage of netsales.

 
|                                                       |   | **Three  months ended** |   |
|------------------------------------------------------------|--------|-------------------------|--------|
|                                                       |   | **February  28,  2003** |   | **February  28,  2002** |   |
| Net  sales:                                                |   |                    |   |   |   |
| Products                                                   |   | 74.2                    | %      | 63.4 | % |
| Services                                                   |   | 25.8                    |   | 36.6 |   |
| Total  net sales                                           |   | 100.0                   |   | 100.0 |   |
| Cost  of sales                                             |   | 51.3                    |   | 49.8 |   |
| Accelerated  depreciation and amortization of fixed assets |   | —                  |   | 5.5 |   |
| Gross  profit                                              |   | 48.7                    |   | 44.7 |   |
| Operating  expenses:                                       |   |                    |   |   |   |
| Research  and development                                  |   | 37.0                    |   | 57.1 |   |
| Selling  and marketing                                     |   | 30.5                    |   | 50.0 |   |
| General  and administrative                                |   | 13.4                    |   | 24.6 |   |
| Amortization  and write-off of intangible assets           |   | —                  |   | 10.9 |   |
| Accelerated  depreciation and amortization Of fixed assets |   | —                  |   | 14.1 |   |
| Settlement  of litigation                                  |   | —                  |   | 20.5 |   |
| Total  operating expenses                                  |   | 80.9                    |   | 177.2 |   |
| Operating  loss                                            |   | (32.2                   | )      | (132.5 | ) |
| Interest  income, net                                      |   | 0.5                     |   | 1.7 |   |
| Other  income (expense), net                               |   | 3.5                     |   | (1.9 | ) |
| Loss  from operations before benefit from income taxes     |   | (28.2                   | )      | (132.6 | ) |
| Benefit  from income taxes                                 |   | —                  |   | (2.3 | ) |
| Net  loss                                                  |   | (28.2                   | )%     | (130.3 | )% |

 

15

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Comparison of FirstFiscal Quarter of 2003 to First Fiscal Quarter of 2002

 

Net sales.  We derive our sales from the licensing andsale of our software for advanced media systems for content design, and fromservices in the form of annual contracts supporting our software andsystems.  In the case of software andsystems, we recognize revenue upon shipment or distribution over the Internetto a customer provided there exists persuasive evidence of an arrangement, thelicense fee is fixed or determinable, a determination has been made bymanagement that the collection is probable and the Company has no remainingobligations.  In the case of servicesthat support our software and systems products, called Platinum Services, werecognize revenue ratably over the life of the service contract.

 

Our total net sales forthe first quarter of fiscal 2003 increased 6.6% to $4.8 million from $4.5million for the first quarter of fiscal 2002. Net sales from products for the first quarter of fiscal 2003 increased24.7% to $3.6 million from $2.9 million for the first quarter of fiscal2002.  The increase in net sales fromproducts is due to sales of 844/X (increase of $1.9 million), which beganshipping in the second quarter of fiscal 2002. This increase was partially offset by a decrease in sales of our digitalvideo editing systems (decrease of $800,000) due to increased competitionresulting in lower unit sales and average selling prices and the elimination ofsales of the MPEG-based products acquired in the acquisition of Wired, Inc.(“Wired”) (decrease of $400,000).  Werecognized approximately $1.3 million of previously deferred 844/X revenueduring the first quarter of fiscal 2003 due to the delivery of an upgrade,which we announced in the fourth quarter of fiscal 2002 and shipped in thefirst quarter of fiscal 2003.  Uponshipment of the upgrade we recognized all revenue previously deferred that wasassociated with the upgrade.  During thefirst quarter of fiscal 2003, we deferred approximately $900,000 of 844/Xrevenue shipped in the first quarter of fiscal 2003 due to the undeliveredversion 2.0 upgrade, which we announced in the first quarter of fiscal 2003 andexpect to ship in the second quarter of fiscal 2003.  Upon shipment of the upgrade we expect to recognize previouslydeferred revenue that is associated with the upgrade.  We anticipate the trend of lower year-over-year sales of ourdigital video systems to continue in fiscal 2003, offset by sales from 844/X.  Net sales from services for the firstquarter of fiscal 2003 decreased 24.7% to $1.2 million from $1.6 million forthe first quarter of fiscal 2002.  Thedecrease in net sales from services is the result of lower sales of servicecontracts due to lower unit sales of our digital video editing systems andlower renewal rates of these service contracts from our installed base.

 

Net sales from customersoutside of North America accounted for approximately 45.4% and 38.2% of netsales in the first quarter of fiscal 2003 and the first quarter of fiscal 2002,respectively.  With the introduction of844/X in April 2002, we are continuing to develop our indirect distributionchannels in North America, Europe, Asia and Latin America and currentlyanticipate that customers outside North America will continue to account for asubstantial portion of our net sales, and as a percentage of net sales, torange between 35% and 45% during the remainder of fiscal 2003.

 

Cost of sales.  Cost of sales for products consists of thecost of manufacturing PCI hardware boards for our advanced media systems forcontent design and our digital video editing systems and royalties paid tothird parties for their software that has been integrated into our systems.  Cost of sales also includes the cost ofmanuals and other product documentation, related labor and, in the case of844/X, may include third-party components such as disk drives, personalcomputers and other third-party hardware components.  Cost of sales for our service offerings consists of salaries andrelated expenses for service personnel delivering the service to the customer.

 

Total cost of salesdecreased 1.0% to $2.5 million in the first quarter of fiscal 2003 from $2.5million in the first quarter of fiscal 2002. The slight decrease in cost of sales is related to lower unit sales ofour digital video editing systems and the elimination of an expense foraccelerated depreciation, offset by increased cost of sales due to higher salesof 844/X.

 

Gross profit.  Our gross profit increased 16.1% to $2.3million in the first quarter of fiscal 2003 from $2.0 million in the firstquarter of fiscal 2002.  Overall grossprofit as a percentage of net sales increased to 48.7% in the first quarter offiscal 2003 from 44.7% in the first quarter of fiscal 2002.  Gross profit as a percentage of net sales ofproducts increased to 37.1% in the first quarter of fiscal 2003 from 23.5% inthe first quarter of fiscal 2002, while gross profit as a percentage of netsales of services increased to 82.0% in the first of fiscal 2003 from 81.7% inthe first quarter of fiscal 2002.  Theincrease in gross profit for products in the first quarter of fiscal 2003 overthe first quarter of fiscal 2002 was the result of the elimination of anexpense for accelerated depreciation of leasehold improvements and other fixedassets located in our former facility and not moved to our new facility.   During the remainder of fiscal 2003, wecurrently anticipate that gross margins will improve slightly from current levels.

 

Research anddevelopment.  Research and developmentexpenses include costs incurred to develop and improve our existingintellectual property and develop new intellectual property and are charged toexpense as incurred.  To date,development costs for our systems have been charged to expense as incurredbecause the costs incurred from the attainment of technological feasibility togeneral product release have not been significant.  Our research and development costs may fluctuate from quarter toquarter due to the nature of the products under development.  Some of our systems have PCI hardwareincluded in the product and the costs associated with designing and developingthis type of hardware can be expensive. In addition, our software developers require this hardware in order tointegrate the software code they develop with the hardware to create a fullyintegrated advanced media system for content design.

 

16

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Research and developmentexpenses decreased 30.9% to $1.8 million in the first quarter of fiscal 2003from $2.6 million in the first quarter of fiscal 2002.  The majority of the decrease in research anddevelopment expenses represented lower development costs associated with 844/X,which shipped in April 2002.  Wecurrently anticipate our research and development expenses will decrease inabsolute dollars in fiscal 2003 versus fiscal 2002 because we believe thatongoing maintenance costs and the cost of improvements to 844/X will not be ashigh in fiscal 2003 as the development costs to create the first version of theproduct.

 

Selling andmarketing.  Selling and marketingexpenses consist primarily of salaries and related benefits, travel,commissions and marketing costs such as advertising, trade shows, marketingmaterials, lead generation activities and public relations.  Our selling and marketing expenses mayfluctuate from quarter to quarter based on the timing of trade shows and salescommissions, which vary based on sales.

 

Selling and marketingexpenses decreased 34.8% to $1.5 million in the first quarter of fiscal 2003from $2.2 million in the first quarter of fiscal 2002.  In the first quarter of fiscal 2002, we werepreparing for the introduction of 844/X and incurred significant marketing expensesin connection with these activities. These product launch activities and the expenses associated with them,occurred in the first and second quarters of fiscal 2002.  In the first quarter of fiscal 2003 therewere no product launch activities still ongoing and the marketing expensesincurred in the period were in support of ongoing promotion and sales of 844/X,which are considerably less than the initial product launch expenses.  We currently anticipate that our selling andmarketing expenses will decrease in absolute dollars in fiscal 2003 versusfiscal 2002 as we execute our strategy of leveraging the indirect channel ofresellers we developed in fiscal 2002 to sell 844/X.  Also, in the first half of fiscal 2002, we incurred significantmarketing expenses related to the introduction of 844/X and, while we plan tocontinue aggressively marketing 844/X, we believe our marketing costs in fiscal2003 will be less than fiscal 2002.

 

General andadministrative.  General andadministrative expenses consist primarily of salaries and related benefits,travel and outside services for human resources, finance, informationtechnology, legal, and other administrative functions.  General and administrative expenses decreased41.7% to $645,000 in the first quarter of fiscal 2003 from $1.1 million in thefirst quarter of fiscal 2002.  Thedecrease in general and administrative expenses resulted primarily from lowerexpenses in the following categories: employee-related; legal fees; bad debts;occupancy; and outside services.  Wecurrently anticipate that our general and administrative expenses will decreasein fiscal 2003 compared to fiscal 2002 as we align our expense structure withanticipated revenue levels.

 

Amortization ofintangible assets.  We recorded amortizationexpense of $492,000 in the first quarter of fiscal 2002 related to theacquisitions of Wired, Inc. and certain assets of Integrated Computing Engines,Inc.   During fiscal 2002, we expensedall remaining goodwill related to these acquisitions and, therefore, there wasno amortization expense in the first quarter of fiscal 2003.

 

Accelerated depreciationand amortization of fixed assets.  Werecorded a charge of $634,000 in the first quarter of fiscal 2002 relatedprimarily to leasehold improvements at our previous facility in Marlborough,Massachusetts.  During the secondquarter of fiscal 2002 we completed our relocation from this facility to a newfacility, also located in Marlborough, Massachusetts, better suited to meet ourneeds.  As a result of this decision andthe signing of a lease for the new facility we amortized the remaining bookvalue as of the beginning of fiscal 2002 of all leasehold improvements,furniture and fixtures over the remaining months in fiscal 2002 (four) that weoccupied our previous facility and, therefore, there was no such charge in thefirst quarter of fiscal 2003.

 

Settlement of litigation.We agreed to settle litigation brought against us by the former shareholders ofWired, Inc., a company we acquired in December 1999.  As part of the settlement, we assigned all rights to the Wiredproduct line, intellectual property relating to Wired products and on-handinventory related to the Wired product line to the former shareholders.   Wired granted us an irrevocable license touse the source code, technology, know how and intellectual property; provided,however, the license does not include the right to sell Wired products or anyequivalent products incorporating the source code, technology, know how andintellectual property.  In addition, weagreed to provide limited manufacturing and marketing support to the formershareholders.  In exchange for all theseitems, we will receive a royalty of 5% of adjusted gross sales of the assignedproducts, not to exceed $1.2 million, plus the cost of the inventory assigned.This agreement resulted in a write-off of the remaining goodwill createdthrough the acquisition of Wired.  Therewas no similar expense recorded in the first quarter of fiscal 2003.  Litigation settlement of $924,000, includedin the Consolidated Statements of Operations for the first quarter of fiscalyear 2002, represents the cost of inventory transferred, the net book value ofremaining intangible assets associated with the acquisition, legal feesassociated with the settlement, less a reimbursement related to the litigationfrom the Company’s insurance carrier.

 

Interest income,net.  Interest income, net, decreased69.2% to $24,000 in the first quarter of fiscal 2003 from $78,000 in the firstquarter of fiscal 2002.  The decrease ininterest income, net, resulted from lower cash and cash equivalents dueprimarily to the net loss incurred in fiscal 2002 and the first quarter offiscal 2003.  We currently anticipatethat interest income will decline in fiscal 2003 versus 2002 due to lower cashlevels.

 

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Other income (expense),net*. *Other income, net was $172,000for the first quarter of fiscal 2003 compared to other expense, net of $84,000for the first quarter of fiscal 2002. In the first quarter of fiscal 2003, other income, net primarilyconsisted of foreign exchange gains on intercompany transactions with ourforeign subsidiaries and for the first quarter of fiscal 2002 other expense,net primarily consisted of foreign exchange losses on intercompany transactionswith our foreign subsidiaries.  Gainsand losses on our intercompany transactions with our foreign subsidiaries areimpacted by changes in the value of the U.S. dollar relative to certainEuropean currencies.

 

Tax benefit.   We recorded a benefit from income taxes of$102,000 in the first quarter of fiscal 2002 due to an income tax refund wereceived.  We did not record a taxprovision or benefit in the first quarter of fiscal 2003.

 

Net loss.   As a result of the above factors, werecorded a net loss in the fist quarter of fiscal 2003 in the amount of ($1.4)million, or ($0.10) per share, compared to a net loss of ($5.9) million, or($0.46) per share, in the first quarter of fiscal 2002.

 

**Liquidity and Capital Resources**

 

Asof February 28, 2003, our principal sources of liquidity included cash, cashequivalents and marketable securities totaling approximately $3.4 million.  This was a decrease of approximately $1.3million of cash, cash equivalents and marketable securities since the end ofour previous fiscal year, which ended November 30, 2002.  In addition, we have approximately $2.8million in an escrow account while the McRoberts litigation is under appeal.This amount is classified as restricted cash in the February 28, 2003Consolidated Balance Sheets. Additionally, the Company has restricted cash of approximately $390,000relating to several letters of credit.

 

During the first quarterof fiscal 2003, cash used in operating activities was approximately $1.2million compared to cash used in operating activities of approximately $4.2million for the first quarter of fiscal 2002. Cash used in operations during the first quarter of fiscal 2003 includeda net loss of $1.4 million including depreciation and amortization of $363,000and was affected by changes in assets and liabilities including decreases indeferred revenue of $594,000, accounts payable of $299,000, prepaid expensesand other current assets of $265,000 and restricted cash of $7,000.  These uses of cash were offset by decreasesin inventories of $494,000 and accounts receivable of $300,000 and an increasein accrued expenses of $178,000.  TheCompany ended the first quarter of fiscal 2003 with days sales outstanding(DSO) of 41.  At the end of fiscal 2002,DSOs were 84 due to the deferral of 844/X revenue from the fourth quarter offiscal 2002 to the first quarter of fiscal 2003.  Net cash used in investing activities was $88,000 for the firstquarter of fiscal 2003 compared to $314,000 for the first quarter of fiscal2002.  Cash used in investing activitiesfor the first quarter of fiscal 2003 was primarily for purchases of capitalequipment of $152,000 and purchases of intangible assets of $18,000, partiallyoffset by net proceeds from sales of marketable securities of $82,000.  Net cash provided by financing activitiesduring the first quarter of fiscal 2003 was $75,000 compared to $272,000 forthe first quarter of fiscal 2002.  Inthe first quarter of fiscal 2003, cash provided by financing activities camefrom proceeds from the issuance of common stock pursuant to stock plans of$75,000.

 

At February 28, 2003, ourcontractual cash obligations were as follows:

 
|                   |   | **Total** |      | **Less than  1 year** |   | **1–3 years** |   |
|------------------------|--------|-----------|-----------|-----------------------|--------|--------------------|--------|
| Lease  commitments     |   | $         | 1,376,000 |                  | $      | 654,000            |   | $ | 722,000 |   |
| Inventory  commitments |   | $         | 377,000   |                  | $      | 377,000            |   | $ | — |   |

 

In addition to the above contractual obligations, the Company has othercontractual obligations.  The Companyhas entered into indemnification agreements with the non-employee members ofthe Board of Directors.  Additionally,the Company has from time to time entered into employment and executiveretention agreements with certain employees and executive officers, which,among other things, include certain severance and change of control provisions.  Under the terms of the Company’s standardproduct license and sale contracts, the Company indemnifies its customers forthe potential liability associated with the infringement of other parties’technology based upon the Company’s products. There is a possibility that the Company may be liable to one of itscustomers in the event that there is infringement occurring.  The Company is not aware of any infringementrelated to the Company’s technology, and therefore has not accrued any amountsfor the replacement or refund of any software products sold through February28, 2003.

 

We have already taken a series of actions to reduce the negative cashflow we experienced in the past fiscal year including the termination ofemployees, reductions in the salaries paid to executives and certain otheremployees, relocation of our facility to lower cost office space and areduction in the marketing expenses for existing products.  However, these expense reductions will notbe enough to return us to profitability without revenue growth.  Our current operating plan and cash flowprojections assume a certain level of revenue growth and operatingexpenses.  If we fail to achieve our revenueplan then we will realign our operating

 

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expenses consistent with the revised revenue expectations at that timein order to conserve cash.  Our currentcash flow projections also assume we will not require substantial cash forcapital purchases or to fund substantial increases in inventory, accountsreceivable or other assets and the projections assume we will be able tocontinue to collect our accounts receivables and will not incur substantial baddebts as a result of the failure of our customers to pay us.

 

We may need to raise additional capital within the next twelve monthsthrough the sale of debt or equity securities to fund future operations,develop new and enhance existing products and services, or acquirecomplementary products, businesses or technologies.  At this time, we are in the process of seeking additionalcapital.  If additional funds are raisedthrough the issuance of equity or convertible debt securities, the percentageownership of our existing stockholders may be reduced, our stockholders mayexperience additional dilution, and such securities may have rights,preferences or privileges senior to those of our existing stockholders (seeCautionary Statements for additional details). Additional financing may not be available on terms favorable to us, orat all.  If adequate funds are notavailable or are not available on acceptable terms our ability to fund existingoperations and expansion, take advantage of unanticipated opportunities ordevelop or enhance our products or services would be significantly limited andwe may need to revise our operating plan to reduce operating expensesfurther.  At this time, we believe that we will be able to operate our business asa going concern for at least the next twelve months based upon the amount ofour existing available capital, our current operating plan and our commitmentto reduce operating expenses further if we do not achieve the revenuesanticipated in our current operating plan.

 

Should we requireadditional capital to fund our operations and are unsuccessful in our effortsto raise sufficient capital, we will examine our alternatives, including thesale or liquidation of part or all of our business.

 

**Cautionary Statements**

 

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning of theSecurities Litigation Reform Act of 1995 that involve risks anduncertainties.  Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of certain factors, including those set forth in the followingcautionary statements and elsewhere in this Quarterly Report on Form 10-Q.  If any of the following risks were to occur,our business, financial condition, or results of operations would likelysuffer.  In that event, the tradingprice of our common stock would decline.

 

*History of Losses and Negative Cash Flows, Expect to IncurLosses in the Future and May Not Achieve or Maintain Profitability.*  We have incurred substantial operatinglosses during the past fiscal year and in four of the past five fiscal years,have experienced negative cash flow from ongoing operations in the last fiscalyear ended November 30, 2002, and we expect to incur operating losses andnegative cash flows for at least the first half of fiscal 2003.  We incurred a loss from continuingoperations of approximately $1.4 million for the first quarter of fiscal 2003ended February 28, 2003 and as of February 28, 2003, we had an accumulateddeficit of approximately $215.7 million.

 

Over the past four yearswe have significantly increased our research and development expenses as apercentage of total sales and we plan to continue to invest in new technology,and as a result, we may incur operating losses in future periods.  We will need to generate increases in ourcurrent sales levels to achieve and maintain profitability and we may not beable to do so.  Our current operatingplan and cash flow projections assume a certain level of revenue growth andoperating expenses.  If we fail toachieve our revenue plan then we will realign our operating expenses consistentwith the revised revenue expectations at that time in order to conservecash.  If our sales grow more slowlythan we anticipate or if our operating expenses increase more than we expect orcannot be reduced in the event of lower revenue, our business will besignificantly and adversely affected. Although we implemented a restructuring program in July 2002 to betteralign our operations and cost structure with current and anticipated marketconditions, this program will not be sufficient for us to achieve profitabilityin any future period without revenue growth. Even if we achieve profitability in the future on a quarterly or annualbasis, we may not be able to sustain or increase profitability.  Our failure to achieve profitability,achieve the level of profitability, or sustain the level of profitabilityexpected by investors and securities analysts may adversely affect the marketprice of our common stock.

 

In addition, we expectthat we will continue to experience negative operating cash flows for at leastthe first half of fiscal 2003. Depending on future cash flow, we may need to raise additional capitalin the future to meet our cash requirements and we may not be able to findadditional financing, if required, on favorable terms or at all.  If adequate funds are not available or arenot available on acceptable terms, our ability to fund existing operations andexpansion, take advantage of unanticipated opportunities or develop or enhanceour products or services would be significantly limited and we may need torevise our operating plan to reduce operating expenses further.

 

*If WeAre Unable to Obtain Additional Capital as Needed in the Future, Our BusinessMay be Adversely Affected and the Market Price for Our Common Stock CouldDecline Significantly.* We have been unable to fund our operations using cash generated from ourbusiness operations and have financed our operations principally through theprior sales of securities and from existing

 

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cash on our balancesheet.  We may need to raise additionaldebt or equity capital to fund our existing operations, expand operations,maintain and enhance existing products and services or acquire or invest incomplementary products, services, businesses or technologies.  At this time, we are in the process ofseeking additional capital.  If we raiseadditional funds through further issuance of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution, andany new equity or debt securities we issue may have rights, preferences, orprivileges superior to those of holders of our common stock.  If we do raise capital through the issuanceof equity or convertible debt the amount of dilution will depend upon severalfactors including, but not necessarily limited to, the amount of capitalraised, the security or securities issued, the terms of the security and themarket price of the company’s common stock. Additionally, the terms of the equity or debt securities we may issue tothe investor(s) may have rights, preferences or privileges superior to those ofholders of our common stock including, but not limited to, liquidationpreferences, anti-dilution provisions, dividends, voting rights, protectiveprovisions, right of first refusal on certain future financing transactions andconsent provisions for certain transactions. The effect of some of these new terms may be to provide what isperceived as a disproportionate return to the new investor.  For example, a new investor might obtain anequity stake based on current market values, but with the right to somemultiple of the investment being required to be returned to the new investorbefore any return is made to existing shareholders.  Even after offering these terms we may not be able to obtainadditional financing.  If adequate fundsare not available to us on terms favorable to us, our business may be adverselyaffected and the market price for our common stock could declinesignificantly.  If adequate funds arenot available or are not available on acceptable terms, our ability to fundexisting operations and expansion, take advantage of unanticipatedopportunities or develop or enhance our products or services would besignificantly limited and we may need to revise our operating plan to reduceoperating expenses further.  At thistime we believe that we will be able to continue to operate our business as agoing concern for at least the next twelve months based upon the amount of ourexisting capital, our current operating plan and our commitment to reduceoperating expenses further if we do not achieve the revenues anticipated in ourcurrent operating plan.  However, weoffer no assurances in this regard

 

*Significant Fluctuations and Unpredictability of OperatingResults.*  Ourquarterly operating results are difficult to predict, have varied significantlyin the past and are likely to vary significantly in the future for a number ofreasons, including new product announcements and introductions by ourselves orour competitors, changes in pricing, and the volume and timing of ordersreceived during the quarter. Also, in the past, we have experienced delays inthe development of new products and enhancements, and such delays may occur inthe future.  These factors make theforecasting of revenue inherently uncertain. Additionally, a significant portion of our operating expenses isrelatively fixed, and operating expense levels are based primarily on internalexpectations of future revenue.  As aconsequence, quarterly operating expense levels cannot be reduced rapidly inthe event that quarterly revenue levels fail to meet internalexpectations.  For these reasons, youshould not rely on period-to-period comparisons of our financial results to forecastour future performance.  It is likelythat in some future quarter or quarters our operating results will be below theexpectations of securities analysts or investors.   In addition, we typically realize a significant percentage ofour sales for a fiscal quarter in the second half of the third month of thequarter.  As a result, our quarterlyresults may be difficult or impossible to predict.  If quarterly revenue or earnings levels fail to meet internal orexternal expectations, the market price of our common stock may declinesignificantly.

 

*Dependence on Key Personnel.*  We believe that our future success willdepend on our continued ability to attract and retain qualified employees,especially in research and development. Our inability to attract and retain qualified personnel on a timelybasis, or the departure of key employees could have a material adverse affecton our business and operating results and negatively affect the price of ourcommon stock.  In addition, if we areunable to maintain existing sales levels or achieve internal sales projectionswe may implement an employee reduction program, which may result in thetermination of key personnel necessary to maintain certain functions oroperations for the Company.  The loss ofkey personnel will have a negative effect on our future results and reduce ourability to achieve projected sales levels and profitability.

 

*Possibility of NASDAQ Delisting.*  By letter dates March 3, 2003, we receivednotification from the Listing Qualifications Department of The NASDAQ StockMarket, Inc., indicating that our stockholders' equity does not satisfy theminimum requirement for continued listing in The NASDAQ National Market as setforth in Marketplace Rule 4450(a)(3) and that, due to this deficiency, Nasdaqhas communicated to us their intention to de-list us from The NASDAQ NationalMarket. In addition, by letter dated March 6, 2003, we received notificationfrom the Listing Qualifications Department of The NASDAQ Stock Market, Inc.,indicating that our common stock had not maintained the required minimum bidprice for continued quotation on The NASDAQ National Market and is thereforesubject to delisting. NASD Rule 4450(a)(5) requires that, for continuedquotation on The NASDAQ National Market, a company must maintain1 a minimum bidprice of $1.00 for at least one day during any period of thirty consecutivebusiness days. NASDAQ rules provide that a listed company is given a period ofninety calendar days to achieve compliance with the minimum bid requirement inorder to maintain its listing on The NASDAQ National Market. During the ninetyday period, a company would be considered to be in compliance with NASDAQ'sminimum bid price requirements if its minimum bid is $1 or greater for any tenconsecutive business days. In response, we have voluntarily submitted anapplication for listing on The NASDAQ Small Cap Market and await a decisionfrom NASDAQ. There can be no assurance that we will be able to take actionssufficient to achieve or maintain compliance with the continued listingcriteria of The NASDAQ Small Cap Market or The NASDAQ National Market, theprice and liquidity of our common stock could be adversely affected, ourability to access the capital markers would likely be more limited, and it mayadversely affect our ability to generate new sales of our software product andmay cause existing customers and vendors to question our viability.Additionally, our stock may be subject to "penny stock" regulations.

 

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*WeakWorldwide Economic Conditions and Advertising Market May Result in DecreasedSales and Continued Operating Losses.*  Growth in sales and a return toprofitability for our company depends on the overall demand for televisionadvertising, which is driven by economic conditions in the markets in which wecompete.  A substantial portion of oursales is to companies providing their services for the creation of televisionadvertisement and demand for our customers’ services is affected by general economicand business conditions.  During thepast two years, due to weak economic conditions, television advertisers havespent less money advertising their products and services and, as a result,demand for the services our customers provide has decreased.  In this weak economic environment, we maynot be able to effectively promote future growth or maintain existing saleslevels or achieve the sales levels expected by investors and securitiesanalysts in any given period, or achieve profitability and, as a result, ourbusiness and operating results could be materially and adversely affected andour stock price could decline.

 

*OurLengthy and Variable Sales Cycle Makes it Difficult for Us to Predict When orif Sales Will Occur and Therefore We May Experience an Unplanned Shortfall inour Anticipated Sales Levels.*  844/X has a lengthy and unpredictable sales cycle thatcontributes to the uncertainty of our operating results.  Our prospects view the purchase of 844/X asa significant and strategic decision for their company.  As a result, prospects generally evaluate844/X and determine its impact on existing infrastructure and workflow.  The purchase of 844/X may be delayed if theprospect has lengthy internal budgeting, approval or evaluation processes.  We may incur significant selling andmarketing expenses during a prospect’s evaluation period before the customerplaces an order with us.  Some prospectsmay purchase 844/X as part of multiple simultaneous purchasing decisions, whichmay result in unanticipated delay in receiving an order from the customer.  If sales forecasted from specific customersare delayed to future quarters, we may experience an unplanned shortfall insales, which could significantly and adversely affect our operating results andstock price.

 

*Emerging Markets.*  The markets in which we offer our systemsproducts and services are intensely competitive and rapidly changing.  We are targeting the emerging market ofbroadcast designers, effects artists, and creative professionals.  This market and the products utilized bythese users are relatively new.  Oursuccess in this emerging market will depend on the rate at which the marketdevelops and our ability to penetrate that market.  We will not succeed if we cannot compete effectively in thismarket and, as a result, our business and operating results could be materiallyand adversely affected.

 

*Risks Associated With Development and Introduction of NewProducts.*  If we arenot successful in developing and introducing new products to the markets weserve our business and operating results will suffer.  In April 2002, we began shipping 844/X, and currently anticipatethis new product will generate greater than 50% of the revenue from productsales beginning in fiscal 2003.  If theadoption of 844/X is slower than we anticipate or if there are delays inreleasing subsequent versions of 844/X, our current revenue expectations may betoo high and our operating results may be negatively affected.  In addition, new product announcements byour competitors and other new product announcements by us could have the effectof reducing customer demand for our existing products.  Also, when we introduce new or enhancedproducts we must effectively manage the transitions from existing products tominimize disruption of orders from our customers.  New product introductions require us to devote time and resourcesto the training of our sales channel in the features and target customers forsuch new products, which efforts could result in less selling efforts beingmade by the sales channel during such training period.  Our failure to effectively manage newproduct announcements or introductions could contribute to significantquarterly fluctuations in operating results as orders for new products commenceand orders for existing products decline and, as a result, our operatingresults will suffer.

 

*Dependence on and competition with Apple Computer, Inc.*  As a competitor, Apple Computer, Inc.(“Apple”) could, in the future, inhibit our ability to develop our productsthat operate on the Macintosh platform. Additionally, new products and enhancements to existing products fromApple such as Final Cut Pro could cause customers to delay purchases of ourproducts or alter their purchase decision altogether.  Furthermore, as the sole supplier of Macintosh computers, anydisruption in the availability of these computers could cause customers todefer or alter their purchase of our products. We rely on access to key information from Apple to continue developmentof our products and any failure to continue supplying our engineers with thisinformation could have a material adverse affect on our business and financialresults and negatively affect the price of our common stock.

 

*Dependence on Microsoft Corporation.*  Many of our products operate in the Windowsenvironment and our engineers depend upon access to information in advance fromMicrosoft Corporation (“Microsoft”). Any failure to continue supplying our engineers with this informationcould have a material adverse affect on our business and financial results andnegatively affect the price of our common stock.

 

*Rapid Technological Change.*  Rapidly changing technology, evolvingindustry standards and frequent new product introductions characterize themarket for our products.  Our futuresuccess will depend in part upon our ability to enhance existing products and

 

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to introduce new productsand features in a timely manner to address customer requirements, respond to competitiveofferings, adapt to new emerging industry standards and take advantage of newenabling technologies that could render our existing products obsolete. We planto continue to invest in research and development, in connection with ourdevelopment strategy.  Any delay orfailure on our part in developing additional new products or features forexisting products or any failure of such new products or features to achievemarket acceptance, could have a material adverse effect on our business andoperating results and our stock price will suffer.

 

*Risks of Third-Party Claims of Infringement.*  There has been substantial industrylitigation regarding patent, trademark and other intellectual property rightsinvolving technology companies.  In thefuture, litigation may be necessary to enforce any patents issued to us or toenforce trade secrets, trademarks and other intellectual property rights ownedby us, to defend ourselves against claimed infringement of the rights of othersand to determine the scope and validity of the proprietary rights ofothers.  For a description of certainpending litigation instituted against us, see Note 9 to the Interim UnauditedConsolidated Financial Statements included herein.  Any such litigation could be costly and a diversion ofmanagement’s attention, which could adversely affect our business and operatingresults and our financial condition. Adverse determinations in any such litigation could result in the lossof our proprietary rights, subject us to significant liabilities, and requireus to seek licenses from third parties or prevent us from manufacturing orselling our products, any of which could adversely affect our business andoperating results and our financial condition.

 

*WeakEconomic Conditions May Cause our Customers to Experience FinancialDifficulties and May Represent a Credit Risk.*  Due to the weak global economy anduncertainties relating to the prospects for near-term global economic growth,some of our customers may experience financial difficulties and may represent acredit risk to us.  If these customersexperience financial difficulties or fail to experience commercial success, wemay have difficulty collecting our accounts receivable.

 

*Competition.*  The market for our products is highly competitive andcharacterized by pressure to reduce prices, incorporate new features andaccelerate the release of new products. A number of companies currently offer products that compete directly orindirectly with our products, including Accom, Inc., Adobe Systems Inc., AppleComputer, Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.),Leitch, Inc., Matrox Electronic Systems Ltd., Pinnacle Systems, Inc. andQuantel Ltd. In addition, we expect much larger vendors, such as MatsushitaElectric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation,to develop and introduce digital editing systems that may compete with ourproducts.  Many of these current andpotential competitors have greater financial, technical and marketing resourcesthan we have, including, without limitation, larger and more establishedselling and marketing capabilities, greater brand recognition and a largerinstalled base of customers, and well-established relationships with ourexisting and potential customers, complementary technology vendors and otherbusiness partners.  As a result, ourcompetitors may be able to develop products comparable to or superior to ourown products, adapt more quickly than us to new technologies, evolving industrystandards or customer requirements, or lower their product costs and thus beable to lower prices to levels at which we could not operate profitably, theoccurrence of any of which could have a material adverse effect on our businessand operating results.  In this regard,we believe that we will continue to experience competitive pressure to reduceprices, particularly for our high performance systems.  We have historically realized higher grossprofit on the sale of these high performance systems, and such continuedcompetitive pricing pressure could result in lower sales and gross margin,which in turn could adversely affect our business and operating results andnegatively affect the price of our common stock.

 

*Dependence on Propriety Technology.*  Our ability to compete successfully andachieve future revenue growth will depend, in part, on our ability to protectour proprietary technology and operate without infringing the rights ofothers.  Previously, we have received,and may in the future continue to receive, communications suggesting that ourproducts may infringe on the patents or other intellectual property rights ofthird parties.  Our policy is toinvestigate the factual basis of such communications and negotiate licenses whereappropriate.  While it may be necessaryor desirable in the future to obtain licenses relating to one or more products,or relating to current or future technologies, there can be no assurance thatwe will be able to do so on commercially reasonable terms or at all.  There can be no assurance that these orother future communications can be settled on commercially reasonable terms orthat they will not result in protracted and costly litigation.  Any failure to secure the necessaryintellectual property right of third parties on commercially reasonable termsmay adversely affect our business and operating results and negatively affectthe price of our common stock.

 

*Dependence on Single or Limited Source Suppliers.*  We are dependent on single or limited sourcesuppliers for several key components used in its products that have no readysubstitutes, including various audio and video signal processing integratedcircuits manufactured in each case only by Crystal Semiconductor® Corp.,Fairchild Semiconductor® Corp., Gennum® Corporation, Toshiba, Kawasaki LSI USA®Inc., Philips® Semiconductors, Silicon OptixTM, Faraday Technology, ScientificConversion, Xilinx®, Altera®, Lattice®, Agere®, Marvel®, and IDT®.  The availability of many of these componentsis dependent on our ability to provide suppliers with accurate forecasts of ourfuture requirements, and certain components we use to build our products havebeen subject to industry-wide shortages and the continued viability of thesesuppliers and product line.

 

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We do not carrysignificant inventories of these components and have no guaranteed supplyarrangements with such suppliers.  Therecan be no assurance that our inventory levels will be adequate to meetproduction needs during any interruption of supply.  Our inability to develop alternative supply sources, if required,or a reduction or stoppage in supply, could delay product shipments until newsources of supply become available, and any such delay could adversely affectour business and operating results in any given period and negatively affectthe price of our common stock.

 

*Dependence on Distributors and Resellers.*  We rely primarily on our worldwide networkof independent distributors and value-added resellers (“VARs”) to distributeand sell our products to end-users.  Ourdistributors and resellers generally offer products from several differentcompanies, including in some cases products that are competitive with our ownproducts.  In addition, many of the VARsare small organizations with limited capital resources.  There can be no assurance that ourdistributors and resellers will continue to purchase products from us, or thatour efforts to expand our network of distributors and resellers will be successful.  Any significant failure on our part tomaintain or expand our network of distributors and resellers could have amaterial adverse effect on our business and operating results and negativelyaffect the price of our common stock.

 

*Reliance on International Sales.*  International sales and operations may besubject to risks such as the imposition of government controls, export licenserequirements, restrictions on the export of critical technology, less effectiveenforcement of proprietary rights; currency exchange fluctuations, generally longercollection periods, political instability, trade restrictions, changes intariffs, difficulties in staffing and managing international operations,potential insolvency of international resellers and difficulty in collectingaccounts receivable.  Our internationalsales are also subject to more seasonal fluctuation than domestic sales.  In this regard, the traditional summervacation period, which occurs during our third fiscal quarter, may result in adecrease in sales, particularly in Europe. There can be no assurance that these factors will not have an adverseeffect on our future international operations and consequently, on our businessand operating results.  This fluctuationmay be material and negatively affect the price of our common stock.

 

*Merger and Acquisition Related Risks.*  Our business and results of operations couldbe materially adversely affected in the event we fail to complete publiclyannounced acquisitions or to successfully integrate the business and operationsof the merger or the acquisitions.  Inthe future, we may continue to acquire or merge with existing businesses,products, and technologies to enhance and expand our line of products.  Such mergers and acquisitions may bematerial in size and in scope.  Therecan be no assurance that we will be able to identify, acquire, or profitablymanage additional businesses or successfully integrate any acquired businessesinto our business without substantial expenses, delays, or other operational orfinancial problems.  Acquisitionsinvolve a number of special risks and factors, including increasing competitionfor attractive acquisition candidates in our markets, the technologicalenhancement and incorporation of acquired products into existing product linesand services, the assimilation of the operations and personnel of the acquiredcompanies, failure to retain key acquired personnel, adverse short-term effectson reported operating results, the amortization of acquired intangible assets,the assumption of undisclosed liabilities of any acquired companies, thefailure to achieve anticipated benefits such as cost savings and synergies, aswell as the diversion of management’s attention during the acquisition andintegration process.  We may not be ableto operate the acquired businesses properly and may not be able to successfullyrecover amounts paid for such businesses. Some or all of these special risks and factors may have a materialadverse impact on our business, operating results, and financial condition and,as a result, may negatively affect the market price of our common stock.

 

Similarly, we may disposeof assets, either assets we have historically used in the business or that wehave acquired.  Our business and resultsof operations could materially change depending on whether or not we are ableto dispose of assets in an advantageous manner.  In addition to obtaining an advantageous price for the assets tobe disposed of, dispositions involve a number of special risks and factors,including searching for appropriate acquirers; managing the effect of thedisposition on existing and proposed product lines and services, thedivestiture of operations and personnel, adverse short-term effects on reportedoperating results, potential post-divestiture indemnification or liability forliabilities of divested operations, as well as the diversion of management’sattention during the disposition process. Some or all of these special risks and factors may have a materialadverse impact on our business, operating results, and financial condition and,as a result, may negatively affect the market price of our common stock.

 

*Stock Price Volatility*.  The trading price of our common stock hasbeen highly volatile and has fluctuated significantly in the past.  During the fiscal year ended November 30,2002 our stock price fluctuated between a low of $0.35 per share and a high of$3.75 per share.   We believe that theprice of our common stock may continue to fluctuate significantly in the futurein response to a number of events and factors relating to our company, ourcompetitors, and the market for our products and services, many of which arebeyond our control, such as, variations in our quarterly operating results;changes in financial estimates and recommendations by securities analysts;changes in market valuations of companies in our markets; announcements by usor our competitors of significant products, acquisitions, or strategicpartnerships; failure to complete significant business transactions; departuresof key personnel; purchases or sales of common stock or other securities by us;or news relating to trends in our markets. In addition, the stock market in general, and the market for technologycompanies in particular, has experienced extreme volatility over the pasttwelve months.  This volatility hasoften been unrelated to the operating performance of particular

 

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companies.  These broad and industry fluctuations mayadversely affect the market price of our common stock, regardless of ouroperating performance.

 

**Item 7A.                 Quantitativeand Qualitative Disclosures About Market Risk**

 

Derivative FinancialInstruments, Other Financial Instruments and Derivative CommodityInstruments.  The Company is not a partyto any derivative financial instruments or other financial instruments forwhich the fair value disclosure would be required under Statement of FinancialAccounting Standards No. 107*Derivative Financial Instruments, Other FinancialInstruments and Derivative Commodity Instruments**(*SFASNo. 107).  All of the Company’sinvestments are in short-term, investment grade commercial paper, certificatesof deposit and U.S. Government and agency securities that are carried at fairvalue on the Company’s books. Accordingly, the Company believes that the market risk of suchinvestments is minimal.

 

Primary Market RiskExposures.  The Company’s primary marketrisk exposures are in the area of interest rate risk and foreign currencyexchange rate risk.  The Company’sinvestment portfolio of cash equivalents is subject to interest ratefluctuations, but the Company believes this risk is immaterial due to theshort-term nature of these investments. The Company’s business in Europe is conducted in local currency.  In Asia, business is conducted in U.S.currency.  The Company has no foreignexchange contracts, option contracts or other foreign hedgingarrangements.  However, the Companyestimates that any market risk associated with its foreign operations is notsignificant and is unlikely to have a material adverse effect on the Company’sbusiness, results of operations, or financial condition.

 

Item 4.   Control and Procedures

 

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we have evaluated the effectiveness of the design andoperation of our disclosure controls and procedures within 90 days of thefiling date of this quarterly report, and, based on their evaluation, ourprincipal executive officer and principal financial officer have concluded thatthese controls and procedures are effective. There were no significant changesin our internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation.

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed by us in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

(i) The Company providesaccruals for all direct costs associated with the estimated resolution of knowncontingencies.  The accrual isestablished at the earliest date at which it is deemed probable that aliability has been incurred and the amount of such liability can be reasonablyestimated.

 

(ii) On June 7, 1995, alawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in theUnited States District Court for the District of Massachusetts.  The complaint generally alleges patentinfringement by the Company arising from the manufacture, sale, and use of theCompany’s Media 100 products.  Thecomplaint includes requests for injunctive relief, treble damages, interest,costs and fees.  In July 1995, theCompany filed an answer and counterclaim denying any infringement and assertingthat the Avid patent in question is invalid. The Company is vigorouslydefending this lawsuit. In addition, Avid is seeking reissue of the patent,including claims that it asserts are broader than in the existing patent, andthese reissue proceedings remain pending before the U.S. Patent and TrademarkOffice.  On January 16, 1998, the courtdismissed the lawsuit without prejudice to either party moving to restore it tothe docket upon completion of all matters pending before the U.S. Patent andTrademark Office.

 

On August 16, 2000, theU.S. Patent and Trademark Office issued an Office Action rejecting all of theclaims made by Avid in their latest request for reexamination of the patentrelated to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Officedesignated the action as “final”.  Avidfiled a Notice of Appeal of the Examiner’s rejections to the U.S. Patent andTrademark Office Board of Patent Appeals and Interferences.  On February 20, 2003, oral argumentregarding the reexamination of Avid’s U.S. Patent No. 5,045,940 occurred and onMarch 21, 2003 a decision was rendered rejecting all of Avid’s claims andsustaining the Examiner’s rejection of all claims made on appeal.    The litigation remains dismissed pendingthe outcome of the consolidated reissue/reexamination proceedings, and therecan be no assurance that the Company will prevail in the appeal by Avid or thatthe expense or other effects of the appeal, whether or not the Companyprevails, will not have a material adverse effect on the Company’s business,operating results and financial condition.

 

(iii) On October 12,1999, a lawsuit was filed against the Company by McRoberts Software, Inc.(“MSI”) in the United States District Court for the Southern District ofIndiana.  The complaint allegescopyright infringement, breach of contract, and trade secretmisappropriation.  The complaintincludes requests for unspecified monetary damages and enhanced damages,interest, costs and fees.  Anunfavorable verdict was filed on February 25, 2002 against the Company in theamount of $2.5 million.  The Company andMSI filed post-trial motions.  Thosemotions were ruled upon with the trial court reducing the total amount awardedby the jury but assessing prejudgment interest and attorney’s fees.  The Company appealed the entire judgment,which approximates $2.8 million, and a hearing before the****United States Court of Appeals for theSeventh Circuit****occurred onDecember 12, 2002.  The appeal remainsoutstanding and the Company is awaiting the verdict.  The entire amount of the award has been placed in an escrowaccount pending judgment from the appellate court and approximately $2.8million is included as restricted cash in the accompanying balance sheet atNovember 20, 2002.

 

The Company had recordeda liability in the amount of $2.6 million that included estimated legal feesassociated with the litigation at November 30, 2001 and the entire amount wasexpensed in the three months ended November 30, 2001.  During the year ended November 30, 2002, the Company recorded anadditional liability and expense of $397,000 for the adjusted judgment whichincluded prejudgment interest and attorney’s fees as well as estimated legalfees associated with the appeal.

 

During the year endedNovember 30, 2002, the Company settled litigation with the former shareholdersof Wired, which was acquired by the Company in 2000.  As part of the settlement, the Company assigned all rights to theWired product line, intellectual property relating to Wired products andon-hand inventory related to the Wired product line to the former shareholders.  In return, Wired granted the Company anirrevocable license to use the source code, technology, know how andintellectual property.

 

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In addition, Wiredpromised to pay the Company a royalty of 5% of adjusted gross sales of theassigned products, not to exceed $1.2 million, plus the cost of the inventoryassigned.  Litigation settlementincluded in the Consolidated Statements of Operations for the three monthsended February 28, 2002 represents the cost of inventory transferred, the netbook value of remaining intangible assets associated with the acquisition, andlegal fees associated with the settlement.

 

(iv) From time to timethe Company is involved in other disputes and/or litigation encountered in itsnormal course of business.  The Companydoes not believe that the ultimate impact of the resolution of such otheroutstanding matters will have a material effect on the Company’s business,operating results or financial condition.

 

Item 6. Exhibits and Reports on Form 8-K

 

a)  Exhibits

 

Exhibits required as partof this Quarterly Report on Form 10-Q are listed on the exhibit index on page30.

 

b)  Reports on Form 8-K

 

There were no reports onForm 8-K during the quarter ended February 28, 2003.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |           | Media 100 Inc. |                                   |   |   |
|--------|----------------|----------------|----------------------------------------|--------|--------|
|   |           |           |                                   |   |   |
|   |           |           |                                   |   |   |
| Date:  | April 14, 2003 | By:            |   /s/ Steven  D. Shea        |   |   |
|   |           |           | Steven D. Shea                         |   |   |
|   |           |           | Chief Financial Officer  and Treasurer |   |   |
|   |           |           | (Principal Financial  Officer)         |   |   |
|        |                |                |                                        |        |        |  |  |  |  |

 

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CERTIFICATIONS

 

I, John A. Molinari,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Media 100 Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement ofmaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly represent in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Actrules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls;

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | April 14, 2003 |   |                                   |   |   |
|--------|----------------|--------|----------------------------------------|--------|--------|
|   |           |   |                                   |   |   |
|   |           |   | /s/ John A. Molinari                   |   |   |   |
|   |           |   | John A. Molinari                       |   |   |
|   |           |   | Chief Executive Officer  and President |   |
|        |                |        |                                        |        |        |  |

 

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CERTIFICATIONS

 

I, Steven D. Shea,certify that:

 

1.                I have reviewedthis quarterly report on Form 10-Q of Media 100 Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement ofmaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly represent in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Actrules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b.              evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c.               presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of the registrant’sboard of directors (or persons performing the equivalent functions):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls;

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  | April 14, 2003 |   |                                   |   |   |
|--------|----------------|--------|----------------------------------------|--------|--------|
|   |           |   |                                   |   |   |
|   |           |   | /s/ Steven D. Shea                     |   |   |   |
|   |           |   | Steven D. Shea                         |   |
|   |           |   | Chief Financial Officer  and Treasurer |   |
|   |           |   | (Principal Financial  Officer)         |   |
|        |                |        |                                        |        |        |  |

 

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EXHIBIT INDEX

 
| **Number** |   | **Description**                                                           |
|------------|--------|---------------------------------------------------------------------------|
|       |   |                                                                      |
| 99.1       |   | Statement Pursuant to  18 U.S.C. Section 1350, dated as of April 14, 2003 |

 

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