SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File No. 0-20292
AMPEX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13--3667696
(State of Incorporation) (I.R.S. Employer Identification Number)
500 Broadway
Redwood City, California 94063-3199
(Address of principal executive offices, including zip code)
(415) 367-2011
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
As of July 15, 1997, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 45,581,827. There were no
outstanding shares of the Registrant's Class C Common Stock, $0.01 par value.
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AMPEX CORPORATION
FORM 10-Q
Quarter Ended June 30, 1997
INDEX
Page
PART I -- FINANCIAL INFORMATION...............................................2
Item 1. Financial Statements...............................................2
Consolidated Balance Sheets (unaudited) at June 30, 1997 and
December 31, 1996..................................................3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1997 and 1996...........4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 1997 and 1996................................5
Notes to Unaudited Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................................14
Item 2. Changes in Securities.............................................15
Item 3. Defaults Upon Senior Securities...................................15
Item 4. Submission of Matters to a Vote of Security Holders...............15
Item 5. Other Information.................................................16
Item 6(a). Exhibits......................................................... 16
Item 6(b). Reports on Form 8-K...............................................16
Signatures ..................................................................17
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
See pages 3-8.
2
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<TABLE>
<CAPTION>
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
1997 1996
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,917 $ 13,410
Short-term investments 20,304 17,241
Notes receivable 8,352 7,926
Accounts receivable (net of allowances of $1,879 and $2,241) 16,343 16,721
Inventories 17,737 14,095
Other current assets 2,793 2,709
--------------- --------------
Total current assets 72,446 72,102
Property, plant and equipment 9,685 10,059
Other assets 1,685 2,331
--------------- --------------
Total assets $ 83,816 $ 84,492
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 1,075 $ 1,075
Accounts payable 7,631 7,148
Income taxes payable 488 571
Accrued restructuring costs 1,941 2,002
Other accrued liabilities 19,595 22,029
--------------- --------------
Total current liabilities 30,730 32,825
Long-term debt 457 914
Other liabilities 55,378 60,233
Deferred income taxes 1,296 1,314
Accrued restructuring costs 4,738 5,596
--------------- --------------
Total liabilities 92,599 100,882
--------------- --------------
Commitments and contingencies (Note 6)
Redeemable nonconvertible preferred stock, $1,000 liquidation value:
Authorized: 69,970 shares 1997 and 1996
Issued and outstanding - 69,970 shares 1997 and 1996 69,970 69,970
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 842,838 shares 1997 and 1996
Issued and outstanding - none 1997 and 1996 - -
Common stock, $.01 par value:
Class A:
Authorized: 125,000,000 shares 1997 and 1996
Issued and outstanding - 45,581,827 shares 1997; 45,434,417 shares 1996 456 454
Class C:
Authorized: 50,000,000 shares 1997 and 1996
Issued and outstanding - none 1997 and 1996 - -
Other additional capital 382,399 382,042
Note receivable from stockholder (3,979) (3,979)
Accumulated deficit (447,591) (454,871)
Cumulative translation adjustments 494 526
Minimum pension liability adjustment (10,532) (10,532)
--------------- --------------
Total stockholders' deficit (78,753) (86,360)
--------------- --------------
Total liabilities and stockholders' deficit $ 83,816 $ 84,492
=============== ==============
The accompanying notes are an integral part of the unaudited consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
------------------------------------ --------------------------------------
June 30, June 30,
------------------------------------ --------------------------------------
1997 1996 1997 1996
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 21,299 $ 24,420 $ 42,380 $ 48,652
Cost of sales 10,681 13,518 21,243 26,889
---------------- ---------------- ----------------- -----------------
Gross profit 10,618 10,902 21,137 21,763
Selling and administrative 6,417 5,757 14,063 11,818
Research, development and engineering 3,890 3,912 7,638 7,824
Royalty income (1,562) (1,631) (7,344) (4,561)
---------------- ---------------- ----------------- -----------------
Operating income 1,873 2,864 6,780 6,682
Interest expense 23 32 54 703
Amortization of debt financing costs - 67 - 85
Interest income (735) (825) (1,513) (1,576)
Other (income) expense, net (3) (635) 55 (638)
---------------- ---------------- ----------------- -----------------
Income before income taxes 2,588 4,225 8,184 8,108
Provision for income taxes 252 253 904 663
---------------- ---------------- ----------------- -----------------
Net income $ 2,336 $ 3,972 $ 7,280 $ 7,445
================ ================ ================= =================
Primary income per share :
Income per share $ 0.05 $ 0.09 $ 0.16 $ 0.17
================ ================ ================= =================
Weighted average number of common shares outstanding 46,492,495 46,301,875 46,580,934 43,009,614
================ ================ ================= =================
Fully diluted income per share :
Income per share $ 0.05 $ 0.09 $ 0.16 $ 0.17
================ ================ ================= =================
Weighted average number of common shares outstanding 46,492,495 46,302,091 46,580,934 46,099,651
================ ================ ================= =================
The accompanying notes are an integral part of the unaudited consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended
---------------------------------
June 30, June 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,280 $ 7,445
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation, amortization and accretion 1,068 1,822
Net gain on sale of assets - 902
Net increase in notes receivable (426) (673)
Net increase in accounts receivable (10) (327)
Net increase in inventories (3,642) (3,660)
Net increase in other assets 430 871
Net increase (decrease) in accounts payable 613 (264)
Net decrease in accrued liabilities and
income taxes payable (3,474) (4,036)
Net decrease in long-term receivables 132 67
Net decrease in other non-current obligations (3,076) (2,868)
Net decrease in accrued restructuring costs (919) (1,638)
--------------- ---------------
Net cash used in operating activities (2,024) (2,359)
--------------- ---------------
Cash flows from investing activities:
Purchases of short-term investments (42,953) (34,749)
Proceeds received on the maturity of short-term investments 39,890 23,114
Additions to notes receivable - (15,107)
Additions to property, plant and equipment (719) (544)
Disposals of property, plant and equipment - 27,883
Deferred gain on sale of assets (407) 5,930
--------------- ---------------
Net cash provided by (used in) investing activities (4,189) 6,527
--------------- ---------------
Cash flows from financing activities:
Borrowings under working capital facilities 27,235 26,072
Repayments under working capital facilities (27,664) (26,900)
Repayment of secured note payable - (7,333)
Repayment of notes payable-affiliates - (80)
Proceeds from issuance of common stock 359 974
Proceeds from issuance of warrants - 17
--------------- ---------------
Net cash used in financing activities (70) (7,250)
--------------- ---------------
Effect of exchange rates on cash (210) (70)
--------------- ---------------
Net decrease in cash and cash equivalents (6,493) (3,152)
Cash and cash equivalents, beginning of period 13,410 6,765
--------------- ---------------
Cash and cash equivalents, end of period $ 6,917 $ 3,613
=============== ===============
The accompanying notes are an integral part of the unaudited consolidated financial statements.
</TABLE>
5
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AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Ampex Corporation
Ampex Corporation ("Ampex" or the "Company") is engaged in the design,
development, production and distribution of high-performance mass data storage
systems, instrumentation recorders and professional video recording and other
products. The Company operates in one industry segment for financial reporting
purposes: the design, development, production and distribution of high-speed,
high-capacity magnetic recording products and systems.
Note 2 -- Basis of Presentation
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The statements
should be read in conjunction with the Company's report on Form 10-K for the
year ended December 31, 1996 and the Audited Consolidated Financial Statements
included therein.
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented. The results of operations for the three- and
six-month periods ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year.
Note 3 -- Income Per Common Share
Primary income per common share for the three-month and six-month
periods ended June 30, 1997 and 1996 is calculated by dividing net income by the
weighted average common shares outstanding during the respective periods. The
calculation of weighted average common shares assumes the exercise of common
stock equivalent warrants and stock options in periods when their exercise would
be dilutive. Fully diluted income per common share for the three- and six-month
periods ended June 30, 1997 and 1996 is calculated by dividing net income, as
adjusted for interest on outstanding convertible notes, by the weighted average
common shares outstanding (calculated as set forth above), including shares
issuable upon conversion of the potentially dilutive convertible notes.
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for income per share of
common stock. SFAS 128 will become effective for the Company's fiscal year
ending December 31, 1997. The impact of adopting SFAS 128 on the Company's
financial statements has not yet been determined.
6
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AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 -- Supplemental Schedule of Cash Flow Information
Cash payments for interest and income taxes (net of refunds received)
from continuing operations were as follows:
Six months ended
June 30, June 30,
1997 1996
(in thousands)
Interest.......................... $ 54 $ 212
Income taxes paid................. 988 1,556
Note 5 -- Inventories
June 30, December 31,
1997 1996
(in thousands)
Raw materials..................... $ 8,522 $ 6,097
Work in process................... 5,266 5,160
Finished goods.................... 3,949 2,838
--------------- -------------
Total......................... $ 17,737 $ 14,095
============== ============
Note 6 -- Commitments and Contingencies
The Company is currently a defendant in lawsuits that have arisen in
the ordinary course of its business. Management does not believe that any such
lawsuits or unasserted claims will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
The Company currently is involved in various stages of monitoring and
cleanup relative to environmental protection matters, some of which relate to
past disposal practices. Some of these matters are being overseen by state or
federal agencies. Management has provided reserves for certain amounts related
to investigation and cleanup costs and believes that the final disposition of
these matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
7
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AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Preferred Stock
The 8% Noncumulative Preferred Stock is subject to optional redemption
by the Company at any time and mandatory redemption, at the election of the
holders thereof, on December 31, 1997, out of funds legally available therefor.
Mandatory or optional redemption payments are payable in cash or, at the option
of the Company, in shares of Common Stock, provided that, as a condition to
redemption in shares, the average market price of the Company's Common Stock
must have been at least $4 per share during the 10 trading days preceding the
notice of redemption. Common Stock issued to redeem the Preferred Stock shall be
valued at 90% of fair market value. As of June 30, 1997, the Company did not
have sufficient funds legally available to redeem the Noncumulative Preferred
Stock in full and, annualizing its results for the first six months of 1997 over
the full fiscal year, the Company would not have sufficient funds legally
available on December 31, 1997 to redeem any of the Noncumulative Preferred
Stock. In the event the Company does not have sufficient funds legally available
to redeem the Noncumulative Preferred Stock in full on the redemption date, the
Company would remain obligated to redeem such shares from time to time
thereafter to the extent funds become legally available for redemption, and
would generally be precluded from declaring any cash dividends on, or
repurchasing shares of, its common stock, until the Noncumulative Preferred
Stock has been redeemed in full. There can be no assurance that the Company will
have adequate liquidity or have funds legally available to redeem the
Noncumulative Preferred Stock on the redemption date or in the future. Although
the Company has no plans for redemption of the Noncumulative Preferred Stock
prior to the redemption date, it will continue to evaluate this possibility in
light of market conditions, its liquidity and other factors. Any such redemption
could occur before or after the redemption date, and could include the issuance
of additional debt or equity securities or other actions that might result in
dilution of current stockholders' equity interests in the Company.
Note 8 -- Income Taxes
The provisions for income taxes in the three-month and six-month
periods ended June 30, 1997 and 1996 consist primarily of foreign income taxes
and withholding taxes on royalty income. The Company was not required to include
any provision for U.S. federal taxes in the first six months of 1997 and 1996
because of certain timing differences in the recognition of expense for tax and
financial reporting purposes.
As of December 31, 1996, the Company had net operating loss
carryforwards for income tax purposes of $95.3 million, expiring in the years
2005 through 2009. As a result of certain financing transactions that were
completed in April 1994 and February 1995, the Company's ability to utilize its
net operating losses and credit carryforwards against future consolidated
federal income tax liabilities will be restricted in their application, which
will result in a material amount of the net operating loss never being utilized
by the Company.
8
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This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which involve certain risks and uncertainties. The Company's actual results or
outcomes may differ materially from those anticipated. The forward-looking
statements relate to various aspects of the Company's operations, including but
not limited to: its keepered media development program and other product
development efforts and expenses; the development and availability of
application software for its DST products; possible future patent license
agreements and royalty income; the costs involved in pursuing its patent
enforcement program; uncertainty about the outcome and costs of the Company's
pending or future patent litigation; future sales levels, net income and gross
profit; the Company's liquidity; redemption of its 8% Noncumulative Preferred
Stock; and potential issuances of additional debt or equity securities. Each
forward-looking statement that the Company believes is material is accompanied
by a cautionary statement or statements identifying important factors that could
cause actual results to differ materially from those described in the
forward-looking statement. The cautionary statements are set forth following the
forward-looking statement, and/or elsewhere in this Form 10-Q and the Company's
other documents filed with the Securities and Exchange Commission, whether or
not such documents are incorporated herein by reference. In assessing the
forward-looking statements contained in this Form 10-Q, readers are urged to
read carefully all cautionary statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and
results of operations of Ampex Corporation and its subsidiaries (collectively,
"Ampex" or the "Company ") should be read in conjunction with the unaudited
Consolidated Financial Statements included elsewhere in this Report, and the
Consolidated Financial Statements and the Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission (file no. 0-20292) (the "1996
Form 10-K"), and its Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
Results of Operations for the Three Months and Six Months Ended June 30, 1997
and 1996
Net Sales. Net sales declined by 12.8% to $21.3 million in the second
quarter of 1997 from $24.4 million in the second quarter of 1996, and by 12.9%
to $42.4 million in the first six months of 1997 from $48.7 million in the first
six months of 1996. This decrease is primarily attributable to the continuing
decline in sales of professional television and television after-market
products. The Company's backlog of firm orders increased to $4.5 million at June
30, 1997 from $3.4 million at December 31, 1996. However, the Company considers
this level of backlog to be minimal in relation to its historical sales levels.
Accordingly, future periods' net sales will be significantly dependent upon
orders received in those periods and, because most orders are typically received
late in each quarter, it is difficult to predict quarterly sales levels.
Although sales for the second quarter of 1997 increased slightly from first
quarter levels, sales of most of the Company's products have historically
declined during the third quarter of its fiscal year, due to seasonal
procurement practices of its customers. For the foregoing reasons, sales in the
third quarter of 1997 may be substantially lower than sales realized in the
first and second quarters of 1997.
Mass Data Storage and Instrumentation Products. Sales of data storage
and instrumentation products totaled $17.5 million for the second quarter of
1997 and $34.4 million for the first half of 1997, and declined slightly from
the comparable periods in 1996 when sales of such products totaled $17.7 million
and $35.1 million, respectively. As previously reported, the Company recently
announced that it had begun shipping its new line of double density 19
millimeter data storage and instrumentation products and its new DST 810 and 812
library systems. The Company anticipates that sales of older 19 millimeter
systems will continue to decline as a result of the new product
9
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announcements, and sales in future quarters may be adversely affected if the
Company experiences any product transition difficulties. Broader acceptance of
the Company's DST products in its target markets will depend significantly on
the availability of certain third party application software. The Company has
been working to integrate certain Ampex DST products with other manufacturers'
equipment using Microsoft Corporation's Windows NTTM , and anticipates achieving
such compatibility during the fourth quarter of 1997. However, the integration
of these and other products with the Company's DST products is not within the
Company's control, and if delayed may adversely affect DST product sales in
future quarters.
A significant portion of instrumentation product sales reflects
purchases by government agencies and defense contractors pursuant to federal
government procurement programs. These sales fluctuate as a result of changes in
government spending programs (including defense programs), and seasonal
procurement practices of government agencies. Sales to such customers may also
be affected adversely by pending budget discussions in Congress. In recent
periods, sales of instrumentation recorders have been increasing, but there can
be no assurance that fluctuations in sales of instrumentation products will not
occur in future periods.
Professional Video Recording and Other Products. Sales of professional
video recording products and all other products (consisting primarily of
television after-market products) decreased to $3.8 million in the second
quarter of 1997 from $6.7 million in the second quarter of 1996, and to $7.9
million in the first half of 1997 from $13.5 million in the first half of 1996.
The Company's DCT digital products were designed for existing broadcast
transmission standards, which are expected to become obsolete upon the adoption
of new digital transmission standards that were recently announced. Accordingly,
the Company anticipates that its professional video product sales will continue
to decline pending the establishment of new standards and until new products can
be introduced that are designed for them.
Gross Profit. Gross profit as a percentage of net sales increased to
49.9% in the second quarter of 1997 from 44.6% in the second quarter of 1996 and
to 49.9% in the first six months of 1997 from 44.7% in the first six months of
1996. The improved gross profit margin reflects the effects of the Company's
cost reduction programs and higher sales of instrumentation products, which are
more profitable than its professional video recording products that experienced
sales declines. As discussed in the foregoing paragraph, future sales of the
Company's instrumentation recorders could be adversely affected by seasonal
procurement practices and pressure on government agencies to reduce spending.
Any significant decline in sales of these relatively high-margin products could
have a material adverse effect on gross profit margins.
Selling and Administrative Expenses. Selling and administrative
expenses increased to $6.4 million in the second quarter of 1997 from $5.8
million in the second quarter of 1996, and to $14.1 million in the first half of
1997 from $11.8 million in the first half of 1996. The Company incurred $1.9
million and $1.7 million of patent infringement litigation expenses in the first
and second quarters of 1997, respectively, which expenses were offset in both
periods by cost reductions in various other categories of expenses. In the first
half of 1996, the Company incurred patent infringement litigation expenses of
$0.8 million, approximately half of which were incurred in each of the first and
second quarters. The Company expects these litigation expenses to continue in
future periods, but at lower levels than in recent quarters. See "Legal
Proceedings," below.
Research, Development and Engineering Expenses. Research, development
and engineering expenses remained unchanged at $3.9 million for the second
quarters of 1997 and 1996, and decreased slightly to $7.6 million in the first
half of 1997 from $7.8 million in the first half of 1996. The percentage of
R,D&E expenses attributable to the development of keepered media, primarily with
magneto-resistive technology, has increased significantly in the comparison
periods. For example, such expenses increased to 31% of R,D&E expenses in the
second quarter of 1997 from 12% in the second quarter of 1996. See "Keepered
Media Research and Development," below. The Company is committed to investing in
R,D&E programs at levels that management believes can be supported by current
levels of sales, and the Company currently anticipates that such expenses in
1997 may increase over 1996 levels as a percentage of net sales.
Royalty Income. Royalty income was $1.6 million in each of the second
quarters of 1997 and 1996, and increased to $7.3 million in the first half of
1997 from $4.6 million in the first half of 1996. The Company's
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royalty income derives from patent licenses, and the Company receives most of
its royalty income from licenses with companies that manufacture consumer video
products (such as VCRs and camcorders) and, in certain cases, professional video
tape recorders. Historically, most royalty income was attributable to VHS video
recorders. However, in recent periods a significant portion of royalty income
has related to 8 mm video recorders and camcorders.
Approximately $3.7 million and $0.9 million of royalty income in the
first half of 1997 and 1996, respectively, were from non-recurring royalties
resulting from negotiated settlements related to sales of products by
manufacturers prior to the negotiation of licenses from the Company. Royalty
income has historically fluctuated widely due to a number of factors that the
Company cannot predict, such as the extent of use of the Company's patented
technology by third parties, the extent to which the Company must pursue
litigation in order to enforce its patents, and the ultimate success of its
licensing and litigation activities. As discussed below under "Legal
Proceedings," Ampex has been in litigation with Mitsubishi Electric Corporation
and Mitsubishi Electric America Inc. regarding an Ampex patent that the Company
contends was used in connection with the manufacture of certain television
receivers. The subject patent expired in July 1997, but Ampex has several other
patents, not presently the subject of litigation, that the Company believes may
be used currently by various manufacturers of television receivers. The Company
has approached certain of these manufacturers with a view toward negotiating
licensing agreements, but there can be no assurance that the Company will be
successful in such efforts.
Television receivers that are designed in the future to be compatible
with pending digital television broadcast standards may also employ various
digital video technologies developed by Ampex. The Company has begun to review
its patent portfolio to assess whether its patents may be used in future digital
television receivers. To the extent Ampex determines that its patents begin to
be used, the Company intends to attempt to negotiate licensing agreements with
manufacturers of television receivers. However, there can be no assurance that
such licensing efforts (including any litigation that may be required) will be
successful or cost-effective.
Operating Income. The Company generated operating income of $1.9
million in the second quarter of 1997, as compared to $2.9 million in the second
quarter of 1996, and $6.8 million in the first half of 1997 as compared to $6.7
million in the first half of 1996. Operating income during the second quarter of
1997 reflects higher litigation expenses associated with the Mitsubishi patent
infringement lawsuit, which were partially offset by reductions in operating
expenses. Operating income during the first half of 1997 also reflects such
higher litigation expenses, which were offset by the increase in royalty income
described above and reductions in operating expenses. See "Royalty Income"
above.
Interest Expense. Interest expense declined in 1997 from 1996 levels
due to the repayment of a mortgage loan in connection with the sale of the
Company's Redwood City, California real estate in January 1996, and the
conversion of $27.3 million principal amount at maturity of the Company's
zero-coupon convertible notes into approximately 8.5 million shares of Common
Stock during the period from February 9, 1996 to April 1, 1996.
Interest Income. Interest income decreased slightly between the
comparison periods primarily as a result of lower cash balances and the partial
repayment of notes receivable from the January 1996 sale of the Company's
Redwood City, California property.
Other (Income) Expense, Net. Other (income) and expense, net, in both
periods consisted primarily of foreign currency transaction gains and losses.
Provision for Income Taxes. The Company derives pretax foreign income
from its international operations, which are conducted principally by its
foreign subsidiaries. In addition, the Company's royalty income is subject, in
certain cases, to foreign tax withholding. Such income is taxed by foreign
taxing authorities, and the Company's domestic tax timing differences and
operating losses, if any, are not deductible in computing such foreign taxes.
The provisions for income taxes in the second quarters of 1997 and 1996 consist
primarily of foreign income taxes and withholding taxes on royalty income.
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Net Income. The Company reported net income of $2.3 million in the
second quarter of 1997 compared to $4.0 million in the second quarter of 1996
and, $7.3 million in the first six months of 1997 compared to $7.4 million in
the first six months of 1996, as a result of the factors discussed above under
"Operating Income." In order to maintain net income, in light of the possible
sales declines in the third quarter of 1997, the Company intends to continue
focusing on controlling costs and other initiatives.
Liquidity and Capital Resources
Cash Flow. At June 30, 1997, the Company had cash and short-term
investments of $27.2 million and working capital of $41.7 million. At December
31, 1996, the Company had cash and short-term investments of $30.7 million and
working capital of $39.3 million. The Company's operating activities utilized
cash of $2.0 million during the first six months of 1997 and $2.4 million during
the first six months of 1996. The Company's previously announced strategy to
increase inventories to support sales of its 19 millimeter DST and DIS products
is the primary reason for the increase of $3.6 million in inventories at June
30, 1997 over year-end 1996 levels. While the Company began shipping its DST 810
library system in the fourth quarter of 1996 and its DST 812 library system in
the first quarter of 1997, it presently has no material backlog of orders for
these products. The increased investment in inventories, particularly with
respect to its DST 810 and DST 812 products, which have a limited sales history,
may expose the Company to an increased risk of inventory write-offs. Cash flows
from investing activities and financing activities for 1996 reflect the
Company's sale of real estate in California.
The Company has available, through a subsidiary, a working capital
facility that allows it to borrow or obtain letters of credit totaling $7.0
million, based on eligible accounts receivable. At June 30, 1997, the Company
had no material borrowings outstanding and had letters of credit issued against
the facility totaling $2.3 million. This credit facility was recently extended
for an additional two years, to expire in May 2000.
Financing Transactions. In December 1997, the Company is scheduled to
redeem the outstanding 8% Noncumulative Preferred Stock, out of funds legally
available therefor (generally, the excess of the value of assets over
liabilities). In certain instances the Company may redeem the Noncumulative
Preferred Stock by issuing common stock at 90% of fair market value, provided
that the fair market value of the common stock is at least $4.00 per share. As
of June 30, 1997, the Company did not have sufficient funds legally available to
redeem the Noncumulative Preferred Stock in full and, annualizing its results
for the first six months of 1997 over the full fiscal year, the Company would
not have sufficient funds legally available on December 31, 1997 to redeem any
of the Noncumulative Preferred Stock. In the event the Company does not have
sufficient funds legally available to redeem the Noncumulative Preferred Stock
in full on the redemption date, the Company would remain obligated to redeem
such shares from time to time thereafter to the extent funds become legally
available for redemption, and would generally be precluded from declaring any
cash dividends on, or repurchasing shares of, its common stock, until the
Noncumulative Preferred Stock has been redeemed in full. See Note 7 of Notes to
Unaudited Consolidated Financial Statements. There can be no assurance that the
Company will have adequate liquidity or have funds legally available to redeem
the Noncumulative Preferred Stock on the redemption date or in the future.
Although the Company has no current plans for redemption of the Noncumulative
Preferred Stock prior to the redemption date, it will continue to evaluate this
possibility in light of market conditions, its liquidity and other factors. Any
such redemption could occur either before or after the redemption date, and
could include the issuance of additional debt or equity securities or other
actions that might result in dilution of current stockholders' equity interests
in the Company.
In the second quarter of 1996, the Company filed a shelf registration
statement with the Securities and Exchange Commission covering 1,150,000 shares
of common stock which may be offered from time to time by the Company, the
proceeds of which would be used for general corporate purposes, including, if
required, the acquisition of specialized production and test equipment for use
in the Company's keepered media development program. See "Keepered Media
Development Program." The sale of common stock covered by the shelf registration
statement could adversely affect the market price for the common stock, and
would dilute current stockholders' interests by approximately 3% if all such
shares were to be issued. The Company is continuing to evaluate its financing
requirements and available financial alternatives, and may determine to issue
additional debt or equity securities, or to take other actions, which would be
in addition or as an alternative to its possible shelf offering. No
determination to proceed with any financing alternatives has been made at the
date of this Report.
12
<PAGE>
Keepered Media Research and Development
Ampex has previously disclosed that it has been engaged in a research
and development program to attempt to commercialize its "keepered media"
technology for use in the hard disk drives that are attached to most computers.
A description of this technology and certain developments and uncertainties
related to the development program are set forth in the 1996 Form 10-K and the
Company's 1996 and 1997 Quarterly Reports on Form 10-Q. In order to understand
properly the following information, it is necessary to refer to these earlier
reports.
The majority of Ampex's development efforts for keepered media were,
until the beginning of 1997, directed towards disk drives based on inductive
head technology. Most of the major disk drive manufacturers that are potential
customers for keepered media have now indicated their intention to convert
substantially all of their production to magneto-resistive (MR) head-based
designs in 1998 and to terminate the development of new inductive based disk
drives. Maxtor Corporation, a disk drive manufacturer with which Ampex had
previously announced an agreement to utilize keepered media, is not now expected
to proceed with the inductive head-based program for which keepered media was
initially targeted, and there are currently no firm plans for Maxtor to
incorporate keepered media into its future MR head-based programs.
Ampex has provided samples of keepered media components optimized for
inductive-based disk drives to two disk drive manufacturers other than Maxtor
and is continuing to discuss possible production programs with them. One such
manufacturer has advised the Company that it intends to build a small number of
inductive head-based disk drives incorporating keepered media during the third
quarter for evaluation purposes only. Even if such disk drives are built and
perform successfully, there may be economic or other reasons why this disk drive
manufacturer might elect to make a transition to MR head-based designs and not
to proceed with any inductive head-based program or with keepered media.
The Company has previously indicated that it has demonstrated
significant capacity increases for MR heads with keepered media under laboratory
conditions, and that results obtained under laboratory conditions may not be
representative of performance in a production disk drive. Additionally, there is
a significant possibility that further testing or technical or economic factors
may make the incorporation of keepered media into MR-based disk drives
impractical. However, based on its evaluation of results obtained with keepered
media and MR heads to date, the Company has recently increased its expenditures
for keepered media development significantly. See "Results of Operations for the
Three Months and Six Months Ended June 30, 1997 and 1996 -Research, Development
and Engineering Expenses."
The Company has provided samples of keepered media optimized for MR
heads to two integrated manufacturers of disk drives and has held discussions
with respect to joint development programs that, if successful, would each
target the introduction of an MR-based disk drive program utilizing keepered
media during 1998. One of these integrated disk drive manufacturers proposed a
joint development effort with Ampex on terms that the Company did not find
acceptable, primarily for economic reasons. It is not possible to forecast
whether a revised proposal will be received or if it will be possible to
conclude any commercially acceptable arrangement with this potential customer.
Discussions are continuing with both of these integrated disk drive
manufacturers.
Separately, in June, the Company and Samsung Information Systems of
America, Inc. ("Samsung") entered into a joint development agreement that, if
successful, would lead to the commercial introduction of MR head-based disk
drives incorporating keepered media in a product that Samsung plans to introduce
during 1998. Samsung is a subsidiary of Samsung Group, a large manufacturing
corporation based in Seoul, Korea. Ampex's testing of keepered media with MR
heads has been conducted principally with generally available MR heads from a
single manufacturer. Ampex will be required to demonstrate acceptable results
with MR heads from suppliers designated by Samsung, which Ampex may not
previously have tested, in order for a commercial program to proceed with
Samsung.
In a high technology industry such as data storage, other technology
may be under development, or may be developed in the future, that could be
technically or economically superior to keepered media. It is also possible that
further analysis by the Company or potential customers will identify other
technical or economic issues of which Ampex is presently unaware.
13
<PAGE>
In view of the many uncertainties associated with the development and
commercialization of keepered media (as described above and in the Company's
prior filings with the Securities and Exchange Commission), it is impossible to
forecast when, or if, any benefit from this technology will be realized by the
Company, and no revenues from keepered media are expected during 1997.
Significant expenditures and commitments for the development of keepered media
have already been incurred by the Company, and the Company will be required to
continue such expenditures in the future for as long as the development program
for keepered media development continues. As previously stated, there can be no
assurance of financial return from these expenditures or commitments, and they
could negatively affect the Company's liquidity or require it to issue debt or
equity securities which would increase the Company's financial leverage or
dilute the earnings attributable to current shareholders of the Company. The
development of keepered media could also divert the Company's technical
resources, which could negatively affect the Company's other research and
development programs, including improvements to the Company's mass data storage
product lines. Since the prospects for keepered media are highly speculative,
there is a risk that the market price of the Company's securities may experience
increased volatility, in addition to the volatility that may result from other
factors affecting the Company, such as changes in financial performance,
analysts' estimates, or product or technology announcements by the Company or
its competitors.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to routine litigation incidental to its
business. In the opinion of management, no such current or pending lawsuits,
either individually or in the aggregate, are likely to have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
On September 22, 1995, the Company filed a lawsuit against Mitsubishi
Electric Corporation and Mitsubishi Electric America Inc. ("Mitsubishi") in the
U.S. District Court for the District of Delaware, alleging patent infringement
and breach of a license agreement in connection with the manufacture of VHS
video recorders and television receivers, and seeking damages and injunctive
relief. In response to the Company's lawsuit, on December 12, 1995, Mitsubishi
filed a lawsuit against Ampex in the U.S. District Court for the Central
District of California, alleging patent infringement of two Mitsubishi patents
by certain Ampex video and data recorder products, and seeking unspecified
damages and injunctive relief. In March 1997, the California court determined
that Ampex has no liability to Mitsubishi, finding in favor of Ampex with
respect to both Mitsubishi patents. Mitsubishi's request for a new trial and for
judgment as a matter of law was denied, and in July 1997 the court affirmed its
decision in favor of Ampex.
In April 1997, a jury in the U.S. District Court for the District of
Delaware returned a verdict in favor of Ampex in its patent infringement lawsuit
against Mitsubishi and awarded damages to Ampex of approximately $8.1 million
for infringing a patent used in connection with the manufacture of certain
television receivers. The defendants asserted various defenses and in June 1997
the judge granted a post-trial motion by Mitsubishi to set aside the verdict and
award of damages on the theory of prosecution history estoppel. In July 1997,
Ampex moved for a retrial. In view of the substantial uncertainty remaining in
this litigation, no income from this verdict has been recorded in the Company's
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --- Results of Operations for the Three
Months and Six Months Ended June 30, 1997 and 1996 --- Selling and
Administrative Expenses" and "--- Royalty Income," above. The June 1997 decision
relates only to infringement of one of the Company's patents which is used in
picture-in-picture television sets. Ampex has asserted additional claims against
Mitsubishi with respect to infringement of Ampex patents in connection with
various VCR products. No date has been set for a trial of these claims.
The Company's facilities are subject to numerous federal, state and
local laws and regulations designed to protect the environment from waste
emissions and hazardous substances. The Company is also subject to the federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in its facilities. Management believes that the
Company is generally in compliance in all material respects with all
14
<PAGE>
applicable environmental and occupational safety laws and regulations or has
plans to bring operations into compliance. Management does not anticipate that
capital expenditures for pollution control equipment for fiscal 1997 will be
material.
Owners and occupiers of sites containing hazardous substances, as well
as generators and transporters of hazardous substances, are subject to broad
liability under various federal and state environmental laws and regulations,
including liability for investigative and cleanup costs and damages arising out
of past disposal activities. The Company has been named as a potentially
responsible party by the United States Environmental Protection Agency with
respect to four contaminated sites that have been designated as "Superfund"
sites on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980. The Company is engaged in
various environmental investigation, remediation and/or monitoring activities at
several sites located off Company facilities, including the removal of solvent
contamination from subsurface aquifers at a site in Sunnyvale, California, and
surface cleanup and contamination assessment at a third party treatment, storage
and disposal facility in Jamestown, North Carolina. Some of these activities
involve the participation of state and local government agencies. Five sites
involved with these activities (including the four Superfund sites) are
associated with the operations of the Company's former magnetic tape
subsidiaries (collectively, "Media"). Although the Company sold Media in
November 1995, the Company may have continuing liability with respect to
environmental contamination at certain of these sites.
Because of the inherent uncertainty as to various aspects of
environmental matters, including the extent of environmental damage, the most
desirable remediation techniques and the time period during which cleanup costs
may be incurred, it is not possible for the Company to estimate with any degree
of certainty the ultimate costs that it may incur with respect to the currently
pending environmental matters referred to above. Nevertheless, at June 30, 1997,
the Company had an accrued liability of $2.0 million for environmental
liabilities. Based on facts currently known to management, management believes
it is only remotely likely that the liability of the Company in connection with
such pending matters, either individually or in the aggregate, will be material
to the Company's financial condition or results of operations or material to
investors, or that the Company's liability will materially exceed the amounts
already accrued.
While the Company believes that it is generally in compliance with all
applicable environmental laws and regulations or has a plan to bring operations
into compliance, it is possible that the Company will be named as a potentially
responsible party in the future with respect to additional Superfund or other
sites. Furthermore, because the Company conducts its business in foreign
countries as well as in the U.S., it is not possible to predict the effect that
future domestic or foreign regulation could have on the Company's business,
operating results or cash flow.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 16, 1997, the Company held its Annual Meeting of Stockholders.
The stockholders elected Craig L. McKibben and Peter Slusser as the Class III
directors. Mr. McKibben received 39,965,282 votes in favor of his election, with
361,783 votes withheld and no broker nonvotes. Mr. Slusser received 39,966,130
votes in favor of his election, with 360,935 votes withheld and no broker
nonvotes. The stockholders also ratified the appointment of Coopers & Lybrand
L.L.P. as the Company's independent public accountants for fiscal 1997, with
40,038,336 votes in favor, 183,017 votes opposed, 105,712 votes abstaining, and
no broker nonvotes.
15
<PAGE>
Item 5. Other Information
Not applicable.
Item 6(a). Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index which appears elsewhere herein and is incorporated herein by
reference.
Item 6(b). Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during its
fiscal quarter ended June 30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMPEX CORPORATION
Date: July 22, 1997 /s/ EDWARD J. BRAMSON
---------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: July 22, 1997 /s/ CRAIG L. McKIBBEN
---------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
17
<PAGE>
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1997
EXHIBIT INDEX
Exhibit
Number Description
10.1 Amendment Agreement dated June 30, 1997
between Ampex Finance Corporation and Congress
Financial Corporation (Western), amending the
Loan and Security Agreement previously filed
as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1994, as amended.
11.1 Statement re Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
18
EXHIBIT 10.1
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT, dated as of June 30, 1997 (the "Amendment"),
between Ampex Finance Corporation (the "Borrower") and Congress Financial
Corporation (Western) (the "Lender").
WHEREAS, the Borrower and Congress Financial Corporation are parties
to that certain Loan and Security Agreement dated as of May 5, 1994, as amended
(the "Loan Agreement"); and
WHEREAS, Congress Financial Corporation (Western) has succeeded to the
interests of Congress Financial Corporation by assignment and is for all
purposes the Lender under the Loan Agreement, as the same may be amended from
time to time; and
WHEREAS, the Borrower and the Lender have agreed to further amend the
Loan Agreement on the terms and subject to the conditions herein.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and subject to the fulfillment of
the conditions set forth below, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO LOAN AGREEMENT
1.1 The first sentence of Section 12.1(a) shall be amended in its
entirety as follow: "This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date six (6) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof.
1.2 Section 12.1(c) shall be amended by deleting all dates and amounts
thereunder and inserting (x) under the "Amount" Column "(i) 3% of Maximum
Credit" and under the "Period" column "June 30, 1997 - May 5, 1999" and (y)
under the "Amount" column (ii) 1% of the "Maximum Credit" and under the "Period"
Column "May 6, 1999 and thereafter."
614236.1
1
<PAGE>
SECTION 2. MISCELLANEOUS
2.1 The Borrower reaffirms and restates the representations and
warranties set forth in Section 8 of the Loan Agreement and confirms that each
such representation and warranty shall be true and correct on the date hereof
with the same force and effect as if made on such date. In addition, the
Borrower represents and warrants (which representations and warranties shall
survive the execution and delivery hereof) that (a) no Defaults or Events of
Default exist as of the date hereof, (b) the Borrower has taken or caused to be
taken all necessary corporate action to authorize the execution and delivery of
this Amendment, and (c) no consent of any other person (including, without
limitation, shareholders or creditors of the Borrower), and no action of, or
filing with any governmental or public body or authority is required to
authorize, or is otherwise required in connection with the execution and
performance of this Amendment other than such that have been obtained.
2.2 Except as herein expressly amended, each of the Loan Agreement and
Loan Documents is hereby ratified and confirmed in all respects and shall remain
in full force and effect in accordance with its terms.
2.3 All references to the Loan Agreement in various Loan Documents
shall mean the Loan Agreement as amended hereby and as the same may in the
future be amended, restated, supplemented or modified from time to time.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings attributed to them in the Loan Agreement.
2.4 This Amendment may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement.
614236.1
2
<PAGE>
2.5 THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
AMPEX FINANCE CORPORATION
By: /s/ Ramon Venema
------------------------------
Name: Ramon Venema
Title: President
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By: /s/ Drew Stawin
------------------------------
Name: Drew Stawin
Title: Vice President
614236.1
3
Exhibit 11.1
Ampex Corporation
Computation of Per Share Earnings
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Weighted average common stock 45,550,703 44,909,250 45,520,127 41,434,976
Plus: Common stock equivalent warrants - 85,800 - 368,330
Plus: Common stock equivalent stock options 941,792 1,306,825 1,060,807 1,206,308
--------------- ------------------ --------------- --------------
Adjusted weighted average common stock 46,492,495 46,301,875 46,580,934 43,009,614
--------------- ------------------ --------------- --------------
Net income 2,336,000 3,972,000 7,280,000 7,445,000
--------------- ------------------ --------------- --------------
Primary income per share $0.05 $0.09 $0.16 $0.17
=============== ================== =============== ==============
Weighted average common stock 45,550,703 44,909,250 45,520,127 41,434,976
Plus: Common stock equivalent warrants - 85,800 - 368,746
Plus: Common stock equivalent stock options 941,792 1,306,825 1,060,807 1,286,983
Plus: Weighted average shares on conversion of notes - 216 - 3,008,946
--------------- ------------------ --------------- --------------
Adjusted weighted average common stock 46,492,495 46,302,091 46,580,934 46,099,651
--------------- ------------------ --------------- --------------
Net income 2,336,000 3,972,000 7,280,000 7,445,000
Add: Interest on notes - - - 491,618
--------------- ------------------ --------------- --------------
Adjusted net income 2,336,000 3,972,000 7,280,000 7,936,618
--------------- ------------------ --------------- --------------
Fully diluted income per share $0.05 $0.09 $0.16 $0.17
=============== ================== =============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,917
<SECURITIES> 20,304
<RECEIVABLES> 26,574
<ALLOWANCES> (1,879)
<INVENTORY> 17,737
<CURRENT-ASSETS> 72,446
<PP&E> 54,854
<DEPRECIATION> 45,169
<TOTAL-ASSETS> 83,816
<CURRENT-LIABILITIES> 30,730
<BONDS> 0
69,970
0
<COMMON> 456
<OTHER-SE> (79,209)
<TOTAL-LIABILITY-AND-EQUITY> 83,816
<SALES> 21,299
<TOTAL-REVENUES> 21,299
<CGS> 10,681
<TOTAL-COSTS> 20,988 <F1>
<OTHER-EXPENSES> (1,565) <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (712) <F3>
<INCOME-PRETAX> 2,588
<INCOME-TAX> 252
<INCOME-CONTINUING> 2,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,336
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<FN>
<F1> INCLUDES S&A AND RD&E OF 6,417 AND 3,890 RESPECTIVELY
<F2> INCLUDES ROYALTY INCOME OF 1,562
<F3> NETS INTEREST INCOME OF 735 AND INTEREST EXPENSE OF 23
</FN>
</TABLE>
