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 March 31, 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 April 15, 1997, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 45,523,597. 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 March 31, 1997
INDEX
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Page
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PART I -- FINANCIAL INFORMATION................................................................................2
Item 1. Financial Statements...................................................................2
Consolidated Balance Sheets (unaudited) at March 31, 1997 and
December 31, 1996......................................................................3
Consolidated Statements of Operation (unaudited) for the
three months ended March 31, 1997 and 1996.............................................4
Consolidated Statements of Cash Flows (unaudited) for the three months
ended March 31, 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.................................................................16
Item 3. Defaults Upon Senior Securities.......................................................16
Item 4. Submission of Matters to a Vote of Security Holders...................................16
Item 5. Other Information.....................................................................16
Item 6(a). Exhibits..............................................................................16
Item 6(b). Reports on Form 8-K...................................................................16
Signatures ......................................................................................17
</TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
See pages 3-8.
2
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AMPEX CORPORATION
CONSOLIDATED BALANCE SHEEETS
(in thousands, except share data)
(unaudited)
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<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
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ASSETS
Current Assets:
Cash and cash equivalents $ 8,507 $ 13,410
Short-term investments 22,650 17,241
Notes receivable 8,136 7,926
Accounts receivable (net of allowances of $1,889 and $2,241) 16,895 16,721
Inventories 16,040 14,095
Other current assets 2,757 2,709
-------------- --------------
Total current assets 74,985 72,102
Property, plant and equipment 9,576 10,059
Other assets 1,980 2,331
-------------- --------------
Total assets $ 86,541 $ 84,492
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 999 $ 1,075
Accounts payable 8,238 7,148
Income taxes payable 450 571
Accrued restructuring costs 1,932 2,002
Other accrued liabilities 21,888 22,029
-------------- --------------
Total current liabilities 33,507 32,825
Long-term debt 628 914
Other liabilities 57,199 60,233
Deferred income taxes 1,314 1,314
Accrued restructuring costs 5,136 5,596
-------------- --------------
Total liabilities 97,784 100,882
-------------- --------------
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 - 45,523,597 shares 1997;
45,434,417 shares 1996 455 454
Class C:
Authorized: 50,000,000 shares 1997 and 1996
Issued and outstanding - none 1997 and 1996 - -
Other additional capital 382,303 382,042
Note receivable from stockholder (3,979) (3,979)
Accumulated deficit (449,927) (454,871)
Cumulative translation adjustments 467 526
Minimum pension liability adjustment (10,532) (10,532)
-------------- --------------
Total stockholders' deficit (81,213) (86,360)
-------------- --------------
Total liabilities and stockholders' deficit $ 86,541 $ 84,492
============== ==============
The accompanying are an integral part of the unaudited consolidated financial statements.
</TABLE>
3
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AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
For the three months ended
--------------------------
March 31, March 31,
1997 1996
-------- ----------
Net sales $ 21,081 $ 24,232
Cost of sales 10,562 13,371
----------- -----------
Gross profit 10,519 10,861
Selling and administrative 7,646 6,061
Research, development and engineering 3,748 3,912
Royalty income (5,782) (2,930)
----------- -----------
Operating income 4,907 3,818
Interest expense 31 671
Amortization of debt financing costs - 18
Interest income (778) (751)
Other (income) expense, net 58 (3)
----------- -----------
Income before income taxes 5,596 3,883
Provision for income taxes 652 410
----------- -----------
Net income $ 4,944 $ 3,473
=========== ===========
Primary income per share :
Income per share $ 0.11 $ 0.09
=========== ===========
Weighted average number of common
shares outstanding $46,669,371 $39,785,140
=========== ===========
Fully diluted income per share :
Income per share $ 0.11 $ 0.09
=========== ===========
Weighted average number of common
shares outstanding $46,669,371 $45,982,319
=========== ===========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended
--------------------------
March 31, March 31,
1997 1996
-------- ---------
Cash flows from operating activities:
Net income $ 4,944 $ 3,473
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion 545 1,182
Net increase in notes receivable (210) (266)
Net (increase) decrease in accounts receivable (641) 243
Net increase in inventories (1,945) (1,668)
Net decrease in long-term receivable 104 -
Net decrease in other assets 199 209
Net increase (decrease) in accounts payable 1,206 (1,852)
Net decrease in accrued liabilities and
income taxes payable (1,247) (738)
Net decrease in other non-current obligations (1,458) (1,179)
Net decrease in accrued restructuring costs (530) (1,104)
--------- ---------
Net cash provided by (used in)
operating activities 967 (1,700)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (22,650) (10,228)
Proceeds received on the maturity of
short-term investments 17,241 12,885
Additions to notes receivable - (15,107)
Additions to property, plant and equipment (91) (160)
Disposals of property, plant and equipment - 26,334
Deferred gain on sale of assets (204) 5,930
--------- ---------
Net cash provided by (used in)
investing activities (5,704) 19,654
--------- ---------
Cash flows from financing activities:
Borrowings under working capital facilities 13,029 13,615
Repayments under working capital facilities (13,248) (14,190)
Repayment of secured note payable - (7,333)
Repayment of notes payable-affiliates - (60)
Proceeds from issuance of common stock 262 275
Proceeds from issuance of warrants - 16
--------- ---------
Net cash provided by (used in)
financing activities 43 (7,677)
--------- ---------
Effect of exchange rates on cash (209) (39)
--------- ---------
Net increase in cash and cash equivalents (4,903) 10,238
Cash and cash equivalents, beginning of period 13,410 6,765
--------- ---------
Cash and cash equivalents, end of period $ 8,507 $ 17,003
========= =========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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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 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. In addition,
certain reclassifications have been made to the prior year financial statements
to conform to the current year's presentation. 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-month
period ended March 31, 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 periods ended March
31, 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-month periods ended March
31, 1997 and 1996 is calculated by dividing net income, as adjusted for interest
on outstanding convertible notes, by the weighted average common shares
outstanding, 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 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:
Three months ended
March 31, March 31,
1997 1996
(in thousands)
Interest.................... $ 31 $ 180
Income taxes paid........... 773 1,337
Note 5 -- Inventories
March 31, December 31,
1997 1996
(in thousands)
Raw materials............... $ 6,738 $ 6,097
Work in process............. 5,788 5,160
Finished goods.............. 3,514 2,838
--------------- -----------
Total................... $ 16,040 $ 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 Noncumulative Redeemable 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 March 31, 1997, the
Company does not have sufficient funds legally available to redeem 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 scheduled 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 maturity, it will continue to evaluate
this possibility in light of market conditions, its liquidity and other factors.
Any such redemption could include 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 first quarters of 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 quarters 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.
Note 9 -- Sale of Real Property
In January 1996, the Company completed the sale of its real property in
Redwood City, California for $36.0. The Company received $18.5 million in cash
on closing and non-interest bearing secured notes with a face amount of $17.5
million. In December 1996, the Company received a scheduled payment against the
notes of $8.7 million. The remaining note of $8.8 million is secured by a
portion of the property sold, but the borrower is a special purpose-entity that
has no material assets other than the property. The Company repaid the
outstanding mortgage loan of $7.4 million associated with the real property on
closing. The Company has entered into certain lease agreements with the
purchaser of the property and will lease back certain facilities on the
property. Future annual lease obligations under these lease agreements with
noncancelable lease terms until April 2001 approximates $1.8 million per year.
The Company funded $3.8 million of leasehold improvements in 1996
which, with interest, will be refunded by the property owner through rent
credits. Rent credits of $0.8 million have been used to March 31, 1997, leaving
a balance including accrued interest of $3.3 million at March 31, 1997.
8
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AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 -- Sale of Real Property (cont'd.)
The sale resulted in a gain of approximately $8.3 million,
substantially all of which was deferred to be recognized in future periods.
Approximately $2.3 million of the gain represents imputed interest on the
secured notes (and will be recognized over the terms of the notes), and $4.2
million will be recognized over a five-year period representing the
noncancelable portion of two of the Company's leases relating to the property.
The remaining $1.8 million will be deferred for four years. If, at that time,
the Company decides to continue the two leases for an additional six- to
nine-year period, the $1.8 million will be recognized over the remaining terms
of the leases; otherwise, the $1.8 million gain will be offset by lease
cancellation fees of the same amount.
Note 10 -- Zero-Coupon Notes and Warrants
In February and March 1996, holders of substantially all of the
Company's three year convertible zero-coupon notes (with an aggregate face
amount at maturity of $27.3 million) converted such notes into approximately 8.5
million shares of Common Stock, thereby eliminating future accrual of interest
on the notes. In addition, during the first quarter of 1996, warrants issued to
holders of the Convertible Notes in April 1994 were exercised to purchase 1.3
million shares of Common Stock at $0.01 per share and other warrants were
exercised to purchase 271,830 shares of Common Stock at $0.01 per share.
9
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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; the development and availability of application software
for its DST products; possible future patent license agreements and royalty
income; the costs involved pursuing its patent enforcement program; uncertainty
about the outcome of the Company's pending patent litigation; the impact of its
Redwood City, California relocation on manufacturing operations and future
facility operating costs; future sales levels, net income and gross profit; the
Company's liquidity; 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).
Overview
Ampex is one of the world's leading innovators in the fields of
magnetic recording, digital image processing and high-performance digital
storage for the visual information age. In recent years, the Company has focused
its efforts on high-performance digital data storage and delivery systems for
the emerging commercial mass data storage market, and has discontinued many
older products and businesses.
Since its founding in 1944, Ampex has developed extensive technical
expertise in the storage, processing and retrieval of digital images. The
Company commits substantial resources to the research, development and
engineering of new products that capitalize on its knowledge, experience and
patent portfolio. As an example of this strategy, since late in 1994 the Company
has been exploring the feasibility of commercializing its patented "keepered
media" technology. This project, which is still in the research and development
stage, has the potential to increase significantly the capacity of hard disk
drives with nominal incremental cost. At present, there can be no assurance that
the keepered media program, or any other efforts by the Company to develop new
products from its intellectual property portfolio, will be a commercial or
technical success. See "Keepered Media Research and Development," below.
Furthermore, the Company has employed a strategy of actively enforcing its
intellectual property portfolio by seeking to license its technology to
manufacturers of consumer electronic products such as VCRs, 8 millimeter
camcorders and television receivers. The Company intends to explore additional
consumer electronics licensing opportunities, if it is determined that the
Company's proprietary technology has been used in such products. See "Royalty
Income" below.
10
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Product Groups
The Company has three principal product groups: computer mass data
storage products and instrumentation recorders (including its DST tape drives
and robotic library systems, its DIS and DCRsi instrumentation products, and
related tape and after-market equipment); professional video recording products
(primarily its DCT video recorders and image processing systems and related tape
products); and other products (consisting principally of television after-market
equipment). No other class of similar products accounted for more than 10% of
net sales during the comparison periods discussed below. 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.
Results of Operations for the Three Months Ended March 31, 1997 and 1996
Net Sales. Net sales declined to $21.1 million in the first quarter of
1997, from $24.2 million in the first quarter of 1996, primarily due to a
significant fall in sales of professional television and television after-market
products. Substantially all of the decline in net sales occurred in the
Company's international markets, whereas domestic sales increased slightly
between the periods. The Company's backlog of firm orders increased to $3.7
million at March 31, 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 and, accordingly, future periods' net sales will be
significantly dependent upon orders received in those periods. At present, the
Company anticipates that future quarterly sales levels in fiscal 1997 may
decline from levels realized during the comparable quarters of 1996, due to
various factors discussed below, and to the effects of the Company's recent
consolidation of its manufacturing facilities. Furthermore, sales levels for the
remaining quarters of 1997 may not attain the level realized in the first
quarter of 1997 due to the expected continuing decline in sales of professional
television and television after-market products and seasonal procurement
practices of the Company's government customers. To offset the effects on net
income of possible lower sales in future periods, the Company intends to focus
on controlling costs, but there can be no assurance that net income will be
maintained as a result.
Mass Data Storage Products and Instrumentation Recorders. Sales of data
storage products and instrumentation products and related after-market products
for the first quarter of 1997 totaled $17.0 million and declined slightly from
the comparable period in 1996 when sales of such products totaled $17.4 million.
In the first quarter of 1996, the Company shipped significant non-recurring
orders of DST products to major oil exploration services firms, which accounted
for a significant portion of total 19 millimeter revenues and approximately 13%
of total mass data storage and instrumentation recorder sales. 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's DST 310 tape drive and DST 410 library are now supported by Oracle
Corporation's 3.0 Video Server, software that manages the storage and
distribution of video content over computer networks, as well as certain other
software products previously announced. However, the integration of these and
other software programs with the Company's DST 810 and 812 robotic library
systems is not within the Company's control, and if delayed may adversely affect
DST product sales in future quarters. In the first quarter of 1997, the Company
announced that it had begun shipping its new line of double density 19
millimeter data storage and instrumentation products. The Company anticipates
sales of older 19 millimeter systems to decline as a result of the new product
announcements, and sales in future quarters may be adversely affected if the
Company experiences any product transition difficulties.
A significant portion of instrumentation product sales reflects
purchases by the federal government. Sales to government agencies 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 years, these factors have not depressed sales to the extent
anticipated by the Company, but there can be no assurance that fluctuations in
government spending will not be more extreme in future periods. The Company's
instrumentation products yield relatively high margins, so a significant decline
in sales of these products would have a material negative impact on gross
margins.
Professional Video Recording Products. Sales of professional video
products decreased to $1.2 million in the first quarter of 1997 from $2.7
million in the first quarter of 1996. As discussed below, sales of all other
11
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products also decreased between the comparison periods, and combined sales of
professional video recording products and all other products decreased to $4.2
million in the first quarter of 1997 from $6.8 million in the first quarter of
1996. See "Other Products," below. The Company has streamlined its video product
line to concentrate on products that utilize the Company's proprietary digital
compression and image processing technology. Sales of the Company's DCT digital
products have declined as the Company has closed certain domestic and
international sales offices as part of its restructuring. The reduced
distribution network for the Company's video products is expected to have a
continuing negative impact on sales of these products. The Company's DCT digital
products have been 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.
Other Products. Sales from all other products (consisting primarily of
television after-market products) decreased to $3.0 million in the first quarter
of 1997 from $4.1 million in the first quarter of 1996. This decline is
primarily the result of the factors discussed above in "Professional Video
Recording Products." See "Other Products," below.
Gross Profit. Gross profit as a percentage of net sales increased to
49.9% in the first quarter of 1997 from 44.8% in the first quarter of 1996. The
improved gross 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 which experienced sales declines.
Sales of the Company's instrumentation recorders could be adversely affected by
pressure on government agencies to reduce spending and seasonal procurement
practices. Any significant decline in sales of these relatively high-margin
products could have a material adverse effect on gross margins.
Selling and Administrative Expenses. Selling and administrative
expenses increased to $7.6 million in the first quarter of 1997 from $6.1
million in the first quarter of 1996. This expense increase is entirely
attributable to litigation expenditures associated with the patent infringement
lawsuit initiated against Mitsubishi Electric Corporation and Mitsubishi
Electric America Inc. ("Mitsubishi") and the related countersuit.
See "Royalty Income" below.
Research, Development and Engineering Expenses. Research, development
and engineering expenses decreased to $3.7 million in the first quarter of 1997
from $3.9 million in the first quarter of 1996. The completion of certain 19
millimeter tape-based development programs during 1996 more than offset an
increase in RD&E spending associated with the Company's keepered media program.
The Company is committed to investing in research, development and engineering
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 $5.8 million in the first quarter of
1997 compared to $2.9 million in the first quarter of 1996. The Company's
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
related to 8 mm video recorders and camcorders.
Approximately $3.7 million and $0.8 million of royalty income in the
first quarters of 1997 and 1996, respectively, was non-recurring royalties
resulting from negotiated settlements related to prior sales of products by
licensees. No income has been recorded in the Company's financial statements
with respect to the recent favorable verdict in its patent infringement
litigation against Mitsubishi because the ultimate outcome of these proceedings
is, at present, uncertain. See "Legal Proceedings," below. 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
12
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been in litigation with Mitsubishi regarding an Ampex patent that the Company
contends was used in connection with the manufacture of certain television
receivers. The subject patent expires in July 1997, but Ampex has several other
patents, not currently the subject of litigation, that the Company believes may
be used by various manufacturers of television receivers. The Company may
attempt to negotiate licensing agreements with certain of these manufacturers,
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 employ various digital
video technologies developed by Ampex. The Company intends to review its patent
portfolio to assess whether its patents are used in future digital television
receivers or in existing television receivers that incorporate advanced digital
features such as picture-in-picture. Once this assessment is complete, and if it
is determined that Ampex's patents are being used, the Company may attempt to
negotiate licensing agreements with manufacturers of television receivers.
However, even if it is determined that Ampex's patents are being used, 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 $4.9
million in the first quarter of 1997, up from $3.8 million in the first quarter
of 1996. The improvement in operating income reflects higher royalty income
which offset a slight decline in total gross margin resulting from lower sales
(despite an improved gross margin percentage) and higher litigation expenses
associated with the Mitsubishi patent infringement lawsuit.
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 from 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. See "Liquidity
and Capital Resources -- Financing Activities," below.
Interest Income. Interest income increased between the comparison
periods primarily as a result of higher cash balances and higher interest rates.
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 first quarters of 1997 and 1996 consist
primarily of foreign income taxes and withholding taxes on royalty income.
Net Income. The Company reported net income of $4.9 million in the
first quarter of 1997 and $3.5 million in the first quarter of 1996. The
improvement in operating income, coupled with lower interest expense, were
primarily the reasons for the improvement in net income.
Liquidity and Capital Resources
Cash Flow. At March 31, 1997, the Company had cash and short-term
investments of $31.2 million and working capital of $41.5 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 generated
cash of $1.0 million during the first quarter of 1997 and utilized cash of $1.7
million in the first quarter 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 $1.9 million in
inventories at March 31, 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
13
<PAGE>
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 through May 1998, based on eligible accounts receivable. At March 31,
1997, the Company had no material borrowings outstanding and had letters of
credit issued against the facility totaling $1.5 million.
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 March 31, 1997, the Company does not have sufficient funds legally available
to redeem 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 maturity, it will continue to evaluate
this possibility in light of market conditions, its liquidity and other factors.
Any such redemption could include 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 3.3% 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.
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 Quarterly Reports on Form 10-Q. In order to understand properly
the following information, it is necessary to refer to these earlier reports.
Until the fourth quarter of 1996, the Company's keepered media research
and development efforts focused primarily on utilizing keepered media in disk
drives that are configured with thin film inductive heads, as inductive heads
are used in the majority of disk drives currently being manufactured. Previously
reported test results of keepered media used in disk drives equipped with
inductive heads have indicated a post-channel capacity gain of approximately
20%. In the first quarter of 1997, Ampex obtained a significant further increase
in capacity with inductive heads by utilizing a new generation of disk drive
channel that is becoming widely used in the disk drive industry.
14
<PAGE>
Despite these further improvements in capacity with inductive heads,
recent discussions with several potential customers have indicated that they are
considering the termination of all new disk drive programs incorporating such
heads, and instead may concentrate substantially all of their development
resources on disk drives incorporating magneto-resistive ("MR") heads, a new
technology. Although MR heads are currently in short supply, industry sources
estimate that by the end of 1998 the majority of disk drives being manufactured
will utilize MR heads, due to their enhanced storage potential over inductive
heads. Maxtor Corporation, a disk drive manufacturer with which Ampex has
previously announced an agreement to utilize keepered media, has advised the
Company that its preference is to switch future programs from inductive to
MR-based designs, provided that a sufficient quantity of MR heads becomes
available.
As a result of this anticipated transition to MR disk drives, Ampex has
been increasing the proportion of its keepered media development efforts that is
focused on MR technology. During the first quarter of 1997, the Company
demonstrated under laboratory conditions a significant increase in the capacity
of MR heads utilizing keepered media. However, testing under laboratory
conditions may not be representative of performance in a production disk drive
and 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.
The development of MR-based drives incorporating keepered media will
require a considerable amount of time and financial resources. Ampex has
discussed its recent test results of keepered media with MR heads with certain
potential customers, and expects to present the data to additional disk drive
and component manufacturers in the near future. In order to attempt to
accelerate the commercial deployment of keepered media in MR disk drives, the
Company has provided samples of keepered media disks that are optimized for MR
heads to two integrated manufacturers of disk drives, and is in discussion with
respect to joint development programs that, if successful, would target the
introduction of an MR-based disk drive program utilizing keepered media during
1998. These discussions have not, to date, resulted in any definite proposal,
and the Company does not expect to generate any revenue from keepered media with
MR heads in the current fiscal year. There can be no assurance that the results
of such joint development efforts, if any, will be successful.
Ampex remains in discussions with several potential customers
concerning inductive head disk drive programs, but it is impossible to forecast
whether such programs will proceed or whether keepered media will be included in
them. All such inductive-based programs are presently scheduled for production
in 1997. Therefore, the Company believes that if it is not advised that keepered
media will be included in any of these programs by the third quarter, it is
unlikely that any keepered media revenue will be generated in 1997.
At present, it is not possible to forecast what effect a change in the
mix of drives using inductive versus MR heads may have on the market for
keepered media. 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.
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. 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.
15
<PAGE>
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. 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. The Company is 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.
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 have asserted various defenses which must
be ruled upon by the trial court before the determination and entry of any final
judgment. A post-trial hearing was held on April 30, 1997, but no decision had
been rendered at the date of this Report. There can be no assurance that the
jury's verdict will be upheld, and any judgment may be subject to appeal by
either party. 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 Ended March 31, 1997 and 1996 -- Royalty Income," above. The April 1997
verdict 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 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
16
<PAGE>
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 March 31,
1997, the Company had an accrued liability of $2.2 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
Not applicable.
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 March 31, 1997.
17
<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: May 1, 1997 /s/ EDWARD J. BRAMSON
---------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: May 1, 1997 /s/ CRAIG L. McKIBBEN
---------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
18
<PAGE>
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1997
EXHIBIT INDEX
Exhibit
Number Description
11.1 Statement re Computation of Per Share Earnings.
27.1 Financial Data Schedule.
19
<PAGE>
Exhibit 11.1
Ampex Corporation
Computation of Per Share Earnings
(Unaudited)
March 31,
1997 1996
Weighted average common stock 45,489,550 37,960,702
Plus: Common stock equivalent warrants - 718,647
Plus: Common stock equivalent stock options 1,179,821 1,105,791
----------- ----------
Adjusted weighted average common stock 46,669,371 39,785,140
----------- ----------
Net income 4,944,000 3,473,000
---------- ----------
Primary income per share $0.11 $0.09
========== ==========
Weighted average common stock 45,489,550 37,960,702
Plus: Common stock equivalent warrants - 719,899
Plus: Common stock equivalent stock options 1,179,821 1,283,825
Plus: Weighted average shares on conversion
of notes - 6,017,893
Adjusted weighted average common stock 46,669,371 45,982,319
---------- -----------
Net income 4,944,000 3,473,000
Plus: Interest on notes - 491,618
Adjusted net income 4,944,000 3,964,618
---------- -----------
Fully diluted income per share $0.11 $0.09
========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 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> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,507
<SECURITIES> 22,650
<RECEIVABLES> 26,920
<ALLOWANCES> (1,889)
<INVENTORY> 16,040
<CURRENT-ASSETS> 74,985
<PP&E> 55,139
<DEPRECIATION> 45,563
<TOTAL-ASSETS> 86,541
<CURRENT-LIABILITIES> 33,507
<BONDS> 0
69,970
0
<COMMON> 455
<OTHER-SE> (81,668)
<TOTAL-LIABILITY-AND-EQUITY> 86,541
<SALES> 21,081
<TOTAL-REVENUES> 21,081
<CGS> 10,562
<TOTAL-COSTS> 21,956<F1>
<OTHER-EXPENSES> (5,724)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (747)<F3>
<INCOME-PRETAX> 5,596
<INCOME-TAX> 652
<INCOME-CONTINUING> 4,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,944
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<FN>
<F1> INCLUDES S&A AND RD&E OF 7,649 AND 3,748 RESPECTIVELY
<F2> INCLUDES ROYALTY INCOME OF 5,782
<F3> NETS INTEREST INCOME OF 778 AND INTEREST EXPENSE OF 31
</FN>
</TABLE>
