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, 1998
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)
(650) 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 March 31, 1998, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 46,056,047. There
were no outstanding shares of the Registrant's Class C Common Stock, $0.01
par value.
<PAGE>
AMPEX CORPORATION
FORM 10-Q
Quarter Ended March 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................2
Consolidated Balance Sheets (unaudited) at March 31, 1998 and
December 31, 1997......................................................................3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1998 and 1997.............................................4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1998 and 1997...................................................5
Notes to Unaudited Consolidated Financial Statements...................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................15
Item 2. Changes in Securities.................................................................16
Item 3. Defaults Upon Senior Securities.......................................................17
Item 4. Submission of Matters to a Vote of Security Holders...................................17
Item 5. Other Information.....................................................................17
Item 6(a). Exhibits..............................................................................17
Item 6(b). Reports on Form 8-K...................................................................17
Signatures ......................................................................................18
</TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
See pages 3-9.
<PAGE>
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,519 $ 24,076
Short-term investments 51,555 17,685
Accounts receivable (net of allowances of $1,352 and $1,484) 12,886 13,246
Inventories 18,426 16,380
Other current assets 1,477 1,347
------------- -------------
Total current assets 100,863 72,734
Property, plant and equipment 8,860 8,892
Other assets 1,099 45
------------- -------------
Total assets $ 110,822 $ 81,671
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 736 $ 933
Accounts payable 6,608 5,173
Income taxes payable 332 373
Accrued restructuring costs 4,107 1,706
Other accrued liabilities 16,736 19,942
------------- -------------
Total current liabilities 28,519 28,127
Long-term debt 29,263 2
Other liabilities 65,359 70,708
Deferred income taxes 1,256 1,267
Accrued restructuring costs 1,443 1,612
------------- -------------
Total liabilities 125,840 101,716
------------- -------------
Commitments and contingencies (Note 6)
Redeemable nonconvertible preferred stock, $1,000 liquidation value:
Authorized: 69,970 shares 1998 and 1997
Issued and outstanding - 69,970 shares 1998 and 1997 69,970 69,970
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 930,030 shares 1998 and 1997
Issued and outstanding - none 1998 and 1997 - -
Common stock, $.01 par value:
Class A:
Authorized: 125,000,000 shares 1998 and 1997
Issued and outstanding - 46,056,047 shares 1998; 45,936,707 shares 1997 461 459
Class C:
Authorized: 50,000,000 shares 1998 and 1997
Issued and outstanding - none 1998 and 1997 - -
Other additional capital 384,551 383,513
Note receivable from stockholder (4,994) (4,818)
Accumulated deficit (435,975) (440,068)
Accumulated other comprehensive income (29,031) (29,101)
------------- -------------
Total stockholders' deficit (84,988) (90,015)
------------- -------------
Total liabilities and stockholders' deficit $ 110,822 $ 81,671
============= =============
The accompanying notes are an integral part of these unaudited financial statements.
</TABLE>
3
<PAGE>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1998 1997
<S> <C> <C>
Net sales $ 16,826 $ 21,081
Cost of sales 8,896 10,562
-------------- --------------
Gross profit 7,930 10,519
Selling and administrative 5,007 7,646
Research, development and engineering 3,038 3,748
Royalty income (1,834) (5,782)
Restructuring charges 2,800 -
-------------- --------------
Operating income (loss) (1,081) 4,907
Interest expense 662 31
Amortization of debt financing costs 37 -
Interest income (837) (778)
Other (income) expense, net 6 58
-------------- --------------
Income (loss) before income taxes (949) 5,596
Provision for (benefit of) income taxes (5,042) 652
-------------- --------------
Net income 4,093 4,944
-------------- --------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 70 (56)
-------------- --------------
Comprehensive income $ 4,163 $ 4,888
============== ==============
Basic income per share :
Income per share $ 0.09 $ 0.11
============== ==============
Weighted average number of common shares outstanding 46,004,179 45,489,550
============== ==============
Diluted income per share :
Income per share $ 0.09 $ 0.11
============== ==============
Weighted average number of common shares outstanding 46,452,301 46,669,371
============== ==============
The accompanying notes are an integral part of these unaudited financial statements.
</TABLE>
4
<PAGE>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,093 $ 4,944
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion 509 545
Net increase in notes receivable - (210)
Net (increase) decrease in accounts receivable 320 (641)
Net increase in inventories (2,046) (1,945)
Net decrease in long-term receivable 8 104
Net (increase) decrease in other assets (130) 199
Net increase in accounts payable 1,462 1,206
Net decrease in accrued liabilities and
income taxes payable (3,174) (1,247)
Net decrease in other non-current obligations (5,122) (1,458)
Net increase (decrease) in accrued restructuring costs 2,232 (530)
------------- ------------
Net cash provided by (used in) operating activities (1,848) 967
------------- ------------
Cash flows from investing activities:
Purchases of short-term investments (57,458) (22,650)
Proceeds received on the maturity of short-term investments 17,438 17,241
Proceeds from sale of short-term investments 6,150 -
Additions to property, plant and equipment (439) (91)
Deferred gain on sale of assets (204) (204)
------------- ------------
Net cash used in investing activities (34,513) (5,704)
------------- ------------
Cash flows from financing activities:
Borrowings under working capital facilities 8,305 13,030
Repayments under working capital facilities (8,507) (13,248)
Repayment of notes payable-affiliates (5) -
Issuance of senior notes and warrants 30,000 -
Debt financing costs (1,099) -
Proceeds from issuance of common stock 126 261
------------- ------------
Net cash provided by financing activities 28,820 43
------------- ------------
Effect of exchange rates on cash (16) (209)
------------- ------------
Net decrease in cash and cash equivalents (7,557) (4,903)
Cash and cash equivalents, beginning of period 24,076 13,410
------------- ------------
Cash and cash equivalents, end of period $ 16,519 $ 8,507
============= ============
The accompanying notes are an integral part of these unaudited financial statements.
</TABLE>
5
<PAGE>
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, 1997 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, 1998 are not necessarily indicative of the results to be
expected for the full year.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which specifies the computation, presentation and disclosure
requirements for comprehensive income. The Company implemented SFAS 130 during
the first quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosure about
Segments of an Enterprise and Related Information. SFAS 131 requires
publicly-held companies to report financial and other information about
revenue-producing segments of the entity for which such information is available
and is utilized by the chief operating decision maker. Specific information to
be reported for the individual segments includes profit or loss, certain revenue
and expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS 131 is effective for the Company's fiscal year ending December 31, 1998 and
the impact of its adoption has not been determined.
Note 3 -- Income Per Common Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No.128 ("SFAS 128"), Earnings Per Share. SFAS 128 requires
the presentation of basic and diluted income per common share. Basic income per
common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted income per common share is computed giving effect to all potentially
dilutive common shares that were outstanding during the period. Dilutive common
shares consist of the incremental common shares issuable upon the conversion of
convertible subordinated debt (using the "if converted" method) and exercise of
stock options and warrants for all periods.
6
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 -- Income Per Common Share (cont'd.)
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted income per
common share is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1998 1997
<S> <C> <C>
Numerator - Basic
Net income.............................................................. $ 4,093 $ 4,944
============= ==============
Denominator - Basic
Weighted average common stock outstanding............................... 46,004 45,490
------------- --------------
Basic income per share....................................................... $ 0.09 $ 0.11
============= ==============
Numerator - Diluted
Net income.............................................................. $ 4,093 $ 4,944
============= ==============
Denominator - Diluted
Weighted average common stock outstanding............................... 46,004 45,490
Effect of dilutive securities:
Stock options....................................................... 346 1,179
Warrants............................................................ 102 -
------------- --------------
46,452 46,669
------------- --------------
Diluted income per share..................................................... $ 0.09 $ 0.11
============ =============
</TABLE>
Stock options to purchase 1,101,739 shares of common stock at prices
ranging from $2.94 to $10.50 per share were outstanding at March 31, 1998, but
were not included in the computation of diluted income per share because the
exercise price was greater than the average market value of the common shares.
Stock options to purchase 307,250 shares of common stock at prices
ranging from $7.94 to $10.50 per share were outstanding at March 31, 1997, but
were not included in the computation of diluted income per share because the
exercise price was greater than the average market value of the common shares.
7
<PAGE>
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,
1998 1997
(in thousands)
Interest............................ $ 12 $ 31
Income taxes paid................... 260 773
Note 5 -- Inventories
March 31, December 31,
1998 1997
(in thousands)
Raw materials....................... $ 7,735 $ 6,686
Work in process..................... 5,708 5,424
Finished goods...................... 4,983 4,270
--------------- -------------
Total........................... $ 18,426 $ 16,380
=============== =============
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.
Note 7 -- Preferred Stock
As of December 31, 1997, the Company became obligated to redeem the
69,970 outstanding shares of its 8% Noncumulative Preferred Stock, to the extent
of funds legally available therefor (generally, the excess of the value of
assets over liabilities), at a redemption price of $1,000 per share. As of
December 31, 1997 and March 31, 1998, the Company did not have any funds legally
available to redeem the Noncumulative Preferred Stock, and the Company cannot
predict when and to what extent it will generate any legally available funds to
redeem the Noncumulative Preferred Stock. The Company will remain obligated to
redeem such shares from time to time in future fiscal periods to the extent
funds become legally available for redemption, and will 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.
Redemption of the Noncumulative Preferred Stock for cash in future periods could
have a negative impact on the Company's liquidity. Under certain circumstances,
the Company may redeem the Noncumulative Preferred Stock by issuing common
stock, which could result in substantial dilution of current stockholders'
equity interests in the Company.
8
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 -- Income Taxes
In the first quarter of 1998, the Company reversed $5.2 million
previously reserved in connection with disputed state income taxes for the prior
years, following the favorable settlement of that dispute in March 1998. The
provisions for income taxes in the first quarter of 1997 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 1998 and 1997 because of certain timing differences in the
recognition of expense for tax and financial reporting purposes.
As of December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of $100.0 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 -- Accumulated Other Comprehensive Income
The balances of each classification within accumulated other
comprehensive income are as follows:
<TABLE>
<CAPTION>
Minimum Accumulated
Foreign Pension Other
Currency Liability Comprehensive
Items Adjustment Income
(in thousands)
<S> <C> <C> <C>
December 31, 1997......................... $ 507 $ (29,608) $ (29,101)
Current-period change..................... 70 - 70
------------- ------------- -------------
March 31, 1998............................ $ 577 $ (29,608) $ (29,031)
============= ============= ==============
</TABLE>
Note 10 -- Senior Notes
In January 1998, the Company issued $30.0 million 12% Senior Notes due
March 15, 2003, together with warrants to purchase 1,020,000 Common Shares. The
warrants are exercisable at $2.25 per share at any time on or prior to March 15,
2003. The warrants have been assigned a value of $0.8 million and charged to
other additional capital and will be amortized to long-term debt over the term
of the Notes. The warrants, if exercised, would represent approximately 2% of
the Company's Common Stock on a diluted basis. The indenture under which the
Notes were issued contains customary affirmative and negative restrictive
covenants that limit, among other things, the incurrence of additional senior
debt, the payment of dividends, the sale of assets and other actions by the
Company and certain restricted subsidiaries. Under such indenture the Company
may, in general, issue additional senior debt, without meeting certain fixed
charges coverage tests, up to $15.0 million. The Company has no present plans to
issue any such additional debt, but may do so in the future if investment
opportunities are subsequently identified that require additional capital funds.
Note 11 -- Subsequent Event
In April 1998, the Company signed a letter of intent to acquire
MicroNet Technology, Inc. ("Micronet"), a manufacturer of disk arrays and
network attached storage products for image-based markets. This acquisition is
subject to various conditions, including the completion of due diligence by
Ampex and the execution of a definitive acquisition agreement. If the
transaction is completed, Ampex would issue approximately 700,000 shares of its
Class A Common Stock to MicroNet's shareholders, and would acquire MicroNet
subject to approximately $3.5 million of preferred stock, debt of $6.0 million,
and other liabilities estimated at approximately $3.0 million.
9
<PAGE>
This Form 10-Q contains predictions, projections and other statements
about the future that are intended to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: potential inaccuracy of future sales and expense
forecasts; effects of increased inventories; potential inability of the Company
to execute its acquisition, investment, licensing and other strategies;
potential inability of the Company to integrate acquired businesses, including
the business of MicroNet Technology, Inc., if acquired; industry conditions;
declining sales to the government; declining sales of professional video
products; the development of application software for its 19-millimeter
products; international operating difficulties; effects of the Company's
relocation of its DCRsi(TM) manufacturing facilities to its Colorado Springs
facility; redemption of the Company's outstanding Noncumulative Preferred Stock;
possible future issuances of debt or equity securities; and the Company's
liquidity and anticipated interest expenses. These forward-looking statements
speak only as of the date of this Report. The Company disclaims any obligation
or undertaking to disseminate updates or revisions of any forward-looking
statements contained or incorporated herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. Each forward-looking
statement that the Company believes is material is accompanied by one or more
cautionary 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, in other sections of this Form 10-Q, and/or in the Company's other
documents filed with the Securities and Exchange Commission, whether or not such
documents are incorporated herein by reference. IN ASSESSING FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS FORM 10-Q, READERS ARE URGED TO READ CAREFULLY ALL
SUCH 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 and the Notes thereto 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, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, as filed with the Securities and Exchange Commission
(file no. 0-20292) (the "1997 Form 10-K").
Results of Operations for the Three Months Ended March 31, 1998 and 1997
Net Sales. Net sales declined by 20.2% to $16.8 million in the first
quarter of 1998 from $21.1 million in the first quarter of 1997, primarily due
to a decline in shipments of instrumentation recorders, offset by an increase in
sales of 19-millimeter data storage products. See "Mass Data Storage Products
and Instrumentation Recorders," below. The Company's backlog of firm orders
decreased to $4.8 million at March 31, 1998 from $6.9 million at December 31,
1997. The Company typically operates with low levels of backlog, requiring it to
obtain most of each period's orders in the same period that they must be shipped
to customers. Historically, a small number of large orders, particularly for
10
<PAGE>
instrumentation products, has significantly impacted sales levels. In the first
quarter of 1998, the Company responded to proposals for such products on several
large programs that have not yet been awarded. Any increase in sales of
instrumentation products in future periods will depend to a large extent on
whether such programs actually proceed and, if so, in which periods. As
previously reported, the Company intends to increase net sales by introducing
new products and by acquiring new businesses and making investments in
companies. In April 1998, the Company signed a letter of intent to purchase
MicroNet Technology, Inc. ("MicroNet"), a manufacturer of disk arrays and
network attached storage products for image-based markets, including the video
and commercial pre-press markets. Pending completion of due diligence, the
acquisition is expected to close at the end of the second quarter of 1998.
Because of the risks and uncertainties inherent in making acquisitions and
investments, there can be no assurance that the Company will successfully
complete the MicroNet acquisition or any other acquisitions or investments or
that the Company will realize any financial benefit therefrom.
Mass Data Storage Products and Instrumentation Recorders.
Sales of mass data storage products and instrumentation recorders and related
after-market products totaled $13.6 million for the first quarter of 1998 and
declined from the comparable period in 1997 when sales of such products totaled
$16.9 million, primarily due to a decline in sales of instrumentation products.
A significant portion of the Company's 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 of the Company's DST(R) and
DIS(TM) products increased slightly in the first quarter of 1998, compared to
the first quarter of 1997. Broader acceptance of the Company's DST products in
its target markets will depend significantly on the integration and vendor
support of third party application software, factors which are not within the
Company's control and which, if delayed, may adversely affect DST product sales
in future quarters.
Professional Video Recording and Other Products. As
anticipated, sales of professional video recording products and all other
products (consisting primarily of television after-market products) continued to
decrease, to $3.3 million in the first quarter of 1998 from $4.2 million in the
first quarter of 1997. The Company's DCT(R) 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 sales of its professional
video products and related after-market products 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 decreased to
47.1% in the first quarter of 1998 from 49.9% in the first quarter of 1997,
reflecting lower sales of the Company's instrumentation products, which are
generally more profitable than its data storage and video recording products.
Selling and Administrative Expenses. Selling and administrative
expenses decreased to $5.0 million in the first quarter of 1998 from $7.6
million in the first quarter of 1997, reflecting reduced patent infringement
litigation expenses, as well as continued implementation of cost controls. The
Company incurred $0.1 million of patent infringement litigation expenses in the
first quarter of 1998, compared to $1.9 million of such expenses in the first
quarter of 1997. The Company expects these litigation expenses to continue in
future periods at lower levels than in 1997 periods. See "Legal Proceedings,"
below.
Research, Development and Engineering Expenses. Research, development
and engineering expenses decreased slightly to $3.0 million in the first quarter
of 1998 from $3.7 million in the first
11
<PAGE>
quarter of 1997, reflecting reduced expenses attributable to the Company's
keepered media development program, which was substantially completed in 1997.
The Company is committed to investing in research, development and engineering
programs at levels that management believes can be supported by current sales
levels.
Royalty Income. Royalty income decreased to $1.8 million in the first
quarter of 1998 from $5.8 million in the first quarter of 1997. Approximately
$3.7 million of royalty income in the first quarter of 1997 was from
nonrecurring royalties resulting from a negotiated settlement related to sales
of products by a manufacturer prior to the negotiation of a license from the
Company. The Company did not receive any such nonrecurring royalty payments in
the first quarter of 1998. The Company is currently assessing whether its
patented technology is being used by manufacturers of video games, DVD recorders
and digital television receivers. There can be no assurance that the Company's
technology is being utilized by the manufacturers of these products or, if used,
whether the Company will be able to negotiate license agreements with the
manufacturers.
Royalty income has historically fluctuated widely due to a number of
factors that the Company cannot predict or control, such as the extent of use of
the Company's patented technology by third parties, the materiality of any
nonrecurring royalties received as the result of negotiated settlements for
products sold by manufacturers prior to entering licensing agreements with the
Company, 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. The costs of patent litigation can be material, and the institution
of patent enforcement litigation may also increase the risk of counterclaims
alleging infringement by the Company of patents held by third parties or seeking
to invalidate patents held by the Company. See "Legal Proceedings," below.
Restructuring Charges (Credits). The Company recorded a restructuring
charge of $2.8 million in the first quarter of 1998, and did not record any such
charges or credits in the first quarter of 1997. The $2.8 million charge was
incurred in connection with the Company's relocation of a portion of its DCRsi
manufacturing operations from its Redwood City, California facility to its
Colorado Springs, Colorado facility, and from a concurrent workforce reduction.
The relocation is expected to reduce operating costs by up to $5.0 million
annually. These savings may be offset in whole or in part by increases in
marketing expenses or other factors. The Company expects to implement the
relocation in various phases throughout the remainder of 1998.
Operating Income (Loss). The Company experienced an operating loss of
$1.1 million in the first quarter of 1998, and generated operating income of
$4.9 million in the first quarter of 1997. This decrease resulted from the
declines in net sales and royalty income and the restructuring charge discussed
above, all of which were incurred in the first quarter of 1998, and which were
only partially offset by reduced patent infringement litigation and other
expenses.
Interest Expense. Interest expense increased in the first quarter of
1998 from the first quarter of 1997. This increase is attributable to the
Company's outstanding 12% Senior Notes due 2003 (the "12% Senior Notes"), which
were issued in January 1998. See "Liquidity and Capital Resources -- Financing
Transactions" and Note 10 of Notes to Unaudited Consolidated Financial
Statements.
Interest Income. Interest income increased slightly between the
comparison periods, resulting primarily from higher cash balances (including
proceeds of the 12% Senior Notes) in the first quarter of 1998, offset in part
by the prepayment of notes issued to the Company in connection with the 1996
sale of the Company's Redwood City property.
12
<PAGE>
Other Expense, Net. Other expense, net, in both periods consisted
primarily of foreign currency transaction gains and losses.
Provision for Income Taxes. In the first quarter of 1998, the Company
reversed $5.2 million previously reserved in connection with disputed state
income taxes for prior years, following the favorable settlement of that dispute
in March 1998. 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 provision for income taxes in
the first quarter of 1997 consisted primarily of foreign income taxes and
withholding taxes on royalty income.
Net Income. The Company reported net income of $4.1 million in the
first quarter of 1998 compared to $4.9 million in the first quarter of 1997,
primarily as a result of the factors discussed above under "Operating Income"
and "Provision for Income Taxes."
Liquidity and Capital Resources
Cash Flow. At March 31, 1998, the Company had cash and short-term
investments of $68.1 million and working capital of $72.3 million. At December
31, 1997, the Company had cash and short-term investments of $41.8 million and
working capital of $44.6 million. The increases in the 1998 period reflect the
receipt of approximately $28.9 million of net proceeds from the Company's
January 1998 issuance of its 12% Senior Notes. Major items impacting net income
in the 1998 period which did not generate or use cash included a $5.2 million
favorable settlement of disputed state income taxes for prior years, partially
offset by the recording of a $2.8 million restructuring charge incurred in
connection with the relocation of a portion of the Company's manufacturing
operations and a concurrent workforce reduction. The Company's operating
activities utilized cash of $1.8 million during the first quarter of 1998 and
generated cash of $1.0 million during the first quarter of 1997. The Company has
increased its inventories by $2.0 million over year-end 1997 levels, primarily
in anticipation of disruptions that may result from the phased relocation during
1998 of a portion of its DCRsi manufacturing operations to its Colorado Springs
facility. The Company expects that 1998 inventory levels will remain higher than
in 1997 periods until this relocation has been completed. Any increased
investment in inventories may expose the Company to an increased risk of
inventory write-offs in future periods.
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, through May 2000. At March 31,
1998, the Company had no material borrowings outstanding and had letters of
credit issued against the facility totaling $2.3 million.
Financing Transactions. As of December 31, 1997, the Company became
obligated to redeem the 69,970 outstanding shares of its 8% Noncumulative
Preferred Stock, to the extent of funds legally available therefor (generally,
the excess of the value of assets over liabilities), at a redemption price of
$1,000 per share. As of December 31, 1997 and March 31, 1998, the Company did
not have any funds legally available to redeem the Noncumulative Preferred
Stock, and the Company cannot predict when and to what extent it will generate
any legally available funds to redeem the Noncumulative Preferred Stock. The
Company will remain obligated to redeem such shares from time to time in future
fiscal periods to the extent funds become legally available for redemption, and
will generally be precluded from declaring any cash dividends on, or
repurchasing shares of, its common stock, until the
13
<PAGE>
Noncumulative Preferred Stock has been redeemed in full. Redemption of the
Noncumulative Preferred Stock for cash in future periods could have a negative
impact on the Company's liquidity. See Note 7 of Notes to Unaudited Consolidated
Financial Statements. Under certain circumstances, the Company may redeem the
Noncumulative Preferred Stock by issuing common stock, which could result in
substantial 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. 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 2.5% 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.
In January 1998, the Company issued $30.0 million of its 12% Senior
Notes, together with Warrants to purchase 1.02 million shares of its Class A
Common Stock (the "Class A Stock"). The Warrants are exercisable at $2.25 per
share at any time on or prior to March 15, 2003. The Warrants, if exercised,
would represent approximately 2.2% of the Company's outstanding shares of common
stock. As a result of the issuance of the 12% Senior Notes, the Company's total
indebtedness and future debt service obligations have increased significantly
from prior levels. The net proceeds of the offering have been invested in
short-term government securities, the yield on which investments is
substantially lower than the interest charges on the 12% Senior Notes. The
Company has wide discretion as to how the proceeds may be invested, including
for acquisitions of and investments in new businesses. Any such investments or
acquisitions, if made, might not pay a current return, which could require the
Company to fund debt service obligations on the 12% Senior Notes out of its
liquidity and cash flow from existing operations. The Indenture under which the
12% Senior Notes were issued contains customary affirmative and negative
restrictive covenants that limit, among other things, the incurrence of
additional senior debt, the payment of dividends, the sale of assets and other
actions by the Company and certain restricted subsidiaries. Under such Indenture
the Company may, in general, issue additional senior debt, without meeting
certain fixed charges coverage tests, up to $15.0 million.
As discussed above under "Results of Operations for the Three Months
Ended March 31, 1998 and 1997 -- Net Sales," the Company recently announced that
it has signed a letter of intent to acquire MicroNet, a supplier of disk arrays
for image-based markets. This acquisition is subject to various conditions,
including the completion of due diligence by Ampex and the execution of a
definitive acquisition agreement. If the transaction is completed, Ampex would
issue approximately 700,000 shares of its Class A Stock to MicroNet's
shareholders, and would acquire MicroNet subject to approximately $3.5 million
of preferred stock, debt of $6 million, and other liabilities estimated at
approximately $3 million. The issuance of such shares would dilute current
stockholders' interests by approximately 1.5%.
Readiness for Year 2000
Many existing computer systems, applications and other control devices
(collectively, "Systems") use only two digits to identify a year in the date
field, and will therefore be unable to reflect accurately the change from the
year 1999 to the years 2000 and beyond. Unless corrected, these Systems could
fail or create erroneous results, rendering them unable to process data related
to the year 2000.
14
<PAGE>
The Company relies on its Systems in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, infrastructure, embedded
computer chips, networks and telecommunications equipment and products. The
Company also relies on the external Systems of its suppliers and other
organizations with which it does business.
The Company has established a Year 2000 Compliance Committee that is
investigating the impact of the year 2000 on the Company's business. The
Committee membership includes representatives involved in all major functions of
the Company. Its charter is to identify all Systems that, if not in compliance,
could adversely affect the Company's business. For critical Systems that are
found not to be in compliance, the Committee will develop a plan, including a
budget for associated costs, to ensure compliance before the year 2000. It has
already been determined that many of the Company's Systems, such as its
manufacturing Systems, are in compliance. Other Systems, such as its financial
Systems, currently do not comply but are expected to do so this year pursuant to
vendor maintenance agreements. To date, no material issue has been identified in
any of the other Systems used or relied upon by the Company. However, despite
the Company's efforts thus far to address the Year 2000 impact, the Company
cannot guarantee that all internal or external Systems will be compliant, or
that its business will not be materially adversely affected by any such
non-compliance.
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.
Ampex has previously reported that it has been engaged since late 1995
in patent infringement litigation with Mitsubishi Electric Corporation and
Mitsubishi Electric America Inc. regarding the manufacture of certain video and
data recording products and television receivers. A description of this
litigation is included under the caption "Legal Proceedings" in the 1997 Form
10-K, and there have been no material changes in the status of this litigation
since the filing of that report.
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 1998 or 1999 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 seven
environmental investigation, remediation and/or monitoring activities at sites
located off Company
15
<PAGE>
facilities, including the removal of solvent contamination from subsurface
aquifers at a site in Sunnyvale, California, and surface cleanup and the closure
of a former site in El Segundo, California. Some of these activities involve the
participation of state and local government agencies. The other five sites
(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 these sites if Media
fails to discharge its responsibilities with respect to such 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,
1998, the Company had an accrued liability of $2.0 million for pending
environmental liabilities associated with the Sunnyvale site and certain other
sites currently owned or leased by the Company. The Company has not accrued for
any contingent liabilities it may incur with respect to the former Media sites
discussed above. 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.
Although the Company believes that it is generally in compliance with
all applicable environmental laws and regulations or has plans 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. There can be no assurance that the
Company will not ultimately incur liability in excess of amounts currently
reserved for pending environmental matters, or that additional liabilities with
respect to environmental matters will not be asserted. In addition, changes in
environmental regulations could impose the need for additional capital equipment
or other requirements. Such liabilities or regulations could have a material
adverse effect on the Company in the future.
Item 2. Changes in Securities
As discussed above, on January 28, 1998 the Company issued $30.0
million of its 12% Senior Notes and Warrants to purchase 1.02 million shares of
its Class A Stock for an aggregate purchase price of $30.0 million, less
aggregate discounts, commissions and expenses of $1.1 million. These securities
were sold to a group of "qualified institutional buyers," as that term is
defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). The sale of the 12% Senior Notes and Warrants was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and
Regulation D thereunder as a transaction by an issuer not involving any public
offering. By agreement with holders of its 12% Senior Notes and Warrants, the
Company has registered these securities with the Securities and Exchange
Commission in order to permit public resales of these securities in accordance
with the Securities Act. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Financing Transactions."
On October 29, 1997, November 7, 1997 and February 18, 1998, the
Company issued a total of 400,000 shares of its Class A Stock to Edward J.
Bramson, Chief Executive Officer of the Company. The shares were sold for an
aggregate purchase price of $1,268,752 (based on the fair value per share of
16
<PAGE>
Common Stock on the date the Company's Board of Directors approved each such
issuance), of which 20% was paid in cash and the balance by promissory notes of
Mr. Bramson. The notes bear interest, payable annually at the applicable federal
rate, and are payable in full five years after the date of issuance. All of the
400,000 shares have been pledged to the Company as security for payment of the
promissory notes. Of these 400,000 shares, 200,000 are subject to vesting. If
Mr. Bramson voluntarily resigns or is terminated for cause before the first
anniversary of each date of issuance, the Company may repurchase up to half of
the shares purchased on each date of issuance at the original purchase price. If
Mr. Bramson voluntarily resigns or is terminated for cause after the first, but
before the second, anniversary of each date of issuance, the Company may
repurchase up to one-quarter of such shares at cost. Mr. Bramson represented
that the acquisition of such shares was made for investment and not with a view
to resale or other distribution absent registration under the Securities Act or
the availability of an exemption therefrom. The transactions were exempt from
registration under the Securities Act by reason of Section 4(2) thereof as
transactions not involving any public offering.
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 filed a Current Report on Form 8-K on February 2, 1998 to
report, pursuant to Item 5 of Form 8-K, the issuance and sale of $30.0 million
of its 12% Senior Notes and Warrants to purchase 1.02 million shares of its
Common Stock.
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 11, 1998 /s/ EDWARD J. BRAMSON
---------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: May 11, 1998 /s/ CRAIG L. McKIBBEN
---------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
<PAGE>
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1998
EXHIBIT INDEX
Exhibit
Number Description
4.1 Indenture dated as of January 28, 1998,
between the Company and IBJ Schroder Bank &
Trust Company, as trustee, relating to the
Company's 12% Senior Notes due 2003,
including forms of 12% Senior Notes (filed
as Exhibit 4.1 to the Company's Form 8-K
filed on February 2, 1998 (the "February
1998 8-K") and incorporated herein by
reference.
4.2 Warrant Agreement, dated as of January 28,
1998, between the Company and American Stock
Transfer & Trust Company, as warrant agent,
including form of Warrant Certificate (filed
as Exhibit 4.2 to the February 1998 8-K and
incorporated herein by reference).
4.3 Purchase Agreement, dated January 26, 1998,
between the Company and First Albany
Corporation, relating to the Company's 12%
Senior Notes due 2003 (filed as Exhibit 1.1
to the February 1998 8-K and incorporated
herein by reference).
4.4 Exchange and Registration Rights Agreement,
dated as of January 28, 1998, between the
Company and First Albany Corporation,
relating to the Registrant's 12% Senior
Notes due 2003 (filed as Exhibit 4.3 to the
February 1998 8-K and incorporated herein by
reference).
4.5 Warrants and Warrants Share Registration
Rights Agreement, dated as of January 28,
1998, between the Company and First Albany
Corporation (filed as Exhibit 4.4 to the
February 1998 8-K and incorporated herein by
reference).
27.1* Financial Data Schedule.
*Filed herewith.
19
<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 MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,519
<SECURITIES> 51,555
<RECEIVABLES> 14,238
<ALLOWANCES> (1,352)
<INVENTORY> 18,426
<CURRENT-ASSETS> 100,863
<PP&E> 39,848
<DEPRECIATION> 30,988
<TOTAL-ASSETS> 110,822
<CURRENT-LIABILITIES> 28,519
<BONDS> 29,263
69,970
0
<COMMON> 461
<OTHER-SE> (85,449)
<TOTAL-LIABILITY-AND-EQUITY> 110,822
<SALES> 16,826
<TOTAL-REVENUES> 16,826
<CGS> 8,896
<TOTAL-COSTS> 16,941 <F1>
<OTHER-EXPENSES> 972 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662
<INCOME-PRETAX> (949)
<INCOME-TAX> (5,042)
<INCOME-CONTINUING> 4,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,093
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1> INCLUDES S&A AND RD&E OF 5,007 AND 3,038 RESPECTIVELY
<F2> INCLUDES ROYALTY INCOME OF 1,834 AND RESTRUCTURING CHARGES OF 2,800
</FN>
</TABLE>
