UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 25, 1998
AMPEX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 0-20292 13-3667696
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(State or Other (Commission) (I.R.S. Employer
Jurisdiction of File Number) Identification
Incorporation) No.)
500 Broadway, Redwood City, CA 94063-3199
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (650) 367-2011
-----------------------------
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(Former name or former address, if changed since last report.)
752594.1
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
This Form 8-K/A amends the Registrant's Report on Form 8-K/A filed
September 25, 1998 and is filed in order to make certain minor typographical and
stylistic changes in the Report as originally filed.
Item 7. Financial Statements and Exhibits.
(a) and (b). Financial Statements of Business Acquired; Pro Forma
Financial Information. The financial statements and related pro forma financial
information required to be filed pursuant to Item 7(a) and (b) are filed
herewith.
(c). Exhibits.
The Exhibits to this Current Report on Form 8-K/A are listed in the
Exhibit Index which appears elsewhere herein and is incorporated herein by
reference.
752594.1
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be on its behalf by the
undersigned hereunto duly authorized.
AMPEX CORPORATION
Date: October 14, 1998 By: /s/ Craig L. McKibben
--------------------------------
Craig L. McKibben
Vice President, Chief Financial
Officer and Treasurer
752594.1
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<PAGE>
AMPEX CORPORATION
FORM 8-K/A
EXHIBIT INDEX
Exhibit Number Description
27.1 Financial Data Schedule
27.2 Financial Data Schedule
752594.1
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<PAGE>
AMPEX CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 1998, the Company completed the
acquisition of MicroNet, (the "MicroNet Acquisition"). The MicroNet Acquisition
has been accounted for as a purchase, effective as of June 30, 1998, and the
Company has been managing the affairs of MicroNet since that date. In connection
with the MicroNet Acquisition, the Company has issued 720,000 shares of its
Common Stock to MicroNet's shareholders, and has acquired MicroNet subject to
MicroNet preferred stock valued at approximately $1.0 million, notes payable of
$5.4 million and other liabilities estimated at approximately $4.1 million.
Assets acquired consisted of $3.8 million of current assets, $0.4 million of
plant and equipment and $2.9 million of in-process research and development and
other intangibles of $4.0 million. The Company has charged operations in the
second quarter of 1998 with the acquired in-process research and development and
intends to amortize intangibles on a straight-line basis over 8 years. The
shares of Common Stock and MicroNet preferred stock are being held in escrow
pending completion of the closing date balance sheet and the resolution of other
contingencies.
Pro forma combined results of operations of the Company and MicroNet
as if the acquisition had been completed at the beginning of the periods are
presented on the Pro Forma Consolidated Statements of Operations.
This method of consolidating historical financial statements for the
presentation of the pro forma consolidated statements is for presentation only.
Actual statements of operations of the companies will be consolidated from the
closing date of the acquisition with no retroactive restatements. The unaudited
pro forma consolidated financial statements are provided for illustrative
purposes only and are not necessarily indicative of the consolidated financial
results of operations that would have been reported had the MicroNet Acquisition
occurred on the dates indicated, nor do they represent a forecast of the
consolidated results of operations for any future period. The unaudited pro
forma consolidated statements should be read in conjunction with the historical
financial statements and accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
Ampex MicroNet Pro Forma Pro Forma
Corporation Technology, Inc. Adjustments * Consolidated
------------- ---------------- ------------- --------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
-------------- ---------------- ------------ --------------
1997 1997 1997 1997
-------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 80,311 $ 32,226 $ - $ 112,537
Cost of sales 41,140 30,067 - 71,207
-------------- --------------- ------------ -------------
Gross profit 39,171 2,159 - 41,330
Selling and administrative 24,452 14,424 - 38,876
Research, development and 15,464 155 - 15,619
engineering
Royalty income (12,550) - - (12,550)
Amortization of intangible - - 497 (b) 497
assets
Restructuring charges (credits) (1,659) - - (1,659)
-------------- ---------- ------------ --------------
Operating income (loss) 13,464 (12,420) (497) 547
Interest expense 86 930 - 1,016
Interest income (2,991) - - (2,991)
Other (income) expense, net 59 - - 59
Income (loss) from continuing operations -------------- ---------- ------------ -------------
before income taxes 16,310 (13,350) (497) 2,463
Provision for income taxes 1,507 - - 1,507
-------------- ---------- ------------ -------------
Net Income (loss) $ 14,803 $ (13,350) $ (497) $ 956
============== ========== ============ =============
Basic income per share:
Income per share $ 0.32 $ 0.02
============ =============
Weighted average number of common 45,616,344 45,616,344
shares outstanding ============ ============
Diluted income per share:
Income per share $ 0.32 $ 0.02
============ =============
Weighted average number of common 46,461,321 (c) 47,181,321
shares outstanding ============ =============
</TABLE>
*See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.
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<PAGE>
AMPEX CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Ampex MicroNet Pro Forma Pro Forma
Corporation Technology, Inc. Adjustments Consolidated
Six months ended Six months ended Six months ended Six months ended
1998 1998 1998 1998
<S> <C> <C> <C> <C>
Net sales $ 32,020 $ 11,161 $ - $ 43,181
Cost of sales 17,599 7,938 - 25,537
---------- --------- ---------- --------------
Gross profit 14,421 3,223 - 17,644
Selling and administrative 10,108 3,963 - 14,071
Research, development and engineering 6,161 70 - 6,231
Royalty income (3,504) - - (3,504)
Amortization of intangible assets - - 249 (b) 249
Restructuring charges 2,800 - - 2,800
Acquisition of in-process research and development 2,940 - (2,940)(a) -
----------- --------- -------------- ---------------
Operating income (loss) (4,084) (810) 2,691 (2,203)
Interest expense 1,575 453 - 2,028
Amortization of debt financing costs 97 - - 97
Interest income (1,736) - - (1,736)
Other (income) expense, net 10 - - 10
----------- --------- -------------- ---------------
Income (loss) from continuing operations before
income taxes (4,030) (1,263) 2,691 (2,602)
Provision for (benefit of) income taxes (9,834) - - (9,834)
----------- --------- -------------- ---------------
Income (loss) from continuing operations 5,804 (1,263) 2,691 7,232
Gain due to forgiveness of debt - 7,343 (7,343)(d) -
----------- --------- -------------- ---------------
Net income $ 5,804 $ 6,080 $ (4,652) $ 7,232
========== ========= ============== ===============
Basic income per share:
Income per share $ 0.13 $ 0.16
========== ================
Weighted average number of common shares
outstanding 46,081,901 46,081,901
========== ================
Diluted income per share:
Income per share
$ 0.12 $ 0.15
========== ================
Weighted average number of common shares
outstanding 46,847,880 (c) 47,547,880
========== =================
</TABLE>
*See accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
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<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Pro Forma Adjustments
The following pro forma adjustments have been made to the Unaudited Pro
Forma Consolidated Statements of Operations:
(a) Pro forma operating results for the year ended December 31, 1997
exclude the one-time charge to operations for acquired in-process
research and development which was charged against historical
operating results for the six months ended June 30, 1998.
(b) Pro forma operating results for all periods include an adjustment
to record goodwill amortization.
(c) The computation of pro forma diluted income per share reflects the
issuance of 720,000 shares of common stock at the beginning of the
periods presented as part of the consideration.
(d) Prior to the closing, MicroNet settled outstanding balances with
unsecured creditors, the notes payable and certain unpaid
management fees and value added tax. The total forgiveness of debt
totaled $7,343. The gain on forgiveness of debt reflected on the
MicroNet Consolidated Statements of Operations has been eliminated
for the Unaudited Pro Forma Consolidated Statements of Operations
for the period ended June 30, 1998.
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<PAGE>
MicroNet Technology, Inc.
Contents
Consolidated Balance Sheet at June 30, 1998
Report of Independent Auditors.................................10
Consolidated Balance Sheet.....................................11
Notes to Consolidated Balance Sheet............................12
Consolidated Financial Statement for the Periods from December 20, 1996 to
December 31, 1997, from January 1, 1996 to December 19, 1996 and for the year
ended December 31, 1995
Report of Independent Auditors.................................23
Consolidated Balance Sheets....................................24
Consolidated Statements of Operations..........................25
Consolidated Statements of Net Capital Deficiency..............26
Consolidated Statements of Cash Flows..........................27
Notes to Consolidated Financial Statements.....................28
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<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
MicroNet Technology, Inc.
We have audited the accompanying consolidated balance sheet of MicroNet
Technology, Inc. as of June 30, 1998. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the consolidated financial position of MicroNet Technology,
Inc. as of June 30, 1998 in conformity with generally accepted accounting
principles.
The accompanying balance sheet has been prepared assuming that MicroNet
Technology, Inc. will continue as a going concern. As more fully described in
Note 1 - Organization and Basis of Presentation, the Company has incurred
significant operating losses in recent periods and at June 30, 1998 has a
substantial working capital deficit. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 1. The accompanying
balance sheet does not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Orange County, CA
August 24, 1998 /s/ Ernst & Young LLP
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<PAGE>
MicroNet Technology, Inc.
Consolidated Balance Sheet
(In thousands, except share and per share amounts)
June 30, 1998
<TABLE>
<CAPTION>
Unaudited Pro
Actual Forma
---------------------------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $390
$ 1,855 $ 1,855
Inventories, net 539 539
---------------------------------
Total current assets 2,394 2,394
Property and equipment, net 400 400
=================================
Total assets $ 2,794 $ 2,794
=================================
Liabilities and net capital deficiency
Current liabilities:
Bank overdraft $ 120 $ 120
Notes payable to bank 5,424 5,424
Accounts payable 5,347 2,344
Accrued warranty 400 400
Other accrued liabilities 1,812 803
Notes payable to shareholders 3,481 -
Loan payable to Ampex 221 221
Current portion of capital lease obligation 24 24
---------------------------------
Total current liabilities 16,829 9,336
Capital lease obligation, less current portion 81 81
Commitments and contingencies (Note 5)
Net capital deficiency:
Preferred stock, $.001 par value:
Authorized shares - 30,000
Issued and outstanding shares:
Series A redeemable - 3,500 (liquidation preference $4,155) 3,100 3,100
Series B redeemable exchangeable - 4,500 (liquidation
preference $5,342)
4,500 4,500
Common stock, $.001 par value:
Authorized shares - 120,000
Issued and outstanding shares:
Class A - 19,125 - -
Class B - 30,150 - -
Accumulated deficit (21,716) (14,223)
---------------------------------
Net capital deficiency (14,116) (6,623)
---------------------------------
Total liabilities and net capital deficiency $ 2,794 $ 2,794
=================================
See accompanying notes.
</TABLE>
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet
(dollars in thousands except per share amounts)
June 30, 1998
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
MicroNet Technology, Inc. (the Company) is a value-added reseller of internal
and external data storage systems for microcomputers. The Company sells its data
storage systems on a worldwide basis primarily through distributors and dealers.
The accompanying balance sheet includes the accounts of the Company and its
wholly owned subsidiaries on a consolidated basis. All significant intercompany
accounts and transactions have been eliminated in consolidation.
On June 24, 1998, the shareholders of the Company agreed to exchange their
outstanding shares of common stock of the Company for shares of Class A common
stock of Ampex Corporation (Ampex), a Delaware corporation traded on the
American Stock Exchange, with an aggregate fair value on the closing date of
approximately $1,800, subject to adjustment, as defined. The number of common
shares of Ampex to be received by the Company's shareholders is to be determined
by dividing $1,800, subject to adjustment, by the Ampex closing stock price, as
defined. However, in no event is the number of Ampex common shares to be issued
to exceed 720,000. In addition, the Company's shareholders also agreed to
exchange all outstanding shares of preferred stock of the Company for shares of
8% non-cumulative redeemable junior preferred stock of the Company. The Company
became a wholly owned subsidiary of Ampex upon the close of the transaction on
July 15, 1998.
Prior to the closing, the Company settled outstanding balances with unsecured
creditors aggregating approximately $5,347 as of June 30, 1998 for approximately
$2,344. Also, notes payable aggregating $3,481 were forgiven by shareholders as
well as related accrued interest aggregating $569 and certain unpaid management
fees of $263. In addition, $27 of accrued freight charges and valued added tax
was forgiven by one of the Company's international freight carriers. The total
forgiveness of debt, including settlements with these creditors and forgiveness
of notes, fees and accrued interest by the Company's shareholders totaled
$7,343. In addition, the Company's subsidiaries, including estimated liabilities
of approximately $150 related to the wind down of their operations, were
transferred to the Company's existing shareholders. The unaudited pro forma
column in the accompanying balance sheet reflects these transactions as if they
had occurred on June 30, 1998.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Organization and Basis of Presentation (continued)
The accompanying balance sheet has been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has experienced recurring losses from
operations which have resulted in an accumulated deficit and a net capital
deficiency of approximately $21,716 and $14,116, respectively, at June 30, 1998.
In addition, the Company's current liabilities exceed its current assets by
approximately $14,435. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis, to obtain additional
financing as may be required and, ultimately, to attain profitable operations.
The accompanying balance sheet does not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of a balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the balance sheet and accompanying notes. The
industry in which the Company operates is characterized by rapid technological
change and short product life cycles. As a result, estimates are required to
provide for product returns, product obsolescence and warranty returns as well
as other matters. Prior to the six months ended June 30, 1998, amounts incurred
under these programs have not varied significantly from estimated amounts.
However, during the current six-month period, the Company established inventory
reserves aggregating $2,742 and future results may differ from current
estimates.
Fair Values of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, notes payable to bank and a capital lease. The carrying amount
of the Company's financial instruments generally approximate their fair values
at June 30, 1998.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
The Company makes periodic evaluations of the credit worthiness of its
customers' financial condition and generally does not require collateral.
Receivables are generally due within 30 days. Credit losses have consistently
been within management's expectations. At June 30, 1998, approximately 49% of
net accounts receivable was due from two distributors.
Inventories
Inventories are stated at the lower of cost or market with cost determined using
the first-in, first out method. Inventories consist of the following:
Components and subassemblies $460
Finished goods 79
===================
$539
===================
Property and Equipment
Property and equipment, at cost, consist of the following:
Computer equipment $3,042
Equipment 454
Furniture and fixtures 588
Leasehold improvements 907
-----------
4,991
Less accumulated depreciation, amortization and impairment (4,591)
-----------
$ 400
===========
Depreciation and amortization of equipment and furniture are provided on the
straight-line method over estimated useful lives of two to seven years.
Leasehold improvements are amortized on the straight-line method over the terms
of the underlying leases or, if shorter, estimated useful lives of the
improvements.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flow estimated to be generated by those assets are less than
the carrying amount of those assets. During the six months ended June 30, 1998,
the company recorded an impairment charge of approximately $544 to reduce its
property and equipment to its estimated fair value. Management believes that no
additional impairment of long-lived assets existed as of June 30, 1998.
2. Notes Payable to Bank
At June 30, 1998, the Company had a revolving line of credit agreement (the
"Agreement") which provided for borrowings of up to $15,000 and a term note
which is governed by the same terms as the Agreement. Under the Agreement, the
line is limited to 85% of eligible accounts receivable plus 50% of eligible raw
materials and finished goods, plus 100% of the undrawn face amount (not to
exceed $500) of an irrevocable letter of credit issued for the benefit of the
lender. Outstanding borrowings under the line and term note at June 30, 1998 of
$5,106 and $318, respectively, bear interest at the prime rate (8.5% at June 30,
1998) plus 1%. The Agreement also requires a facility fee of $75 to be paid
annually. The Agreement is collateralized by substantially all of the assets of
the Company and is subject to certain financial and nonfinancial covenants with
which the Company was not in compliance at June 30, 1998. In connection with the
close of the transaction with Ampex, amounts due under the Agreement and term
loan were repaid in full on July 17, 1998 and the related agreements were
terminated.
3. Income Taxes
At June 30, 1998, the Company has available for federal and state income tax
purposes, net operating loss carryforwards of approximately $14,632 and $8,322,
respectively, which begin to expire in 2011 and 2001, respectively. The ultimate
realization of the loss carryforwards is dependent on the future profitability
of the Company.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
3. Income Taxes (continued)
The Tax Reform Act of 1986 contains provisions which could substantially limit
the availability of net operating loss carryforwards. This limitation generally
applies if there is a greater than 50% change in ownership during a three-year
period. The Company may have experienced such an ownership change during 1996,
1997 or 1998, which could result in a limitation on its ability to utilize net
operating loss carryforwards. The limitation is based upon the value of the
Company on the date that the effective change in ownership occurred.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Income tax benefit may be
realized on future utilization of deferred tax assets. Significant components of
the Company's deferred tax assets and liabilities consist of the following:
Deferred tax assets (liabilities):
Net operating loss carryforwards $5,460
Inventory reserve 1,081
Warranty reserve 159
Sales return reserve 327
Bad debt reserve 155
Accrued management fees 150
Other accruals and reserves 386
Depreciation 134
---------------------
7,852
Valuation allowance (7,852)
=====================
Net deferred taxes $ -
=====================
4. Defined Contribution Plan
Effective July 1, 1993, the Company and affiliated companies implemented a
contributory 401(k) retirement savings plan covering all of the Company's
employees twenty-one years of age and older who have completed at least three
months of service.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
5. Commitments and Contingencies
Lease Commitments
The Company leases its corporate facility under a noncancelable operating lease
which expires in April 1999. Future minimum lease payments (exclusive of
property taxes and insurance) for operating leases as of June 30, 1998, are as
follows:
Years ending December 31:
1998 $505
1999 279
==================
Total minimum lease payments $784
==================
During fiscal 1997, the Company entered into a capital lease for certain
computer equipment which expires in the year 2000. The asset is being
depreciated over its estimated useful life. Future minimum lease payments under
the capital lease are as follows:
Years ending December 31:
1998 $ 24
1999 48
2000 44
------------------
116
Less: imputed interest (11)
------------------
105
Less: current portion (24)
==================
$ 81
==================
Other Commitments
The Company has arranged for product financing for dealers of the Company's
products with five financial institutions. Under these arrangements, the
customers can obtain financing from these institutions to purchase the Company's
products. The Company then sells the trade receivables from the customers to
these financial institutions. In conjunction with these financing arrangements,
the Company has signed inventory repurchase agreements with these financial
institutions. The repurchase agreements provide that in the event of default by
a customer, the Company will repurchase certain inventory from these financial
institutions for a period of time as provided in these
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
5. Commitments and Contingencies (continued)
Other Commitments (continued)
agreements. Sales under these agreements were approximately $550 for the
six-month period ended June 30, 1998. The Company has not been called upon to
make significant repurchases under these agreements and, in the opinion of
management, claims under these agreements would not have a material adverse
effect on the Company's financial position.
Pursuant to the Company's revolving line of credit agreement, the lending bank
extended additional credit facilities to the Company. In order to secure the
additional credit facility, the lending bank required a shareholder of the
Company to pledge $2,500 in 90-day certificates of deposit in the bank's name.
The bank's lien on such certificates of deposit was released upon termination of
the Agreement in July 1998 (Note 2).
The Company and a shareholder have entered into commitments with certain key
employees which provide, among other things, that such individuals would receive
cash payments aggregating $200 at the closing of the acquisition of the Company
by Ampex. Such amounts were paid and expensed in July 1998. In addition, certain
of the Company's employees may be entitled to cash payments from the Company in
the approximate aggregate amount of $120 if they are terminated in connection
with such acquisition.
Contingencies
At June 30, 1998, the Company was not in compliance with the stated payment
terms with respect to substantially all of its accounts payable. The Company
considers itself to be out of compliance with payment terms whenever its
payments to particular creditors are beyond such creditors' principal stated
payment terms. A significant number of the Company's creditors have from time to
time notified the Company that it is in default under the terms of their
obligations and have taken or threatened to take collection action against the
Company. The Company has entered into settlements with certain of its trade
creditors to resolve such noncompliance.
There are certain legal actions pending against the Company which have arisen in
the normal course of operations. In the opinion of management, the ultimate
resolutions of such actions are not expected to have a material adverse effect
on the financial position of the Company.
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
6. Net Capital Deficiency
Preferred Stock
The holders of the preferred stock do not have voting rights except as may be
required by applicable law. With respect to dividend rights and rights on
liquidation, winding up and dissolution, the Series A and B preferred stock rank
pari passu with each other and rank senior to the common stock. The liquidation
price of each share of preferred stock is $1,000. Holders of the preferred stock
are entitled to receive dividends in cash at a rate of 12% per annum of the
liquidation price payable quarterly in arrears on February 28, May 31, August
31, and November 30 of each year commencing February 28, 1997. To the extent not
declared and paid, dividends are considered in arrears and cumulate until paid.
At June 30, 1998, cumulative preferred dividends in arrears aggregate
approximately $1,497.
Common Stock
The Class A common stockholders are entitled to one vote for each share and the
Class B common stockholders are entitled to 1.4 votes for each share. Except as
otherwise provided by law, the holders of the outstanding shares of Class A and
Class B common stock vote together as a single class on all matters submitted to
a vote of the stockholders of the Company. Each share of Class B common stock is
convertible into one share of Class A common stock.
At June 30, 1998, the Company had reserved 54,066 shares of its Class A common
stock for future issuance as follows:
Conversion of Class B common stock 30,150
Exercise of stock options 1,713
Exercise of warrants 22,203
-------------
54,066
=============
Stock Option Plans
The 1996 Plan provides for the grant of stock options (incentive stock options
or non-qualified stock options), stock appreciation rights or limited stock
appreciation rights restricted stock, performance shares, deferred stock, or any
combination of the foregoing up to an aggregate of 9,414 shares of the Company's
common stock. The exercise price of the options will not be less than the market
price of the common stock at the time of
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<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Balance Sheet (continued)
(dollars in thousands except per share amounts)
6. Net Capital Deficiency (continued)
Stock Option Plans (continued)
the grant and shall not in any event, be less than the par value. Stock options
shall be exercisable at such time or times as shall be determined by the Board
of Directors on the date of grant, but no stock option shall be exercisable more
than ten years after the grant date.
At June 30, 1998, 1,713 options were outstanding at an option exercise price of
$170.00 per share. In connection with the acquisition of the Company by Ampex
(Note 1), all options outstanding and available for grant were canceled.
Warrants
In connection with a December 20, 1996 recapitalization and a July 1997 issuance
of a note payable to a shareholder for $1,000, the Company issued warrants to
certain shareholders of the Company to purchase up to 22,203 shares of Class A
common stock of the Company at an exercise price of $.001 per share. These
warrants were canceled prior to the closing of the acquisition of the Company by
Ampex.
7. Impact of Year 2000 (Unaudited)
Certain of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruption of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities. Subsequent to the close of the acquisition of the Company by Ampex,
the Company's data processing will be converted to Ampex's computer systems.
-20-
<PAGE>
MicroNet Technology, Inc.
Consolidated Statements of Operations
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Period from Period from
January 1, 1998 December 21, 1996
to June 30, to June 30,
1998 1997
------------- ------------
<S> <C> <C>
Net sales 11,161 17,943
Costs and expenses:
Cost of goods sold 7,938 17,072
Selling, general and administrative 3,963 6,610
Research and development 70 90
Interest expense, net 453 412
---------- ----------
Total costs and expenses 12,424 24,184
---------- ----------
Net loss from continuing operations (1,263) (6,241)
Gain on forgiveness of debt 7,343 -
---------- ----------
Net income (loss) 6,080 (6,241)
========== ==========
</TABLE>
-21-
<PAGE>
MicroNet Technology, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Period from Period from
January 1, 1998 December 21, 1996
to June 30, to June 30,
1998 1997
<S> <C> <C>
Operating activities
Net income (loss) 6,080 (6,241)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 318 364
Gain on forgiveness of debt (7,343) -
Loss on disposition of equipment - 166
Write-off of long-lived assets 544 -
Loss on write-down of inventory - 2,068
Foreign currency translation loss - 40
Changes in operating assets and liabilities:
Accounts receivable 895 (1,047)
Inventories 998 (6,997)
Accounts payable (976) 4,739
Accrued liabilities (791) 1,724
Other (4) 27
------ --------
Net cash used in operating activities (279) (5,157)
------ --------
Financing activities
Loans from shareholders - 2,509
Net proceeds from issuance of common and preferred stock - 3,500
Borrowings on bank term loan 58 -
Repayment of bank term loan - (576)
------ ------
Net cash used in financing activities 58 5,433
------ ------
Net increase (decrease) in cash (221) 276
Cash at beginning of period 101 -
------ ------
Cash (overdraft) at end of period (120) 276
====== ======
</TABLE>
-22-
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
MicroNet Technology, Inc.
We have audited the accompanying consolidated balance sheets of MicroNet
Technology, Inc. as of December 31, 1997 and December 19, 1996 and the related
consolidated statements of operations, net capital deficiency and cash flows for
the periods from December 20, 1996 to December 31, 1997, from January 1, 1996 to
December 19, 1996 and for the year ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MicroNet
Technology, Inc. as of December 31, 1997 and December 19, 1996, and the
consolidated results of its operations and its cash flows for the periods from
December 20, 1996 to December 31, 1997, from January 1, 1996 to December 19,
1996 and for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that MicroNet
Technology, Inc. will continue as a going concern. As more fully described in
Note 1 -Organization and Basis of Presentation, the Company has incurred
significant operating losses in recent years and at December 31, 1997 has a
substantial working capital deficit. These conditions raise substantial doubt
about the Company's ability to continue as going concern. Management's plans in
regard to these matters are also discussed in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Orange County, CA /s/ Ernst & Young LLP
July 14, 1998
-23-
<PAGE>
MicroNet Technology, Inc.
Consolidated Balance Sheets
(dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 19,
1997 1996
------------------------------------
<S> <C> <C>
Current assets:
Cash $ 101 $ -
Accounts receivable, net of allowance for doubtful accounts
of $919 in 1997 and $698 in 1996 2,750 4,135
Inventories, net 1,537 8,700
Other current assets 11 87
------------------------------------
Total current assets 4,399 12,922
Property and equipment, net 1,262 1,917
Deposits and other assets 5 254
------------------------------------
Total assets $ 5,666 $15,093
====================================
Liabilities and net capital deficiency
Current liabilities:
Notes payable to bank $ 5,366 $ 4,303
Accounts payable 6,323 10,564
Accrued liabilities 3,074 2,208
Notes payable to shareholders 3,481 -
Current portion of capital lease obligation 48 -
------------------------------------
Total current liabilities 18,292 17,075
Notes payable to shareholders - 4,950
Capital lease obligation, less current portion 77 -
Commitments and contingencies (Note 8)
Net capital deficiency:
Preferred stock, $.001 par value (no par value in 1996)
Authorized shares - 30,000 in 1997 and 1,000,000 in 1996
Issued and outstanding shares:
Series A redeemable - 3,500 in 1997 (liquidation
preference $3,920) 3,100 -
Series B redeemable exchangeable - 4,500 in 1997
(liquidation preference $5,040) 4,500 -
Common stock, $.001 par value (no par value in 1996):
Authorized shares - 120,000 in 1997 and 12,500,000 in 1996
Issued and outstanding shares:
Class A - 19,125 in 1997 - -
Class B - 30,150 in 1997 - -
Undesignated - 10,000,000 in 1996 - 100
Accumulated deficit (20,303) (6,953)
Foreign currency translation adjustment - (79)
------------------------------------
Net capital deficiency (12,703) (6,932)
------------------------------------
Total liabilities and net capital deficiency $ 5,666 $15,093
====================================
</TABLE>
See accompanying notes.
-24-
<PAGE>
MicroNet Technology, Inc.
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
December 20, 1996 January 1, 1996
to December 31, to December 19, Year ended
1997 1996 December 31, 1995
-------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 32,226 $60,248 $74,733
Costs and expenses:
Cost of goods sold 30,067 50,818 63,455
Selling, general and administrative 14,424 14,242 12,787
Research and development 155 1,166 750
Interest expense, net 930 810 752
Non-recurring operating expense - - 1,167
-------------------------------------------------------
Total costs and expenses 45,576 67,036 78,911
-------------------------------------------------------
Net loss $(13,350) $ (6,788) $ (4,178)
=======================================================
</TABLE>
See accompanying notes.
-25-
<PAGE>
MicroNet Technology, Inc.
Consolidated Statements of Net Capital Deficiency
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Preferred stock Common stock Foreign
--------------------------------------------------------- currency
Number of Number of Accumulated translation
shares Amounts shares Amounts deficit adjustment
---------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - 10,000,000 $ 15 $ 4,163 $(3)
Translation adjustment - - - - - (23)
Dividends - - - - (150) -
Net loss - - - - (4,178) -
------------------------------------------------------------------------- ---------------
Balance at December 31, 1995 - - 10,000,000 15 (165) (26)
Translation adjustment - - - - - (53)
Capital contribution to
Micronet Technology
International, Inc. - - - 85 - -
Net loss - - - - (6,788) -
------------------------------------------------------------------------- ---------------
Balance at December 19, 1996 - - 10,000,000 100 (6,953) (79)
Recapitalization on December 20,
1996, net of related costs of
approximately $500 8,000 7,600 (9,950,725) (100) - -
Translation adjustment - - - - - 79
Net loss - - - - (13,350) -
========================================================================= ===============
Balance at December 31, 1997 8,000 $7,600 49,275 $ - $(20,303) $ -
========================================================================= ===============
</TABLE>
Net capital
deficiency
------------------
$ 4,175
(23)
(150)
(4,178)
- -----------------
(176)
(53)
85
(6,788)
- -----------------
(6,932)
7,500
79
(13,350)
=================
$ (12,703)
=================
See accompanying notes.
-26-
<PAGE>
MicroNet Technology, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
December 20, 1996 January 1, 1996 Year ended
to December 31, to December 19, December 31, 1995
1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net loss $(13,350) $(6,788) $(4,178)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 728 993 1,114
Loss on disposition of equipment 331 - 26
Loss on write-down of inventory 4,136 - -
Foreign currency translation loss (gain) 79 (53) (23)
Non-recurring operating expense - - 1,167
Changes in operating assets and liabilities:
Accounts receivable 1,385 1,272 1,979
Accounts receivable from an affiliate - 192 (89)
Inventories 3,027 3,869 (1,831)
Other current assets 76 29 29
Deposits and other assets 249 (148) (41)
Accounts payable (4,241) (1,096) 1,818
Accrued liabilities 866 790 289
---------------------------------------------------------
Net cash (used in) provided by operating activities (6,714) (940) 260
Investing activities
Acquisition of property and equipment (279) (507) (772)
Financing activities
Loans from shareholders 3,031 4,855 -
Net proceeds from issuance of common and preferred stock 3,000 - -
Capital contribution - 85 -
Borrowings on bank term loan 542 - -
Repayment of bank term loan (195) (1,780) (420)
Increase (decrease) in line of credit borrowing, net 716 (1,733) 579
Cash dividends paid - - (150)
---------------------------------------------------------
Net cash provided by financing activities 7,094 1,427 9
---------------------------------------------------------
Net increase (decrease) in cash 101 (20) (503)
Cash at beginning of period - 20 523
---------------------------------------------------------
Cash at end of period $ 101 $ - $ 20
=========================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 575 $ 632 $ 679
=========================================================
Supplemental disclosure of non-cash financing activities
Issuance of preferred stock in satisfaction of notes payable
to stockholders $ 4,500 $ - $ -
=========================================================
Acquisition of equipment under capital lease obligation $ 125 $ - $ -
=========================================================
</TABLE>
See accompanying notes.
-27-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
December 31, 1997
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
MicroNet Technology, Inc. (the Company) is a value-added reseller of internal
and external data storage systems for microcomputers. The Company sells its data
storage systems on a worldwide basis primarily through distributors and dealers.
On December 20, 1996, the Company was merged into a Delaware corporation of the
same name. As part of that transaction, the Company issued 18,500 shares of its
Class A common stock in exchange for the issued and outstanding shares of common
stock of the predecessor company and issued 4,500 shares of its Series B
redeemable exchangeable preferred stock to the shareholders of the predecessor
company upon the conversion of outstanding notes payable aggregating $4,500.
Concurrently, the Company sold 30,150 shares of its Class B common stock and
3,500 shares of its Series A redeemable preferred stock to an outside investor
for $3,500. The Company also borrowed $2,000 under a subordinated note agreement
with the investor and entered into a $15 million revolving line of credit with a
bank. In connection with the recapitalization, the Company issued warrants to
the shareholders to purchase up to an aggregate 11,127 shares of its common
stock and issued 625 shares of its common stock to an unrelated third party as
compensation for brokerage services provided to the Company in connection with
the recapitalization.
In August 1994, the shareholders of the Company incorporated an affiliated
company, MicroNet Technology, France SARL (MicroNet France) and in May 1996 the
shareholders of the Company incorporated another affiliated company MicroNet
Technology International, Inc. In connection with the December 20, 1996
recapitalization transaction, these entities became wholly owned subsidiaries of
the Company. Prior to December 31, 1997, the Company decided to wind-down the
operations of these subsidiaries and at December 31, 1997 the remaining
estimated cost to complete the wind down of these operations approximates $420
and has been included in accrued liabilities in the accompanying consolidated
balance sheet.
These financial statements include the accounts of the Company and its wholly
owned subsidiaries on a consolidated basis. Prior to December 20, 1996, the
operations of MicroNet France and MicroNet Technology International, Inc. were
combined in these financial statements due to common control and purpose. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
-28-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Organization and Basis of Presentation (continued)
Fiscal years 1997 and 1996 represent the periods from December 20, 1996 through
December 31, 1997 and January 1, 1996 through December 19, 1996, respectively.
For simplicity, the Company has described such periods as fiscal years 1997 and
1996, respectively, in the accompanying notes to consolidated financial
statements.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has experienced
recurring losses from operations which have resulted in an accumulated deficit
and a net capital deficiency of approximately $20,303 and $12,703, respectively,
at December 31, 1997. In addition, the Company's current liabilities exceed its
current assets by approximately $13,893 million at December 31, 1997. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to continue as a going concern is dependent
upon its ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing as may be required and, ultimately,
to attain profitable operations. The consolidated financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
Sale of the Company to Ampex Corporation
On June 24, 1998, the shareholders of the Company agreed to exchange their
outstanding shares of common stock of the Company for shares of Class A common
stock of Ampex Corporation (Ampex), a Delaware corporation traded on the
American Stock Exchange, with an aggregate fair value on the closing date of
approximately $1,800, subject to adjustment, as defined. The number of common
shares of Ampex to be received by the Company's shareholders is to be determined
by dividing $1,800, subject to adjustment, by the Ampex closing stock price, as
defined. However, in no event is the number of Ampex common shares to be issued
to exceed 720,000. In addition, the Company's shareholders also agreed to
exchange all outstanding shares of preferred stock of the Company for shares of
redeemable junior preferred stock of the Company. The Company will become a
wholly owned subsidiary of Ampex upon the close of the transaction which is
expected to occur on or before July 31, 1998.
-29-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Sale of the Company to Ampex Corporation (continued)
The acquisition of the Company by Ampex excludes the Company's subsidiaries
which are to be transferred to the Company's existing shareholders prior to the
closing date. Prior to the closing, the Company expects to settle outstanding
balances with unsecured creditors aggregating approximately $5,347 as of June
30, 1998 for approximately $2,344. Also, notes payable aggregating $3,481 are to
be forgiven by shareholders as well as related accrued interest aggregating $569
and unpaid management fees of $263. In addition, $27 of accrued freight charges
and valued added tax are to be forgiven by one of the Company's international
freight carriers. The total forgiveness of debt, including settlements with
those creditors and forgiveness of notes, fees and accrued interest by certain
of the Company's shareholders is expected to total approximately $7,343.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The industry in which the Company operates is characterized by rapid
technological change and short product life cycles. As a result, estimates are
required to provide for product returns, product obsolescence and warranty
returns as well as other matters. Prior to fiscal year 1997, amounts incurred
under these programs have not varied significantly from estimated amounts.
However, during fiscal year 1997, the Company recognized a loss on the
write-down of inventory of $4,136 and future results may differ from current
estimates.
Revenue Recognition and Sales Return Reserves
The Company recognizes revenue from product sales upon shipment. Under specified
conditions, the Company allows distributors and dealers to return products to
the Company for credit against additional purchases. In addition, if the Company
reduces its selling prices on existing products, under specified conditions it
may credit certain
-30-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition and Sales Return Reserves (continued)
customers for the amount of the price reduction for products remaining in that
customer's inventory at the time of the price reduction. The amount of the
potential product returns and price adjustments is estimated and provided for
when the sale is recognized. A reserve for estimated sales returns has been
included as a reduction of sales and accounts receivable. The reserves for sales
returns and price protection totaled $2,073 and $3,069 at December 31, 1997 and
December 19, 1996, respectively.
Fair Values of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, notes payable to bank, notes payable to shareholders and a
capital lease. The carrying amount of the Company's financial instruments
generally approximate their fair values at December 31, 1997.
Advertising Expenses
Advertising costs of $546, $1,415 and $1,950 for fiscal years 1997, 1996 and
1995, respectively, were expensed as incurred.
Concentrations of Credit Risk
The Company makes periodic evaluations of the credit worthiness of its
customers' financial condition and generally does not require collateral.
Receivables are generally due within 30 days. Credit losses have consistently
been within management's expectations.
The Company had net sales to one distributor representing 17%, 22% and 24% of
total net sales during fiscal years 1997, 1996 and 1995, respectively. At
December 31, 1997, approximately 40% of net accounts receivable was due from two
distributors and at December 19, 1996 approximately 12% net accounts receivable
was due from one distributor.
-31-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market with cost determined using
the first-in, first out method. Inventories consist of the following:
December 31, December 19,
1997 1996
-------------------------------
Components and subassemblies $1,306 $6,400
Finished goods 231 2,300
-------------------------------
$1,537 $8,700
===============================
During 1997 and 1998, management decided to eliminate certain product lines and
deemphasize certain other product lines. Accordingly, subsequent to December 31,
1997, the Company obtained an independent appraisal of certain inventory items.
Application of this methodology to the inventory on hand at December 31, 1997
resulted in a write-down of inventory of $4,136 in order to properly reflect the
inventory at its estimated net realizable value.
Income Taxes
On December 20, 1996, the Company revoked its election to be taxed under the
provisions of Subchapter S of the Internal Revenue Code for federal and state
income tax reporting purposes, and accordingly, taxes have been provided under
the provisions of Subchapter C of the Internal Revenue Code for fiscal year
1997. The Company accounts for income taxes using the liability method whereby
deferred taxes are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates.
Depreciation and Amortization
Depreciation and amortization of equipment and furniture are provided on the
straight-line method over estimated useful lives of two to seven years.
Leasehold improvements are amortized on the straight-line method over the terms
of the underlying leases or, if shorter, estimated useful lives of the
improvements.
-32-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
1. Summary of Significant Accounting Policies (continued)
Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flow estimated to be generated by those assets are less than
the carrying amount of those assets. Management believes that no impairment of
long-lived assets existed as of December 31, 1997.
Reclassifications
Certain reclassifications have been made to the fiscal 1995 and 1996 financial
statements to conform with the fiscal 1997 presentation.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
which establishes standards for the reporting and display of comprehensive
income and its components in financial statements. Comprehensive income
generally represents all changes in shareholders' equity except those resulting
from investments by and distributions to shareholders. Statement No. 130 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. Adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
statements.
2. Transactions with Affiliates
In connection with the December 20, 1996 recapitalization transaction (Note 1),
the Company entered into a management services agreement with a shareholder
providing for an annual management fee of $250 payable quarterly through
December 31, 1998. During the period from December 20, 1996 through December 31,
1997, the management fee was charged to general and administrative expense in
the accompanying statement of operations and remains in accrued liabilities in
the accompanying balance sheet at December 31, 1997. In addition to the
management fees, the management services agreement requires the Company to pay
certain fees in the event of a liquidity event or a change in control, as
defined.
-33-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
2. Transactions with Affiliates (continued)
On May 13, 1998, the Company and Ampex entered into a Consignment Agreement
which provides for the Company's acquisition from Ampex of up to $200 of certain
inventory on consignment.
The Company is affiliated with other entities through common ownership. During
fiscal years 1996 and 1995, the Company purchased components from and sold
finished goods to these affiliated entities.
Transactions with these affiliates are summarized as follows:
1997 1996 1995
------------------------------------
Net sales to affiliates $ - $ 20 $663
====================================
Purchases from affiliates $ - $192 $413
====================================
3. Property and Equipment
Property and equipment, at cost, consist of the following:
December 31, December 19,
1997 1996
-----------------------------------
Computer equipment $3,055 $3,138
Equipment 909 731
Furniture and fixtures 588 610
Leasehold improvements 461 461
-----------------------------------
5,013 4,940
Less accumulated depreciation (3,751) (3,023)
and amortization --------------------------------
$1,262 $1,917
================================
4. Notes Payable to Bank
The Company has a revolving line of credit agreement (the "Agreement") which
provides for borrowings of up to $15,000 and a term note which is governed by
the same terms as the Agreement. Under the Agreement, the line is limited to 85%
of eligible accounts receivable plus 50% of eligible raw materials and finished
goods, plus 100% of the
-34-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
4. Notes Payable to Bank (continued)
undrawn face amount (not to exceed $500) of an irrevocable letter of credit
issued for the benefit of the lender. The Agreement expires on December 19, 1999
and automatically renews for successive terms of two years unless terminated as
provided for in the Agreement. Outstanding borrowings under the line and term
note at December 31, 1997 of $5,019 and $347, respectively, bear interest at the
prime rate (8.5% at December 31, 1997) plus 1%. The Agreement also requires a
facility fee of $75 to be paid annually. The term note requires monthly
principal payments of $7 through December 2001. The Agreement is collateralized
by substantially all of the assets of the Company and is subject to certain
financial and nonfinancial covenants with which the Company was not in
compliance at December 31, 1997. Accordingly, the borrowings have been
classified as a current liability in the accompanying consolidated balance
sheet.
At December 19, 1996, the Company had a line of credit agreement with a bank
which was secured by substantially all of the Company's assets and accrued
interest at the banks prime rate (8.25% at December 19, 1996) plus 4.0%. That
line of credit was repaid in full on December 20, 1996 upon the merger and
recapitalization of the Company (Note 1).
5. Notes Payable to Shareholders
Notes payable to the shareholders consist of the following:
<TABLE>
<CAPTION>
December 31, December 19,
1997 1996
--------------------------------------
<S> <C> <C>
Subordinated note payable to shareholder, payable in
December 2001, interest at 12% $ 2,000 $ -
Subordinated note payable to shareholder, payable in July
2002, interest at 12% 1,000 -
Unsecured notes payable to shareholders, payable on
demand, interest at prime (8.5% at December 31, 1997)
plus 3%
481 4,950
--------------------------------------
$ 3,481 $ 4,950
======================================
</TABLE>
The Company incurred total interest costs on notes payable to shareholders of
$357, $204 and $9, of which $0 was paid during fiscal years 1997, 1996 and 1995,
respectively. As accrued interest on notes payable to shareholders was not paid
at December 31, 1997,
-35-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
5. Notes Payable to Shareholders (continued)
such notes are not in compliance with their loan covenants and, accordingly, are
classified as current liabilities in the accompanying consolidated balance
sheet. In connection with the sale of the Company to Ampex (Note 1), notes
payable aggregating $3,481 are expected to be forgiven by shareholders.
6. Income Taxes
During the year ended December 31, 1996, the Company's S Corporation election
was terminated for federal and state income tax purposes. As a result, the
Company remeasured its deferred tax assets and liabilities for temporary
differences using the federal and state corporate rates applicable to C
Corporations. The effect of remeasuring the deferred tax assets and liabilities
did not have a material effect on the consolidated financial statements.
At December 1997, the Company has available for federal and state income tax
purposes, net operating loss carryforwards of approximately $6,487 and $4,250,
respectively, which begin to expire in 2011 and 2001, respectively. The ultimate
realization of the loss carryforwards is dependent on the future profitability
of the Company.
The Tax Reform Act of 1986 contains provisions which could substantially limit
the availability of net operating loss carryforwards. This limitation generally
applies if there is a greater than 50% change in ownership during a three-year
period. The Company may have experienced such an ownership change during 1996 or
1997, which could result in a limitation on its ability to utilize net operating
loss carryforwards. The limitation is based upon the value of the Company on the
date that the effective change in ownership occurred.
The primary difference between the Company's effective income tax rate and the
statutory federal rate for the year ended December 31, 1997 relates primarily to
losses incurred for which no tax benefit was recognized.
-36-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
6. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consist of the following:
December 31, December 19,
1997 1996
--------------------------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $2,453 $ 118
Inventory reserve 2,593 734
Warranty reserve 357 197
Sales return reserve 555 164
Bad debt reserve 1,420 278
Accrued management fees 100 -
Other accruals and reserves 194 204
Depreciation (83) -
--------------------------------
7,589 1,695
Valuation allowance (7,589) (1,695)
--------------------------------
Net deferred taxes $ - $ -
================================
The increase in the Company's valuation allowance of $5,894 is primarily due to
the increase of the Company's deferred tax assets. Income tax benefit may be
realized on future utilization of deferred tax assets.
7. Defined Contribution Plan
Effective July 1, 1993, the Company and affiliated companies implemented a
contributory 401(k) retirement savings plan covering all of the Company's
employees twenty-one years of age and older who have completed at least three
months of service. The Company made no contributions to the plan during fiscal
years 1997, 1996 and 1995.
-37-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
8. Commitments and Contingencies
Lease Commitments
The Company leases its corporate facility under a noncancelable operating lease
which expires in April 1999. Future minimum lease payments (exclusive of
property taxes and insurance) for operating leases as of December 31, 1997, are
as follows:
Year ending December 31:
1998 $ 843
1999 279
------------------
Total minimum lease payments $1,122
==================
Total rent expense for fiscal years 1997, 1996 and 1995 was $919, $858 and $754,
respectively.
During fiscal year 1997, the Company entered into a capital lease for certain
computer equipment which expires in the year 2000. The asset is depreciated over
its estimated useful life. Depreciation of the asset is included in depreciation
expense for fiscal year 1997. Future minimum lease payments under the capital
lease or as follows:
Years ending December 31:
1998 $ 48
1999 48
2000 44
------------------
140
Less: imputed interest (15)
------------------
125
Less: current portion (48)
------------------
$ 77
==================
-38-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
8. Commitments and Contingencies (continued)
Other Commitments
The Company has arranged for product financing for dealers of the Company's
products with five financial institutions. Under these arrangements, the
customers can obtain financing from these institutions to purchase the Company's
products. The Company then sells the trade receivables from the customers to
these financial institutions. In conjunction with these financing arrangements,
the Company has signed inventory repurchase agreements with these financial
institutions. The repurchase agreements provide that in the event of default by
a customer, the Company will repurchase certain inventory from these financial
institutions for a period of time as provided in these agreements. Sales under
these agreements were approximately $1,546, $3,945 and $6,145 for fiscal years
1997, 1996 and 1995, respectively. The Company has not been called upon to make
significant repurchases under these agreements and, in the opinion of
management, claims under these agreements would not have a material adverse
effect on the Company's financial position or results of operations.
Pursuant to the Company's revolving line of credit agreement, the lending bank
extended additional credit facilities to the Company. In order to secure the
additional credit facility, the lending bank required a shareholder of the
Company to pledge $2,500 in 90-day certificates of deposit in the bank's name.
The bank's lien on such certificates of deposit will continue until the
additional credit facility is repaid by the Company.
The Company and a shareholder have entered into commitments with certain key
employees which provide, among other things, that such individuals would receive
cash payments aggregating $200 if they are employed by the Company at the
closing of the acquisition of the Company by Ampex. The shareholder intends to
make these payments at or prior to the closing. In addition, certain of the
Company's employees may be entitled to cash payments from the Company in the
approximate aggregate amount of $120 if they are terminated in connection with
such acquisition.
-39-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
8. Commitments and Contingencies (continued)
Contingencies
The Company is currently not in compliance with the stated payment terms with
respect to substantially all of its accounts payable. The Company considers
itself to be out of compliance with payment terms whenever its payments to
particular creditors are beyond such creditors' principal stated payment terms.
A significant number of the Company's creditors have from time to time notified
the Company that it is in default under the terms of their obligations and have
taken or threatened to take collection action against the Company. At or prior
to the closing of the acquisition of the Company by Ampex (Note 1), the Company
intends to enter into settlements with certain of its account payable creditors.
There are certain legal actions pending against the Company which have arisen in
the normal course of operations. In the opinion of management, the ultimate
resolutions of such actions are not expected to have a material adverse effect
on the consolidated financial position, result of operations, or cash flows of
the Company.
9. Net Capital Deficiency
Preferred Stock
The holders of the preferred stock do not have voting rights except as may be
required by applicable law. With respect to dividend rights and rights on
liquidation, winding up and dissolution, the Series A and B preferred stock rank
pari passu with each other and rank senior to the common stock. The liquidation
price of each share of preferred stock is $1,000. Holders of the preferred stock
are entitled to receive dividends in cash at a rate of 12% per annum of the
liquidation price payable quarterly in arrears on February 28, May 31, August
31, and November 30 of each year commencing February 28, 1997. To the extent not
declared and paid, dividends are considered in arrears and accumulate, until
paid. At December 31, 1997, cumulative preferred dividends in arrears aggregate
approximately $960.
In the event of liquidation, the holders of preferred stock are entitled to
receive the liquidation price plus accumulated and unpaid dividends. After
payment in full of the liquidation price and any unpaid dividends, the holders
of the preferred stock are not entitled to any further right or claim to any
remaining assets of the Company.
-40-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
9. Net Capital Deficiency (continued)
Preferred Stock (continued)
Shares of the preferred stock may be redeemed by the Company at its option on
any date set by the Board of Directors at a redemption price per share of $1,000
plus accumulated and unpaid dividends. Holders of the Series B redeemable
exchangeable preferred stock (Series B preferred stock) may require the Company
to exchange outstanding shares of Series B preferred stock for $1,000 per share,
plus accumulated and unpaid dividends; provided, however, that the Company may
not effect an exchange unless, after giving effect to the proposed exchange, at
least 3,500 shares of Series B preferred stock remain outstanding.
Common Stock
The Class A common stockholders are entitled to one vote for each share and the
Class B common stockholders are entitled to 1.4 votes for each share. Except as
otherwise provided by law, the holders of the outstanding shares of Class A and
Class B common stock vote together as a single class on all matters submitted to
a vote of the stockholders of the Company. Each share of Class B common stock is
convertible into one share of Class A common stock.
At December 31, 1997, the Company had reserved 54,066 shares of its Class A
common stock for future issuance as follows:
Conversion of Class B common stock 30,150
Exercise of stock options 1,713
Exercise of warrants 22,203
-------------------
54,066
===================
Stock Option Plans
On June 1, 1994, the Company adopted the 1994 Incentive Stock Option Plan (the
1994 Plan). The Plan provided for the grant of stock options to purchase up to
an aggregate of 2,500,000 shares of the Company's common stock. Following the
December 20, 1996 merger and recapitalization of the Company, all options issued
under the 1994 Incentive Stock Option Plan were canceled, and the Company
adopted the 1996 Stock Incentive Plan (the 1996 Plan).
-41-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
9. Net Capital Deficiency (continued)
Stock Option Plans (continued)
The 1996 Plan provides for the grant of stock options (incentive stock options
or non-qualified stock options), stock appreciation rights or limited stock
appreciation rights restricted stock, performance shares, deferred stock, or any
combination of the foregoing up to an aggregate of 9,414 shares of the Company's
common stock. The exercise price of the options will not be less than the market
price of the common stock at the time of the grant and shall not in any event,
be less than the par value. Stock options shall be exercisable at such time or
times as shall be determined by the Board of Directors on the date of grant, but
no stock option shall be exercisable more than ten years after the grant date.
Transactions under the plans are as follows:
1997 1996 1995
----------------------------------------------
Options outstanding:
Beginning of period 1,636,500 1,571,500 1,564,000
Granted 1,713 73,000 58,500
Canceled (1,636,500) (8,000) (51,000)
----------------------------------------------
End of year 1,713 1,636,500 1,571,500
==============================================
Option price $170.00 $2.00 $2.00
==============================================
Options exercisable 309 1,003,133 600,528
==============================================
At December 31, 1997, 7,701 shares were available for future grant under the
1996 Plan. Following the acquisition of the Company by Ampex (Note 1), all
options under the 1996 Plan are expected to be canceled.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for the
Plan. Accordingly, no compensation expense was recognized for fiscal years 1997,
1996, and 1995. The impact on the Company's net loss would have been
insignificant had compensation cost for the plans been determined consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
-42-
<PAGE>
MicroNet Technology, Inc.
Notes to Consolidated Financial Statements (continued)
(dollar amounts in thousands, except per share amounts)
9. Net Capital Deficiency (continued)
Warrants
In connection with the December 20, 1996 recapitalization (Note 1) and the July
1997 issuance of a note payable to a shareholder for $1,000, the Company issued
warrants to certain shareholders of the Company to purchase up to 22,203 shares
of Class A common stock of the Company at an exercise price of $.001 per share.
These warrants are to be exercised or canceled at or prior to the closing of the
acquisition of the Company by Ampex (Note 1).
10. Non-Recurring Operating Expense
In 1995, the Company provided $1,167 to write-off the net value of certain
technology acquired in 1994 that management no longer deemed useful.
11. Impact of Year 2000 (Unaudited)
Certain of the Company's computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
causing disruption of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities. Subsequent to the close of the acquisition of the Company by Ampex
(Note 1), the Company's data processing will be converted to Ampex's computer
systems.
-43-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE MICRONET CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,245
<ALLOWANCES> (390)
<INVENTORY> 539
<CURRENT-ASSETS> 2,394
<PP&E> 4,991
<DEPRECIATION> 4,591
<TOTAL-ASSETS> 2,794
<CURRENT-LIABILITIES> 9,336
<BONDS> 0
0
7,600
<COMMON> 0
<OTHER-SE> (14,223)
<TOTAL-LIABILITY-AND-EQUITY> 2,794
<SALES> 11,161
<TOTAL-REVENUES> 11,161
<CGS> 7,938
<TOTAL-COSTS> 11,971 <F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> (1,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 7,343
<CHANGES> 0
<NET-INCOME> 6,080
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES S&A AND RD&E OF 3,963 AND 70 RESPECTIVELY
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE MICRONET CONSOLIDATED FINANCIAL
STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 3,669
<ALLOWANCES> (919)
<INVENTORY> 1,537
<CURRENT-ASSETS> 4,399
<PP&E> 5,013
<DEPRECIATION> 3,751
<TOTAL-ASSETS> 5,666
<CURRENT-LIABILITIES> 18,292
<BONDS> 0
0
7,600
<COMMON> 0
<OTHER-SE> (20,303)
<TOTAL-LIABILITY-AND-EQUITY> 5,666
<SALES> 32,226
<TOTAL-REVENUES> 32,226
<CGS> 30,067
<TOTAL-COSTS> 44,646 <F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 930
<INCOME-PRETAX> (13,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,350)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES S&A AND RD&E OF 14,424 AND 155 RESPECTIVELY
</FN>
</TABLE>
