<PAGE>
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 September 30, 1999
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 June 30, 1999, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 54,518,954. 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 September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Consolidated Balance Sheets (unaudited) at September 30, 1999 and
December 31, 1998................................................ 3
Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 1999 and 1998.......... 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1999 and 1998......................... 5
Notes to Unaudited Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 30
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 30
Item 2. Changes in Securities and Use of Proceeds........................ 31
Item 3. Defaults Upon Senior Securities.................................. 31
Item 4. Submission of Matters to a Vote of Security Holders.............. 31
Item 5. Other Information................................................ 31
Item 6(a). Exhibits 31
Item 6(b). Reports on Form 8-K.............................................. 31
Signatures ................................................................. 32
</TABLE>
2
<PAGE>
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,253 $ 23,357
Short-term investments 33,440 39,222
Accounts receivable (net of allowances of $1,172 in 1999 and $1,360 in 1998) 9,615 11,789
Inventories 19,385 19,766
Other current assets 5,319 2,510
-------------- -------------
Total current assets 83,012 96,644
Property, plant and equipment, net 12,032 10,546
Intangible assets, net 10,587 5,461
Investment in unconsolidated companies 1,985 -
Other assets 2,536 3,350
-------------- -------------
Total assets $ 110,152 $ 116,001
============== =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 1,294 $ 180
Accounts payable 7,167 6,470
Income taxes payable 73 12
Accrued restructuring costs 5,218 2,135
Other accrued liabilities 18,137 17,889
-------------- -------------
Total current liabilities 31,889 26,686
Long-term debt 45,697 43,380
Other liabilities 46,365 51,470
Deferred income taxes 1,213 1,213
Accrued restructuring costs 200 688
-------------- -------------
Total liabilities 125,364 123,437
-------------- -------------
Commitments and contingencies (Note 6)
Mandatorily redeemable junior preferred stock (Note 7) - -
Mandatorily redeemable nonconvertible preferred stock, $1,000 liquidation value:
Authorized: 69,970 shares in 1999 and in 1998
Issued and outstanding - none in 1999 and in 1998 - -
Mandatorily redeemable preferred stock, $2,000 liquidation value:
Authorized: 21,859 shares in 1999 and in 1998
Issued and outstanding - 20,071 shares in 1999; 21,859 in 1998 40,142 43,718
Convertible preferred stock, $2,000 liquidation value:
Authorized: 10,000 shares in 1999 and in 1998
Issued and outstanding - 1,885 shares in 1999; 10,000 shares in 1998 3,770 20,000
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 898,171 shares in 1999 and in 1998
Issued and outstanding - none in 1999 and in 1998 - -
Common stock, $.01 par value:
Class A:
Authorized: 125,000,000 shares in 1999 and in 1998
Issued and outstanding - 55,347,631 shares in 1999; 49,782,547 shares in 1998 553 498
Class C:
Authorized: 50,000,000 shares in 1999 and in 1998
Issued and outstanding - none in 1999 and in 1998 - -
Other additional capital 413,861 391,849
Notes receivable from stockholder (4,818) (4,818)
Accumulated deficit (440,008) (429,630)
Accumulated other comprehensive income (28,712) (29,053)
-------------- -------------
Total stockholders' deficit (59,124) (71,154)
-------------- -------------
Total liabilities and stockholders' deficit $ 110,152 $ 116,001
============== =============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------- ---------------------------------
September 30, September 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 17,298 $ 16,001 $ 48,838 $ 48,021
Cost of sales 11,592 10,624 31,972 28,223
---------------- -------------- -------------- ---------------
Gross profit 5,706 5,377 16,866 19,798
Selling and administrative 8,567 6,864 21,312 16,972
Internet video programming and site development 3,117 - 3,877 -
Research, development and engineering 2,358 2,899 7,197 9,060
Royalty income (2,982) (2,234) (16,104) (5,738)
Amortization of goodwill 870 303 1,646 303
Restructuring charges - (274) 4,583 2,526
Acquisition of in-process research and development - - - 929
---------------- -------------- -------------- ---------------
Operating loss (6,224) (2,181) (5,645) (4,254)
Interest expense 1,421 1,393 4,198 2,968
Amortization of debt financing costs 112 133 286 230
Interest income (659) (836) (2,073) (2,572)
Other (income) expense, net 48 4 693 14
---------------- -------------- -------------- ---------------
Loss before income taxes (7,146) (2,875) (8,749) (4,894)
Provision for (benefit of) income taxes 304 (4,944) 1,629 (14,778)
---------------- -------------- -------------- ---------------
Net income (loss) (7,450) 2,069 (10,378) 9,884
Benefit from extinguishment of mandatorily
redeemable preferred stock - - 374 -
---------------- -------------- -------------- ---------------
Net income (loss) available for common stockholders (7,450) 2,069 (10,004) 9,884
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities (143) - 124 -
Foreign currency translation adjustments 150 (76) 217 (81)
---------------- -------------- -------------- ---------------
Comprehensive income (loss) $ (7,443) $ 1,993 $ (9,663) $ 9,803
================ ============== ============== ===============
Basic income (loss) per share :
Income (loss) per share $ (0.14) $ 0.04 $ (0.19) $ 0.21
================ ============== ============== ===============
Weighted average number of common shares outstanding 54,152,115 49,062,547 52,627,766 47,075,450
================ ============== ============== ===============
Diluted income (loss) per share :
Income (loss) per share $ (0.14) $ 0.03 $ (0.19) $ 0.19
================ ============== ============== ===============
Weighted average number of common shares outstanding 54,152,115 59,782,547 52,627,766 50,976,537
================ ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
------------------------------------
September 30, September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,378) $ 9,884
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation, amortization and accretion 3,738 2,040
Loss on sale of assets 48 450
Reversal of prior years' tax accrual - (15,378)
Issuance of stock for services rendered 721 -
Equity in loss of subsidiary prior to control 686 -
Acquisition of in-process research and development - 929
Changes in operating assets and liabilities:
Accounts receivable 2,741 (2,587)
Inventories 381 (3,757)
Long-term receivable - 8
Other assets (2,144) 1,557
Accounts payable 155 (2,376)
Other accrued liabilities and income tax payable (865) (4,195)
Accrued restructuring costs 2,595 751
Other liabilities (4,494) (1,893)
---------------- ----------------
Net cash used in operating activities (6,816) (14,567)
---------------- ----------------
Cash flows from investing activities:
Purchase of company, net of cash acquired (5,039) (338)
Purchases of short-term investments (81,880) (70,632)
Proceeds received on the maturity of short-term investments 77,418 22,791
Proceeds from sale of short-term investments 10,369 11,989
Additions to property, plant and equipment (1,780) (2,487)
Deferred gain on sale of assets (611) (611)
Investments in unconsolidated companies (1,254) -
---------------- ----------------
Net cash used in investing activities (2,777) (39,288)
---------------- ----------------
Cash flows from financing activities:
Borrowings under working capital facilities 24,895 28,960
Repayments under working capital facilities (24,169) (33,736)
Repayments of notes-affiliates (6) (5)
Issuance of senior notes - 44,000
Debt financing costs (20) (1,831)
Proceeds from issuance of common stock 809 136
---------------- ----------------
Net cash provided by financing activities 1,509 37,524
---------------- ----------------
Effect of exchange rates on cash (20) (42)
---------------- ----------------
Net decrease in cash and cash equivalents (8,104) (16,373)
Cash and cash equivalents, beginning of period 23,357 24,076
---------------- ----------------
Cash and cash equivalents, end of period $ 15,253 $ 7,703
================ ================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Ampex Corporation
Ampex Corporation ("Ampex" or the "Company") is one of the world's leading
providers of technologies for the acquisition, storage and processing of visual
information. Today, Ampex is delivering digital image storage solutions for
large-scale corporate, government, network, entertainment and telecommunications
applications.
During the first quarter of 1999, the Company purchased 19.9% of the
capital stock of TV onthe WEB, Inc. ("TV onthe WEB"), a provider of services and
content for delivery of compressed video over the world wide web, for $4.0
million and 19.9% of the capital stock of Alternative Entertainment Network,
Inc. (AENTV"), a producer and aggregator of compressed, streaming video content
for delivery over the world wide web, for $1.0 million. On May 20, 1999, the
Company acquired an additional 30.2% of TV onthe WEB for $4.5 million resulting
in a 50.1% majority holding and on July 6, 1999, the Company acquired an
additional 31.1% of AENTV for $2.3 million resulting in a 51.0% majority
holding. The Consolidated Balance Sheet as of September 30, 1999 includes the
value of assets and liabilities of TV onthe WEB and AENTV. The Consolidated
Statements of Operations and Comprehensive Income (Loss) for the three and nine
months ended September 30, 1999 includes the Company's minority share of the net
loss of TV onthe WEB and AENTV for periods the Company held less than 50% of
these entities and 100% of their net loss for periods it held a majority
interest. See Note 12.
During the third quarter of 1999, the Company purchased or committed to
purchase a minority interest in TV1 Internet Television ("TV1"), a leading
provider of video services to European businesses, and Executive Branch
Webcasting Corporation ("EXBTV"), a provider of Internet video programming based
on information from the Executive Branch and various Federal agencies, for a
total of $1.8 million and $1.5 million, respectively. The Company holds an
option to acquire a majority interest in EXBTV and an option to acquire an
increased minority interest in TV1. At September 30, 1999, the Company's
investment in TV1 and EXBTV are being accounted for using the cost method. On
October 4, 1999, the Company invested $1.3 million to complete its subscription
to acquire 17.5% of TV1.
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, 1998 and the Audited Consolidated Financial Statements included therein.
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented. The results of operations for the three and
nine-month periods ended September 30, 1999 are not necessarily indicative of
the results to be expected for the full year.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized
6
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 -- Basis of Presentation (cont'd.)
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is effective for the
Company in fiscal year 2001 and will not require retroactive restatement of
prior period financial statements. The Company has not yet quantified the impact
of adopting SFAS 133 on its financial statements, but the Company believes there
will not be a significant impact.
Note 3 -- Income (Loss) Per Common Share
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted income
(loss) per common share is provided as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Numerator - Basic
Net income (loss) available for common stockholders.. $(7,450) $ 2,069 $(10,004) $ 9,884
======= ======= ======== =======
Denominator - Basic
Weighted average common stock outstanding............ 54,152 49,063 52,628 47,075
------- ------- -------- -------
Basic income (loss) per share.......................... $ (0.14) $ 0.04 $ (0.19) $ 0.21
======= ======= ======== =======
Numerator - Diluted
Net income (loss) available for common stockholders.. $(7,450) $ 2,069 $(10,004) $ 9,884
======= ======= ======== =======
Denominator - Diluted
Weighted average common stock outstanding............ 54,152 49,063 52,628 47,075
Contingent shares due to acquisition................. - 720 - 253
Effect of dilutive securities:
Stock options..................................... - - - 205
Redeemable preferred stock........................ - 5,000 - 1,722
Convertible preferred stock....................... - 5,000 - 1,722
------- ------- -------- -------
54,152 59,783 52,628 50,977
------- ------- -------- -------
Diluted income (loss) per share........................ $ (0.14) $ 0.03 $ (0.19) $ 0.19
======= ======= ======== =======
</TABLE>
7
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 -- Income (Loss) Per Common Share (cont'd.)
In connection with the acquisition of MicroNet, the Company issued 720,000
shares of Common Stock. Such shares are being held in escrow pending the
resolution of certain contingencies. These shares have been included in the
computation of diluted weighted average common stock outstanding for the three
and nine months ended September 30, 1998 but have not been included in the
computation of diluted weighted average common stock outstanding for the three
and nine months ended September 30, 1999 since they are anti-dilutive.
In connection with the redemption in June 1998 of the 8% Noncumulative
Preferred Stock, the Company issued 3,000,000 shares of Common Stock, $20.0
million face amount of Convertible Preferred Stock and $43.7 million face amount
of Redeemable Preferred Stock. The 3,000,000 shares of Common Stock have been
included in the computation of weighted average common stock outstanding for the
three and nine months ended September 30, 1999. In the nine months ended
September 30, 1999, holders of 8,115 shares of Convertible Preferred Stock
converted their holdings into 4,057,500 shares of Common Stock which are
included in the weighted average common stock outstanding since the date of
conversion. The remaining shares of Common Stock potentially issuable on
conversion of the Convertible Preferred Stock have not been included in the
computation of diluted weighted average common stock outstanding for the three
and nine months ended September 30, 1999 since they are anti-dilutive.
In June 1999, the Company became obligated to redeem the Redeemable
Preferred Stock in quarterly installments over a 10-year period. The Company at
its election may make redemption payments in shares of Common Stock or in cash,
subject to certain statutory requirements. The Company has adopted a policy on
the proportion of redemption payments to be made in cash and in Common Stock.
The number of shares to be issued to satisfy redemption payments is based on the
market price of the Common Stock, subject to a floor price of $2.50 per share.
In the second and third quarter of 1999, the Company redeemed 1,788 shares of
Redeemable Preferred Stock by issuing 755,228 shares of Common Stock. Such
shares are included in the weighted average common stock outstanding since the
date of exchange. Shares of Common Stock potentially issuable to satisfy future
redemption payments to be made in stock have not been included in the
computation of diluted weighted average common stock outstanding for the three
and nine months ended September 30, 1999 since they are anti-dilutive.
Stock options to purchase 3,092,533 shares of common stock at prices
ranging from $1.06 to $6.00 per share were outstanding at September 30, 1999,
but were not included in the computation of diluted income per share because
they are anti-dilutive.
Stock options to purchase 2,449,327 shares of common stock at prices
ranging from $1.50 to $10.50 per share were outstanding at September 30, 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.
In January 1998, Warrants to purchase 1,020,000 shares of Common Stock at
$2.25 per share were issued in connection with the issuance of the Senior Notes.
See Note 10. The Warrants were not included in the computation of diluted
weighted average common stock outstanding for the three and nine months ended
September 30, 1998 because the exercise price was greater than the average
market value of the common shares. On May 10, 1999, Warrants were exercised for
204,000 shares of Common Stock, which are included in the weighted average
common stock outstanding since the date of exchange. The remaining outstanding
warrants are excluded from the computation for the three and nine months ended
September 30, 1999 as they are anti-dilutive.
8
<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:
<TABLE>
<CAPTION>
Nine months ended
------------------------------
Sept. 30, Sept. 30,
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Interest....................................... $ 5,315 $ 2,595
Income taxes paid.............................. 1,715 693
Non-cash transactions were as follows:
Issuance of common stock to acquire MicroNet... - 1,224
Issuance of common stock to acquire EXBTV...... 731 -
Issuance of common stock on conversion of preferred stock 16,230 -
Issuance of common stock on redemption of preferred stock 3,576 -
Note 5 -- Inventories
<CAPTION>
Nine months ended
------------------------------
Sept. 30, Dec. 30,
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Raw materials.................................. $ 7,340 $ 7,488
Work in process................................ 4,884 5,824
Finished goods................................. 7,161 6,454
---------- ----------
Total......................................... $ 19,385 $ 19,766
========== ==========
</TABLE>
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.
Certain subsidiaries have been assessed income and value-added taxes
together with penalties and interest. MicroNet was involved in litigation in the
ordinary course of its business that was unresolved at the date the business was
acquired by the Company. The Company has been indemnified against loss by the
former shareholders of MicroNet for such matters. A portion of the purchase
price paid in shares of Common Stock is being held in escrow pending the
ultimate resolution of the litigation and would revert to the Company in the
event the Company incurred any future loss relative to such matters.
The Company currently is involved in various stages of investigation 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, which have not been
discounted, 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.
9
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Preferred Stock
At December 31, 1997, the Company became required to redeem the 69,970
outstanding shares of its 8% Noncumulative Preferred Stock with an aggregate
liquidation value of $70.0 million (the "Old Preferred Stock"), to the extent of
funds legally available therefore (generally, the excess of the value of assets
over liabilities) at the redemption price of $1,000 per share. Pursuant to an
agreement in the second quarter of 1998, the Company completed the redemption of
the Old Preferred Stock in exchange for the following securities (a) 3,000,000
shares of its Common Stock, par value $0.01 per share; (b) 10,000 shares of a
new series of 8% Noncumulative Convertible Preferred Stock, par value $1.00,
with an aggregate liquidation value of $20.0 million (the "Convertible Preferred
Stock"); and (c) 21,859 shares of a new series of 8% Noncumulative Redeemable
Preferred Stock, par value $1.00 per share, with an aggregate liquidation value
of $43.7 million (the "Redeemable Preferred Stock").
Each share of Convertible Preferred Stock and Redeemable Preferred Stock
entitles the holder thereof to receive noncumulative dividends at the rate of 8%
per annum, if declared by the Company's Board of Directors. Each share of
Convertible Preferred Stock may be converted, at the option of the holder
thereof, at a conversion price of $4.00 per share, into 500 shares of Common
Stock, subject to adjustment under certain circumstances. In the nine months
ended September 30, 1999, the holders of 8,115 shares of Convertible Preferred
Stock converted their holdings into 4,057,500 shares of Common Stock. Beginning
in June 2001, the Company will become obligated to redeem any remaining
Convertible Preferred Stock in quarterly installments through December 2008. On
April 28, 1999, the Company agreed to exchange 287 shares of Redeemable
Preferred Stock for 40,000 shares of its Common Stock. The resultant $374,000
benefit on exchange has been recognized as a benefit available to the common
stockholders on the Consolidated Statements of Operations and Comprehensive
Income (Loss) for the nine months ended September 30, 1999. Beginning in June
1999, the Company became obligated to redeem the Redeemable Preferred Stock in
quarterly installments through March 2008. On June 30, 1999 and September 30,
1999, the Company issued 316,611 shares and 398,617 shares, respectively, of its
Common Stock to satisfy the $1.5 million quarterly redemption requirement. The
Company is obligated to redeem approximately $4.7 million face amount of the
security over the next twelve months. The Company has the option to redeem the
Redeemable Preferred Stock at any time and the Convertible Preferred Stock
beginning in June 2001, and has the option to make mandatory redemption payments
either in cash or in shares of Common Stock. In the event that the Company does
not have sufficient funds legally available to make any mandatory redemption
payment in cash, the Company will be required to make such redemption payment by
issuing shares of Common Stock. Shares of Common Stock issued to make any
optional or mandatory redemption payments will be valued at the higher of $2.50
or fair market value per share of Common Stock. The Company intends to issue
shares of Common Stock to satisfy its redemption obligation on the Redeemable
Preferred Stock through September 30, 2000.
The MicroNet Redeemable Junior Preferred Stock is redeemable out of a
percentage of earnings of MicroNet beginning in fiscal 1999. Due to the
contingent nature of the redemption provision, no value has been ascribed to the
MicroNet Redeemable Junior Preferred Stock in determination of the purchase
price. The shares of the MicroNet Redeemable Junior Preferred Stock are being
held in escrow, pending resolution of certain contingencies for which the
Company has been indemnified by the former shareholders of MicroNet.
10
<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. In the second
and third quarter of 1998, the Company reversed $4.9 million and $5.2 million
previously reserved in connection with the liquidation of its subsidiary in
Italy. The provisions for income taxes in the three and nine months ended
September 30, 1999 consist primarily of withholding taxes on royalty income.
As of December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of $118.0 million, expiring in the years 2005 through
2013. 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 (Loss)
The balances of each classification within accumulated other comprehensive
income (loss) are as follows:
<TABLE>
<CAPTION>
Unrealized Minimum Accumulated
Foreign Gain on Pension Other
Currency Marketable Liability Comprehensive
Items Securities Adjustment Income (Loss)
-------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 1998...... $ 578 - $(29,631) $(29,053)
Year- to- date change.. 217 $124 - 341
-------- ---------- ---------- --------
September 30, 1999..... $ 795 $124 $(29,631) $(28,712)
======== ========== ========== ========
</TABLE>
Note 10 -- Senior Notes
In January 1998, the Company issued $30.0 million of its 12% Senior Notes
(the "Notes"), together with Warrants to purchase 1.02 million shares of Common
Stock. The Warrants are exercisable at $2.25 per share at any time on or prior
to March 15, 2003. At the time of issuance, the Warrants were valued using the
Black-Scholes model. The value assigned to the Warrants was $765,000, which is
being amortized against interest expense over the term of the Notes. On May 10,
1999, Warrants were exchanged to purchase 204,000 shares of Common Stock. At the
end of June 1998, the Company issued an additional $14.0 million Senior Notes.
Interest on the Notes is payable semi-annually on March 15 and September 15 of
each year, commencing September 15, 1998. The Notes will mature on March 15,
2003. The Company may redeem the Notes, in whole or in part, at any time after
March 15, 2000, at redemption prices expressed as percentages of the principal
amount of the Notes ranging from 100% to 106% depending on the redemption date,
together with accrued and unpaid interest, if any, to the date of redemption.
The Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future subordinated indebtedness of the
Company.
11
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 -- Segment Reporting
The Company has the following operating segments: high-performance mass
data storage systems, instrumentation recorders and professional video recording
products; high-performance magnetic disk arrays; licensing of intellectual
property and Internet video programming and services. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies.
The Company evaluates segment performance based on return on operating
assets employed. Profitability is measured as income or loss from operations
before income taxes, excluding restructuring charges (credits), foreign exchange
gains and losses and goodwill amortization and related acquisition charges.
Intersegment sales and transfers are accounted for at current market prices
but they were not significant to revenues.
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
------------------------------------------------------------------------------
Mass Data
Storage Systems/ Licensing of Eliminations
Instrumentation Disk Intellectual Internet and
Recorders Arrays Property Video Corporate Totals
--------- -------- -------- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.......... $39,291 $ 8,503 $16,104 $ 1,184 $ (140) $ 64,942
Interest income........................... 179 - - 67 1,827 2,073
Interest expense.......................... 497 982 - 89 2,630 4,198
Depreciation, amortization and accretion.. 1,084 92 1 144 755 2,076
Segment income (loss)..................... (2,459) (3,062) 15,418 (10,232) (2,187) (2,522)
Segment assets............................ 32,495 9,017 3,780 12,963 51,897 110,152
Expenditures for segment assets........... 403 304 - 875 197 1,779
<CAPTION>
Nine months ended September 30, 1999
------------------------------------------------------------------------------
Mass Data
Storage Systems/ Licensing of Eliminations
Instrumentation Disk Intellectual Internet and
Recorders Arrays Property Video Corporate Totals
--------- -------- -------- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.......... $44,785 $3,236 $5,738 - - $ 53,759
Interest income........................... 440 - - - $ 2,132 2,572
Interest expense.......................... 38 217 - - 2,713 2,968
Depreciation, amortization and accretion.. 1,242 17 1 - 478 1,737
Segment income (loss)..................... (2,023) (541) 4,662 - (3,237) (1,139)
Segment assets............................ 42,135 7,561 3 - 68,591 118,290
Expenditures for segment assets........... 574 - - - 1,913 2,487
</TABLE>
12
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 -- Acquisition of Internet Businesses
On May 20, 1999, the Company increased its interest in TV WEB from 19.9% to
50.1%. The Company invested a total of $8.6 million for its interest and has
recorded its proportionate share of the net loss for the period which the
Company held a minority interest in TV Web totaling $0.6 million, which is
included in other (income) expense for the quarter ended June 30, 1999. When the
Company acquired control, TV WEB had assets and liabilities consisting of $5.3
million of current assets, $0.6 million of plant and equipment, $3.1 million of
current liabilities and $1.5 million of long-term debt. The Company recognized
goodwill of $6.7 million, which is being amortized on a straight-line basis over
3 years. For the approximate four-month period the Company held a majority
interest, 100% of the results of operations of TV onthe WEB have been included
in the Company's consolidated results of operations because a shareholders
deficit existed at the date the Company acquired control of TV WEB.
On July 6, 1999, the Company increased its interest in AENTV from 19.9% to
51.0%. The Company invested a total of $3.7 million for its interest and has
recorded its proportionate share of the net loss for the period which the
Company held a minority interest in AENTV totaling $0.1 million, which is
included in other (income) expense for the quarter ended September 30, 1999.
When the Company acquired control, AENTV had assets and liabilities consisting
of $2.8 million of current assets, $0.8 million of plant and equipment and $0.1
million of current liabilities. The Company recognized goodwill of $0.1 million,
which is being amortized on a straight-line basis over 3 years. For the
approximate three-month period the Company held a majority interest, 100% of the
results of operations of AENTV have been included in the Company's consolidated
results of operations because a shareholders deficit existed at the date the
Company acquired control of AENTV.
Pro forma combined results of operations of the Company as if the
acquisition of TV WEB and AENTV had been completed at the beginning of the
periods presented are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Nine months ended
Dec. 31, 1998 Sept. 30, 1999
------------- -----------------
<S> <C> <C>
Net sales........................... $ 66,854 $ 50,336
Loss before income taxes............ (6,740) (16,248)
Net income (loss)................... 7,717 (17,503)
Income (loss) per share
Basic............................ 0.16 (0.33)
Diluted.......................... 0.14 (0.33)
</TABLE>
Pro forma operating results for all periods include an adjustment to record
additional goodwill amortization of $2.3 million for the twelve months ended
December 31, 1998 and $0.9 million for the nine months ended September 30, 1999.
13
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 -- Restructuring Charges
Restructuring charges for the nine months ended September 30, 1999 and 1998
consist of the following:
<TABLE>
<CAPTION>
Nine months ended
----------------------------
Sept. 30, Sept. 30,
1999 1998
----------- ----------
<S> <C> <C>
Provisions for employee separation costs............... $ 3,287 $ 2,301
Recovery on vacated lease obligations.................. (166) (274)
Provisions for relocation.............................. - 499
Costs associated with closure of foreign subsidiaries.. 1,462 -
---------- ----------
$ 4,583 $ 2,526
========== ==========
</TABLE>
The Company recorded a net restructuring charge for the nine months ended
September 30, 1999 of $4.6 million. The charge included $3.3 million in
connection with the Company's relocation of the remaining portion of its DCRsi
manufacturing operations and other functions from its Redwood City, California
facility to its Colorado Springs, Colorado facility and $1.5 million for the
wind down of its German subsidiary, offset by a credit of $0.2 million related
to the finalization of a termination clause on one of its subleased properties
previously reserved. The $3.3 million restructuring charge was associated with
the elimination of approximately 86 U.S. positions in engineering, manufacturing
and administration. At September 30, 1999, the Company had paid and charged $0.7
million against the liability accounts related to the termination benefits set
up for the restructuring.
The Company recorded a net restructuring charge in the quarter ended March
30, 1998 of $2.8 million. The charge related to 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 concurrent workforce
reduction. The charge includes $2.3 million for costs associated with the
elimination of approximately 72 U.S. positions in engineering, manufacturing and
administration, and $0.5 million for transition, shipping and other costs. At
September 30, 1999, the Company had paid and charged substantially all of these
costs against the liability accounts and terminated 71 employees. The Company
recorded a net restructuring credit in the quarter ended September 30, 1998 of
$0.3 million related to the recovery on certain subleased properties previously
reserved.
Accruals for restructuring costs totaled $5.4 million at September 30, 1999
including $0.6 million relating to vacated or abandoned leases. The lease
obligations associated with the Company's restructuring have not been discounted
to present value.
14
<PAGE>
Forward-Looking Statements
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, those described under "Risk Factors," below.
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. 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 the Company and its subsidiaries 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, 1998, as filed with the Securities and
Exchange Commission (file no. 0-20292) (the "1998 Form 10-K").
Results of Operations for the Three and Nine Months Ended September 30, 1999 and
1998
Net Sales. Net sales increased by 8.1% to $17.3 million in the three
months ended September 30, 1999 from $16.0 million for the three months ended
September 30, 1998, and increased by 1.7% to $48.8 million in the first nine
months of 1999 from $48.0 million in the first nine months of 1998. The sales
increase for the comparable three-month period is primarily due to the Company's
revenue from its Internet video operations. The increase of Ampex Data Systems'
("Data Systems") mass data storage products and instrumentation sales in the
quarter ended September 30, 1999 over 1998 was offset in part by its lower sales
of television after-market products. The slight increase in sales in the
comparable nine month period was due to the inclusion of net sales of MicroNet
Technology, Inc. ("MicroNet") which was acquired in June 1998, offset in part by
lower instrumentation and television after-market sales.
The Company's backlog of firm orders increased to $4.5 million at September
30, 1999 from $1.6 million at December 31, 1998. As previously disclosed, the
Company has also received memoranda of understanding from customers for
substantial potential orders of product sales for delivery over several years.
The Company typically operates with low levels of backlog, requiring it to
obtain the majority of each period's orders in the same period that they must be
shipped to the customer. Historically, a small number of large orders has
significantly impacted sales levels and often orders are received late in the
quarter making it difficult to predict sales levels in future periods.
iNEXTV's Internet Video Programming and Services. The Company's Internet
video programming and services business began in early 1999, and in June 1999
were consolidated under its subsidiary iNEXTV Corporation ("iNEXTV"). iNEXTV
recorded revenue of $0.8 million in the quarter ended September 30, 1999 and
$1.2 million for the nine months ended September 30, 1999, principally from
Internet video services. Such revenues do not include revenues of TV1.de
("TV1") which provides Internet video services to European businesses, as TV1 is
a less than majority-owned affiliate. iNEXTV currently anticipates that
Internet video revenues will grow in the fourth quarter of 1999, but that
revenues from advertising and e-commerce are not expected to become significant
until the first quarter of 2000. The Company's two new websites, exbtv.com
("exbtv") and iStyleTV.com ("iStyleTV") which are expected to rely significantly
on advertising and e-commerce revenues are not being
15
<PAGE>
launched until the fourth quarter of 1999. Additionally, AENTV's new
programming, on which it will be primarily dependent for revenue, is not being
introduced until the fourth quarter of 1999. Any significant delay in the launch
of these web sites or new programming could materially affect the Company's
Internet video operations (see Risk Factors).
Data Systems' Mass Data Storage and Instrumentation Recorder Products.
Sales of Data Systems' mass data storage products and instrumentation recorders
and related after-market products increased to $11.5 million in the third
quarter of 1999 compared to $9.8 million in the third quarter of 1998. For the
first nine months of 1999 sales totaled $32.5 million, a decline from the
comparable period in 1998 when sales of such products totaled $35.7 million. A
significant portion of the Company's 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.
The Company believes that television broadcasters and cable stations may
elect over several years to reformat their existing videotape libraries to
digital standards such as DST Systems in order to achieve greater operational
flexibility and efficiency. The Company has entered into strategic partnering
arrangements with leading video server providers in order to supplement its in-
house sales and marketing organizations. Additionally, to preserve
competitiveness, the Company will be required to invest in improving the
capabilities of its products. For example, the maximum capacity per cartridge
of the first generation DST tape drive was 165 gigabytes. The Company is
currently delivering products with a maximum capacity of 330 gigabytes per
cartridge (double-density) and is accepting orders for future delivery of
products with a maximum capacity of 660 gigabytes per cartridge (quadruple-
density).
The Company continues to propose on additional domestic and foreign
government programs. Typically such proposals are part of larger capital
projects, which involve risks or delays beyond the Company's control. Since
such orders often are relatively large, the receipt or loss of a significant
order can materially affect quarterly sales and results of operations.
Additionally, larger programs frequently schedule deliveries of the Company's
products over an extended period. The Company expects that sales to government
customers will increase modestly over the next twelve months but may not reach
historical levels realized in recent years.
Data Systems' 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
decline to $2.2 million in the third quarter of 1999 from $2.9 million in the
third quarter of 1998, and to $6.8 million in the first nine months of 1999 from
$9.1 million in the first nine months of 1998. The Company anticipates a
continuing reduction in the sale of television after-market products. The
Company is presently seeking to position its mass data storage tape drives and
library systems for use in digital storage archive applications of television
broadcasters and cable stations.
MicroNet Products. The Company has included the operations of MicroNet in
its consolidated results of operations since its acquisition effective June 30,
1998. Sales of MicroNet products for the three months ended September 30, 1999
totaled $2.9 compared to $3.2 million for the three-month period ended September
30, 1998. For the nine months ended September 30, 1999 sales were $8.5 million.
MicroNet sales levels have been affected by the decision to withdraw from lower
performance product lines which historically accounted for the majority of sales
and to refocus on higher performance disk-array products such as the DataDock
7000. The Company has developed a new generation of disk array (the Genesis
product line) that offers substantially improved capacity, performance and
features, such as fibre channel connectivity. These products have shipped in
limited quantities in the nine-month period ended September 30, 1999. As a
result, revenues for the three months ended September 30, 1999 increased over
levels recorded for the quarters ended June 30, 1999, March 31, 1999 and
December 31, 1998. The Company currently expects continued revenue growth for
MicroNet in future periods.
Gross Profit. Gross profit as a percentage of net sales decreased to 33.0%
in the third quarter of 1999 from 33.6% in the third quarter of 1998, and to
34.5% in the first nine months of 1999 from 41.2% in the first nine months of
1998. The decline in the gross margin percentage in 1999 compared to 1998
reflects the inclusion of
16
<PAGE>
MicroNet products that have lower margins than Data Systems' products, a lower
proportion of instrumentation product sales which have higher gross profit
margin than other sales, and an overall decline in sales volume that resulted in
lower absorption of fixed manufacturing costs. The Company believes that sales
of relatively high-margin instrumentation recorders will continue to be
adversely affected by pressure on government agencies to further reduce
spending. Accordingly, gross margins in future periods will continue to be
adversely affected. Also, the Company may elect to use aggressive pricing as a
marketing strategy to enter new markets for its storage products. While these
efforts would be designed ultimately to increase revenues and profitability,
they might reduce the gross margin percentage of net sales in future periods.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $8.6 million in the third quarter of 1999 from $6.9 million in the
third quarter of 1998, and to $21.3 million in the first nine months of 1999
from $17.0 million in the first nine months of 1998. For the three and nine
months ended September 30, 1999, selling and administrative costs include
MicroNet expenditures of $1.0 million and $3.1 million, respectively. In
addition to costs incurred for the Internet video programming and site
development discussed below, the Company's Internet video businesses incurred
sales, marketing and administrative expenses totaling $4.0 million and $6.8
million for the three and nine months ended September 30, 1999, respectively.
The Company anticipates that it will need to increase its sales and marketing
efforts to increase sales at MicroNet due to its new product offerings in early
1999, and to bring together the necessary capabilities to build the Company's
Internet video programming network.
Internet Video Programming and Site Development. Internet video programming
and site development costs represent costs incurred for services rendered to
customers as well as costs incurred for the development of made for the Internet
video programming and website hardware and software purchases in preparation for
the launch of exbtv and iStyleTV. Such costs also include costs incurred by
Ampex's Internet Technology Group to develop improved Internet video technology
that will be used by iNEXTV and its affiliates. The Company anticipates that
site development startup costs will decline in the first quarter of 2000, but
that expenditures for program production, marketing and advertising will
increase materially as the network expands.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased to $2.4 million in the third quarter of 1999 from
$2.9 million in the third quarter of 1998, and decreased to $7.2 million in the
first nine months of 1999 from $9.1 million in the first nine months of 1998.
The Company does not capitalize any RD&E expenditures. The majority of RD&E
expenses in each of these periods was used to enhance the price/performance
levels of Data Systems' mass data storage products, as well as to integrate its
storage systems with various computer manufacturers' servers, workstations and
other computer systems. The Company is also committed to investing in research,
development and engineering programs which support iNEXTV's Internet video
strategy.
Royalty Income. Royalty income was $3.0 million and $2.2 million in the
third quarters of 1999 and 1998, respectively and $16.1 million and $5.7 million
in the first nine months of 1999 and 1998, respectively. The increase in
royalty income in 1999 reflects royalty income of approximately $7.5 million
representing the portion of royalties earned through the third quarter of 1999
from a previously disclosed long-term license agreement extending through the
year 2001. The Company did not receive any long-term nonrecurring royalty
payments in the first nine months of 1998. The Company's royalty income derives
from patent licenses, and the Company receives most of its royalty income from
licenses with companies that manufacture consumer video products (such as VCRs
and camcorders) and, in certain cases, professional videotape recorders. The
Company intends to pursue additional digital video recorder licensees. The
Company is also assessing whether manufacturers of video games, DVD recorders
and digital television receivers are using its patented technology. The Company
recently notified certain manufactures of video game software that its force-
feedback patents may be incorporated in their products. There can be no
assurance that the manufacturers of these products are utilizing the Company's
technology 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 into
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
17
<PAGE>
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.
Acquisition of In-process Research and Development. In connection with the
acquisition of MicroNet, the independent appraisal of the in-process research
and development resulted in the recording of a one-time $0.9 million charge in
the second quarter of 1998.
Amortization of Goodwill. In connection with the acquisition of MicroNet,
TV onthe WEB and AENTV, the purchase price exceeded the fair value of the assets
acquired and liabilities assumed, resulting in the recording of goodwill.
Goodwill is being amortized on a straight-line basis over a three-to-five year
period from the date of acquisition. Additional goodwill will be recognized if
the Company exercises options to acquire controlling equity interest in its
other Internet video affiliates. The rapid amortization policy results in
material charges against operations and increased losses being recognized.
Restructuring Charges. The charge of $2.5 million in the first nine months
of 1998 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 offset in part by a recovery on the cancellation of certain
termination rights on sublet property ($0.3 million). The Company recorded a
restructuring charge of $4.6 million in the second quarter of 1999. The charge
was in connection with the Company's relocation of virtually all of its
remaining manufacturing operations from its Redwood City, California facility to
its Colorado Springs, Colorado facility and concurrent U.S. workforce reduction
($3.3 million), the wind down of its German subsidiary ($1.5 million) and was
offset in part by a recovery on the cancellation of certain termination rights
on a sublet property ($0.2 million). The Company believes these relocation and
restructuring activities will result in material savings in manufacturing costs,
selling and administrative costs and engineering costs.
As of September 30, 1999, the Company had a remaining balance for accrued
restructuring costs of $5.4 million. The Company will continue to evaluate the
amount of accrued restructuring costs on a quarterly basis, and the Company may
make adjustments in future periods if it determines that its actual obligations
will differ significantly from the amounts accrued.
Operating Loss. The Company incurred an operating loss of $6.2 million in
the third quarter of 1999 and $5.6 million in the first nine months of 1999.
The operating loss was primarily due to the inclusion of the Company's Internet
video activities and the restructuring charges of $4.6 million, offset in part
by royalty income of approximately $7.5 million representing the portion of
royalties earned through September 30, 1999 from a previously disclosed license
agreement. The Company had an operating loss of $2.2 million in the third
quarter of 1998 and $4.3 million in the first nine months of 1998. The 1998
operating loss was primarily due to a charge of $0.9 million for acquired in-
process research and development pertaining to the MicroNet acquisition and the
provision for restructuring of $2.5 million. The Company expects to make
strategic acquisitions and build in-house capabilities relative to its Internet
video strategy and expects these activities to require significant expenditures
in 1999 and future periods that will result in material charges to goodwill
amortization and that may result in consolidated net losses while the Company is
building its Internet video programming network.
Interest Expense. Interest expense, primarily due to the issuance of 12%
Senior Notes due 2003 and warrants to purchase approximately 1.02 million shares
of Common Stock in January and July 1998, was $1.4 million and $4.2 million for
the three and nine months ended September 30, 1999, respectively and $1.4
million and $3.0 million for the three and nine months ended September 30, 1998,
respectively.
Amortization of Debt Financing Costs. These amounts reflect periodic
amortization of financing costs over the remaining terms of the debt. Financing
costs associated with the January and July 1998 issuance of the 12% Senior Notes
are being charged to expense over five years.
Interest Income. Interest income is earned on cash balances and short and
long-term investments. For the three and nine months ended September 30, 1999
interest income was $0.7 and $2.1 million, respectively and for the three and
nine months ended September 30, 1998 interest income was $0.8 million and $2.6
million, respectively.
18
<PAGE>
The decline is due to a modest reduction in the cash and investment balances as
well as the decline in interest rates for the comparable periods.
Other (Income) Expense, Net. For the nine months ended September 30, 1999,
other (income) expense includes a proportionate share of the net loss for the
period the Company held a minority interest in TV onthe WEB and AENTV. For the
three and nine months ended September 30, 1998, other (income) expense, net
consists primarily of the foreign currency transaction gains and losses
resulting from the Company's foreign operations.
Provision for (Benefit of) 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. In the second and third quarter of 1998, the
Company reversed $4.9 million and $5.2 million, respectively, previously
reserved in connection with the liquidation of its subsidiary in Italy. The
Company was not required to include any material provision for U.S. Federal
income tax in the comparable three and nine-month periods due to the utilization
of net operating loss carryforwards and timing differences. The Company's
international operations, which are conducted principally by its foreign
subsidiaries, may have pretax foreign income and 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 interest and amortization
expenses and operating loss carryforwards are not deductible in computing such
foreign taxes.
Net Income(Loss). The Company reported a net loss of $10.3 million in the
first nine months of 1999 compared to a net income of $9.9 million in the first
nine months of 1998, primarily as a result of the factors discussed above under
"Operating Income (Loss)" and "Provision for (Benefit of) Income Taxes."
Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. On
April 28, 1999, the Company agreed to exchange 40,000 shares of its Common Stock
for 287 of its outstanding Redeemable Preferred Stock. The resultant $374,000
benefit on exchange has been recognized as a benefit available to the common
stockholders in the Consolidated Statements of Operations and Comprehensive
Income (Loss).
Liquidity and Capital Resources
Cash Flow. At September 30, 1999, the Company had cash and short-term
investments of $48.7 million and working capital of $51.1 million. At December
31, 1998, the Company had cash and short-term investments of $62.6 million and
working capital of $70.0 million. The change in cash and short-term investments
in the 1999 period reflects the purchase of strategic investments in Internet
video businesses and cash utilized in their operations of $17.9 million, cash
used in the operations of MicroNet and Data Systems of $4.0 million and $1.7
million, respectively, offset by royalty income received of $12.1 million.
Overall, the Company's operating activities utilized cash of $6.8 million during
the first nine months of 1999 and utilized cash of $14.6 million during the
first nine months of 1998.
The Company has announced that it is building an international Internet
video network, iNEXTV. In the first quarter of 1999, the Company purchased
minority investments in TV onthe WEB and AENTV. In May and July 1999,
respectively, the Company purchased a majority interest in TV onthe WEB and
AENTV. In July 1999, the Company acquired a minority interest in Executive
Branch Webcasting Corporation and in September 1999, the Company acquired a
minority interest in TV1 Internet Television of Munich, Germany. The Company has
built in-house Internet video production and distribution facilities in Los
Angeles and is constructing new facilities into which its present New York City
operations will relocate in early 2000. The Company also anticipates
constructing Internet video facilities in Berlin, Germany in 2000. There can be
no assurance that the Company will generate material revenues from its Internet
businesses. The Company believes that its Internet businesses will incur
significant production, distribution and marketing expenses to build content and
presence, which will utilize cash resources. The Company may seek to raise
additional equity capital in the private or public markets to finance the
expansion of its Internet video business. The Company may also consider selling
certain of its assets or operations to raise additional capital for its Internet
businesses and to reduce indebtedness. Such financing efforts, if any, would be
supplemental to its existing working capital resources which the Company
believes are sufficient to fund capital additions, operating expenditures and
debt service obligations of the Company and its subsidiaries through at least
2000.
19
<PAGE>
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 2002. At September 30, 1999,
the Company had borrowings outstanding of $1.0 million and had letters of credit
issued against the facility totaling $1.1 million. At September 30, 1998, the
Company had borrowings outstanding of $1.3 million and had letters of credit
issued against the facility totaling $1.1 million. In addition, the Company's
subsidiaries have bank term loans and notes payable to minority shareholders
totaling $2.3 million at September 30, 1999.
Financing Transactions. At December 31, 1997, the Company became required
to redeem the 69,970 outstanding shares of its 8% Noncumulative Preferred Stock
with an aggregate liquidation value of $70.0 million (the "Old Preferred
Stock"), to the extent of funds legally available therefore (generally, the
excess of the value of assets over liabilities) at the redemption price of
$1,000 per share. Pursuant to an agreement in the second quarter of 1998, the
Company completed the redemption of the Old Preferred Stock in exchange for the
following securities (a) 3,000,000 shares of its Common Stock, par value $0.01
per share; (b) 10,000 shares of a new series of 8% Noncumulative Convertible
Preferred Stock, par value $1.00, with an aggregate liquidation value of $20.0
million (the "Convertible Preferred Stock"); and (c) 21,859 shares of a new
series of 8% Noncumulative Redeemable Preferred Stock, par value $1.00 per
share, with an aggregate liquidation value of $43.7 million (the "Redeemable
Preferred Stock").
Each share of Convertible Preferred Stock and Redeemable Preferred Stock
entitles the holder thereof to receive noncumulative dividends at the rate of 8%
per annum, if declared by the Company's Board of Directors. Each share of
Convertible Preferred Stock may be converted, at the option of the holder
thereof, at a conversion price of $4.00 per share, into 500 shares of Common
Stock, subject to adjustment under certain circumstances. In the nine months
ended September 30, 1999, the holders of 8,115 shares of Convertible Preferred
Stock converted their holdings into 4,057,500 shares of Common Stock. Beginning
in June 2001, the Company will become obligated to redeem any remaining
Convertible Preferred Stock in quarterly installments through December 2008. On
April 28, 1999, the Company agreed to exchange 287 shares of Redeemable
Preferred Stock for 40,000 shares of its Common Stock. The resultant $374,000
benefit on exchange has been recognized as a benefit available to the common
stockholders on the Consolidated Statements of Operations and Comprehensive
Income (Loss) for the nine months ended September 30, 1999. Beginning in June
1999, the Company became obligated to redeem the Redeemable Preferred Stock in
quarterly installments through March 2008. For the nine months ended September
30, 1999, the Company issued 715,228 shares of its Common Stock to satisfy the
$1.5 million quarterly redemption requirement. The Company is obligated to
redeem approximately $4.7 million face amount of the security over the next
twelve months. The Company has the option to redeem the Redeemable Preferred
Stock at any time and the Convertible Preferred Stock beginning in June 2001,
and has the option to make mandatory redemption payments either in cash or in
shares of Common Stock. In the event that the Company does not have sufficient
funds legally available to make any mandatory redemption payment in cash, the
Company will be required to make such redemption payment by issuing shares of
Common Stock. Shares of Common Stock issued to make any optional or mandatory
redemption payments will be valued at the higher of $2.50 or fair market value
per share of Common Stock. The Company intends to issue shares of Common Stock
to satisfy its redemption obligation on the Redeemable Preferred Stock through
September 30, 2000. See Note 7 of Notes to Unaudited Consolidated Financial
Statements.
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. At the end of the second quarter of
1998, the Company issued an additional $14.0 million of 12% Senior Notes. As a
result of the issuance of the 12% Senior Notes, the Company's total indebtedness
and future debt service obligations increased significantly from prior levels.
The Company has wide discretion as to how the debt proceeds may be invested,
including for acquisitions of and investments in new businesses. Any such
investments or acquisitions, if made, are not expected to 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. In
order to minimize the difference between the interest the Company currently
receives on its investments and the interest payable on the Senior Notes, the
Company has invested $3.0 million at September 30, 1999, in securities with
higher yields, longer terms or lower credit quality. The Company may also engage
in various transactions in derivative securities. Investments in any securities
could
20
<PAGE>
expose the Company to a risk of trading losses due to market or interest rate
fluctuations or other factors that are not within the Company's control. 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.
Readiness for Year 2000
Many currently installed computer systems, software applications and other
control devices (collectively, "Systems") are coded to accept only two-digit
entries in the date code field. As the year 2000 approaches, these code fields
will need to accept four digit entries to distinguish years beginning with "19"
from those beginning with "20". As a result, in just under three months the
Systems used by many companies may need to be modified to comply with year 2000
requirements. Ampex relies on its internal Systems in operating and monitoring
all major aspects of its business, including its manufacturing processes,
engineering management controls, financial systems (such as general ledger,
accounts payable and payroll modules), customer services, infrastructure,
embedded computer chips, networks and telecommunications equipment and products.
Ampex also relies on the external Systems of its suppliers and other
organizations with which it does business.
The Company has completed its review of all of its products, as well as its
internal systems, both IT (information technology) systems and non-IT
(noninformation technology) systems, and third-party vendors relied on for the
manufacture of the Company's products. To accomplish this the Company, in early
1998, established a Year 2000 Compliance Committee to investigate and determine
the compliance status of the Company, to identify what needs to be done to
achieve compliance if noncompliance issues are identified, the cost of achieving
compliance, and implementation plans to achieve compliance before January 1,
2000. The Committee is headed by an executive officer of the Company and
membership includes representatives from all functional areas. The Committee
has completed its assessment and has determined that most systems are compliant
and those that are not do not represent major efforts and are expected to be
fully compliant by January 1, 2000. The status of the investigation is as
follows:
System Status
------ ------
Manufacturing Control and Financial Systems The manufacturing control and
financial control and reporting
systems have been upgraded, tested
and are compliant. The hardware
that operates both the financial
and manufacturing systems along
with the operating system has been
successfully implemented and is now
compliant.
Engineering Systems The electrical design and the
mechanical design systems are
compliant. The document control
system is noncompliant but the
Company is in the process of
purchasing software from an outside
software vendor that is compliant.
The software will be installed,
tested and operating by December
31, 1999. The Company anticipates
that the system will be fully
compliant by December 31, 1999.
Products Offered for Sale Existing products are compliant.
Former products that are no longer
manufactured are generally
compliant but these former products
are not warranted to be Year 2000
compliant.
Production Equipment All production and test equipment
relied on by the Company to
manufacture products are either
fully compliant, or in the case of
several manufacturing test machines
that are not compliant, do not need
to be compliant to fully function.
21
<PAGE>
Third-Party Vendors The Company has sent questionnaires
to third-party vendors upon whom it
relies for various parts,
components and other product-
related material. To date no
material noncompliance issues have
been identified, and we have
determined that all critical
vendors are compliant, and thus we
do not anticipate any negative
impact on the Company's business.
The cost for the Company to become Year 2000 compliant is approximately
$400,000, with an estimated $40,000 yet to be expended in the fourth quarter of
1999.
Because of the current state of the Company's Y2K preparedness, the Company
believes that there is minimal risk that the Company will experience any
material Y2K compliance problems beginning January 1, 2000. The Company's
current insurance programs do not specifically exclude losses attributed to Year
2000 non-compliance, but these programs are subject to change as they are
renewed for future periods. Despite the Company's efforts so far to address the
Year 2000 impact, the Company cannot guarantee that all internal and external
systems will be compliant, or that its business will not be materially adversely
affected by any such non-compliance.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is effective for the
Company in fiscal year 2001 and will not require retroactive restatement of
prior period financial statements. The Company has not yet quantified the
impact of adopting SFAS 133 on its financial statements, but the Company
believes there will not be a significant impact.
Risk Factors
Risk of Increased Leverage
As of September 30, 1999, Ampex had outstanding approximately $46.3 million
of total borrowings, which includes $44.0 million principal amount of 12% Senior
Notes due 2003 and $2.3 million of subsidiary indebtedness. The Company has
invested a portion of the proceeds from the Senior Notes in its MicroNet and
iNEXTV subsidiaries and for general corporate purposes. The Company has
invested a portion of the balance of these proceeds in government securities
and, in order to realize yields approaching the interest rate on the Senior
Notes, from time-to-time has invested in high-yield mutual funds and corporate
securities, some of which have longer terms and lower credit quality than U.S.
government securities. The Company may also engage in various transactions in
derivative securities although it has not done so to date.
The Company may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes, subject to the
restrictions in the indenture governing the Senior Notes. The degree to which
the Company is leveraged, and the types of investments it selects, could have
important consequences to investors, including the following:
. a substantial portion of the Company's consolidated cash flow from
operations must be dedicated to the payment of the principal of and
interest on outstanding indebtedness, and will not be available for
other purposes;
22
<PAGE>
. Ampex's ability to obtain additional financing in the future for
working capital needs, capital expenditures, acquisitions and general
corporate purposes may be materially limited or impaired, or such
financing may not be available on terms favorable to Ampex;
. the Company may be more highly leveraged than its competitors, which
may place it at a competitive disadvantage;
. Ampex's leverage may make it more vulnerable to a downturn in its
business or the economy in general;
. investments in securities with lower credit quality or longer
maturities could subject the Company to potential losses due to
nonpayment or changes in market value of those securities, and
transactions in derivative securities could expose Ampex to losses
caused by stock market fluctuations; and
. the financial covenants and other restrictions contained in the Senior
Note indenture and other agreements relating to Ampex's indebtedness
will restrict Ampex's ability to borrow additional funds, to dispose
of assets or to pay dividends on or repurchase preferred or common
stock.
Ampex expects that cash balances and cash flow from operations will be
sufficient to fund anticipated operating expenses, capital expenditures and debt
service requirements as they become due, at least through 2000. There can be no
assurance, however, that the amounts available from these sources will be
sufficient for such purposes in future periods. The Company may also seek to
raise additional equity capital in the private or public markets to finance the
expansion of its Internet video businesses. No assurance can be given that
additional sources of funding will be available if required or, if available,
will be on satisfactory terms. If Ampex cannot service its indebtedness, it
will be forced to adopt alternative strategies. These strategies may include
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing Ampex's indebtedness. There can be no assurance that any of these
strategies will be successful or that they will be permitted under the Senior
Note Indenture.
Ampex derives a substantial portion of its operating income from
subsidiaries. Accordingly, Ampex will be dependent on dividends and other
distributions from its subsidiaries to generate the funds necessary to meet its
obligations, including the payment of principal and interest on the Senior
Notes. The ability of Ampex's subsidiaries to pay such dividends will be
subject to, among other things, the terms of any debt instruments of the
subsidiaries then in effect and applicable law.
Risk of Continuing Sales Decline; Anticipation of Future Losses
In recent years, Ampex's net sales have declined materially. These declines
primarily reflect declines in sales of Data Systems' products to U.S. and
foreign government agencies and defense contractors, which are material to
operating results. These government agencies and contractors have experienced
continued pressure to reduce spending, which has particularly affected Data
Systems' sales to government contractors of its DCRsi instrumentation recorders,
which have generally been more profitable than its data storage and video
recording products. Sales of professional television and after-market products
are also expected to decline as a result of the announcement of new digital
television transmission standards.
In response to declining sales of these products, Ampex has been seeking to
expand its products and services, including acquisitions. Ampex has also
instituted, and will continue to implement, cost reduction programs. However,
there can be no assurance that any of these strategies will be successful, or
that Ampex will be able to reverse recent sales declines.
Ampex has incurred losses in the first nine months of 1999 and due to its
Internet video programming activities, promotion expenditures and amortization
of goodwill of acquired businesses, the Company expects such losses to increase
in the fourth quarter of 1999.
23
<PAGE>
Risks Associated with Acquisition Strategy
In order to expand Ampex's products and services, Ampex has made, and may
continue to make, acquisitions of, and/or investments in, other business
entities, including businesses involved in both producing and distributing
Internet video programming. Ampex may not be able to identify or acquire
additional acquisition candidates in the future, or complete any further
acquisitions or investments on satisfactory terms. In order to pay for future
acquisitions or investments, Ampex may have to:
. issue additional equity securities of the Company or a subsidiary, which
would dilute the ownership interest of existing Ampex shareholders;
. incur additional debt; and/or
. amortize goodwill and other intangibles or incur other acquisition-
related charges, which could materially impact earnings.
Acquisitions and investments involve numerous additional risks, including
difficulties in the management of operations, services and personnel of the
acquired companies, and of integrating acquired companies with Ampex and/or each
other's operations. Ampex may also encounter problems in entering markets and
businesses in which it has limited or no experience. Acquisitions can also
divert management's attention from other business concerns. Ampex may make
investments in companies in which it has less than a 100% interest. Such
investments involve additional risks, including the risk that Ampex may not be
in a position to control the management or policies of such entities, and risks
of potential conflicts with other investors. Ampex has invested in companies
that are in the early stage of development and may be expected to incur
substantial losses. Ampex's financial resources may not be sufficient to fund
the operations of such companies. Accordingly, there can be no assurance that
any acquisitions or investments that Ampex has made, or may make in the future,
will result in any return, or as to the timing of any return and Ampex could
lose all or a substantial portion of its investments.
Risks Associated with iNEXTV and Internet Video Strategy
The Company's Internet subsidiary, iNEXTV, was formed recently, and has not
yet generated any material advertising or sales revenues. In evaluating the
business and prospects of iNEXTV, and the Company's Internet video strategy in
general, you should take into account the risks and uncertainties typical of
companies in the early stages of development, particularly in new and rapidly
evolving markets such as those for Internet content, advertising and electronic
commerce (e-commerce). The development of iNEXTV and the implementation of the
Company's strategy to expand its Internet video businesses involve special risks
and uncertainties, including but not limited to the following:
. the ability of iNEXTV and its affiliates to identify, acquire and
deliver compelling, quality video programming over the Internet;
. the ability of iNEXTV and its affiliates to obtain and manage resources
for growth from their present size and to become profitable;
. market acceptance of streaming media technology, which is currently of
lower quality than television or radio broadcasts, is subject to
congestion and interruptions on the Internet, and requires specialized
software, technical expertise and increased bandwidth;
. dependence upon the continued acceptance and growth of the Internet as a
medium for advertising and e-commerce, and upon iNEXTV's ability to
generate advertising revenues and, in future periods, to sell goods and
services over the Internet;
. dependence upon timely delivery and integration of web site software and
hardware purchased from third parties in order to achieve planned launch
dates for its exbtv.com and iStyleTV.com websites.
24
<PAGE>
. vulnerability of Internet content delivery to system failures and
interruptions for a variety of reasons (including telecommunications
problems and natural disasters), computer viruses and other breaches of
security;
. dependence upon Internet service providers, web browsers, providers of
streaming media products and others to provide Internet access to
iNEXTV's websites and programming;
. the ability of Ampex to transfer to iNEXTV and its affiliates audio or
video technology for Internet-based applications;
. competition among Internet broadcasters and providers of products and
services for users, advertisers, content and new products and services;
. uncertainty about the adoption and application of new laws and
government regulations relating to Internet businesses, which could slow
Internet growth, expose iNEXTV to potential liabilities or otherwise
adversely affect its Internet businesses;
. the ability to expand successfully in the European market, which is
likely to be subject to cultural and language barriers, different
regulatory environments, currency exchange rate fluctuations and other
difficulties relating to managing foreign operations; and
. likelihood of continued and significant expenses resulting in material
losses in future periods, which could negatively affect the price of the
Company's securities and require it to seek additional capital which may
not be available on satisfactory terms or at all.
Fluctuations in Royalty Income
Ampex's results of operations in certain prior periods reflect the receipt
of significant royalty income, including material nonrecurring payments
resulting from negotiated settlements primarily related to sales of products by
manufacturers before negotiating licenses from Ampex. Although Ampex has a
substantial number of outstanding and pending patents, and its patents have
generated substantial royalties in the past, it is not possible to predict the
amount of royalty income Ampex will receive in the future. Royalty income has
historically fluctuated widely due to a number of factors that Ampex cannot
predict, such as the extent to which third parties use its patented technology,
the extent to which it 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. The institution of patent
enforcement litigation may also increase the risk of counterclaims alleging
infringement by Ampex of patents held by third parties or seeking to invalidate
patents held by Ampex. Moreover, there is no assurance that Ampex will continue
to develop patentable technology that will be able to generate significant
patent royalties in future years to replace patents as they expire. Ampex's
royalty income fluctuates significantly from quarter to quarter and from year to
year, and there can be no assurance as to the level of royalty income that will
be realized in future periods.
Fluctuations in Operating Results
Ampex's sales and results of operations are generally subject to quarterly
and annual fluctuations. Various factors affect Ampex's operating results, some
of which are outside of the Company's control, including:
. customer ordering patterns;
. availability and market acceptance of new products;
. timing of significant orders and new product announcements;
. order cancellations;
25
<PAGE>
. receipt of royalty income;
. the amount and timing of capital expenditures and other costs relating
to the expansion of operations; and
. general economic and industry conditions, including those related to the
Internet, e-commerce and new media.
Data Systems' revenues are typically dependent upon receipt of a limited
number of customer orders involving relatively large dollar volumes and are
difficult to forecast in any given fiscal period. Results can also be
significantly affected by any acquisitions or material investments that Ampex
may elect to make in a given quarter. Therefore, its results may fluctuate
significantly from quarter to quarter and from year to year. Results of a given
quarter or year may not necessarily be indicative of results to be expected for
future periods. In addition, fluctuations in operating results may negatively
affect Ampex's debt service coverage, or its ability to issue debt or equity
securities should it wish to do so, in any given fiscal period. Material
fluctuations in Ampex's results in future periods could have a material adverse
effect on the price of the Company's Common Stock.
Seasonality and Backlog
Sales of most of Ampex's products have historically declined during the
first and third quarters of the fiscal year, due to the seasonal procurement
practices of Ampex's customers. Depending on the ability of iNEXTV to generate
Internet advertising and sales revenue, the Company could experience different
seasonal trends in the recognition of revenues. A substantial portion of
Ampex's backlog at a given time is normally shipped within one or two quarters
thereafter. Therefore, sales in any quarter are heavily dependent on orders
received in that quarter and the immediately preceding quarter.
Rapid Technological Change and Risks of New Product Development
All the industries and markets from which Ampex derives revenues, directly
or through its licensing program, are characterized by continual technological
change and the need to introduce new products, product upgrades and patentable
technology. This has required, and will continue to require, that Ampex spend
substantial amounts for the research, development and engineering of new
products and advances to existing products and, with respect to the Company's
Internet operations, new content and services. No assurance can be given that
Ampex's existing products and technologies will not become obsolete or that any
new products or technologies will win commercial acceptance. Obsolescence of
existing product lines, or inability to develop and introduce new products,
could have a material and adverse effect on its sales and results of operations
in the future. The development and introduction of new technologies and products
are subject to inherent technical and market risks, and there can be no
assurance that we will be successful in this regard.
Competition
Data Systems encounters significant competition in all its product markets.
Many of its competitors have greater resources and access to capital than the
Company. In the mass data storage market, Data Systems competes with a number of
well-established competitors such as IBM, Storage Technology, Exabyte and
Quantum, as well as smaller companies. In addition, other manufacturers of
scanning video recorders may seek to enter the mass data storage market in
competition with us. For example, Sony has entered this market with storage
products based on its video recording technology. In addition, price declines in
competitive storage systems, such as magnetic or optical disk drives, can
negatively impact sales of Data Systems' DST products.
In the instrumentation market, Data Systems competes primarily with
companies that depend on government contracts for a major portion of their sales
in this market, including Sony, Loral Data Systems, Datatape and Metrum. The
number of competitors in this market has decreased in recent years as the level
of government spending in many areas has declined.
26
<PAGE>
MicroNet's competitors include both large companies such as EMC, Data
General and IBM and other small system integrators. There is no assurance that
MicroNet will be able to compete successfully in these markets in the future.
The market for Internet products and services is highly competitive and
characterized by multiple competitors and low barriers to entry. Ampex is
attempting to develop improvements in video quality in order to differentiate
itself from its competitors. However, other companies may develop competing
technology and Ampex may be unable to obtain patent or other protection for its
Internet video technology. In addition, the market for Internet advertising and
electronic commerce, upon which iNEXTV's Internet operations will be partially
dependent to achieve ultimate profitability, is intensely competitive and the
Company believes that competition in this field will intensify.
Dependence on Certain Suppliers
Ampex purchases certain components from a single domestic or foreign
manufacturer. Significant delays in deliveries or defects in such components
could adversely affect Ampex's manufacturing operations, pending qualification
of an alternative supplier. In addition, Ampex produces highly engineered
products in relatively small quantities. As a result, Ampex's ability to cause
suppliers to continue production of certain products on which it may depend may
be limited. Ampex does not generally enter into long-term raw materials or
components supply contracts.
Risks Related to International Operations
Although Data Systems significantly curtailed its international operations
in connection with the restructuring of its operations in 1993, sales to foreign
customers (including U.S. export sales) continue to be significant to Ampex's
results of operations. The expansion of iNEXTV's European operations may
generate advertising and sales revenues in future periods, although the Company
has not recognized any material revenue to date. The European operations of
iNEXTV are expected to be subject to certain risks and uncertainties, as set
forth under the caption "Risks Associated with iNEXTV and Internet Video
Strategy." International operations are subject to a number of special risks,
including limitations on repatriation of earnings, restrictive actions by local
governments, and fluctuations in foreign currency exchange rates and
nationalization. Additionally, export sales are subject to export regulation
and restrictions imposed by U.S. government agencies. Fluctuations in the value
of foreign currencies can affect Ampex's results of operations. Ampex does not
normally seek to mitigate its exposure to exchange rate fluctuations by hedging
its foreign currency positions.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union. Beginning in 2003, all
EMU countries are expected to be operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally. Some of the rules and regulations
relating to the governance of the currency have not yet been defined and
finalized. As a result, companies operating or conducting business in Europe
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling the Euro. Ampex is currently
assessing the effect the introduction of the Euro will have on its internal
accounting systems and the potential sales of its products. Ampex will take
appropriate corrective actions based on the results of such assessment. Ampex
has not yet determined the costs related to addressing this issue. This issue
is not expected to have a material adverse affect on Ampex's business.
Volatility of Stock Price
The trading price of Ampex's Common Stock has been and can be expected to
be subject to significant volatility, reflecting a variety of factors,
including:
. quarterly fluctuations in operating results;
. announcements of new product introductions by Ampex or its competitors;
. reports and predictions concerning the Company by analysts and other
members of the media;
27
<PAGE>
. issuances of substantial amounts of Common Stock in order to redeem
outstanding shares of its Preferred Stock; and
. general economic or market conditions.
The stock market in general, and Internet and technology companies in
particular, have experienced a high degree of price volatility, which has had a
substantial effect on the market prices of many such companies for reasons that
often are unrelated or disproportionate to operating performance. These broad
market and industry fluctuations may adversely affect the price of Ampex's
Common Stock, regardless of its operating performance.
Dependence on Key Personnel
Ampex is highly dependent on its management. Ampex's success depends upon
the availability and performance of key executive officers and directors.
Except for certain of its Internet affiliates, the Company has not entered into
employment agreements with its key employees, and the loss of the services of
key persons could have a material adverse effect upon Ampex. The Company does
not maintain key man life insurance on any of these individuals.
Anti-Takeover Consequences of Certain Governing Instruments
Ampex's Certificate of Incorporation provides for a classified Board of
Directors, with members of each class elected for a three-year term. The
Certificate of Incorporation provides for nullification of voting rights of
certain foreign stockholders in certain circumstances involving possible
violations of security regulations of the United States Department of Defense.
The instrument governing Ampex's outstanding Preferred Stock, which had an
aggregate liquidation value of approximately $43.9 million at September 30,
1999, requires that Ampex make mandatory offers to redeem those securities out
of legally available funds in the event of a change of control. For this
purpose, a change of control includes the following events: a person or group of
people acting together acquires 30% or more of Ampex's voting securities; Ampex
merges, consolidates or transfers all or substantially all of its assets; or the
dissolution of Ampex. The Certificate of Incorporation authorizes the Board of
Directors to issue additional shares of Preferred Stock without the vote of
stockholders. The indenture governing Ampex's outstanding Senior Notes, in the
total principal amount of $44 million, requires Ampex to offer to repurchase the
Senior Notes at a purchase price equal to 101% of the outstanding principal
amount thereof together with accrued and unpaid interest in the event of a
change of control. Under the indenture, a change of control includes the
following events: a person or group of people acting together acquires 50% or
more of the Company's voting stock; or the transfer of substantially all of the
Company's assets to any such person or group, other than to certain subsidiaries
and affiliates of Ampex.
The Company also holds certain promissory notes issued by the Chief
Executive Officer, Edward J. Bramson, and his designees. As of September 30,
1999, the unpaid principal amount of these notes totaled $3.0 million. In
September 1998, the Company entered into two agreements which provided that, in
the event of a change in control (as defined in these agreements), Mr. Bramson
will have the right to surrender the 800,000 shares of Common Stock currently
securing the notes in exchange for the full release and cancellation of any
claims by the Company for repayment of the notes, and the return of the notes
and cash payments previously paid by him for those shares, without interest.
These provisions could have anti-takeover effects by making an acquisition
of Ampex by a third party more difficult or expensive in certain circumstances.
Nonpayment of Dividends
Ampex has not declared dividends on its Common Stock since its
incorporation in 1992 and Ampex has no present intention of paying dividends on
its Common Stock. Ampex is also restricted by the terms of certain agreements
and of the outstanding Preferred Stock as to the declaration of dividends.
28
<PAGE>
Dependence on Licensed Patent Applications and Proprietary Technology
Ampex's success depends, in part, upon its ability to establish and
maintain the proprietary nature of its technology through the patent process.
There can be no assurance that one or more of Ampex's patents will not be
successfully challenged, invalidated or circumvented or that it will otherwise
be able to rely on such patents for any reason. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with Ampex's ability to
make, use and sell its products either in the United States or in foreign
markets. If any of Ampex's patents are successfully challenged, invalidated or
circumvented or its right or ability to manufacture products were to be
proscribed or limited, Ampex's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon Ampex's business, financial condition and results of operations.
Litigation may be necessary to enforce Ampex's patents, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings brought against, initiated by or otherwise involving
Ampex may require Ampex to incur substantial legal and other fees and expenses
and may require some of its employees to devote all or a substantial portion of
their time to the prosecution or defense of such litigation or proceedings.
Environmental Issues
Ampex's facilities are subject to numerous federal, state and local laws
and regulations designed to protect the environment from waste emissions and
hazardous substances. 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. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites, and are currently engaged in various environmental
investigation, remediation and/or monitoring activities at several sites located
off Company facilities. There can be no assurance Ampex 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 Ampex in the future.
Readiness for Year 2000
Many currently installed computer systems, software applications and other
control devices (collectively, "Systems") are coded to accept only two digit
entries in the date code field. As the year 2000 approaches, these code fields
will need to accept four digit entries to distinguish years beginning with "19"
from those beginning with "20". As a result, in just under three months the
Systems used by many companies may need to be modified to comply with year 2000
requirements. Ampex relies on its internal Systems in operating and monitoring
all major aspects of its business, including its manufacturing processes,
engineering management controls, financial systems (such as general ledger,
accounts payable and payroll modules), customer services, infrastructure,
embedded computer chips, networks and telecommunications equipment and products.
Ampex also relies on the external Systems of its suppliers and other
organizations with which it does business. Based on a review of its Systems and
the nature of the corrections needed to make the Systems compliant, the Company
believes there is minimal risk that the Systems will be non-compliant on January
1, 2000. However, despite the efforts thus far to address the year 2000 impact,
the Company cannot guarantee that all internal and external systems will be
compliant, or that its business will not be materially adversely affected by any
such non-compliance.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the disclosure made in the 1998 Form
10-K.
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.
In response to a lawsuit filed by the Company against Mitsubishi Electric
Corporation and Mitsubishi Electric America Inc. ("Mitsubishi") and which has
been finally resolved as previously reported, Mitsubishi filed a lawsuit against
Ampex, alleging patent infringement by certain Ampex video and data recorder
products. In 1997, the U.S. District Court for the Central District of
California determined that Ampex has no liability to Mitsubishi patents, and
Mitsubishi appealed to the Court of Appeals for the Federal Circuit. On August
30, 1999, the Court of Appeals affirmed the judgment in favor of Ampex.
Mitsubishi requested reconsideration, which has been denied by the Court.
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. Ampex 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 Ampex 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 1999 or 2000 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 six
environmental investigation, remediation and/or monitoring activities at sites
located off Company facilities, including the removal of solvent contamination
from subsurface aquifers at a site in Sunnyvale, 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 Media subsidiaries formerly owned by the Company.
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 September 30,
1999, the Company had an accrued liability of $1.8 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 any
liability for contingent liabilities it may incur with respect to 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.
30
<PAGE>
While 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 Ampex'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 AND USE OF PROCEEDS
During the nine months ended September 30, 1999, the holders of 8,115
shares of the Company's outstanding 8% Noncumulative Convertible Preferred Stock
(the "Convertible Preferred Stock") converted such shares into a total of
4,057,500 shares of the Company's Class A Common Stock pursuant to the
conversion right contained in the Convertible Preferred Stock. For the nine
months ended September 30, 1999, holders of 1,788 shares of Redeemable Preferred
Stock exchanged their holdings into 755,228 shares of Common Stock. No cash or
other consideration was paid by the Company, directly or indirectly, in
connection with such conversion or exchange. The shares of Class A Common Stock
were issued in reliance upon the exemption from registration contained in
Section 3(a)(9) of the Securities Act of 1933, as amended, for the issuance of
securities exchanged by the issuer with the existing security holders
exclusively where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6(a). EXHIBITS
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index which appears elsewhere herein and is incorporated herein by
reference.
ITEM 6(b). REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during its fiscal
quarter ended September 30, 1999.
31
<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: November 15, 1999 /s/ EDWARD J. BRAMSON
---------------------------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: November 15, 1999 /s/ CRAIG L. McKIBBEN
---------------------------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
32
<PAGE>
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
September 30, 1999
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1* Financial Data Schedule.
* Filed Herewith.
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,253
<SECURITIES> 33,440
<RECEIVABLES> 10,787
<ALLOWANCES> (1,172)
<INVENTORY> 19,385
<CURRENT-ASSETS> 83,012
<PP&E> 44,308
<DEPRECIATION> 32,276
<TOTAL-ASSETS> 110,152
<CURRENT-LIABILITIES> 31,889
<BONDS> 43,492
43,912
0
<COMMON> 553
<OTHER-SE> (59,677)
<TOTAL-LIABILITY-AND-EQUITY> 110,152
<SALES> 17,298
<TOTAL-REVENUES> 17,298
<CGS> 11,592
<TOTAL-COSTS> 26,504<F1>
<OTHER-EXPENSES> (2,934)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,421
<INCOME-PRETAX> (7,146)
<INCOME-TAX> 304
<INCOME-CONTINUING> (7,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,450)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<FN>
<F1>INCLUDES S&A, INTERNET VIDEO PROGRAMMING & SITE DEVELOPMENT, AMORTIZATION OF
GOODWILL AND RD&E OF 8,567, 3,117, 870 AND 2,358, RESPECTIVELY.
<F2>INCLUDES ROYALTY INCOME AND OTHER EXPENSE OF 2,982 AND 48, RESPECTIVELY.
</FN>
</TABLE>
