<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 June 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 June 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements....................................................... 3
Consolidated Balance Sheets (unaudited) at June 30, 1999 and
December 31, 1998........................................................... 3
Consolidated Statements of Operations (unaudited) for the
three and six months ended June 30, 1999 and 1998........................... 4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 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....................................................... 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk................... 28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 28
Item 2. Changes in Securities and Use of Proceeds................................... 29
Item 3. Defaults Upon Senior Securities............................................. 29
Item 4. Submission of Matters to a Vote of Security Holders......................... 29
Item 5. Other Information........................................................... 30
Item 6(a). Exhibits.................................................................... 30
Item 6(b). Reports on Form 8-K......................................................... 30
Signatures ............................................................................ 31
</TABLE>
<PAGE>
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,194 $ 23,357
Short-term investments 23,776 39,222
Accounts receivable (net of allowances of $1,393 in 1999 and $1,360 in 1998) 13,553 11,789
Inventories 19,759 19,766
Other current assets 5,137 2,510
------------- ---------------
Total current assets 90,419 96,644
Property, plant and equipment, net 10,962 10,546
Intangible assets, net 11,259 5,461
Investment in unconsolidated companies 1,228 -
Other assets 3,752 3,350
------------- ---------------
Total assets $ 117,620 $ 116,001
============= ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 1,281 $ 180
Accounts payable 6,192 6,470
Income taxes payable 0 12
Accrued restructuring costs 6,033 2,135
Other accrued liabilities 18,806 17,889
------------- ---------------
Total current liabilities 32,312 26,686
Long-term debt 44,772 43,380
Other liabilities 48,368 51,470
Deferred income taxes 1,213 1,213
Accrued restructuring costs 308 688
------------- ---------------
Total liabilities 126,973 123,437
------------- ---------------
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 - 20,821 shares in 1999; 21,859 shares in 1998 41,642 43,718
Convertible preferred stock, $2,000 liquidation value:
Authorized: 10,000 shares in 1999 and in 1998
Issued and outstanding - 1,931 shares in 1999; 10,000 shares in 1998 3,862 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 - 54,518,954 shares in 1999; 49,782,547 shares in 1998 545 498
Class C:
Authorized: 50,000,000 shares in 1999 and in 1998
Issued and outstanding - none in 1999 and in 1998 - -
Other additional capital 410,693 391,849
Notes receivable from stockholder (4,818) (4,818)
Accumulated deficit (432,558) (429,630)
Accumulated other comprehensive income (28,719) (29,053)
------------- ---------------
Total stockholders' deficit (54,857) (71,154)
------------- ---------------
Total liabilities and stockholders' deficit $ 117,620 $ 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 Six months ended
-------------------------------- -------------------------------
June 30, June 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 16,520 $ 15,194 $ 31,540 $ 32,020
Cost of sales 10,490 8,703 20,478 17,599
--------------- -------------- -------------- --------------
Gross profit 6,030 6,491 11,062 14,421
Selling and administrative 7,242 5,101 13,407 10,108
Research, development and engineering 2,561 3,123 4,839 6,161
Royalty income (10,460) (1,670) (13,122) (3,504)
Amortization of goodwill 473 - 776 -
Restructuring charges 4,583 - 4,583 2,800
Acquisition of in-process research and development - 929 - 929
--------------- -------------- -------------- --------------
Operating income (loss) 1,631 (992) 579 (2,073)
Interest expense 1,407 913 2,777 1,575
Amortization of debt financing costs 88 60 174 97
Interest income (585) (899) (1,414) (1,736)
Other (income) expense, net 637 4 645 10
--------------- -------------- -------------- --------------
Income (loss) before income taxes 84 (1,070) (1,603) (2,019)
Provision for (benefit of) income taxes 1,065 (4,792) 1,325 (9,834)
--------------- -------------- -------------- --------------
Net income (loss) (981) 3,722 (2,928) 7,815
Benefit from extinguishment of mandatorily
redeemable preferred stock 374 - 374 -
--------------- -------------- -------------- --------------
Net income (loss) available for common stockholders (607) 3,722 (2,554) 7,815
Other comprehensive income (loss), net of tax:
Unrealized gain on marketable securities 68 - 267 -
Foreign currency translation adjustments 22 (75) 67 (5)
--------------- -------------- -------------- --------------
Comprehensive income (loss) $ (517) $ 3,647 $ (2,220) $ 7,810
=============== ============== ============== ==============
Basic income (loss) per share :
Income (loss) per share $ (0.01) $ 0.08 $ (0.05) $ 0.17
=============== ============== ============== ==============
Weighted average number of common shares outstanding 53,113,090 46,159,624 51,865,591 46,081,901
=============== ============== ============== ==============
Diluted income (loss) per share :
Income (loss) per share $ (0.01) $ 0.08 $ (0.05) $ 0.17
=============== ============== ============== ==============
Weighted average number of common shares outstanding 53,113,090 47,226,284 51,865,591 46,847,880
=============== ============== ============== ==============
</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 six months ended
----------------------------
June 30, June 30,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,928) $ 7,815
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation, amortization and accretion 2,082 1,017
Loss on sale of assets 48 -
Reversal of prior year's tax accrual - (10,171)
Equity in loss of subsidiary prior to control 627 -
Acquisition of in-process research and development - 929
Changes in operating assets and liabilities:
Accounts receivable (1,611) (2,577)
Inventories 7 (5,028)
Long-term receivable - 8
Other assets (3,182) 3
Accounts payable (675) 1,126
Other accrued liabilities and income tax payable (113) (2,149)
Accrued restructuring costs 3,518 1,285
Other liabilities (2,694) (1,071)
------------ ------------
Net cash used in operating activities (4,921) (8,813)
------------ -----------
Cash flows from investing activities:
Purchase of company, net of cash acquired (3,866) (338)
Purchases of short-term investments (44,846) (61,306)
Proceeds received on the maturity of short-term investments 55,956 21,239
Proceeds from sale of short-term investments 4,603 6,689
Additions to property, plant and equipment (826) (1,472)
Deferred gain on sale of assets (408) (407)
Investments in unconsolidated companies (1,228) -
------------ -----------
Net cash provided by (used in) investing activities 9,385 (35,595)
------------ -----------
Cash flows from financing activities:
Borrowings under working capital facilities 16,296 18,132
Repayments under working capital facilities (16,470) (17,757)
Repayments of notes-affiliates (6) (5)
Issuance of senior notes - 30,000
Debt financing costs (20) (1,169)
Proceeds from issuance of common stock 677 136
------------ -----------
Net cash provided by financing activities 477 29,337
------------ -----------
Effect of exchange rates on cash (104) (27)
------------ -----------
Net increase (decrease) in cash and cash equivalents 4,837 (15,098)
Cash and cash equivalents, beginning of period 23,357 24,076
------------ -----------
Cash and cash equivalents, end of period $ 28,194 $ 8,978
============ ===========
</TABLE>
The accompanying notes are an integral part of the 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. 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. The Consolidated
Balance Sheet as of June 30, 1999 includes the value of assets and liabilities
of TV onthe WEB. The Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three and six months ended June 30, 1999 includes a
proportionate share of the net loss for the period the Company held a minority
interest in TV onthe WEB and 100% of the net loss for the period it held a
majority interest. See Note 12.
During the first quarter of 1999, the Company purchased 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. The Company holds an option to acquire a
majority interest in AENTV. At June 30, 1999, the Company's investment in AENTV
is being accounted for using the cost method. See Note 14.
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
six-month periods ended June 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 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.
6
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Numerator - Basic
Net income (loss) available for common stockholders.. $ (607) $ 3,722 $(2,554) $ 7,815
======= ======= ======= =======
Denominator - Basic
Weighted average common stock outstanding............ 53,113 46,160 51,866 46,082
------- ------- ------- -------
Basic income (loss) per share.......................... $ (0.01) $ 0.08 $ (0.05) $ 0.17
======= ======= ======= =======
Numerator - Diluted
Net income (loss) available for common stockholders.. $ (607) $ 3,722 $(2,554) $ 7,815
======= ======= ======= =======
Denominator - Diluted
Weighted average common stock outstanding............ 53,113 46,160 51,866 46,082
Contingent shares due to acquisition................. - 40 - 20
Effect of dilutive securities:
Stock options..................................... - 268 - 307
Redeemable preferred stock........................ - 576 - 288
Convertible preferred stock....................... - 164 - 82
Warrants.......................................... - 18 - 69
------- ------- ------- -------
53,113 47,226 51,866 46,848
------- ------- ------- -------
Diluted income (loss) per share........................ $ (0.01) $ 0.08 $ (0.05) $ 0.17
======= ======= ======= =======
</TABLE>
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 six months ended June 30, 1998 but have not been included in the computation
of diluted weighted average common stock outstanding for the three and six
months ended June 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 six months ended June 30, 1999. In the six months ended June 30, 1999,
holders of 8,069 shares of Convertible Preferred Stock converted their holdings
into 4,034,500 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
7
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 -- Income (Loss) Per Common Share (cont'd.)
of Convertible Preferred Stock have not been included in the computation of
diluted weighted average common stock outstanding for the three and six months
ended June 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 quarter of 1999, the Company redeemed 1,038 shares of Redeemable
Preferred Stock by issuing 356,611 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 six months ended June 30, 1999 since they are anti-dilutive.
Stock options to purchase 2,939,091 shares of common stock at prices
ranging from $1.06 to $6.00 per share were outstanding at June 30, 1999, but
were not included in the computation of diluted income per share because they
are anti-dilutive.
Stock options to purchase 1,440,050 shares of common stock at prices
ranging from $2.38 to $10.50 per share were outstanding at June 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 included in the computation of diluted weighted
average common stock outstanding for the three and six months ended June 30,
1998. 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 six months ended June 30, 1999 as they are anti-
dilutive.
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>
Six months ended
-------------------------------
June 30, June 30,
1999 1998
--------- -----------
(in thousands)
<S> <C> <C>
Interest...................................... $ 2,652 $ 25
Income taxes paid............................. 1 477
Non-cash transactions were as follows:
Issuance of common stock to acquire MicroNet.. - 1,224
Issuance of common stock on conversion of preferred stock 16,138 -
Issuance of common stock on redemption of preferred stock 2,076 -
</TABLE>
8
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 -- Inventories
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
(in thousands)
<S> <C> <C>
Raw materials................................. $ 7,890 $ 7,488
Work in process............................... 5,288 5,824
Finished goods................................ 6,581 6,454
------- -------
Total........................................ $19,759 $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.
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 therefor (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 six months
ended June 30, 1999, the holders of 8,069 shares of Convertible Preferred Stock
converted their holdings into 4,034,500 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
9
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Preferred Stock (cont'd.)
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 three and six months ended
June 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, the Company issued 316,611 shares of its Common Stock to satisfy
the $1.5 million quarterly redemption requirement. The Company is obligated to
redeem approximately $6.0 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
June 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.
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
quarter of 1998, the Company reversed $4.9 million previously reserved in
connection with the liquidation of its subsidiary in Italy. The provisions for
income taxes in the three and six months ended June 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............. 67 267 - 334
---- ------- --------- --------
June 30, 1999................... $645 $267 $(29,631) $(28,719)
==== ======= ========= ========
</TABLE>
10
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 production and distribution. 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>
Six months ended June 30, 1999
------------------------------------------------------------------------
Mass Data
Storage Systems/ Licensing of Eliminations
Instrumentation Intellectual Internet and
Recorders MicroNet Property Video Corporate Totals
---------------- -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.......... $25,592 $ 5,612 $13,122 $ 395 $ (59) $ 44,662
Interest income........................... 140 - - 16 1,258 1,414
Interest expense.......................... 344 618 - 37 1,778 2,777
Depreciation, amortization and accretion.. 744 38 1 24 486 1,293
Segment income (loss)..................... (1,510) (2,175) 12,689 (3,853) (1,398) 3,753
Segment assets............................ 33,483 8,633 26 12,234 63,244 117,620
Expenditures for segment assets........... 255 146 - 331 94 826
</TABLE>
11
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 -- Segment Reporting (cont'd.)
<TABLE>
<CAPTION>
Six months ended June 30, 1998
----------------------------------------------------------------------
Mass Data
Storage Systems/ Licensing of Eliminations
Instrumentation Intellectual Internet and
Recorders MicroNet Property Video Corporate Totals
---------------- -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.......... $32,020 $ - $3,504 $ - $ - $ 35,524
Interest income........................... 378 - - - 1,358 1,736
Interest expense.......................... 25 - - - 1,550 1,575
Depreciation, amortization and accretion.. 823 - 1 - 193 1,017
Segment income (loss)..................... 866 - 2,722 - (1,878) 1,710
Segment assets............................ 43,349 10,800 3 - 65,713 119,865
Expenditures for segment assets........... 123 - - - 1,349 1,472
</TABLE>
Note 12-- TV onthe WEB Acquisition
On May 20, 1999, the Company increased its interest in TV onthe 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 the
Company held a minority interest in TV onthe 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 onthe 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 $6.6 million, which is being amortized on a straight-line
basis over 3 years. For the approximate one-month period the Company held a
majority interest, 100% of the results of operations of TV onthe WEB has been
consolidated into the Company operations for the three and six months ended June
30, 1999. The Company has not recognized a minority interest on its financial
statements due to a shareholders deficit position of TV onthe WEB prior to the
Company's investment.
Pro forma combined results of operations of the Company and TV onthe WEB as
if the acquisition had been completed at the beginning of the periods presented
are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, 1998 June 30, 1999
------------------ ----------------
<S> <C> <C>
Net sales............................... $66,540 $17,594
Income (loss) before income taxes....... $(6,586) $(6,773)
Net income (loss)....................... $ 7,871 $(7,724)
Income (loss) per share
Basic................................ $ 0.17 $ (0.15)
Diluted.............................. $ 0.15 $ (0.15)
</TABLE>
Pro forma operating results for all periods include an adjustment to record
goodwill amortization of $2.2 million for the twelve months ended December 31,
1998 and $1.1 million for the six months ended June 30, 1999.
12
<PAGE>
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 -- Restructuring Charges
Restructuring charges for the six months ended June 30, 1999 and 1998
consist of the following:
<TABLE>
<CAPTION>
Six months ended
---------------------------
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Provisions for employee separation costs.................... $3,287 $2,301
Provision for (recovery on) vacated lease obligations....... (166) -
Provisions for relocation................................... - 499
Costs associated with closure of foreign subsidiaries....... 1,462 -
------ ------
$4,583 $2,800
====== ======
</TABLE>
The Company recorded a net restructuring charge for the quarter ended June
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 June 30, 1999, the Company had not paid and charged any
amounts 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
June 30, 1999, the Company had paid and charged substantially all of these costs
against the liability accounts and terminated 70 employees.
Accruals for restructuring costs totaled $6.3 million at June 30, 1999
including $0.7 million relating to vacated or abandoned leases. The lease
obligations associated with the Company's restructuring have not been discounted
to present value.
Note 14 -- Subsequent Event
On July 6, 1999, the Company exercised its option to acquire a majority
interest in AENTV. The Company will incorporate the results of AENTV in its
consolidated financial statements beginning in the third quarter of 1999. In
addition in July 1999, the Company acquired a minority interest in Executive
Branch Webcasting Corporation of Washington, D.C. and has agreed in principle to
acquire a minority interest in TV1 Internet Television of Munich, Germany..
13
<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 Six Months Ended June 30, 1999 and 1998
Net Sales. Net sales increased by 8.7% to $16.5 million in the three
months ended June 30, 1999 from $15.2 million for the three months ended June
30, 1998, and declined by 1.5% to $31.5 million in the first six months of 1999
from $32.0 million in the first six months of 1998. The sales increase for the
comparable three month period is due to the inclusion of net sales of MicroNet
Technology, Inc. ("MicroNet") and the Company's first revenue from its Internet
video operations, the increase of Ampex Data Systems' ("Data Systems") mass data
storage products sales which was offset in part by its lower sales of
instrumentation products to government customers and lower sales of television
after-market products. The slight decline in sales in the comparable six month
period is due to lower instrumentation and after-market sales offset in part by
the inclusion of MicroNet sales and improved mass data storage sales.
The Company's backlog of firm orders increased to $7.9 million at June 30,
1999 from $1.6 million at December 31, 1998. In addition, the Company has
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. Also sales levels of the Company's Data
Systems and MicroNet subsidiaries are typically lower in the third quarter due
to seasonal procurement practices of their customers.
The Company's Internet programming business, consolidated under its
subsidiary iNEXTV Corporation ("iNEXTV"), recorded its first revenue of $0.4
million in the quarter ended June 30, 1999. The Company expects that iNEXTV and
its subsidiaries will report increased revenue in future periods. However, many
of iNEXTV programming initiatives are not expected to generate any revenue until
after the third quarter of 1999.
14
<PAGE>
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 totaled $11.2 million in the second quarter of
1999 and $21.0 million for the first half of 1999, and declined from the
comparable periods in 1998 when sales of such products totaled $12.3 million and
$25.8 million, respectively. 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 $2.1 million in the second quarter of 1999 from $4.6 million in the
second quarter of 1998, and to $3.3 million in the first half of 1999 from $6.2
million in the first half 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 and six months ended June 30,
1999 totaled $2.8 and $5.7 million, respectively. MicroNet sales levels have
been reduced 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 six-month
period ended June 30, 1999. As a result, revenues for the three ended June 30,
1999 increased over levels recorded for the quarters ended March 31, 1999 and
December 31, 1998. The Company currently expects continued revenue growth for
MicroNet during the remainder of 1999. However, sales in the quarter ended
September 30, 1999 may be adversely affected due to shortages of newly-designed
components for its Genesis product line.
Gross Profit. Gross profit as a percentage of net sales decreased to 36.5%
in the second quarter of 1999 from 42.7% in the second quarter of 1998, and to
35.1% in the first six months of 1999 from 45.0% in the first six months of
1998. The decline in the gross margin percentage in 1999 compared to 1998
reflects the inclusion of 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
15
<PAGE>
would be designed ultimately to increase revenues and profitability, they might
reduce the gross margin percentage of net sales in the future periods.
Selling and Administrative Expenses. Selling and administrative expenses
increased to $7.2 million in the second quarter of 1999 from $5.1 million in the
second quarter of 1998, and to $13.4 million in the first half of 1999 from
$10.1 million in the first half of 1998. For the three and six months ended June
30, 1999, selling and administrative costs include MicroNet expenditures of $0.9
million and $2.1 million, respectively. The Company's Internet video activities,
exclusive of its investments carried on the cost method, incurred costs which
are included in selling and administrative expenses totaling $3.2 million and
$4.7 million for the three and six months ended June 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.
Research, Development and Engineering Expenses. Research, development and
engineering expenses decreased to $2.6 million in the second quarter of 1999
from $3.1 million in the second quarter of 1998, and decreased to $4.8 million
in the first half of 1999 from $6.2 million in the first half 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 committed to investing in research, development
and engineering programs at levels that can be supported by current levels of
sales.
Royalty Income. Royalty income was $10.5 million and $1.7 million in the
second quarters of 1999 and 1998, respectively and $13.2 million and $3.5
million in the first half of 1999 and 1998, respectively. The increase in
royalty income in 1999 was positively impacted by royalty income of
approximately $7.5 million representing the portion of royalties earned through
the second 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 half 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 which the Company must pursue litigation in order to enforce its patents,
and the ultimate success of its licensing and litigation activities. The costs
of patent litigation can be material, and the institution of patent enforcement
litigation may also increase the risk of counterclaims alleging infringement by
the Company of patents held by third parties or seeking to invalidate patents
held by the Company.
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
and TV on the WEB, Inc. ("TV on the WEB"), 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 when 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. The Company estimates that goodwill amortization related to its
investments in Internet companies will approximate $1.0 million per quarter
beginning in the quarter ended September 30, 1999.
16
<PAGE>
Restructuring Charges. The charge of $2.8 million in the first six 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. 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 June 30, 1999, the Company had a remaining balance for accrued
restructuring costs of $6.3 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 Income (Loss). The Company had an operating income of $1.6
million in the second quarter of 1999 and $0.6 million in the first half of
1999. The operating income was primarily due to royalty income of approximately
$7.5 million representing the portion of royalties earned through June 30, 1999
from a previously disclosed license agreement, partially offset by the
restructuring charges of $4.6 million and the loss due to the inclusion of the
Company's Internet video activities. The Company had an operating loss of $1.0
million in the second quarter of 1998 and $2.1 million in the first half 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 $2.8 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 $2.8 million for
the three and six months ended June 30, 1999, respectively and $0.9 million and
$1.6 million for the three and six months ended June 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 six months ended June 30, 1999 interest
income was $0.6 and $1.4 million, respectively and for the three and six months
ended June 30, 1998 interest income was $0.9million and $1.7 million,
respectively. 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 three and six months ended June 30,
1999, the other (income) expense includes a proportionate share of the net loss
for the period the Company held a minority interest in TV on the WEB. For the
three and six months ended June 30, 1998, the 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 quarter of 1998, the Company reversed
$4.9 million 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 six month
periods due to the utilization of net operating loss carry forwards 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
17
<PAGE>
authorities and the Company's domestic interest and amortization expenses and
operating loss carry forwards are not deductible in computing such foreign
taxes.
Net Income. The Company reported a net loss of $2.9 million in the first
half of 1999 compared to a net income of $7.8 million in the first half 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 Manditorily 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 on the Consolidated Statements of Operations and Comprehensive
Income (Loss).
Liquidity and Capital Resources
Cash Flow. At June 30, 1999, the Company had cash and short-term
investments of $52.0 million and working capital of $58.1 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 $9.8 million, cash
used in the operations of MicroNet and Data Systems of $3.1 million and $5.1
million, respectively, offset by royalty income received of $10.0 million.
Overall, the Company's operating activities utilized cash of $4.9 million during
the first six months of 1999 and utilized cash of $8.8 million during the first
six months of 1998.
The Company has announced that it is building a national and global
Internet video network, iNEXTV. In January 1999, the Company purchased minority
investments in TV on the WEB and Alternative Entertainment Network ("AENTV"). In
May 1999, the Company purchased a majority interest in TV on the WEB. In July
1999, the Company purchased a majority interest in AENTV. In addition, in July
1999, the Company acquired a minority interest in Executive Branch Webcasting
Corporation of Washington, D.C. and has announced that it has reached an
agreement in principle to acquire a minority interest in TV1 Internet Television
of Munich, Germany. The Company is currently building in-house Internet video
production and distribution facilities in Los Angeles and New York City which
are expected to become operational by the fourth quarter of 1999 and anticipates
constructing facilities in Berlin, Germany in 2000. There can be no assurance
that the Company will generate material revenues from its Internet activities.
The Company believes its Internet businesses will incur significant production,
distribution and marketing expenses to build content and presence, which will
utilize cash resources. The Company believes that it has sufficient working
capital resources to fund the capital additions and operating expenditures of
its subsidiaries and its in-house Internet activities throughout 1999.
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 June 30, 1999, the
Company had immaterial borrowings outstanding and had letters of credit issued
against the facility totaling $1.1 million. At June 30, 1998, the Company had
borrowings outstanding of $0.8 million and had letters of credit issued against
the facility totaling $2.3 million. In addition, the Company's subsidiaries have
bank term loans and notes payable to minority shareholders totaling $2.4 million
at June 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 therefor (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").
18
<PAGE>
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 six months
ended June 30, 1999, the holders of 8,069 shares of Convertible Preferred Stock
converted their holdings into 4,034,500 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 three and six months ended June 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, the Company issued 316,611
shares of its Common Stock to satisfy the $1.5 million quarterly redemption
requirement. The Company is obligated to redeem approximately $6.0 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 June 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 have 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 a significant portion of the Senior Note proceeds in
securities with higher yields, longer terms or lower credit quality, and the
Company may also engage in various transactions in derivative securities.
Investments in any securities could 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 six 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
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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 The manufacturing control and financial
Financial Systems 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.
Although the Company is confident that the
software package being purchased will resolve
the noncompliance issue for this system, the
Company has identified another compliant
software package that could be installed, if
necessary, on short notice. In either case,
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.
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 $80,000 yet to be expended in the second half 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.
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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 June 30, 1999, Ampex had outstanding approximately $46.4 million of
total borrowings, which includes $44.0 million principal amount of 12% Senior
Notes due 2003 and $2.4 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;
. 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.
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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 the current fiscal
year. There can be no assurance, however, that the amounts available from these
sources will be sufficient for such purposes in future periods. 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, or seeking additional
equity capital. 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 through 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 half 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 second half of 1999.
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.
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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, 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 bandwith;
. 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;
. 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 iNEXTV and its affiliates to transfer audio or video
technology to 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.
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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;
. 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
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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 Corporation, Storage Technology
Corporation, Exabyte Corporation and Quantum Corporation, 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
Corporation 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 Incorporated and
Metrum Incorporated. The number of competitors in this market has decreased in
recent years as the level of government spending in many areas has declined.
MicroNet's competitors include both large companies such as EMC
Corporation, Data General Corporation 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. Although iNEXTV
is attempting to develop improvements in video quality in order to differentiate
itself from its competitors, iNEXTV holds no proprietary technology and is not
in a position to achieve dominance in any market segment of the Internet. In
addition, the market for Internet advertising and electronic commerce, upon
which Ampex's Internet operations will be partially dependent to achieve
ultimate profitability, is intensely competitive and Ampex 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
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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;
. 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
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an aggregate liquidation value of approximately $45.5 million at June 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 June 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.
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
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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 six 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the disclosure made in the 1998 Form10-
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.
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
28
<PAGE>
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 June 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.
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 six months ended June 30, 1999, the holders of 8,069 shares of
the Company's outstanding 8% Noncumulative Convertible Preferred Stock (the
"Convertible Preferred Stock") converted such shares into a total of 4,034,500
shares of the Company's Class A Common Stock pursuant to the conversion right
contained in the Convertible Preferred Stock. In the second quarter of 1999,
holders of 1,038 shares of Redeemable Preferred Stock exchanged their holdings
into 356,611 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
On May 28, 1999 and June 18, 1999, the Company held its Annual Meeting
of Stockholders. The stockholders elected Douglas T. McClure, Jr. as the Class
II director. Mr. McClure received 44,533,550 votes in favor of his election,
with 5,047,106 votes withheld and no broker nonvotes. The stockholders voted to
increase the total number of authorized shares of capital stock of the Company
from 176,000,000 to 226,000,000 shares and increase the number of authorized
shares of the Company's Class A Common Stock, par value $0.01 per share, from
125,000,000 to 175,000,000 shares, with 47,355,222 votes in favor, 1,636,323
votes opposed, 589,110 votes abstaining, and no broker nonvotes. The
stockholders voted to amend the Company's 1992 Stock Incentive Plan to increase
the number of shares of Class A Stock available for issuance thereunder by
4,000,000 shares (from 4,250,000 to 8,250,000 shares) with 21,519,414 votes in
favor, 6,802,671 votes opposed, 220,634 votes abstaining, and no broker
nonvotes. The stockholders also ratified the appointment of
PricewaterhouseCoopers L.L.P. as the
29
<PAGE>
Company's independent public accountants for the fiscal 1999 with 49,133,516
votes in favor, 249,035 votes opposed, 198,105 votes abstaining, and no broker
nonvotes.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6(a). EXHIBITS
The Exhibits to this Quarterly Report on Form 10-Q are listed in the Exhibit
Index which appears elsewhere herein and is incorporated herein by reference.
ITEM 6(b). REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during its fiscal
quarter ended June 30, 1999.
30
<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: August 13, 1999 /s/ EDWARD J. BRAMSON
---------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: August 13, 1999 /s/ CRAIG L. McKIBBEN
---------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
31
<PAGE>
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
June 30, 1999
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1* Financial Data Schedule.
* Filed Herewith.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,194
<SECURITIES> 23,776
<RECEIVABLES> 14,946
<ALLOWANCES> (1,393)
<INVENTORY> 19,759
<CURRENT-ASSETS> 90,419
<PP&E> 43,583
<DEPRECIATION> 32,671
<TOTAL-ASSETS> 117,620
<CURRENT-LIABILITIES> 32,312
<BONDS> 43,454
45,504
0
<COMMON> 545
<OTHER-SE> (55,402)
<TOTAL-LIABILITY-AND-EQUITY> 117,620
<SALES> 16,520
<TOTAL-REVENUES> 16,520
<CGS> 10,490
<TOTAL-COSTS> 25,349<F1>
<OTHER-EXPENSES> (9,823)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,407
<INCOME-PRETAX> 84
<INCOME-TAX> 1,065
<INCOME-CONTINUING> (981)
<DISCONTINUED> 0
<EXTRAORDINARY> 374
<CHANGES> 0
<NET-INCOME> (607)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<FN>
<F1>INCLUDES S&A, AMORTIZATION OF GOODWILL, RD&E AND RESTRUCTURING CHARGES OF
7,242,473,2,561 AND 4,583 RESPECTIVELY
<F2>INCLUDES ROYALTY INCOME AND OTHE EXPENSE OF 10,460, AND 637, RESPECTIVELY
</FN>
</TABLE>
