SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 September 30, 2000, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 57,645,796. There were
no outstanding shares of the Registrant's Class C Common Stock, $0.01 par
value.
AMPEX CORPORATION
FORM 10-Q
Quarter Ended September 30, 2000
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 2
Consolidated Balance Sheets (unaudited) at September 30, 2000 and
December 31, 1999................................................ 3
Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 2000 and 1999.......... 4
Consolidated Statements of Cash Flows (unaudited) for the three
and nine months ended September 30, 2000 and 1999................ 5
Notes to Unaudited Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 29
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 29
Item 2. Changes in Securities and Use of Proceeds........................ 30
Item 3. Defaults Upon Senior Securities.................................. 31
Item 4. Submission of Matters to a Vote of Security Holders.............. 31
Item 5. Other Information................................................ 31
Item 6(a). Exhibits......................................................... 31
Item 6(b). Reports on Form 8-K.............................................. 31
Signatures ................................................................. 32
2
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)
September 30, December 31,
2000 1999
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,459 $ 10,598
Short-term investments 42 31,067
Accounts receivable (net of allowances of $265 in 2000 and $358 in 1999) 1,421 1,236
Inventories 3,502 2,261
Other current assets 3,294 4,951
--------------- ---------------
Total current assets 20,718 50,113
Property, plant and equipment 5,694 5,363
Intangible assets, net 3,715 9,806
Investment in unconsolidated companies 1,786 1,786
Deferred pension asset 9,409 5,571
Other assets 1,483 1,620
Net assets of business held for disposition 20,724 13,060
--------------- ---------------
Total assets $ 63,529 $ 87,319
=============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 436 $ 1,103
Accounts payable 3,961 2,569
Accrued restructuring costs 634 67
Other accrued liabilities 6,614 7,913
--------------- ---------------
Total current liabilities 11,645 11,652
Long-term debt 44,798 43,914
Other liabilities 21,077 21,634
Deferred income taxes 1,213 1,213
--------------- ---------------
Total liabilities 78,733 78,413
--------------- ---------------
Commitments and contingencies (Note 7)
Mandatorily redeemable junior preferred stock (Note 8) - -
Mandatorily redeemable nonconvertible preferred stock, $1,000 liquidation value:
Authorized: 69,970 shares in 2000 and in 1999
Issued and outstanding - none in 2000 and in 1999 - -
Mandatorily redeemable preferred stock, $2,000 liquidation value:
Authorized: 21,859 shares in 2000 and in 1999
Issued and outstanding - 17,710 shares in 2000; 19,321 in 1999 35,420 38,642
Convertible preferred stock, $2,000 liquidation value:
Authorized: 10,000 shares in 2000 and in 1999
Issued and outstanding - 1,125 shares in 2000; 1,885 in 1999 2,250 3,770
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 898,171 shares in 2000 and in 1999
Issued and outstanding - none in 2000 and in 1999 - -
Common stock, $.01 par value:
Class A:
Authorized: 175,000,000 shares in 2000 and in 1999
Issued and outstanding - 57,645,796 shares in 2000; 55,941,854 in 1999 577 559
Class C:
Authorized: 50,000,000 shares in 2000 and in 1999
Issued and outstanding - none in 2000 and in 1999 - -
Other additional capital 420,902 415,437
Notes receivable from stockholders (4,642) (4,642)
Accumulated deficit (469,722) (445,001)
Accumulated other comprehensive income 11 141
--------------- ---------------
Total stockholders' deficit (52,874) (33,506)
--------------- ---------------
Total liabilities, redeemable preferred stock and stockholders' deficit $ 63,529 $ 87,319
=============== ===============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
(unaudited)
For the three months ended For the nine months ended
------------------------------- ---------------------------------
September 30, September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- ------------
Royalty income $ 2,908 $ 2,982 $ 9,614 $ 16,104
Internet revenue 1,721 789 2,784 1,184
Product sales 2,460 2,838 8,711 8,450
------------- ------------- ------------- ------------
Total revenue 7,089 6,609 21,109 25,738
------------- ------------- ------------- ------------
Intellectual property costs (57) 191 551 756
Internet video programming and site development 3,467 3,117 9,177 3,877
Cost of product sales 2,425 2,127 7,278 6,764
Research, development and engineering 399 295 1,210 736
Selling and administrative 5,189 5,439 17,466 10,925
Amortization of goodwill 429 870 2,765 1,646
Writedown of impaired assets 4,389 - 4,389 -
------------- ------------- ------------- ------------
Total costs and operating expenses 16,241 12,039 42,836 24,704
------------- ------------- ------------- ------------
Operating income (loss) (9,152) (5,430) (21,727) 1,034
Interest expense 1,368 1,410 4,115 4,154
Amortization of debt financing costs 88 112 263 286
Interest income (356) (621) (1,117) (1,894)
Other (income) expense, net 1 60 223 684
------------- ------------- ------------- ------------
Loss from continuing operations before income taxes (10,253) (6,391) (25,211) (2,196)
Provision for income taxes 306 304 994 1,629
------------- ------------- ------------- ------------
Loss from continuing operations (10,559) (6,695) (26,205) (3,825)
Income (loss) of business held for disposition (net of taxes
of $(35) in 2000 and none in 1999) 243 (755) 1,484 (6,553)
------------- ------------- ------------- ------------
Net loss (10,316) (7,450) (24,721) (10,378)
Benefit from extinguishment of mandatorily
redeemable preferred stock 516 - 516 374
------------- ------------- ------------- ------------
Net loss available for common stockholders (9,800) (7,450) (24,205) (10,004)
Other comprehensive loss, net of tax:
Unrealized gain (loss) on marketable securities - (143) (141) 124
Foreign currency translation adjustments - - 11 -
------------- ------------- ------------- ------------
Comprehensive loss $ (9,800) $ (7,593) $ (24,335) $ (9,880)
============= ============= ============= ============
Basic and diluted income (loss) per share:
Loss per share from continuing operations $ (0.19) $ (0.12) $ (0.47) $ (0.07)
Income (loss) per share from discontinued operations $ 0.00 $ (0.01) $ 0.03 $ (0.12)
Loss per share available to common stockholders $ (0.17) $ (0.14) $ (0.43) $ (0.19)
------------- ------------- ------------- ------------
Weighted average number of common shares outstanding 56,463,285 54,152,115 55,966,196 52,627,766
============= ============= ============= ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months ended
-------------------------------------
September 30, September 30,
2000 1999
----------------- --------------
Cash flows from operating activities:
Net loss $ (24,721) $ (10,378)
Loss (income) from discontinued operations (1,484) 6,553
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and accretion 7,984 2,654
Net loss on disposal of assets 814 -
Issuance of stock for services rendered - 721
Equity in loss of subsidiary prior to control - 686
Changes in operating assets and liabilities:
Accounts receivable (105) 264
Inventories (1,241) (1,057)
Deferred pension asset (3,838) -
Other assets 1,702 (2,188)
Accounts payable 1,391 152
Other accrued liabilities and income taxes payable (1,310) (466)
Accrued restructuring costs 567 (83)
Other liabilities (558) (3,934)
--------------- --------------
Net cash used in continuing operations (20,799) (7,076)
Net cash provided by (used in) discontinued operations (4,854) 260
--------------- --------------
Net cash used in operating activities (25,653) (6,816)
--------------- --------------
Cash flows from investing activities:
Purchase of company, net of cash acquired (451) (5,039)
Purchases of short-term investments (27,219) (81,880)
Proceeds received on the maturity of short-term investments 50,451 77,418
Proceeds from the sale of short-term investments 7,613 10,369
Additions to property, plant and equipment (2,521) (1,377)
Investments in unconsolidated companies - (1,254)
--------------- --------------
Net cash provided by (used in) continuing operations 27,873 (1,763)
Net cash used in discontinued operations (920) (1,014)
--------------- --------------
Net cash provided by (used in) investing activities 26,953 (2,777)
--------------- --------------
Cash flows from financing activities:
Borrowings under working capital facilities 803 1,003
Repayments under working capital facilities (507) (275)
Repayment of notes payable-affiliates (12) (6)
Debt financing costs - (20)
Proceeds from issuance of common stock 740 809
--------------- --------------
Net cash provided by continuing operations 1,024 1,511
Net cash used in discontinued operations (752) (2)
--------------- --------------
Net cash provided by financing activities 272 1,509
--------------- --------------
Effects of exchange rates on continuing operations 11 -
--------------- --------------
Effects of exchange rates on discontinued operations 278 (20)
--------------- --------------
Net increase (decrease) in cash and cash equivalents 1,861 (8,104)
Cash and cash equivalents, beginning of period 10,598 23,357
--------------- --------------
Cash and cash equivalents, end of period $ 12,459 $ 15,253
=============== ===============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
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
innovators of technologies for the visual information age. Beginning in 1999,
the Company embarked to strategically reposition the Company by building a
network of Internet video businesses, focused on programming, services and
technology. During 1999, the Company, through its subsidiary, iNEXTV
Corporation ("iNEXTV"), acquired equity interests in various Internet video
businesses, started to assemble its internal organization to support the iNEXTV
network and to develop video programming for these websites and for customers
seeking to add video capability to their websites.
In February 2000, in order to focus more sharply on its Internet video
businesses, the Company announced plans to sell Ampex Data Systems Corporation
("Data Systems"), its subsidiary that makes high performance tape-based mass
data storage products. The results of operations of Data Systems have been
classified as Discontinued Operations in the Statements of Operations for all
periods presented. The book value of the net assets to be sold is reflected in
net assets of business held for disposition in the Consolidated Balance Sheet
for September 30, 2000 and December 31, 1999. At the date of these financial
statements, the Company has not yet entered into a contract to sell Data
Systems. Upon consummation of a successful sale, the Company intends to use a
substantial portion of the proceeds for investment in iNEXTV and its other
continuing businesses.
Following the planned sale of Data Systems, the Company's continuing
operations would include iNEXTV, its non-Internet technology licensing group,
the Internet Technology Group ("ITG") and MicroNet Technology, Inc.
("MicroNet"), its wholly-owned subsidiary that makes high performance disk
arrays and Storage Area Network products.
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, 1999 and the Audited Consolidated Financial Statements included therein.
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented. The results of operations for the three and
nine-month periods ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full year.
In the second quarter of 2000, the Company changed the expected life of
goodwill of the acquired Internet businesses from three years to two years,
given the rapid changes affecting the Internet and to conform with other
Internet content companies. In the nine months ended September 30, 2000, the
impact of this change in estimate resulted in increased amortization of $0.5
million. In the third quarter of 2000, the Company wrote off its remaining
investment in TV onthe Web, resulting in fully amortizing all remaining goodwill
of $3.6 million and providing a reserve for asset impairment of $0.8 million to
writedown the assets of TV onthe Web to their estimated realizable value. The
Company will not record revenues or expenses of TV onthe Web in future periods'
consolidated financial statements, as a result of its decision to cease funding
its operations.
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 methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. The Company
believes that adoption of this pronouncement will have no material impact on the
Company's financial position and results of operations.
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
SEC. In June 2000, the SEC issued SAB 101B, Second Amendment: Revenue
Recognition in Financial Statements ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.
6
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Basis of Presentation (cont'd.)
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the financial position or results of operations of the Company.
Note 3 - Business Held for Disposition
In February 2000, the Board of Directors of the Company authorized
management to pursue a sale of Data Systems, its wholly-owned subsidiary that
manufacturers and sells high performance, tape-based mass data storage products.
A summary of the operating results of Data Systems is as follows:
Three months ended Nine months ended
------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- -------- ------- ---------
(in thousands)
Revenues................................................................ 11,547 13,671 35,315 39,204
Costs and operating expenses............................................ 11,232 14,465 33,948 45,883
Operating income (loss)................................................. 315 (794) 1,367 (6,679)
Other (income) expenses................................................. 120 (12) 24 9
Income (loss) of business held for disposition.......................... 243 (755) 1,484 (6,553)
A summary of the assets and liabilities of Data Systems is as follows:
September 30, December 31,
2000 1999
------------- -------------
(in thousands)
Current assets.......................................................... $ 26,317 26,328
Property, plant and equipment, net...................................... 6,321 6,796
Other assets............................................................ 20 134
Current liabilities..................................................... (10,561) (17,527)
Long-term debt.......................................................... - (752)
Other liabilities....................................................... (609) (1,038)
Other................................................................... (764) (881)
-------- -------
Net assets of segment to be sold........................................ $ 20,724 13,060
-------- -------
Prospective buyers have been approached by the Company's advisors.
However, the Company has not entered into any definitive agreement of sale at
this time.
7
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Computation of Basic and Diluted Loss per Share
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted loss per
common share is provided as follows (in thousands, except per share amounts):
Three months ended Nine months ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- ------- -------- --------
Numerator
Loss from continuing operations............. $(10,559) $(6,695) $(26,205) $ (3,825)
======== ======= ======== ========
Net loss available for common stockholders.. $ (9,800) $(7,450) $(24,205) $(10,004)
======== ======= ======== ========
Denominator
Weighted average common stock outstanding... 56,463 54,152 55,966 52,628
-------- ------- -------- --------
Basic and diluted loss per share
from continuing operations.................. $ (0.19) $ (0.12) $ (0.47) $ (0.07)
======== ======= ======== ========
Basic and diluted loss per share.............. $ (0.17) $ (0.14) $ (0.43) $ (0.19)
======== ======= ======== ========
In connection with the acquisition of MicroNet, the Company issued 720,000
shares of Common Stock. Such shares are expected to be released to the seller in
the fourth quarter of 2000. These shares have been included in the computation
of diluted weighted average common stock outstanding in periods when their
inclusion is dilutive.
In the nine months ended September 30, 2000, holders of 760 shares of
Convertible Preferred Stock converted their holdings into 380,000 shares of
Common Stock and holders of 1,611 shares of Redeemable Preferred Stock were
redeemed for 1,119,879 shares of Common Stock which are included in the weighted
average common stock outstanding since the date of exchange. In the nine months
ended September 30, 1999, holders of 8,115 shares of Convertible Preferred Stock
converted their holdings into 4,057,500 shares of Common Stock and holders of
1,788 shares of Redeemable Preferred Stock were redeemed for 755,228 shares of
Common Stock which are included in the weighted average common stock outstanding
since the date of exchange. The remaining shares of Common Stock potentially
issuable on conversion of Convertible Preferred Stock and redemption of the
Redeemable Preferred Stock have not been included in the computation of diluted
weighted average common stock outstanding for the periods ended September 30,
2000 and 1999, respectively, since they are anti-dilutive. If the Company were
to make all remaining redemption payments in Common Stock based on the floor
conversion price, an additional 14,730,500 shares of Common Stock would be
issued over the number of common shares included in the diluted income per share
computation. At September 30, 2000 such additional shares of Common Stock would
be anti-dilutive to the diluted loss per share reported.
Stock options to purchase 3,648,584 shares of Common Stock at prices
ranging from $1.0625 to $6.00 per share were outstanding at September 30, 2000,
but were not included in the computation of diluted loss per share as they are
anti-dilutive.
Stock options to purchase 3,092,533 shares of Common Stock at prices
ranging from $1.0625 to $6.00 per share were outstanding at September 30, 1999,
but were not included in the computation of diluted loss per share as they are
anti-dilutive.
8
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Computation of Basic and Diluted Loss per Share (cont'd.)
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 11. 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 the exchange. The remaining outstanding warrants
are excluded from the computation of weighted average common stock outstanding
for the three and nine months ended September 30, 2000 and 1999 as they are
anti-dilutive.
Note 5 - Supplemental Schedule of Cash Flow Information
Nine months ended Sept. 30,
--------------------------
2000 1999
------- -------
(in thousands)
Interest paid........................................... $ 5,283 $ 5,281
Income taxes paid....................................... 993 1,629
Warrants................................................ - (459)
Redeemable preferred stock.............................. (3,222) (3,576)
Convertible preferred stock............................. (1,520) (16,230)
Issuance of common stock................................ 4,742 20,265
Issuance of common stock to acquire EBWC................ - 731
Issuance of common stock for services rendered.......... - 721
Note 6 - Inventories
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
Raw materials........................................... $ 630 $ 313
Work in process......................................... 339 57
Finished goods.......................................... 2,533 1,891
------- --------
Total.................................................. $ 3,502 $ 2,261
======= ========
Note 7 - Commitments and Contingencies
Legal Proceedings
The Company is currently a defendant in lawsuits that have arisen in the
ordinary course of its business. Certain subsidiaries have been assessed income
and value-added taxes together with penalties and interest. 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.
On January 7, 2000, a suit was filed against the Company and others by
Information Super Station ("ISS"), the majority stockholder of Executive Branch
Webcasting Corporation, in which the Company's Internet subsidiary, iNEXTV, held
a minority interest. On February 1, 2000, the Company filed suit against ISS
and others under the Federal securities laws seeking contract recission and
damages in connection with activities related to the Company's investment. Both
of these lawsuits were settled in July 2000, and all pending litigation between
the parties was dismissed with prejudice. As part of the settlement, the
Company made a cash payment and amended the vesting provisions with respect to
warrants to purchase 100,000 shares of Common Stock at a price of $3.90 per
share. The warrants expire if unexercised in June 2001. The cost of the
settlement is recorded in other (income) expense, net in the Consolidated
Statements of Operations and Comprehensive Loss.
9
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and Contingencies (cont'd.)
Environmental Matters
Ampex's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste emissions
and hazardous substances. Owners and occupiers of sites containing hazardous
substances, as well as generators and transporters of hazardous substances, are
subject to broad liability under various federal and state environmental laws
and regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites, and are currently engaged in various environmental
investigation, remediation and/or monitoring activities at several sites located
off Company facilities. 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.
The Company has not accrued any liability for costs that might be assessed
against it by federal or state environmental agencies involving sites owned by
the Company's former subsidiary Media. Media is primarily responsible for the
cleanup at its facilities and at off site locations. The Company believes that
it has no material contingent liability in connection with the Media properties.
Note 8 - Preferred Stock
Each share of Convertible Preferred Stock and Redeemable Preferred Stock
entitles the holder thereof to receive noncumulative dividends at the rate of 8%
per annum, if declared by the Company's Board of Directors. Each share of
Convertible Preferred Stock may be converted, at the option of the holder
thereof, at a conversion price of $4.00 per share, into 500 shares of Common
Stock, subject to adjustment under certain circumstances. In the nine months
ended September 30, 2000, the holders of 760 shares of Convertible Preferred
Stock converted their holdings into 380,000 shares of Common Stock. In the nine
months ended September 30, 1999, the holders of 8,115 shares of Convertible
Preferred Stock converted their holdings into 4,057,500 shares of Common Stock.
Beginning in June 2001, the Company will become obligated to redeem any
remaining Convertible Preferred Stock in quarterly installments through December
2008. In 2000, the Company issued shares of Common Stock valued at $2.50 per
share to satisfy its redemption obligation on the Redeemable Preferred Stock,
which was higher than fair value per share of Common Sock. As a result the
Company recorded a benefit available to common stockholders of $516,000,
representing the difference between the fair value and $2.50 per share for the
number of shares issued, on the Consolidated Statements of Operations and
Comprehensive Loss for the nine months ended September 30, 2000. 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 Loss for the nine
months ended September 30, 1999. Beginning in June 1999, the Company became
obligated to redeem the Redeemable Preferred Stock in quarterly installments
through March 2008. In the nine months ended September 30, 2000, the Company
issued 1,119,879 shares of its Common Stock to satisfy the quarterly redemption
requirements. The Company is obligated to redeem approximately $4.2 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 December 31, 2000.
The 3,500 shares of MicroNet Redeemable Junior Preferred Stock has a
liquidation value of $5.0 million and is redeemable out of a percentage of
earnings of MicroNet beginning in fiscal 1999. No redemption payments have been
made because MicroNet has reported losses since its date of acquisition. 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. It is anticipated that 2,565 shares of the MicroNet Redeemable Junior
Preferred Stock will be distributed to the seller by the escrow agent during the
fourth quarter with the balance returned to MicroNet.
10
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes
As of December 31, 1999, the Company had net operating loss carryforwards
for income tax purposes of $130.4 million expiring in the years 2005 through
2014. As a result of the financing transactions that were completed in April
1994 and February 1995, the Company's ability to utilize its net operating
losses and credit carryforwards as an offset against future consolidated federal
income tax liabilities will be restricted in its application, which will result
in a material amount of the net operating loss never being utilized by the
Company.
Note 10 - Accumulated Other Comprehensive Income
The balances of each classification within accumulated other comprehensive
income are as follows:
Unrealized Accumulated
Foreign Gain on Other
Currency Marketable Comprehensive
Items Securities Income
--------- ----------- -------------
(in thousands)
December 31, 1999.... $ - $ 141 $ 141
Year-to-date change.. 11 (141) (130)
----- ----- --------
September 30, 2000... $11 $ - $ 11
===== ===== ========
Note 11 - Senior Notes
In January 1998, the Company issued $30.0 million of its 12% Senior Notes
("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. 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. 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 12 - Segment Reporting
The Company has the following operating segments: high-performance
magnetic disk arrays, licensing of intellectual property and Internet video
programming and services. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
The Company evaluates segment performance based on return on operating
assets employed. Profitability is measured as income or loss from operations
before income taxes, excluding restructuring charges (credits), foreign exchange
gains and losses and goodwill amortization and related acquisition charges.
11
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Segment Reporting (cont'd.)
Intersegment sales and transfers are accounted for at current market prices
but they were not significant to revenues.
Nine months ended September 30, 2000
-----------------------------------------------------------
Licensing of Eliminations
Internet Disk Intellectual and
Video Arrays Property Corporate Totals
--------- -------- ------------ ------------- ---------
Revenues from external customers.......... $ 2,784 $ 8,711 $9,614 $ - $ 21,109
Interest income........................... 39 - - 1,078 1,117
Interest expense.......................... 46 1,309 - 2,760 4,115
Depreciation, amortization and accretion.. 907 110 3 604 1,624
Segment income (loss)..................... (18,109) (4,386) 9,063 (3,970) (17,402)
Segment assets............................ 6,788 8,606 2 48,133 63,529
Expenditures for segment assets........... 2,384 137 - - 2,521
Nine months ended September 30, 1999
----------------------------------------------------------
Licensing of Eliminations
Internet Disk Intellectual and
Video Arrays Property Corporate Totals
--------- -------- ------------ ------------- --------
Revenues from external customers.......... $ 1,184 $ 8,450 $16,104 $ - $25,738
Interest income........................... 67 - - 1,827 1,894
Interest expense.......................... 89 982 - 3,083 4,154
Depreciation, amortization and accretion.. 118 92 2 764 976
Segment income (loss)..................... (10,232) (3,062) 15,348 (9,157) (7,103)
Segment assets............................ 346 9,017 2 66,915 76,280
Expenditures for segment assets........... 748 304 - 325 1,377
Note 13 - Subsequent Event
In November 2000, Data Systems issued Senior Discount Notes providing net
proceeds of approximately $8.0 million, which will be used to fund the Company's
short term working capital requirements. The Notes are secured by certain
assets of Data Systems and the Company and are due on the earlier of May 31,
2001 or the date of divestiture of Data Systems. Ampex plans to repay the Notes
out of the proceeds of the sale of Data Systems.
12
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, 1999, as filed with the
Securities and Exchange Commission (file no. 0-20292) (the "1999 Form 10-K").
Strategic Repositioning of the Company
Beginning in 1999, the Company initiated a strategic repositioning of its
business by building a network of Internet video businesses, focusing on
programming, services and technology. During 1999 the Company, through its
subsidiary, iNEXTV, acquired equity interests in various Internet video
businesses and started to assemble an internal organization to support the
iNEXTV network and to develop additional Internet video-based websites. Since
1999, the Company has been involved in developing video programming for these
websites, and syndicating its content for distribution by unaffiliated websites.
The Company also offers Internet video production and distribution services for
clients who wish to develop content for distribution on their own websites or on
websites maintained by third parties. The Company expects to continue refining
its Internet activities and strategies in order to adapt to the rapid pace of
change currently facing most Internet businesses. There can be no assurance
that the Company will be able to realize sufficient revenues or to earn profits
as a result of the implementation of its Internet strategies.
In February 2000, in order to focus more sharply on its Internet video
businesses, the Company announced plans to sell Ampex Data Systems Corporation
("Data Systems"), its subsidiary which makes high performance tape-based mass
data storage products. The results of operations of Data Systems have been
classified as Discontinued Operations in the Statements of Operations for all
periods presented. The book value of the net assets to be sold have been
reflected in net assets of business held for disposition in the Consolidated
Balance Sheet as of December 31, 1999 and September 30, 2000. During the third
quarter of 2000, Ampex received offers to purchase Data Systems and believes
that additional offers may be received. The Company is in negotiation with a
potential buyer but, at the date of this Report, has not reached any binding
agreement. Upon consummation of a successful sale, the Company intends to use
the proceeds to repay the Senior Discount Notes and then for investment in
iNEXTV and its other continuing businesses.
13
Following the planned sale of Data Systems, the Company's continuing
operations would include iNEXTV, its non-Internet technology licensing group,
the Internet Technology Group and MicroNet, its wholly-owned subsidiary that
makes high performance disk arrays and storage area networks ("SAN") products
(principally DataDock, Genesis and SANcube products).
Results of Operations for the Three and Nine Months Ended September 30, 2000 and
1999
Total Revenue. Total revenue increased by 7.3% to $7.1 million for the
three months ended September 30, 2000 compared to $6.6 million for the three
months ended September 30, 1999, and declined by 18.0% to $21.1 million in the
first nine months of 2000 from $25.7 million in the first nine months of 1999.
The decrease in the nine month period is due to a long-term license agreement
signed in the second quarter of 1999, of which $7.5 million pertains to
royalties earned in prior periods.
Royalty Income. Royalty income was $2.9 million and $3.0 million in the
third quarters of 2000 and 1999, respectively, and $9.6 million and $16.1
million in the first nine months of 2000 and 1999, respectively. Royalty income
in 1999 was positively impacted by approximately $7.5 million representing the
portion of royalties earned in prior periods from a long-term license agreement
signed in the second quarter of 1999. The Company's royalty income derives from
patent licenses, and the Company receives most of its royalty income from
licenses with companies that manufacture consumer video products (such as VCRs
and camcorders) and, in certain cases, professional video tape recorders.
During this period, a growing portion of royalty income related to 6-mm and 8-mm
video recorders and camcorders. The Company is assessing whether manufacturers
of video games, DVD recorders and digital television receivers are using its
patented technology. There can be no assurance that the manufacturers of these
products are utilizing the Company's technology or, if used, that the Company
will be able to negotiate license agreements with the manufacturers. Royalty
income has historically fluctuated widely due to a number of factors that the
Company cannot predict or control, such as the extent of use of the Company's
patented technology by third parties, the materiality of any nonrecurring
royalties received as the result of negotiated settlements for products sold by
manufacturers prior to entering into licensing agreements with the Company, the
extent to which the Company must pursue litigation in order to enforce its
patents, and the ultimate success of its licensing and litigation activities.
The costs of patent litigation can be material, and the institution of patent
enforcement litigation may also increase the risk of counterclaims alleging
infringement by the Company of patents held by third parties or seeking to
invalidate patents held by the Company. See "Legal Proceedings," below.
Internet Revenue. The Company's Internet video programming and services
business began in early 1999, and in June 1999 were consolidated under its
subsidiary, iNEXTV. iNEXTV recorded revenue of $1.7 million and $0.8 million in
the third quarter of 2000 and 1999, respectively and $2.8 million and $1.2
million in the first nine months of 2000 and 1999, respectively, principally
from webcasting, video production and event marketing services, substantially
all of which have historically been provided by the Company's subsidiary, TV
ontheWeb. In August 2000, the Company announced that it would write off its
investment in TV onthe Web, allowing it to re-deploy its financial resources to
its core Internet video businesses which produce video content and technology
for distribution on the web. In the quarter ended September 30, 2000, TV onthe
Web reported an operating loss of $5.5 million, which included the amortization
of all remaining goodwill resulting from its acquisition by the Company and
write down of impaired assets to their estimated realizable value. In the
quarter ended September 30, 1999, TV onthe Web reported an operating loss of
$2.7 million. The Company will not recognize any future revenues or expenses of
TV onthe Web in future periods' consolidated financial statements. iNEXTV will
continue to offer certain web video services through its other Internet
subsidiaries. Internet revenues do not include revenues of TV1, which provides
Internet video services to European businesses, as TV1 is not a majority-owned
affiliate. The Company's other websites, AENTV.com, EXBTV.com and istyletv.com,
rely significantly on advertising and e-commerce revenues. The Company is
seeking to grow revenues by syndicating its content and that of others for
distribution to third party websites under advertising revenue sharing
arrangements and by offering various services to customers who wish to add video
content to their own websites. iNEXTV and its subsidiary AENTV have announced
agreements with
14
iwon.com, Alta Vista, Juno.com and classic car.com. In addition, the Company has
concluded several agreements with Internet portals and broadband service
providers that will be implemented during the fourth quarter. By increasing the
size of its audiences through syndication, management believes that it will
enhance the attractiveness of its programming to potential buyers of web based
video advertising. Revenues from syndicated advertising activities are not
expected to become significant before early 2001.
Product Sales. Sales of MicroNet products for the three and nine months
ended September 30, 2000 totaled $2.5 and $8.7 million, respectively, compared
to $2.8 and $8.5 million, respectively, for the comparable three and nine months
ended September 30, 1999. The delay in obtaining certain integrated circuits
used in SANcube, its newly introduced storage area network product, depressed
sales in the three month period ended September 30, 2000 and caused margins to
decrease from levels realized in the comparable period in 1999. MicroNet
started to ship SANcube's single and two person user models in the second
quarter of 2000, and anticipates that this product will enhance MicroNet's
position in the market for storage area network products as the three and four
user versions begin to ship in volume in the fourth quarter of 2000.
Intellectual Property Costs. Intellectual property costs relate to those
expenditures incurred by the Company's in-house patent department in procuring
royalty income and expenditures associated with patent enforcement litigation.
In the third quarter of 2000, the Company received a reimbursement of legal
costs previously incurred on a patent infringement case. The intellectual
property costs for the quarter excluding this recovery was $0.2 million.
Internet Video Programming and Site Development. Internet video
programming and site development costs totaled $3.5 and $9.2 million in the
three and nine months ended September 30, 2000, respectively, and totaled $3.1
million and $3.9 million in the three and nine months ended September 30, 1999,
respectively. Such costs represent costs incurred for services rendered to
customers, as well as costs incurred for the development of made-for-the-
Internet video programming and non-capitalized website hardware and software
purchases in support of iNEXTV's websites and infrastructure. The operations of
TV onthe Web were responsible for $1.6 million and $3.5 million of Internet
Video Programming and Site Development expenses in the three and nine months
ended September 30, 2000, respectively. The Company will not record revenues or
expenses of TV onthe Web in future periods' consolidated financial statements,
as a result of its decision to cease funding its operations. The Company
anticipates that site development startup costs of its other web sites will
continue to decline in 2000, as the requisite web site infrastructure is
substantially in place. The Company is also seeking to add content from others
to expand the scope of its programming without a commensurate increase in
expenses. The Company has given notice of its intention to increase its
investment in TV1 Internet Television with effect from early 2001. After this
additional investment, the Company may be required to consolidate this
enterprise or to record its equity interest in the enterprise's future losses,
which could result in greater losses reported by the Company in future periods.
Cost of Product Sales. Product costs associated with the sales of MicroNet
products for the three and nine months ended September 30, 2000 totaled $2.4 and
$7.3 million, respectively, compared to $2.1 and $6.8 million, respectively, for
the comparable three and nine months ended September 30, 1999. MicroNet has
incurred significant startup production and marketing costs in connection with
the introduction of SANcube which have resulted in depressed gross margins and
larger than expected operating losses during the periods' ended September 30,
2000.
Research, Development and Engineering Expenses. The majority of RD&E was
focused on the development and engineering of disk array products, specifically
the development of MicroNet's Genesis and SANcube product lines which have been
introduced to the market in 1999 and early 2000, respectively. Research,
development and engineering expenses associated with MicroNet were $0.3 and $0.9
million, respectively, in the three and nine months ended September 30, 2000,
compared to $0.3 million and $0.7 million, respectively, in the three and nine
months ended September 30, 1999. The balance of research and development costs
were incurred by
15
ITG. The Company anticipates increased spending in connection with research,
development and engineering programs which support iNEXTV's Internet video
strategy.
Selling and Administrative. Selling and administrative expenses decreased
to $5.2 million in the three months ended September 30, 2000 from $5.4 million
in the comparable three month period ended September 30, 1999. For the nine
month period ended September 30, 2000, the selling and administrative expenses
increased to $17.5 million as compared to $10.9 million in the nine months ended
September 30, 1999. In addition to costs incurred for the Internet video
programming and site development discussed above, the Company's Internet video
businesses incurred direct sales, marketing and administrative expenses totaling
$2.8 and $9.9 million, respectively in the three and nine months ended September
30, 2000, of which TV onthe Web accounted for $1.1 million and $2.9 million in
the respective periods of 2000. In the three and nine months ended September
30, 1999, direct Internet-related expenditures were $4.0 and $6.8 million,
respectively. The content syndication business model reduces the Company's
expenses for marketing and advertising in return for sharing advertising revenue
with syndication partners. Accordingly, the Company believes its Internet
marketing and advertising expenditures will decline in the future from levels
incurred in recent periods. MicroNet's selling and administrative expenses
totaled $1.3 million and $3.7 million, respectively, in the three and nine
months ended September 30, 2000 compared to $1.0 million and $3.1 million,
respectively, in the three and nine months ended September 30, 1999. Other
nonallocated administrative costs totaled $1.2 million and $3.8 million,
respectively, in the three and nine months ended September 30, 2000 compared to
$0.5 million and $1.2 million, respectively, in the three and nine months ended
September 30, 1999.
Amortization of Goodwill and Writedown of Impaired Assets . In connection
with the acquisitions of each of MicroNet, TV onthe WEB and AENTV, the purchase
price exceeded the fair value of assets acquired and liabilities assumed,
resulting in the recording of goodwill. In the second quarter of 2000, the
Company changed the expected life of goodwill of the acquired Internet
businesses from three years to two years, given the rapid changes affecting the
Internet and to conform to other Internet content companies. In the nine months
ended September 30, 2000 the impact of this change in estimate resulted in
increased amortization of $0.5 million. In the third quarter of 2000, the
Company wrote off its remaining investment in TV onthe Web, resulting in fully
amortizing all remaining goodwill of $3.6 million and providing a reserve for
asset impairment of $0.8 million to writedown the assets of TV onthe Web to
their estimated realizable value. Goodwill arising from the purchase of
MicroNet is being amortized on a straight-line basis over 5 years from the date
of acquisition. Additional goodwill may be recognized to the extent that future
payments are required to be paid on the MicroNet preferred stock, or if the
Company was to exercise options to increase its equity interest in its other
Internet video affiliates, as it expects to do with TV1.
Interest Expense. Interest expense, primarily due to the issuance of $44.0
million 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 and $4.1
million, respectively for the three and nine months ended September 30, 2000 and
1999. It is expected that interest expense will increase by approximately $0.4
million per quarter as a result of the issuance of the Senior Discount Notes by
Data Systems in November 2000.
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. In the three and nine months ended September 30, 1999
the Company, pending application of the proceeds of the 12% Senior Notes, had
higher investment balances compared to the three and nine months ended September
30, 2000, which resulted in higher interest income.
Other (Income) Expense, Net. In connection with certain litigation between
the Company and ISS as described in "Item 1. Legal Proceedings," the value of
the settlement was included in other (income) expense for the
16
nine months ended September 30, 2000. For the three and nine months ended
September 30, 1999, other (income) expense included a proportionate share of the
net loss for the period the Company held a minority interest in TV onthe WEB and
AENTV.
Provision for Income Taxes. The provisions for income taxes in the three
and nine months ended September 30, 2000 and 1999 consist primarily of foreign
income taxes and withholding taxes on royalty income. The Company was not
required to include any material provision for U.S. Federal income tax in any of
these periods due to the utilization of net operating loss carry forwards and
timing differences. At September 30, 2000, the Company had net operating loss
carry forwards for income tax purposes of $130.4 million, expiring in the years
2005 through 2014. As a result of financing transactions that were completed in
1994 and 1995, the Company is limited in the amount of net operating loss carry
forwards that can offset consolidated Federal taxable income in a given year.
The Company derives pretax foreign income from its international operations,
which are conducted principally by its foreign subsidiaries. In addition, the
Company's royalty income is subject, in certain cases, to foreign tax
withholding. Such income is taxed by foreign taxing authorities and the
Company's domestic interest and amortization expenses and operating loss carry
forwards are not deductible in computing such foreign taxes.
Income (Loss) of Business Held for Disposition. In February 2000, the
Board of Directors of the Company authorized management to pursue a sale of Data
Systems, its wholly-owned subsidiary that manufacturers and sells high
performance, tape-based mass data storage products. As a result, for all
periods presented, the Company reported as a single line item in the
Consolidated Statements of Operations and Comprehensive Loss, an income (loss)
of business held for disposition (net of taxes).
A summary of the operating results of Data Systems is as follows:
Three months ended Nine months ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ----------
(in thousands)
Revenues........................................ 11,547 13,671 35,315 39,204
Costs and operating expenses.................... 11,232 14,465 33,948 45,883
Operating income (loss)......................... 315 (794) 1,367 (6,679)
Other (income) expenses......................... 120 (12) 24 9
Income (loss) of business held for disposition.. 243 (755) 1,484 (6,553)
Net Loss. The Company reported a net loss of $10.3 and $24.7 million for
the three and nine months ended September 30, 2000, respectively, compared to a
net loss of $7.5 and $10.4 million for the three and nine months ended September
30, 1999, primarily as a result of the factors discussed above under "Royalty
Income," "Internet Video Programming and Site Development," "Selling and
Administrative," "Amortization of Goodwill," and "Income (Loss) of Business Held
for Disposition."
Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. In
2000, the Company issued shares of Common Stock valued at $2.50 per share to
satisfy its redemption obligation on the Redeemable Preferred Stock, which was
higher than fair value per share of Common Stock. As a result the Company
recorded a benefit available to common stockholders of $516,000, representing
the difference between the fair value and $2.50 per share for the number of
shares issued, on the Consolidated Statements of Operations and Comprehensive
Loss for the nine months ended September 30, 2000. On April 28, 1999, the
Company agreed to exchange 40,000 shares of its Common Stock for 287 shares 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 Loss for the nine
months ended September 30, 1999.
17
Liquidity and Capital Resources
Cash Flow. At September 30, 2000, the Company had cash and short-term
investments of $12.5 million and working capital of $9.1 million. At December
31, 1999, the Company had cash and short-term investments of $41.7 million and
working capital of $38.5 million. Data Systems, which is accounted for as a
Discontinued Operation, had working capital of $15.8 million and $8.8 million at
September 30, 2000 and December 31, 1999, respectively. Working capital of Data
Systems has been included in net assets of business held for disposition at
September 30, 2000 and December 31, 1999. The decline in cash and short-term
investments in the nine months ended September 30, 2000 results primarily from
operating losses of the Company's Internet video businesses, operations of the
Internet Technology Group, operating losses of MicroNet, an increase in working
capital of discontinued operations, and interest expense offset in part by
operating income earned from the Company's technology licensing activities and
interest income. The Internet operating loss for the nine months ended
September 30, 2000 included $9.7 million associated with the operations of TV on
the Web. The Company will not include revenues or expenses of TV onthe Web in
future periods' Consolidated Financial Statements. Cash used in continuing
operations totaled $20.8 million in the nine months ended September 30, 2000 and
$7.1 million in the nine months ended September 30, 1999. Cash used in
discontinued operations totaled $4.9 million in the nine months ended September
30, 2000, largely due to payments against restructuring reserves established in
prior years.
Major items impacting results from continuing operations in the nine months
ended September 30, 2000, which did not affect cash, were goodwill amortization
associated with MicroNet and acquired Internet businesses, totaling $2.8 million
and provision for asset impairment of $4.4 million to write down assets of TV
onthe Web to their estimated realizable value. Other non-cash charges affecting
the first nine months of 2000 operations included other depreciation,
amortization and accretion of $1.6 million.
During 1999, the Company, through its subsidiary iNEXTV, acquired majority
control of TV onthe WEB and AENTV in step acquisitions. The Company has
included the value of assets and liabilities of these majority-owned affiliates
in its Consolidated Financial Statements and has reported 100% of net losses
reported by these affiliates for periods after it acquired a majority interest.
Also during 1999, the Company acquired a minority interest in Executive Branch
Webcasting Corporation ("EBWC"). The Company elected not to exercise options to
acquire additional ownership in EBWC. Accordingly, in the fourth quarter of
1999, the Company wrote off its minority investment in EBWC. In July 2000, the
Company made a payment to former investors in EBWC as part of its settlement of
litigation between the two parties. In the nine months ended September 30,
2000, the Company incurred infrastructure capital expenditures of $2.0 million
to expand its Internet video production and distribution facilities and to
support the network website, communications, accounting and information tracking
systems. The Company also gave notice of its intent to increase its equity
ownership in TV1 Internet Television in early 2001.
The Company's strategy is to grow Internet revenues from video advertising,
e-commerce partnerships, webcasting, content syndication, Internet video
services and technology licensing. In order to do so, the Company will be
required to incur substantial content production expenditures and sales and
marketing costs to attract users to its video websites, which have only recently
become operational. Material advertising and e-commerce revenues are not likely
to be obtained until a significant base of users can be demonstrated. Recently,
iNEXTV has increased the syndication of its video programming to other web sites
under advertising revenue sharing arrangements. By increasing the size of its
audiences management believes that it will materially enhance the attractiveness
of its programming to potential buyers of web based video advertising. The
Company has also begun to syndicate programming developed by others and is
seeking joint program development arrangements with other content sources to
expand its programming and to defray the cost of programming. There can be no
assurance that the Company will be successful in obtaining sufficient revenues
from the above sources to make its Internet video businesses viable or
profitable.
The Company intends to seek strategic partnerships with other companies in
order to obtain additional content, brand recognition, user awareness,
technology and infrastructure cost savings. The Company may be
18
required to commit significant resources to these partnerships, which could
increase the Company's liquidity needs and require it to issue debt or equity
securities which would dilute current stockholders' interest in the Company.
The Company recently announced its intention to sell Data Systems, which
manufactures the Company's high performance mass data storage and
instrumentation products for entertainment and government applications. In the
third quarter of 2000, the Company received offers to purchase Data Systems and
the Company believes it may receive additional offers in the future. Presently,
Ampex is negotiating with one company which is conducting its due diligence
review. At the date of this Report, the Company has not entered into any
definitive agreement of sale, and there can be no assurance that the Company
will be able to consummate a sale, or as to the terms or timing of any sale, if
consummated.
Ampex intends to use the proceeds of the proposed sale of Data Systems to
repay the Senior Discount Notes discussed below, and in its continuing
operations, including its Internet video operations. Upon the successful sale
of Data Systems at the currently anticipated price, together with cash and
marketable investments on hand and ongoing royalty income, the Company believes
that it will have sufficient funds to satisfy its operating cash requirements,
capital expenditures and debt service costs through at least 2001.
In November 2000, Data Systems issued Senior Discount Notes providing net
proceeds of approximately $8.0 million, which will be used to fund the Company's
short term working capital requirements. The Notes are secured by certain assets
of Data Systems and the Company and are due on the earlier of May 31, 2001 or
the divestiture of Data Systems. Ampex plans to repay the Senior Discount Notes
out of the proceeds of the sale of Data Systems. In the event the planned sale
of Data Systems is not consummated, the Company believes it will be required to
raise additional capital within the next twelve months from the sale of other
assets or from the issuance of debt or equity securities in order to continue to
carry out its current business strategy. No assurance can be given that the
Company would be successful in raising any additional funds, or as to the terms
of any securities that might be issued or arrangements that might be entered
into.
In addition, the Company may seek to raise additional capital at any time
to make new investments in streaming media Internet ventures and technology.
The Company may seek to issue additional shares of Common Stock in public or
private equity transactions or seek to sell equity securities of one or more of
its Internet video businesses privately or in an initial public offering. There
can be no assurance that a market will exist for the Company's or its
affiliates' securities. The Company expects that it will face an increased
number of competitors in future years, many of whom will be better capitalized
and have greater financial resources than the Company. The Company may require
additional capital to execute its Internet strategy, and there can be no
assurance that it will be able to obtain such capital on reasonable terms or at
all.
The Company has available, through a subsidiary, a working capital facility
that allows it to borrow or obtain letters of credit totaling $7.0 million,
based on eligible accounts receivable, through May 2002. At September 30, 2000,
the Company had borrowings outstanding of $1.3 million and had letters of credit
issued against the facility totaling $1.1 million. At September 30, 1999, the
Company had borrowings outstanding of $2,706 and had letters of credit issued
against the facility totaling $1.1 million. The Company believes that its usage
of this facility will be significantly reduced after the sale of Data Systems.
Financing Transactions. In the nine months ended September 30, 2000, the
holders of 760 shares of Convertible Preferred Stock converted their holdings
into 380,000 shares of Common Stock, leaving 1,125 shares of Convertible
Preferred Stock outstanding. In the nine months ended September 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. In 2000, the Company issued shares
of Common Stock valued at $2.50 per share to satisfy its redemption obligation
on the Redeemable Preferred Stock, which was higher than fair value per share of
Common Sock. As a result the Company recorded a benefit available to common
stockholders of $516,000,
19
representing the difference between the fair value and $2.50 per share for the
number of shares issued, on the Consolidated Statements of Operations and
Comprehensive Loss for the nine months ended September 30, 2000.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 Loss for the nine
months ended September 30, 1999. Beginning in June 1999, the Company became
obligated to redeem the Redeemable Preferred Stock in quarterly installments
through March 2008. In the nine months ended September 30, 2000, the Company
issued 1,119,879 shares of its Common Stock to satisfy the quarterly redemption
requirements. The Company is obligated to redeem approximately $4.2 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 December 31, 2000. See Note 8 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 working capital and acquisitions of and investments in
new businesses, including the Company's Internet video businesses. Any such
investments or acquisitions 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. 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.
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 methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. The Company
believes that adoption of this pronouncement will have no material impact on the
Company's financial position and results of operations.
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
SEC. In June 2000, the SEC issued SAB 101B, Second Amendment: Revenue
Recognition in Financial Statements ("SAB 101B"). SAB 101B deferred the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on the Company's financial
position and results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion
20
No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. Management believes that that the impact of FIN 44 will not
have a material effect on the financial position or results of operations of the
Company.
Risk Factors
Risk of Continuing Losses
Ampex has incurred significant operating and net losses in the three and
nine months ended September 30, 2000 and its 1999 fiscal year, primarily due to
its Internet video programming activities, promotional expenses, amortization
of goodwill of acquired businesses and interest expense. Total revenues were
not sufficient to offset these items. Although the Company expects its Internet
video revenues to grow in future periods, there can be no assurance that such
revenues will be sufficient to offset similar expenses and/or losses that may be
incurred. There can be no assurance that such expenses or losses will not
increase in future periods. The Company may be required to incur additional
indebtedness in connection with future acquisitions or its Internet expansion
plans, which could increase future interest expenses. In addition, the Company
cannot predict the amount of licensing royalties that it may recognize in future
periods. Accordingly, the Company expects operating and net losses to continue
at least for the near future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," above, and the other Risk
Factors included in this section.
Risks Associated with iNEXTV and Internet Video Strategy
The Company's Internet subsidiary, iNEXTV, was formed in mid-1999, and has
generated limited revenues. The business and prospects of iNEXTV, and the
Company's Internet video strategy in general, are subject to the risks and
uncertainties typical of companies in the early stages of development. These
risks are especially high in new and rapidly evolving markets such as those for
Internet video content, services, advertising and electronic commerce (e-
commerce). If the Company is not successful in its Internet strategy, investors
in Ampex Common Stock could suffer the loss of a significant portion or all of
their investment.
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, produce or acquire
and deliver compelling, quality video programming over the Internet that
appeals to its target audiences;
. the ability of iNEXTV and its affiliates to obtain and manage key
employees and other resources necessary for growth and profitability;
. market acceptance of Internet broadband access connections, which
improve the quality of streaming video but are more costly than methods
currently used by most consumers;
. market acceptance of streaming media technology, which is currently of
lower quality than television or radio broadcasts, is subject to
congestion and interruptions on the Internet, and requires specialized
software, technical expertise and increased bandwidth;
. dependence upon the continued acceptance and growth of the Internet as a
significant medium for advertising and e-commerce;
21
. iNEXTV's ability to generate advertising revenues from the Internet and
to sell goods and services over the Internet on its own websites and
those of its content partners and third parties to whom its content has
been syndicated;
. the ability of iNEXTV and its affiliates to attract and retain sponsors
and advertisers, content developers, production customers and other key
partners necessary to make its websites and video production services
viable;
. dependence upon timely delivery and integration of website software and
hardware purchased from third parties used in its websites;
. vulnerability of Internet content delivery to system failures and
interruptions for a variety of reasons, including 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 the Company to generate sufficient revenues to offset the
increased cost of bandwidth that would result from increased viewership
of its streaming media video sites and the risk that the Company may
compete with sites which have access to lower cost bandwidth;
. the ability of Ampex to innovate, upgrade and transfer to iNEXTV and its
affiliates audio or video technology for Internet-based applications;
. the ability of iNEXTV to syndicate its content to other web sites or to
obtain content from other providers;
. 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, proposed
taxation and government regulations relating to Internet businesses,
which could have a negative effect on Internet business. Some of these
negative effects could include slowing down Internet growth, adversely
affecting the viability of e-commerce, exposing iNEXTV to potential
liabilities or negative publicity for mishandling customer security or
user privacy concerns or otherwise adversely affecting its Internet
businesses;
. the ability, if needed, to obtain licenses of intellectual property
developed by others that affect Internet usage. Intellectual property
claims, if asserted, against the Company could be costly and could have
a material adverse effect on its Internet business;
. the ability to expand successfully in the European or other foreign
markets, 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. Such losses could negatively affect the price
of the Company's securities. In addition, continued losses could require
the Company to seek additional capital, which may not be available on
satisfactory terms, or at all.
22
Risks Associated with Acquisition Strategy
In order to expand Ampex's products and services, Ampex has made, and will
continue to make under the right circumstances, acquisitions of, and/or
investments in, other business entities. These entities may be involved in
producing or distributing Internet video programming or providing related
services or technology. 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. Except for increasing its investment in TV1,
the Company is not currently engaged in negotiating any specific acquisitions of
other business entities and there can be no assurance as to when or if it will
make acquisitions in the future. In order to pay for future acquisitions or
investments, Ampex may:
. issue additional equity securities, which would dilute the ownership
interest of existing Ampex stockholders;
. 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 integration and management of operations, services and
personnel of the acquired companies. Ampex may also encounter problems in
entering markets and businesses in which it has limited or no experience.
Acquisitions can also divert management's attention from other business
concerns. Ampex may make investments in companies in which it has less than a
100% interest. Such investments involve additional risks, including the
Company's inability 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 that 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 makes will result in any returns
or as to the timing of any such returns. In the third quarter of 2000, the
Company wrote off its investment in TV onthe Web as a result of its decision to
cease funding its operations. In addition, it is possible that Ampex could lose
all or a substantial portion of its other investments.
Risk of Proposed Sale of Data Systems
The Company has announced its intention to sell Data Systems, which
manufactures high performance mass data storage and instrumentation products for
entertainment and government applications. The Company has accounted for this
subsidiary's operations as a discontinued business effective with its fiscal
1999 financial statements. The Company has retained the services of a financial
advisory firm to assist with the sale. In the third quarter of 2000, the Company
received offers to purchase Data Systems and believes that it may receive
additional offers. The Company is in negotiations with a prospective buyer who
is presently conducting its due diligence. The Company has not entered into any
definitive Stock Purchase Agreement and there can be no assurance that the
Company will be able to consummate a sale. Data Systems has experienced a
decline in its product sales and there can be no assurance that this decline
will not continue. Ampex intends to use the proceeds of the proposed sale to
repay the Senior Discount Notes issued in November 2000 and then to invest in
its continuing operations, including its Internet video businesses. There can
be no assurance that any proceeds will be sufficient to fund anticipated losses.
In addition, if the proposed sale is consummated, Ampex may retain certain
liabilities associated with Data Systems' prior operations, including pension
benefit obligations, environmental liabilities and indemnification obligations
customarily contained in sale agreements.
23
Risk of Leverage
As of September 30, 2000, Ampex had outstanding approximately $45.2 million
of total borrowings, which included $44.0 million principal amount of 12% Senior
Notes due 2003 and $1.2 million of subsidiary indebtedness. Subsequent to
September 30, 2000, Data Systems issued the Senior Discount Notes that provided
approximately $8 million of net proceeds. The Senior Discount Notes are due the
earlier of May 31, 2001 or the date Data Systems is sold. The Senior Discount
Notes accrete ratably from $8 million to $8.9 million from November 7, 2000 to
May 31, 2001. The Senior Discount Notes may be prepaid at any time without
prepayment penalty. 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 intends to use the proceeds of the Senior Discount Notes
to finance its short-term working capital requirements.
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 Discount Notes and 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 principal and interest on
outstanding indebtedness, and is therefore unavailable 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. 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
Discount Notes and Senior Note indentures and other agreements relating
to Ampex's indebtedness may restrict Ampex's ability to borrow
additional funds, to dispose of assets or to pay dividends on, or to
repurchase preferred or common stock.
Ampex expects that cash balances and cash flow from royalty income,
together with the anticipated proceeds of the sale of Data Systems, will be
sufficient to fund anticipated operating expenses, capital expenditures and debt
service requirements as they become due, at least through 2001. There can be no
assurance, however, that the amounts available from these sources will be
sufficient for such purposes in future periods. The Company may also seek to
raise additional equity capital in the private or public markets to finance the
expansion of its Internet video businesses. No assurance can be given that
additional sources of funding will be available if required or, if available,
will be on satisfactory terms. If Ampex cannot service its indebtedness, it
will be forced to adopt alternative strategies. These strategies may include
discontinuing certain operations or reducing or delaying capital expenditures,
selling additional assets and restructuring or refinancing Ampex's indebtedness.
There can be no assurance that any of these strategies will be successful or
that they will be permitted under the Indentures, if applicable.
24
Risks of Declining Liquidity
The Company has experienced a substantial reduction in its cash and
marketable securities which declined to $12.5 million at September 30, 2000.
Subsequent to September 2000, Data Systems issued Senior Discount Notes
providing net proceeds of approximately $8 million, which will be used to fund
the Company's short-term working capital requirements. The Notes are secured by
certain assets of the Company and Data Systems and are due on the earlier of May
31, 2001 or the divestiture of Data Systems. Ampex plans to repay the Notes out
of the proceeds of the sale of Data Systems. The Company believes that the
expected proceeds of sale, together with cash and marketable securities on hand
and ongoing royalty income, will be sufficient to fund its cash requirements for
operations, working capital, capital expenditures and debt service through at
least 2001. In the event the planned sale of Data Systems is not consummated,
the Company believes that it will be required to raise additional capital within
the next twelve months from the sale of other assets or from the issuance of
debt or equity securities in order to continue to carry out its current business
strategy. No assurance can be given that the Company would be successful in
raising any additional funds, or as to the terms of any securities that might be
issued or arrangements that might be entered into.
In the event that the Company is not able to sell Data Systems or to raise
additional funds from other sources, it may be necessary for the Company to
implement personnel reductions and/or scale back marketing and capital
expenditures or to take other cost-cutting measures. However, the
implementation of such measures could have material adverse effects on the
Company's future business operations.
Fluctuations in Royalty Income
Ampex's results of operations in certain prior and current 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 impossible to
predict the amount of royalty income Ampex will receive in the future. Royalty
income has historically fluctuated significantly from quarter to quarter and
year to year due to a number of factors that Ampex cannot predict. These
factors include the extent to which third parties use the Company's patented
technology, the extent to which the Company must pursue litigation in order to
enforce its patents, and the ultimate success of its licensing and litigation
activities. Accordingly, there can be no assurance of the level of royalty
income that the Company may realize in the future.
The costs of instituting patent litigation can be material. 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 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 periods to replace
patents as they expire.
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
25
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.
Rapid Technological Change and Risks of New Product and Services 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, services 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, services and technologies will not become
obsolete or that any new products, services or technologies will win commercial
acceptance. Obsolescence of existing product lines, or inability to develop and
introduce new products and services, could have a material and adverse effect on
the Company's sales and results of operations in the future. The development
and introduction of new technologies, services and products are subject to
inherent technical and market risks, and there can be no assurance that Ampex
will be successful in this regard.
In 1999, MicroNet changed its focus to concentrate on its high-end products
and has recently introduced and expects to introduce later this year several new
products and new versions of existing products. Although the Company believes
that these products will be well received, there is no guarantee that they will
be introduced on a timely basis or will achieve significant market share or
generate significant sales revenues. To the extent that MicroNet fails to
improve its profitability, the Company will be required to devote resources
(including management's time and attention) to MicroNet that would otherwise be
available for the expansion of the Company's Internet video businesses.
Competition
The market for Internet products and services is highly competitive and
characterized by multiple competitors and low barriers to entry. Ampex is
attempting to develop improvements in video quality in order to differentiate
itself from its competitors. However, other companies may develop competing
technologies and Ampex may be unable to obtain patent or other protection for
its Internet video technology. In addition, the market for Internet advertising
and electronic commerce, upon which iNEXTV's Internet operations will be
partially dependent to achieve ultimate profitability, is intensely competitive
and the Company believes that competition in this field will intensify.
MicroNet's competitors include large companies such as EMC and IBM and
other small system integrators, many of which are more established and have
greater resources than MicroNet. There is no assurance that MicroNet will be
able to compete successfully in these markets in the future.
Dependence on Certain Suppliers
The Company's manufacturing subsidiaries purchase certain components from a
single domestic or foreign manufacturer for use in its disk arrays and other
manufactured products. Significant delays in deliveries or defects in such
components have adversely affected MicroNet's manufacturing operations and it is
currently qualifying an alternative supplier of such component parts. In
addition, Ampex's manufacturing subsidiaries produce highly
26
engineered products in relatively small quantities. As a result, their 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
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.
The expansion of iNEXTV's European operations, which are conducted
primarily through TV1, may generate advertising and sales revenues in future
periods, although the Company has not recognized any revenue to date, since it
does not presently consolidate the operations of TV1. The European operations
of iNEXTV are expected to be subject to certain risks and uncertainties,
including risks and uncertainties similar to those facing domestic development
stage Internet companies.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). 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 effect 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 acquisitions, Internet developments or new product
introductions by Ampex or its competitors;
. announcements regarding the Company's planned sale of Data Systems;
. 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, or otherwise; and
. fluctuations in trading volume of the Company's Common Stock, and
general economic or market conditions.
27
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 employees 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 has an
aggregate liquidation value of approximately $35.4 million at September 30,
2000, 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. In addition, the Senior Discount Notes issued in
November 2000 are mandatorily redeemable in the event of the sale of Data
Systems or a change of control (as defined) of Ampex or Data Systems.
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.
Environmental Issues
Ampex's facilities are subject to numerous federal, state and local laws
and regulations designed to protect the environment from waste emissions and
hazardous substances. Owners and occupiers of sites containing hazardous
substances, as well as generators and transporters of hazardous substances, are
subject to broad liability under various federal and state environmental laws
and regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites. The Company is also currently engaged in various
environmental
28
investigation, remediation and/or monitoring activities at several sites located
off its facilities. There can be no assurance that 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the disclosure made in the
1999 Form 10-K.
PART II -- OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business.
In the opinion of management, no such current or pending lawsuits, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
In response to a lawsuit filed by the Company against Mitsubishi Electric
Corporation and Mitsubishi Electric America Inc. ("Mitsubishi"), which has been
finally resolved as previously reported, Mitsubishi filed a lawsuit against
Ampex, alleging patent infringement by certain Ampex video and data recorder
products. In 1997, the U.S. District Court for the Central District of
California determined that Ampex has no liability to Mitsubishi patents, and
Mitsubishi appealed to the Court of Appeals for the Federal Circuit. On August
30, 1999, the Court of Appeals affirmed the judgment in favor of Ampex and
subsequently denied Mitsubishi's request for reconsideration. On January 31,
2000, Mitsubishi filed a petition for certiorari to the Supreme Court of the
United States. On April 3, 2000, the Supreme Court denied Mitsubishi's
petition. No further appeals are available.
On January 7, 2000, a suit was filed against the Company and others in the
Superior Court of the District of Columbia by Information Super Station ("ISS")
seeking an injunction and recovery of damages in connection with activities
related to an investment in a subsidiary of ISS made by the Company's
subsidiary, iNEXTV. The Company moved to dismiss this suit on the grounds of
inconvenient forum. On February 1, 2000, the Company filed suit against ISS and
others in the United States District Court for the Southern District of New York
under the Federal securities laws seeking contract rescission and damages in
connection with activities related to this investment. ISS moved to dismiss the
suit on the grounds of inconvenient forum or, in the alternative, to transfer
the suit to the United States District Court for the District of Colombia. Both
of these lawsuits were settled on July 19, 2000. Under the terms of the
settlement agreement, all pending litigation between the parties was dismissed
with prejudice. As part of the settlement, Ampex paid cash to ISS and amended
the vesting provisions with respect to warrants to purchase 100,000 shares of
Common Stock at $3.90 per share. The warrants, if unexercised, will expire in
June 2001. The cost of the settlement are included in other (income) expense,
net in the Consolidated Results of Operations for the nine month period ended
September 30, 2000.
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 2000 or 2001 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
29
regulations, including liability for investigative and cleanup costs and damages
arising out of past disposal activities. The Company has been named as a
potentially responsible party by the United States Environmental Protection
Agency with respect to four contaminated sites that have been designated as
"Superfund" sites on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980. The Company is
engaged in six environmental investigation, remediation and/or monitoring
activities at sites located off Company facilities, including the removal of
solvent contamination from subsurface aquifers at a site in Sunnyvale,
California. Some of these activities involve the participation of state and
local government agencies. The other five sites (including the four Superfund
sites) are associated with the operations of the Media subsidiaries formerly
owned by the Company. Although the Company sold Media in November 1995, the
Company may have continuing liability with respect to environmental
contamination at these sites if Media fails to discharge its responsibilities
with respect to such sites.
Because of the inherent uncertainty as to various aspects of environmental
matters, including the extent of environmental damage, the most desirable
remediation techniques and the time period during which cleanup costs may be
incurred, it is not possible for the Company to estimate with any degree of
certainty the ultimate costs that it may incur with respect to the currently
pending environmental matters referred to above. Nevertheless, at September 30,
2000, the Company had an accrued liability of $1.6 million for pending
environmental liabilities associated with the Sunnyvale site and certain other
sites currently owned or leased by the Company. The Company expects that it
will retain such liabilities or indemnify a purchaser for such liabilities in
the event of the sale of Data Systems. 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 has no contingent liability 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
On November 7, 2000 Ampex Data Systems Corporation, a wholly-owned
subsidiary of the Registrant (the "Issuer") issued $8,919,555.56 aggregate
principal amount of its Senior Discount Notes due May 31, 2001 (the "Notes") to
certain institutional purchasers (the "Purchasers"). The Notes are secured by a
deed of trust on certain manufacturing facilities owned by the Issuer, are
guaranteed by the Registrant, and are further secured by a security interest in
certain intellectual property rights owned by the Registrant. The net proceeds
of the Notes, which amounted to approximately $8 million, are expected to be
used primarily for short-term working capital purposes.
The Notes were placed privately with the Purchasers who acquired the Notes
for investment in a transaction exempt from registration under the Securities
Act of 1933, as amended (the "Act") by reason of Section 4(2) of the Act.
For the quarter ended September 30, 2000, the Company issued 429,600 shares
of Class A Common Stock in payment of the redemption price for 537 shares of its
8% Noncumulative Redeemable Preferred Stock, which is required to be redeemed on
a quarterly basis. No cash or other consideration was paid by the Company,
directly or
30
indirectly, in connection with such redemption. 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.
In July 1999, Ampex issued to ISS a warrant to purchase up to 512,821 shares
of the Company's Class A Common Stock at $3.90 per share, subject to adjustment.
The warrant was issued in connection with the Company's investment in Executive
Branch Webcasting Corporation, in a transaction exempt from registration under
section 4(2) of the Securities Act of 1933, as amended. The shares of Class A
Common Stock issuable upon exercise of the warrant were registered under the
Company's shelf Registration Statement on Form S-3 (File No. 333-85605). In
connection with the settlement of certain litigation between Ampex and ISS, as
described above in "Item 1. Legal Proceedings," Ampex amended the vesting
provisions with respect to a portion of the warrant. By its terms, the warrant
would have expired in its entirety, without having become vested, on March 15,
2000. Under the terms of the amendment, the warrant became vested with respect
to 100,000 shares, and was terminated with respect to the balance of the shares,
in each case effective as of March 15, 2000. The warrant, as amended, will
expire on June 15, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6(a). EXHIBITS
The Exhibits to this Quarterly Report on Form 10-Q are listed in the Exhibit
Index which appears elsewhere herein and is incorporated herein by reference.
ITEM 6(b). REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during its fiscal
quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMPEX CORPORATION
Date: November 14, 2000 /s/ EDWARD J. BRAMSON
---------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: November 14, 2000 /s/ CRAIG L. McKIBBEN
---------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
32
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
September 30, 2000
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ---------- -------------------
4.1 Note Purchase Agreement, dated as of November 6, 2000, among Ampex Data
Systems Corporation ("Issuer"), the Registrant and the several Note
Purchasers named therein.
4.2 Senior Discount Note due May 31, 2001.
4.3 Senior Discount Note due May 31, 2001.
4.4 Senior Discount Note due May 31, 2001.
4.5 Deed of Trust, Security Agreement, Financing Statement and Assignment
of Rents and Revenues, dated as of November 6, 2000, between the Issuer
and the Trustee named therein.
4.6 Form of Management Rights Letter.
4.7 Form of Management Rights Letter.
4.8 Collateral Security Agreement, dated as of November 6, 2000, between
the Issuer and the Secured Party named therein.
27.1 Financial Data Schedule.
33