SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File No. 0-20292
AMPEX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-3667696
(State of Incorporation) (I.R.S. Employer Identification Number)
500 Broadway
Redwood City, California 94063-3199
(Address of principal executive offices, including zip code)
(650) 367-2011
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 2001, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 59,220,996. There were no
outstanding shares of the Registrant's Class C Common Stock, $0.01 par value.
AMPEX CORPORATION
FORM 10-Q
Quarter Ended June 30, 2001
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 2
Consolidated Balance Sheets (unaudited) at June 30, 2001 and
December 31, 2000............................................... 3
Consolidated Statements of Operations (unaudited) for the
three and six months ended June 30, 2001 and 2000............... 4
Consolidated Statements of Cash Flows (unaudited) for the three
and six months ended June 30, 2001 and 2000..................... 5
Notes to Unaudited Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk....... 28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................... 28
Item 2. Changes in Securities and Use of Proceeds....................... 29
Item 3. Defaults Upon Senior Securities................................. 29
Item 4. Submission of Matters to a Vote of Security Holders............. 29
Item 5. Other Information............................................... 30
Item 6(a). Exhibits........................................................ 30
Item 6(b). Reports on Form 8-K............................................. 30
Signatures ................................................................ 31
2
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
[in thousands, except share and per share data)
June 30, December 31,
2001 2000
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 6,364 $ 10,384
Short-term investments.................................................... 10 5,011
Accounts receivable (net of allowances of nil in 2001 and in 2000)........ 66 127
Other current assets...................................................... 1,892 3,930
------------- -------------
Total current assets.................................................. 8,332 19,452
Property, plant and equipment, net.............................................. 1,732 5,217
Intangible assets, net.......................................................... -- 211
Investments in affiliate........................................................ -- 1,678
Deferred pension asset.......................................................... 61 377
Other assets.................................................................... 929 1,173
Net assets of business held for sale............................................ 9,134 11,660
------------- -------------
Total assets.......................................................... $ 20,188 $ 39,768
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable............................................................. $ 157 $ 157
Accounts payable.......................................................... 57 554
Net liabilities of discontinued operations................................ 3,872 2,482
Other accrued liabilities................................................. 9,058 7,973
------------- -------------
Total current liabilities............................................. 13,144 11,166
Long-term debt.................................................................. 44,448 46,086
Other liabilities............................................................... 26,072 26,637
Net liabilities of discontinued operations...................................... 4,604 --
Deferred income taxes........................................................... 1,213 1,213
------------- -------------
Total liabilities..................................................... 89,481 85,102
------------- -------------
Commitments and contingencies (Note 7)
Mandatorily redeemable nonconvertible preferred stock, $1,000 liquidation value:
Authorized: 69,970 shares in 2001 and in 2000
Issued and outstanding - none in 2001 and 2000............................ -- --
Mandatorily redeemable preferred stock, $2,000 liquidation value:
Authorized: 21,859 shares in 2001 and in 2000
Issued and outstanding - 16,099 shares in 2001; 17,173 in 2000............ 32,198 34,346
Convertible preferred stock, $2,000 liquidation value:
Authorized: 10,000 shares in 2001 and in 2000
Issued and outstanding - 767 shares in 2001 and 1,125 in 2000............. 1,534 2,250
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 898,171 shares in 2001 and 2000
Issued and outstanding - none in 2001 and in 2000..................... -- --
Common stock, $.01 par value:
Class A:
Authorized: 175,000,000 shares in 2001 and in 2000
Issued and outstanding - 59,220,996 shares in 2001; 58,075,396 in
2000............................................................. 592 581
Class C:
Authorized: 50,000,000 shares in 2001 and in 2000
Issued and outstanding - none in 2001 and in 2000................. -- --
Other additional capital.................................................. 424,441 421,578
Notes receivable from stockholders........................................ (4,642) (4,642)
Accumulated deficit....................................................... (505,863) (481,894)
Accumulated other comprehensive loss...................................... (17,553) (17,553)
------------- -------------
Total stockholder's deficit........................................... (103,025) (81,930)
------------- -------------
Total liabilities, redeemable preferred stock and stockholders'
deficit.............................................................. $ 20,188 $ 39,768
============= =============
The accompanying notes are an integral part of these unaudited
consolidated statements.
3
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited)
Royalty income....................... $ 2,181 $ 3,587 $ 4,517 $ 6,706
------------ ------------ ------------ ------------
Intellectual property costs.......... 213 238 386 608
Selling and administrative........... 1,412 1,661 3,333 2,661
------------ ------------ ------------ ------------
Total costs and operating
expenses........................ 1,625 1,899 3,719 3,269
------------ ------------ ------------ ------------
Operating income................. 556 1,688 798 3,437
Interest expense..................... 1,359 1,359 2,690 2,714
Amortization of debt financing costs. 87 87 175 175
Interest income...................... (74) (204) (200) (729)
Other (income) expense, net.......... (49) 223 (136) 222
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes.. (767) 223 (1,731) 1,055
Provision for income taxes........... 219 365 466 688
------------ ------------ ------------ ------------
Income (loss) from continuing
operations...................... (986) (142) (2,197) 367
Loss on disposal of discontinued
operations (net of taxes of none in
2001 and 2000)...................... (10,338) -- (10,338) --
Loss from discontinued operations
(net of taxes of none in 2001 and
in 2000............................. (3,759) (8,469) (7,294) (16,465)
Income (loss of business held for
sale (net of taxes of none in 2001
and 2000)........................... (2,230) 693 (4,140) 1,241
------------ ------------ ------------ ------------
Net loss......................... (17,313) (7,918) (23,969) (14,857)
Benefit from extinguishment of
mandatorily redeemable preferred
stock............................... 1,505 -- 2,337 --
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders.................... (15,808) (7,918) (21,632) (14,857)
Other comprehensive loss, net of tax:
Unrealized gain (loss) on
marketable securities........... -- (11) -- (141)
Foreign currency translation
adjustments..................... -- 1 -- 11
------------ ------------ ------------ ------------
Comprehensive loss............... $ (15,808) $ (7,928) $ (21,632) $ (14,987)
============ ============ ============ ============
Basic and diluted loss per share:
Income (loss) per share from
continuing operations............ $ (0.02) $ 0.00 $ (0.04) $ 0.01
Loss per share from discontinued
operations....................... $ (0.28) $ (0.14) $ (0.37) $ (0.21)
Loss per share applicable to
common stockholders.............. $ (0.27) $ (0.14) $ (0.37) $ (0.20)
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding.................. 58,512,864 55,916,857 58,296,491 72,762,923
============ ============ ============ ============
The accompanying notes are an integral par of these unaudited consolidated
financial statements.
4
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
-------------------------------------
June 30, 2001 June 30, 2000
---------------- -----------------
(unaudited)
Cash flows from operating activities:
Net loss................................................................... $ (23,969) $ (14,857)
Loss from discontinued operations.......................................... 21,772 15,224
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion............................. 423 405
Changes in operating assets and liabilities:
Accounts receivable............................................... 28 345
Deferred pension asset............................................ 316 (1,636)
Other assets...................................................... 2,024 2,816
Accounts payable.................................................. (358) 273
Other accrued liabilities and income taxes payable................ 2,800 2,602
Net liabilities of discontinued operations........................ (848) (2,476)
Other liabilities................................................. (640) (791)
---------------- -----------------
Net cash provided by continuing operations.................. 1,548 1,905
Net cash used in discontinued operations.................... (7,529) (13,749)
---------------- -----------------
Net cash used in operating activities....................... (5,981) (11,844)
---------------- -----------------
Cash flows from investing activities:
Purchases of short-term investments........................................ -- (27,219)
Proceeds received on the maturity of short-term investments................ 5,001 36,225
Proceeds from the sale of short-term investments........................... -- 8,730
Additions to property, plant and equiment.................................. -- (108)
---------------- -----------------
Net cash provided by continuing operations.................. 5,001 17,628
Net cash used in discontinued operations.................... (1,259) (2,343)
---------------- -----------------
Net cash provided by investing activities................... 3,742 15,285
---------------- -----------------
Cash flows from financing activities:
Borrowings under working capital facilities................................ -- 1,302
Repayments under working capital facilities................................ (1,715) (752)
Repayment of notes payable-affiliates...................................... -- (12)
Proceeds from issuance of common stock..................................... 9 81
---------------- -----------------
Net cash provided by (used in) continuing operations........ (1,706) 619
Net cash used in discontinued operations.................... -- (29)
---------------- -----------------
Net cash provided by (used in) financing activities......... (1,706) 590
---------------- -----------------
Effects of exchange rates on discontinued operations........ -- 11
---------------- -----------------
Effects of exchange rates on discontinued operations........ (75) 144
---------------- -----------------
Net increase (decrease) in cash and cash equivalents........ (4,020) 4,186
Cash and cash equivalents, beginning of period.................................. 10,384 10,598
---------------- -----------------
Cash and cash equivalents, end of period........................................ $ 6,364 $ 14,784
================ =================
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 a leading innovator of
visual information technology. In recent years, the Company launched a program
to reposition itself in the Internet video industry, providing programming,
services and technology. The Company's internal Internet video operations,
acquisitions and strategic investments were consolidated into iNEXTV Corporation
("iNEXTV" or "iNEXTV.com"), a wholly-owned subsidiary. In July 2001, the Company
announced that it will close iNEXTV's operations in New York City and will
terminate the development of Internet video technology in Redwood City,
California. It will also discontinue making investments in its partially-owned
affiliates, Alternative Entertainment Network, Inc. ("AENTV" or "AENTV.com") in
Los Angeles and TV1 Internet Television, ("TV1"or "TV1.de") in Munich, Germany.
As a result, the operations of iNEXTV have been classified as "Discontinued
Operations" in the Consolidated Statements of Operations for all periods
presented. At June 30, 2001, the Company established a reserve for the costs of
closure and to write-off its investment in iNEXTV which is included in "Loss on
Disposal of Discontinued Operations." The liabilities of iNEXTV and reserve for
closure costs are included in "Net liabilities of Discontinued Businesses" in
the Consolidated Balance Sheet as at June 30, 2001. The assets or liabilities of
iNEXTV are included in the Consolidated Balance Sheet as of December 31, 2000.
In September 2000, the Company discontinued making investments in its
partially-owned affiliate TV onthe WEB, Inc. ("TV onthe WEB") and wrote off its
remaining investment in the subsidiary and ceased to include it in the Company's
Consolidated Financial Statements. As a result, there are no assets or
liabilities of TV onthe WEB included in the Consolidated Balance Sheet for all
periods presented.
As of the year ended 1999, the Company announced plans to sell Ampex Data
Systems Corporation, ("Data Systems"), its subsidiary that makes high
performance tape-based mass data storage products. For accounting reporting
purposes, the results of operations of Data Systems have been classified as a
"Business Held for Sale" in the Consolidated 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 Sale" in the Consolidated Balance Sheets. The
Company continues to have discussions with prospective buyers but does not
currently anticipate that it will close a transaction in 2001, if at all.
As of the year ended 2000, Ampex decided to discontinue the operations of
MicroNet Technology, Inc. ("MicroNet"), its wholly-owned subsidiary that made
high performance disk arrays and storage area network products. The operations
of MicroNet have been classified as "Discontinued Operations" in the
Consolidated Statements of Operations for all periods presented. As a result,
there are no assets or liabilities of MicroNet included in the Consolidated
Balance Sheet for all periods presented.
The Company's continuing operations consist of Ampex's intellectual
property licensing activities.
Liquidity and Going Concern Considerations
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred operating
losses for several quarters and has restructured certain of its businesses and
discontinued certain businesses. The Company's liquidity has declined
substantially in recent periods and it requires additional capital to meet its
obligations which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company's working capital has declined substantially from December 31,
1999 to December 31, 2000 and further declined in the first half of 2001. The
Company has experienced a substantial reduction in its cash and marketable
securities which declined to $6.4 million at June 30, 2001. In November 2000,
Data Systems issued Senior Secured Notes providing net proceeds of approximately
$8 million. The Notes are secured by certain assets of the Company and Data
Systems. Ampex has entered into an agreement to sell and leaseback certain real
estate and would apply the net proceeds from the transaction to repay the Notes.
The sale and leaseback agreement is subject to a number of material
contingencies, including the buyer obtaining financing for a significant portion
of the purchase price, and there can be no assurance that this transaction will
be completed. The Notes as amended are scheduled to mature on the earlier of
August 31, 2001 or the sale of Data Systems. The Company and representatives of
the Noteholders have reached an agreement in principal to extend the maturity
date to October 31, 2001 to complete the sale and leaseback. Pursuant to an
agreement between the Company, Hillside Capital Incorporated ("Hillside") and
certain other parties, Hillside is obligated to fund pension contributions in
the event the Company is unable to do so. The Company has notified Hillside that
it does not have sufficient liquidity to make currently scheduled pension
contributions and pursuant to its agreement has requested Hillside to fund the
pension contributions. The Company will issue to Hillside a Note in the amount
of the required contributions. Data
6
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Ampex Corporation (cont'd.)
Systems requires additional working capital financing in order to fund
outstanding payables and other obligations. To date, Data Systems has been
unable to obtain additional financing, although it is currently exploring
potential financing sources. The Company is scheduled to make an interest
payment of approximately $2.6 million on its Senior Notes due September 15,
2001. Management intends to seek to negotiate a deferral of this obligation and
a restructuring of the indebtedness. While the Company is actively addressing
each of these issues, if the Company is unable to restructure its indebtedness
or if Data Systems is unable to conclude new financing arrangements, either or
both companies may be required to seek bankruptcy protection. In this event the
Company's Stock may be negatively affected or rendered worthless. The Company
has entered into discussions with certain consumer electronics manufacturers to
license the Company's intellectual property for use in the manufacture of
digital camcorders, DVDs and computer games. These capital raising strategies
are in preliminary stages, and there can be no assurance that they will be
successful or raise sufficient resources in time for the Company to remain a
going concern. Furthermore, the Company's debt indentures include provisions
that may adversely impact the ability to complete a sale of all or substantially
all of its assets.
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, 2000 and the Audited Consolidated Financial Statements included therein.
In the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position, results of operations and cash flows
for the interim periods presented. The results of operations for the three and
six-month periods ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 ("FAS 141"), Business Combinations, and No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets. FAS 141 addresses financial accounting and
reporting for business combinations and supercedes APB16, Business Combinations.
The provisions of FAS 141 are required to be adopted July 1, 2001. The most
significant changes made by FAS 141 are: (1) requiring that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the recognition of intangible
assets separately from goodwill, and (3) requiring unallocated negative goodwill
to be written off immediately as an extraordinary gain.
FAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and supercedes APB 17, Intangible Assets.
The provisions of FAS 142 are required to be adopted in fiscal years beginning
after December 15, 2001. The most significant changes made by FAS 142 are: (1)
goodwill and indefinite lived intangible assets will no longer be amortized, (2)
goodwill will be tested for impairment at least annually at the reporting unit
level, (3) intangible assets deemed to have an indefinite life will be tested
for impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.
The Company will adopt FAS 141 effective July 1, 2001 which will result in
the Company accounting for any business combination consummated on or after that
date under the purchase method of accounting. The Company will also apply the
non-amortization provisions of FAS 142 for any business combination consummated
on or after July 1, 2001.
The Company will adopt FAS 142 effective January 1, 2002. At June 30, 2001
there was no goodwill and goodwill amortization on the Company's financial
statements.
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.
Ampex continues to seek a buyer for the Data Systems business, but due to
economic and market conditions believes that it will be difficult to consummate
a successful sale until late 2001 or 2002, if at all.
7
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Business Held for Disposition (cont'd.)
A summary of the operating results of Data Systems is as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues ..................................... 8,128 12,029 17,953 23,768
Costs and operating expenses ................. (9,938) 11,426 (21,277) 22,716
Operating income (loss) ...................... (1,810) 603 (3,323) 1,052
Interest expense ............................. (435) (13) (842) (26)
Income (loss) of business held for
disposition.................................. (2,230) 693 (4,140) 1,241
A summary of the assets and liabilities of Data Systems is as follows:
June 30, December 31,
2001 2000
-------- -----------
(in thousands)
Current assets ..................... $ 24,314 $ 26,040
Property, plant and equipment, net.. 5,660 6,010
Other assets ....................... 139 159
Senior Discount Notes .............. (9,064) (8,240)
Current liabilities ................ 10,979) (11,062)
Other liabilities .................. (375) (552)
Other .............................. (561) (695)
-------- -----------
Net assets of segment to be sold.... $ 9,134 $ 11,660
-------- -----------
In November 2000, Data Systems issued Senior Discount Notes providing net
proceeds of $8 million to fund the Company's short-term working capital
requirements. The Notes are secured by certain assets of the Company and Data
Systems. Ampex has entered into an agreement to sell and leaseback certain real
estate which is subject to a number of significant closing conditions, including
the buyer obtaining a financing commitment for a substantial portion of the
purchase price. There can be no assurance that the sale and leaseback will be
completed. The Company would apply the net proceeds from the transaction to
repay the Senior Discount Notes. The Notes, as amended, are scheduled to mature
on the earlier of August 31, 2001 or the sale of Data Systems. The Company and
representatives of the Noteholders have reached an agreement in principal to
extend the Note maturity date to October 31, 2001 to facilitate the completion
of the sale and leaseback of certain real estate discussed above.
In the three months ended June 2001, Data Systems recorded a net
restructuring charge of $0.8 million. The $0.8 million restructuring charge are
costs associated with the elimination of approximately 73 U.S. positions in
engineering, manufacturing and administration. At June 30, 2001, Data Systems
had paid and charged $0.5 million against the liability accounts related to the
termination benefits set up for the 2001 restructuring and terminated 71
employees. At June 30, 2001, the Company includes the remaining balance of Data
Systems accrued restructuring of $0.5 million as part of its net liabilities of
discontinued operations. Included in the Data Systems accrued restructuring are
prior year lease obligations totaling $32 thousand related to vacated or
abandoned leases which have not been discounted to present value.
Note 4 - Discontinued Operation
As of the year-end 2000, the Board of Directors of the Company authorized
management to close MicroNet and to establish a reserve for the costs of closure
and to write-off its investment. Management is attempting to liquidate
MicroNet's assets and plans to distribute the proceeds to MicroNet's creditors.
The Consolidated Balance Sheet as of June 30, 2001 and December 31, 2000 did not
include any assets or liabilities of MicroNet.
8
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Discontinued Operation (cont'd.)
A summary of the operating results of MicroNet are as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues .......................................... -- 2,990 -- 6,251
Costs and operating expenses excluding amortization -- (4,045) -- (7,777)
Goodwill amortization ............................. -- (303) -- (606)
Operating loss .................................... -- (1,358) -- (2,132)
Loss from discontinued operations ................. -- (1,358) -- (2,132)
In July 2001, the Board of Directors of the Company authorized management
to close iNEXTV and to cease future funding of its other Internet-based
affiliates, AENTV and TV1, and to establish a reserve for the costs of closure
at the end of the quarter ended June 30, 2001.
A summary of the operating results of iNEXTV are as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues .......................................... 58 488 188 1,090
Costs and operating expenses excluding amortization (3,233) (6,203) (6,277) (13,240)
Goodwill amortization ............................. (84) (1,156) (211) (1,730)
Operating loss .................................... (3,259) (6,871) (6,300) (13,880)
Equity loss of unconsolidated subsidiary .......... (502) (226) (999) (452)
Loss from discontinued operations ................. (3,759) (7,111) (7,294) (14,333)
Internet revenues in 2000 were principally from webcasting, video
production and event marketing services, substantially all of which were
provided by the Company's subsidiary, TV onthe WEB, which the Company ceased
funding in October 2000. For the three and six months ended June 30, 2000, TV
onthe WEB reported a net loss of $2.2 million and $4.2 million, respectively.
Since October 1, 2000, the Company has not recognized any revenues or expenses
of TV onthe WEB in its consolidated financial statements.
A summary of the loss on disposal of iNEXTV is as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Reserve for closure ....................... (5,736) -- (5,736) --
Impairment charge ......................... (4,602) -- (4,602) --
Loss on disposal of discontinued operations (10,338) -- (10,338) --
The impairment charge recorded in the quarter ended June 30, 2001 reflects
the write-off of the Company's unamortized investment in the Internet
businesses. The reserve for closure costs includes future payments to be made
over a seven year period for facility rental commitments and related costs of
$5.0 million, which may be mitigated if they are sublet in the future, employee
and contractor severance costs of $0.6 million and other costs of $0.1 million.
9
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - 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 Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
Numerator - Basic and Diluted
Income (loss) from continuing operations............. $ (986) $ (142) $ (2,197) $ 367
========== ========= ========= =========
Net loss applicable to common stockholders........... $ (15,808) $ (7,918) $(21,632) $ (14,857)
========== ========= ========= =========
Denominator - Basic
Weighted average common stock outstanding............ 58,513 55,917 58,296 55,718
========== ========= ========= =========
Basic income (loss) per share
from continuing operations........................... $ (0.02) $ 0.00 $ (0.04) $ 0.01
========== ========= ========= =========
Basic loss per share
applicable to common stockholders.................... $ (0.27) $ (0.14) $ (0.37) $ (0.27)
========== ========= ========= =========
Denominator - Diluted
Weighted average common stock outstanding............ 58,513 55,917 58,296 55,718
Contingent shares due to acquisition................. -- -- -- 720
Effect of dilutive securities
Stock options.................................... -- -- -- 947
Redeemable and convertible preferred stock....... -- -- -- 15,160
Warrants......................................... -- -- -- 218
---------- --------- --------- ---------
58,513 55,917 58,296 72,763
========== ========= ========= =========
Diluted income (loss) per share
from continuing operations........................... $ (0.02) $ 0.00 $ (0.04) $ 0.01
========== ========= ========= =========
Diluted loss per share
applicable to common stockholders.................... $ (0.27) $ (0.14) $ (0.37) $ (0.20)
========== ========= ========= =========
In the six months ended June 30, 2001, holders of 358 shares of Convertible
Preferred Stock converted their holdings into 286,400 shares of Common Stock and
1,074 shares of Redeemable Preferred Stock were redeemed into 859,200 shares of
Common Stock which are included in the weighted average common stock outstanding
from the date of exchange. In the six months ended June 30, 2000, holders of 760
shares of Convertible Preferred Stock converted their holdings into 380,000
shares of Common Stock and 1,074 shares of Redeemable Preferred Stock were
redeemed into 690,279 shares of Common Stock which are included in the weighted
average common stock outstanding from 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
three and six months ended June 30, 2001 and the three months ended June 30,
2000, respectively, since they are anti-dilutive. If the Company was to make all
remaining redemption payments in Common Stock based on the floor conversion
price, an additional 13,262,700 shares of Common Stock would be issued over the
number of common shares included in the diluted income per share computation. At
June 30, 2001 such additional shares of Common Stock would be anti-dilutive to
the diluted loss per share reported.
Stock options to purchase 3,767,940 shares of Common Stock at prices
ranging from $0.26 to $6.00 per share were outstanding at June 30, 2001, but
were not included in the computation of diluted loss per share as they are
anti-dilutive.
10
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Computation of Basic and Diluted Loss per Share (cont'd.)
Stock options to purchase 3,324,922 shares of Common Stock at prices
ranging from $1.0625 to $6.00 per share were outstanding at June 30, 2000, but
were not included in the computation of diluted loss per share for the three
months ended June 30, 2000 as they are anti-dilutive.
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 six months ended June 30, 2001 and the three months ended June
30, 2000, respectively, since they are anti-dilutive.
Note 6 - Supplemental Schedule of Cash Flow Information
Six months ended June 30,
---------------------------------
2001 2000
------------- -------------
(in thousands)
Interest paid ................ $ 2,640 $ 2,641
Income taxes paid ............ 466 697
Redeemable preferred stock.... (1,074) (2,148)
Convertible preferred stock... (716) (1,520)
Issuance of common stock...... 1,790 3,668
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 May 17, 2001, Sumitomo Marine Management (USA), Inc. and Great American
Insurance Company filed suit in the Superior Court of New Jersey as subrogees of
Casio, Inc. against AENTV and others, alleging that Arnold Schwarzenegger had
sought and obtained payment from Casio based on its use in an ad of an image of
Schwarzennegger as the Terminator, which had been purchased from the defendants
and was extracted from a television show on the making of "The Terminator"
created by defendants. Plaintiffs allege they paid "millions" in settlement of
Schwarzenegger's claim. Suit seeks unspecified damages and costs.
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.
11
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. Beginning in June
2001, the Company became obligated to redeem any remaining Convertible Preferred
Stock in quarterly installments through December 2008. In the six months ended
June 30, 2000, the Company issued 286,400 shares of Common Stock to satisfy the
quarterly redemption requirements, leaving 767 shares of Convertible Preferred
Stock outstanding. In the six months ended June 30, 2000, the holders of 760
shares of Convertible Preferred Stock converted their holdings into 380,000
shares of Common Stock. Beginning in June 1999, the Company became obligated to
redeem the Redeemable Preferred Stock in quarterly installments through March
2008. In the six months ended June 30, 2001, the Company issued 859,200 shares
of its Common Stock to satisfy the quarterly redemption requirements, leaving
16,099 shares of Redeemable Preferred Stock outstanding. In the six months ended
June 30, 2000, the Company issued 690,279 shares of its Common Stock to satisfy
the quarterly redemption requirements. The Company is obligated to redeem
approximately $5.8 million face amount of Convertible and Redeemable Preferred
Stock 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, 2001. To the extent that the floor
redemption price exceeds the fair value of shares issued to redeem the
Convertible Preferred Stock and the Redeemable Preferred Stock the Company
recognizes a benefit from extinguishment of preferred stock.
Note 9 - Income Taxes
As of December 31, 2000, the Company had net operating loss carryforwards
for income tax purposes of $125 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:
Minimum
Pension
Liability
-------------
(in thousands)
December 31, 2000........................ $ 17,553
Current period change.................... --
-------------
June 30, 2001............................ $ 17,553
=============
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.
12
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Senior Notes (cont'd.)
The Company is scheduled to make an interest payment of approximately $2.6
million on its Senior Notes due on September 15, 2001. Management intends to
seek to negotiate a deferral of this obligation and a restructuring of the
Notes. If the Company is unable to restructure the Notes, the Company may be
required to seek bankruptcy protection which might result in the Company's
Common Stock becoming worthless.
Note 12 - Segment Reporting
The Company has one operating segment: licensing of intellectual property.
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 continuing
operations before income taxes excluding goodwill amortization and asset
writedowns.
Intersegment sales and transfers are accounted for at current market prices
but they were not significant to revenues.
Six Months Ended June 30, 2001
-----------------------------------------
Licensing of Eliminations
Intellectual and
Property Corporate Totals
----------- ----------- -----------
Revenues from external customers ....... $ 4,517 $ -- $ 4,517
Interest income ........................ -- 200 200
Interest expense ....................... -- 2,690 2,690
Depreciation, amortization and accretion -- 423 423
Segment income (loss) .................. 4,131 (5,862) (1,731)
Segment assets ......................... -- 20,188 20,188
Expenditures for segment assets ........ -- -- --
Six Months Ended June 30, 2000
-----------------------------------------
Licensing of Eliminations
Intellectual and
Property Corporate Totals
----------- ----------- -----------
Revenues from external customers ....... $ 6,706 $ -- $ 6,706
Interest income ........................ -- 729 729
Interest expense ....................... -- 2,714 2,714
Depreciation, amortization and accretion 2 405 405
Segment income (loss) .................. 6,098 (5,043) 1,055
Segment assets ......................... 1 60,032 60,033
Expenditures for segment assets ........ -- 108 108
13
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, 2000, as filed with the
Securities and Exchange Commission (file no. 0-20292) (the "2000 Form 10-K").
Going Concern
The Company has previously disclosed that it may not be able to continue as
a going concern. As discussed below, the Company's subsidiary, Data Systems,
requires additional working capital financing to fund outstanding payables and
other liabilities and will be required to repay short-term debt secured by
certain real estate in the near future. The Company is scheduled to make an
interest payment of approximately $2.6 million on its Senior Notes which is due
September 15, 2001. The Company intends to seek to negotiate a deferral of this
obligation and a restructuring of the Notes. If the Company is unable to
restructure its indebtedness or if Data Systems is unable to conclude new
financing arrangements, either or both companies may be required to seek
bankruptcy protection. Such an event may result in the Company's Common Stock
being negatively affected or becoming worthless.
In 1999, Ampex launched a program to reposition the Company in the Internet
video industry, providing programming, services and technology. The Company's
Internet video operations, acquisitions and strategic investments were
consolidated into iNEXTV Corporation, a wholly-owned subsidiary.
In order to provide funding for its Internet video operations the Company
announced in February 2000, plans to sell Ampex Data Systems Corporation, ("Data
Systems"), its subsidiary which makes high performance tape-based mass data
storage products. Data Systems has since been accounted for as a discontinued
operation.
Discontinuance of Internet Video Development Strategy
To date, Ampex has been unable to conclude an acceptable sale of Data
Systems or to raise capital from other sources to fund the cash requirements of
iNEXTV. Accordingly, on July 20, 2001, the Company announced that it will close
iNEXTV's operations in New York City and will terminate the development of
Internet video
14
technology in Redwood City, California. It will also discontinue making
investments in its partially-owned affiliates, AENTV in Los Angeles and TV1.de
in Munich, Germany The Company intends to sell the assets of iNEXTV but does not
currently expect that it will generate significant proceeds from such sales. In
the quarter ended June 30, 2001, Ampex wrote off its investments in those
entities completely and provided a reserve for the costs of closing all
operations.
Prior to its closure iNEXTV became one of the most active video websites.
Traffic grew materially from approximately 163 thousand minutes of video in Q4
2000 to approximately 808 thousand minutes in Q1 2001 and 3.2 million minutes in
Q2 2001, due to success in expanding its distribution network. iNEXTV also
reduced its operating expenditures significantly while increasing its program
production to in excess of 200 video segments per month. However, while
management continues to believe that the use of video for branding on the
Internet will, in the future, become widely accepted, current advertising market
conditions are extremely adverse. As a result, the Company's ability to generate
advertising revenues was severely limited. Ampex approached numerous potential
financial or strategic investors for iNEXTV but was unsuccessful in raising
additional capital. In view of Ampex's inability to provide additional funding,
iNEXTV was required to suspend its operations. In the second quarter of 2001,
Ampex recorded a charge of approximately $4.6 million to write-off its
investments in iNEXTV and its affiliates. In addition, the Company recorded a
charge of approximately $5.7 million to reflect other costs of closure,
principally real estate leases. Such costs may be mitigated to the extent that
the Company is able to sublet its facilities. The impairment charge and reserve
for closure costs are included in Loss on Disposal of Discontinued Operations.
Ampex continues to seek a buyer for Data Systems. For accounting purposes,
the results of operations of Data Systems have been classified as a "Business
Held for Sale" in the Consolidated Statements of Operations for all periods
presented. The book value of the net assets to be sold of this segment is
reflected in "Net Assets of Business Held for Sale" in the Consolidated Balance
Sheets as of June 30, 2001 and December 31, 2000. The Company continues to have
discussions with prospective buyers but does not currently anticipate that it
will close a transaction in 2001, if at all.
As of year-end 2000, Ampex determined to discontinue the operations of
MicroNet, its subsidiary which manufactured disk arrays and storage area network
products. At December 31, 2000, the Company established a reserve for the costs
of closure and to write-off its investment in MicroNet. Accordingly, the
operations of MicroNet have been classified as "Discontinued Operations" for all
periods presented.
The Company's continuing operations consist of Ampex's intellectual
property licensing activities.
Results of Operations for the Three and Six Months Ended June 30, 2001 and 2000
Royalty Income. Royalty income was $2.2 million and $3.6 million in the
second quarters of 2001 and 2000, respectively, and $4.5 million and $6.7
million in the first half of 2001 and 2000, respectively. The Company's royalty
income derives from patent licenses. 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. The Company is assessing whether manufacturers of digital camcorders
and cameras, computer video games and DVD recorders are using its patented
technology and has entered into preliminary discussions with certain
manufacturers to license the Company's patents for such use. There can be no
assurance that the manufacturers of these products are utilizing the Company's
technology or, if used, whether the Company will be able to negotiate license
agreements with the manufacturers. Royalty income has historically fluctuated
widely due to a number of factors that the Company cannot predict or control
such as the extent of use of the Company's patented technology by third parties,
the materiality of any nonrecurring royalties received as the result of
negotiated settlements for products sold by manufacturers prior to entering into
licensing agreements with the Company, the extent to which the Company must
pursue litigation in order to enforce its patents, and the ultimate success of
its licensing and litigation activities.
15
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.
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
Selling and Administrative. Selling and administrative expenses not
allocated to Discontinued Operations was $1.4 million and $1.7 million in the
three months ended June 30, 2001 and June 30, 2000, respectively and was $3.3
million and $2.7 million in the comparable six months ended June 30, 2001 and
June 30, 2000. The increase in the comparable six-month period relates to
one-time occupancy costs charged in the first three months of 2001 offset in
part by a recovery of $0.2 million of legal fees through an insurance claim in
the three months ended June 30, 2001.
Operating Income. The Company had operating income of $0.6 million and $0.8
million, respectively, in the three and six months ended June 30, 2001 compared
to $1.7 million and $3.4 million, respectively in the three and six months ended
June 30, 2000. The decrease in operating income in the three and six months
ended June 30, 2001 from 2000 was due to a reduction in royalty income.
Interest Expense. Interest expense is associated primarily with $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. Interest expense
associated with the Senior Discount Notes issued in November 2000 is included in
Loss of Business Held for Sale.
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 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 six months ended June 30, 2001 the
Company had significantly lower investment balances compared to the three and
six months ended June 30, 2000, which resulted in lower interest income.
Other (Income) Expense, Net. For the three and six months ended June 30,
2001, other (income) expense, net consists primarily of foreign currency
transaction gains and losses. In the three and six months ended June 30, 2000,
other (income) expense, net, included the value of the settlement of certain
litigation between the Company and a shareholder of a former Internet
investment.
Provision for Income Taxes. The provisions for income taxes in the three
and six months ended June 30, 2001 and 2000 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 June 30, 2001, the Company had net operating loss carry forwards
for income tax purposes of $125 million, expiring in the years 2007 through
2015. 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.
16
Income (Loss) of Business Held for Sale. 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. To date, no acceptable offers to purchase
Data Systems have been received, although the Company continues to offer Data
Systems for sale. As a result, for all periods presented, the Company reported
as a single line item in the Consolidated Statements of Operations, income
(loss) of business held for sale, net of taxes, of ($2.2) million and $(4.1)
million in the three and six months ended June 30, 2001, respectively, and $0.7
million and $1.2 million in the three and six months ended June 30, 2000,
respectively.
A summary of the operating results of Data Systems is as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues ..................................... 8,128 12,029 17,953 23,768
Costs and operating expenses ................. (9,938) 11,426 (21,277) 22,716
Operating income (loss) ...................... (1,810) 603 (3,323) 1,052
Interest expense ............................. (435) (13) (842) (26)
Income (loss) of business held for disposition (2,230) 693 (4,140) 1,241
In the three months ended June 2001, Data Systems recorded a net
restructuring charge of $0.8 million. The $0.8 million restructuring charge are
costs associated with the elimination of approximately 73 U.S. positions in
engineering, manufacturing and administration. At June 30, 2001, Data Systems
had paid and charged $0.5 million against the liability accounts related to the
termination benefits set up for the 2001 restructuring and terminated 71
employees. At June 30, 2001, the Company includes the remaining balance of Data
Systems accrued restructuring of $0.5 million as part of its net liabilities of
discontinued operations. Included in the Data Systems accrued restructuring are
prior year lease obligations totaling $32 thousand related to vacated or
abandoned leases which have not been discounted to present value.
Loss from Discontinued Operations and Loss on Disposal of Discontinued
Operations
In February 2001, the Board of Directors of the Company authorized
management to close MicroNet, its wholly-owned subsidiary that made high
performance disk arrays and Storage Area Networks, and to establish a reserve
for the costs of closure at the year ended December 31, 2000.
A summary of the operating results of MicroNet are as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues .......................................... -- 2,990 -- 6,251
Costs and operating expenses excluding amortization -- (4,045) -- (7,777)
Goodwill amortization ............................. -- (303) -- (606)
Operating loss .................................... -- (1,358) -- (2,132)
Loss from discontinued operations ................. -- (1,358) -- (2,132)
17
In July 2001, the Board of Directors of the Company authorized
management to close iNEXTV's operations in New York and to cease future funding
of its other Internet-based and partially-owned affiliates, AENTV in Los Angeles
and TV1 in Munich, Germany, and to establish a reserve for the costs of closure
at the end of the quarter ended June 30, 2001.
A summary of the operating results of iNEXTV are as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues............................................. 58 488 188 1,090
Costs and operating expenses excluding amortization.. (3,233) (6,203) (6,277) (13,240)
Goodwill amortization................................ (84) (1,156) (211) (1,730)
Operating loss....................................... (3,259) (6,871) (6,300) (13,880)
Equity loss of unconsolidated subsidiary............. (502) (226) (999) (452)
Loss from discontinued operations.................... (3,759) (7,111) (7,294) (14,333)
Internet revenues in 2000 were principally from webcasting, video
production and event marketing services, substantially all of which were
provided by the Company's subsidiary, TV onthe WEB, which the Company ceased
funding in October 2000. For the three and six months ended June 30, 2000, TV
onthe WEB reported a net loss of $2.2 million and $4.2 million, respectively.
Since October 1, 2000, the Company has not recognized any revenues or expenses
of TV onthe WEB in its consolidated financial statements.
A summary of the loss on disposal of iNEXTV are as follows:
Three months ended Six months ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Reserve for closure............................... (5,736) -- (5,736) --
Impairment charge................................. (4,602) -- (4,602) --
Loss on disposal of discontinued operations....... (10,338) -- (10,338) --
The impairment charge recorded in the quarter ended June 30, 2001 reflects
the write-off of the Company's unamortized investment in the Internet
businesses. The reserve for closure costs includes future payments to be made
over a seven year period for facility rental commitments and related costs of
$5.0 million, which may be mitigated if they are sublet in the future, employee
and contractor severance costs of $0.6 million and other costs of $0.1 million.
Net Loss. The Company reported a net loss of $17.3 million and $24.0
million, respectively, in the three and six months ended June 30, 2001 compared
to a net loss of $7.9 million and $14.9 million, respectively, in the three and
six months ended June 30, 2000, primarily as a result of the factors discussed
above under "Royalty Income," and "Loss from Discontinued Operations and Loss on
Disposal of Discontinued Operations."
Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. In
the three and six months ended June 30, 2001, the Company issued shares of
Common Stock valued at $2.50 per share to satisfy its redemption obligation on
the Redeemable and Convertible 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 $1.5
18
million and $2.3 million, respectively, representing the difference between the
fair value and $2.50 per share for the number of shares issued, on the
Consolidated Statements of Operations.
Liquidity and Capital Resources
Going Concern. The Company has previously disclosed that it may not be able
to continue as a going concern. As discussed below, the Company's subsidiary,
Data Systems, requires additional working capital financing in order to fund
outstanding payables and other obligations. To date, Data Systems has been
unable to obtain additional financing although it is currently exploring
potential financing sources and will be required to repay short-term debt
secured by certain real estate in the near future. The Company is scheduled to
make an interest payment of approximately $2.6 million on its Senior Notes which
is due September 15, 2001. Management intends to seek to negotiate a deferral of
this obligation and a restructuring of the indebtedness. If the Company is
unable to restructure its indebtedness or if Data Systems is unable to conclude
new financing arrangements, either or both companies may be required to seek
bankruptcy protection. In such event, the Company's Common Stock may be
negatively affected or become worthless.
Cash Flow. At June 30, 2001, the Company had cash and short-term
investments of $6.4 million and working capital deficit of $4.8 million. At
December 31, 2000, the Company had cash and short-term investments of $15.4
million and working capital of $8.3 million. Data Systems, which is accounted
for as a "Business Held for Sale," had working capital of $0.9 million and $5.4
million at June 30, 2001 and December 31, 2000, respectively. Working capital of
Data Systems has been classified in "Net Assets of Business Held for Sale" at
June 30, 2001 and December 31, 2000. The decline in cash and short-term
investments in the six months ended June 30, 2001 results primarily from
operating losses of the Company's Internet video businesses and operations of
the Internet Technology Group as well as cash utilized in Data Systems. These
losses more than offset operating income from the Company's non-Internet
technology licensing activities. Cash provided by continuing operations totaled
$1.5 million in the six months ended June 30, 2001 and $1.9 million in the six
months ended June 30, 2000. Cash used in discontinued operations totaled $7.5
million in the six months ended June 30, 2001 and $13.7 million in the six
months ended June 30, 2000.
Pursuant to an agreement between the Company, Hillside Capital
Incorporated, ("Hillside") and certain other parties, Hillside is obligated to
fund pension contributions in the event the Company is unable to do so. The
Company has notified Hillside that, due to its declining liquidity, it is unable
to make the pension contribution amounting to $0.5 million, due no later than
August 15, 2001. The Company will issue a Note to Hillside in the amount of the
pension contribution.
The Company has 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. At the
date of these financial statements, the Company continues to meet with and have
discussions with prospective buyers but has not entered into a definitive sale
agreement. Accordingly, the Company does not anticipate being able to close a
transaction in 2001, if at all.
In November 2000, Data Systems issued Senior Discount Notes providing net
proceeds of $8 million to fund the Company's short-term working capital
requirements. The Notes are secured by certain assets of the Company and Data
Systems. Ampex has entered into an agreement to sell and leaseback certain real
estate which is subject to a number of significant closing conditions, including
the buyer obtaining a financing commitment for a substantial portion of the
purchase price. There can be no assurance that the sale and leaseback will be
completed. The Company would apply the net proceeds from the transaction to
repay the Senior Discount Notes. The Notes, as amended, are scheduled to mature
on the earlier of August 31, 2001 or the sale of Data Systems. The Company and
representatives of the Noteholders have reached an agreement in principal to
extend the Note maturity date to October 31, 2001 to facilitate the completion
of the sale and leaseback of certain real estate discussed above.
19
The Company has recently reduced headcount and overhead expenses of Data
Systems in order to operate at a cash breakeven level at current sales levels.
In the second quarter ended June 30, 2001, Data Systems recorded a restructuring
reserve of $0.8 million in connection with its cost reduction initiatives. There
can be no assurance that the cost savings to be realized will be adequate for
Data Systems to return to profitability.
The Company has available, through a subsidiary, a working capital facility
that allows it to borrow or obtain letters of credit totaling $7.0 million,
based on eligible accounts receivable, through May 2002. At June 30, 2001, the
Company had borrowings outstanding of $0.7 million and had letters of credit
issued against the facility totaling $1.1 million. At December 31, 2000, the
Company had borrowings outstanding of $2.4 million and had letters of credit
issued against the facility totaling $1.1 million. Data Systems inventories have
increased beyond desired levels due to customer deferral of shipping dates and
postponed orders pending government funding. The increase in inventories has
decreased the liquidity of Data Systems. The Company is seeking to expand its
working capital facilities to provide additional borrowing capacity at Data
Systems as it realizes operational cost savings and reduces its investment in
inventories. Data Systems has been required to delay payment to its suppliers
and venders pending new working capital facilities and, at June 30, 2001, past
due amounts were significant. If an expanded working capital facility is not
made available, Data Systems may be required to sell other assets to raise
liquidity, which if unsuccessful may adversely impact Data Systems' ability to
remain a going concern.
In April 2001, the staff of the American Stock Exchange ("Amex") notified
the Company that it would conduct a review of the Company's eligibility for
continued listing on the Amex, and requested certain additional information and
financial data concerning the Company's business and financial condition. The
Company submitted this information and in July the Exchange informed the Company
that it would continue the Company's listing pending a review of the September
30, 2001 Form 10-Q, subject to continued monitoring of the Company's public
disclosures.
Debt Agreements. In 1998, the Company issued $44.0 million of its 12%
Senior Notes due March 15, 2003, together with Warrants to purchase 1.02 million
shares of its Class A Common Stock (the "Class A Stock"). The Company has
applied a substantial portion of the debt proceeds to fund acquisitions and the
Company's Internet video businesses, that have subsequently become impaired and
have been written off due to the Company's inability to raise additional capital
for them. The Company has recently restructured Data Systems so that it is
capable of breaking even at a lower level of sales. Until these cost savings are
fully realized and cash can be generated through the reduction in inventories,
the Company has been required to invest additional cash to fund Data Systems'
operating losses. The Company is seeking to expand its working capital facility
to provide the requisite amount of liquidity for Data Systems. The Company
expects to seek approval from the Company's lenders for the Data Systems working
capital facility as well as the Hillside notes discussed above. 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.
In November 2000, Data Systems issued Senior Discount Notes providing net
proceeds of approximately $8.0 million, which used to fund the Company's
short-term working capital requirements. The Notes as amended are secured by
certain assets of Data Systems and the Company and are due on the earlier of
August 31, 2001 or the divestiture of Data Systems. The Company and
representatives of the Noteholders have reached an agreement in principal to
extend the Note maturity date to October 31, 2001 to facilitate the completion
of the sale and leaseback of certain real estate discussed above. Ampex plans to
repay the Senior Discount Notes out of the proceeds of the anticipated sale and
leaseback or sale of Data Systems as described above. The sale and leaseback is
subject to a number of contingencies and there can be no assurance that it will
be completed. If the sale and leaseback is not consummated, the Company believes
it will be required to seek to restructure the Senior Discount Notes. Should
such a restructuring not be agreed to, it would have a material adverse effect
on the Company's liquidity and ability to remain a going concern.
20
The Company is aggressively pursuing its traditional licensing activities
and is seeking to accelerate the receipt of royalties. The Company's declining
liquidity may necessitate discussions with the Company's lenders to modify the
terms of its debt agreement to permit additional debt as discussed above and
perhaps to defer or to capitalize impending interest payments. The Company has
an interest payment of $2.6 million due in September 2001 on the 12% Senior
Notes and interest of approximately $1.1 million has accrued on the Senior
Discount Notes at June 30, 2001. There can be no assurance that the lenders and
the Company will agree to amend the Senior Notes or Senior Discount Notes to
permit the deferral of all or a portion of such interest payments. Failure to
restructure indebtedness may require the Company to seek to sell assets or raise
additional capital on terms that may not be desirable or permitted by its
indentures. Failure to raise additional capital may adversely effect the
Company's ability to remain a going concern.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141 ("FAS 141"), Business Combinations, and No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets. FAS 141 addresses financial accounting and
reporting for business combinations and supercedes APB16, Business Combinations.
The provisions of FAS 141 are required to be adopted July 1, 2001. The most
significant changes made by FAS 141 are: (1) requiring that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001, (2) establishing specific criteria for the recognition of intangible
assets separately from goodwill, and (3) requiring unallocated negative goodwill
to be written off immediately as an extraordinary gain.
FAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and supercedes APB 17, Intangible Assets.
The provisions of FAS 142 are required to be adopted in fiscal years beginning
after December 15, 2001. The most significant changes made by FAS 142 are: (1)
goodwill and indefinite lived intangible assets will no longer be amortized, (2)
goodwill will be tested for impairment at least annually at the reporting unit
level, (3) intangible assets deemed to have an indefinite life will be tested
for impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.
The Company will adopt FAS 141 effective July 1, 2001 which will result in
the Company accounting for any business combination consummated on or after that
date under the purchase method of accounting. The Company will also apply the
non-amortization provisions of FAS 142 for any business combination consummated
on or after July 1, 2001.
The Company will adopt FAS 142 effective January 1, 2002. At June 30, 2001
there was no goodwill and goodwill amortization on the Company's financial
statements.
Risk Factors
Ability to Continue as a Going Concern
As discussed in the Notes to the Unaudited Financial Statements for the
three and six months ended June 30, 2001, there exists substantial uncertainty
as to the Company's ability to continue as a going concern. The Company has
incurred operating losses in each of the past twelve quarters. Recently, the
Company has restructured certain of its businesses and discontinued certain
businesses, including its Internet video business in the second quarter ended
June 30, 2001, in order to conserve its resources. However, the Company requires
additional capital to meet its obligations, which include debt service,
severance and other shut down costs. The Company's working capital has declined
substantially in recent periods and its cash and marketable securities have
declined to $6.4 million at June 30, 2001. The Company has entered into
discussions with prospective licensees of its intellectual property for use in
consumer electronics and video games in order to accelerate the receipt of
royalty income to fund its operating costs and debt service obligations. In
addition, the Company has entered into an agreement to sell and
21
leaseback certain real estate and would use the proceeds to repay Senior
Discount Notes issued by Data Systems which mature shortly, as discussed below.
The sale and leaseback agreement is subject to a number of material
contingencies and there can be no assurance that it will be completed. The
Company is seeking to expand its working capital debt facilities and to further
reduce operating costs of its Data Systems subsidiary. The Company is continuing
to offer its Data Systems subsidiary for sale, but does not currently anticipate
closing such a transaction in 2001, if at all. While management is actively
addressing these issues, there can be no assurance that these negotiations will
be successful or raise sufficient resources for the Company to remain a going
concern. If the Company is unable to raise additional liquidity, it will attempt
to restructure its debt service obligations to allow additional time for its
operations to generate positive cash flow. There can be no assurance that an
acceptable restructuring program will be agreed to by all parties and it is
possible that the Company may be required to seek bankruptcy protection. In such
event, the Company's Common Stock may be negatively affected or become
worthless. (See Liquidity and Capital Resources.)
Risk of Continuing Losses
Ampex has incurred significant operating and net losses in the three and
six months ended June 30, 2001 and its fiscal years ended December 31, 2000 and
1999. Such losses were primarily due to its Internet video business which have
been discontinued at the end of the quarter ended June 30, 2001 as well as from
operating losses of MicroNet which were discontinued at the end of December 31,
2000. Although the Company is seeking to increase its traditional licensing
activities and hopes to increase the amount of royalty income from such
activities, there can be no assurance that such revenues will be sufficient to
offset operating costs and interest expense. The Company has substantial
indebtedness outstanding and it incurs substantial interest expense. The Company
anticipates incurring additional interest expense on Notes to be issued to
Hillside, as Hillside advances pension contributions to the Ampex Retirement
Plan on behalf of the Company. The Company has recently taken steps to reduce
headcount and overhead expenses of Data Systems, which is classified as a
Discontinued Operation, in order to seek to operate at a cash breakeven level at
reduced sales levels, pending a sale of Data Systems. Such actions have given
rise to restructuring charges in the second quarter of 2001. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below, and the other Risk Factors included in this section.
Risks of Declining Liquidity
The Company has experienced a substantial reduction in its cash and
marketable securities which declined to $6.4 million at June 30, 2001. In
November 2000, Data Systems issued Senior Discount Notes providing net proceeds
of approximately $8 million, which are included in the above amount and are
being used to fund the Company's short-term working capital requirements. The
Notes are secured by certain assets of the Company and Data Systems. Ampex has
entered into an agreement to sell and leaseback certain real estate and would
apply the net proceeds from the transaction to repay the Notes. The sale and
leaseback agreement is subject to a number of material contingencies, including
the buyer obtaining financing for a significant portion of the purchase price.
There can be no assurance that the sale and leaseback will be completed. The
Notes as amended are scheduled to mature on the earlier of August 31, 2001 or
the sale of Data Systems. The Company and representatives of the Noteholders
have reached an agreement in principal to extend the maturity date to October
31, 2001 to complete the sale and leaseback. The Company continues to meet with
and have discussions with prospective buyers of Data Systems but has not entered
into a definitive sale agreement. Accordingly, the Company does not anticipate
being able to close a transaction in 2001, if at all.
The Company has notified Hillside that it does not have sufficient
liquidity to make the July 2001 scheduled pension contribution and pursuant to
its agreement has requested Hillside to fund the pension contribution. The
Company will issue to Hillside a Note in the amount of the contribution. The
Company is also negotiating an expansion of its working capital facility to
provide additional borrowing capacity at Data Systems and intends to seek the
consent of its lenders to enter into the working capital facility if one is
ultimately negotiated. The Company has entered into discussions with certain
consumer electronics manufacturers to license the
22
Company's intellectual property for use in the manufacture of digital
camcorders, DVDs and computer games. No assurance can be given that the Company
will 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 liquidity of the Company or Data Systems is not improved,
either or both companies may be unable to meet their scheduled obligations and
in turn may be required to seek bankruptcy protection. In such event, the
Company's Common Stock may be negatively affected or become worthless.
Risks Associated with Acquisition Strategy
In order to expand Ampex's products and services, Ampex has made, and may
continue to make under the right circumstances, acquisitions of, and/or
investments in, other business entities. These entities may be involved in new
businesses in which Ampex has not historically been involved. Ampex may not be
able to identify or acquire additional acquisition candidates in the future, or
complete any further acquisitions or investments on satisfactory terms. In order
to pay for future acquisitions or investments, Ampex may have to:
o issue additional equity securities of the Company or a subsidiary,
which would dilute the ownership interest of existing Ampex
stockholders;
o incur additional debt; and/or
o amortize goodwill and other intangibles or incur other
acquisition-related charges, which could materially impact earnings.
Acquisitions and investments involve numerous additional risks, including
difficulties in the management of operations, services and personnel of the
acquired companies, and of integrating acquired companies with Ampex and/or each
other's operations. Ampex may also encounter problems in entering markets and
businesses in which it has limited or no experience. Acquisitions can also
divert management's attention from other business concerns. Ampex has made and
may make additional investments in companies in which it has less than a 100%
interest. Such investments involve additional risks, including the risk that
Ampex may not be in a position to control the management or policies of such
entities, and risks of potential conflicts with other investors. Ampex has
invested in companies that are in the early stage of development and may be
expected to incur substantial losses. Ampex's financial resources may not be
sufficient to fund the operations of such companies. Accordingly, there can be
no assurance that any acquisitions or investments that Ampex has made, or may
make in the future, will result in any return, or as to the timing of any
return. All of the Company's acquisitions of Internet companies have been
written off during 2000 and 2001. In addition, Ampex elected to discontinue the
operations of MicroNet, which it acquired in 1998. It is possible that Ampex
could lose all or a substantial portion of any future investments.
Risk that the Company will be Unable to Sell 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. For accounting purposes, the results
of operations of Data Systems have been classified as a "Business Held for Sale"
for all periods presented. At the date of these financial statements, the
Company continues to meet with and have discussions with prospective buyers but
has not entered into a definitive sale agreement. Accordingly, the Company does
not anticipate being able to close a transaction in 2001. There can be no
assurance that the Company will be able to consummate a sale, or as to the
terms, conditions or timing of any sale, if consummated. Failure to sell Data
Systems would have a significant negative impact on the Company's liquidity and
capital resources.
23
Risk of Leverage
As of June 30, 2001, Ampex had outstanding total borrowings of
approximately $44.4 million, which included $9.1 million of Senior Discount
Notes scheduled to mature on August 31, 2001, $44.0 million principal amount of
12% Senior Notes due 2003 and $0.7 million of subsidiary indebtedness. The
Senior Discount Notes are secured by liens on the Data Systems manufacturing
facilities in Colorado Springs, Colorado and on the Company's future patent
licensing income stream. As discussed above, the Company has entered into an
agreement to sell and leaseback certain real estate and would apply the net
proceeds to repay the Senior Discount Notes. The Company and representatives of
the Noteholders have agreed in principal to extend the maturity date to October
31, 2001 in order to complete the sale and leaseback transaction.
The Company is seeking to increase its working capital facility and in the
future may incur additional indebtedness from time to time, subject to the
restrictions in the indenture governing the Senior Notes. The degree to which
the Company is leveraged, and the types of investments it selects, could have
important consequences to investors, including the following:
o 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;
o 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;
o the Company may be more highly leveraged than its competitors, which
may place it at a competitive disadvantage;
o Ampex's leverage may make it more vulnerable to a downturn in its
business or the economy in general;
o 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
o 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.
As discussed in Liquidity and Capital Resources, in order to meet their
obligations, the Company and Data Systems will be required to obtain new
financing and to restructure the terms of existing indebtedness. If the Company
is unable to meet its debt obligations it may be required to seek bankruptcy
protection, and in such event the Company's common stock may be negatively
affected or become worthless.
Fluctuations in Royalty Income
Ampex's results of operations in certain prior periods reflect the receipt
of significant royalty income, including material nonrecurring payments
resulting from negotiated settlements primarily related to sales of products by
manufacturers before negotiating licenses from Ampex. Although Ampex has a
substantial number of outstanding and pending patents, and its patents have
generated substantial royalties in the past, it is not possible to
24
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 its 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.
Upon an event of default, the Holders of the Senior Discount Notes will receive
additional collateral consisting of the right to receive the proceeds of all
future royalties sufficient to repay principal and accrued interest.
The costs of patent litigation can be material. The institution of patent
enforcement litigation may also increase the risk of counterclaims alleging
infringement by Ampex of patents held by third parties or seeking to invalidate
patents held by Ampex. Moreover, there is no assurance that Ampex will continue
to develop patentable technology that will be able to generate significant
patent royalties in future years to replace patents as they expire.
Dependence on Licensed Patent Applications and Proprietary Technology
Ampex's success depends, in part, upon its ability to establish and
maintain the proprietary nature of its technology through the patent process.
There can be no assurance that one or more of Ampex's patents will not be
successfully challenged, invalidated or circumvented or that it will otherwise
be able to rely on such patents for any reason. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with Ampex's ability to
make, use and sell its products either in the United States or in foreign
markets. If any of Ampex's patents are successfully challenged, invalidated or
circumvented or its right or ability to manufacture products were to be
proscribed or limited, Ampex's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon Ampex's business, financial condition and results of operations.
Litigation may be necessary to enforce Ampex's patents, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings brought against, initiated by or otherwise involving
Ampex may require Ampex to incur substantial legal and other fees and expenses
and may require some of its employees to devote all or a substantial portion of
their time to the prosecution or defense of such litigation or proceedings.
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. No assurance can be given that
Ampex's existing products 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.
Competition
The market for Data Systems products and services is highly competitive and
characterized by multiple competitors, most of whom have greater financial
resources than Data Systems. Data Systems' products incorporate many high
performance features and functions in order to differentiate them from their
competitors. However, other companies may develop competing technologies or
products that render Data Systems products as inferior.
25
Dependence on Certain Suppliers
The Company's manufacturing subsidiaries purchase certain components from a
single domestic or foreign manufacturer for use in its products. Significant
delays in deliveries or defects in such components have adversely affected
Ampex's manufacturing operations in the past, pending qualification of an
alternative supplier. In addition, Ampex produces highly engineered products in
relatively small quantities. As a result, Ampex's ability to cause suppliers to
continue production of certain products on which it may depend may be limited.
Ampex does not generally enter into long-term raw materials or components supply
contracts.
Risks Related to International Operations
International operations are subject to a number of special risks,
including limitations on repatriation of earnings, restrictive actions by local
governments, and fluctuations in foreign currency exchange rates and
nationalization. Additionally, export sales are subject to export regulation and
restrictions imposed by U.S. government agencies. Fluctuations in the value of
foreign currencies can affect Ampex's results of operations. Ampex does not
normally seek to mitigate its exposure to exchange rate fluctuations by hedging
its foreign currency positions.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union. Beginning in 2003, all
EMU countries are expected to be operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally. Some of the rules and regulations
relating to the governance of the currency have not yet been defined and
finalized. As a result, companies operating or conducting business in Europe
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling the Euro. Ampex is currently
assessing the effect the introduction of the Euro will have on its internal
accounting systems and the potential sales of its products. Ampex will take
appropriate corrective actions based on the results of such assessment. Ampex
has not yet determined the costs related to addressing this issue. This issue is
not expected to have a material adverse affect on Ampex's business.
Volatility of Stock Price
The trading price of Ampex's Common Stock has been and can be expected to
be subject to significant volatility, reflecting a variety of factors,
including:
o quarterly fluctuations in operating results;
o announcements of acquisitions or new product introductions by Ampex or
its competitors;
o announcements regarding the Company's planned sale of Data Systems;
o reports and predictions concerning the Company by analysts and other
members of the media;
o issuances of substantial amounts of Common Stock in order to redeem
outstanding shares of its Preferred Stock, or otherwise; and
o fluctuations in trading volume of the Company's Common Stock, and
general economic or market conditions.
o Developments in the status of the Company's indebtedness and
restructuring negotiations.
26
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. The Company has been
notified by the American Stock Exchange ("Amex") that it will continue to list
the Company's Common shares pending a review of the Company's September 30, 2001
Form 10-Q and public disclosures. If the Company's Common Shares become delisted
from Amex, the share price might become more volatile and an active market may
no longer be maintained.
In addition, if the Company's efforts to refinance its indebtedness are
unsuccessful, there is a risk that the Company's Common Stock may become
worthless.
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. 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 $33.7 million at June 30, 2001,
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.
27
Environmental Issues
Ampex's facilities are subject to numerous federal, state and local laws
and regulations designed to protect the environment from waste emissions and
hazardous substances. Owners and occupiers of sites containing hazardous
substances, as well as generators and transporters of hazardous substances, are
subject to broad liability under various federal and state environmental laws
and regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites, and are currently engaged in various environmental
investigation, remediation and/or monitoring activities at several sites located
off Company facilities. There can be no assurance Ampex will not ultimately
incur liability in excess of amounts currently reserved for pending
environmental matters, or that additional liabilities with respect to
environmental matters will not be asserted. In addition, changes in
environmental regulations could impose the need for additional capital equipment
or other requirements. Such liabilities or regulations could have a material
adverse effect on Ampex in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change to the disclosure made in the 2000
Form10-K.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business. In
the opinion of management, no such current or pending lawsuits, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
Sumitomo Marine Management (USA), Inc. and Great American Insurance Company
filed suit on May 17, 2001, in the Superior Court of New Jersey as subrogees of
Casio, Inc. against AENTV and others, alleging that Arnold Schwarzenegger had
sought and obtained payment from Casio based on its use in an ad of an image of
Schwarzennegger as the Terminator, which had been purchased from the defendants
and was extracted from a television show on the making of "The Terminator"
created by defendants. Plaintiffs allege they paid "millions" in settlement of
Schwarzenegger's claim. Suit seeks unspecified damages and costs.
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 2001 or 2002 will be
material.
Owners and occupiers of sites containing hazardous substances, as well as
generators and transporters of hazardous substances, are subject to broad
liability under various federal and state environmental laws and regulations,
including liability for investigative and cleanup costs and damages arising out
of past disposal activities. The Company has been named as a potentially
responsible party by the United States Environmental Protection Agency with
respect to four contaminated sites that have been designated as "Superfund"
sites on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980. The Company is engaged in six
environmental investigation, remediation and/or monitoring activities at sites
located off Company facilities, including the removal of solvent contamination
from subsurface aquifers at a site in Sunnyvale, California. Some of these
activities involve the participation of state and local government agencies. The
other five
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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. During 2000, the Company spent a
total of approximately $0.1 million in connection with environmental
investigation, remediation and monitoring activities and expects to spend a
similar amount in fiscal 2001 for such activities.
Because of the inherent uncertainty as to various aspects of environmental
matters, including the extent of environmental damage, the most desirable
remediation techniques and the time period during which cleanup costs may be
incurred, it is not possible for the Company to estimate with any degree of
certainty the ultimate costs that it may incur with respect to the currently
pending environmental matters referred to above. Nevertheless, at June 30, 2000,
the Company had an accrued liability of $1.1 million for pending environmental
liabilities associated with the Sunnyvale site and certain other sites currently
owned or leased by the Company. The Company has not accrued any liability for
contingent liabilities it may incur with respect to former Media sites discussed
above. Based on facts currently known to management, management believes it 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
For the three months ended June 30, 2001, holders of 537 shares of
Redeemable Preferred Stock and holders of 358 shares of Convertible Preferred
Stock exchanged their holdings into 429,600 shares and 286,400 shares of Common
Stock, respectively. No cash or other consideration was paid by the Company,
directly or indirectly, in connection with such conversion or exchange. The
shares of Class A Common Stock were issued in reliance upon the exemption from
registration contained in Section 3(a)(9) of the Securities Act of 1933, as
amended, for the issuance of securities exchanged by the issuer with the
existing security holders exclusively where no commission or other remuneration
is paid or given directly or indirectly for soliciting such exchange.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 1, 2001 the Company held its Annual Meeting of Stockholders. The
stockholders elected Edward J. Bramson and William A. Stoltzfus Jr. as its Class
I directors. Mr. Bramson received 51,495,209 votes in favor of his election,
with 4,126,791 votes withheld and no broker nonvotes. Mr. Stoltzfus Jr. received
52,900,774 votes in favor of his election, with 2,721,226 votes withheld and no
broker nonvotes. The stockholders ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year 2001, with 54,457,470 votes in favor, 1,026,564 votes against,
137,966 votes abstaining, and no broker nonvotes.
29
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6(a). EXHIBITS
The Exhibits filed with this Report are listed in the Exhibit Index
included elsewhere herein and which is hereby incorporated by reference in this
Item 6(a).
ITEM 6(b). REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on May 3, 2001 containing
information under Item 5 regarding a review by the Amex of the Company's
continuing eligibility for listing.
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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: August 13, 2001 /s/ EDWARD J. BRAMSON
--------------------------------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: August 13, 2001 /s/ CRAIG L. McKIBBEN
--------------------------------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
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AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
June 30, 2001
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4.1 Amendment to Note Purchase Agreement, dated as of May 30,
2001, among Ampex Data Systems Corporation ("Issuer"),
Registrant and the several Note Purchasers named therein.
4.2 First Amendment to Deed of Trust, Security Agreement, Financing
Statement and Assignment of Rents and Revenues, dated as of May
30, 2001, between the Issuer and the Trustee named therein.
32