SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 2001, the aggregate number of outstanding shares of the
Registrant's Class A Common Stock, $.01 par value, was 59,936,996. There
were no outstanding shares of the Registrant's Class C Common Stock, $0.01
par value.
AMPEX CORPORATION
FORM 10-Q
Quarter Ended September 30, 2001
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements ................................................... 2
Consolidated Balance Sheets (unaudited) at September 30, 2001 and
December 31, 2000 ...................................................... 3
Consolidated Statements of Operations (unaudited) for the
three and nine months ended September 30, 2001 and 2000 ................ 4
Consolidated Statements of Cash Flows (unaudited) for the three
and nine months ended September 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. ................................................. 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk .............. 31
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 32
Item 2. Changes in Securities and Use of Proceeds .............................. 33
Item 3. Defaults Upon Senior Securities ........................................ 33
Item 4. Submission of Matters to a Vote of Security Holders .................... 33
Item 5. Other Information ...................................................... 33
Item 6(a). Exhibits ............................................................... 34
Item 6(b). Reports on Form 8-K .................................................... 34
Signatures ............................................................................. 35
2
AMPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
September 30, December 31,
2001 2000
------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 4,259 $ 10,384
Short-term investments 10 5,011
Prepaid royalties 2,012 3,214
Other current assets 640 843
------------ -----------
Total current assets 6,921 19,452
Property, plant and equipment, net 1,781 5,217
Intangible assets, net - 211
Investments in affiliate - 1,678
Deferred pension asset - 377
Other assets 842 1,173
Net assets of business held for sale 6,874 11,660
------------ -----------
Total assets $ 16,418 $ 39,768
============ ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 457 $ 157
Accounts payable 60 554
Net liabilities of discontinued operations 1,790 2,482
Interest payable 2,917 1,567
Other accrued liabilities 7,498 6,406
------------ -----------
Total current liabilities 12,722 11,166
Long-term debt 44,912 46,086
Other liabilities 24,428 26,637
Net liabilities of discontinued operations 4,340 -
Deferred income taxes 1,213 1,213
------------ -----------
Total liabilities 87,615 85,102
------------ -----------
Commitments and contingencies (Note 8)
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 in 2000 - -
Mandatorily redeemable preferred stock, $2,000 liquidation value:
Authorized: 21,859 shares in 2001 and in 2000
Issued and outstanding - 15,562 shares in 2001; 17,173 in 2000 31,124 34,346
Convertible preferred stock, $2,000 liquidation value:
Authorized: 10,000 shares in 2001 and in 2000
Issued and outstanding - 409 shares in 2001; 1,125 in 2000 818 2,250
Stockholders' deficit:
Preferred stock, $1.00 par value:
Authorized: 898,171 shares in 2001 and in 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 - 59,936,996 shares in 2001; 58,075,396 in 2000 599 581
Class C:
Authorized: 50,000,000 shares in 2001 and in 2000
Issued and outstanding - none in 2001 and in 2000 - -
Other additional capital 426,224 421,578
Notes receivable from stockholders (4,642) (4,642)
Accumulated deficit (507,767) (481,894)
Accumulated other comprehensive loss (17,553) (17,553)
------------ -----------
Total stockholders' deficit (103,139) (81,930)
------------ -----------
Total liabilities, redeemable preferred stock and stockholders' deficit $ 16,418 $ 39,768
============ ===========
The accompanying notes are an integral part of these unaudited
condolidated financial 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 nine months ended
----------------------------- -----------------------------
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------- ------------- -------------
(unaudited)
Royalty income $ 2,088 $ 2,908 $ 6,605 $ 9,614
------------ ------------ ------------ ------------
Intellectual property costs 96 (57) 482 551
Selling and administrative 1,419 1,471 4,752 4,132
------------ ------------ ------------ ------------
Total costs and operating expenses 1,515 1,414 5,234 4,683
------------ ------------ ------------ ------------
Operating income 573 1,494 1,371 4,931
Interest expense 1,365 1,355 4,055 4,069
Amortization of debt financing costs 88 88 263 263
Interest income (17) (349) (217) (1,078)
Other (income) expense, net 117 1 (19) 223
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes (980) 399 (2,711) 1,454
Provision for income taxes 210 306 676 994
------------ ------------ ------------ ------------
Income (loss) from continuing operations (1,190) 93 (3,387) 460
Loss on disposal of discontinued operations (net of taxes
of none in 2001 and 2000) - - (10,338) -
Loss from discontinued operations (net of taxes of none
in 2001 and 2000) - (10,878) (7,294) (27,343)
Income (loss) of business held for sale (net of taxes of
none in 2001 and 2000) (714) 243 (4,854) 1,484
------------ ------------ ------------ ------------
Net loss (1,904) (10,542) (25,873) (25,399)
Benefit from extinguishment of mandatorily redeemable
preferred stock 1,716 516 4,053 516
------------ ------------ ------------ ------------
Net loss applicable to common stockholders (188) (10,026) (21,820) (24,883)
Other comprehensive loss, net of tax:
Unrealized loss on marketable securities - - - (141)
Foreign currency translation adjustments - - - 11
------------ ------------ ------------ ------------
Comprehensive loss $ (188) $ (10,026) $ (21,820) $ (25,013)
============ ============ ============ ============
Basic income (loss) per share:
Income (loss) per share from continuing operations $ (0.02) $ 0.00 $ (0.06) $ 0.01
Loss per share from discontinued operations $ (0.01) $ (0.19) $ (0.38) $ (0.46)
Loss per share applicable to common stockholders $ 0.00 $ (0.18) $ (0.37) $ (0.44)
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding 59,228,864 56,463,285 58,607,282 55,966,196
============ ============ ============ ============
Diluted income (loss) per share:
Income (loss) per share from continuing operations $ (0.02) $ 0.00 $ (0.06) $ 0.01
Loss per share from discontinued operations $ (0.01) $ (0.15) $ (0.38) $ (0.36)
Loss per share applicable to common stockholders $ 0.00 $ (0.14) $ (0.37) $ (0.34)
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding 59,228,864 72,092,352 58,607,282 72,186,347
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
AMPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months ended
-------------------------------
Sept 30, Sept 30,
2001 2000
---------- ----------
(unaudited)
Cash flows from operating activities:
Net loss $ (25,873) $ (25,399)
Loss from discontinued operations 22,486 25,859
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and accretion 636 607
Changes in operating assets and liabilities:
Deferred pension asset 377 (3,838)
Other assets 1,359 2,441
Accounts payable (356) (51)
Other accrued liabilities and income taxes payable 4,140 (2,715)
Net liabilities of discontinued operations 3,648 (2,820)
Other liabilities (2,284) (862)
---------- ----------
Net cash provided by (used in) continuing operations 4,133 (6,778)
Net cash used in discontinued operations (12,071) (18,875)
---------- ----------
Net cash used in operating activities (7,938) (25,653)
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments - (27,219)
Proceeds received on the maturity of short-term investments 5,001 50,451
Proceeds from the sale of short-term investments - 6,639
---------- ----------
Net cash provided by continuing operations 5,001 29,871
Net cash used in discontinued operations (2,168) (2,918)
---------- ----------
Net cash provided by investing activities 2,833 26,953
---------- ----------
Cash flows from financing activities:
Borrowings under working capital facilities 753 803
Repayments under working capital facilities (1,742) (752)
Repayment of notes payable-affiliates - (12)
Proceeds from issuance of common stock 9 340
---------- ----------
Net cash provided by (used in) continuing operations (980) 379
Net cash used in discontinued operations - (107)
---------- ----------
Net cash provided by (used in) financing activities (980) 272
---------- ----------
Effects of exchange rates on continuing operations - 11
---------- ----------
Effects of exchange rates on discontinued operations (40) 278
---------- ----------
Net increase (decrease) in cash and cash equivalents (6,125) 1,861
Cash and cash equivalents, beginning of period 10,384 10,598
---------- ----------
Cash and cash equivalents, end of period $ 4,259 $ 12,459
========== ==========
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 the closure of iNEXTV's operations in New York City and termination of
the development of Internet video technology in Redwood City, California. The
Company also announced that it will discontinue making investments in iNEXTV's
majority-owned subsidiary, Alternative Entertainment Network, Inc. ("AENTV" or
"AENTV.com") in Los Angeles and in iNEXTV's partially-owned affiliate, TV1
Internet Television, ("TV1"or "TV1.de") in Munich, Germany. iNEXTV's investment
in a majority-owned subsidiary, TV onthe WEB, was written off in September 2000
when the Company discontinued funding operations and the business closed. 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. However, the assets and
liabilities of iNEXTV are included in the Consolidated Balance Sheet as of
December 31, 2000.
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 offer Data Systems for sale but does not currently
anticipate that it will close a transaction in 2001, if at all.
As of the year ended 2000, Ampex discontinued 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 prompting negotiations between the Company and
the holders of the Discount Notes and Senior Notes to restructure their
indebtedness. The restructuring plan would apply substantially all future
royalty receipts, net of operating expenses, as well as the net proceeds of
certain asset sales, to repay interest and principal on the indebtedness. The
Company agreed with holders of its 12% Senior Notes to defer an interest payment
of approximately $2.6 million to January 31, 2002 to provide time to complete
the restructuring. Ampex has terminated a previously announced agreement to sell
and leaseback certain real estate, the net proceeds from which would have been
applied to repay the Senior Discount Notes. Data Systems and the holders of the
Discount Notes have agreed to extend the maturity of the Discount Notes to March
31, 2002. Data Systems is currently seeking a mortgage financing of the real
estate and will continue to pursue new sale and leaseback opportunities. There
can be no assurance that these financing efforts will be successful or be
completed by the due date of the Discount Notes. As part of the restructuring,
the Company and the holders of the Senior Discount Notes are discussing a
long-term extension of the Notes and repayment of principal and accrued interest
from future net royalty receipts in the event that the mortgage financing or
sale and leaseback of real estate do not materialize or do not raise sufficient
proceeds.
6
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Ampex Corporation (cont'd.)
Subsequent to the end of the third quarter (see Note 14), Data Systems
obtained a short-term financing commitment of up to $2.5 million through March
2002. Borrowings under the line are secured by inventories and bear interest at
8% per annum. The facility will be used to reduce accounts payable, a
significant portion of which at September 30, 2001 had become past due. The
Company believes that the new inventory line of credit will bridge the liquidity
gap that existed pending realization of recently enacted operational cost
savings and inventory liquidation initiatives. Management's current projections
indicate that Data Systems should generate sufficient liquidity to continue as a
going concern subject to refinancing of the Senior Discount Notes. As described
above, the Company is actively seeking a restructuring of its indebtedness, but
if this is not concluded successfully, the Company may be unable to continue as
a going concern and could be required to seek bankruptcy protection. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
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
nine-month periods ended September 30, 2001 are not necessarily indicative of
the results to be expected for the full year.
Note 3 - 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 were 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 has 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 September
30, 2001 there was no goodwill and goodwill amortization on the Company's
financial statements.
7
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Recent Pronouncements (cont'd.)
In August 2001, the FASB issued Statement No. 143 ("FAS 143"),
Accounting for Asset Retirement Obligations. The standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. The standard is effective for 2003. The
company is currently reviewing the requirements of this new standard and has not
yet determined its impact on the company's financial position or results of
operations.
In October 2001, the FASB issued Statement No. 144 ("FAS 144"),
Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes
Statement No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and certain provisions of
APB Opinion No. 30, Reporting Results of Operations / Reporting the Effects of
Disposal of a Segment of a Business. FAS 144 requires that long-lived assets to
be disposed of by sale, including discontinued operations, be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. As a result, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. FAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that can be distinguished and eliminated from the rest of the entity's
ongoing operations. The provisions of FAS 144 are effective for fiscal years
beginning after December 15, 2001. The company is currently reviewing the
requirements of this new standard and has not yet determined its impact on the
company's financial position or results of operations.
Note 4 - 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.
The Company continues to offer Data Systems for sale but does not
currently anticipate that it will close a transaction in 2001, if at all.
A summary of the operating results of Data Systems is as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues .............................................. 7,500 11,547 25,454 35,315
Costs and operating expenses .......................... (7,753) (11,232) (29,030) (33,948)
Operating income (loss) ............................... (253) 315 (3,577) 1,367
Interest expense ...................................... (460) (159) (1,302) (507)
Income (loss) of business held for disposition ........ (714) 243 (4,854) 1,484
A summary of the assets and liabilities of Data Systems is as follows:
Sept 30, Dec 31,
2001 2000
------------- -------------
(in thousands)
Current assets ................................................. $ 22,021 $ 26,040
Property, plant and equipment, net ............................. 5,477 6,010
Other assets ................................................... 136 159
Senior Discount Notes .......................................... (9,509) (8,240)
Current liabilities ............................................ (10,274) (11,062)
Other liabilities .............................................. (376) (552)
Other .......................................................... (601) (695)
-------------- --------------
Net assets of segment to be sold ............................... $ 6,874 $ 11,660
-------------- --------------
8
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Business Held for Disposition (cont'd.)
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. These Notes have been extended to March 31, 2002. Data Systems is
currently seeking mortgage financing and new sale and leaseback opportunities on
the real estate that collateralizes the Discount Notes in order to repay the
Notes, but there can be no assurance that these efforts will be successful.
In the three months ended June 2001, Data Systems recorded a
restructuring charge of $0.8 million, consisting principally of costs associated
with the elimination of approximately 73 U.S. positions in engineering,
manufacturing and administration. At September 30, 2001, Data Systems had paid
and charged $0.8 million against the liability accounts related to termination
benefits set up for the 2001 restructuring and terminated 73 employees. At
September 30, 2001, the Company included the remaining balance of the Data
Systems accrued restructuring of $0.1 million as part of its net liabilities of
discontinued operations.
Note 5 - 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 has liquidated MicroNet's
assets which were not significant. The Consolidated Balance Sheet as of
September 30, 2001 and December 31, 2000 did not include any assets or
liabilities of MicroNet.
A summary of the operating results of MicroNet are as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues ................................................. - 2,460 - 8,711
Costs and operating expenses excluding amortization ...... - (4,011) - (11,788)
Goodwill amortization .................................... - (304) - (910)
Operating loss ........................................... - (1,855) - (3,987)
Loss from discontinued operations ........................ - (1,855) - (3,987)
At September 30, 2001, the Company had paid and charged $1.1 million
against the restructuring reserve. At September 30, 2001, the Company included
the remaining balance of the MicroNet accrued restructuring of $0.9 million as
part of its net liabilities of discontinued operations. The remaining accrued
restructuring is mainly related to a lease obligation related to a vacated or
abandoned lease which has not been discounted to present value.
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.
9
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Discontinued Operation (cont'd.)
A summary of the operating results of iNEXTV are as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues - 1,721 188 2,811
Costs and operating expenses excluding amortization ... - (5,998) (6,277) (19,238)
Goodwill amortization and writedown of assets ......... - (4,514) (211) (6,244)
Operating loss ........................................ - (8,791) (6,300) (22,671)
Equity loss of unconsolidated subsidiary .............. - (226) (999) (678)
Loss from discontinued operations ..................... - (9,023) (7,294) (23,356)
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 and which closed down operations in September 2000. For the three and
nine months ended September 30, 2000, TV onthe WEB reported a net loss of $5.5
million and $9.7 million, respectively.
A summary of the loss on disposal of iNEXTV is as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Reserve for closure ................................... - - (5,736) -
Impairment charge ..................................... - - (4,602) -
Loss on disposal of discontinued operations ........... - - (10,338) -
The impairment charge was recorded in the quarter ended June 30, 2001
and reflects the write-off of the Company's unamortized investment in the
Internet businesses including an additional investment in TV1 during the first
quarter of 2001 of $1.7 million. 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. In addition to the reserve for closure, the net liabilities of
discontinued operations for iNEXTV included the reclassification of certain
liabilities at the time of closure of $1.1 million. During the three months
ended September 30, 2001, the Company paid and recorded charges of $1.7 million
against the net liabilities of discontinued operations. The unamortized balance
in the net liabilities of discontinued operations totaled $5.1 million at
September 30, 2001.
10
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Computation of Basic and Diluted Loss per Share
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted loss per
common share is provided as follows (in thousands, except per share amounts):
Three months ended Nine months ended
----------------------- -----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
---------- --------- --------- ----------
Numerator - Basic and Diluted
Income (loss) from continuing operations ................ $ (1,190) $ 93 $ (3,387) $ 460
========== ========= ========= ==========
Net loss applicable to common stockholders .............. $ (188) $(10,026) $(21,820) $ (24,883)
========== ========= ========= ==========
Denominator - Basic
Weighted average common stock outstanding ............... 59,229 56,463 58,607 55,966
---------- --------- --------- ----------
Basic income (loss) per share
from continuing operations .............................. $ (0.02) $ 0.00 $ (0.06) $ 0.01
========== ========= ========= ==========
Basic income (loss) per share
applicable to common stockholders ....................... $ 0.00 $ (0.18) $ (0.37) $ (0.44)
========== ========= ========= ==========
Denominator - Diluted
Weighted average common stock outstanding ............... 59,223 56,463 58,607 55,966
Contingent shares due to acquisition .................... - 720 - 720
Effect of dilutive securities
Stock options ....................................... - 178 - 691
Redeemable and convertible preferred stock .......... - 14,731 - 14,731
Warrants ............................................ - - - 78
---------- --------- --------- ----------
59,223 72,092 58,607 72,186
---------- --------- --------- ----------
Diluted income (loss) per share
from continuing operations .............................. $ (0.02) $ 0.00 $ (0.06) $ 0.01
========== ========= ========= ==========
Diluted income (loss) per share
applicable to common stockholders ....................... $ 0.00 $ (0.14) $ (0.37) $ (0.34)
========== ========= ========= ==========
In the nine months ended September 30, 2001, holders of 716 shares of
Convertible Preferred Stock converted their holdings into 572,800 shares of
Common Stock and 1,611 shares of Redeemable Preferred Stock were redeemed into
1,288,800 shares of Common Stock. In the nine months ended September 30, 2000,
holders of 760 shares of Convertible Preferred Stock converted their holdings
into 380,000 shares of Common Stock and 1,611 shares of Redeemable Preferred
Stock were redeemed into 1,119,879 shares of Common Stock. Such shares of common
stock are included in the weighted average common stock outstanding from the
dates of exchange. The remaining shares of Common Stock potentially issuable on
conversion of Convertible Preferred Stock and redemption of the Redeemable
Preferred Stock have been included in the computation of diluted weighted
average common stock outstanding in the periods where their deemed issuance
would have a dilutive effect. If the Company was to make all remaining
redemption payments in Common Stock based on the floor conversion price, an
additional 12,654,100 shares of Common Stock would be issued over the number of
common shares included in the diluted income per share computation at September
30, 2001.
11
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIALS STATEMENTS
Note 6 - Computation of Basic and Diluted Loss per Share (cont'd.)
Stock options to purchase 2,857,083 shares of Common Stock at prices
ranging from $0.26 to $6.00 per share were outstanding at September 30, 2001,
but were not included in the computation of diluted loss per share as they are
anti-dilutive.
Stock options to purchase 3,684,584 shares of Common Stock at prices
ranging from $1.0625 to $6.00 per share were outstanding at September 30, 2000,
but were not included in the computation of diluted loss per share for the three
months ended September 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 12. On May 10, 1999, Warrants were exercised for 204,000 shares
of Common Stock, which are included in the weighted average common stock
outstanding since the date of the exchange. The remaining outstanding warrants
are excluded from the computation of weighted average common stock outstanding
for the three and nine months ended September 30, 2001 and the three months
ended September 30, 2000, respectively, since they are anti-dilutive.
Note 7 - Supplemental Schedule of Cash Flow Information
Nine months ended September 30,
---------------------------------
2001 2000
------------- -------------
(in thousands)
Interest paid ........................................ $ 2,640 $ 5,283
Income taxes paid .................................... 676 993
Redeemable preferred stock ........................... (1,611) (3,222)
Convertible preferred stock .......................... (716) (1,520)
Issuance of common stock ............................. 2,327 4,742
Note 8 - 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.
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 Schwarzenegger 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. In July 2001, the Company's subsidiary, iNEXTV, wrote off its investment
in AENTV and believes that it has no further obligations with respect to AENTV.
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.
12
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIALS STATEMENTS
Note 8 - Commitments and Contingencies (cont'd.)
Environmental Matters
Ampex's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste emissions
and hazardous substances. Owners and occupiers of sites containing hazardous
substances, as well as generators and transporters of hazardous substances, are
subject to broad liability under various federal and state environmental laws
and regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites, and are currently engaged in various environmental
investigation, remediation and/or monitoring activities at several sites located
off Company facilities. Management has provided reserves, which have not been
discounted, related to investigation and cleanup costs and believes that the
final disposition of these matters will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
The Company has not accrued any liability for costs that might be
assessed against it by federal or state environmental agencies involving sites
owned by the Company's former subsidiary Media. Media is primarily responsible
for the cleanup at its facilities and at off site locations. The Company
believes that it has no material contingent liability in connection with the
Media properties.
Note 9 - 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 nine months ended
September 30, 2001, the Company issued 572,800 shares of Common Stock to satisfy
the quarterly redemption requirements, leaving 409 shares of Convertible
Preferred Stock outstanding. In the nine months ended September 30, 2000, the
holders of 760 shares of Convertible Preferred Stock converted their holdings
into 380,000 shares of Common Stock. Beginning in June 1999, the Company became
obligated to redeem the Redeemable Preferred Stock in quarterly installments
through March 2008. In the nine months ended September 30, 2001, the Company
issued 1,288,800 shares of its Common Stock to satisfy the quarterly redemption
requirements, leaving 15,562 shares of Redeemable Preferred Stock outstanding.
In the nine months ended June 30, 2000, the Company issued 1,119,879 shares of
its Common Stock to satisfy the quarterly redemption requirements. The Company
is obligated to redeem approximately $5.1 million face amount of Convertible and
Redeemable Preferred Stock over the next twelve months. The Company 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 10 - 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.
13
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - 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 ..................... -
-------------
September 30, 2001 ........................ $ 17,553
=============
Note 12 - Debt
Sept 30, Dec 31,
2001 2000
------------- --------------
(in thousands)
Notes Payable
Data Systems senior secured notes ........................................ $ 9,509 $ 8,000
Liability included in net assets of business held for sale ............... (9,509) (8,000)
Hillside notes payable ................................................... 300 -
Note payable - other ..................................................... 157 157
------------- --------------
Total ................................................................ $ 457 $ 157
============= ==============
Long-term Debt
Working capital facilities ............................................... $ 661 $ 2,403
Hillside notes payable ................................................... 453 -
Senior notes ............................................................. 43,798 43,683
------------- --------------
Total ................................................................ $ 44,912 $ 46,086
============= ==============
Data Systems Senior Secured Notes
In November 2000, Data Systems issued Senior Discount Notes, which are
included in "Net Assets of Business Held for Sale" in the Consolidated Balance
Sheet, providing net proceeds of $8 million that have accreted in value to $9.5
million at September 30, 2001. The Senior Discount Notes are secured by certain
assets of the Company and Data Systems. Data Systems has terminated a previously
announced agreement to sell and leaseback certain real estate, the net proceeds
from which would have been used to repay the Senior Discount Notes. Data Systems
and the holders of the Senior Discount Notes have agreed to extend their
maturity to March 31, 2002. The Company is currently seeking a mortgage
financing of the real estate and will continue to pursue new sale and leaseback
opportunities. There can be no assurance that these financing efforts will be
successful or be completed by the due date of the Senior Discount Notes.
Note Payable - Other
The note is a noninterest-bearing demand promissory note held by NH
Holding Incorporated. The outstanding balance is expected to be paid or
converted into shares of Common Stock in 2002.
14
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Debt (cont'd.)
Working Capital Facilities
Ampex has a revolving credit line with a domestic financial institution
to finance working capital requirements. The Company's domestic revolving credit
agreement permits borrowings up to $7.0 million, based on eligible accounts
receivable as defined in the agreement, less a standby letter of credit facility
in the amount of $2.5 million. At September 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. The Company pays a monthly commitment fee of
0.5% per annum based on the average daily unused amount. The borrowings are
collateralized by certain current assets of the Company.
Hillside Notes
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. At the
Company's request, Hillside has made pension contributions totaling $0.7 million
through September 30, 2001 and has been issued notes by the Company in the
amount of the pension contributions. Under the terms of the Notes, $150,000 is
due on the first anniversary of the Note with the remainder due on the fourth
anniversary of the Notes. The Hillside Notes provide for interest payable
quarterly at 175% of the applicable Federal rate at the time of issuance.
Senior Notes
In 1998, the Company issued $44.0 million of 12% Senior Notes
("Notes"), due March 15, 2003, 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 at $765,000 using the Black-Scholes model. Warrants are being amortized
against interest expense over the term of the Notes. Interest on the Notes is
payable semi-annually on March 15 and September 15 of each year.
The Company agreed with holders of its 12% Senior Notes to defer an
interest payment of approximately $2.6 million to January 31, 2002 to provide
time to complete a restructuring of the Company's Senior Notes. The
restructuring plan would apply substantially all future royalty receipts, net of
operating expenses, as well as the net proceeds of certain asset sales, to repay
interest and principal on the indebtedness. If the Company is unable to
restructure the Notes, the Company may be required to seek bankruptcy
protection.
Note 13 - 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.
15
AMPEX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Segment Reporting (cont'd)
Nine Months Ended September 30, 2001
-----------------------------------------
Licensing of Eliminations
Intellectual and
Property Corporate Totals
----------- ----------- -----------
Revenues from external customers ....................... $ 6,605 $ - $ 6,605
Interest income ........................................ - 217 217
Interest expense ....................................... - 4,055 4,055
Depreciation, amortization and accretion ............... - 636 636
Segment income (loss) .................................. 6,123 (8,834) (2,711)
Segment assets ......................................... - 16,418 16,418
Nine Months Ended September 30, 2000
-----------------------------------------
Licensing of Eliminations
Intellectual and
Property Corporate Totals
----------- ----------- -----------
Revenues from external customers ....................... $ 9,614 $ - $ 9,614
Interest income ........................................ - 1,078 1,078
Interest expense ....................................... - 4,069 4,069
Depreciation, amortization and accretion ............... 3 604 607
Segment income (loss) .................................. 9,063 (7,609) 1,454
Segment assets ......................................... 2 49,504 49,506
Note 14 - Subsequent Events
In October 2001, Data Systems entered into a revolving credit agreement
providing for borrowings of up to $2.5 million, secured principally by the
borrower's inventories. The Company has guaranteed all borrowings. Availability
under the agreement declines to $1.5 million in January 2002, to $750,000 in
February 2002 and the loan is due and payable in full on March 31, 2002.
Borrowings bear interest at 8% per annum on the outstanding balance. As a
commitment fee the Company issued to the lender 1 million shares of its Common
Stock with a market value of approximately $160,000. The lender, Sherborne &
Company Incorporated, is a related party of the Company and is wholly-owned by
Edward Bramson, the Chairman and Chief Executive Officer of Ampex Corporation.
16
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. The Company agreed with holders of its 12% Senior
Notes to defer an interest payment of approximately $2.6 million to January 31,
2002 to allow it to conclude a restructuring of the Company's Senior Notes. The
restructuring plan would apply substantially all future royalty receipts, net of
operating expenses, as well as the net proceeds of certain asset sales, to repay
interest and principal on the Senior Notes.
Data Systems has terminated a previously announced agreement to sell
and leaseback certain real estate, the net proceeds from which would have been
applied to repay the Senior Discount Notes. Data Systems and the holders of the
Senior Discount Notes have agreed to extend the maturity of the Senior Discount
Notes to March 31, 2002. The Company is currently seeking a mortgage financing
of the real estate and will continue to pursue new sale and leaseback
opportunities. There can be no assurance that these financing efforts will be
successful or be completed by the due date of the Senior Discount Notes.
The Company is discussing with the holders of the Senior Discount
Notes a long-term extension of the Notes and repayment of principal and accrued
interest from future net royalty receipts in the event that the sale and
leaseback or other financing of real estate does not materialize or does not
raise sufficient proceeds. Subject to refinancing of the Senior Discount Notes,
management's current projections indicate that Data Systems should generate
sufficient liquidity to meet its obligations for at least the next twelve
months. As described above, the Company is actively seeking a restructuring of
its indebtedness but if this is not concluded successfully the Company may be
unable to continue as a going concern and could be required to seek bankruptcy
protection. Such an event may result in the Company's Common Stock being
negatively affected or becoming worthless.
17
Discontinuance of Internet Video Development Strategy
As of June 30, 2001, the Company closed iNEXTV's operations in New York
City and terminated the development of Internet video technology in Redwood
City, California. It also discontinued funding its subsidiary, AENTV in Los
Angeles and its partially-owned affiliate, TV1.de in Munich in Germany. In the
quarter ended June 30, 2001, Ampex provided a reserve for the cost of closing
all Internet-based operations and wrote down its investments in those entities
completely because the proceeds from asset sales will not be sufficient to repay
third party obligations of those entities.
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. During the quarter ended
September 30, 2001, the Company recorded charges of $1.7 million against the
reserve and reclassified certain liabilities totaling $1.1 million to the
reserve. The unamortized balance in the reserve for closure costs totaled $5.1
million at September 30, 2001. The reserve may be reduced to the extent that the
Company is able to sublet its facilities in future periods. 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 September 30, 2001 and December 31, 2000. The Company
continues to offer Data Systems for sale but to date has not received any
acceptable offers to purchase the company. Accordingly, the Company 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. Accordingly, the operations of MicroNet have been classified as
"Discontinued Operations" for all periods presented. At December 31, 2000, the
Company established a reserve for the costs of closure and to write-down its
investment in MicroNet to estimated net realizable value. During 2001, the
Company recorded charges of $1.1 million against the reserve. The unamortized
balance in the reserve for closure costs totals $0.9 million at September 30,
2001
The Company's continuing operations consist of Ampex's intellectual
property licensing activities.
Results of Operations for the Three and Nine Months Ended September 30, 2001 and
2000
Royalty Income. Royalty income was $2.1 million and $2.9 million in the
third quarters of 2001 and 2000, respectively, and $6.6 million and $9.6 million
in the first nine months 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
18
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. As discussed above, the Company and
Data Systems are negotiating with holders of the Senior Notes and the Senior
Discount Notes to restructure the indebtedness to apply future net royalty
receipts to the repayment of interest and principal on the indebtedness.
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 $1.5 million in the
three months ended September 30, 2001 and September 30, 2000, respectively and
was $4.8 million and $4.1 million in the comparable nine months ended September
30, 2001 and September 30, 2000. The increase in the comparable nine-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
$1.4 million, respectively, in the three and nine months ended September 30,
2001 compared to $1.5 million and $4.9 million, respectively in the three and
nine months ended September 30, 2000. The decrease in operating income in the
three and nine months ended September 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. Interest expense charged on the Senior Discount
Notes and included in the income (loss) of business held for sale was $0.4 and
$1.3 million in the three and nine months ended September 30, 2001,
respectively.
Amortization of Debt Financing Costs. These amounts reflect periodic
amortization of financing costs over the remaining terms of the debt. Financing
costs associated with the issuance of the 12% Senior Notes are being charged to
expense over five years.
Interest Income. Interest income is earned on cash balances and short
and long-term investments. In the three and nine months ended September 30, 2001
the Company had significantly lower investment balances compared to the three
and nine months ended September 30, 2000, which resulted in lower interest
income.
Other (Income) Expense, Net. For the three and nine months ended
September 30, 2001, other (income) expense, net consists primarily of foreign
currency transaction gains and losses. In the three and nine months ended
September 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 nine months ended September 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 September 30, 2001, the
19
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.
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 ($0.7) million and $(4.9)
million in the three and nine months ended September 30, 2001, respectively, and
$0.2 million and $1.5 million in the three and nine months ended September 30,
2000, respectively.
A summary of the operating results of Data Systems is as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues .............................................. 7,500 11,547 25,454 35,315
Costs and operating expenses .......................... (7,753) (11,232) (29,030) (33,948)
Operating income (loss) ............................... (253) 315 (3,577) 1,367
Interest expense ...................................... (460) (159) (1,302) (507)
Income (loss) of business held for disposition ........ (714) 243 (4,854) 1,484
In the three months ended June 30, 2001, Data Systems recorded a net
restructuring charge of $0.8 million, principally related to costs associated
with the elimination of approximately 73 U.S. positions in engineering,
manufacturing and administration. At September 30, 2001, Data Systems had paid
and charged $0.8 million against the liability accounts related to the
termination benefits set up for the 2001 restructuring and terminated 73
employees. At September 30, 2001, the Company includes the remaining balance of
Data Systems accrued restructuring reserve of $0.1 million as part of its net
liabilities of discontinued operations.
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 as of December 31, 2000.
20
A summary of the operating results of MicroNet are as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues ............................................... - 2,460 - 8,711
Costs and operating expenses excluding amortization .... - (4,011) - (11,788)
Goodwill amortization .................................. - (304) - (910)
Operating loss ......................................... - (1,855) - (3,987)
Loss from discontinued operations ...................... - (1,855) - (3,987)
At September 30, 2001, the Company had paid and charged $1.1 million
against the restructuring reserve. At September 30, 2001, the Company included
the remaining balance of the MicroNet accrued restructuring of $0.9 million as
part of its net liabilities of discontinued operations. The remaining accrued
restructuring is mainly related to a lease obligation related to a vacated or
abandoned lease which has not been discounted to present value.
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 Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Revenues ............................................... - 1,721 188 2,811
Costs and operating expenses excluding amortization .... - (5,998) (6,277) (19,238)
Goodwill amortization and writedown of assets .......... - (4,514) (211) (6,244)
Operating loss ......................................... - (8,791) (6,300) (22,671)
Equity loss of unconsolidated subsidiary ............... - (226) (999) (678)
Loss from discontinued operations ...................... - (9,023) (7,294) (23,356)
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 nine months ended September 30, 2000,
TV onthe WEB reported a net loss of $5.5 million and $9.7 million, respectively.
21
A summary of the loss on disposal of iNEXTV are as follows:
Three months ended Nine months ended
---------------------- ----------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
--------- -------- -------- ---------
(in thousands)
Reserve for closure ................................... - - (5,736) -
Impairment charge ..................................... - - (4,602) -
Loss on disposal of discontinued operations ........... - - (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 including an additional investment in TV1 during the first quarter of
2001 of $1.7 million. 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 the facilities are sublet in
the future, employee and contractor severance costs of $0.6 million and other
costs of $0.1 million. In addition to the reserve for closure, the net
liabilities of discontinued operations for iNEXTV included the reclass of
certain liabilities at the time of closure of $1.1 million. During the three
months ended September 30, 2001, the Company paid and recorded charges of $1.7
million against the net liabilities of discontinued operations. The unamortized
balance in the net liabilities of discontinued operations totaled $5.1 million
at September 30, 2001.
Net Loss. The Company reported a net loss of $1.9 million and $25.9
million, respectively, in the three and nine months ended September 30, 2001
compared to a net loss of $10.5 million and $25.4 million, respectively, in the
three and nine months ended September 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.
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 in the three and
nine months ended September 30, 2001 of $1.7 million and $4.1 million,
respectively, and $0.5 million for the three and nine months ended September 30,
2000, 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 above, the Company and holders
of its 12% Senior Notes and Data Systems' Senior Discount Notes are seeking to
restructure the indebtedness and have agreed to defer a scheduled interest
payment on the Senior Notes and extend the maturity date on the Senior Discount
Notes. The restructuring plan would apply substantially all future royalty
receipts, net of operating expenses, as well as the net proceeds of certain
asset sales, to repay interest and principal. While the Company is actively
negotiating the restructuring described above, if a restructuring is not
concluded successfully the Company may be unable to continue as a going concern
and could be required to seek bankruptcy protection. Such an event may result in
the Company's Common Stock being negatively affected or becoming worthless.
Cash Flow. The decline in cash and short-term investments in the nine
months ended September 30, 2001 results primarily from operating losses of the
Company's Internet video businesses and operations of the Internet Technology
Group that have been closed as of June 30, 2001. These losses more than offset
operating income from the Company's non-Internet technology licensing
activities. Cash provided by continuing operations totaled $4.1 million in the
nine months ended September 30, 2001 and cash used in continuing operations
totaled $6.8 million in
22
the nine months ended September 30, 2000 largely as a result of pension plan
payments and Data Systems accrued restructuring payments. Cash used in
discontinued operations totaled $12.1 million in the nine months ended September
30, 2001 and $18.9 million in the nine months ended September 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. At the
Company's request, Hillside has made pension contributions totaling $0.7 million
through September 30, 2001 and has been issued notes by the Company in the
amount of the pension contributions. Under the terms of the Notes, $150,000 is
due on the first anniversary of the Note with the remainder due on the fourth
anniversary of the Notes.
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 terminated a previously announced agreement to sell and
leaseback certain real estate, the net proceeds from which would have been used
to repay the Senior Discount Notes. Data Systems and the holders of the Senior
Discount Notes have agreed to extend their maturity to March 31, 2002. The
Company is currently seeking a mortgage financing of the real estate and will
continue to pursue new sale and leaseback opportunities. There can be no
assurance that these financing efforts will be successful or be completed by the
due date of the Senior Discount Notes.
Data Systems has recently reduced headcount and overhead expenses in
order to operate at a cash breakeven level at current sales levels. In the nine
month period ended September 30, 2001, Data Systems recorded a restructuring
reserve of $0.8 million in connection with its cost reduction initiatives.
Recently, Data Systems has seen an increase in proposal activity from government
customers that it believes may result in higher sales levels in future periods.
In October 2001, Data Systems entered into a revolving credit agreement
providing for borrowings of up to $2.5 million, secured principally by the
borrower's inventories. The Company has guaranteed all borrowings. Availability
under the agreement declines to $1.5 million in January 2002, to $750,000 in
February 2002 and the loan is due and payable in full on March 31, 2002.
Borrowings bear interest at 8% per annum on the outstanding balance. As a
commitment fee the Company issued to the lender 1 million shares of its Common
Stock having a market value of approximately $160,000. Data Systems had been
seeking such financing for several months but was unable to obtain it on
commercially reasonable terms. The lender, Sherborne & Company Incorporated, is
a related party of the Company and is wholly-owned by Edward Bramson, the
Chairman and Chief Executive Officer of Ampex Corporation. The facility will be
used to reduce accounts payable, a significant portion of which at September 30,
2001 had become past due. The Company believes that the new inventory line of
credit will bridge the liquidity gap that existed pending realization of
recently enacted operational cost savings and inventory liquidation initiatives.
Management's current projections indicate that Data Systems should generate
sufficient liquidity to meet its obligations over at least the next twelve
months subject to refinancing the Senior Discount Notes.
The Company has available, through a subsidiary, a working capital
facility that allows it to borrow or obtain letters of credit totaling $7.0
million, based on eligible accounts receivable, through May 2002. At September
30, 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.
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.
23
Debt Agreements. The indentures under which the Senior Discount Notes
and 12% Senior Notes were issued contain 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. As discussed above,
the Company has initiated negotiations to restructure the Senior Discount Notes
and the Senior Notes to provide for the repayment of principal and interest out
of future net royalty receipts. In connection with the restructuring, the
Company may seek to modify the terms of the existing Indentures to the extent
that they limit the incurrence of additional senior debt, the sale of assets and
other actions by the Company and its restricted subsidiaries. If a restructuring
is not concluded successfully the Company may be unable to continue as a going
concern and could be required to seek bankruptcy protection. Such an event may
result in the Company's Common Stock being negatively affected or becoming
worthless.
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 has adopted 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 September
30, 2001 there was no goodwill and goodwill amortization on the Company's
financial statements.
In August 2001, the FASB issued Statement No. 143 ("FAS 143"),
Accounting for Asset Retirement Obligations. The standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. The standard is effective for 2003. The
company is currently reviewing the requirements of this new standard and has not
yet determined its impact on the company's financial position or results of
operations.
In October 2001, the FASB issued Statement No. 144 ("FAS 144"),
Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes
Statement No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and certain provisions of
APB Opinion No. 30, Reporting Results of Operations / Reporting the Effects of
Disposal of a Segment of a Business. FAS 144 requires that long-lived assets to
be disposed of by sale, including discontinued operations, be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued
24
operations. As a result, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. FAS 144 also broadens the reporting requirements of discontinued
operations to include all components of an entity that can be distinguished and
eliminated from the rest of the entity's ongoing operations. The provisions of
FAS 144 are effective for fiscal years beginning after December 15, 2001. The
company is currently reviewing the requirements of this new standard and has not
yet determined its impact on the company's financial position or results of
operations.
Risk Factors
Ability to Continue as a Going Concern - Declining Liquidity
As discussed in the Notes to the Unaudited Financial Statements for the
three and nine months ended September 30, 2001, there exists substantial
uncertainty as to the Company's ability to continue as a going concern. The
Company's working capital has declined substantially in recent periods and its
cash and marketable securities have declined to $4.3 million at September 30,
2001. The Company's declining liquidity has prompted negotiations between the
Company and the holders of the Senior Discount Notes and Senior Notes to
restructure their indebtedness. The restructuring plan would apply substantially
all future royalty receipts, net of operating expenses, as well as the net
proceeds of certain asset sales, to repay interest and principal on the
indebtedness. The Company agreed with holders of its 12% Senior Notes to defer
an interest payment of approximately $2.6 million to January 31, 2002 to provide
time to complete the restructuring. Ampex has terminated a previously announced
agreement to sell and leaseback certain real estate, the net proceeds from which
would have been applied to repay the Senior Discount Notes. Data Systems and the
holders of the Senior Discount Notes have agreed to extend the maturity of the
Senior Discount Notes to March 31, 2002. Data Systems is currently seeking a
mortgage financing of the real estate and will continue to pursue new sale and
leaseback opportunities. There can be no assurance that these financing efforts
will be successful or be completed by the due date of the Senior Discount Notes.
As part of the restructuring, the Company and the holders of the Senior Discount
Notes are discussing a long-term extension of the Notes and repayment of
principal and accrued interest from future net royalty receipts in the event
that the mortgage financing or sale and leaseback of real estate do not
materialize or do not raise sufficient proceeds.
Subsequent to the end of the third quarter, Data Systems obtained a
short-term financing commitment of up to $2.5 million through March 2002.
Borrowings under the line are secured by inventories and bear interest at 8% per
annum. The facility will be used to reduce accounts payable, a significant
portion of which at September 30, 2001 had become past due. The Company believes
that the new inventory line of credit will bridge the liquidity gap that existed
pending realization of recently enacted operational cost savings and inventory
liquidation initiatives. 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. Management's current projections indicate that
Data Systems should generate sufficient liquidity to meet its obligations for at
least the next twelve months. The Company is actively seeking a restructuring of
its indebtedness, but if this is not concluded successfully, the Company may be
unable to continue as a going concern and could be required to seek bankruptcy
protection. Such an event may result in the Company's Common Stock being
negatively affected or becoming worthless. (See Liquidity and Capital
Resources.)
Risk of Continuing Losses
Ampex has incurred significant operating and net losses in the nine
months ended September 30, 2001 and its fiscal years ended December 31, 2000 and
1999. Such losses were primarily due to its Internet video businesses that have
been closed 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
has recently taken
25
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 Associated with Acquisition Strategy
Ampex is not currently seeking to make any acquisitions of new
businesses. However, 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:
. issue additional equity securities of the Company or a
subsidiary, which would dilute the ownership interest of existing
Ampex stockholders;
. incur additional debt; and/or
. amortize goodwill and other intangibles or incur other
acquisition-related charges, which could materially impact
earnings.
Acquisitions and investments involve numerous additional risks,
including difficulties in the 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 offer Data Systems for sale but has not received any
acceptable offers to purchase Data Systems. 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.
Possible Inability to Complete Restructuring
26
As discussed above, the Company's declining liquidity has prompted
negotiations with the holders of the Senior Discount Notes and Senior Notes to
restructure their indebtedness. The restructuring plan would apply substantially
all future royalty receipts, net of operating expenses, as well as the net
proceeds of certain asset sales, to repay interest and principal on the
indebtedness. If the Company is unable to restructure 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.
The Company may seek to incur additional indebtedness from time to
time, and current restrictions in the indenture governing the Senior Discount
Notes and Senior Notes may need to be modified to permit such borrowings. The
degree to which the Company is leveraged could have important consequences to
investors, including the following:
. under the proposed restructuring plan, a substantial portion of
the Company's consolidated cash flow from operations will be
dedicated to the payment of principal and interest on outstanding
indebtedness, and is therefore unavailable for other purposes;
. Ampex's ability to obtain additional financing in the future for
working capital needs, capital expenditures, acquisitions and
general corporate purposes may be materially limited or impaired,
or such financing may not be available on terms favorable to
Ampex;
. the Company may be more highly leveraged than its competitors,
which may place it at a competitive disadvantage;
. Ampex's leverage may make it more vulnerable to a downturn in its
business or the economy in general;
Fluctuations in Royalty Income
Ampex's results of operations in certain prior periods reflect the
receipt of significant royalty income, including material nonrecurring payments
resulting from negotiated settlements primarily related to sales of products by
manufacturers before negotiating licenses from Ampex. Although Ampex has a
substantial number of outstanding and pending patents, and its patents have
generated substantial royalties in the past, it is not possible to predict the
amount of royalty income Ampex will receive in the future. Royalty income has
historically fluctuated 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
27
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.
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. A significant portion of Data Systems trade
accounts payable had become past due at September 30, 2001. Data Systems expects
to enter into agreements
28
with its trade creditors that provide for the systematic repayment of accounts
payable over several months and continue access to critical manufacturing
components in future periods. Certain suppliers have required prepayment or
payment at the time of delivery of materials or services.
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:
. quarterly fluctuations in operating results;
. announcements of acquisitions or new product introductions by
Ampex or its competitors;
. announcements regarding the Company's planned sale of Data
Systems;
. reports and predictions concerning the Company by analysts and
other members of the media;
. issuances of substantial amounts of Common Stock in order to
redeem outstanding shares of its Preferred Stock, or otherwise;
and
. fluctuations in trading volume of the Company's Common Stock, and
general economic or market conditions.
. developments in the status of the Company's indebtedness and
restructuring negotiations.
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
29
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 $31.9 million at September 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.
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
30
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
The Company does not use derivative financial instruments in its
investment portfolio. The investment portfolio generally has been comprised of
US Treasury Bills. These securities mature within one year and are classified as
available for sale in accordance with FAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Investments in both fixed-rate and
floating-rate interest-earning instruments carry a degree of interest-rate risk.
Fixed-rate securities may have their fair market value adversely impacted due to
a rise in interest rates, while floating-rate securities may produce less income
than expected if interest rates fall.
At December 31, 2000 the investment portfolio included a fixed-income
security, of the quality described above, with a fair market value of
approximately $5 million. This security is subject to interest-rate risk, and
will decline in value if interest rates increase. The Company also had a number
of cash and cash equivalent accounts whose return varied directly proportionally
to US interest rates.
Due to the short duration of the investment portfolio, an immediate,
hypothetical 10 percent decrease in interest rates would not have a material
effect on the current-year financial condition or results of operations. The new
securities the Company replaces them with, when they mature, would yield less
interest income, but the impact of the 10 percent reduction would not be
material to the Company. If a 10 percent reduction occurred on January 1, 2001
and remained in effect throughout 2001, interest income and cash flow would be
reduced by approximately $29,000 in 2001. The Company does not hold any
long-term fixed instruments.
The Company has a revolving credit line with a domestic financial
institution to finance working capital requirements. The Company's domestic
revolving credit agreement permits borrowings up to $7.0 million, based on
eligible accounts receivable as defined in the agreement, less a standby letter
of credit facility in the amount of $2.5 million. Average borrowings under these
agreements during both 2000 and 1999 were less than $0.1 million at an average
interest rate of 9.8% and 8.9%, respectively. Maximum borrowings outstanding at
any time during 2000 and 1999 were $2.4 million and $1.0 million, respectively.
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. If a
10% increase in interest rates were to occur at January 1, 2001 and remain in
effect throughout 2001, and the balance remained the same, interest expense and
cash outflow would increase by approximately $21,000.
Foreign Currency Exchange Rate Risk.
International revenues from the Company's foreign subsidiaries were
less than 25% of total revenues. International sales are made mostly from the
Company's foreign sales subsidiaries in their respective countries and are
typically denominated in the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, all
foreign subsidiaries use the local currency as their functional currency.
The Company's international business is subject to risks typical of an
international business including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises in
part from intercompany accounts in which costs incurred in the United States are
charged to the Company's foreign sales subsidiaries. These
31
intercompany accounts are typically denominated in the US dollar. The Company is
also exposed to foreign exchange rate fluctuations as the financial results of
foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability. The effect of foreign
exchange rate fluctuations on the Company in 2000 and 1999 was not material.
Investment Risk.
The Company invests in equity instruments of technology companies for
business and strategic purposes. These investments are included in other
long-term assets and are accounted for under the cost method when ownership is
less than 20% and the Company does not have significant influence over the
business operations. The Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. Investments, which are in the Internet industry, are subject to
significant fluctuations in fair market value due to the volatility of the stock
market.
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 Schwarzenegger 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. In July 2001, the Company's subsidiary, iNEXTV, wrote off its investment
in AENTV and believes that it has no further obligations with respect to AENTV.
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 sites (including the four Superfund sites) are associated with the
operations of the Media subsidiaries formerly
32
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 September 30,
2001, the Company had an accrued liability of $1.0 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 September 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
33
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
Not applicable.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMPEX CORPORATION
Date: November 14, 2001 /s/ EDWARD J. BRAMSON
--------------------------------------------
Edward J. Bramson
Chairman and Chief Executive Officer
Date: November 14, 2001 /s/ CRAIG L. McKIBBEN
--------------------------------------------
Craig L. McKibben
Vice President, Chief Financial Officer and
Treasurer
35
AMPEX CORPORATION
FORM 10-Q FOR THE QUARTER ENDED
September 30, 2001
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4.3 Second Amendment to Note Purchase Agreement, dated as of
August 13, 2001, among Ampex Data Systems Corporation,
Registrant and the several Note Purchasers named therein.
4.4 Third Amendment to Note Purchase Agreement, dated as of
October 26, 2001, among Ampex Data Systems Corporation,
Registrant and the several Note Purchasers named therein.
4.5 Form of Interest Deferral Agreement, dated as of November
14, 2001, among Ampex Corporation and each of the Holders of
the Company's 12% Senior Notes due March 15, 2003.
4.6 Loan Agreement, dated as of October 29, 2001, between
Sherborne & Company Incorporated and Ampex Data Systems
Corporation to advance funds up to an aggregate amount at
any one time outstanding not in excess of $2,500.000.00.
4.7 Secured Promissory Note, dated as of October 29, 2001,
between Ampex Data Systems Corporation and Sherborne &
Company Incorporated.
4.8 Security Agreement, dated as of October 29, 2001, by Ampex
Data Systems Corporation in favor of Sherborne & Company
Incorporated.
4.9 Guarantee Agreement, dated as of October 29, 2001, between
Registrant and Sherborne & Company Incorporated.
4.10 Letter Agreement, dated as of October 29, 2001, between
Registrant and Sherborne & Company Incorporated providing
for the issuance to Sherborne & Company Incorporated of
1,000,000 shares of the Registrant's Class A Common Stock.
4.11 Form of Note between Ampex Corporation and Hillside Capital
Incorporated to fund pension contributions.