-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IbSRAdumK1U75RgsRFQgdOFRcrhwkfcpf2k0vKqi170Gu1XbyDyTdGYXt7wbmx/8 tNbgKWPe5p9rh3ADNhNhNQ== 0001012870-00-002774.txt : 20000515 0001012870-00-002774.hdr.sgml : 20000515 ACCESSION NUMBER: 0001012870-00-002774 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMPEX CORP /DE/ CENTRAL INDEX KEY: 0000887433 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133667696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20292 FILM NUMBER: 629531 BUSINESS ADDRESS: STREET 1: 500 BROADWAY STREET 2: MAIL STOP 3-36 CITY: REDWOOD CITY STATE: CA ZIP: 94063-3199 BUSINESS PHONE: 6503672011 MAIL ADDRESS: STREET 1: 500 BROADWAY STREET 2: MAIL STOP 3-36 CITY: REDWOOD CITY STATE: CA ZIP: 94063-3199 FORMER COMPANY: FORMER CONFORMED NAME: AMPEX INC /DE/ DATE OF NAME CHANGE: 19940505 FORMER COMPANY: FORMER CONFORMED NAME: AMPEX INC DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/2000 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 MARCH 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File No. 0-20292 AMPEX CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 13-3667696 (State of Incorporation) (I.R.S. Employer Identification Number) 500 BROADWAY REDWOOD CITY, CALIFORNIA 94063-3199 (Address of principal executive offices, including zip code) (650) 367-2011 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of March 31, 2000, the aggregate number of outstanding shares of the Registrant's Class A Common Stock, $.01 par value, was 56,616,572. There were no outstanding shares of the Registrant's Class C Common Stock, $0.01 par value. AMPEX CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 2000 INDEX
Page PART I -- FINANCIAL INFORMATION Item 1. Financial Statements...................................................................2 Consolidated Balance Sheets (unaudited) at March 31, 2000 and December 31, 1999......................................................................3 Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2000 and 1999.............................................4 Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2000 and 1999...................................................5 Notes to Unaudited Consolidated Financial Statements...................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................12 Item 3. Quantitative and Qualitative Disclosure about Market Risk.............................25 PART II -- OTHER INFORMATION Item 1. Legal Proceedings.....................................................................25 Item 2. Changes in Securities and Use of Proceeds.............................................27 Item 3. Defaults Upon Senior Securities.......................................................27 Item 4. Submission of Matters to a Vote of Security Holders...................................27 Item 5. Other Information.....................................................................27 Item 6(a).Exhibits..............................................................................27 Item 6(b).Reports on Form 8-K...................................................................27 Signatures......................................................................................28
2 AMPEX CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
March 31, December 31, 2000 1999 -------- --------- ASSETS Current assets: Cash and cash equivalents $ 14,392 $ 10,598 Short-term investments 18,709 31,067 Accounts receivable (net allowances of $274 in 2000 and $358 in 1999) 1,665 1,236 Inventories 2,089 2,261 Other current assets 1,522 4,951 -------- --------- Total current assets 38,377 50,113 Property, plant and equipment 6,336 5,363 Intangible assets, net 8,928 9,806 Investment in unconsolidated companies 1,786 1,786 Deferred pension asset 6,777 5,571 Other assets 1,508 1,620 Net assets of business held for disposition 16,053 13,060 -------- --------- Total assets $ 79,765 $ 87,319 ======== ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable $ 898 $ 1,103 Accounts payable 2,347 2,569 Accrued restructuring costs 57 67 Other accured liabilities 7,849 7,913 -------- --------- Total current liabilities 11,151 11,652 Long-term debt 43,870 43,914 Other liabilities 21,423 21,634 Deferred income taxes 1,213 1,213 -------- --------- Total liabilities 77,657 78,413 -------- --------- Commitments and contingencies (Note 7) Mandatorily redeemable junior preferred stock (Note 8) - - Mandatorily redeemable nonconvertible preferred stock, $1,000 liquidation value: Authorized: 69,970 shares in 2000 and in 1999 Issued and outstanding - none in 2000 and in 1999 - - Mandatorily redeemable preferred stock, $2,000 liquidation value: Authorized: 21,859 shares in 2000 and in 1999 Issued and outstanding - 18,784 shares in 2000, 19,321 in 1999 37,568 38,642 Convertible preferred stock, $2,000 liquidation value: Authorized: 10,000 shares in 2000 and in 1999 Issued and outstanding - 1,125 shares in 2000; 1,885 in 1999 2,250 3,770 Shareholders' deficit: Preferred stock, $1.00 par value: Authorized: 898,171 shares in 2000 and in 1999 Issued and outstanding - none in 2000 and in 1999 - - Common stock, $.01 par value: Class A: Authorized: 175,000,000 shares in 2000 and in 1999 Issued and outstanding - 56,616,572 shares in 2000; 55,941,854 in 1999 566 559 Class C: Authorized: 50,000,000 shares in 2000 and in 1999 Issued and outstanding - none in 2000 and in 1999 - - Other additional capital 418,059 415,437 Notes receivable from stockholders (4,642) (4,642) Accumulated deficit (451,714) (445,001) Accumulated other comprehensive income 21 141 -------- --------- Total stockholders' deficit (37,710) (33,506) -------- --------- Total liabilities, redeemable preferred stock and stockholders' deficit $ 79,765 $ 87,319 ======== =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 AMPEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share data) (unaudited)
For the three months ended March 31, --------------------------- 2000 1999 ----------- ----------- Royalty income $ 3,119 $ 2,662 Internet revenue 575 - Product sales 3,261 2,825 ----------- ----------- Total revenue 6,955 5,487 ----------- ----------- Intellectual property costs 370 377 Internet video programming and site development 3,249 - Cost of product sales 2,255 2,592 Research, development and engineering 444 184 Selling and administrative 5,794 2,231 Amortization of goodwill 877 303 ----------- ----------- Total costs and operating expenses 12,989 5,687 ----------- ----------- Operating loss (6,034) (200) Interest expense 1,364 1,352 Amortization of debt financing costs 88 86 Interest income (547) (739) Other (income) expense, net (1) (2) ----------- ----------- Loss from continuing operations before income taxes (6,938) (897) Provision for income taxes 323 260 ----------- ----------- Loss from continuing operations (7,261) (1,157) Income (loss) of business held for disposition (net of taxes of none in 2000 and 1999) 548 (790) ----------- ----------- Net loss available for common stockholders (6,713) (1,947) Other comprehensive loss, net of tax: Unrealized gain (loss) on marketable securities (130) 199 Foreign currency translation adjustments 10 - ----------- ----------- Comprehensive loss $ (6,833) $ (1,748) =========== =========== Basic and diluted income (loss) per share: Loss per share from continuing operations $ (0.13) $ (0.02) Income (loss) per share from discontinued operations $ 0.01 $ (0.02) Loss per share available to common stockholders $ (0.12) $ (0.04) ----------- ----------- Weighted average number of common shares outstanding 55,518,445 50,618,092 =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 AMPEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the three months ended ------------------------ March 31, March 31, 2000 1999 --------- --------- Cash flows from operating activities: Net loss $ (6,713) $ (1,947) Loss (income) from discontinued operations (548) 790 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, amortization and accretion 1,359 567 Net loss on disposal of assets 155 - Changes in operating assets and liabilities: Accounts receivable (429) (359) Inventories 172 (491) Deferred pension asset (1,206) - Other assets 3,466 973 Accounts payable (223) 123 Other accrued liabilities and income taxes payable (65) (1,419) Accrued restructuring costs (10) (652) Other liabilities (203) (396) --------- --------- Net cash used in continuing operations (4,245) (2,811) Net cash used in discontinued operations (2,904) (3,223) --------- --------- Net cash used in operating activities (7,149) (6,034) --------- --------- Cash flows from investing activities: Purchases of short-term investments (15,552) (29,265) Proceeds received on the maturity of short-term investments 25,621 32,854 Proceeds from the sale of short-term investments 2,140 4,224 Additions to property, plant and equipment (1,475) (60) Investments to unconsolidated companies - (5,000) --------- --------- Net cash provided by continuing operations 10,734 2,753 Net cash used in discontinued operations (378) (210) --------- --------- Net cash provided by investing activities 10,356 2,543 --------- --------- Cash flows from financing activities: Repayments under working facilities (288) - Repayment of notes payable affiliates - (6) Debt financing costs - (5) Proceeds from issuance of common stock 37 32 --------- --------- Net cash provided by (used in) continuing operations (251) 21 Net cash provided by discontinued operations 950 12 --------- --------- Net cash provided by financing activities 699 33 --------- --------- Effects of exchange rates on discontinued operations (112) (36) --------- --------- Net increase (decrease) in cash and cash equivalents 3,794 (3,494) Cash and cash equivalents, beginning of period 10,598 23,357 -------- --------- Cash and cash equivalents, end of period $ 14,392 $ 19,863 ======== =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - AMPEX CORPORATION Ampex Corporation ("Ampex" or the "Company") is one of the world's leading innovators of technologies for the visual information age. Beginning in 1999, the Company embarked to strategically reposition the Company by building a network of Internet video businesses, focused on programming, services and technology. During 1999, the Company, through its subsidiary, iNEXTV Corporation ("iNEXTV"), acquired equity interests in various Internet video businesses and started to assemble its internal organization to support the iNEXTV network and to develop additional Internet video-based websites. In February 2000, in order to focus more sharply on its Internet video businesses, the Company announced plans to sell Ampex Data Systems Corporation, ("Data Systems"), its subsidiary that makes high performance tape-based mass data storage products. The results of operations of Data Systems have been classified as Discontinued Operations in the Statements of Operations for all periods presented. The book value of the net assets to be sold is reflected in net assets of business held for disposition in the Consolidated Balance Sheet for March 31, 2000 and December 31, 1999. The Company expects to report a gain on the sale of Data Systems. However, at the date of these financial statements, the Company has not yet entered into a contract to sell Data Systems. Upon consummation of a successful sale, the Company intends to use the proceeds for investment in iNEXTV and other Internet initiatives, as well as to retire debt. Following the planned sale of Data Systems, the Company's continuing operations will include iNEXTV, its non-Internet technology licensing group, the newly-formed Internet Technology Group ("ITG") and MicroNet Technology, Inc. ("MicroNet"), its wholly-owned subsidiary that makes high performance disk arrays and Storage Area Network products. NOTE 2 - BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In addition, certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation. The statements should be read in conjunction with the Company's report on Form 10-K for the year ended December 31, 1999 and the Audited Consolidated Financial Statements included therein. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three-month period ended March 31, 2000 are not necessarily indicative of the results to be expected for the full year. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. The Company believes that adoption of this pronouncement will have no material impact on the Company's financial position and results of operations. In December 1999, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. The Company believes that adopting SAB 101 will not have a material impact on the Company's financial position and results of operations. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that that the impact of FIN 44 will not have a material effect on the financial position or results of operations of the Company. 6 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - BUSINESS HELD FOR DISPOSITION In February 2000, the Board of Directors of the Company authorized management to pursue a sale of Data Systems, its wholly-owned subsidiary that manufacturers and sells high performance, tape-based mass data storage products. A summary of the operating results of Data Systems is as follows:
March 31, March 31, 2000 1999 --------- -------- (in thousands) Revenues...................................................... $ 11,739 $ 12,195 Costs and operating expenses.................................. 11,290 13,047 Operating income (loss)....................................... 449 (852) Other (income) expense........................................ (68) 10 Income (loss) of business held for disposition................ 548 (790)
A summary of the assets and liabilities of Data Systems is as follows:
March 31, December 31, 2000 1999 --------- ----------- (in thousands) Current assets................................................ $ 27,286 26,328 Property, plant and equipment, net............................ 6,702 6,796 Other assets.................................................. 89 134 Current liabilities........................................... (14,724) (17,527) Long-term debt................................................ (1,702) (752) Other liabilities............................................. (731) (1,038) Other......................................................... (867) (881) ------------- ------------- Net assets of segment to be sold.............................. $ 16,053 13,060 ============= =============
Prospective buyers have only recently been approached by the Company's advisors. However, the Company believes that it will recognize a gain on the sale of Data Systems some time in fiscal 2000. NOTE 4 - COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted loss per common share is provided as follows (in thousands, except per share amounts):
Three months ended March 31, --------------------------------- 2000 1999 ------------- -------------- Numerator Loss from continuing operations........................ $ (7,261) $ (1,157) ============= ============= Net loss available for common stockholders............. $ (6,713) $ (1,947) ============= ============= Denominator Weighted average common stock outstanding.............. 55,518 50,618 ------------ ------------- Basic and diluted loss per share from continuing operations. $ (0.13) $ (0.02) ============= ============= Basic and diluted loss per share............................ $ (0.12) $ (0.04) ============= =============
7 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE (CONT'D.) In connection with the acquisition of MicroNet, the Company issued 720,000 shares of Common Stock which are being held in escrow pending the resolution of certain contingencies. These shares have been included in the computation of diluted weighted average common stock outstanding from their issue date in periods when their inclusion is dilutive. In the three months ended March 31, 2000, holders of 760 shares of Convertible Preferred Stock converted their holdings into 380,000 shares of Common Stock and holders of 537 shares of Redeemable Preferred Stock were redeemed for 260,679 shares of Common Stock which are included in the weighted average common stock outstanding since the date of exchange. In the three months ended March 31, 1999, holders of 5,640 shares of Convertible Preferred Stock converted their holdings into 2,815,000 shares of Common Stock which are included in the weighted average common stock outstanding since the date of exchange. The remaining shares of Common Stock potentially issuable on conversion of Convertible Preferred Stock and redemption of the Redeemable Preferred Stock have not been included in the computation of diluted weighted average common stock outstanding for the three months ended March 31, 2000 and 1999, respectively, since they are anti-dilutive. If the Company were to make all remaining redemption payments in Common Stock based on the floor conversion price, an additional 15,589,700 shares of Common Stock would be issued over the number of common shares included in the diluted income per share computation. At March 31, 2000 such additional shares of Common Stock would be anti-dilutive to the diluted loss per share reported. Stock options to purchase 3,340,118 shares of Common Stock at prices ranging from $1.06 to $6.00 per share were outstanding at March 31, 2000, but were not included in the computation of diluted loss per share as they are anti-dilutive. Stock options to purchase 2,800,179 shares of Common Stock at prices ranging from $1.0625 to $10.50 per share were outstanding at March 31, 1999, but were not included in the computation of diluted loss per share as they are anti-dilutive. In January 1998, Warrants to purchase 1,020,000 shares of Common Stock at $2.25 per share were issued in connection with the issuance of the Senior Notes. See Note 11. The Warrants were not included in the computation of diluted weighted average common stock outstanding at March 31, 1999 because the exercise price was greater than the average market value of the common shares. On May 10, 1999, Warrants were exercised for 204,000 shares of Common Stock, which are included in the weighted average common stock outstanding since the date of the exchange. The remaining outstanding warrants are excluded from the computation of weighted average common stock outstanding at March 31, 2000 as they are anti-dilutive. NOTE 5 - SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Three months ended March 31, --------------------------------- 2000 1999 ------------- ------------- (in thousands) Interest paid.......................................... $ 2,641 $ 2,640 Income taxes paid...................................... 260 330 Redeemable preferred stock............................. (1,520) - Convertible preferred stock............................ (1,074) (11,260) Issuance of common stock............................... 2,594 11,260
8 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - INVENTORIES March 31, December 31, 2000 1999 ------------- -------------- (in thousands) Raw materials...................... $ 338 $ 313 Work in process.................... 140 57 Finished goods..................... 1,611 1,891 ------------- -------------- Total.......................... $ 2,089 $ 2,261 ============= ============== NOTE 7 - COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS The Company is currently a defendant in lawsuits that have arisen in the ordinary course of its business. Certain subsidiaries have been assessed income and value-added taxes together with penalties and interest. Management does not believe that any such lawsuits or unasserted claims will have a material adverse effect on the Company's financial position, results of operations or cash flows. On January 7, 2000, a suit was filed against the Company and others by Information Super Station ("ISS"), the majority stockholder of Executive Branch Webcasting Corporation, in which the Company's Internet subsidiary, iNEXTV, held a minority interest. The suit seeks an injunction or recovery of damages in the amount of $600 million. The Company believes that the suit is without merit. On February 1, 2000, the Company filed suit against ISS and others under the Federal securities laws seeking contract recission and damages in connection with activities related to the Company's investment. ENVIRONMENTAL MATTERS Ampex's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and hazardous substances. Owners and occupiers of sites containing hazardous substances, as well as generators and transporters of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including liability for investigative and cleanup costs and damages arising out of past disposal activities. Ampex has been named from time to time as a potentially responsible party by the United States Environmental Protection Agency with respect to contaminated sites that have been designated as "Superfund" sites, and are currently engaged in various environmental investigation, remediation and/or monitoring activities at several sites located off Company facilities. Management has provided reserves, which have not been discounted, related to investigation and cleanup costs and believes that the final disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company has not accrued any liability for costs that might be assessed against it by federal or state environmental agencies involving sites owned by the Company's former subsidiary Media. Media is primarily responsible for the cleanup at its facilities and at off site locations. The Company believes that it has no material contingent liability in connection with the Media properties. NOTE 8 - PREFERRED STOCK Each share of Convertible Preferred Stock and Redeemable Preferred Stock entitles the holder thereof to receive noncumulative dividends at the rate of 8% per annum, if declared by the Company's Board of Directors. Each share of Convertible Preferred Stock may be converted, at the option of the holder thereof, at a conversion price of $4.00 per share, into 500 shares of Common Stock, subject to adjustment under certain circumstances. In the three months ended March 31, 2000, the holders of 760 shares of Convertible Preferred Stock converted their holdings into 380,000 shares of Common Stock. In the three months ended March 31, 1999, the holders of 5,630 shares of Convertible Preferred Stock converted their holdings into 2,815,000 shares of Common Stock. Beginning in June 2001, the Company will become obligated to redeem any remaining Convertible Preferred Stock in quarterly installments through December 2008. Beginning in June 1999, the Company became obligated to redeem the Redeemable Preferred Stock in quarterly installments through March 2008. In the three months ended March 31, 2000, the Company issued 260,679 shares of its Common Stock to satisfy the quarterly redemption 9 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - PREFERRED STOCK (CONT'D.) requirements. The Company is obligated to redeem approximately $4.2 million face amount of the security over the next twelve months. The Company has the option to redeem the Redeemable Preferred Stock at any time and the Convertible Preferred Stock beginning in June 2001, and has the option to make mandatory redemption payments either in cash or in shares of Common Stock. In the event that the Company does not have sufficient funds legally available to make any mandatory redemption payment in cash, the Company will be required to make such redemption payment by issuing shares of Common Stock. Shares of Common Stock issued to make any optional or mandatory redemption payments will be valued at the higher of $2.50 or fair market value per share of Common Stock. The Company intends to issue shares of Common Stock to satisfy its redemption obligation on the Redeemable Preferred Stock through December 31, 2000. The MicroNet Redeemable Junior Preferred Stock has a liquidation value of $5.0 million and is redeemable out of a percentage of earnings of MicroNet beginning in fiscal 1999. No redemption payments have been made because MicroNet has reported losses since its date of acquisition. Due to the contingent nature of the redemption provision, no value has been ascribed to the MicroNet Redeemable Junior Preferred Stock in determination of the purchase price. The shares of the MicroNet Redeemable Junior Preferred Stock are being held in escrow, pending resolution of certain contingencies for which the Company has been indemnified by the former stockholders of MicroNet. NOTE 9 - INCOME TAXES As of December 31, 1999, the Company had net operating loss carryforwards for income tax purposes of $130.4 million expiring in the years 2005 through 2014. As a result of the financing transactions that were completed in April 1994 and February 1995, the Company's ability to utilize its net operating losses and credit carryforwards as an offset against future consolidated federal income tax liabilities will be restricted in its application, which will result in a material amount of the net operating loss never being utilized by the Company. NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME The balances of each classification within accumulated other comprehensive income are as follows:
Unrealized Accumulated Foreign Gain on Other Currency Marketable Comprehensive Items Securities Income ------------- ------------- -------------- (in thousands) December 31, 1999......................... $ - $ 141 $ 141 Current period change..................... 10 (130) (120) ------------- ------------- -------------- March 31, 2000............................ $ 10 $ 11 $ 21 ============= ============= ==============
NOTE 11 -- SENIOR NOTES In January 1998, the Company issued $30.0 million of its 12% Senior Notes ("Notes"), together with Warrants to purchase 1.02 million shares of Common Stock. The Warrants are exercisable at $2.25 per share at any time on or prior to March 15, 2003. At the time of issuance, the Warrants were valued using the Black-Scholes model. The value assigned to the Warrants was $765,000, which is being amortized against interest expense over the term of the Notes. At the end of June 1998, the Company issued an additional $14.0 million Senior Notes. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year. The Notes will mature on March 15, 2003. The Company may redeem the Notes, in whole or in part, at any time after March 15, 2000, at redemption prices expressed as percentages of the principal amount of the Notes ranging from 100% to 106% depending on the redemption date, together with accrued and unpaid interest, if any, to the date of redemption. The Notes are senior unsecured obligations of the Company and rank pari passu in right of payment with all existing and future subordinated indebtedness of the Company. 10 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - SEGMENT REPORTING The Company has the following operating segments: high-performance magnetic disk arrays; licensing of intellectual property and Internet video programming and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on return on operating assets employed. Profitability is measured as income or loss from operations before income taxes, excluding restructuring charges (credits), foreign exchange gains and losses and goodwill amortization and related acquisition charges. Intersegment sales and transfers are accounted for at current market prices but they were not significant to revenues.
Three months ended March 31, 2000 ------------------------------------------------------------------------- Licensing of Eliminations Internet Disk Intellectual and Video Arrays Property Corporate Totals ----------- ----------- ----------- ---------------- ------ Revenues from external customers.......... $ 575 $ 3,261 $ 3,119 $ - $ 6,955 Interest income........................... 22 - - 525 547 Interest expense.......................... 9 413 - 942 1,364 Depreciation, amortization and accretion.. 241 37 1 201 480 Segment income (loss)..................... (6,422) (884) 2,749 (1,504) (6,061) Segment assets............................ 12,305 8,226 1 59,233 79,765 Expenditures for segment assets........... 1,435 40 - - 1,475
Three months ended March 31, 1999 -------------------------------------------------------------------------- Licensing of Eliminations Internet Disk Intellectual and Video Arrays Property Corporate Totals ----------- ----------- ----------- ---------------- ------ Revenues from external customers.......... $ - $ 2,825 $ 2,662 $ - $ 5,487 Interest income........................... - - - 739 739 Interest expense.......................... - 279 - 1,073 1,352 Depreciation, amortization and accretion.. - 23 1 240 264 Segment income (loss)..................... (60) (1,377) 2,285 (1,442) (594) Segment assets............................ - 8,761 2 66,334 75,097 Expenditures for segment assets........... - 74 - 60 60
11 FORWARD-LOOKING STATEMENTS THIS FORM 10-Q CONTAINS PREDICTIONS, PROJECTIONS AND OTHER STATEMENTS ABOUT THE FUTURE THAT ARE INTENDED TO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS INCLUDE, AMONG OTHERS, THOSE DESCRIBED UNDER "RISK FACTORS," BELOW. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE UPDATES OR REVISIONS OF ANY FORWARD-LOOKING STATEMENTS CONTAINED OR INCORPORATED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q, READERS ARE URGED TO READ CAREFULLY ALL SUCH CAUTIONARY STATEMENTS. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto, included elsewhere in this Report, and the Consolidated Financial Statements and the Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission (file no. 0-20292) (the "1999 Form 10-K"). STRATEGIC REPOSITIONING OF THE COMPANY Beginning in 1999, the Company began a strategic repositioning of its business by building a network of Internet video businesses, focusing on programming, services and technology. During 1999 the Company, through its subsidiary, iNEXTV, acquired equity interests in various Internet video businesses and started to assemble an internal organization to support the iNEXTV network and to develop additional Internet video-based websites. In February 2000, in order to focus more sharply on its Internet video businesses, the Company announced plans to sell Ampex Data Systems Corporation ("Data Systems"), its subsidiary which makes high performance tape-based mass data storage products. The results of operations of Data Systems have been classified as Discontinued Operations in the Statements of Operations for all periods presented. The book value of the net assets to be sold of this segment have been reflected in net assets of business held for disposition in the Consolidated Balance Sheet as of December 31, 1999. Upon consummation of a successful sale, the Company intends to use the proceeds for investment in iNEXTV and other Internet initiatives, as well as to retire debt. Following the planned sale of Data Systems, the Company's continuing operations will include iNEXTV; its non-Internet technology licensing group; the newly-formed Internet Technology Group; and MicroNet, its wholly-owned subsidiary that makes high performance disk arrays and storage area networks products (principally DataDock, Genesis and SANcube products). No other class of similar products, services or royalty arrangements accounted for more than 10% of continuing revenues during the comparison periods discussed below. 12 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 Total Revenue. Total revenue increased by 27.2% to $7.0 million for the three months ended March 31, 2000 compared to $5.5 million for the three months ended March 31,1999. In the three months ended March 31, 2000, the revenue increase over the three months ended March 31,1999 was primarily due to the increased royalty income and the inclusion of the Company's Internet video businesses. In addition, product sales from MicroNet increased in the comparable three-month periods due to increased sales of the Genesis product line in 2000. Royalty Income. Royalty income was $3.1 million in the three months ended March 31, 2000 compared to $2.7 million in the three months ended March 31, 1999, reflecting a previously disclosed long-term license agreement extending through the year 2001. The Company's royalty income derives from patent licenses, and the Company receives most of its royalty income from licenses with companies that manufacture consumer video products (such as VCRs and camcorders) and, in certain cases, professional videotape recorders. During this period, a growing portion of royalty income related to 6-mm and 8-mm video recorders and camcorders. The Company is assessing whether manufacturers of video games, DVD recorders and digital television receivers are using its patented technology. There can be no assurance that the manufacturers of these products are utilizing the Company's technology or, if used, whether the Company will be able to negotiate license agreements with the manufacturers. Royalty income has historically fluctuated widely due to a number of factors that the Company cannot predict or control, such as the extent of use of the Company's patented technology by third parties, the materiality of any nonrecurring royalties received as the result of negotiated settlements for products sold by manufacturers prior to entering into licensing agreements with the Company, the extent which the Company must pursue litigation in order to enforce its patents, and the ultimate success of its licensing and litigation activities. The costs of patent litigation can be material, and the institution of patent enforcement litigation may also increase the risk of counterclaims alleging infringement by the Company of patents held by third parties or seeking to invalidate patents held by the Company. See "Legal Proceedings," below. Internet Revenue. The Company's Internet video programming and services business began in early 1999, and in June 1999 were consolidated under its subsidiary, iNEXTV. iNEXTV recorded revenue of $0.6 million in the three months ended year March 31, 2000, principally from Internet video services conducted by TV onthe WEB. Due to the growth in web-based services, subsequent to the end of the quarter, the Company discontinued the traditional video production business conducted by a subsidiary of TV onthe WEB, which accounted for approximately 20% of Internet revenue in the quarter ended March 31, 2000. Internet revenues do not include revenues of TV1, which provides Internet video services to European businesses, as TV1 is not a majority-owned affiliate. iNEXTV currently anticipates that Internet video revenues will grow in future quarters of 2000, but that revenues from advertising and e-commerce are not expected to become significant before the second half of 2000. The Company's two new websites, EXBTV.com and istyletv.com, (anticipated to be launched in the second quarter of 2000), are expected to rely significantly on advertising and e-commerce revenues. Additionally, AENTV.com's new programming, on which the Company will be primarily dependent for revenue, was introduced in the fourth quarter of 1999. There was no significant Internet revenue in the three months ended March 31, 1999. Product Sales. Sales of MicroNet products for the three months ended March 31, 2000 totaled $3.3 million compared to $2.8 million for the three months ended March 31, 1999. The Company believes that MicroNet sales levels have been adversely impacted by the decision to withdraw from lower priced product lines, and MicroNet is refocusing on higher performance disk-array products such as the DataDock 7000 and Genesis, which was introduced in 1999. MicroNet has introduced SANcube which it expects to ship in the second quarter of 2000 and is anticipated to further enhance MicroNet's position in the market for storage area network products. 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. 13 Internet Video Programming and Site Development. Internet video programming and site development costs of $3.2 million in the three months ended March 31, 2000 represent costs incurred for services rendered to customers, as well as costs incurred for the development of made-for-the-Internet video programming and website hardware and software purchases in support of iNEXTV's websites and infrastructure. The Company anticipates that site development startup costs will decline in the future quarters of 2000, but that expenditures for program production, marketing and advertising will increase materially as the network expands. Cost of Product Sales. Product costs associated with MicroNet sales were $2.3 million and $2.6 million in the three months ended March 31, 2000 and 1999, respectively. MicroNet's sales mix in the three months ended March 31, 2000 reflects the transition into higher margin disk arrays which generated higher gross margins than MicroNet's older product line which represented the majority of the its product sales in 1999. Research, Development and Engineering Expenses. The majority of RD&E was focused on the development and engineering on disk array products, specifically the development of the Genesis and SANcube product lines which have been introduced to the market in 1999 and early 2000, respectively. Research, development and engineering expenses associated with MicroNet increased to $0.3 million (10.0% of product sales) in the three months ended March 31, 2000 from $0.2 million (6.5% of product sales) in the three months ended March 31,1999. Research and development costs incurred by the Internet Technology Group ("ITG") amounted to $0.1 million in the three months ended March 31, 2000 and were not material in 1999. The Company anticipates increased spending in connection with research, development and engineering programs which support iNEXTV's Internet video strategy. Selling and Administrative. Selling and administrative expenses increased to $5.8 million in the three months ended March 31, 2000 from $2.2 million in the three months ended March 31, 1999. In addition to costs incurred for the Internet video programming and site development discussed above, the Company's Internet video businesses incurred direct sales, marketing and administrative expenses totaling $3.6 million in the three months ended March 31, 2000. In the three months ended March 31, 1999, direct Internet-related expenditures were $0.1 million. MicroNet selling and administrative expenses and other nonallocated administrative costs totaled $1.2 million and $1.0 million, respectively, in the three months ended March 31, 2000 compared to $1.1 million and $1.1 million, respectively, in the three months ended March 31, 1999. The Company anticipates that it will need to increase its sales and marketing efforts to be successful in bringing together the necessary capabilities to build the Company's presence in Internet video markets and increase sales at MicroNet due to its new product offerings in early 2000. Amortization of Goodwill. In connection with the acquisitions of each of MicroNet, TV onthe WEB and AENTV, the purchase price exceeded the fair value of assets acquired and liabilities assumed, resulting in the recording of goodwill. Goodwill is being amortized on a straight-line basis over a three-to-five year period from the respective dates of acquisition. Additional goodwill may be recognized to the extent that future payments are required to be paid on the MicroNet preferred stock, or if the Company exercises options to acquire controlling equity interest in its other Internet video affiliates. The rapid amortization policy results in material charges against operations and increased losses being recognized. Interest Expense. Interest expense, primarily due to the issuance of $44.0 million of 12% Senior Notes due 2003 and Warrants to purchase approximately 1.02 million shares of Common Stock in January and July 1998, was $1.4 million for the three months ended March 31, 2000 and 1999, respectively. Amortization of Debt Financing Costs. These amounts reflect periodic amortization of financing costs over the remaining terms of the debt. Financing costs associated with the January and July 1998 issuance of the 12% Senior Notes are being charged to expense over five years. 14 Interest Income. Interest income is earned on cash balances and short and long-term investments. In the three months ended March 31,1999 the Company, pending application of the proceeds of the 12% Senior Notes, had significantly higher investment balances compared to the three months ended March 31, 2000, which resulted in higher interest income. Other (Income) Expense, Net. In the three months ended March 31, 2000 and 1999, other (income) expense, net , was minor. Provision for Income Taxes. The provisions for income taxes in the three months ended March 31, 2000 and 1999 consist primarily of foreign income taxes and withholding taxes on royalty income. The Company was not required to include any material provision for U.S. Federal income tax in any of these periods due to the utilization of net operating loss carry forwards and timing differences. At March 31, 2000, the Company had net operating loss carry forwards for income tax purposes of $130.4 million, expiring in the years 2005 through 2014. As a result of financing transactions that were completed in 1994 and 1995, the Company is limited in the amount of net operating loss carry forwards that can offset consolidated Federal taxable income in a given year. The Company derives pretax foreign income from its international operations, which are conducted principally by its foreign subsidiaries. In addition, the Company's royalty income is subject, in certain cases, to foreign tax withholding. Such income is taxed by foreign taxing authorities and the Company's domestic interest and amortization expenses and operating loss carry forwards are not deductible in computing such foreign taxes. Income (Loss) of Business Held for Disposition. In February 2000, the Board of Directors of the Company authorized management to pursue a sale of Data Systems, its wholly-owned subsidiary that manufacturers and sells high performance, tape-based mass data storage products. As a result, for all periods presented, the Company reported as a single line item in the Consolidated Statements of Operations and Comprehensive Loss, an income (loss) of business held for disposition, net of taxes of $0.5 million and $(0.8) million in the three months ended March 31, 2000 and 1999, respectively. Revenues of this segment totaled $11.7 million and $12.3 million in the three months ended March 31, 2000 and 1999, respectively. Total costs and operating expenses of this segment totaled $11.4 million and $13.1 million in the three months ended March 31, 2000 and 1999, respectively. Other (income) expense of this segment totaled $(0.1) million and none in the three months ended March 31, 2000 and 1999, respectively. Prospective buyers have only recently been approached by the Company's advisors. However, the Company believes that it will recognize a gain on the sale of Data Systems some time in fiscal 2000. Net Loss. The Company reported a net loss of $6.7 million in the three months ended March 31, 2000 compared to a net loss of $1.9 million in the three months ended March 31, 1999, primarily as a result of the factors discussed above under "Internet Video Programming and Site Development" and "Selling and Administrative." LIQUIDITY AND CAPITAL RESOURCES Cash Flow. At March 31, 2000, the Company had cash and short-term investments of $33.1 million and working capital of $27.2 million. At December 31, 1999, the Company had cash and short-term investments of $41.7 million and working capital of $38.5 million. Data Systems, which is accounted for as a Discontinued Operation, had working capital of $12.6 million and $8.8 million at March 31, 2000 and December 31, 1999, respectively. Working capital of Data Systems has been classified in net assets of business held for disposition at March 31, 2000 and December 31, 1999. The decline in cash and short-term investments in the three months ended March 31, 2000 results primarily from capitalized costs and operating losses of the Company's Internet video businesses, operations of the Internet Technology Group, operating losses of MicroNet, an increase in working capital of discontinued operations of $2.9 million, offset in part by operating income earned from the Company's technology licensing activities. Cash used in continuing operations totaled $4.2 million in the three months ended March 31, 2000 and $2.8 million in the three months ended March 31, 1999. Cash used in discontinued operations 15 totaled $2.9 million in the three months ended March 31, 2000, largely due to the increase in inventory levels for government programs scheduled for delivery later in the year and payments against restructuring reserves established in prior years, and $3.2 million in the three months ended March 31, 1999. Major items impacting income from continuing operations in the three months ended March 31, 2000, which did not affect cash, were goodwill amortization associated with acquired Internet businesses, totaling $0.6 million. Other non-cash charges affecting the first quarter of 2000 operations included other depreciation and amortization of $0.8 million. During 1999, the Company, through its subsidiary iNEXTV, acquired majority control of TV onthe WEB and AENTV in step acquisitions. The Company has included the value of assets and liabilities of these majority-owned affiliates in its Consolidated Financial Statements and has reported 100% of net losses reported by these affiliates for periods after it acquired a majority interest. Also during 1999, the Company acquired minority interests in Executive Branch Webcasting Corporation ("EBWC") and TV1. The Company has elected not to exercise options to acquire additional ownership in EBWC. Accordingly, in the fourth quarter of 1999, the Company wrote off its minority investment in EBWC. In the quarter ended March 31, 2000, the Company incurred infrastructure capital costs of $1.3 million to build out the New York City studio and to support the network website, communications, accounting and information tracking systems. The Company's strategy is to grow Internet revenues from video advertising, e-commerce partnerships, webcasting and technology licensing. In order to do so, the Company will be required to incur substantial expenditures to attract users to its video websites, which have only recently become operational. Material advertising and e-commerce revenues are not likely to be obtained until a significant base of users can be demonstrated. There can be no assurance that the Company will be successful in obtaining sufficient revenues from the above sources to make its Internet video businesses viable or profitable. The Company intends to seek strategic partnerships with other companies in order to obtain additional content, brand recognition, user awareness, technology and infrastructure cost savings. The Company may be required to commit significant resources and/or to issue a significant percentage of its Common Stock in order to attract such prospective partners, which would dilute current stockholders' interest in the Company. The Company believes that it has adequate financial resources to develop its Internet video businesses as presently envisioned for at least the next twelve months. The Company recently announced its intention to sell Data Systems, which manufactures the Company's high performance mass data storage and instrumentation products for entertainment and government applications. At the date of this Report the Company had not entered into any definitive agreement of sale, and there can be no assurance that the Company will be able to consummate a sale, or as to the terms or timing of any sale, if consummated. Ampex intends to use the proceeds of the proposed sale to expand its Internet video operations through its iNEXTV subsidiary and other Internet activities, and to retire debt. In addition, the Company may seek to raise additional capital at any time to make new investments in streaming media Internet ventures and technology. The Company may seek to issue additional shares of Common Stock in public or private equity transactions or seek to sell equity securities of one or more of its Internet video businesses in an initial public offering. There can be no assurance that a market will exist for the Company's or its affiliates' securities. The Company expects that it will face an increased number of competitors in future years, many of whom will be better capitalized and have greater financial resources than the Company. The ability to access the capital markets will be instrumental to the Company's future success. 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 March 31, 2000, the Company had borrowings outstanding of $1.7 million and had letters of 16 credit issued against the facility totaling $1.1 million. At March 31, 1999, the Company had borrowings outstanding of $13,934 and had letters of credit issued against the facility totaling $0.9 million. The Company believes that this facility will be significantly reduced or allowed to expire in conjunction with the sale of Data Systems. Financing Transactions. During the three months ended March 31, 2000, holders of 760 shares of Convertible Preferred Stock exchanged their holdings for 380,000 shares of Common Stock, leaving 1,125 shares of Convertible Preferred Stock outstanding. Beginning in June 2001, the Company will be required to redeem any remaining shares of Convertible Preferred Stock in quarterly installments through September 2008. The Company's Redeemable Preferred Stock is redeemable in quarterly installments from June 1999 through March 2008. During the three months ended March 31, 2000, the Company satisfied its redemption obligation by issuing 260,679 shares of Common Stock in exchange for Redeemable Preferred Stock with a liquidation preference of $1.1 million. The Company will have the option to redeem the Redeemable Preferred Stock at any time and the Convertible Preferred Stock beginning in June 2001, and has the option to make mandatory redemption payments either in cash or in shares of Common Stock. 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. See Note 8 of Notes to Unaudited Consolidated Financial Statements. In January 1998, the Company issued $30.0 million of its 12% Senior Notes, together with Warrants to purchase 1.02 million shares of its Class A Common Stock (the "Class A Stock"). The Warrants are exercisable at $2.25 per share at any time on or prior to March 15, 2003. At the end of the second quarter of 1998, the Company issued an additional $14.0 million of 12% Senior Notes. As a result of the issuance of the 12% Senior Notes, the Company's total indebtedness and future debt service obligations have increased significantly from prior levels. A portion of the net proceeds of the offering have been invested to repay short-term debt and trade accounts payable of MicroNet, and the balance has been invested in short-term government securities and other investments. The yield on the Company's investment portfolio is substantially lower than the interest charges on the 12% Senior Notes. The Company has wide discretion as to how the debt proceeds may be invested, including for acquisitions of and investments in new businesses, including the Company's Internet video businesses. Any such investments or acquisitions are not expected to pay a current return, which could require the Company to fund debt service obligations on the 12% Senior Notes out of its liquidity and cash flow from existing operations. In order to minimize the difference between the interest the Company currently receives on its investments and the interest payable on the Senior Notes, the Company has invested a portion of the Senior Note proceeds in securities with higher yields, longer terms or lower credit quality, and the Company may also engage in various transactions in derivative securities. Investments in any securities could expose the Company to a risk of trading losses due to market or interest rate fluctuations or other factors that are not within the Company's control. The indenture under which the 12% Senior Notes were issued contains customary affirmative and negative restrictive covenants that limit, among other things, the incurrence of additional senior debt, the payment of dividends, the sale of assets and other actions by the Company and certain restricted subsidiaries. Upon a successful sale of Data Systems, the Company plans to offer to repay a substantial portion of the Senior Notes. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for the Company in fiscal year 2001 and will not require retroactive restatement of prior period financial statements. The Company has not yet quantified the impact of adopting SFAS 133 on its financial statements, but the Company believes there will not be a significant impact. 17 In December 1999, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. The Company believes that adopting SAB 101 will not have a material impact on the Company's financial position and results of operations. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that that the impact of FIN 44 will not have a material effect on the financial position or results of operations of the Company. RISK FACTORS RISK OF CONTINUING LOSSES Ampex has incurred significant operating and net losses in the three months ended March 31, 2000 and its 1999 fiscal year, primarily due to its Internet video programming activities, promotional expenses and amortization of goodwill of acquired businesses. The Company also incurred certain interest expenses and in fiscal 1999 incurred additional losses from its discontinued operation. Although Internet video revenues may grow in future periods, there can be no assurance that such revenues will be sufficient to offset expenses and/or losses that may be incurred in such periods, or that such items will not increase. The Company may be required to incur additional indebtedness in connection with future acquisitions or its Internet expansion plans, which could increase future interest expenses, and may be unable to consummate the sale of Data Systems, which has experienced and is expected to continue to experience declining product sales. In addition, the Company cannot predict the amount of licensing royalties that it may recognize in future periods. Accordingly, the Company expects operating and net losses to continue at least for the near future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations, " above, and the other Risk Factors included in this section. RISKS ASSOCIATED WITH INEXTV AND INTERNET VIDEO STRATEGY The Company's Internet subsidiary, iNEXTV, was formed in mid-1999, and has not yet generated any material advertising or sales revenues. The business and prospects of iNEXTV and the Company's Internet video strategy in general, are subject to the risks and uncertainties typical of companies in the early stages of development, particularly in new and rapidly evolving markets such as those for Internet content, advertising and electronic commerce (e-commerce). If the Company is not successful in its Internet strategy, investors in Ampex Common Stock could suffer the loss of a significant portion or all of their investment. The development of iNEXTV and the implementation of the Company's strategy to expand its Internet video businesses involve special risks and uncertainties, including but not limited to the following: . the ability of iNEXTV and its affiliates to identify, produce or acquire and deliver compelling, quality video programming over the Internet that appeals to its target audiences; . the ability of iNEXTV and its affiliates to obtain and manage key employees and other resources for growth from their present size and to become profitable; 18 . market acceptance of streaming media technology, which is currently of lower quality than television or radio broadcasts, is subject to congestion and interruptions on the Internet, and requires specialized software, technical expertise and increased bandwidth; . dependence upon the continued acceptance and growth of the Internet as a significant medium for advertising and e-commerce, and upon iNEXTV's ability to generate advertising revenues and, in future periods, to sell goods and services over the Internet; . the ability of iNEXTV and its affiliates to attract and retain sponsors and advertisers, content developers and other key partners necessary to make its websites viable; . dependence upon timely delivery and integration of website software and hardware purchased from third parties which the Company is continually required to develop and upgrade in order to support all its websites; . vulnerability of Internet content delivery to system failures and interruptions for a variety of reasons (including telecommunications problems and natural disasters), computer viruses and other breaches of security; . dependence upon Internet service providers, web browsers, providers of streaming media products and others to provide Internet access to iNEXTV's websites and programming; . the ability of the Company to generate sufficient revenues to offset the related high cost of bandwidth for its streaming media video sites and the risk that the Company may compete with sites which have access to low cost bandwidth facilities; . the ability of Ampex to innovate, upgrade and transfer to iNEXTV and its affiliates audio or video technology for Internet-based applications; . competition among Internet broadcasters and providers of products and services for users, advertisers, content and new products and services; . uncertainty about the adoption and application of new laws, proposed taxation and government regulations relating to Internet businesses, which could slow Internet growth, adversely affect the viability of e-commerce, expose iNEXTV to potential liabilities or negative criticism for mishandling customer security or user privacy concerns or otherwise adversely affect its Internet businesses; . the ability to obtain licenses of intellectual property developed by others that affect Internet usage. Intellectual property claims against the Company could be costly and could result in the loss of significant rights; . the ability to expand successfully in the European or other foreign markets, which is likely to be subject to cultural and language barriers, different regulatory environments, currency exchange rate fluctuations and other difficulties relating to managing foreign operations; and . likelihood of continued and significant expenses resulting in material losses in future periods, which could negatively affect the price of the Company's securities and require it to seek additional capital which may not be available on satisfactory terms, or at all. 19 RISKS ASSOCIATED WITH ACQUISITION STRATEGY In order to expand Ampex's products and services, Ampex has made, and may continue to make, acquisitions of, and/or investments in, other business entities, including businesses involved in both producing and distributing Internet video programming. Ampex may not be able to identify or acquire additional acquisition candidates in the future, or complete any further acquisitions or investments on satisfactory terms. In order to pay for future acquisitions or investments, Ampex may have to: . issue additional equity securities of the Company or a subsidiary, which would dilute the ownership interest of existing Ampex 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 may make investments in companies in which it has less than a 100% interest. Such investments involve additional risks, including the risk that Ampex may not be in a position to control the management or policies of such entities, and risks of potential conflicts with other investors. Ampex has invested in companies that are in the early stage of development and may be expected to incur substantial losses. Ampex's financial resources may not be sufficient to fund the operations of such companies, which could require sales of other non-Internet assets. Accordingly, there can be no assurance that any acquisitions or investments that Ampex has made, or may make in the future, will result in any return, or as to the timing of any return and Ampex could lose all or a substantial portion of its investments. RISK OF PROPOSED SALE OF DATA SYSTEMS The Company recently announced its intention to sell Data Systems, which manufactures the Company's high performance mass data storage and instrumentation products for entertainment and government applications, and the Company has accounted for this subsidiary's operations as a discontinued business effective with its fiscal 1999 financial statements. Although the Company has engaged a financial advisory firm and has had preliminary discussions related to the proposed sale, at the date of this Report the Company had not entered into any definitive agreement of sale, and there can be no assurance that the Company will be able to consummate a sale, or as to the terms or timing of any sale, if consummated. Ampex intends to use the proceeds of the proposed sale to expand its Internet video operations through its iNEXTV subsidiary and other Internet activities, and to retire debt. However, there can be no assurance that any such proceeds will be sufficient to do so, or to offset any potential losses that may be attributable to iNEXTV or other Company operations. See "Risks Associated with iNEXTV and Internet Video Strategy, " above. In addition, if the proposed sale is consummated, Ampex may retain certain liabilities associated with Data Systems' prior operations, including pension benefit obligations, environmental liabilities and indemnification obligations customarily contained in sale agreements. RISK OF LEVERAGE As of March 31, 2000, Ampex had outstanding approximately $45.0 million of total borrowings, which included $44.0 million principal amount of 12% Senior Notes due 2003 and $1.0 million of subsidiary indebtedness. The Company has invested a portion of the proceeds from the Senior Notes in its MicroNet and iNEXTV 20 subsidiaries and for general corporate purposes. The Company has invested a portion of the balance of these proceeds in government securities and, in order to realize yields approaching the interest rate on the Senior Notes, from time to time has invested in high-yield mutual funds and corporate securities, some of which have longer terms and lower credit quality than U.S. government securities. The Company may also engage in various transactions in derivative securities although it has not done so to date. As discussed above, the Company hopes to use a portion of the proceeds from the planned sale of Data Systems to reduce its indebtedness. However, there can be no assurance that the Company will be able to consummate the sale or, if consummated, that the Company will realize proceeds that it determines are available for such repayment. The Company may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for other purposes, subject to the restrictions in the indenture governing the Senior Notes. The degree to which the Company is leveraged, and the types of investments it selects, could have important consequences to investors, including the following: . a substantial portion of the Company's consolidated cash flow from operations must be dedicated to the payment of the principal of and interest on outstanding indebtedness, and will not be available for other purposes; . Ampex's ability to obtain additional financing in the future for working capital needs, capital expenditures, acquisitions and general corporate purposes may be materially limited or impaired, or such financing may not be available on terms favorable to Ampex; . the Company may be more highly leveraged than its competitors, which may place it at a competitive disadvantage; . Ampex's leverage may make it more vulnerable to a downturn in its business or the economy in general; . investments in securities with lower credit quality or longer maturities could subject the Company to potential losses due to nonpayment or changes in market value of those securities, and transactions in derivative securities could expose Ampex to losses caused by stock market fluctuations; and . the financial covenants and other restrictions contained in the Senior Note indenture and other agreements relating to Ampex's indebtedness will restrict Ampex's ability to borrow additional funds, to dispose of assets or to pay dividends on or repurchase preferred or common stock. Ampex expects that cash balances and cash flow from operations will be sufficient to fund anticipated operating expenses, capital expenditures and debt service requirements as they become due, at least through 2000. There can be no assurance, however, that the amounts available from these sources will be sufficient for such purposes in future periods. The Company may also seek to raise additional equity capital in the private or public markets to finance the expansion of its Internet video businesses. No assurance can be given that additional sources of funding will be available if required or, if available, will be on satisfactory terms. If Ampex cannot service its indebtedness, it will be forced to adopt alternative strategies. These strategies may include reducing or delaying capital expenditures, selling additional assets, restructuring or refinancing Ampex's indebtedness. There can be no assurance that any of these strategies will be successful or that they will be permitted under the Senior Note Indenture, if applicable. FLUCTUATIONS IN ROYALTY INCOME Ampex's results of operations in certain prior and current periods reflect the receipt of significant royalty income, including material nonrecurring payments resulting from negotiated settlements primarily related to sales of 21 products by manufacturers before negotiating licenses from Ampex. Although Ampex has a substantial number of outstanding and pending patents, and its patents have generated substantial royalties in the past, it is not possible to predict the amount of royalty income Ampex will receive in the future. Royalty income has historically fluctuated widely due to a number of factors that Ampex cannot predict, such as the extent to which third parties use its patented technology, the extent to which it must pursue litigation in order to enforce its patents, and the ultimate success of its licensing and litigation activities. As the Company expands its Internet video businesses, the significance of its royalty income, relative to operating income, is expected to increase until those businesses become profitable. The costs of patent litigation can be material. The institution of patent enforcement litigation may also increase the risk of counterclaims alleging infringement by Ampex of patents held by third parties or seeking to invalidate patents held by Ampex. Moreover, there is no assurance that Ampex will continue to develop patentable technology that will be able to generate significant patent royalties in future years to replace patents as they expire. Ampex's royalty income fluctuates significantly from quarter to quarter and from year to year, and there can be no assurance as to the level of royalty income that will be realized in future periods. 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 and, with respect to the Company's Internet operations, new content and services. No assurance can be given that Ampex's existing products, services and technologies will not become obsolete or that any new products, services or technologies will win commercial acceptance. Obsolescence of existing product lines, or inability to develop and introduce new products and services, could have a material and adverse effect on the Company's sales and results of operations in the future. The development and introduction of new technologies, services and products are subject to inherent technical and market risks, and there can be no assurance that Ampex will be successful in this regard. In 1999, MicroNet changed the mix of its products to focus on its high-end products, some of which it recently introduced or expects to introduce later this year. Although the Company believes that these products will 22 be well received, there is no guarantee that they will be introduced on a timely basis or will achieve significant market share or generate significant sales revenues. To the extent that MicroNet fails to improve its profitability, the Company will be required to devote resources (including management's time and attention) to MicroNet that would otherwise be available for the expansion of the Company's Internet video businesses. COMPETITION The market for Internet products and services is highly competitive and characterized by multiple competitors and low barriers to entry. Ampex is attempting to develop improvements in video quality in order to differentiate itself from its competitors. However, other companies may develop competing technologies and Ampex may be unable to obtain patent or other protection for its Internet video technology. In addition, the market for Internet advertising and electronic commerce, upon which iNEXTV's Internet operations will be partially dependent to achieve ultimate profitability, is intensely competitive and the Company believes that competition in this field will intensify. MicroNet's competitors include large companies such as EMC, Data General and IBM and other small system integrators, many of which are more established and have greater resources than MicroNet. There is no assurance that MicroNet will be able to compete successfully in these markets in the future. DEPENDENCE ON CERTAIN SUPPLIERS Ampex purchases certain components from a single domestic or foreign manufacturer for use in its disk arrays and other manufactured products. Significant delays in deliveries or defects in such components have adversely affect Ampex's manufacturing operations, pending qualification of an alternative supplier. In addition, Ampex produces highly engineered products in relatively small quantities. As a result, Ampex's ability to cause suppliers to continue production of certain products on which it may depend may be limited. Ampex does not generally enter into long-term raw materials or components supply contracts. RISKS RELATED TO INTERNATIONAL OPERATIONS International operations are subject to a number of special risks, including limitations on repatriation of earnings, restrictive actions by local governments, and fluctuations in foreign currency exchange rates and nationalization. Additionally, export sales are subject to export regulation and restrictions imposed by U.S. government agencies. Fluctuations in the value of foreign currencies can affect Ampex's results of operations. Ampex does not normally seek to mitigate its exposure to exchange rate fluctuations by hedging its foreign currency positions. The expansion of iNEXTV's European operations, which are conducted primarily through TV1, may generate advertising and sales revenues in future periods, although the Company has not recognized any material revenue to date. The European operations of iNEXTV are expected to be subject to certain risks and uncertainties, as set forth under the caption "Risks Associated with iNEXTV and Internet Video Strategy. " 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 23 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, Internet developments or new product introductions by Ampex or its competitors; . reports and predictions concerning the Company by analysts and other members of the media; . issuances of substantial amounts of Common Stock in order to redeem outstanding shares of its Preferred Stock, or otherwise; and . fluctuations in trading volume of the Company's Common Stock, and general economic or market conditions. The stock market in general, and Internet and technology companies in particular, have experienced a high degree of price volatility, which has had a substantial effect on the market prices of many such companies for reasons that often are unrelated or disproportionate to operating performance. These broad market and industry fluctuations may adversely affect the price of Ampex's Common Stock, regardless of its operating performance. DEPENDENCE ON KEY PERSONNEL Ampex is highly dependent on its management. Ampex's success depends upon the availability and performance of key executive officers and directors. Except for certain employees of its Internet affiliates, the Company has not entered into employment agreements with its key employees, and the loss of the services of key persons could have a material adverse effect upon Ampex. The Company does not maintain key man life insurance on any of these individuals. ANTI-TAKEOVER CONSEQUENCES OF CERTAIN GOVERNING INSTRUMENTS Ampex's Certificate of Incorporation provides for a classified Board of Directors, with members of each class elected for a three-year term. The Certificate of Incorporation provides for nullification of voting rights of certain foreign stockholders in certain circumstances involving possible violations of security regulations of the United States Department of Defense. The instrument governing Ampex's outstanding Preferred Stock, which has an aggregate liquidation value of approximately $37.6 million at March 31, 2000, requires that Ampex make mandatory offers to redeem those securities out of legally available funds in the event of a change of control. For this purpose, a change of control includes the following events: a person or group of people acting together acquires 30% or more of Ampex's voting securities; Ampex merges, consolidates or transfers all or substantially all of its assets; or the dissolution of Ampex. The Certificate of Incorporation authorizes the Board of Directors to issue additional shares of Preferred Stock without the vote of stockholders. The indenture governing Ampex's outstanding Senior Notes, in the total principal amount of $44 million, requires Ampex to offer to repurchase the Senior Notes at a purchase price equal to 101% of the outstanding principal amount thereof together with accrued and unpaid interest in the event of a change of control. Under the indenture, a change of control includes the following events: a person or group of people acting together acquires 50% or more of the Company's voting stock; or the transfer of 24 substantially all of the Company's assets to any such person or group, other than to certain subsidiaries and affiliates of Ampex. 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 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. YEAR 2000 RISKS Year 2000 problems could interfere with Ampex's business. Many software programs may not recognize calendar dates beginning in Year 2000. This problem could cause computers or machines that utilize date dependent software either to shut down or provide incorrect information. As of the date of this 10-Q, Ampex has not experienced any material Year 2000 problems. However, if Ampex or any other company that it conducts business with fails to mitigate internal or external Year 2000 risks, Ampex may temporarily be unable to engage in business activities, which could materially harm its business and impair the value of Ampex Common Stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the disclosure made in the 1999 Form10-K. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to routine litigation incidental to its business. In the opinion of management, no such current or pending lawsuits, either individually or in the aggregate, are likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. 25 In response to a lawsuit filed by the Company against Mitsubishi Electric Corporation and Mitsubishi Electric America Inc. ("Mitsubishi"), which has been finally resolved as previously reported, Mitsubishi filed a lawsuit against Ampex, alleging patent infringement by certain Ampex video and data recorder products. In 1997, the U.S. District Court for the Central District of California determined that Ampex has no liability to Mitsubishi patents, and Mitsubishi appealed to the Court of Appeals for the Federal Circuit. On August 30, 1999, the Court of Appeals affirmed the judgment in favor of Ampex and subsequently denied Mitsubishi's request for reconsideration. On January 31, 2000, Mitsubishi filed a petition for certiorari to the Supreme Court of the United States. On April 3, 2000, the Supreme Court denied Mitsubishi's petition. No further appeals are available. On January 7, 2000, a suit was filed against the Company and others in the Superior Court of the District of Columbia by Information Super Station ("ISS") seeking an injunction and recovery of damages in connection with activities related to an investment in a subsidiary of ISS made by the Company's subsidiary, iNEXTV. The Company has moved to dismiss this suit on the grounds of inconvenient forum. While no order has yet been issued, the judge has stated her intention to grant this motion. On February 1, 2000, the Company filed suit against ISS and others in the United States District Court for the Southern District of New York under the Federal securities laws seeking contract rescission and damages in connection with activities related to this investment. ISS has moved to dismiss the suit on the grounds of inconvenient forum or, in the alternative, to transfer the suit to the United States District Court for the District of Colombia. The Company's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and hazardous substances. Ampex is also subject to the federal Occupational Safety and Health Act and other laws and regulations affecting the safety and health of employees in its facilities. Management believes that Ampex is generally in compliance in all material respects with all applicable environmental and occupational safety laws and regulations or has plans to bring operations into compliance. Management does not anticipate that capital expenditures for pollution control equipment for fiscal 2000 or 2001 will be material. Owners and occupiers of sites containing hazardous substances, as well as generators and transporters of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including liability for investigative and cleanup costs and damages arising out of past disposal activities. The Company has been named as a potentially responsible party by the United States Environmental Protection Agency with respect to four contaminated sites that have been designated as "Superfund" sites on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Company is engaged in six environmental investigation, remediation and/or monitoring activities at sites located off Company facilities, including the removal of solvent contamination from subsurface aquifers at a site in Sunnyvale, California. Some of these activities involve the participation of state and local government agencies. The other five sites (including the four Superfund sites) are associated with the operations of the Media subsidiaries formerly owned by the Company. Although the Company sold Media in November 1995, the Company may have continuing liability with respect to environmental contamination at these sites if Media fails to discharge its responsibilities with respect to such sites. Because of the inherent uncertainty as to various aspects of environmental matters, including the extent of environmental damage, the most desirable remediation techniques and the time period during which cleanup costs may be incurred, it is not possible for the Company to estimate with any degree of certainty the ultimate costs that it may incur with respect to the currently pending environmental matters referred to above. Nevertheless, at March 31, 2000, the Company had an accrued liability of $1.6 million for pending environmental liabilities associated with the Sunnyvale site and certain other sites currently owned or leased by the Company. The Company 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. 26 While the Company believes that it is generally in compliance with all applicable environmental laws and regulations or has plans to bring operations into compliance, it is possible that the Company will be named as a potentially responsible party in the future with respect to additional Superfund or other sites. Furthermore, because the Company conducts its business in foreign countries as well as in the U.S., it is not possible to predict the effect that future domestic or foreign regulation could have on Ampex's business, operating results or cash flow. There can be no assurance that the Company will not ultimately incur liability in excess of amounts currently reserved for pending environmental matters, or that additional liabilities with respect to environmental matters will not be asserted. In addition, changes in environmental regulations could impose the need for additional capital equipment or other requirements. Such liabilities or regulations could have a material adverse effect on the Company in the future. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended March 31, 2000, the holders of 760 shares of the Company's outstanding 8% Noncumulative Convertible Preferred Stock (the "Convertible Preferred Stock") converted such shares into a total of 380,000 shares of the Company's Class A Common Stock pursuant to the conversion right contained in the Convertible Preferred Stock. For the three months ended March 31, 2000, holders of 537 shares of Redeemable Preferred Stock exchanged their holdings into 260,679 shares of Common Stock. No cash or other consideration was paid by the Company, directly or indirectly, in connection with such conversion or exchange. The shares of Class A Common Stock were issued in reliance upon the exemption from registration contained in Section 3(a)(9) of the Securities Act of 1933, as amended, for the issuance of securities exchanged by the issuer with the existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6(a). EXHIBITS The Exhibits to this Quarterly Report on Form 10-Q are listed in the Exhibit Index which appears elsewhere herein and is incorporated herein by reference. ITEM 6(b). REPORTS ON FORM 8-K The Company did not file any Current Reports on Form 8-K during its fiscal quarter ended March 31, 2000. 27 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: May 12, 2000 /s/ EDWARD J. BRAMSON --------------------- Edward J. Bramson Chairman and Chief Executive Officer Date: May 12, 2000 /s/ CRAIG L. McKIBBEN --------------------- Craig L. McKibben Vice President, Chief Financial Officer and Treasurer 28 AMPEX CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 27.1* Financial Data Schedule. * Filed Herewith. 29 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 14,392 18,709 1,939 (274) 2,089 38,377 9,040 2,704 79,765 11,151 43,569 39,818 0 566 (38,276) 79,765 3,261 6,955 2,255 12,989 (1) 0 1,364 (6,938) 323 (7,261) 548 0 0 (6,713) (0.12) (0.12)
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