-----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, HBqqsnt+s55f6V84WwiuSMY0cZuj4/pcBYqrX/UpEHOac1Q9a2ZXSd6nsMeUAFuy NH+r8m6z0r9pI1WnIn878Q== 0001012870-99-004246.txt : 19991117 0001012870-99-004246.hdr.sgml : 19991117 ACCESSION NUMBER: 0001012870-99-004246 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755235 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 THE PERIOD ENDED 09/30/1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File No. 0-20292 AMPEX CORPORATION (Exact name of Registrant as specified in its charter) Delaware 13-3667696 (State of Incorporation) (I.R.S. Employer Identification Number) 500 Broadway Redwood City, California 94063-3199 (Address of principal executive offices, including zip code) (650) 367-2011 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- As of June 30, 1999, the aggregate number of outstanding shares of the Registrant's Class A Common Stock, $.01 par value, was 54,518,954. There were no outstanding shares of the Registrant's Class C Common Stock, $0.01 par value. AMPEX CORPORATION FORM 10-Q Quarter Ended September 30, 1999 INDEX
Page ---- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements............................................. 3 Consolidated Balance Sheets (unaudited) at September 30, 1999 and December 31, 1998................................................ 3 Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 1999 and 1998.......... 4 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1999 and 1998......................... 5 Notes to Unaudited Consolidated Financial Statements............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 15 Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 30 PART II -- OTHER INFORMATION Item 1. Legal Proceedings................................................ 30 Item 2. Changes in Securities and Use of Proceeds........................ 31 Item 3. Defaults Upon Senior Securities.................................. 31 Item 4. Submission of Matters to a Vote of Security Holders.............. 31 Item 5. Other Information................................................ 31 Item 6(a). Exhibits 31 Item 6(b). Reports on Form 8-K.............................................. 31 Signatures ................................................................. 32
2 AMPEX CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 15,253 $ 23,357 Short-term investments 33,440 39,222 Accounts receivable (net of allowances of $1,172 in 1999 and $1,360 in 1998) 9,615 11,789 Inventories 19,385 19,766 Other current assets 5,319 2,510 -------------- ------------- Total current assets 83,012 96,644 Property, plant and equipment, net 12,032 10,546 Intangible assets, net 10,587 5,461 Investment in unconsolidated companies 1,985 - Other assets 2,536 3,350 -------------- ------------- Total assets $ 110,152 $ 116,001 ============== ============= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable $ 1,294 $ 180 Accounts payable 7,167 6,470 Income taxes payable 73 12 Accrued restructuring costs 5,218 2,135 Other accrued liabilities 18,137 17,889 -------------- ------------- Total current liabilities 31,889 26,686 Long-term debt 45,697 43,380 Other liabilities 46,365 51,470 Deferred income taxes 1,213 1,213 Accrued restructuring costs 200 688 -------------- ------------- Total liabilities 125,364 123,437 -------------- ------------- Commitments and contingencies (Note 6) Mandatorily redeemable junior preferred stock (Note 7) - - Mandatorily redeemable nonconvertible preferred stock, $1,000 liquidation value: Authorized: 69,970 shares in 1999 and in 1998 Issued and outstanding - none in 1999 and in 1998 - - Mandatorily redeemable preferred stock, $2,000 liquidation value: Authorized: 21,859 shares in 1999 and in 1998 Issued and outstanding - 20,071 shares in 1999; 21,859 in 1998 40,142 43,718 Convertible preferred stock, $2,000 liquidation value: Authorized: 10,000 shares in 1999 and in 1998 Issued and outstanding - 1,885 shares in 1999; 10,000 shares in 1998 3,770 20,000 Stockholders' deficit: Preferred stock, $1.00 par value: Authorized: 898,171 shares in 1999 and in 1998 Issued and outstanding - none in 1999 and in 1998 - - Common stock, $.01 par value: Class A: Authorized: 125,000,000 shares in 1999 and in 1998 Issued and outstanding - 55,347,631 shares in 1999; 49,782,547 shares in 1998 553 498 Class C: Authorized: 50,000,000 shares in 1999 and in 1998 Issued and outstanding - none in 1999 and in 1998 - - Other additional capital 413,861 391,849 Notes receivable from stockholder (4,818) (4,818) Accumulated deficit (440,008) (429,630) Accumulated other comprehensive income (28,712) (29,053) -------------- ------------- Total stockholders' deficit (59,124) (71,154) -------------- ------------- Total liabilities and stockholders' deficit $ 110,152 $ 116,001 ============== =============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 AMPEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except share and per share data) (unaudited)
Three months ended Nine months ended ---------------------------------- --------------------------------- September 30, September 30, ---------------------------------- --------------------------------- 1999 1998 1999 1998 ---------------- -------------- -------------- --------------- Net sales $ 17,298 $ 16,001 $ 48,838 $ 48,021 Cost of sales 11,592 10,624 31,972 28,223 ---------------- -------------- -------------- --------------- Gross profit 5,706 5,377 16,866 19,798 Selling and administrative 8,567 6,864 21,312 16,972 Internet video programming and site development 3,117 - 3,877 - Research, development and engineering 2,358 2,899 7,197 9,060 Royalty income (2,982) (2,234) (16,104) (5,738) Amortization of goodwill 870 303 1,646 303 Restructuring charges - (274) 4,583 2,526 Acquisition of in-process research and development - - - 929 ---------------- -------------- -------------- --------------- Operating loss (6,224) (2,181) (5,645) (4,254) Interest expense 1,421 1,393 4,198 2,968 Amortization of debt financing costs 112 133 286 230 Interest income (659) (836) (2,073) (2,572) Other (income) expense, net 48 4 693 14 ---------------- -------------- -------------- --------------- Loss before income taxes (7,146) (2,875) (8,749) (4,894) Provision for (benefit of) income taxes 304 (4,944) 1,629 (14,778) ---------------- -------------- -------------- --------------- Net income (loss) (7,450) 2,069 (10,378) 9,884 Benefit from extinguishment of mandatorily redeemable preferred stock - - 374 - ---------------- -------------- -------------- --------------- Net income (loss) available for common stockholders (7,450) 2,069 (10,004) 9,884 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities (143) - 124 - Foreign currency translation adjustments 150 (76) 217 (81) ---------------- -------------- -------------- --------------- Comprehensive income (loss) $ (7,443) $ 1,993 $ (9,663) $ 9,803 ================ ============== ============== =============== Basic income (loss) per share : Income (loss) per share $ (0.14) $ 0.04 $ (0.19) $ 0.21 ================ ============== ============== =============== Weighted average number of common shares outstanding 54,152,115 49,062,547 52,627,766 47,075,450 ================ ============== ============== =============== Diluted income (loss) per share : Income (loss) per share $ (0.14) $ 0.03 $ (0.19) $ 0.19 ================ ============== ============== =============== Weighted average number of common shares outstanding 54,152,115 59,782,547 52,627,766 50,976,537 ================ ============== ============== ===============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 AMPEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the nine months ended ------------------------------------ September 30, September 30, 1999 1998 ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ (10,378) $ 9,884 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation, amortization and accretion 3,738 2,040 Loss on sale of assets 48 450 Reversal of prior years' tax accrual - (15,378) Issuance of stock for services rendered 721 - Equity in loss of subsidiary prior to control 686 - Acquisition of in-process research and development - 929 Changes in operating assets and liabilities: Accounts receivable 2,741 (2,587) Inventories 381 (3,757) Long-term receivable - 8 Other assets (2,144) 1,557 Accounts payable 155 (2,376) Other accrued liabilities and income tax payable (865) (4,195) Accrued restructuring costs 2,595 751 Other liabilities (4,494) (1,893) ---------------- ---------------- Net cash used in operating activities (6,816) (14,567) ---------------- ---------------- Cash flows from investing activities: Purchase of company, net of cash acquired (5,039) (338) Purchases of short-term investments (81,880) (70,632) Proceeds received on the maturity of short-term investments 77,418 22,791 Proceeds from sale of short-term investments 10,369 11,989 Additions to property, plant and equipment (1,780) (2,487) Deferred gain on sale of assets (611) (611) Investments in unconsolidated companies (1,254) - ---------------- ---------------- Net cash used in investing activities (2,777) (39,288) ---------------- ---------------- Cash flows from financing activities: Borrowings under working capital facilities 24,895 28,960 Repayments under working capital facilities (24,169) (33,736) Repayments of notes-affiliates (6) (5) Issuance of senior notes - 44,000 Debt financing costs (20) (1,831) Proceeds from issuance of common stock 809 136 ---------------- ---------------- Net cash provided by financing activities 1,509 37,524 ---------------- ---------------- Effect of exchange rates on cash (20) (42) ---------------- ---------------- Net decrease in cash and cash equivalents (8,104) (16,373) Cash and cash equivalents, beginning of period 23,357 24,076 ---------------- ---------------- Cash and cash equivalents, end of period $ 15,253 $ 7,703 ================ ================
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 providers of technologies for the acquisition, storage and processing of visual information. Today, Ampex is delivering digital image storage solutions for large-scale corporate, government, network, entertainment and telecommunications applications. During the first quarter of 1999, the Company purchased 19.9% of the capital stock of TV onthe WEB, Inc. ("TV onthe WEB"), a provider of services and content for delivery of compressed video over the world wide web, for $4.0 million and 19.9% of the capital stock of Alternative Entertainment Network, Inc. (AENTV"), a producer and aggregator of compressed, streaming video content for delivery over the world wide web, for $1.0 million. On May 20, 1999, the Company acquired an additional 30.2% of TV onthe WEB for $4.5 million resulting in a 50.1% majority holding and on July 6, 1999, the Company acquired an additional 31.1% of AENTV for $2.3 million resulting in a 51.0% majority holding. The Consolidated Balance Sheet as of September 30, 1999 includes the value of assets and liabilities of TV onthe WEB and AENTV. The Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 1999 includes the Company's minority share of the net loss of TV onthe WEB and AENTV for periods the Company held less than 50% of these entities and 100% of their net loss for periods it held a majority interest. See Note 12. During the third quarter of 1999, the Company purchased or committed to purchase a minority interest in TV1 Internet Television ("TV1"), a leading provider of video services to European businesses, and Executive Branch Webcasting Corporation ("EXBTV"), a provider of Internet video programming based on information from the Executive Branch and various Federal agencies, for a total of $1.8 million and $1.5 million, respectively. The Company holds an option to acquire a majority interest in EXBTV and an option to acquire an increased minority interest in TV1. At September 30, 1999, the Company's investment in TV1 and EXBTV are being accounted for using the cost method. On October 4, 1999, the Company invested $1.3 million to complete its subscription to acquire 17.5% of TV1. Note 2 -- Basis of Presentation The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In addition, certain reclassifications have been made to the prior year financial statements to conform to the current year's presentation. The statements should be read in conjunction with the Company's report on Form 10-K for the year ended December 31, 1998 and the Audited Consolidated Financial Statements included therein. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine-month periods ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized 6 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 2 -- Basis of Presentation (cont'd.) 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. Note 3 -- Income (Loss) Per Common Share In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted income (loss) per common share is provided as follows (in thousands, except per share amounts):
Three months ended Nine months ended --------------------- --------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 ---------- --------- ---------- --------- Numerator - Basic Net income (loss) available for common stockholders.. $(7,450) $ 2,069 $(10,004) $ 9,884 ======= ======= ======== ======= Denominator - Basic Weighted average common stock outstanding............ 54,152 49,063 52,628 47,075 ------- ------- -------- ------- Basic income (loss) per share.......................... $ (0.14) $ 0.04 $ (0.19) $ 0.21 ======= ======= ======== ======= Numerator - Diluted Net income (loss) available for common stockholders.. $(7,450) $ 2,069 $(10,004) $ 9,884 ======= ======= ======== ======= Denominator - Diluted Weighted average common stock outstanding............ 54,152 49,063 52,628 47,075 Contingent shares due to acquisition................. - 720 - 253 Effect of dilutive securities: Stock options..................................... - - - 205 Redeemable preferred stock........................ - 5,000 - 1,722 Convertible preferred stock....................... - 5,000 - 1,722 ------- ------- -------- ------- 54,152 59,783 52,628 50,977 ------- ------- -------- ------- Diluted income (loss) per share........................ $ (0.14) $ 0.03 $ (0.19) $ 0.19 ======= ======= ======== =======
7 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3 -- Income (Loss) Per Common Share (cont'd.) In connection with the acquisition of MicroNet, the Company issued 720,000 shares of Common Stock. Such shares are being held in escrow pending the resolution of certain contingencies. These shares have been included in the computation of diluted weighted average common stock outstanding for the three and nine months ended September 30, 1998 but have not been included in the computation of diluted weighted average common stock outstanding for the three and nine months ended September 30, 1999 since they are anti-dilutive. In connection with the redemption in June 1998 of the 8% Noncumulative Preferred Stock, the Company issued 3,000,000 shares of Common Stock, $20.0 million face amount of Convertible Preferred Stock and $43.7 million face amount of Redeemable Preferred Stock. The 3,000,000 shares of Common Stock have been included in the computation of weighted average common stock outstanding for the three and nine months ended September 30, 1999. In the nine months ended September 30, 1999, holders of 8,115 shares of Convertible Preferred Stock converted their holdings into 4,057,500 shares of Common Stock which are included in the weighted average common stock outstanding since the date of conversion. The remaining shares of Common Stock potentially issuable on conversion of the Convertible Preferred Stock have not been included in the computation of diluted weighted average common stock outstanding for the three and nine months ended September 30, 1999 since they are anti-dilutive. In June 1999, the Company became obligated to redeem the Redeemable Preferred Stock in quarterly installments over a 10-year period. The Company at its election may make redemption payments in shares of Common Stock or in cash, subject to certain statutory requirements. The Company has adopted a policy on the proportion of redemption payments to be made in cash and in Common Stock. The number of shares to be issued to satisfy redemption payments is based on the market price of the Common Stock, subject to a floor price of $2.50 per share. In the second and third quarter of 1999, the Company redeemed 1,788 shares of Redeemable Preferred Stock by issuing 755,228 shares of Common Stock. Such shares are included in the weighted average common stock outstanding since the date of exchange. Shares of Common Stock potentially issuable to satisfy future redemption payments to be made in stock have not been included in the computation of diluted weighted average common stock outstanding for the three and nine months ended September 30, 1999 since they are anti-dilutive. Stock options to purchase 3,092,533 shares of common stock at prices ranging from $1.06 to $6.00 per share were outstanding at September 30, 1999, but were not included in the computation of diluted income per share because they are anti-dilutive. Stock options to purchase 2,449,327 shares of common stock at prices ranging from $1.50 to $10.50 per share were outstanding at September 30, 1998, but were not included in the computation of diluted income per share because the exercise price was greater than the average market value of the common shares. In January 1998, Warrants to purchase 1,020,000 shares of Common Stock at $2.25 per share were issued in connection with the issuance of the Senior Notes. See Note 10. The Warrants were not included in the computation of diluted weighted average common stock outstanding for the three and nine months ended September 30, 1998 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 exchange. The remaining outstanding warrants are excluded from the computation for the three and nine months ended September 30, 1999 as they are anti-dilutive. 8 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 4 -- Supplemental Schedule of Cash Flow Information Cash payments for interest and income taxes (net of refunds received) from continuing operations were as follows:
Nine months ended ------------------------------ Sept. 30, Sept. 30, 1999 1998 ---------- ---------- (in thousands) Interest....................................... $ 5,315 $ 2,595 Income taxes paid.............................. 1,715 693 Non-cash transactions were as follows: Issuance of common stock to acquire MicroNet... - 1,224 Issuance of common stock to acquire EXBTV...... 731 - Issuance of common stock on conversion of preferred stock 16,230 - Issuance of common stock on redemption of preferred stock 3,576 - Note 5 -- Inventories Nine months ended ------------------------------ Sept. 30, Dec. 30, 1999 1998 ---------- ---------- (in thousands) Raw materials.................................. $ 7,340 $ 7,488 Work in process................................ 4,884 5,824 Finished goods................................. 7,161 6,454 ---------- ---------- Total......................................... $ 19,385 $ 19,766 ========== ==========
Note 6 -- Commitments and Contingencies The Company is currently a defendant in lawsuits that have arisen in the ordinary course of its business. Management does not believe that any such lawsuits or unasserted claims will have a material adverse effect on the Company's financial position, results of operations or cash flows. Certain subsidiaries have been assessed income and value-added taxes together with penalties and interest. MicroNet was involved in litigation in the ordinary course of its business that was unresolved at the date the business was acquired by the Company. The Company has been indemnified against loss by the former shareholders of MicroNet for such matters. A portion of the purchase price paid in shares of Common Stock is being held in escrow pending the ultimate resolution of the litigation and would revert to the Company in the event the Company incurred any future loss relative to such matters. The Company currently is involved in various stages of investigation and cleanup relative to environmental protection matters, some of which relate to past disposal practices. Some of these matters are being overseen by state or federal agencies. Management has provided reserves, which have not been discounted, related to investigation and cleanup costs and believes that the final disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 9 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7 -- Preferred Stock At December 31, 1997, the Company became required to redeem the 69,970 outstanding shares of its 8% Noncumulative Preferred Stock with an aggregate liquidation value of $70.0 million (the "Old Preferred Stock"), to the extent of funds legally available therefore (generally, the excess of the value of assets over liabilities) at the redemption price of $1,000 per share. Pursuant to an agreement in the second quarter of 1998, the Company completed the redemption of the Old Preferred Stock in exchange for the following securities (a) 3,000,000 shares of its Common Stock, par value $0.01 per share; (b) 10,000 shares of a new series of 8% Noncumulative Convertible Preferred Stock, par value $1.00, with an aggregate liquidation value of $20.0 million (the "Convertible Preferred Stock"); and (c) 21,859 shares of a new series of 8% Noncumulative Redeemable Preferred Stock, par value $1.00 per share, with an aggregate liquidation value of $43.7 million (the "Redeemable Preferred Stock"). Each share of Convertible Preferred Stock and Redeemable Preferred Stock entitles the holder thereof to receive noncumulative dividends at the rate of 8% per annum, if declared by the Company's Board of Directors. Each share of Convertible Preferred Stock may be converted, at the option of the holder thereof, at a conversion price of $4.00 per share, into 500 shares of Common Stock, subject to adjustment under certain circumstances. In the nine months ended September 30, 1999, the holders of 8,115 shares of Convertible Preferred Stock converted their holdings into 4,057,500 shares of Common Stock. Beginning in June 2001, the Company will become obligated to redeem any remaining Convertible Preferred Stock in quarterly installments through December 2008. On April 28, 1999, the Company agreed to exchange 287 shares of Redeemable Preferred Stock for 40,000 shares of its Common Stock. The resultant $374,000 benefit on exchange has been recognized as a benefit available to the common stockholders on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 1999. Beginning in June 1999, the Company became obligated to redeem the Redeemable Preferred Stock in quarterly installments through March 2008. On June 30, 1999 and September 30, 1999, the Company issued 316,611 shares and 398,617 shares, respectively, of its Common Stock to satisfy the $1.5 million quarterly redemption requirement. The Company is obligated to redeem approximately $4.7 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 September 30, 2000. The MicroNet Redeemable Junior Preferred Stock is redeemable out of a percentage of earnings of MicroNet beginning in fiscal 1999. Due to the contingent nature of the redemption provision, no value has been ascribed to the MicroNet Redeemable Junior Preferred Stock in determination of the purchase price. The shares of the MicroNet Redeemable Junior Preferred Stock are being held in escrow, pending resolution of certain contingencies for which the Company has been indemnified by the former shareholders of MicroNet. 10 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 8 -- Income Taxes In the first quarter of 1998, the Company reversed $5.2 million previously reserved in connection with disputed state income taxes for the prior years, following the favorable settlement of that dispute in March 1998. In the second and third quarter of 1998, the Company reversed $4.9 million and $5.2 million previously reserved in connection with the liquidation of its subsidiary in Italy. The provisions for income taxes in the three and nine months ended September 30, 1999 consist primarily of withholding taxes on royalty income. As of December 31, 1998, the Company had net operating loss carryforwards for income tax purposes of $118.0 million, expiring in the years 2005 through 2013. As a result of certain financing transactions that were completed in April 1994 and February 1995, the Company's ability to utilize its net operating losses and credit carryforwards against future consolidated federal income tax liabilities will be restricted in their application, which will result in a material amount of the net operating loss never being utilized by the Company. Note 9 -- Accumulated Other Comprehensive Income (Loss) The balances of each classification within accumulated other comprehensive income (loss) are as follows:
Unrealized Minimum Accumulated Foreign Gain on Pension Other Currency Marketable Liability Comprehensive Items Securities Adjustment Income (Loss) -------- ---------- ---------- ------------- (in thousands) December 31, 1998...... $ 578 - $(29,631) $(29,053) Year- to- date change.. 217 $124 - 341 -------- ---------- ---------- -------- September 30, 1999..... $ 795 $124 $(29,631) $(28,712) ======== ========== ========== ========
Note 10 -- Senior Notes In January 1998, the Company issued $30.0 million of its 12% Senior Notes (the "Notes"), together with Warrants to purchase 1.02 million shares of Common Stock. The Warrants are exercisable at $2.25 per share at any time on or prior to March 15, 2003. At the time of issuance, the Warrants were valued using the Black-Scholes model. The value assigned to the Warrants was $765,000, which is being amortized against interest expense over the term of the Notes. On May 10, 1999, Warrants were exchanged to purchase 204,000 shares of Common Stock. At the end of June 1998, the Company issued an additional $14.0 million Senior Notes. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year, commencing September 15, 1998. The Notes will mature on March 15, 2003. The Company may redeem the Notes, in whole or in part, at any time after March 15, 2000, at redemption prices expressed as percentages of the principal amount of the Notes ranging from 100% to 106% depending on the redemption date, together with accrued and unpaid interest, if any, to the date of redemption. The Notes are senior unsecured obligations of the Company and rank pari passu in right of payment with all existing and future subordinated indebtedness of the Company. 11 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 11 -- Segment Reporting The Company has the following operating segments: high-performance mass data storage systems, instrumentation recorders and professional video recording products; high-performance magnetic disk arrays; licensing of intellectual property and Internet video 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.
Nine months ended September 30, 1999 ------------------------------------------------------------------------------ Mass Data Storage Systems/ Licensing of Eliminations Instrumentation Disk Intellectual Internet and Recorders Arrays Property Video Corporate Totals --------- -------- -------- ----- --------- -------- Revenues from external customers.......... $39,291 $ 8,503 $16,104 $ 1,184 $ (140) $ 64,942 Interest income........................... 179 - - 67 1,827 2,073 Interest expense.......................... 497 982 - 89 2,630 4,198 Depreciation, amortization and accretion.. 1,084 92 1 144 755 2,076 Segment income (loss)..................... (2,459) (3,062) 15,418 (10,232) (2,187) (2,522) Segment assets............................ 32,495 9,017 3,780 12,963 51,897 110,152 Expenditures for segment assets........... 403 304 - 875 197 1,779 Nine months ended September 30, 1999 ------------------------------------------------------------------------------ Mass Data Storage Systems/ Licensing of Eliminations Instrumentation Disk Intellectual Internet and Recorders Arrays Property Video Corporate Totals --------- -------- -------- ----- --------- -------- Revenues from external customers.......... $44,785 $3,236 $5,738 - - $ 53,759 Interest income........................... 440 - - - $ 2,132 2,572 Interest expense.......................... 38 217 - - 2,713 2,968 Depreciation, amortization and accretion.. 1,242 17 1 - 478 1,737 Segment income (loss)..................... (2,023) (541) 4,662 - (3,237) (1,139) Segment assets............................ 42,135 7,561 3 - 68,591 118,290 Expenditures for segment assets........... 574 - - - 1,913 2,487
12 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 12 -- Acquisition of Internet Businesses On May 20, 1999, the Company increased its interest in TV WEB from 19.9% to 50.1%. The Company invested a total of $8.6 million for its interest and has recorded its proportionate share of the net loss for the period which the Company held a minority interest in TV Web totaling $0.6 million, which is included in other (income) expense for the quarter ended June 30, 1999. When the Company acquired control, TV WEB had assets and liabilities consisting of $5.3 million of current assets, $0.6 million of plant and equipment, $3.1 million of current liabilities and $1.5 million of long-term debt. The Company recognized goodwill of $6.7 million, which is being amortized on a straight-line basis over 3 years. For the approximate four-month period the Company held a majority interest, 100% of the results of operations of TV onthe WEB have been included in the Company's consolidated results of operations because a shareholders deficit existed at the date the Company acquired control of TV WEB. On July 6, 1999, the Company increased its interest in AENTV from 19.9% to 51.0%. The Company invested a total of $3.7 million for its interest and has recorded its proportionate share of the net loss for the period which the Company held a minority interest in AENTV totaling $0.1 million, which is included in other (income) expense for the quarter ended September 30, 1999. When the Company acquired control, AENTV had assets and liabilities consisting of $2.8 million of current assets, $0.8 million of plant and equipment and $0.1 million of current liabilities. The Company recognized goodwill of $0.1 million, which is being amortized on a straight-line basis over 3 years. For the approximate three-month period the Company held a majority interest, 100% of the results of operations of AENTV have been included in the Company's consolidated results of operations because a shareholders deficit existed at the date the Company acquired control of AENTV. Pro forma combined results of operations of the Company as if the acquisition of TV WEB and AENTV had been completed at the beginning of the periods presented are as follows (in thousands, except per share data):
Year ended Nine months ended Dec. 31, 1998 Sept. 30, 1999 ------------- ----------------- Net sales........................... $ 66,854 $ 50,336 Loss before income taxes............ (6,740) (16,248) Net income (loss)................... 7,717 (17,503) Income (loss) per share Basic............................ 0.16 (0.33) Diluted.......................... 0.14 (0.33)
Pro forma operating results for all periods include an adjustment to record additional goodwill amortization of $2.3 million for the twelve months ended December 31, 1998 and $0.9 million for the nine months ended September 30, 1999. 13 AMPEX CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 13 -- Restructuring Charges Restructuring charges for the nine months ended September 30, 1999 and 1998 consist of the following:
Nine months ended ---------------------------- Sept. 30, Sept. 30, 1999 1998 ----------- ---------- Provisions for employee separation costs............... $ 3,287 $ 2,301 Recovery on vacated lease obligations.................. (166) (274) Provisions for relocation.............................. - 499 Costs associated with closure of foreign subsidiaries.. 1,462 - ---------- ---------- $ 4,583 $ 2,526 ========== ==========
The Company recorded a net restructuring charge for the nine months ended September 30, 1999 of $4.6 million. The charge included $3.3 million in connection with the Company's relocation of the remaining portion of its DCRsi manufacturing operations and other functions from its Redwood City, California facility to its Colorado Springs, Colorado facility and $1.5 million for the wind down of its German subsidiary, offset by a credit of $0.2 million related to the finalization of a termination clause on one of its subleased properties previously reserved. The $3.3 million restructuring charge was associated with the elimination of approximately 86 U.S. positions in engineering, manufacturing and administration. At September 30, 1999, the Company had paid and charged $0.7 million against the liability accounts related to the termination benefits set up for the restructuring. The Company recorded a net restructuring charge in the quarter ended March 30, 1998 of $2.8 million. The charge related to the Company's relocation of a portion of its DCRsi manufacturing operations from its Redwood City, California facility to its Colorado Springs, Colorado facility and concurrent workforce reduction. The charge includes $2.3 million for costs associated with the elimination of approximately 72 U.S. positions in engineering, manufacturing and administration, and $0.5 million for transition, shipping and other costs. At September 30, 1999, the Company had paid and charged substantially all of these costs against the liability accounts and terminated 71 employees. The Company recorded a net restructuring credit in the quarter ended September 30, 1998 of $0.3 million related to the recovery on certain subleased properties previously reserved. Accruals for restructuring costs totaled $5.4 million at September 30, 1999 including $0.6 million relating to vacated or abandoned leases. The lease obligations associated with the Company's restructuring have not been discounted to present value. 14 Forward-Looking Statements This Form 10-Q contains predictions, projections and other statements about the future that are intended to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward- looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others, those described under "Risk Factors," below. These forward-looking statements speak only as of the date of this Report. The Company disclaims any obligation or undertaking to disseminate updates or revisions of any forward-looking statements contained or incorporated herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q, READERS ARE URGED TO READ CAREFULLY ALL SUCH CAUTIONARY STATEMENTS. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto, included elsewhere in this Report, and the Consolidated Financial Statements and the Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission (file no. 0-20292) (the "1998 Form 10-K"). Results of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 Net Sales. Net sales increased by 8.1% to $17.3 million in the three months ended September 30, 1999 from $16.0 million for the three months ended September 30, 1998, and increased by 1.7% to $48.8 million in the first nine months of 1999 from $48.0 million in the first nine months of 1998. The sales increase for the comparable three-month period is primarily due to the Company's revenue from its Internet video operations. The increase of Ampex Data Systems' ("Data Systems") mass data storage products and instrumentation sales in the quarter ended September 30, 1999 over 1998 was offset in part by its lower sales of television after-market products. The slight increase in sales in the comparable nine month period was due to the inclusion of net sales of MicroNet Technology, Inc. ("MicroNet") which was acquired in June 1998, offset in part by lower instrumentation and television after-market sales. The Company's backlog of firm orders increased to $4.5 million at September 30, 1999 from $1.6 million at December 31, 1998. As previously disclosed, the Company has also received memoranda of understanding from customers for substantial potential orders of product sales for delivery over several years. The Company typically operates with low levels of backlog, requiring it to obtain the majority of each period's orders in the same period that they must be shipped to the customer. Historically, a small number of large orders has significantly impacted sales levels and often orders are received late in the quarter making it difficult to predict sales levels in future periods. iNEXTV's Internet Video Programming and Services. The Company's Internet video programming and services business began in early 1999, and in June 1999 were consolidated under its subsidiary iNEXTV Corporation ("iNEXTV"). iNEXTV recorded revenue of $0.8 million in the quarter ended September 30, 1999 and $1.2 million for the nine months ended September 30, 1999, principally from Internet video services. Such revenues do not include revenues of TV1.de ("TV1") which provides Internet video services to European businesses, as TV1 is a less than majority-owned affiliate. iNEXTV currently anticipates that Internet video revenues will grow in the fourth quarter of 1999, but that revenues from advertising and e-commerce are not expected to become significant until the first quarter of 2000. The Company's two new websites, exbtv.com ("exbtv") and iStyleTV.com ("iStyleTV") which are expected to rely significantly on advertising and e-commerce revenues are not being 15 launched until the fourth quarter of 1999. Additionally, AENTV's new programming, on which it will be primarily dependent for revenue, is not being introduced until the fourth quarter of 1999. Any significant delay in the launch of these web sites or new programming could materially affect the Company's Internet video operations (see Risk Factors). Data Systems' Mass Data Storage and Instrumentation Recorder Products. Sales of Data Systems' mass data storage products and instrumentation recorders and related after-market products increased to $11.5 million in the third quarter of 1999 compared to $9.8 million in the third quarter of 1998. For the first nine months of 1999 sales totaled $32.5 million, a decline from the comparable period in 1998 when sales of such products totaled $35.7 million. A significant portion of the Company's product sales reflects purchases by government agencies and defense contractors pursuant to federal government procurement programs. These sales fluctuate as a result of changes in government spending programs (including defense programs), and seasonal procurement practices of government agencies. The Company believes that television broadcasters and cable stations may elect over several years to reformat their existing videotape libraries to digital standards such as DST Systems in order to achieve greater operational flexibility and efficiency. The Company has entered into strategic partnering arrangements with leading video server providers in order to supplement its in- house sales and marketing organizations. Additionally, to preserve competitiveness, the Company will be required to invest in improving the capabilities of its products. For example, the maximum capacity per cartridge of the first generation DST tape drive was 165 gigabytes. The Company is currently delivering products with a maximum capacity of 330 gigabytes per cartridge (double-density) and is accepting orders for future delivery of products with a maximum capacity of 660 gigabytes per cartridge (quadruple- density). The Company continues to propose on additional domestic and foreign government programs. Typically such proposals are part of larger capital projects, which involve risks or delays beyond the Company's control. Since such orders often are relatively large, the receipt or loss of a significant order can materially affect quarterly sales and results of operations. Additionally, larger programs frequently schedule deliveries of the Company's products over an extended period. The Company expects that sales to government customers will increase modestly over the next twelve months but may not reach historical levels realized in recent years. Data Systems' Professional Video Recording and Other Products. As anticipated, sales of professional video recording products and all other products (consisting primarily of television after-market products) continued to decline to $2.2 million in the third quarter of 1999 from $2.9 million in the third quarter of 1998, and to $6.8 million in the first nine months of 1999 from $9.1 million in the first nine months of 1998. The Company anticipates a continuing reduction in the sale of television after-market products. The Company is presently seeking to position its mass data storage tape drives and library systems for use in digital storage archive applications of television broadcasters and cable stations. MicroNet Products. The Company has included the operations of MicroNet in its consolidated results of operations since its acquisition effective June 30, 1998. Sales of MicroNet products for the three months ended September 30, 1999 totaled $2.9 compared to $3.2 million for the three-month period ended September 30, 1998. For the nine months ended September 30, 1999 sales were $8.5 million. MicroNet sales levels have been affected by the decision to withdraw from lower performance product lines which historically accounted for the majority of sales and to refocus on higher performance disk-array products such as the DataDock 7000. The Company has developed a new generation of disk array (the Genesis product line) that offers substantially improved capacity, performance and features, such as fibre channel connectivity. These products have shipped in limited quantities in the nine-month period ended September 30, 1999. As a result, revenues for the three months ended September 30, 1999 increased over levels recorded for the quarters ended June 30, 1999, March 31, 1999 and December 31, 1998. The Company currently expects continued revenue growth for MicroNet in future periods. Gross Profit. Gross profit as a percentage of net sales decreased to 33.0% in the third quarter of 1999 from 33.6% in the third quarter of 1998, and to 34.5% in the first nine months of 1999 from 41.2% in the first nine months of 1998. The decline in the gross margin percentage in 1999 compared to 1998 reflects the inclusion of 16 MicroNet products that have lower margins than Data Systems' products, a lower proportion of instrumentation product sales which have higher gross profit margin than other sales, and an overall decline in sales volume that resulted in lower absorption of fixed manufacturing costs. The Company believes that sales of relatively high-margin instrumentation recorders will continue to be adversely affected by pressure on government agencies to further reduce spending. Accordingly, gross margins in future periods will continue to be adversely affected. Also, the Company may elect to use aggressive pricing as a marketing strategy to enter new markets for its storage products. While these efforts would be designed ultimately to increase revenues and profitability, they might reduce the gross margin percentage of net sales in future periods. Selling and Administrative Expenses. Selling and administrative expenses increased to $8.6 million in the third quarter of 1999 from $6.9 million in the third quarter of 1998, and to $21.3 million in the first nine months of 1999 from $17.0 million in the first nine months of 1998. For the three and nine months ended September 30, 1999, selling and administrative costs include MicroNet expenditures of $1.0 million and $3.1 million, respectively. In addition to costs incurred for the Internet video programming and site development discussed below, the Company's Internet video businesses incurred sales, marketing and administrative expenses totaling $4.0 million and $6.8 million for the three and nine months ended September 30, 1999, respectively. The Company anticipates that it will need to increase its sales and marketing efforts to increase sales at MicroNet due to its new product offerings in early 1999, and to bring together the necessary capabilities to build the Company's Internet video programming network. Internet Video Programming and Site Development. Internet video programming and site development costs represent costs incurred for services rendered to customers as well as costs incurred for the development of made for the Internet video programming and website hardware and software purchases in preparation for the launch of exbtv and iStyleTV. Such costs also include costs incurred by Ampex's Internet Technology Group to develop improved Internet video technology that will be used by iNEXTV and its affiliates. The Company anticipates that site development startup costs will decline in the first quarter of 2000, but that expenditures for program production, marketing and advertising will increase materially as the network expands. Research, Development and Engineering Expenses. Research, development and engineering expenses decreased to $2.4 million in the third quarter of 1999 from $2.9 million in the third quarter of 1998, and decreased to $7.2 million in the first nine months of 1999 from $9.1 million in the first nine months of 1998. The Company does not capitalize any RD&E expenditures. The majority of RD&E expenses in each of these periods was used to enhance the price/performance levels of Data Systems' mass data storage products, as well as to integrate its storage systems with various computer manufacturers' servers, workstations and other computer systems. The Company is also committed to investing in research, development and engineering programs which support iNEXTV's Internet video strategy. Royalty Income. Royalty income was $3.0 million and $2.2 million in the third quarters of 1999 and 1998, respectively and $16.1 million and $5.7 million in the first nine months of 1999 and 1998, respectively. The increase in royalty income in 1999 reflects royalty income of approximately $7.5 million representing the portion of royalties earned through the third quarter of 1999 from a previously disclosed long-term license agreement extending through the year 2001. The Company did not receive any long-term nonrecurring royalty payments in the first nine months of 1998. The Company's royalty income derives from patent licenses, and the Company receives most of its royalty income from licenses with companies that manufacture consumer video products (such as VCRs and camcorders) and, in certain cases, professional videotape recorders. The Company intends to pursue additional digital video recorder licensees. The Company is also assessing whether manufacturers of video games, DVD recorders and digital television receivers are using its patented technology. The Company recently notified certain manufactures of video game software that its force- feedback patents may be incorporated in their products. There can be no assurance that the manufacturers of these products are utilizing the Company's technology or, if used, whether the Company will be able to negotiate license agreements with the manufacturers. Royalty income has historically fluctuated widely due to a number of factors that the Company cannot predict or control such as the extent of use of the Company's patented technology by third parties, the materiality of any nonrecurring royalties received as the result of negotiated settlements for products sold by manufacturers prior to entering into licensing agreements with the Company, the extent to which the Company must pursue litigation in order to enforce its patents, and the ultimate success of its licensing and litigation activities. The costs of patent litigation can be 17 material, and the institution of patent enforcement litigation may also increase the risk of counterclaims alleging infringement by the Company of patents held by third parties or seeking to invalidate patents held by the Company. Acquisition of In-process Research and Development. In connection with the acquisition of MicroNet, the independent appraisal of the in-process research and development resulted in the recording of a one-time $0.9 million charge in the second quarter of 1998. Amortization of Goodwill. In connection with the acquisition of MicroNet, TV onthe WEB and AENTV, the purchase price exceeded the fair value of the assets acquired and liabilities assumed, resulting in the recording of goodwill. Goodwill is being amortized on a straight-line basis over a three-to-five year period from the date of acquisition. Additional goodwill will be recognized 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. Restructuring Charges. The charge of $2.5 million in the first nine months of 1998 was incurred in connection with the Company's relocation of a portion of its DCRsi manufacturing operations from its Redwood City, California facility to its Colorado Springs, Colorado facility and from a concurrent workforce reduction offset in part by a recovery on the cancellation of certain termination rights on sublet property ($0.3 million). The Company recorded a restructuring charge of $4.6 million in the second quarter of 1999. The charge was in connection with the Company's relocation of virtually all of its remaining manufacturing operations from its Redwood City, California facility to its Colorado Springs, Colorado facility and concurrent U.S. workforce reduction ($3.3 million), the wind down of its German subsidiary ($1.5 million) and was offset in part by a recovery on the cancellation of certain termination rights on a sublet property ($0.2 million). The Company believes these relocation and restructuring activities will result in material savings in manufacturing costs, selling and administrative costs and engineering costs. As of September 30, 1999, the Company had a remaining balance for accrued restructuring costs of $5.4 million. The Company will continue to evaluate the amount of accrued restructuring costs on a quarterly basis, and the Company may make adjustments in future periods if it determines that its actual obligations will differ significantly from the amounts accrued. Operating Loss. The Company incurred an operating loss of $6.2 million in the third quarter of 1999 and $5.6 million in the first nine months of 1999. The operating loss was primarily due to the inclusion of the Company's Internet video activities and the restructuring charges of $4.6 million, offset in part by royalty income of approximately $7.5 million representing the portion of royalties earned through September 30, 1999 from a previously disclosed license agreement. The Company had an operating loss of $2.2 million in the third quarter of 1998 and $4.3 million in the first nine months of 1998. The 1998 operating loss was primarily due to a charge of $0.9 million for acquired in- process research and development pertaining to the MicroNet acquisition and the provision for restructuring of $2.5 million. The Company expects to make strategic acquisitions and build in-house capabilities relative to its Internet video strategy and expects these activities to require significant expenditures in 1999 and future periods that will result in material charges to goodwill amortization and that may result in consolidated net losses while the Company is building its Internet video programming network. Interest Expense. Interest expense, primarily due to the issuance of 12% Senior Notes due 2003 and warrants to purchase approximately 1.02 million shares of Common Stock in January and July 1998, was $1.4 million and $4.2 million for the three and nine months ended September 30, 1999, respectively and $1.4 million and $3.0 million for the three and nine months ended September 30, 1998, respectively. Amortization of Debt Financing Costs. These amounts reflect periodic amortization of financing costs over the remaining terms of the debt. Financing costs associated with the January and July 1998 issuance of the 12% Senior Notes are being charged to expense over five years. Interest Income. Interest income is earned on cash balances and short and long-term investments. For the three and nine months ended September 30, 1999 interest income was $0.7 and $2.1 million, respectively and for the three and nine months ended September 30, 1998 interest income was $0.8 million and $2.6 million, respectively. 18 The decline is due to a modest reduction in the cash and investment balances as well as the decline in interest rates for the comparable periods. Other (Income) Expense, Net. For the nine months ended September 30, 1999, other (income) expense includes a proportionate share of the net loss for the period the Company held a minority interest in TV onthe WEB and AENTV. For the three and nine months ended September 30, 1998, other (income) expense, net consists primarily of the foreign currency transaction gains and losses resulting from the Company's foreign operations. Provision for (Benefit of) Income Taxes. In the first quarter of 1998, the Company reversed $5.2 million previously reserved in connection with disputed state income taxes for the prior years, following the favorable settlement of that dispute in March 1998. In the second and third quarter of 1998, the Company reversed $4.9 million and $5.2 million, respectively, previously reserved in connection with the liquidation of its subsidiary in Italy. The Company was not required to include any material provision for U.S. Federal income tax in the comparable three and nine-month periods due to the utilization of net operating loss carryforwards and timing differences. The Company's international operations, which are conducted principally by its foreign subsidiaries, may have pretax foreign income and the Company's royalty income is subject, in certain cases, to foreign tax withholding. Such income is taxed by foreign taxing authorities and the Company's domestic interest and amortization expenses and operating loss carryforwards are not deductible in computing such foreign taxes. Net Income(Loss). The Company reported a net loss of $10.3 million in the first nine months of 1999 compared to a net income of $9.9 million in the first nine months of 1998, primarily as a result of the factors discussed above under "Operating Income (Loss)" and "Provision for (Benefit of) Income Taxes." Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. On April 28, 1999, the Company agreed to exchange 40,000 shares of its Common Stock for 287 of its outstanding Redeemable Preferred Stock. The resultant $374,000 benefit on exchange has been recognized as a benefit available to the common stockholders in the Consolidated Statements of Operations and Comprehensive Income (Loss). Liquidity and Capital Resources Cash Flow. At September 30, 1999, the Company had cash and short-term investments of $48.7 million and working capital of $51.1 million. At December 31, 1998, the Company had cash and short-term investments of $62.6 million and working capital of $70.0 million. The change in cash and short-term investments in the 1999 period reflects the purchase of strategic investments in Internet video businesses and cash utilized in their operations of $17.9 million, cash used in the operations of MicroNet and Data Systems of $4.0 million and $1.7 million, respectively, offset by royalty income received of $12.1 million. Overall, the Company's operating activities utilized cash of $6.8 million during the first nine months of 1999 and utilized cash of $14.6 million during the first nine months of 1998. The Company has announced that it is building an international Internet video network, iNEXTV. In the first quarter of 1999, the Company purchased minority investments in TV onthe WEB and AENTV. In May and July 1999, respectively, the Company purchased a majority interest in TV onthe WEB and AENTV. In July 1999, the Company acquired a minority interest in Executive Branch Webcasting Corporation and in September 1999, the Company acquired a minority interest in TV1 Internet Television of Munich, Germany. The Company has built in-house Internet video production and distribution facilities in Los Angeles and is constructing new facilities into which its present New York City operations will relocate in early 2000. The Company also anticipates constructing Internet video facilities in Berlin, Germany in 2000. There can be no assurance that the Company will generate material revenues from its Internet businesses. The Company believes that its Internet businesses will incur significant production, distribution and marketing expenses to build content and presence, which will utilize cash resources. The Company may seek to raise additional equity capital in the private or public markets to finance the expansion of its Internet video business. The Company may also consider selling certain of its assets or operations to raise additional capital for its Internet businesses and to reduce indebtedness. Such financing efforts, if any, would be supplemental to its existing working capital resources which the Company believes are sufficient to fund capital additions, operating expenditures and debt service obligations of the Company and its subsidiaries through at least 2000. 19 The Company has available, through a subsidiary, a working capital facility that allows it to borrow or obtain letters of credit totaling $7.0 million, based on eligible accounts receivable, through May 2002. At September 30, 1999, the Company had borrowings outstanding of $1.0 million and had letters of credit issued against the facility totaling $1.1 million. At September 30, 1998, the Company had borrowings outstanding of $1.3 million and had letters of credit issued against the facility totaling $1.1 million. In addition, the Company's subsidiaries have bank term loans and notes payable to minority shareholders totaling $2.3 million at September 30, 1999. Financing Transactions. At December 31, 1997, the Company became required to redeem the 69,970 outstanding shares of its 8% Noncumulative Preferred Stock with an aggregate liquidation value of $70.0 million (the "Old Preferred Stock"), to the extent of funds legally available therefore (generally, the excess of the value of assets over liabilities) at the redemption price of $1,000 per share. Pursuant to an agreement in the second quarter of 1998, the Company completed the redemption of the Old Preferred Stock in exchange for the following securities (a) 3,000,000 shares of its Common Stock, par value $0.01 per share; (b) 10,000 shares of a new series of 8% Noncumulative Convertible Preferred Stock, par value $1.00, with an aggregate liquidation value of $20.0 million (the "Convertible Preferred Stock"); and (c) 21,859 shares of a new series of 8% Noncumulative Redeemable Preferred Stock, par value $1.00 per share, with an aggregate liquidation value of $43.7 million (the "Redeemable Preferred Stock"). Each share of Convertible Preferred Stock and Redeemable Preferred Stock entitles the holder thereof to receive noncumulative dividends at the rate of 8% per annum, if declared by the Company's Board of Directors. Each share of Convertible Preferred Stock may be converted, at the option of the holder thereof, at a conversion price of $4.00 per share, into 500 shares of Common Stock, subject to adjustment under certain circumstances. In the nine months ended September 30, 1999, the holders of 8,115 shares of Convertible Preferred Stock converted their holdings into 4,057,500 shares of Common Stock. Beginning in June 2001, the Company will become obligated to redeem any remaining Convertible Preferred Stock in quarterly installments through December 2008. On April 28, 1999, the Company agreed to exchange 287 shares of Redeemable Preferred Stock for 40,000 shares of its Common Stock. The resultant $374,000 benefit on exchange has been recognized as a benefit available to the common stockholders on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 1999. Beginning in June 1999, the Company became obligated to redeem the Redeemable Preferred Stock in quarterly installments through March 2008. For the nine months ended September 30, 1999, the Company issued 715,228 shares of its Common Stock to satisfy the $1.5 million quarterly redemption requirement. The Company is obligated to redeem approximately $4.7 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 September 30, 2000. See Note 7 of Notes to Unaudited Consolidated Financial Statements. In January 1998, the Company issued $30.0 million of its 12% Senior Notes, together with Warrants to purchase 1.02 million shares of its Class A Common Stock (the "Class A Stock"). The Warrants are exercisable at $2.25 per share at any time on or prior to March 15, 2003. At the end of the second quarter of 1998, the Company issued an additional $14.0 million of 12% Senior Notes. As a result of the issuance of the 12% Senior Notes, the Company's total indebtedness and future debt service obligations increased significantly from prior levels. The Company has wide discretion as to how the debt proceeds may be invested, including for acquisitions of and investments in new businesses. Any such investments or acquisitions, if made, are not expected to pay a current return, which could require the Company to fund debt service obligations on the 12% Senior Notes out of its liquidity and cash flow from existing operations. In order to minimize the difference between the interest the Company currently receives on its investments and the interest payable on the Senior Notes, the Company has invested $3.0 million at September 30, 1999, in securities with higher yields, longer terms or lower credit quality. The Company may also engage in various transactions in derivative securities. Investments in any securities could 20 expose the Company to a risk of trading losses due to market or interest rate fluctuations or other factors that are not within the Company's control. The Indenture under which the 12% Senior Notes were issued contains customary affirmative and negative restrictive covenants that limit, among other things, the incurrence of additional senior debt, the payment of dividends, the sale of assets and other actions by the Company and certain restricted subsidiaries. Readiness for Year 2000 Many currently installed computer systems, software applications and other control devices (collectively, "Systems") are coded to accept only two-digit entries in the date code field. As the year 2000 approaches, these code fields will need to accept four digit entries to distinguish years beginning with "19" from those beginning with "20". As a result, in just under three months the Systems used by many companies may need to be modified to comply with year 2000 requirements. Ampex relies on its internal Systems in operating and monitoring all major aspects of its business, including its manufacturing processes, engineering management controls, financial systems (such as general ledger, accounts payable and payroll modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and products. Ampex also relies on the external Systems of its suppliers and other organizations with which it does business. The Company has completed its review of all of its products, as well as its internal systems, both IT (information technology) systems and non-IT (noninformation technology) systems, and third-party vendors relied on for the manufacture of the Company's products. To accomplish this the Company, in early 1998, established a Year 2000 Compliance Committee to investigate and determine the compliance status of the Company, to identify what needs to be done to achieve compliance if noncompliance issues are identified, the cost of achieving compliance, and implementation plans to achieve compliance before January 1, 2000. The Committee is headed by an executive officer of the Company and membership includes representatives from all functional areas. The Committee has completed its assessment and has determined that most systems are compliant and those that are not do not represent major efforts and are expected to be fully compliant by January 1, 2000. The status of the investigation is as follows: System Status ------ ------ Manufacturing Control and Financial Systems The manufacturing control and financial control and reporting systems have been upgraded, tested and are compliant. The hardware that operates both the financial and manufacturing systems along with the operating system has been successfully implemented and is now compliant. Engineering Systems The electrical design and the mechanical design systems are compliant. The document control system is noncompliant but the Company is in the process of purchasing software from an outside software vendor that is compliant. The software will be installed, tested and operating by December 31, 1999. The Company anticipates that the system will be fully compliant by December 31, 1999. Products Offered for Sale Existing products are compliant. Former products that are no longer manufactured are generally compliant but these former products are not warranted to be Year 2000 compliant. Production Equipment All production and test equipment relied on by the Company to manufacture products are either fully compliant, or in the case of several manufacturing test machines that are not compliant, do not need to be compliant to fully function. 21 Third-Party Vendors The Company has sent questionnaires to third-party vendors upon whom it relies for various parts, components and other product- related material. To date no material noncompliance issues have been identified, and we have determined that all critical vendors are compliant, and thus we do not anticipate any negative impact on the Company's business. The cost for the Company to become Year 2000 compliant is approximately $400,000, with an estimated $40,000 yet to be expended in the fourth quarter of 1999. Because of the current state of the Company's Y2K preparedness, the Company believes that there is minimal risk that the Company will experience any material Y2K compliance problems beginning January 1, 2000. The Company's current insurance programs do not specifically exclude losses attributed to Year 2000 non-compliance, but these programs are subject to change as they are renewed for future periods. Despite the Company's efforts so far to address the Year 2000 impact, the Company cannot guarantee that all internal and external systems will be compliant, or that its business will not be materially adversely affected by any such non-compliance. Recent Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for the Company in fiscal year 2001 and will not require retroactive restatement of prior period financial statements. The Company has not yet quantified the impact of adopting SFAS 133 on its financial statements, but the Company believes there will not be a significant impact. Risk Factors Risk of Increased Leverage As of September 30, 1999, Ampex had outstanding approximately $46.3 million of total borrowings, which includes $44.0 million principal amount of 12% Senior Notes due 2003 and $2.3 million of subsidiary indebtedness. The Company has invested a portion of the proceeds from the Senior Notes in its MicroNet and iNEXTV subsidiaries and for general corporate purposes. The Company has invested a portion of the balance of these proceeds in government securities and, in order to realize yields approaching the interest rate on the Senior Notes, from time-to-time has invested in high-yield mutual funds and corporate securities, some of which have longer terms and lower credit quality than U.S. government securities. The Company may also engage in various transactions in derivative securities although it has not done so to date. The Company may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for other purposes, subject to the restrictions in the indenture governing the Senior Notes. The degree to which the Company is leveraged, and the types of investments it selects, could have important consequences to investors, including the following: . a substantial portion of the Company's consolidated cash flow from operations must be dedicated to the payment of the principal of and interest on outstanding indebtedness, and will not be available for other purposes; 22 . 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 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. Ampex derives a substantial portion of its operating income from subsidiaries. Accordingly, Ampex will be dependent on dividends and other distributions from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of principal and interest on the Senior Notes. The ability of Ampex's subsidiaries to pay such dividends will be subject to, among other things, the terms of any debt instruments of the subsidiaries then in effect and applicable law. Risk of Continuing Sales Decline; Anticipation of Future Losses In recent years, Ampex's net sales have declined materially. These declines primarily reflect declines in sales of Data Systems' products to U.S. and foreign government agencies and defense contractors, which are material to operating results. These government agencies and contractors have experienced continued pressure to reduce spending, which has particularly affected Data Systems' sales to government contractors of its DCRsi instrumentation recorders, which have generally been more profitable than its data storage and video recording products. Sales of professional television and after-market products are also expected to decline as a result of the announcement of new digital television transmission standards. In response to declining sales of these products, Ampex has been seeking to expand its products and services, including acquisitions. Ampex has also instituted, and will continue to implement, cost reduction programs. However, there can be no assurance that any of these strategies will be successful, or that Ampex will be able to reverse recent sales declines. Ampex has incurred losses in the first nine months of 1999 and due to its Internet video programming activities, promotion expenditures and amortization of goodwill of acquired businesses, the Company expects such losses to increase in the fourth quarter of 1999. 23 Risks Associated with Acquisition Strategy In order to expand Ampex's products and services, Ampex has made, and may continue to make, acquisitions of, and/or investments in, other business entities, including businesses involved in both producing and distributing Internet video programming. Ampex may not be able to identify or acquire additional acquisition candidates in the future, or complete any further acquisitions or investments on satisfactory terms. In order to pay for future acquisitions or investments, Ampex may have to: . issue additional equity securities of the Company or a subsidiary, which would dilute the ownership interest of existing Ampex shareholders; . incur additional debt; and/or . amortize goodwill and other intangibles or incur other acquisition- related charges, which could materially impact earnings. Acquisitions and investments involve numerous additional risks, including difficulties in the management of operations, services and personnel of the acquired companies, and of integrating acquired companies with Ampex and/or each other's operations. Ampex may also encounter problems in entering markets and businesses in which it has limited or no experience. Acquisitions can also divert management's attention from other business concerns. Ampex may make investments in companies in which it has less than a 100% interest. Such investments involve additional risks, including the risk that Ampex may not be in a position to control the management or policies of such entities, and risks of potential conflicts with other investors. Ampex has invested in companies that are in the early stage of development and may be expected to incur substantial losses. Ampex's financial resources may not be sufficient to fund the operations of such companies. Accordingly, there can be no assurance that any acquisitions or investments that Ampex has made, or may make in the future, will result in any return, or as to the timing of any return and Ampex could lose all or a substantial portion of its investments. Risks Associated with iNEXTV and Internet Video Strategy The Company's Internet subsidiary, iNEXTV, was formed recently, and has not yet generated any material advertising or sales revenues. In evaluating the business and prospects of iNEXTV, and the Company's Internet video strategy in general, you should take into account the risks and uncertainties typical of companies in the early stages of development, particularly in new and rapidly evolving markets such as those for Internet content, advertising and electronic commerce (e-commerce). The development of iNEXTV and the implementation of the Company's strategy to expand its Internet video businesses involve special risks and uncertainties, including but not limited to the following: . the ability of iNEXTV and its affiliates to identify, acquire and deliver compelling, quality video programming over the Internet; . the ability of iNEXTV and its affiliates to obtain and manage resources for growth from their present size and to become profitable; . market acceptance of streaming media technology, which is currently of lower quality than television or radio broadcasts, is subject to congestion and interruptions on the Internet, and requires specialized software, technical expertise and increased bandwidth; . dependence upon the continued acceptance and growth of the Internet as a medium for advertising and e-commerce, and upon iNEXTV's ability to generate advertising revenues and, in future periods, to sell goods and services over the Internet; . dependence upon timely delivery and integration of web site software and hardware purchased from third parties in order to achieve planned launch dates for its exbtv.com and iStyleTV.com websites. 24 . 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 Ampex to 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 and government regulations relating to Internet businesses, which could slow Internet growth, expose iNEXTV to potential liabilities or otherwise adversely affect its Internet businesses; . the ability to expand successfully in the European market, which is likely to be subject to cultural and language barriers, different regulatory environments, currency exchange rate fluctuations and other difficulties relating to managing foreign operations; and . likelihood of continued and significant expenses resulting in material losses in future periods, which could negatively affect the price of the Company's securities and require it to seek additional capital which may not be available on satisfactory terms or at all. Fluctuations in Royalty Income Ampex's results of operations in certain prior periods reflect the receipt of significant royalty income, including material nonrecurring payments resulting from negotiated settlements primarily related to sales of products by manufacturers before negotiating licenses from Ampex. Although Ampex has a substantial number of outstanding and pending patents, and its patents have generated substantial royalties in the past, it is not possible to predict the amount of royalty income Ampex will receive in the future. Royalty income has historically fluctuated widely due to a number of factors that Ampex cannot predict, such as the extent to which third parties use its patented technology, the extent to which it must pursue litigation in order to enforce its patents, and the ultimate success of its licensing and litigation activities. The costs of patent litigation can be material. The institution of patent enforcement litigation may also increase the risk of counterclaims alleging infringement by Ampex of patents held by third parties or seeking to invalidate patents held by Ampex. Moreover, there is no assurance that Ampex will continue to develop patentable technology that will be able to generate significant patent royalties in future years to replace patents as they expire. Ampex's royalty income fluctuates significantly from quarter to quarter and from year to year, and there can be no assurance as to the level of royalty income that will be realized in future periods. Fluctuations in Operating Results Ampex's sales and results of operations are generally subject to quarterly and annual fluctuations. Various factors affect Ampex's operating results, some of which are outside of the Company's control, including: . customer ordering patterns; . availability and market acceptance of new products; . timing of significant orders and new product announcements; . order cancellations; 25 . receipt of royalty income; . the amount and timing of capital expenditures and other costs relating to the expansion of operations; and . general economic and industry conditions, including those related to the Internet, e-commerce and new media. Data Systems' revenues are typically dependent upon receipt of a limited number of customer orders involving relatively large dollar volumes and are difficult to forecast in any given fiscal period. Results can also be significantly affected by any acquisitions or material investments that Ampex may elect to make in a given quarter. Therefore, its results may fluctuate significantly from quarter to quarter and from year to year. Results of a given quarter or year may not necessarily be indicative of results to be expected for future periods. In addition, fluctuations in operating results may negatively affect Ampex's debt service coverage, or its ability to issue debt or equity securities should it wish to do so, in any given fiscal period. Material fluctuations in Ampex's results in future periods could have a material adverse effect on the price of the Company's Common Stock. Seasonality and Backlog Sales of most of Ampex's products have historically declined during the first and third quarters of the fiscal year, due to the seasonal procurement practices of Ampex's customers. Depending on the ability of iNEXTV to generate Internet advertising and sales revenue, the Company could experience different seasonal trends in the recognition of revenues. A substantial portion of Ampex's backlog at a given time is normally shipped within one or two quarters thereafter. Therefore, sales in any quarter are heavily dependent on orders received in that quarter and the immediately preceding quarter. Rapid Technological Change and Risks of New Product Development All the industries and markets from which Ampex derives revenues, directly or through its licensing program, are characterized by continual technological change and the need to introduce new products, product upgrades and patentable technology. This has required, and will continue to require, that Ampex spend substantial amounts for the research, development and engineering of new products and advances to existing products and, with respect to the Company's Internet operations, new content and services. No assurance can be given that Ampex's existing products and technologies will not become obsolete or that any new products or technologies will win commercial acceptance. Obsolescence of existing product lines, or inability to develop and introduce new products, could have a material and adverse effect on its sales and results of operations in the future. The development and introduction of new technologies and products are subject to inherent technical and market risks, and there can be no assurance that we will be successful in this regard. Competition Data Systems encounters significant competition in all its product markets. Many of its competitors have greater resources and access to capital than the Company. In the mass data storage market, Data Systems competes with a number of well-established competitors such as IBM, Storage Technology, Exabyte and Quantum, as well as smaller companies. In addition, other manufacturers of scanning video recorders may seek to enter the mass data storage market in competition with us. For example, Sony has entered this market with storage products based on its video recording technology. In addition, price declines in competitive storage systems, such as magnetic or optical disk drives, can negatively impact sales of Data Systems' DST products. In the instrumentation market, Data Systems competes primarily with companies that depend on government contracts for a major portion of their sales in this market, including Sony, Loral Data Systems, Datatape and Metrum. The number of competitors in this market has decreased in recent years as the level of government spending in many areas has declined. 26 MicroNet's competitors include both large companies such as EMC, Data General and IBM and other small system integrators. There is no assurance that MicroNet will be able to compete successfully in these markets in the future. The market for Internet products and services is highly competitive and characterized by multiple competitors and low barriers to entry. Ampex is attempting to develop improvements in video quality in order to differentiate itself from its competitors. However, other companies may develop competing technology 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. Dependence on Certain Suppliers Ampex purchases certain components from a single domestic or foreign manufacturer. Significant delays in deliveries or defects in such components could adversely affect Ampex's manufacturing operations, pending qualification of an alternative supplier. In addition, Ampex produces highly engineered products in relatively small quantities. As a result, Ampex's ability to cause suppliers to continue production of certain products on which it may depend may be limited. Ampex does not generally enter into long-term raw materials or components supply contracts. Risks Related to International Operations Although Data Systems significantly curtailed its international operations in connection with the restructuring of its operations in 1993, sales to foreign customers (including U.S. export sales) continue to be significant to Ampex's results of operations. The expansion of iNEXTV's European operations may generate advertising and sales revenues in future periods, although the Company has not recognized any material revenue to date. The European operations of iNEXTV are expected to be subject to certain risks and uncertainties, as set forth under the caption "Risks Associated with iNEXTV and Internet Video Strategy." International operations are subject to a number of special risks, including limitations on repatriation of earnings, restrictive actions by local governments, and fluctuations in foreign currency exchange rates and nationalization. Additionally, export sales are subject to export regulation and restrictions imposed by U.S. government agencies. Fluctuations in the value of foreign currencies can affect Ampex's results of operations. Ampex does not normally seek to mitigate its exposure to exchange rate fluctuations by hedging its foreign currency positions. In January 1999, the new "Euro" currency was introduced in certain European countries that are part of the European Monetary Union. Beginning in 2003, all EMU countries are expected to be operating with the Euro as their single currency. A significant amount of uncertainty exists as to the effect the Euro will have on the marketplace generally. Some of the rules and regulations relating to the governance of the currency have not yet been defined and finalized. As a result, companies operating or conducting business in Europe will need to ensure that their financial and other software systems are capable of processing transactions and properly handling the Euro. Ampex is currently assessing the effect the introduction of the Euro will have on its internal accounting systems and the potential sales of its products. Ampex will take appropriate corrective actions based on the results of such assessment. Ampex has not yet determined the costs related to addressing this issue. This issue is not expected to have a material adverse affect on Ampex's business. Volatility of Stock Price The trading price of Ampex's Common Stock has been and can be expected to be subject to significant volatility, reflecting a variety of factors, including: . quarterly fluctuations in operating results; . announcements of new product introductions by Ampex or its competitors; . reports and predictions concerning the Company by analysts and other members of the media; 27 . issuances of substantial amounts of Common Stock in order to redeem outstanding shares of its Preferred Stock; and . general economic or market conditions. The stock market in general, and Internet and technology companies in particular, have experienced a high degree of price volatility, which has had a substantial effect on the market prices of many such companies for reasons that often are unrelated or disproportionate to operating performance. These broad market and industry fluctuations may adversely affect the price of Ampex's Common Stock, regardless of its operating performance. Dependence on Key Personnel Ampex is highly dependent on its management. Ampex's success depends upon the availability and performance of key executive officers and directors. Except for certain of its Internet affiliates, the Company has not entered into employment agreements with its key employees, and the loss of the services of key persons could have a material adverse effect upon Ampex. The Company does not maintain key man life insurance on any of these individuals. Anti-Takeover Consequences of Certain Governing Instruments Ampex's Certificate of Incorporation provides for a classified Board of Directors, with members of each class elected for a three-year term. The Certificate of Incorporation provides for nullification of voting rights of certain foreign stockholders in certain circumstances involving possible violations of security regulations of the United States Department of Defense. The instrument governing Ampex's outstanding Preferred Stock, which had an aggregate liquidation value of approximately $43.9 million at September 30, 1999, requires that Ampex make mandatory offers to redeem those securities out of legally available funds in the event of a change of control. For this purpose, a change of control includes the following events: a person or group of people acting together acquires 30% or more of Ampex's voting securities; Ampex merges, consolidates or transfers all or substantially all of its assets; or the dissolution of Ampex. The Certificate of Incorporation authorizes the Board of Directors to issue additional shares of Preferred Stock without the vote of stockholders. The indenture governing Ampex's outstanding Senior Notes, in the total principal amount of $44 million, requires Ampex to offer to repurchase the Senior Notes at a purchase price equal to 101% of the outstanding principal amount thereof together with accrued and unpaid interest in the event of a change of control. Under the indenture, a change of control includes the following events: a person or group of people acting together acquires 50% or more of the Company's voting stock; or the transfer of substantially all of the Company's assets to any such person or group, other than to certain subsidiaries and affiliates of Ampex. The Company also holds certain promissory notes issued by the Chief Executive Officer, Edward J. Bramson, and his designees. As of September 30, 1999, the unpaid principal amount of these notes totaled $3.0 million. In September 1998, the Company entered into two agreements which provided that, in the event of a change in control (as defined in these agreements), Mr. Bramson will have the right to surrender the 800,000 shares of Common Stock currently securing the notes in exchange for the full release and cancellation of any claims by the Company for repayment of the notes, and the return of the notes and cash payments previously paid by him for those shares, without interest. These provisions could have anti-takeover effects by making an acquisition of Ampex by a third party more difficult or expensive in certain circumstances. Nonpayment of Dividends Ampex has not declared dividends on its Common Stock since its incorporation in 1992 and Ampex has no present intention of paying dividends on its Common Stock. Ampex is also restricted by the terms of certain agreements and of the outstanding Preferred Stock as to the declaration of dividends. 28 Dependence on Licensed Patent Applications and Proprietary Technology Ampex's success depends, in part, upon its ability to establish and maintain the proprietary nature of its technology through the patent process. There can be no assurance that one or more of Ampex's patents will not be successfully challenged, invalidated or circumvented or that it will otherwise be able to rely on such patents for any reason. In addition, there can be no assurance that competitors, many of whom have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that prevent, limit or interfere with Ampex's ability to make, use and sell its products either in the United States or in foreign markets. If any of Ampex's patents are successfully challenged, invalidated or circumvented or its right or ability to manufacture products were to be proscribed or limited, Ampex's ability to continue to manufacture and market its products could be adversely affected, which would likely have a material adverse effect upon Ampex's business, financial condition and results of operations. Litigation may be necessary to enforce Ampex's patents, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings brought against, initiated by or otherwise involving Ampex may require Ampex to incur substantial legal and other fees and expenses and may require some of its employees to devote all or a substantial portion of their time to the prosecution or defense of such litigation or proceedings. Environmental Issues Ampex's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and hazardous substances. Owners and occupiers of sites containing hazardous substances, as well as generators and transporters of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including liability for investigative and cleanup costs and damages arising out of past disposal activities. Ampex has been named from time to time as a potentially responsible party by the United States Environmental Protection Agency with respect to contaminated sites that have been designated as "Superfund" sites, and are currently engaged in various environmental investigation, remediation and/or monitoring activities at several sites located off Company facilities. There can be no assurance Ampex will not ultimately incur liability in excess of amounts currently reserved for pending environmental matters, or that additional liabilities with respect to environmental matters will not be asserted. In addition, changes in environmental regulations could impose the need for additional capital equipment or other requirements. Such liabilities or regulations could have a material adverse effect on Ampex in the future. Readiness for Year 2000 Many currently installed computer systems, software applications and other control devices (collectively, "Systems") are coded to accept only two digit entries in the date code field. As the year 2000 approaches, these code fields will need to accept four digit entries to distinguish years beginning with "19" from those beginning with "20". As a result, in just under three months the Systems used by many companies may need to be modified to comply with year 2000 requirements. Ampex relies on its internal Systems in operating and monitoring all major aspects of its business, including its manufacturing processes, engineering management controls, financial systems (such as general ledger, accounts payable and payroll modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and products. Ampex also relies on the external Systems of its suppliers and other organizations with which it does business. Based on a review of its Systems and the nature of the corrections needed to make the Systems compliant, the Company believes there is minimal risk that the Systems will be non-compliant on January 1, 2000. However, despite the efforts thus far to address the year 2000 impact, the Company cannot guarantee that all internal and external systems will be compliant, or that its business will not be materially adversely affected by any such non-compliance. 29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change to the disclosure made in the 1998 Form 10-K. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to routine litigation incidental to its business. In the opinion of management, no such current or pending lawsuits, either individually or in the aggregate, are likely to have a material adverse effect on the company's financial condition, results of operations or cash flows. In response to a lawsuit filed by the Company against Mitsubishi Electric Corporation and Mitsubishi Electric America Inc. ("Mitsubishi") and 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. Mitsubishi requested reconsideration, which has been denied by the Court. The Company's facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and hazardous substances. Ampex is also subject to the federal Occupational Safety and Health Act and other laws and regulations affecting the safety and health of employees in its facilities. Management believes that Ampex is generally in compliance in all material respects with all applicable environmental and occupational safety laws and regulations or has plans to bring operations into compliance. Management does not anticipate that capital expenditures for pollution control equipment for fiscal 1999 or 2000 will be material. Owners and occupiers of sites containing hazardous substances, as well as generators and transporters of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including liability for investigative and cleanup costs and damages arising out of past disposal activities. The Company has been named as a potentially responsible party by the United States Environmental Protection Agency with respect to four contaminated sites that have been designated as "Superfund" sites on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. The Company is engaged in six environmental investigation, remediation and/or monitoring activities at sites located off Company facilities, including the removal of solvent contamination from subsurface aquifers at a site in Sunnyvale, California. Some of these activities involve the participation of state and local government agencies. The other five sites (including the four Superfund sites) are associated with the operations of the Media subsidiaries formerly owned by the Company. Although the Company sold Media in November 1995, the Company may have continuing liability with respect to environmental contamination at these sites if Media fails to discharge its responsibilities with respect to such sites. Because of the inherent uncertainty as to various aspects of environmental matters, including the extent of environmental damage, the most desirable remediation techniques and the time period during which cleanup costs may be incurred, it is not possible for the Company to estimate with any degree of certainty the ultimate costs that it may incur with respect to the currently pending environmental matters referred to above. Nevertheless, at September 30, 1999, the Company had an accrued liability of $1.8 million for pending environmental liabilities associated with the Sunnyvale site and certain other sites currently owned or leased by the Company. The Company has not accrued any liability for contingent liabilities it may incur with respect to former Media sites discussed above. Based on facts currently known to management, management believes it is only remotely likely that the liability of the Company in connection with such pending matters, either individually or in the aggregate, will be material to the Company's financial condition or results of operations or material to investors. 30 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 nine months ended September 30, 1999, the holders of 8,115 shares of the Company's outstanding 8% Noncumulative Convertible Preferred Stock (the "Convertible Preferred Stock") converted such shares into a total of 4,057,500 shares of the Company's Class A Common Stock pursuant to the conversion right contained in the Convertible Preferred Stock. For the nine months ended September 30, 1999, holders of 1,788 shares of Redeemable Preferred Stock exchanged their holdings into 755,228 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 September 30, 1999. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMPEX CORPORATION Date: November 15, 1999 /s/ EDWARD J. BRAMSON --------------------------------------- Edward J. Bramson Chairman and Chief Executive Officer Date: November 15, 1999 /s/ CRAIG L. McKIBBEN --------------------------------------- Craig L. McKibben Vice President, Chief Financial Officer and Treasurer 32 AMPEX CORPORATION FORM 10-Q FOR THE QUARTER ENDED September 30, 1999 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27.1* Financial Data Schedule. * Filed Herewith. 33 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 15,253 33,440 10,787 (1,172) 19,385 83,012 44,308 32,276 110,152 31,889 43,492 43,912 0 553 (59,677) 110,152 17,298 17,298 11,592 26,504 (2,934) 0 1,421 (7,146) 304 (7,450) 0 0 0 (7,450) (0.14) (0.14) INCLUDES S&A, INTERNET VIDEO PROGRAMMING & SITE DEVELOPMENT, AMORTIZATION OF GOODWILL AND RD&E OF 8,567, 3,117, 870 AND 2,358, RESPECTIVELY. INCLUDES ROYALTY INCOME AND OTHER EXPENSE OF 2,982 AND 48, RESPECTIVELY.
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