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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of January 30, 1998 was $115,486,648, based
on a price of $3.0625 per share, which was the closing price of the Registrant's
Class A Common Stock on the American Stock Exchange on that date. The Class A
Common Stock is the only class of voting stock outstanding.
As of January 30, 1998 there were 45,973,517 outstanding shares of Class A
Common Stock and no outstanding shares of Class C Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders is
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this Form
10-K.
679833.6
AMPEX CORPORATION
FORM 10-K
Year Ended December 31, 1997
INDEX
Page
PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 17
PART II 18
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III 25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 25
ITEM 11. EXECUTIVE COMPENSATION 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV 26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 26
SIGNATURES AND POWER OF ATTORNEY 33
679833.6
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PART I
ITEM 1. BUSINESS
Introduction
Ampex Corporation ("Ampex" or the "Company") is a leading innovator in
the design and manufacture of high performance scanning recording devices and
digital image processors. Its specialized recording products are used for the
acquisition of data at high speeds under difficult conditions, such as those in
aircraft, and for the storage of mass computer data, especially images. The
Company has significant experience in digital image processing and has
approximately 1,000 patents and patent applications in this field and in
recording technology, from which it has derived significant licensing income.
The Company's principal licensees are the manufacturers of consumer video
products worldwide.
The Company's principal product groups are its mass data storage and
instrumentation products and its professional video and other products. The mass
data storage and instrumentation products group includes (i) 19- millimeter
scanning recorders and library systems (DST(R) and DIS(TM) products) and related
tape and after-market equipment; and (ii) data acquisition and instrumentation
products (primarily DCRsi(TM) instrumentation recorders) and related tape and
after-market equipment. The Company's professional video and other products
group includes primarily its DCT(R) video recorders and image processing systems
and related tape products and television aftermarket equipment. The Company's
DST tape drives and robotic library systems for computer mass data storage offer
superior data access times, rapid data transfer rates and low cost per megabyte
of storage. Ampex DIS instrumentation recorders allow users to record
instrumentation data on DST tape cartridges, so that the data can be used in a
computer environment as well as in an instrumentation environment. Ampex DCRsi
instrumentation recorders are designed for demanding aeronautical applications
such as commercial and military flight testing, as well as other applications
involving comparable data-gathering challenges in extreme environments. The
Company's DCT video recording products have been developed for high-end digital
component recording applications in entertainment and imaging markets. These
products are more fully described below under "Products."
During its 54-year history, Ampex has developed extensive technical
expertise in electronic storage, processing and retrieval of digital images. The
Company participates at the high end of the video market with its DCT broadcast
video products which were, in 1992, re-engineered to incorporate digital image
compression. The major industry market for video technology is in consumer
products. Ampex has licensed its patents for consumer markets since 1968, and
signed two new licenses in 1997. In the years 1993 through 1997, the Company's
licensing income averaged $16.3 million per year, and in fiscal 1997 totaled
$12.6 million. Royalty income has fluctuated materially from year to year and
there is no assurance that Ampex will continue to generate comparable levels of
licensing income in future years.
The Company was incorporated in Delaware in January 1992 as the
successor to a business originally organized in 1944. References to "Ampex" or
the "Company" include subsidiaries and predecessors of Ampex Corporation, unless
the context indicates otherwise. The principal executive offices of the Company
are located at 500 Broadway, Redwood City, California 94063, and its telephone
number is (650) 367-2011. The Company's Class A Common Stock is traded on the
American Stock Exchange under the symbol "AXC."
Recent Developments
In January 1998 the Company issued and sold to a group of institutional
investors its 12% Senior Notes due March 15, 2003 (the "Senior Notes") in the
aggregate principal amount of $30,000,000, together with warrants to purchase up
to 1,020,000 shares of the Class A Common Stock of the Company (the "Warrants").
As a result of the issuance of the Senior Notes, the Company's total
indebtedness and debt service obligations have increased substantially from
prior levels. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." The Company
expects to use the net proceeds of the Senior Notes
679833.6
(approximately $28.5 million after deduction of estimated fees and expenses)
primarily for working capital purposes, expansion of its existing business
lines, and possible investments in, or acquisitions of, new businesses. The
Company has not entered into any negotiations, arrangements or understandings
with any acquisition candidates at the date of this Report, except that the
Company has been in discussions regarding the acquisition of the seismic data
storage and related software and marketing business and assets of one of its
resellers in the oil and gas exploration industry. The acquisition of such
business and assets, if completed, would not be material to the Company. There
can be no assurance that the Company will successfully complete this acquisition
or any other acquisitions of businesses or that the Company will realize any
financial benefit therefrom. See "Markets -- Mass Data Storage and
Instrumentation Products -- 19-millimeter Products," "-- Research, Development
and Engineering" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Three Years
Ended December 31, 1997."
Forward-Looking Statements
This Form 10-K 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: potential inaccuracy of future sales and expense
forecasts; effects of increased inventories; potential inability of the Company
to execute its marketing, acquisition, investment, licensing and other
strategies; potential inability of the Company to integrate acquired businesses;
effects of existing and emerging competition and industry conditions; decline in
sales to the government; declining sales of professional video products; rapid
technological changes and risks of new product and business development efforts;
the development of application software for its 19-millimeter products;
international operating difficulties; redemption of the Company's outstanding
Noncumulative Preferred Stock; possible future issuances of debt or equity
securities; and the Company's liquidity and anticipated interest expenses. These
forward-looking statements speak only as of the date of this Report. Statements
herein with respect to the Company's future strategies, policies or practices
are subject to change at any time without prior notice to security holders of
the Company, and 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. Each forward-looking statement that the Company
believes is material is accompanied by one or more cautionary statements
identifying important factors that could cause actual results to differ
materially from those described in the forward-looking statement. The cautionary
statements are set forth following the forward-looking statement, and/or in
other sections of this Form 10-K. IN ASSESSING FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS FORM 10-K, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY
STATEMENTS -- INCLUDING THOSE CONTAINED IN OTHER SECTIONS OF THIS FORM 10-K.
Products
As stated above in "Introduction," the Company's principal product
groups are its mass data storage and instrumentation products (including DST,
DIS and DCRsi) and its professional video and other products (including DCT).
For information concerning net sales for each product group, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Mass Data Storage and Instrumentation Products
19-millimeter Products. In 1992, Ampex entered the high-performance
mass data storage market with its DST series of 19-millimeter data storage
products, including tape drives and robotic library systems. Based on its
679833.6
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own evaluation and that of outside sources, the Company believes its DST and DIS
mass data storage products offer a price-performance advantage over alternative
magnetic, optical, solid state or disk-based storage systems now available,
providing fast data access times, rapid data transfer rates and extremely low
cost per megabyte of storage.
Access time is one of the most important sustainable advantages of DST
products compared to alternative tape-based storage systems. Older tape-based
storage products achieve low-cost storage but trade off accessibility; since the
data stored is not available for most online or near-online applications, such
systems are generally limited to back-up and archival storage applications. DST
products, in contrast, combine low storage cost per megabyte with fast access to
rapidly transferable information. DST products use software logic that enables a
library or even a single tape drive to organize information using partitions,
much as disk drives do. Individual segments can then be accessed quickly and
updated independently. This proprietary Ampex technology, introduced in 1994,
gives DST products the performance of a digital tape drive and the efficiency
and access speed of partitioned memory. DST systems also provide rapid data
transfer rates that exceed the speed of other mass storage products such as
optical disks, allowing a user to download stored information to a computer at a
sustained rate of 15 megabytes per second ("MB/sec"), with an option available
to increase to a rate of 20 MB/sec.
DST and DIS tape drives use core technology developed by Ampex for its
digital video recorders. The drives use high-density metal particle tape
cartridges, which are available in a range of sizes providing storage capacities
from 25 to 165 gigabytes ("GB") per cartridge in single density format and from
50 to 330 GB per cartridge in double density format. DST automated library
systems incorporate multiple tape cartridges and tape drives and provide from
1.2 to 12.8 terabytes ("TB") of storage capacity while occupying only a fraction
of the floor space required by competing storage systems. The Company recently
announced the availability of expansion modules which can expand DST library
storage capacity in virtually unlimited increments.
Ampex's single-density DST product line currently includes the DST 310
tape drive, the DST 410 automated cartridge library and the DST 810 automated
library system. The DST 310 is a single cartridge tape drive that provides
convenient and fast backup for applications such as large databases or disk
arrays. The DST 310 is capable of accepting 25 GB, 75 GB and 165 GB cartridges.
The DST 410 automated cartridge library is an entry- level library with a
storage capacity of up to 1.2 TB in less than eight square feet of space. The
DST 810 automated library is designed to combine from one to four tape drives,
and features a storage capacity of 6.4 TB. The DST 810 library system is
optimized for large file size applications and, accordingly, is suited for
image-based document storage, medical records, news archives, oil and gas
seismic data and CAD/CAM image data, as well as potential video-on-demand
applications. These products can deliver a sustained rate of 15 MB/sec across a
SCSI-2 interface, search speeds of up to 1600 MB/sec, an average access time of
less than 16 seconds and capacity of up to 165 GB on a single cartridge.
In the first quarter of 1997, the Company began shipping its new
"double-density" versions of its 19- millimeter data storage product line. The
DST 310, DST 410 and DST 810 products are all available with double density
cartridges, as the DST 312, DST 412 and DST 812 products, respectively. The new
versions double the amount of data that can be stored on a single cartridge with
a corresponding reduction in the cost per megabyte of the Company's mass data
storage products. The DST 312 tape drive can hold 50 GB, 150 GB and 330 GB
cartridges, and the DST 412 library can store up to 2.4 TB of data. The DST 812
library system can store 12.8 TB of data at a cost of approximately $.02 per
megabyte. Although the new versions are intended to enhance the performance of
the Company's data storage products, the Company believes that the availability
of these new versions has contributed to the decline in sales of the Company's
existing 19-millimeter data storage products. Ampex is currently working to
double the per-cartridge capacity of its mass data storage products again which,
if successful, could permit the storage of as much as 660 GB of data on a single
cartridge. The Company believes that this will enable it to maintain its
relative cost advantage as per-megabyte costs of competing storage technologies,
such as disk drives, continue to decline. There can be no assurance that these
efforts will be successful or, if they are, that future sales will not be
adversely affected if the Company experiences any product development delays or
transition difficulties. (Subsequent references to storage capacity of the
Company's mass storage products in this Form 10-K refer to the Company's new
double-density versions unless the context otherwise specifies.)
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In October 1997, the Company announced the availability for shipment in
early 1998 of a new medium-sized library product, the DST 712, which has a
maximum storage capacity of 5.8 TB in 7.5 square feet of space and can
accommodate one or two tape drives. This automated tape library product was
designed to fill the gap between the Company's DST 412 and DST 812 products. The
Company also announced its intention to offer an expansion module for the DST
712 and DST 812 products, which will permit additional storage capacity for
those products on a cost-efficient, incremental basis.
Although the Company believes that its DST drives and library systems
offer significant advantages over competitive systems, there are a variety of
risks involved in this product line. The Company's DST products incorporate a
proprietary magnetic tape format that is not compatible with current industry
standard formats. The Company has not licensed its tape format to other
manufacturers and as such is the sole source of these products. In addition,
other factors relating to the markets for these products and to competition in
these markets may affect future sales of DST products. See "Markets--Mass Data
Storage and Instrumentation Products," "--Distribution and Customers,"
"--Competition," and "--New Product Development and Industry Conditions."
In 1995, the Company expanded its 19-millimeter product line with the
introduction of its DIS instrumentation recorders and library systems. The
Company's principal instrumentation products currently are the DIS 120i and DIS
160i instrumentation/data recorders and the DIS 220i automated
instrumentation/data library. The Company's DIS products are designed for mass
storage of instrumentation data. These recorders use the same 19mm helical scan
recording technology used in the Company's DST products. Data from DIS recorders
can also be stored on DST cartridges, placed in DST libraries and accessed using
DST tape drives, so that all the benefits of DST mass storage products are
available, including rapid, random access to the data for subsequent processing.
The DIS 120i and 160i drives have capacities of 25, 75 or 165 GB (depending on
the DST cartridge used) and record/reproduce rates of 120 Mb and 160 Mb per
second, respectively. The DIS 220i automated library, which is the
instrumentation version of the DST 410 library, can hold up to 1.2 terabytes of
data. The Company introduced double density versions of each of its DIS
recorders at the time it similarly upgraded its DST product line.
Data Acquisition/Instrumentation Products. Ampex has been
well-established for a number of years as a supplier of instrumentation
recorders. Ampex has supplied these recorders primarily to government agencies
for use in data collection, satellite surveillance and defense-related
applications, as well as to defense contractors and aerospace and other
industrial users primarily for test and measurement purposes. Ampex
instrumentation recorders have been used on almost every advanced commercial and
U.S. military aircraft, as well as on many foreign aircraft. The Company
believes they are well-suited to these demanding aeronautical applications, and
other applications involving comparable data-gathering challenges in extreme
environments, because of their unmatched performance and reliability.
The Company's principal data acquisition/instrumentation products
currently are the DCRsi 240, DCRsi 107 and DCRsi 75 digital instrumentation
recorders. The DCRsi recorders are rugged, highly reliable and compact recorders
that permit uninterrupted data capture over very long periods of time, such as
during test flights of new aircraft. The DCRsi 240 instrumentation recorder has
the capability of storing 48 GB of data at a record/reproduce rate of up to 240
megabits ("Mb") per second. The DCRsi 107 instrumentation recorder has a similar
storage capacity and a record/reproduce rate of 107 Mb per second. During 1995,
the Company introduced the DCRsi 75 recorder, a lower cost DCRsi model with a
record-reproduce rate of 75 Mb per second. Shipments of DCRsi 75 recorders
commenced in 1996.
A significant portion of data acquisition and instrumentation recorder
sales reflect purchases by the federal government, which can be subject to
significant fluctuations. See "Markets--Data Acquisition/Instrumentation
Recorders." In addition, other factors relating to the markets for the Company's
instrumentation products and to competition in these markets may affect future
sales of these products. See "Distribution and Customers," "Competition," and
"New Product Development and Industry Conditions."
Professional Video Recording and Other Products
679833.6
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The Company's DCT products, which employ a 19-millimeter digital
component video recorder format, are designed primarily for use in high-quality
post-production applications. DCT products record in a digital component format
compatible with "CCIR-601," a worldwide signal standard for digital component
television equipment. The Company's DCT 1700d digital tape drive is designed for
high-end performance, as its output is not subject to signal degradation even
during complex layering and special effects sequences. In order to process the
higher data volume involved in digital component recording, DCT recorders employ
data compression techniques.
Ampex also offers a variety of switchers and systems products as part
of the DCT product line, including digital special effects systems and
production switchers, that are used in connection with the production of
television programming. These products focus on the on-line segment of the
professional television industry. On-line operations typically require equipment
to operate at high speeds and require the highest picture quality. In order to
process video signals at the required speeds, Ampex's products employ advanced
proprietary signal processing and other electronic technologies, many of which
are also used in the Company's data storage digital recorder systems. Ampex's
switchers and systems products also incorporate advanced filtering techniques
and incorporate significant special purpose software to manipulate, generate or
combine video signals.
In the period 1992 to 1994, the Company discontinued sales of many
older (primarily analog) recorders, switchers and systems products, which
contributed to the decline in sales for this product group in recent years.
Sales levels have also been adversely affected by changes in the traditional
markets for the Company's professional video products and by the reduction in
the Company's distribution network for these products. See "Markets--
Professional Video Recording Products" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations for
the Three Years Ended December 31, 1997 -- Professional Video Recording and
Other Products." In 1995, 1996 and 1997, sales of these products consisted
almost exclusively of DCT video recorders and image processing systems. In view
of the recent announcement of standards for the digital transmission of
television signals, Ampex believes it is unlikely that such special purpose
video products will continue to be sold in material quantities. Accordingly, the
Company expects that its sales of products in this market will be limited to
after-market products and services, and that such sales will continue to decline
in future years. Certain of the Company's DST and DIS products have been used in
professional video recording markets, and the Company believes that the
potential for increased sales of its 19-millimeter products in these markets
could help to offset the decline in sales of its DCT products, but there can be
no assurance that this will occur.
The Company's other products are currently almost entirely television
after-market products (including spare parts) relating to television products
that the Company now manufactures, or that it manufactured in prior periods and
continues to support. Ampex's after-market activities have declined as a
percentage of net sales in recent years as the Company has narrowed its
professional television product line, and many of the products that have
historically generated a significant portion of these net sales (including
Betacam small-format recorder after-market products, turnkey studio facilities,
mobile vans, computer core memory products and refurbished equipment accepted as
trade-ins on new equipment sales) have been discontinued. Other products also
include the sale of a limited number of integrated circuits. See
"Markets--Components" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for the Three Years
Ended December 31, 1997 -- Professional Video Recording and Other Products."
Markets
Mass Data Storage and Instrumentation Products
19-mllimeter Products. The Company's DST mass data storage systems are
designed to meet the rapidly changing requirements of the mass data storage
market. The market for mass storage devices has undergone an evolution in recent
years. Historically, mass storage devices were used to store data off-line as
protection against catastrophes affecting on-line storage, to archive data for
record retention purposes or as a low-cost means of storing infrequently used
data. More recently there is a growing demand for mass storage devices that
provide cost-effective storage combined with rapid access to data. The demand
for storage devices that can store large amounts of data
679833.6
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in a readily accessible manner has grown due to two factors. First, faster and
lower-cost computer processors are generating more data. Second, a steadily
growing percentage of information is created, stored, accessed and transmitted
in visual form (such as drawings, pictures, scanned documents and other images),
and the storage of visual information requires much greater capacity than the
storage of text. For example, while one page of text requires 2,000 bytes of
storage, one second of full-color video requires 30,000,000 bytes.
Despite the rapid increase in the need for data storage on the part of
most computers users, the Company believes that its mass storage products offer
such large capacities and high speeds that they currently exceed the capacity
needs and retrieval rates required by the majority of computer users.
Accordingly, the Company expects that its sales of these products will continue
to be limited to large and technically sophisticated corporations and national
and local government agencies for the foreseeable future. Ampex's customers in
these industries include Mobil, Amoco, the FBI, NASA, Time Warner, Fox
Television and Industrial Light and Magic. The Company also believes that if the
new digital television standards are widely adopted, Ampex may be able to sell
its DST and DIS products to customers who historically purchased its specialized
video products. Ampex's current sales of mass data storage and instrumentation
products are concentrated at present in three major vertical industry markets --
the oil and gas exploration industry; government; and the digital video industry
organizations. The Company believes that, whereas in prior years organizations
involved in the markets described above maintained large technical staffs which
were capable of integrating equipment such as the Company's into their existing
computer facilities, even the largest of these potential customers are now
increasingly likely to purchase complete solutions or even to outsource certain
activities and to reduce their in-house technical staffs. This trend is
unfavorable to companies like Ampex, which primarily provide system components
like mass data storage tape drives. The Company has been working to address this
by ensuring that certain widely used software can interface with its products.
For example, the Company is seeking to address hierarchical storage management
and database backup applications in certain markets, and its DST 310 tape drive
and DST 410 and 810 libraries are now supported by certain third party
hierarchical storage management and UNIX file system back up software packages.
However, the Company cannot predict the extent to which such software will
result in increased sales of DST products.
In order to capitalize further on the relatively low cost per megabyte
and rapid retrieval rates of its products, the Company believes that it may be
necessary to offer more specialized and industry-specific services than it
currently provides. Accordingly, the Company intends to expand the integration,
software and other services that it offers, either by developing these services
internally or by investing or acquiring other entities capable of providing such
services, together with Ampex equipment, initially in Ampex's existing markets.
Ampex has not reached any understanding with respect to any such acquisitions or
investments, except that it has been in discussions regarding the acquisition of
the seismic data storage and related software and marketing assets of one of its
larger resellers in the oil and gas exploration industry. There can be no
assurance that the Company will successfully complete any such acquisitions or
investments or that the Company will recognize any financial benefit from them.
Although the emergence of applications that envision the transmission of video,
graphics and other images over the Internet or private networks may create new
markets for the Company's data storage products, the Company's management
believes that these applications will require bandwidth improvements to current
information delivery systems before the information storage systems offered by
the Company and others will be required. Should this technical obstacle be
overcome and commercial markets ultimately develop, the Company believes that it
will experience aggressive competition from other companies, and there can be no
assurance that the Company will be able to remain competitive against products
ultimately offered by such companies.
Data Acquisition/Instrumentation Recorders. Ampex's DCRsi recording
drives and magnetic media are designed to acquire large volumes of data in
stressful physical environments, and are used extensively in airborne and naval
intelligence acquisition and for the collection of test data during the design
and qualification of airplanes. DCRsi products are used by U.S. and foreign
military and intelligence agencies (including those of Germany, Japan, the
United Kingdom and Russia), as well as by manufacturers of commercial airplanes,
such as Boeing Corporation, and by Airbus, the consortium of European airframe
manufacturers. A significant portion of DCRsi products are also sold in versions
that are intended for use in ground facilities for the long-term storage or
analysis of data previously collected in mobile environments.
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The storage capacity and data transfer rates of the Company's DCRsi
products can be varied continuously from fractions of a megabit per second up to
240 megabits per second on its highest performance versions. These products
perform reliably in conditions of extreme shock and vibration, variations in
gravitational force and extremes of temperature, humidity and electronic
interference, such as those found in aircraft, helicopters and space vehicles.
Because these products are widely used in their target markets, recordings made
on one machine can subsequently be reproduced on other machines at various
customer locations. In ground-based applications, which generally are less harsh
environments that do not require the ruggedness of a DCRsi recorder, the storage
and analysis functions of DCRsi products can also be performed by the Company's
19-millimeter DST and DIS mass data storage products.
The Company has supplied its data acquisition and instrumentation
products to U.S. and foreign government agencies for many years, and this
continues to be the primary market for the Company's DCRsi products. Sales to
government agencies are subject to fluctuation as a result of changes in
government spending programs (including defense programs). Sales to these
markets could be adversely affected by pressure on government agencies to reduce
spending, and any material decline in the current level of government purchases
of the Company's products could have a material adverse effect on the Company.
Professional Video Recording and Other Products. The Company's DCT
professional recording products are designed to provide high-performance
capabilities for customers in entertainment and imaging markets. Historically,
Ampex sold its professional video products to television companies and
broadcasters that used them to produce or edit television commercials or
programs for broadcast. More recently, however, the production and editing of
television commercials and programs is increasingly being performed by
independent organizations rather than by broadcasters or cable television
companies themselves. These services are commonly known as "post-production"
services. Most of Ampex's video recording product sales are to such
post-production facilities or to motion picture studios that use Ampex products
for their in-house post-production needs. Post-production customers whose
business reputations are based on high picture quality and whose needs include
rapid editing capabilities currently represent the major market for the
Company's DCT digital component video recording products. The Company does not
serve the lower end of the post-production market.
Sales of the Company's video recording products have declined in recent
years as a result of changing conditions in the traditional markets for the
Company's products. In response to these changes, the Company has reduced its
product line, marketing expenditures and distribution network for its video
products. In addition, the Company believes that the recent announcement of
standards for the digital transmission of television signals will cause sales of
its special purpose video products to continue to decline in future years. These
factors have had and will continue to have a negative impact on sales of the
Company's professional video recording and related aftermarket products.
Distribution and Customers
The Company currently distributes all its 19-millimeter products
(including DST and DIS recorders) directly through its internal sales force, as
well as through independent value-added resellers. The Company's DST products
are sold to customers such as oil and gas companies, imaging companies,
information and entertainment delivery companies and broad-band
telecommunications companies. The Company is also pursuing opportunities in the
market for storage of very large databases maintained by many commercial and
government entities.
The Company's instrumentation recorders (including its DIS recorders)
are sold primarily to government agencies involved in data collection, satellite
surveillance and defense-related activities, as well as to defense contractors
and other industrial users for testing and measurement purposes. Sales of
instrumentation recorders are made through the Company's internal domestic and
international sales forces, as well as through independent sales organizations
in foreign markets.
Ampex's professional video recording products are sold principally to
customers in entertainment markets, including independent post-production
houses, broadcast and cable networks, motion picture studios and independent
679833.6
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television stations. The Company distributes its video products through its
internal sales force and through various independent distributors.
The Company currently operates a total of nine sales offices, including
six in the U.S., one in Germany, one in Japan and one in the United Kingdom.
Ampex's sales to U.S. government agencies (either directly or
indirectly through government contractors) represented 27.7% of net sales in
fiscal 1997 compared to 18.0% in fiscal 1996 and 14.7% in fiscal 1995. Products
sold for U.S. government use include primarily instrumentation recording
systems. Sales to government customers are subject to fluctuations as a result
of changes in government spending programs and are subject to customary
contractual provisions permitting termination at the government's election. See
"Markets--Mass Data Storage and Instrumentation Products."
No single non-governmental customer accounted for more than 10% of
Ampex's total net sales in 1996 or 1997.
Research, Development and Engineering
Scanning recording systems such as those developed by Ampex involve
extremely complex technology. As a result, Ampex has developed extensive
expertise in a wide area of technical disciplines and has developed fundamental
innovations in digital image processing, magnetic recording technology and
channel electronics. In 1997, the Company spent approximately 19% of net sales
for research and development programs and engineering costs, compared to 17% in
1996 and 16% in 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3 of Notes to Consolidated
Financial Statements. These continuous research and development efforts have
resulted in a substantial patent portfolio covering not only existing products,
but also covering technological innovations that may result or be useful in
future commercial products. With respect to current products, the Company has
allocated a major portion of its research and development budget in recent years
to the 19-millimeter digital recording technology included in its DST, DIS and
DCT products. The Company will continue to fund future generations of its mass
data storage and instrumentation products, and presently is working to double
the current per-cartridge capacity of these products to 660 GB of data and to
increase their data transfer rates above the current 15-20 MB/sec levels. If
successful, these efforts will further enhance the cost- efficiency of these
products. Ampex also plans to introduce lower cost versions of its data
acquisition and instrumentation products, and to improve the ability of these
products to interface with other companies' products. The Company hopes to
develop an expansion module that will increase the solid state memory capacity
of its DCRsi products, thereby increasing the speed of their data acquisition
functions. See "Products--Mass Data Storage and Instruments" above. Ampex will
also continue researching other new product opportunities that capitalize on its
expertise and patented technology in digital image processing, magnetic
recording and channel electronics. All of the Company's research, development
and engineering efforts are subject to certain risks and uncertainties described
below under "New Product Development and Industry Conditions," and there can be
no assurance that any of these efforts will be technologically or commercially
successful.
Keepered Media Development Program
Ampex has previously disclosed that it has been engaged since late in
1994 in a research and development program to attempt to commercialize its
"keepered media" technology for use in the hard disk drives that are attached to
most computers. A description of this technology and certain developments and
uncertainties related to the development program are set forth in the Company's
1996 Annual Report on Form 10-K (the "1996 Form 10-K") and its 1996 and 1997
Quarterly Reports on Form 10-Q. In order to understand properly the following
information, it is necessary to refer to these earlier reports.
As previously disclosed, keepered media technology was originally
intended for use in inductive head-based disk drives, which are rapidly being
replaced by magneto-resistive ("MR") head-based technology. In 1996 and
679833.6
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1997, the Company spent a significant portion of its research, development, and
engineering budget on the development of keepered media. The Company continues
to believe that keepered media could have commercial potential. However,
management has concluded that this technology will not generate revenue in the
near future and, accordingly, the Company has reduced the level of its
development expenditure for keepered media, but is continuing its research for
advanced uses of the technology. In the fourth quarter of 1997, the Company
incurred charges of $0.9 million in connection with the transfer of the keepered
media program to a long-term development project. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations for the Three Years Ended December 31, 1997 -- Research, Development
and Engineering" and "-- Restructuring Changes (Credits)."
The Company has discontinued its previously disclosed programs relating
to the development of disk drives based on inductive heads, and has terminated
one of its previously announced contractual arrangements for the development of
keepered media. The Company's research indicates that it is unlikely that
keepered media will offer significant capacity gains with current generation MR
heads unless such heads are substantially modified from current designs, and
management believes it is unlikely that disk drive manufacturers will modify
existing head designs. However, as new generations of heads are developed with
higher capacity, the benefits of keepered media, such as improved thermal
stability, could become significant. The Company is targeting its continuing
research on keepered media for such higher density uses, but it is impossible to
forecast when, or if, keepered media will be adopted for commercial disk drives.
In addition to continuing research, the Company is giving consideration to the
development of products that would incorporate keepered media in its own high
performance digital tape drives. The Company is unable to forecast when or if it
will receive any revenues from keepered media, and the Company's business plans
do not assume that any such revenue will be received.
Patents, Licenses and Trademarks
As a result of its on-going research and development expenditures, the
Company has developed substantial proprietary technology, certain of which it
has elected to patent or to seek to patent. As of December 31, 1997, Ampex held
over 1,000 patents and patent applications, including approximately 350 patents
in the U.S., approximately 550 corresponding patents in other countries, and
approximately 150 U.S. and foreign patent applications pending. The majority of
these patents and pending patents relate to the Company's recording technology.
The Company continually reviews its patent portfolio and allows non-strategic
patents to lapse, thereby minimizing substantial renewal fees.
Ampex has granted numerous royalty-bearing patent licenses to, and
holds patent licenses from, third parties. Certain of the Company's patented
innovations have been adopted for use in mass market consumer products, and as a
result, the Company receives the majority of its licensing royalties from
foreign manufacturers of VCRs and 8-mm camcorders. The Company intends to
negotiate license agreements with remaining unlicensed manufacturers of 8-mm
camcorders, but there can be no assurance that any such licensing efforts
(including any necessary litigation) will be successful. In the last two years
the Company has been pursuing licensing opportunities in the market for
television receivers, from which it has not previously derived any material
licensing income. The Company believes it may have several patents that could be
useful in television receivers and is taking various steps to enforce them,
including in one instance litigation.
Since the fourth quarter of 1995, the Company has been involved in
patent infringement litigation with a major foreign manufacturer of VHS video
recorders and television receivers. In response to the Company's lawsuit, this
manufacturer filed a lawsuit against Ampex alleging patent infringement. This
litigation relates not only to videotape recorders, a traditional source of the
Company's royalty income, but also to television receivers from which the
Company has not previously generated any income. There can be no assurance that
the Company will be successful in this litigation, but to the extent that it
prevails in this litigation, it may be able to obtain additional royalty income
from the licensing of its patents that are used in the manufacture of television
receivers. See "Legal Proceedings."
679833.6
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The Company believes that it has other patents, not the subject of this
litigation, that may also be used in the manufacture of television receivers. In
addition, Ampex is evaluating the extent to which its technology may be employed
or useful in video games, and will continue to evaluate additional products as
potential licensing opportunities to the extent that its technical and financial
resources permit. Ampex has not granted any licenses under its scanning recorder
patents specifically for data storage applications, but it may do so in the
future if it determines that this would support the Company's marketing
strategy.
It is not possible to predict the amount of royalty income that will be
received in the future. Royalty income has historically fluctuated widely due to
a number of factors that the Company cannot predict, such as the extent of use
of the Company's patented technology by third parties, 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. Moreover, there can be no
assurance that the Company will continue to develop patentable technology that
will generate significant patent royalties in future years.
U.S. patents are, at present, in force for a period of 20 years from
the date of application and patents granted by foreign jurisdictions are
generally in force for between 14 years to 20 years from the date of
application. Ampex has obtained its present patents over the course of the past
20 years and, accordingly, has patents in force that will expire from time to
time over the next 20 years. Patents are important to the current overall
business of the Company, both as a source of protection of the proprietary
technology used in the Company's current products, and as a source of royalty
income. While results of operations would be adversely affected by the loss of
patents that generate significant royalty income, management believes that none
of Ampex's current product lines is materially dependent upon a single patent or
license or group of related patents or licenses, and that timely introduction of
products incorporating new technologies or particularly suited to meet the needs
of a specific market or customer group is a more important determinant of the
success of Ampex's current business. Nevertheless, there can be no assurance
that the Company will continue to develop patentable technology that will be
able to generate significant patent royalties in future years to replace patents
as they expire. See "Research, Development and Engineering."
Ampex regards its trademark Ampex(R) and the Ampex logo as valuable to
its businesses. Ampex has registered its trademark and logo in the U.S. and a
number of foreign countries. U.S. trademark registrations are generally valid
for an initial term of 10 years and renewable for subsequent 10-year periods.
The Company's former magnetic tape subsidiaries (the "Media" subsidiaries),
which were sold by the Company in November 1995, have a non-exclusive license to
use the Ampex trademark on their audio, video and instrumentation media products
through July 2000. Ampex has not granted any other material rights to use its
name or logo to any other third party. Other trademarks of Ampex include DCT,
DST, DCRsi and DIS.
Manufacturing
The Company's products are manufactured at Ampex's facilities in
Redwood City, California and Colorado Springs, Colorado. Products are designed
and engineered primarily in Redwood City, California. Because the Company's mass
data storage products incorporate many of the technologies and components of the
Company's 19mm-based video tape recorders, the manufacturing process of the mass
data storage products has benefited from the existing video recorder production
facilities and techniques.
In January 1996, the Company sold its Redwood City, California
property, and relocated its manufacturing, administrative and RD&E operations to
smaller facilities located on a portion of the property that it leased back at
the time of sale. In May 1996, the Company sold a portion of its Colorado
Springs, Colorado facility which was not required for current operations. See
"Properties." The Company believes that its consolidated manufacturing
facilities continue to have sufficient capacity to accommodate business growth
for its present products in the foreseeable future, and that the relocations
will not have a long-term adverse effect on the Company's manufacturing capacity
or on its ability to meet the customer demands for its products in a timely
manner.
679833.6
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The Company maintains insurance, including business interruption
insurance, that management considers to be adequate and customary under the
circumstances. However, there is no assurance that the Company will not incur
losses beyond the limits of, or outside the coverage of, its insurance.
Sources of Supply
Ampex uses a broad variety of raw materials and components in its
manufacturing operations. While most materials are readily available from
numerous sources, Ampex purchases certain components, such as customized
integrated circuits and flexible magnetic media, from a single domestic or
foreign manufacturer. Significant delays in deliveries of, or defects in the
supply of, such components could adversely affect Ampex's manufacturing
operations pending qualification of an alternative supplier. In addition, the
Company produces highly engineered products in relatively small quantities. As a
result, its ability to cause suppliers to continue production of certain
products on which the Company may depend may be limited. The Company does not
generally enter into long-term raw material supply contracts. In addition, many
of the components of Ampex's products are designed, developed and manufactured
by Ampex itself, and thus are not readily available from alternative sources.
Fluctuations in Operating Results; Seasonality; Backlog
Ampex's sales and results of operations are generally subject to
quarterly and annual fluctuations. Factors affecting operating results include:
customer ordering patterns; availability and market acceptance of new products;
timing of significant orders and new product announcements; order cancellations;
receipt of royalty income; and numerous other factors. Ampex's revenues are
typically dependent upon receipt of a limited number of customer orders
involving relatively large dollar volumes in any given fiscal period, increasing
the potential volatility of its sales revenues from quarter to quarter. In
addition, sales to government customers (primarily sales of DCRsi
instrumentation products) are subject to fluctuations as a result of changes in
government spending programs, which can materially affect the Company's gross
margin as well as its sales. Sales of most of the Company's products have
historically declined during the first and third quarters of its fiscal year,
due to seasonal procurement practices of its customers.
A substantial portion of the Company'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. Ampex's backlog of firm orders at December 31,
1997 was $6.9 million, compared to $3.4 million at December 31, 1996 and $13.8
million at December 31, 1995. The backlog at December 31, 1997 was approximately
35% of average quarterly net sales, based on 1997 sales levels. Ampex does not
generally include foreign orders in backlog until it has obtained requisite
export licenses and other documentation. Orders may be subject to cancellation
in the event shipments are delayed. For all of the foregoing reasons, results of
a given quarter are not necessarily indicative of results to be expected for a
fiscal year.
Competition
Ampex encounters significant competition in all its product markets.
Although its competitors vary from product to product, many are significantly
larger companies with greater financial resources, broader product lines and
other competitive advantages.
Ampex competes in the mass data storage market with a number of
well-established competitors, such as IBM, Storage Technology Corporation,
Exabyte Corporation, Sony Corporation and Quantum Corporation, 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 the Company.
For example, in 1996, IBM Corporation announced the general availability of a
new high-capacity, high-speed tape storage product designated "Magstar." Also,
Sony Corporation in 1995 introduced its DTF tape drive, which is intended for
the mass data storage industry. In the mass data storage market, the Company
believes that the principal competitive factors are product performance, cost of
equipment and media, product reliability and availability of service and
support. The Company believes its strongest competitive
679833.6
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advantage is in the area of product performance. However, DST products are
relatively expensive in comparison to other competitive products, and are
generally cost-effective only if the customer requires the high level of
performance and storage capacity of DST products. While the Company is working
to reduce the cost of its DST products, the prices of other storage systems,
such as disk drives, are also declining. In addition, although DST products
offer faster data access times than competing tape-based library systems,
magnetic disks deliver faster data access than DST products. There can be no
assurance that the Company can compete successfully on a long-term basis in the
mass data storage market.
In the instrumentation market, the Company 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 Incorporated and
Metrum Incorporated. The number of competitors in this market has decreased in
recent years as the level of government spending in many areas has declined. The
principal competitive factors in this market are cost, product reliability,
product performance and the ability to satisfy applicable government procurement
requirements.
In the professional video recorder market, Sony and Panasonic are the
leading competitors of the Company. Competition in this market is based
principally on design and manufacturing expertise, new product development,
service, reliability and price. In the high end of the market, management
believes that Ampex is competitive in each of these areas, although the
Company's sales of these products have declined due to the recently announced
digital television transmission standards. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations for the Three Years Ended December 31, 1997 -- Mass Data Storage and
Instrumentation Recorders." DCT products are not competitive in the lower end of
the market. Sales of these products have been declining in recent years as the
Company has discontinued many of its professional video products.
New Product Development and Industry Conditions
The data storage, instrumentation and video recording industries are
characterized by continual technological change and the need to introduce new
products and product upgrades. This requires a high level of expenditure for
research and development. Obsolescence of existing product lines, or the
inability to develop and introduce new products, could have a material adverse
effect on sales and results of operations. Although Ampex has completed
development of its 19-millimeter digital video tape recorders and its
second-generation mass data storage drives and robotic library systems, the
Company must continue to invest in research and development programs to improve
these products and develop new products. No assurance can be given that existing
products will not become obsolete, that any new products will win commercial
acceptance or that Ampex's new products or technology will be competitive. See
"Competition." Furthermore, the introduction of new products or technologies can
be hampered by technical problems in design, manufacturing and test procedures
or the occurrence of other unforeseen events.
Ampex has been manufacturing its 19-millimeter digital video recorders
since 1989, and has been selling its DCT recorders since 1992. However, sales of
all of its video recording products have declined substantially in recent years,
partly as a result of changes in the market for the Company's products, as
lower-cost small format recorders have replaced traditional high-end products
for many applications. The Company expects that the traditional markets for its
video products will continue to decline. Accordingly, any significant increases
in sales of DCT products will depend on the success of the Company's efforts at
identifying and developing new markets for the products, and there can be no
assurance that the Company can do so. See "Products-Professional Video Recording
and Other Products" and "Markets--Professional Video Recording and Other
Products."
Sales of the Company's instrumentation products can be significantly
affected by changes in government spending levels. See "Markets--Mass Data
Storage and Instrumentation Products--Data Acquisition Instrumentation
Recorders" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
679833.6
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The Company significantly restructured its product lines during 1993
and 1994, and the Company has no present plans to discontinue any of its current
principal products. However, like all technology companies, the Company must
continually reassess its products based on their ability to respond to the
changing demands of the marketplace. If, as a result of such a reassessment, the
Company decides to discontinue any significant products, such a decision could
have a material adverse effect on sales and operating results.
International Operations
Although the Company's net sales revenues include significant revenue
from sales to foreign customers, these sales (particularly sales of professional
video products) have been declining in recent years. Sales to foreign customers
accounted for approximately 31.2% of net sales in fiscal 1997, compared to 34.1%
in fiscal 1996 and 35.6% in 1995. Foreign marketing operations are conducted
primarily through local distributors and agents, with support from Ampex's
internal marketing and sales organization. See "Distribution and Customers."
Foreign operations are subject to the usual risks attendant upon
investments in foreign countries, including limitations on repatriation of
earnings, restrictive actions by local governments, fluctuations in foreign
currency exchange rates and nationalization. Additionally, export sales are
subject to export regulations and restrictions imposed by the U.S. Department of
State and the U.S. Department of Commerce.
In certain prior periods, declines in the value of the U.S. dollar in
relation to certain foreign currencies have favorably affected Ampex's
international operations, and in other periods the strength of the dollar
relative to such currencies has adversely affected its operations. Fluctuations
in the value of international currencies can be expected to continue to affect
Ampex's operations in the future, although the impact will be less significant
than it was in periods with a higher proportion of sales in foreign currencies.
The Company currently does not hedge its assets that are denominated in foreign
currencies. U.S. export sales are denominated in U.S. dollars.
See Note 20 of Notes to Consolidated Financial Statements for
additional information concerning the Company's foreign operations.
Readiness for Year 2000
Many existing computer systems, applications and other control devices
(collectively, "Systems") use only two digits to identify a year in the date
field, and will therefore be unable to reflect accurately the change from the
year 1999 to the years 2000 and beyond. Unless corrected, these Systems could
fail or create erroneous results, rendering them unable to process data related
to the year 2000. The Company relies on its Systems in operating and monitoring
all major aspects of its business, including financial systems (such as general
ledger, accounts payable and payroll modules), customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company also relies on the external Systems of its
suppliers and other organizations with which it does business.
The Company has established a Year 2000 Compliance Committee that is
investigating the impact of the year 2000 on the Company's business. The
Committee membership includes representatives involved in all major functions of
the Company. Its charter is to identify all Systems that, if not in compliance,
could adversely affect the Company's business. For critical Systems that are
found not to be in compliance, the Committee will develop a plan, including a
budget for associated costs, to ensure compliance before the year 2000. It has
already been determined that many of the Company's Systems, such as its
manufacturing Systems, are in compliance. Other Systems, such as its financial
Systems, currently do not comply but are expected to do so this year pursuant to
vendor maintenance agreements. To date, no material issue has been identified in
any of the other Systems used or relied upon by the Company. However, despite
the Company's efforts thus far to address the Year 2000 impact, the Company
cannot guarantee that all internal or external Systems will be compliant, or
that its business will not be materially adversely affected by any such
non-compliance.
679833.6
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Environmental Regulation and Proceedings
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 1998 or 1999 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
seven 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, and
surface clean-up and the closure of a former site in El Segundo, 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.
During 1997, the Company spent a total of approximately $0.2 million in
connection with environmental investigation, remediation and monitoring
activities and expects to spend a similar amount in fiscal 1998 for such
activities.
Because of the inherent uncertainty as to various aspects of
environmental matters, including the extent of environmental damage, the most
desirable remediation techniques and the time period during which cleanup costs
may be incurred, it is not possible for the Company to estimate with any degree
of certainty the ultimate costs that it may incur with respect to the currently
pending environmental matters referred to above. Nevertheless, at December 31,
1997, the Company had an accrued liability of $2.1 million for pending
environmental liabilities associated with the Sunnyvale site and certain other
sites currently owned or leased by the Company. The Company has not accrued any
liability for contingent liabilities it may incur with respect to former Media
sites discussed above. Based on facts currently known to management, management
believes it 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.
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.
679833.6
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Employees
As of December 31, 1997, Ampex employed 509 people worldwide, compared
to 527 at December 31, 1996 and 531 at December 31, 1995. Approximately 8% of
Ampex's current worldwide workforce is employed in the Company's international
operations, compared to 7% at December 31, 1996 and 6% at December 31, 1995. No
employees are covered by any collective bargaining Agreement. The Company is
dependent on the performance of certain key members of management and key
technical personnel. The Company has not entered into employment agreements with
any such individuals. Edward J. Bramson, who has served as the Company's Chief
Executive Officer since 1991, is also engaged in the management of certain
companies affiliated with Sherborne Holdings Incorporated, a privately owned
Delaware holding company and a Company stockholder. Mr. Bramson currently
devotes most of his time to the management of the Company. The loss of the
services of Mr. Bramson or other key individuals could have a material adverse
effect on the Company.
Pension Plan Matters
In 1994, the Company, the Pension Benefit Guaranty Corporation (the
"PBGC") and certain affiliates (the "Affiliates") who were members of a "group
under common control" for purposes of the Employee Retirement Income Security
Act ("ERISA") entered into certain agreements in connection with the liquidation
of the Company's former parent, NH Holding Incorporated ("NHI"), relating to the
pension plans of the Company and of its former Media subsidiaries, which are
currently underfunded. See Note 16 of Notes to Consolidated Financial
Statements. Pursuant to these agreements, the Affiliates agreed that if during
the terms of the agreements Ampex fails to make a required contribution to the
pension plans, the Affiliates will make or advance funds to permit Ampex to make
such contribution, and Ampex agreed to repay such amounts in accordance with the
terms of the agreements. Ampex has agreed to grant the Affiliates a security
interest in certain assets as collateral for any advances which the Affiliates
may be required to make in the future pursuant to the agreements. The agreements
contain certain restrictive covenants which, among other things, restrict
Ampex's ability to declare dividends, sell all or substantially all its assets
or commence liquidation, or engage in specified transactions with certain
related parties, breach of which could result in acceleration of the Company's
potential termination liabilities. In 1994, the Company discontinued accrual of
benefits under the pension plans, but has continued to fund its plan in
accordance with ERISA (and remains contingently liable to fund the Media plan if
Media fails to do so). No claims have been asserted or, to the knowledge of
management, are threatened under these agreements.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company's principal properties were as
follows:
Approximate
Square Footage
Location Activities Conducted of Facility
- -------- -------------------- -----------
Redwood City, California Executive offices, RD&E
and manufacturing (1) 195,840
Colorado Springs, Colorado Manufacturing 229,961
Chineham, Basingstoke, England Sales and service (2) 7,184
Tokyo, Japan Sales and service (3) 3,886
Sulzbach, Germany Sales and service (3) 13,530
- -------------------
(1) The majority of this property (186,440 square feet) is leased under
leases entered into in connection with the January 1996 sale of this
property. The remainder (9,400 square feet) is leased on a short-term
basis.
(2) These facilities are leased under a ten-year lease, which is terminable
at the option of the Company or the landlord in 2002.
679833.6
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(3) These facilities are leased under leases that expire at various times
through 2000.
In addition to the properties and leased facilities listed above, Ampex
leases office space and warehouse facilities from time to time at various
domestic and foreign locations. In addition, the Company has outstanding lease
obligations with respect to various facilities whose functions were terminated
in connection with the Company's prior period restructuring of its business
operations. The Company is subleasing portions of these facilities pending
termination of the underlying leases.
On January 25, 1996, the Company completed the sale of its real
property in Redwood City, California. All of the functions that were located at
the Redwood City site have been relocated to portions of the facility that have
been leased back from the purchaser under two separate leases. One lease covers
approximately 132,150 square feet in buildings leased for a term of from 10 to
13 years. The second lease covers a 54,290 square foot building occupied on an
interim basis under similar terms, but the lease contains a provision allowing a
move to a new 60,000 square foot building upon its completion, which is expected
to occur in 1998. When the move to this new building is complete, the lease for
the 54,290 square foot building will terminate and the Company will enter into a
new ten-year lease for the 60,000 square foot property. The lease for the
132,150 square foot property will then become co-terminous with the new lease,
so that both such leases are expected to terminate in 2008; however, the Company
has a one-time option to terminate the lease for the 132,150 square foot
facility in 2001.
The Company believes that its current facilities, including machinery
and equipment, are generally in good condition, well-maintained and suitable for
their intended uses, and that its facilities have, and will continue to have,
adequate capacity to accommodate the Company's present needs and business growth
for its present products in the foreseeable future.
ITEM 3. 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.
On September 22, 1995, the Company filed a lawsuit against Mitsubishi
Electric Corporation and Mitsubishi Electric America Inc. ("Mitsubishi") in the
U.S. District Court for the District of Delaware, alleging patent infringement
and breach of license agreement in connection with the manufacture of VHS video
recorders and television receivers, and seeking damages and injunctive relief.
In response to the Company's lawsuit, on December 12, 1995, Mitsubishi filed a
lawsuit against Ampex in the U.S. District Court for the Central District of
California, alleging patent infringement of two Mitsubishi patents by certain
Ampex video and data recorder products, and seeking unspecified damages and
injunctive relief. In March 1997, the California court determined that Ampex has
no liability to Mitsubishi patents. Mitsubishi's request for a new trial and for
judgment as a matter of law was denied. In July 1997, the court affirmed its
decisions in favor of Ampex and Mitsubishi filed a notice of appeal with the
Court of Appeals for the Federal Circuit.
In April 1997, a jury in the U.S. District Court for the District of
Delaware returned a verdict in favor of Ampex in its patent infringement lawsuit
against Mitsubishi and awarded damages to Ampex of approximately $8.1 million
for infringing a patent used in connection with the manufacture of certain
television receivers. The defendants asserted various defenses and in June 1997
the judge granted a post-trial motion by Mitsubishi to set aside the verdict and
award of damages on the theory of prosecution history estoppel. In August 1997,
Ampex's motion for retrial was denied and the Company filed a notice of appeal
with the Court of Appeals for the Federal Circuit. The Company does not expect
the Courts of Appeals to issue their decision in this case or in the case
described in the foregoing paragraph before the latter part of 1998. In view of
the substantial uncertainty remaining in this litigation, no income from this
verdict has been recorded in the Company's financial statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations for the Three Years Ended December 31, 1997 --
Selling and Administrative Expenses" and "--Royalty Income,"
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above. The June 1997 decision relates only to infringement of one of the
Company's patents which is used in picture-in-picture television sets. Ampex has
asserted additional claims against Mitsubishi with respect to infringement of
Ampex patents in connection with various VCR products. No date has been set for
trial of these claims.
See also "Environmental Regulation and Proceedings" and Note 12 of
Notes to Consolidated Financial Statements for additional information with
respect to pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of February 1,
1998 are as follows:
Name Age Position
---- --- --------
Edward J. Bramson 46 Chairman and Chief Executive Officer
Craig L. McKibben 47 Vice President, Chief Financial Officer and Treasurer
Robert L. Atchison 60 Vice President
Richard J. Jacquet 58 Vice President
Joel D. Talcott 56 Vice President and Secretary
Each of the executive officers of the Company serves in such capacity
at the discretion of the Board.
Edward J. Bramson is Chairman of the Board, Chief Executive Officer and
a director of the Company. He has been an officer and director of the Company
since 1987, and since January 1991 has been Chief Executive Officer of the
Company. He is also Chairman and Chief Executive Officer of Sherborne Holdings
Incorporated, Sherborne & Company Incorporated and Sherborne Investments
Corporation, is a limited partner of Newhill Partners, L.P. and the managing
member of SH Securities Co., L.L.C. These entities, which are private investment
holding companies, may be deemed to be affiliates of the Company. Mr. Bramson is
also a director of Hillside Capital Incorporated, a private industrial holding
company with which he has been associated since 1976. From 1987 until 1994, Mr.
Bramson was a director and executive officer of NH Holding Incorporated ("NHI"),
the Company's former parent. See "Relationship with NH Holding Incorporated,"
below.
Craig L. McKibben is Vice President, Treasurer, Chief Financial Officer
and a director of the Company. Mr. McKibben has been an officer and a director
of the Company since 1989. From 1983 to 1989, he was a partner at the firm of
Coopers & Lybrand, independent public accountants. He is also Vice President and
a director of Sherborne Holdings Incorporated and of Sherborne & Company
Incorporated. Since 1989, Mr. McKibben has been a director and executive officer
of NHI. See "Relationship with NH Holding Incorporated," below.
Robert L. Atchison is Vice President of the Company. Since January
1994, he has been responsible for all operating activities of the Company, and
in 1996 assumed responsibility for certain of the Company's sales and marketing
activities. From April 1991 to January 1994, he was responsible for engineering
and operations for the Company. Mr. Atchison also serves as President and a
director of Ampex Data Systems Corporation, a wholly owned subsidiary of the
Company. He has served as an executive officer of the Company and various
subsidiaries since 1987.
Richard J. Jacquet is Vice President of the Company. Since January
1994, he has been responsible for all administrative functions of the Company.
From 1989 to January 1994, he was responsible for personnel and human resources
matters for the Company. Mr. Jacquet has been associated with the Company since
1988, serving as Director of Human Resources prior to his appointment in 1989 as
Vice President.
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Joel D. Talcott is Vice President and Secretary of the Company,
positions he has held since 1987. He has served as General Counsel since January
1996, a position he also held from 1987 to January 1994. He is also responsible
for the Company's patent licensing activities (having served as Patent Counsel
from 1981 to 1987), and has supervisory responsibility for investor relations
and corporate communications functions. Mr. Talcott is an officer and director
of Ampex Data Systems Corporation, a wholly-owned subsidiary of the Company.
Relationship with NH Holding Incorporated
From May 1987 until December 1994, the Company was a subsidiary of NH
Holding Incorporated ("NHI"). Messrs. Bramson, McKibben and Slusser were the
directors of NHI, and Messrs. Bramson and McKibben were executive officers of
NHI. On December 28, 1994 (the "Consummation Date"), the United States
Bankruptcy Court for the District of Delaware confirmed a plan of reorganization
for NHI (the "NHI Plan"), pursuant to which all of the assets of NHI (including
16,000,000 shares of Class A Stock of the Company) were distributed to NHI's
former creditors. Since the Consummation Date, Mr. McKibben has been serving as
the sole officer and director of NHI and the disbursing agent under the NHI
Plan.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The following table sets forth the high and low prices for the
Company's Class A Common Stock for each quarter during fiscal 1996 and 1997.
Since January 16, 1996, the Class A Common Stock has been traded on the American
Stock Exchange under the symbol "AXC."
The trading price of the Company's Class A Common Stock has been and
can be expected to be subject to significant volatility, reflecting a variety of
factors, including quarterly variations in operating results, analysts'
estimates, announcements of new product introductions and other announcements by
the Company or its competitors and general economic or market conditions. In
addition, the stock market in general 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 technology companies for reasons that often
are unrelated or disproportionate to operating performance.
Fiscal Year High Low
----------- ---- ---
1997
First Quarter $10.50 $5.63
Second Quarter 7.38 5.44
Third Quarter 6.25 3.88
Fourth Quarter 4.56 2.13
1996
First Quarter 7.06 3.63
Second Quarter 15.75 5.38
Third Quarter 9.50 5.13
Fourth Quarter 11.38 6.25
As of January 30, 1998, there were 833 holders of record of the
Company's Class A Common Stock.
The Company has not declared any dividends on its Common Stock since
its incorporation in 1992 and has no present intention of paying dividends on
its Common Stock. The Company is also restricted by the terms of the Indenture
for the Senior Notes and certain other agreements and of its outstanding
Noncumulative Preferred Stock as to the declaration of dividends. Under current
circumstances, the Company may not pay any cash dividends on
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its Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
Notes 10 and 13 of Notes to Consolidated Financial Statements.
(b) The following sets forth information as to securities sold by the
Company during the past three years which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
On January 28, 1998, the Company issued and sold $30 million of its
Senior Notes and Warrants to purchase 1,020,000 shares of its Class A Common
Stock to a group of "qualified institutional buyers" as that term is defined in
Rule 144A under the Securities Act. The transaction was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and Regulation D
thereunder as a transaction by an issuer not involving any public offering. Each
Warrant is exercisable to purchase one share of the Company's Class A Common
Stock at $2.25 per share, and expires on March 15, 2003.
On October 29, 1997, November 7, 1997 and February 18, 1998, the
Company issued a total of 400,000 shares of its Class A Common Stock to Edward
J. Bramson, chief executive officer of the Company. The shares were sold for an
aggregate purchase price of $1,268,752, of which 20% was paid in cash and the
balance by promissory notes of Mr. Bramson. All such shares have been pledged to
the Company as security for the promissory notes. Mr. Bramson represented that
the acquisition of such shares was made for investment and not with a view to
resale or other distribution absent registration under the Securities Act or the
availability of an exemption therefrom. The transaction was exempt from
registration under the Securities Act by reason of Section 4(2) thereof as a
transaction not involving any public offering.
On October 23, 1996, the Company issued 400,000 shares of Class A Stock
to SH Securities Co. LLC ("SH LLC"), a limited liability company controlled by
Mr. Bramson, chief executive officer of the Company. The shares were sold for an
aggregate price of $2,750,000, of which $550,000 was paid in cash and the
balance by a promissory note issued by SH LLC. All such shares have been pledged
to the Company as security for the promissory note issued by SH LLC. The
purchaser represented that the acquisition of such securities was made for
investment and not with a view to resale or other distribution absent
registration under the Securities Act or the availability of an exemption
therefrom. The transaction was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a transaction by an issuer not involving
any public offering.
Information as to additional sales of unregistered securities by the
Company during the past three years is contained in Item 15 of Amendment No. 2
to Registration Statement on Form S-1 of the Company (File No. 33- 91312) filed
with the Securities and Exchange Commission and is incorporated herein by
reference. All such sales were made to affiliates of the Company or to
institutional investors who represented that the acquisition of such securities
was made for investment and not with a view to resale or other distribution
absent registration under the Securities Act or the availability of an exemption
therefrom. The transactions were exempt from registration under the Securities
Act by reason of Section 4(2) thereof as transactions by an issuer not involving
any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The financial data required by Item 6 is included immediately following
Item 14 hereof.
ITEM 7. 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 Consolidated Financial Statements and the Notes thereto,
included elsewhere in this Report.
679833.6
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Product Groups
The Company's principal product groups are: its mass data storage and
instrumentation products and its professional video and other products. The mass
data storage and instrumentation products group includes: (i) 19- millimeter
scanning recorders and library systems (DST and DIS products) and related tape
and after-market equipment; and (ii) data acquisition and instrumentation
products (primarily DCRsi instrumentation recorders) and related tape and
after-market equipment. The Company's professional video and other products
group includes primarily its DCT video recorders and image processing systems
and related tape products and television aftermarket equipment. These product
groups are described below. No other class of similar products accounted for
more than 10% of net sales during the comparison periods discussed below. In
recent years, the Company has focused its efforts on high-performance digital
data storage and delivery systems for the emerging commercial mass data storage
market, and has discontinued many older products and businesses. The Company
operates in one industry segment for financial reporting purposes: the design,
development, production and distribution of high-speed, high-capacity magnetic
recording products and systems.
The following table shows sales of the Company's products by product
group for the past three years.
Net Sales
(in millions)
1997 1996 1995
Mass data
storage/instrumentation $63.7 $71.6 $65.6
Professional video and
other products 16.6 24.9 30.1
---- ---- ----
Total net sales 80.3 96.5 95.7
Results of Operations for the Three Years Ended December 31, 1997
Net Sales. Net sales decreased by 16.8% to $80.3 million in 1997 from
$96.5 million in 1996, compared to $95.7 million in 1995. The anticipated
continuing decline in sales of professional video and other products accounted
for the majority of the decline in net sales during 1997 and 1996. In 1997,
sales of the Company's 19-millimeter product line declined from 1996 levels and
sales of instrumentation recorders increased modestly during the period. The
Company doubled the capacity of its 19-millimeter product line early in 1997 and
passed along this improvement to the customer at no increase in selling price.
Although the Company shipped more megabytes of 19-millimeter tape-based
storage, its revenues for this product category declined during the 1997 fiscal
year, due also to declining sales to customers in the oil and gas industry and
the government. In 1996, the increase in sales of 19-millimeter tape-based mass
data storage and instrumentation products offset the decline in sales of
professional video recording products and other products. The Company's backlog
of firm orders increased to $6.9 million at December 31, 1997 from $3.4 million
at December 31, 1996. The Company typically operates with low levels of backlog,
requiring it to obtain the vast 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. See "Business -- Fluctuations in Operating Results; Seasonality;
Backlog." Management currently believes that net sales of its existing products
will decline materially in the first quarter of 1998 and in fiscal 1998,
relative to comparable 1997 periods.
Mass Data Storage Products and Instrumentation Recorders. Sales of mass
data storage products and instrumentation recorders and related after-market
products decreased by 11.0% from 1996 to 1997, after experiencing a 9.1%
increase in 1996 from 1995 levels. Early in 1997, the Company doubled the
density of its 19-
679833.6
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millimeter tape-based storage products without increasing the selling price in
order to retain the price/performance advantage over competing tape-based
storage products and hard disk drives. Accordingly, while the Company shipped a
larger amount of capacity measured in megabytes, revenues in this product
category declined in 1997 from 1996 levels. Revenues from these products in 1997
were also affected by declining sales to customers in the oil and gas industry
and the government. In addition to retaining its price/performance advantage,
broader commercial acceptance of its 19-millimeter storage systems will depend
significantly on the integration and vendor support of third party application
software, which are often beyond the Company's control.
The cost-efficiency of the Company's 19-millimeter storage systems has
historically been dependent on data intensive applications, such as those which
incorporate video, graphics and other images, requiring storage capacity
materially greater than those required by traditional alphanumeric applications.
The Company has concentrated its sales and marketing efforts primarily in
certain specialized vertical markets, such as digital special effects creation
and 3-D seismic data gathering and analysis, that can utilize the unique
performance capabilities of the Company's 19-millimeter scanning recorders.
Industry sources predict that by 2002, image-based storage content will account
for 40% of all storage, up from 15% today. In order to capitalize on this
increasing demand for storage, the Company may be required to increase its sales
and marketing efforts to penetrate the commercial data processing market, and
there is typically a lag from the time such efforts are initiated until
additional revenues are generated.
A significant portion of instrumentation product sales reflect
purchases by the federal government. Direct and indirect sales to U.S.
government agencies amounted to $22.3 million, $17.4 million and $14.0 million
in 1997, 1996 and 1995, respectively, representing 27.7%, 18.0% and 14.7% of net
sales in those years. While sales to government agencies have historically
consisted primarily of data acquisition and instrumentation recorders, the
Company has recently experienced an increase in sales of 19-millimeter-based
data storage products to these customers. Sales to government agencies fluctuate
as a result of changes in government spending programs (including defense
programs), and may be adversely impacted by Congressional appropriations
discussions. The Company is unable to forecast the extent to which sales may be
adversely affected in future periods by these factors.
Professional Video Recording and Other Products. Sales of professional
video recording products and all other products (consisting primarily of
television after-market products) continued to decline as anticipated and as
previously disclosed. In 1997 and 1996, sales of the Company's DCT products
accounted for all of the Company's professional television product sales. The
Company's DCT digital products were designed for existing broadcast transmission
standards, which are expected to become obsolete upon the adoption of new
digital transmission standards that were recently announced. The Company
anticipates that its professional video product sales will continue to decline
pending the establishment of new standards and until new products can be
introduced that are designed for them. The Company also anticipates a continuing
reduction in the sale of television after-market products for these same
reasons. Such sales declines could have a materially adverse effect on the
Company. There can be no assurance as to when broadcasters will re-equip for the
new transmission standards or whether the Company will be successful in any
future efforts it may undertake to design and sell new products based on such
standards. The Company is exploring ways to increase its market presence in the
professional video industry, capitalizing on its reputation in television and
video recording, which may include acquisitions of products and/or businesses
that serve these markets. There can be no assurance that the Company will be
successful in integrating these products and businesses into its operations.
Gross Profit. Gross profit as a percentage of net sales was 48.8% in
1997, 45.7% in 1996 and 45.9% in 1995. The improved gross margin percentages
reflect the effects of the Company's cost containment activities, which have
reduced fixed manufacturing and administrative costs, as well as an improved
sales mix of newer, high-margin products. If sales of the Company's relatively
high-margin instrumentation recorders are adversely affected by pressure on
government agencies to further reduce spending, gross margins in future periods
could 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 the
current period.
679833.6
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Selling and Administrative Expenses. Selling and administrative
expenses as a percentage of net sales were 30.4% in 1997, 28.1% in 1996 and
23.7% in 1995. Spending levels included $4.2 million in 1997, $4.9 million in
1996 and $0.1 million in 1995 relating to patent infringement litigation with a
foreign consumer products manufacturer. While the Company anticipates that the
appeal of this litigation will be heard late in 1998, it anticipates that it
will not incur material costs related to this matter in 1998. Excluding such
costs, selling and administrative costs declined in 1997, reflecting savings
realized in facility operating costs from levels incurred in 1996 as a result of
relocating the Company's headquarters into smaller facilities. The Company
anticipates that it will need to increase its sales and marketing efforts to be
successful in penetrating the commercial data markets with its 19-millimeter
storage products. Also, if it pursues additional opportunities in video and
image processing, the Company forecasts that selling and administrative expenses
may increase as a percentage of sales in future periods until such new business
efforts begin to generate additional revenues.
Research, Development and Engineering Expenses. Research, development
and engineering expenses represented 19.3%, 16.5% and 16.3% of net sales in
1997, 1996 and 1995, respectively. The Company does not capitalize a material
amount of RD&E expenditures. The majority of RD&E expenses in each of these
years was used to enhance the price/performance levels of the Company's mass
data storage products, as well as to integrate the Company's storage systems
with various computer manufacturers' servers, workstations and other computer
systems. Since the second half of 1994, the Company has been investing in the
development of keepered media technology and has spent $3.6 million, $1.9
million and $1.0 million in 1997, 1996 and 1995, respectively, on
commercializing this technology for use in hard disk drives. The keepered media
development program was substantially completed during 1997. The Company has
transferred this program to a long-term research and development project to
assess whether the technology might be commercially employed with advanced head
technologies. Continuing expenses for keepered media research are estimated to
be less than $0.5 million annually. The Company is committed to investing in
research, development and engineering programs at levels that can be supported
by current levels of sales.
Royalty Income. Royalty income was $12.6 million in 1997, $10.5 million
in 1996 and $15.0 million in 1995. The Company's royalty income derives from
patent licenses, and the Company receives most of its royalty income from
licenses with companies that manufacture consumer video products (such as VCRs
and camcorders) and, in certain cases, professional video tape recorders. During
this period a growing portion of royalty income related to 8-mm video recorders
and camcorders. In 1996, the Company negotiated its first license for use of
certain of its patents in the manufacture of 6-mm digital video recorders. The
Company intends to pursue additional digital video recorder licensees. The
Company is also assessing whether its patented technology is being used by
manufacturers of video games, DVD recorders and digital television receivers.
There can be no assurance that the Company's technology is being utilized by the
manufacturers of these products 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 can
not predict or control, such as the extent of use of the Company's patented
technology by third parties, the materiality of any non-recurring royalties
received as the result of negotiated settlements for products sold by
manufacturers prior to entering into licensing agreements with the Company, the
extent which the Company must pursue litigation in order to enforce its patents,
and the ultimate success of its licensing and litigation activities. The costs
of patent litigation can be material, and the institution of patent enforcement
litigation may also increase the risk of counterclaims alleging infringement by
the Company of patents held by third parties or seeking to invalidate patents
held by the Company. See "Legal Proceedings," above.
Restructuring Charges (Credits). In connection with the Company's
restructuring that was substantially completed in 1993, the Company had accrued
for the estimated future costs of vacated leased property and the closure of
certain foreign subsidiaries. In the past three years, the Company has entered
into transactions that reduced its anticipated obligations under several vacated
leases. In addition, certain expenses related to the closure of foreign
subsidiaries were less than originally anticipated. In 1997, the amount of
restructuring credit recognized in income is net of a reserve that was recorded
to write-off certain fixed assets and to provide for certain other costs
totaling $0.9 million in connection with the transfer of the keepered media
program to a long-term research and development project. As of December 31,
1997, the Company had a remaining balance of $3.3 million of accrued
679833.6
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restructuring costs. The Company will continue to evaluate the amount of accrued
restructuring costs on a quarterly basis, and the Company may make additional
adjustments in future periods if it determines that its actual obligations will
differ significantly from the amounts accrued.
Operating Income. Operating income was $13.5 million (16.8% of net
sales) in 1997, $12.0 million (12.5% of net sales) in 1996 and $23.1 million
(24.2% of net sales) in 1995. Operating income was positively impacted by the
receipt of negotiated license settlements in addition to regular recurring
license payments, improved gross margins due to an improved sales mix of
products, continuing focus on cost controls on recurring selling and
administrative expenses and restructuring credits. Patent infringement
litigation costs, RD&E spending on keepered media and continuing declines in
sales, particularly sales of professional video and other products, adversely
impacted operating income as discussed above.
Interest Expense. Interest expense was not material in 1997, $0.8
million in 1996 and $3.8 million in 1995. In the first quarter of 1996, the
holders of the then outstanding 8% zero coupon convertible notes with a
principal amount at maturity of $27.4 million converted the notes into
approximately 8.5 million shares of Common Stock. Also, in January 1996, the
mortgage on the real property in Redwood City, California was repaid from the
cash proceeds of the sale of such property. In January 1998, the Company issued
$30.0 million of 12% Senior Notes due 2003 and warrants to purchase
approximately 1.02 million shares of Common Stock to certain institutional
investors. Accordingly, leverage and interest expense will increase in 1998 from
current levels.
Amortization of Debt Financing Costs. These amounts reflect periodic
amortization of financing costs over the remaining terms of the debt. Due to the
conversion of the zero coupon notes and the repayment of the mortgage in 1996,
the remaining deferred financing costs were written off during 1996. Financing
costs associated with the January 1998 issuance of the 12% Senior Notes,
estimated to total $1.5 million, will be charged to expense over 5 years.
Interest Income. Interest income is earned on cash balances, and in
1997 and 1996 interest income was imputed on the notes received in connection
with the sale of the Company's Redwood City, California property in 1996. The
notes were fully paid in 1997. Pending application of the proceeds of the Senior
Notes, they have been invested in short-term government securities.
Other (Income) Expense, Net. Other (income) expense, net consists
primarily of foreign currency transaction gains and losses resulting from the
Company's foreign operations. In 1996, such amounts included a gain of $0.9
million on the sale of the smaller of its two manufacturing facilities in
Colorado Springs, Colorado, offset by moving-related expenditures of $0.9
million at the Redwood City, California facility.
Provision for Income Taxes. The Company was not required to include any
material provision for U.S. Federal income tax in any of the last three fiscal
years due to the utilization of net operating loss carryforwards and timing
differences. At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of $100.0 million, expiring in the years
2005 through 2009. As a result of financing transactions that were completed in
1994 and 1995, the Company is limited in the amount of net operating loss
carryforwards that can offset consolidated Federal taxable income in a given
year. See Note 19 of Notes to Consolidated Financial Statements. The Company
derives pretax foreign income from its international operations, which are
conducted principally by its foreign subsidiaries. In addition, the Company's
royalty income is subject, in certain cases, to foreign tax withholding. Such
income is taxed by foreign taxing authorities, and the Company's domestic
interest and amortization expenses and operating loss carryforwards are not
deductible in computing such foreign taxes. The provisions for income taxes in
1997, 1996 and 1995 consist primarily of foreign income taxes and withholding
taxes on royalty income.
Gain of Business Held for Disposition. In November 1995, the Company
completed the disposition of the Media subsidiaries, which had been accounted
for as a business held for disposition since the quarter ended June 1993. The
sale did not result in the receipt of any cash proceeds by the Company, and the
non-recurring gain of
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$43.9 million in 1995 represented the elimination of net liabilities of Media,
less taxes and other costs. See Note 2 of Notes to Consolidated Financial
Statements.
Net Income. The Company reported net income of $14.8 million in 1997,
$12.7 million in 1996 and $63.3 million in 1995. Net income benefited from the
non-recurring gain of $43.9 million on the sale of Media in 1995 and from the
factors discussed above in "Operating Income."
Liquidity and Capital Resources.
Cash Flow. At December 31, 1997, the Company had cash and short-term
investments of $41.8 million, an increase from $30.7 million at December 31,
1996. In addition, in January 1998, the Company issued $30.0 million of Senior
Notes. The net proceeds of the Senior Notes are available for general corporate
purposes, including acquisitions of and investments in new business. Pending
application for such purposes, the net proceeds are being invested in short-term
government securities. The increase in cash and short-term investments in 1997
and in 1996 was due in part to receipt of the proceeds of repayment of certain
notes received from the sale of portions of the Company's Redwood City,
California facilities in 1996. The Company's operating activities generated cash
of $4.6 million in 1997 and used cash of $6.1 million in 1996. The improvement
in operating cash flow resulted from the factors discussed above in "Operating
Income." The Company's decision to increase inventories to support sales of its
19-millimeter DST and DIS products is the primary reason for the increase of
$2.3 million in inventories at December 31, 1997 from December 31, 1996. The
increased investment in inventories, particularly with respect to its library
systems, which have a limited sales history, may expose the Company to an
increased risk of inventory write-offs.
The Company has available a working capital and letter of credit
facility that allows it to borrow up to $7.0 million through May 2000, based on
eligible accounts receivable. At December 31, 1997, the Company had no material
borrowings outstanding and had letters of credit issued against the facility
totaling $2.7 million.
Financing Transactions. In January 1996, the Company repaid the balance
of the $7.4 million mortgage loan on the Redwood City, California property from
a portion of the cash proceeds of the sale. Also, during 1996, the Company's
convertible notes with an aggregate face amount at maturity of $27.4 million
were converted into approximately 8.5 million shares of Commo