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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, 1999
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 statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant as of January 28, 2000 was approximately
$166,667,235, based on a price of $3.50 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 common stock outstanding.
As of January 28, 2000 there were 56,324,384 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 2000 Annual Meeting of Stockholders is
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this Form
10-K.
AMPEX CORPORATION
FORM 10-K
Year Ended December 31, 1999
INDEX
Page
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PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 20
PART II 21
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 29
PART III 29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 29
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
PART IV 30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 30
SIGNATURES AND POWER OF ATTORNEY 36
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PART I
ITEM 1. BUSINESS
Introduction
Ampex Corporation ("Ampex" or the "Company") is a leading innovator of
visual information technology. The Company has traditionally specialized in the
development and manufacture of high performance recording products used for the
acquisition and processing of data and for the storage of mass computer data,
especially images. Recently, in order to capitalize on its expertise and
technology in digital video, Ampex has been focusing on the development and
expansion of its Internet video businesses, through internal projects,
acquisitions and strategic investments, which in 1999 it consolidated in its
subsidiary, iNEXTV Corporation ("iNEXTV"). Ampex is seeking to leverage its
significant experience in digital video processing to become a major provider of
Internet video programming services and technology.
During its 56-year history, Ampex has developed substantial proprietary
technology relating to the electronic storage, processing and retrieval of data,
particularly images, certain of which it has elected to patent or seek to
patent. Ampex currently holds approximately 1,000 patents and patent
applications covering digital image-processing and recording technology, and has
licensed its patents, primarily for use in videocassette recorders and other
consumer products. In the years 1994 through 1999, the Company's licensing
income averaged $15 million per year. However, royalty income has fluctuated
materially from year to year, and there can be no assurance that the Company
will continue to generate comparable levels of royalty income in future periods.
The Company's Internet video businesses are conducted primarily through
its iNEXTV subsidiary, which manages the Company's Internet operations, and its
Internet Technology Group ("ITG"), which was organized to conduct the research,
development and engineering of products and services for the Internet. The
iNEXTV network currently includes: Alternative Entertainment Network, Inc. ("
AENTV" or "AENTV.com"), a provider of on-demand streaming video sites about the
entertainment industry; EXBTV.com, a producer and netcaster of original Internet
programming, covering the executive branch of the U.S. government; TV onthe WEB,
Inc. ("TV on the WEB" or "TVontheWEB.com"), a leading provider of webcasting and
other Internet video services; and TV1 Internet Television ("TV1" or "TV1.de"),
one of the leading European webcasters. Ampex's Internet operations are at an
early stage of development, and have not yet produced significant revenues.
Accordingly, these operations involve a material risk of loss, and can be
expected to be unprofitable for a substantial period of time. See "Risk Factors
- - Risks Associated with iNEXTV and Internet Video Strategy" and "Risk of
Continuing Losses."
Ampex also owns MicroNet Technology, Inc. ("MicroNet"), which manufactures
disk arrays and related storage products for image-based markets, such as the
video and commercial pre-press markets. MicroNet's principal disk storage
products include its DataDock and Genesis disk array systems.
In February 2000, in order to focus more sharply on its Internet business,
Ampex announced plans to sell Ampex Data Systems Corporation ("Data Systems" or
"ADSC"), a subsidiary engaged in the manufacture and sale of high performance
mass data storage and instrumentation recorders and systems. Data Systems
products are sold primarily for use in the television broadcast and government
markets. The Company has not yet entered into a contract to sell Data Systems,
and there can be no assurance that a contract will be entered into or as to the
terms or timing of any sale. Pending consummation of a sale, and in accordance
with generally accepted accounting principles, the Company has accounted for
ADSC's operations as a discontinued business as of December 31, 1999 and for
each of the years then ended. See "Business Held for Disposition" and "Risk of
Proposed Sale of Data Systems, " below. Following the planned sale of Data
Systems, Ampex's principal products will be the MicroNet products, and its
principal business operations will be conducted by iNEXTV, ITG and MicroNet.
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".
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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, those described under "Risk Factors," below.
These forward-looking statements speak only as of the date of this Report. The
Company disclaims any obligation or undertaking to disseminate updates or
revisions of any forward-looking statements contained or incorporated herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K,
READERS ARE URGED TO READ CAREFULLY ALL SUCH CAUTIONARY STATEMENTS.
Risk Factors
Risk of Continuing Losses
Ampex has incurred significant operating and net losses in its 1999 fiscal
year, primarily due to its Internet video programming activities, promotional
expenses and amortization of goodwill of acquired businesses. The Company also
incurred certain interest expenses and additional losses from its discontinued
operations. Total revenues were not sufficient to offset these items. Although
the Company expects that its Internet video revenues will grow in future
periods, there can be no assurance that such revenues will be sufficient to
offset similar expenses and/or losses that may be incurred in such periods, or
that such items will not increase. The Company may be required to incur
additional indebtedness in connection with future acquisitions or its Internet
expansion plans, which could increase future interest expenses, and may be
unable to consummate the sale of Data Systems, which has experienced and is
expected to continue to experience declining product sales. In addition, the
Company cannot predict the amount of licensing royalties that it may recognize
in future periods. Accordingly, the Company expects operating and net losses to
continue at least for the near future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations, " below, and the other Risk
Factors included in this section.
Risks Associated with iNEXTV and Internet Video Strategy
The Company's Internet subsidiary, iNEXTV, was formed in mid-1999, and has
not yet generated any material advertising or sales revenues. The business and
prospects of iNEXTV, and the Company's Internet video strategy in general, are
subject to the risks and uncertainties typical of companies in the early stages
of development, particularly in new and rapidly evolving markets such as those
for Internet content, advertising and electronic commerce (e-commerce). The
development of iNEXTV and the implementation of the Company's strategy to expand
its Internet video businesses involve special risks and uncertainties, including
but not limited to the following:
. the ability of iNEXTV and its affiliates to identify, produce or
acquire and deliver compelling, quality video programming over the
Internet that appeals to its target audiences;
. the ability of iNEXTV and its affiliates to obtain and manage key
employees and other resources for growth from their present size and
to become profitable;
. market acceptance of streaming media technology, which is currently
of lower quality than television or radio broadcasts, is subject to
congestion and interruptions on the Internet, and requires
specialized software, technical expertise and increased bandwidth;
. dependence upon the continued acceptance and growth of the Internet
as a significant medium for advertising and e-commerce, and upon
iNEXTV's ability to generate advertising revenues and, in future
periods, to sell goods and services over the Internet;
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. the ability of iNEXTV and its affiliates to attract and retain
sponsors and advertisers, content developers and other key partners
necessary to make its websites viable;
. dependence upon timely delivery and integration of website software
and hardware purchased from third parties used in its EXBTV.com and
iSTYLETV.com websites;
. vulnerability of Internet content delivery to system failures and
interruptions for a variety of reasons (including telecommunications
problems and natural disasters), computer viruses and other breaches
of security;
. dependence upon Internet service providers, web browsers, providers
of streaming media products and others to provide Internet access to
iNEXTV's websites and programming;
. the ability of Ampex to innovate, upgrade and transfer to iNEXTV and
its affiliates audio or video technology for Internet-based
applications;
. competition among Internet broadcasters and providers of products
and services for users, advertisers, content and new products and
services;
. uncertainty about the adoption and application of new laws, proposed
taxation and government regulations relating to Internet businesses,
which could slow Internet growth, adversely affect the viability of
e-commerce, expose iNEXTV to potential liabilities or negative
criticism for mishandling customer security or user privacy concerns
or otherwise adversely affect its Internet businesses;
. the ability to obtain licenses of intellectual property developed by
others that affect Internet usage. Intellectual property claims
against the Company could be costly and could result in the loss of
significant rights;
. the ability to expand successfully in the European or other foreign
markets, which is likely to be subject to cultural and language
barriers, different regulatory environments, currency exchange rate
fluctuations and other difficulties relating to managing foreign
operations; and
. likelihood of continued and significant expenses resulting in
material losses in future periods, which could negatively affect the
price of the Company's securities and require it to seek additional
capital which may not be available on satisfactory terms, or at all.
Risks Associated with Acquisition Strategy
In order to expand Ampex's products and services, Ampex has made, and may
continue to make, acquisitions of, and/or investments in, other business
entities, including businesses involved in both producing and distributing
Internet video programming. Ampex may not be able to identify or acquire
additional acquisition candidates in the future, or complete any further
acquisitions or investments on satisfactory terms. In order to pay for future
acquisitions or investments, Ampex may have to:
. issue additional equity securities of the Company or a subsidiary,
which would dilute the ownership interest of existing Ampex
stockholders;
. incur additional debt; and/or
. amortize goodwill and other intangibles or incur other
acquisition-related charges, which could materially impact earnings.
Acquisitions and investments involve numerous additional risks, including
difficulties in the management of operations, services and personnel of the
acquired companies, and of integrating acquired companies with Ampex and/or each
other's operations. Ampex may also encounter problems in entering markets and
businesses in which it
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has limited or no experience. Acquisitions can also divert management's
attention from other business concerns. Ampex may make investments in companies
in which it has less than a 100% interest. Such investments involve additional
risks, including the risk that Ampex may not be in a position to control the
management or policies of such entities, and risks of potential conflicts with
other investors. Ampex has invested in companies that are in the early stage of
development and may be expected to incur substantial losses. Ampex's financial
resources may not be sufficient to fund the operations of such companies.
Accordingly, there can be no assurance that any acquisitions or investments that
Ampex has made, or may make in the future, will result in any return, or as to
the timing of any return and Ampex could lose all or a substantial portion of
its investments.
Risk of Proposed Sale of Data Systems
The Company recently announced its intention to sell Data Systems, which
manufactures the Company's high performance mass data storage and
instrumentation products for entertainment and government applications, and the
Company has accounted for this subsidiary's operations as a discontinued
business effective with its fiscal 1999 financial statements. Although the
Company has engaged a financial advisory firm and has had preliminary
discussions related to the proposed sale, at the date of this Report the Company
had not entered into any definitive agreement of sale, and there can be no
assurance that the Company will be able to consummate a sale, or as to the terms
or timing of any sale, if consummated. Ampex intends to use the proceeds of the
proposed sale to expand its Internet video operations through its iNEXTV
subsidiary and other Internet activities, and to retire debt. However, there can
be no assurance that any such proceeds will be sufficient to do so, or to offset
any potential losses that may be attributable to iNEXTV or other Company
operations. See "Risks Associated with iNEXTV and Internet Video Strategy,"
above. In addition, if the proposed sale is consummated, Ampex may retain
certain liabilities associated with Data Systems' prior operations, including
pension benefit obligations, environmental liabilities and indemnification
obligations customarily contained in sale agreements.
Risk of Leverage
As of December 31, 1999, Ampex had outstanding approximately $45.3 million
of total borrowings, which included $44.0 million principal amount of 12% Senior
Notes due 2003 and $1.3 million of subsidiary indebtedness. The Company has
invested a portion of the proceeds from the Senior Notes in its MicroNet and
iNEXTV subsidiaries and for general corporate purposes. The Company has invested
a portion of the balance of these proceeds in government securities and, in
order to realize yields approaching the interest rate on the Senior Notes, from
time to time has invested in high-yield mutual funds and corporate securities,
some of which have longer terms and lower credit quality than U.S. government
securities. The Company may also engage in various transactions in derivative
securities although it has not done so to date. As discussed above, the Company
hopes to use a portion of the proceeds from the planned sale of Data Systems to
reduce its indebtedness. However, there can be no assurance that the Company
will be able to consummate the sale or, if consummated, that the Company will
realize proceeds that it determines are available for such repayment.
The Company may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes, subject to the
restrictions in the indenture governing the Senior Notes. The degree to which
the Company is leveraged, and the types of investments it selects, could have
important consequences to investors, including the following:
. a substantial portion of the Company's consolidated cash flow from
operations must be dedicated to the payment of the principal of and
interest on outstanding indebtedness, and will not be available for
other purposes;
. Ampex's ability to obtain additional financing in the future for
working capital needs, capital expenditures, acquisitions and
general corporate purposes may be materially limited or impaired, or
such financing may not be available on terms favorable to Ampex;
. the Company may be more highly leveraged than its competitors, which
may place it at a competitive disadvantage;
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. Ampex's leverage may make it more vulnerable to a downturn in its
business or the economy in general;
. investments in securities with lower credit quality or longer
maturities could subject the Company to potential losses due to
nonpayment or changes in market value of those securities, and
transactions in derivative securities could expose Ampex to losses
caused by stock market fluctuations; and
. the financial covenants and other restrictions contained in the
Senior Note indenture and other agreements relating to Ampex's
indebtedness will restrict Ampex's ability to borrow additional
funds, to dispose of assets or to pay dividends on or repurchase
preferred or common stock.
Ampex expects that cash balances and cash flow from operations will be
sufficient to fund anticipated operating expenses, capital expenditures and debt
service requirements as they become due, at least through 2000. There can be no
assurance, however, that the amounts available from these sources will be
sufficient for such purposes in future periods. The Company may also seek to
raise additional equity capital in the private or public markets to finance the
expansion of its Internet video businesses. No assurance can be given that
additional sources of funding will be available if required or, if available,
will be on satisfactory terms. If Ampex cannot service its indebtedness, it will
be forced to adopt alternative strategies. These strategies may include reducing
or delaying capital expenditures, selling additional assets, restructuring or
refinancing Ampex's indebtedness. There can be no assurance that any of these
strategies will be successful or that they will be permitted under the Senior
Note Indenture, if applicable.
Fluctuations in Royalty Income
Ampex's results of operations in certain prior periods reflect the receipt
of significant royalty income, including material nonrecurring payments
resulting from negotiated settlements primarily related to sales of products by
manufacturers before negotiating licenses from Ampex. Although Ampex has a
substantial number of outstanding and pending patents, and its patents have
generated substantial royalties in the past, it is not possible to predict the
amount of royalty income Ampex will receive in the future. Royalty income has
historically fluctuated widely due to a number of factors that Ampex cannot
predict, such as the extent to which third parties use its patented technology,
the extent to which it must pursue litigation in order to enforce its patents,
and the ultimate success of its licensing and litigation activities. As the
Company expands its Internet video businesses, the significance of its royalty
income, relative to operating income, is expected to increase until those
businesses become profitable.
The costs of patent litigation can be material. The institution of patent
enforcement litigation may also increase the risk of counterclaims alleging
infringement by Ampex of patents held by third parties or seeking to invalidate
patents held by Ampex. Moreover, there is no assurance that Ampex will continue
to develop patentable technology that will be able to generate significant
patent royalties in future years to replace patents as they expire. Ampex's
royalty income fluctuates significantly from quarter to quarter and from year to
year, and there can be no assurance as to the level of royalty income that will
be realized in future periods.
Dependence on Licensed Patent Applications and Proprietary Technology
Ampex's success depends, in part, upon its ability to establish and
maintain the proprietary nature of its technology through the patent process.
There can be no assurance that one or more of Ampex's patents will not be
successfully challenged, invalidated or circumvented or that it will otherwise
be able to rely on such patents for any reason. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with Ampex's ability to
make, use and sell its products either in the United States or in foreign
markets. If any of Ampex's patents are successfully challenged, invalidated or
circumvented or its right or ability to manufacture products were to be
proscribed or limited, Ampex's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon Ampex's business, financial condition and results of operations.
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Litigation may be necessary to enforce Ampex's patents, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings brought against, initiated by or otherwise involving
Ampex may require Ampex to incur substantial legal and other fees and expenses
and may require some of its employees to devote all or a substantial portion of
their time to the prosecution or defense of such litigation or proceedings.
Rapid Technological Change and Risks of New Product and Services Development
All the industries and markets from which Ampex derives revenues, directly
or through its licensing program, are characterized by continual technological
change and the need to introduce new products, product upgrades, services and
patentable technology. This has required, and will continue to require, that
Ampex spend substantial amounts for the research, development and engineering of
new products and advances to existing products and, with respect to the
Company's Internet operations, new content and services. No assurance can be
given that Ampex's existing products, services and technologies will not become
obsolete or that any new products, services or technologies will win commercial
acceptance. Obsolescence of existing product lines, or inability to develop and
introduce new products and services, could have a material and adverse effect on
the Company's sales and results of operations in the future. The development and
introduction of new technologies, services and products are subject to inherent
technical and market risks, and there can be no assurance that Ampex will be
successful in this regard.
In 1999, MicroNet changed the mix of its products to focus on its high-end
products, some of which it recently introduced or expects to introduce later
this year. Although the Company believes that these products will be well
received, there is no guarantee that they will be introduced on a timely basis
or will achieve significant market share or generate significant sales revenues.
To the extent that MicroNet fails to improve its profitability, the Company will
be required to devote resources (including management's time and attention) to
MicroNet that would otherwise be available for the expansion of the Company's
Internet video businesses.
Competition
The market for Internet products and services is highly competitive and
characterized by multiple competitors and low barriers to entry. Ampex is
attempting to develop improvements in video quality in order to differentiate
itself from its competitors. However, other companies may develop competing
technologies and Ampex may be unable to obtain patent or other protection for
its Internet video technology. In addition, the market for Internet advertising
and electronic commerce, upon which iNEXTV's Internet operations will be
partially dependent to achieve ultimate profitability, is intensely competitive
and the Company believes that competition in this field will intensify.
MicroNet's competitors include large companies such as EMC, Data General
and IBM and other small system integrators, many of which are more established
and have greater resources than MicroNet. There is no assurance that MicroNet
will be able to compete successfully in these markets in the future.
Dependence on Certain Suppliers
Ampex purchases certain components from a single domestic or foreign
manufacturer for use in its disk arrays and other manufactured products.
Significant delays in deliveries or defects in such components have adversely
affect Ampex's manufacturing operations, pending qualification of an alternative
supplier. In addition, Ampex produces highly engineered products in relatively
small quantities. As a result, Ampex's ability to cause suppliers to continue
production of certain products on which it may depend may be limited. Ampex does
not generally enter into long-term raw materials or components supply contracts.
Risks Related to International Operations
International operations are subject to a number of special risks,
including limitations on repatriation of earnings, restrictive actions by local
governments, and fluctuations in foreign currency exchange rates and
nationalization. Additionally, export sales are subject to export regulation and
restrictions imposed by U.S. government agencies. Fluctuations in the value of
foreign currencies can affect Ampex's results of operations.
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Ampex does not normally seek to mitigate its exposure to exchange rate
fluctuations by hedging its foreign currency positions.
The expansion of iNEXTV's European operations, which are conducted
primarily through TV1, may generate advertising and sales revenues in future
periods, although the Company has not recognized any material revenue to date.
The European operations of iNEXTV are expected to be subject to certain risks
and uncertainties, as set forth under the caption "Risks Associated with iNEXTV
and Internet Video Strategy. "
In January 1999, the new "Euro" currency was introduced in certain
European countries that are part of the European Monetary Union. Beginning in
2003, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace generally. Some of the rules and regulations
relating to the governance of the currency have not yet been defined and
finalized. As a result, companies operating or conducting business in Europe
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling the Euro. Ampex is currently
assessing the effect the introduction of the Euro will have on its internal
accounting systems and the potential sales of its products. Ampex will take
appropriate corrective actions based on the results of such assessment. Ampex
has not yet determined the costs related to addressing this issue. This issue is
not expected to have a material adverse affect on Ampex's business.
Volatility of Stock Price
The trading price of Ampex's Common Stock has been and can be expected to
be subject to significant volatility, reflecting a variety of factors,
including:
. quarterly fluctuations in operating results;
. announcements of acquisitions, Internet developments or new product
introductions by Ampex or its competitors;
. reports and predictions concerning the Company by analysts and other
members of the media;
. issuances of substantial amounts of Common Stock in order to redeem
outstanding shares of its Preferred Stock, or otherwise; and
. fluctuations in trading volume of the Company's Common Stock, and
general economic or market conditions.
The stock market in general, and Internet and technology companies in
particular, have experienced a high degree of price volatility, which has had a
substantial effect on the market prices of many such companies for reasons that
often are unrelated or disproportionate to operating performance. These broad
market and industry fluctuations may adversely affect the price of Ampex's
Common Stock, regardless of its operating performance.
Dependence on Key Personnel
Ampex is highly dependent on its management. Ampex's success depends upon
the availability and performance of key executive officers and directors. Except
for certain employees of its Internet affiliates, the Company has not entered
into employment agreements with its key employees, and the loss of the services
of key persons could have a material adverse effect upon Ampex. The Company does
not maintain key man life insurance on any of these individuals.
Anti-Takeover Consequences of Certain Governing Instruments
Ampex's Certificate of Incorporation provides for a classified Board of
Directors, with members of each class elected for a three-year term. The
Certificate of Incorporation provides for nullification of voting rights of
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certain foreign stockholders in certain circumstances involving possible
violations of security regulations of the United States Department of Defense.
The instrument governing Ampex's outstanding Preferred Stock, which has an
aggregate liquidation value of approximately $38.6 million at December 31, 1999,
requires that Ampex make mandatory offers to redeem those securities out of
legally available funds in the event of a change of control. For this purpose, a
change of control includes the following events: a person or group of people
acting together acquires 30% or more of Ampex's voting securities; Ampex merges,
consolidates or transfers all or substantially all of its assets; or the
dissolution of Ampex. The Certificate of Incorporation authorizes the Board of
Directors to issue additional shares of Preferred Stock without the vote of
stockholders. The indenture governing Ampex's outstanding Senior Notes, in the
total principal amount of $44 million, requires Ampex to offer to repurchase the
Senior Notes at a purchase price equal to 101% of the outstanding principal
amount thereof together with accrued and unpaid interest in the event of a
change of control. Under the indenture, a change of control includes the
following events: a person or group of people acting together acquires 50% or
more of the Company's voting stock; or the transfer of substantially all of the
Company's assets to any such person or group, other than to certain subsidiaries
and affiliates of Ampex.
These provisions could have anti-takeover effects by making an acquisition
of Ampex by a third party more difficult or expensive in certain circumstances.
Nonpayment of Dividends
Ampex has not declared dividends on its Common Stock since its
incorporation in 1992 and Ampex has no present intention of paying dividends on
its Common Stock. Ampex is also restricted by the terms of certain agreements
and of the outstanding Preferred Stock as to the declaration of dividends.
Environmental Issues
Ampex's facilities are subject to numerous federal, state and local laws
and regulations designed to protect the environment from waste emissions and
hazardous substances. Owners and occupiers of sites containing hazardous
substances, as well as generators and transporters of hazardous substances, are
subject to broad liability under various federal and state environmental laws
and regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. Ampex has been named from time
to time as a potentially responsible party by the United States Environmental
Protection Agency with respect to contaminated sites that have been designated
as "Superfund" sites, and are currently engaged in various environmental
investigation, remediation and/or monitoring activities at several sites located
off Company facilities. There can be no assurance Ampex will not ultimately
incur liability in excess of amounts currently reserved for pending
environmental matters, or that additional liabilities with respect to
environmental matters will not be asserted. In addition, changes in
environmental regulations could impose the need for additional capital equipment
or other requirements. Such liabilities or regulations could have a material
adverse effect on Ampex in the future.
Year 2000 Risks
Year 2000 problems could interfere with Ampex's business. Many software
programs may not recognize calendar dates beginning in Year 2000. This problem
could cause computers or machines that utilize date dependent software either to
shut down or provide incorrect information. As of the date of this annual
report, Ampex has not experienced any material Year 2000 problems. However, if
Ampex or any other company that it conducts business with fails to mitigate
internal or external Year 2000 risks, Ampex may temporarily be unable to engage
in business activities, which could materially harm its business and impair the
value of Ampex Common Stock.
Description of Continuing Business Operations
The Company's current operations consist principally of its iNEXTV
Internet operations, including its Internet Technology Group; its technology
licensing activities; and its MicroNet disk storage business. The operations of
Data Systems, which is being held for sale and is accounted for as a
discontinued business effective
8
with the Company's December 31, 1999 financial statements, consist of Data
System's mass data storage and instrumentation businesses. If the Company
completes the planned sale of Data Systems, it can be anticipated that the
Company's historical mix will change significantly, with an increasing emphasis
on its video-based Internet businesses. There can be no assurance that the
Company's Internet business strategy will be successful. Ampex's Internet
operations are at an early stage of development, and have not yet produced
significant revenues. Accordingly, these operations involve a material risk of
loss, and can be expected to be unprofitable for a substantial period of time.
See "Risk Factors - Risks Associated with iNEXTV and Internet Video Strategy."
The information with respect to total revenues, income (loss) from
continuing operations before income taxes, gain (loss) on business held for
disposition and identifiable assets of the Registrant's industry segments and
operations outside the United States is contained in the Notes to Consolidated
Financial Statements captioned "Segment Reporting" and "Foreign Operations" on
pages F-26 to F-28 of the Company's 1999 Consolidated Financial Statements.
Internet Operations
The Company's Internet operations are conducted primarily through its
wholly-owned subsidiary, iNEXTV, which the Company organized in 1999. The
mission of iNEXTV is to be a leading provider of streaming video content
designed for the Internet, to deliver webcasting and other services on behalf of
other business and corporate websites and to continue to innovate new
technologies that enhance the viewing experience of video on the Internet.
The iNEXTV network of content and service oriented websites currently
includes: AENTV.com, a provider of on-demand streaming video about the
entertainment industry; EXBTV.com, a producer and netcaster of original Internet
programming, covering the executive branch of the U.S. government; iSTYLE.com,
which provides video programming for affluent Internet users; TVontheWEB.com, a
leading provider of Internet video services; and TV1.de, one of Europe's leading
webcasters. The Company's Internet operations are at an early stage of
development and have not yet produced significant revenues.
In order to expand its Internet network, Ampex may make additional
acquisitions of and/or investments in other Internet businesses or websites. The
Company's strategy has typically been to make an initial investment in a
potential acquisition candidate, with options to increase its investment or to
acquire control at a future time, affording the Company the opportunity to
evaluate the risks and merits of a further investment. See Note 3 of Notes to
Consolidated Financial Statements. Nevertheless, such acquisitions and
investments involve numerous risks and uncertainties, including difficulties in
integrating acquired entities into the Ampex Internet operation, potential
conflicts with other shareholders, and where Ampex acquires a minority interest,
risks of the inability to control the management and policies of such entities.
See "Risk Factors - Risks Associated with Acquisition Strategy."
Ampex is not currently engaged in negotiating any material Internet or
other acquisitions. However, it may elect to increase its investments in one or
more of its existing acquired businesses, and intends to actively review
investment opportunities that may be presented. There can be no assurance that
any acquisitions or investments that Ampex has made, or in the future may make,
will be successful or will not incur a partial or complete loss.
Internet Video Programming
The Company believes that there will be a growing demand for targeted
video programming to be delivered over the Internet. Accordingly, a substantial
portion of the Company's Internet activities are involved in developing such
content. The increase in demand for Internet video programming results from
Internet infrastructure enhancements, and from the deployment of DSL and cable
modems that greatly increase the speed by which information can be delivered
over the Internet and into the home or business. The Company believes that
programming that was initially developed for broadcast or cable television and
that has been repackaged for delivery over the Internet will not effectively
satisfy the demand for Internet video programming. The picture quality of
streaming video over the Internet will not, in the near term, equal that of
television or movies. Traditional media programming does not address the user's
need for highly tailored and individualized information nor the user's desire to
interact and socialize with the medium. Instead, the Company believes that a
significant portion of the demand for Internet video content will be satisfied
by companies that develop programming that is specifically designed for the
Internet.
9
Currently, Internet video is subject to inferior picture quality and size
compared to television as well as frequent service interruptions. However, the
Company believes that the user will still seek the richness of an audio/video
experience over the Internet if the content is properly designed. The Company's
Internet video programming blends text, graphics, audio and interactivity
together with video. Video is used selectively first to capture an audience, and
then to inform, to persuade and to sell them in the way that sight, sound and
motion do best. The video component of made-for-the-Internet programming
constitutes a smaller portion of the overall experience than the video component
in made-for-television programming. Small screen size, delivery interruptions
and a nearly infinite number of program choices require that video for the
Internet be short in length, frequently updated, timely, easily navigated,
interactive and targeted. The Company also believes that the increasing
deployment of broadband will improve the video experience of a growing number of
web users.
In addition to investing in multiple strategic partnerships and
wholly-owned operations that produce streaming video content as discussed above,
the Company hopes to gain greater scale economies by working with independent
content developers and other content partners. The Company has built or is
building production facilities in New York City, Reston, Virginia, Washington,
DC, Los Angeles and Berlin, Germany that it intends to make available to its
content partners in order to facilitate the acquisition of Internet video
content on a cost-effective basis. The Company believes that independent content
developers often best understand a unique audience segment and can develop
programming that targets this audience most effectively and uniquely. The
Company also believes that its content partners will be well-recognized media
businesses that, as partners with the Company, seek to extend their brands and
editorial capabilities to this new distribution medium. The Company's strategy
is to obtain access to such programming on a revenue- or equity-sharing basis.
Internet Services. The Company believes that business and other corporate
websites will increasingly look to webcasting as a tool to rapidly and
effectively communicate new developments to employees, customers and other
stakeholders. The Company's affiliates, TV onthe Web and TV1, are well
recognized in their respective markets for the delivery of professionally
produced webcasts. They have established strategic partnerships with several
Internet Service Providers and are the webcaster of choice in their markets.
These affiliates differentiate their service offerings by providing creative
program and design services in addition to video production, encoding, hosting
and webcasting services. iNEXTV utilizes a combination of in-house production,
design and engineering personnel as well as independent contractors to deliver
these services.
Internet Technology Group. Ampex has developed technologies for making
electronic sound and pictures for the television broadcast market over several
decades. The Company has a thorough understanding of digital time-base
correction, digital filtering and image compression that are key enabling
technologies that support Internet streaming media. The Company's Internet
Technology Group is responsible for developing products and services to enhance
the Internet video viewing experience.
In the fourth quarter of 1999, the Company introduced the first generation
of its improved streaming video technology in certain programming shown on
EXBTV.com. These enhancements enable the Company's programming to be clearer and
flow more smoothly than competitors' video programming. The Company believes
that these improvements also permit the Company to increase the area of its
video window by 80% compared to standard player software.
The Company's Internet strategy is dependent, in part, upon the ITG's
ability to continue to develop improved technologies for streaming video
applications. The Company regards its internally developed Internet technology
as proprietary and attempts to protect it primarily with patents, copyrights,
and contractual obligations of confidentiality, regarding its trade secrets. The
Company does not currently hold any patents on its Internet technologies.
However, the Company has filed a patent application in the U.S. Patent &
Trademark office and may seek to file in the United States and foreign countries
additional patent applications with respect to technologies, such as
enhancements of picture clarity of Internet video content, that it may develop
in the future. There can be no assurance that the Company would be granted any
patents for such technology if developed or, if granted, that it would result in
any substantial competitive advantage over competing technologies. In addition,
the Company's Internet technologies could be claimed to conflict with or
infringe the proprietary rights of others, which could result in litigation and
the Company's being required to seek a license to use those proprietary assets.
The Company is not
10
currently involved in any material conflict with any third party concerning
patented or proprietary Internet technology rights.
Internet Video Markets. Today, the proportion of websites that include
video content is relatively small. Those that incorporate video are primarily
websites affiliated with television and cable networks that repurpose clips of
their news and other video feeds. There also exists a limited number of
companies that are developing Internet video programming that is tailored to
appeal to specific demographic groups, believed not to be served by broadcast or
cable programming. In the near future, the Company believes that video content
will be included in an increasing number of websites of corporations,
not-for-profit agencies and other organizations that seek to enhance
communications beyond that currently provided by traditional text and
graphics-based content. Also, the Company believes that most Internet portals
will provide access to more video programming in order to continue to attract a
large number of viewers to its sites, especially those that have broadband
access. Lastly, the Company believes that there will be an increasing numbers of
websites that are dedicated to the delivery of video programming along specific
targeted demographics, where the business model is dependent upon advertising
and sponsorship revenues and fees from e-commerce activity.
The Company intends to syndicate to Internet portals and to certain other
destination websites, certain of its video programming. For example, AENTV.com
is producing timely news programming about the entertainment industry in
conjunction with the "Hollywood Reporter" and "Billboard Magazine", which it
intends to syndicate.
EXBTV.com produces daily "live" and on demand webcasts of press
conferences and Committee hearings from the White House and several Federal
agencies. This programming is targeted toward businesses and enterprises that
are regulated or otherwise strongly affected by government policy. iSTYLETV.com
is developing "life style" programming about high end personal interests of
affluent individuals, including Classic Cars, Travel, Fashion and others.
The Company's TV onthe WEB operation in Reston, Virginia provides national
webcasting, web-serving and Internet video program production for a variety of
corporations, not-for-profit organizations and other business entities.
The Company's strategy with EXBTV.com and iSTYLETV.com is to grow revenues
from Internet video advertising, sponsorships and e-commerce partnerships.
Advertising on the Internet is in its early development. Industry sources
estimate that Internet advertising in 1999 totaled approximately $3 billion, out
of total U.S. advertising in excess of $200 billion. However, by 2004, these
sources estimate that Internet advertising will exceed $20 billion and represent
nearly 7% of total U.S. advertising.
Advertising on the Internet is currently conducted primarily through
banner ads and sponsorships. Together, they accounted for over 90% of all
on-line advertising in 1998. The advertising community recognizes that banner
ads lack the impact of traditional sophisticated media. As bandwidth into the
home increases, advertisers will be able to become more creative and
advertisements may begin to look more like television advertising, though more
tailored for the audience being targeted. The Company believes the advent and
development of enhanced streaming video content will logically be supported by
the growth in sophisticated advertising.
The Company's EXBTV.com and iSTYLE.com websites have only recently become
operational. The Company intends to incur substantial marketing and promotional
expenditures to attract users to its video websites. The Company believes that
will begin to attract a growing advertiser clientele and begin to generate
e-commerce activity through these sites when they demonstrate significant
viewership. However, material advertising and e-commerce revenues are not
expected to be obtained for the next several fiscal quarters. Accordingly, the
Company anticipates that its Internet operations will generate material losses
for the foreseeable future.
Depending on the Company's financial resources and access to additional
capital, the Company may seek to take equity positions in companies that have
unique Internet video content, technology or other attributes. By providing
infrastructure support in production, sales and marketing and technology, the
Company believes that it can accelerate access to the public capital markets for
these companies. The Company may seek to make public or
11
private offerings of the securities of one or more of its affiliates, depending
on market conditions and other factors. There can be no assurance that any of
these efforts will materialize or be successful.
Licensing Operations
As a result of its ongoing 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, 1999, 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 125 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 unlicensed manufacturers of digital format
consumer video recorders, but there can be no assurance that any such licensing
efforts (including any necessary litigation) will be successful.
The Company believes that it has patents that may 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.
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" 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 nonexclusive 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.
Trademarks of the Company used in this Report include Ampex include Ampex,
DCT, DST, DCRsi and DIS, all of which are trademarks of Ampex Corporation, and
MicroNet, DataDock, Genesis, FibreFlex and Premier, all of which are trademarks
of MicroNet. All other trademarks and service marks used in this Report are the
property of Ampex or their respective owners.
12
MicroNet Operations
MicroNet Products. MicroNet offers a wide variety of storage solutions
targeted at image-based creative professional markets, including principally
digital pre-press and digital video editing. It's principal products are
described below.
DataDock. DataDock transportable storage systems provide a high level of
performance, flexibility and safe removable operation available for desktop
systems. DataDock and DataDock 525 storage systems were developed for use in the
publishing and collaborative content-creation markets, where sharing of large
data files is integral to the workflow process. Available drive modules range
from hard disk drives, CD recorders, DVD-RAM and tape backup devices to high
performance disk arrays. DataDock products can be used with many computing
platforms and operating systems including Windows 95/98, NT, Mac OS, Sun Solaris
and SGI IRIX. DataDock 7000 redundant array of independent disks ("RAID")
storage systems provide platform and operating systems interdependence combined
with DataDock features in a self-contained RAID system with capacities up to 250
gigabytes ("GB"). DataDock 7000 systems were designed for small to medium
companies requiring a high performance mid-capacity RAID storage system. The
DataDock 7000 is scalable and can incorporate backup devices in the unit in
order to provide self-contained RAID storage and archive solution. Data Dock
products accounted for 22.7% and 22.4% of total revenues in 1999 and 1998,
respectively.
Genesis. MicroNet believes that many of its customers are migrating to
higher bandwidth internal networks requiring larger storage capabilities. The
Genesis RAID Systems have been developed in response to this trend. These
products incorporate many of the features of the DataDock 7000 product line and
can operate on a fibre channel interface. The Genesis product line includes
three scalable products defined by capacity, interface and feature set. All are
platform independent, fibre channel-ready. Genesis products include redundant
RAID controllers for added security and a web-based GUI (graphical user
interface) for easier system management. Genesis products integrate dual
FibreBridge technology allowing them to achieve high-speed fibre channel
connectivity for integration in a Storage Area Network ("SAN"), offering up to
1.4 terabytes of storage.
FibreFlex. FibreFlex is a complete, multi-platform compatible fibre
channel SAN that enables workgroups to achieve fast network access and was
designed as the next generation of connectivity for companies that work with
large data and graphic image files. By integrating fibre channel switches, hubs
and host adapters with Genesis RAID system and file level data management
software, FibreFlex allows multiple users simultaneously to access large data or
graphics files without typical network slowdown. FibreFlex also eliminates data
copying time and provides true version control by centralizing data and
providing file level data access, which MicroNet believes surpasses other fibre
networks that allow only volume level access. User productivity is significantly
increased in multi-project, multi-user environments.
SANCube. At MacWorld in January 2000, MicroNet introduced SANCube, an
external storage product for Apple Macintosh workgroups, providing as much as
220GB of storage which can be shared by up to four users utilizing SAN software.
SANCube products afford superior data transfer rates by connecting to Macintosh
workstations through Firewire ports.
MicroNet's Markets. MicroNet products are sold in many segments of the
high-end graphics market, which includes printers, book and magazine publishers,
advertising agencies, graphic designers', video production and post production
facilities, and web design and creation houses. MicroNet enjoys an excellent
reputation in both the production and post production market segments of the
digital video programming market.
MicroNet Distribution and Customers. MicroNet products, including
DataDock, Genesis and Premier lines, are sold primarily to content-creation
customers in the publishing, pre-press and digital video open systems post
production markets. Sales of MicroNet products are made through an internal
sales force to a worldwide network of Value Added Resellers ("VARs"),
integrators and distributors. MicroNet currently maintains three regional sales
offices strategically located in the U.S. No single customer accounted for more
than 10% of the MicroNet's total net sales in 1999, 1998 or 1997. MicroNet's
backlog is not generally material to its operations.
13
MicroNet Research, Development and Engineering. MicroNet will continue to
focus its development and engineering efforts on disk array products. The
Genesis product line builds on the DataDock 7000 family of disk arrays (RAID).
MicroNet engineering is developing new features for Genesis to include a native
fibre channel-version of the Genesis product line that utilizes fibre channel
devices throughout the system. This product line will leverage the 100 megabyte
("MB") per second bandwidth of fibre channel to greatly increase data transfer
rates to users on a SAN. It will be particularly attractive to users who require
a very high-sustained data transfer rate, such as for video applications.
SANCube introduces the concept of SAN at a very reasonable cost to small
workgroups with a need for shared storage. Design emphasis is on performance,
reliability, ease of use and management features.
Manufacturing. MicroNet's products are primarily manufactured, designed
and engineered at MicroNet facilities in Irvine, California. The Company also
outsources manufacturing for some of its products to contract manufacturers, and
plans to increase the use of such contractors. The Company believes that its
manufacturing facilities and outsourcing to contract manufacturers, it will have
sufficient capacity to accommodate business growth for its present products in
the foreseeable future.
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 current insurance.
Sources of Supply. MicroNet uses a broad variety of raw materials and
components in its manufacturing operations. While most materials are readily
available from numerous sources, MicroNet 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 MicroNet's
manufacturing operations pending qualification of an alternative supplier. In
addition, MicroNet produces highly-engineered products in relatively small
quantities. As a result, its ability to cause suppliers to continue production
of certain products on which MicroNet may depend may be limited. MicroNet does
not generally enter into long-term raw material supply contracts. In addition,
many of the components of MicroNet's products are designed, developed and
manufactured by MicroNet itself, and thus are not readily available from
alternative sources.
Competition. MicroNet services the professional graphics community, which
is significant in range; therefore, the Company has competition in many
different segments. Competition comes mainly from captive storage solutions
provided by Compaq and Intergraph. In other segments of the professional
graphics market, MicroNet sees competition from captive storage solutions
provided by various CPU manufacturers, including Apple Computer, Silicon
Graphics, Sun MicroSystems and Intergraph. In the digital video open systems
post-production market, competitors such as DataDirect Networks and Rorke Data
Systems have products offering similar performance and capabilities. Sales of
MicroNet products can be affected by the performance of complementary software
and hardware products and market conditions in both the professional graphics
and digital video open systems post-production markets.
Description of Business Held for Disposition
As noted above, in February 2000, in order to focus more sharply on its
Internet business, Ampex announced plans to sell its Data Systems subsidiary,
which produces high performance mass data storage and instrumentation recorders
and systems. Data Systems products are sold primarily for use in the television
broadcast and government markets. At the date of this Report, the Company had
not yet entered into a contract to sell Data Systems, and there can be no
assurance that a contract will be entered into or as to the terms or timing of
any sale. Pending consummation of a sale, the Company will account for Data
Systems' operations as a discontinued business effective for the fiscal year
ended December 31, 1999. See "Risk Factors - Risk of Proposed Sale of Data
Systems," above. A brief summary of Data Systems' business and operations is set
forth below. For additional information, reference is made to the Company's 1998
Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q filed with the
Securities and Exchange Commission during 1999.
Data Systems' principal products are: (i) 19-millimeter scanning recorders
and library systems (DST and DIS products) and related tape and after-market
equipment; (ii) data acquisition and instrumentation products
14
(primarily DCRsi instrumentation recorders) and related tape and after-market
equipment; and (iii) professional video and other products (primarily its DCT
video recorders and image processing systems) and related tape products and
television after-market equipment.
Data Systems distributes its 19-millimeter products directly through its
internal sales force and independent value-added resellers. Data Systems' DST
products are sold to customers such as oil and gas companies, imaging companies,
information and entertainment delivery companies and broadband
telecommunications companies. Data Systems is also pursuing opportunities for
storage of very large databases maintained by many commercial and government
entities. Data Systems' 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 Data Systems' internal domestic and
international sales forces, as well as through independent sales organizations
in foreign markets. Data Systems' sales to U.S. government agencies (either
directly or indirectly through government contractors) represented 19.2 % of
their net sales in fiscal 1999 compared to 25.8 % in fiscal 1998 and 27.7% in
fiscal 1997. No single non-government customer accounted for more than 10% of
Data System's total net sales in 1999, 1998 or 1997. Data Systems' products are
manufactured at facilities in Redwood City, California and Colorado Springs,
Colorado. The Company believes that Data Systems' manufacturing facilities,
which were consolidated in 1998, continue to have sufficient capacity to meet
current and future demand. Data Systems competes in all markets with a number of
well-established corporations, such as IBM Corporation, Sony Corporation,
Quantum Corporation and others. In the instrumentation market, its major
competitors include Sony Corporation, Loral Data Systems, Data Tape Incorporated
and Metrum Incorporated. Data Systems' product lines are characterized by
continual technological developments, and require 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 the Data Systems operation.
As of December 31, 1999, Data Systems employed 293 people, as compared to
386 people as of December 31, 1998.
Employees
As of December 31, 1999, Ampex employed 172 people (including employees of
consolidated subsidiaries) in its continuing operations, as compared to 75
persons employed as of December 31, 1998, primarily reflecting expansion of the
Company's Internet operations during 1999. Also, the Company from time-to-time
utilizes the services of independent contractors, primarily in its Internet
operations. 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, except for certain employees of its Internet
affiliates. 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.
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 2000 or 2001 will be
material.
Owners and occupiers of sites containing hazardous substances, as well as
generators and transporters of hazardous substances, are subject to broad
liability under various federal and state environmental laws and regulations,
including liability for investigative and cleanup costs and damages arising out
of past disposal activities.
15
The Company has been named as a potentially responsible party by the United
States Environmental Protection Agency with respect to four contaminated sites
that have been designated as "Superfund" sites on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980. The Company is engaged in six environmental investigation, remediation
and/or monitoring activities at sites located off Company facilities, including
the removal of solvent contamination from subsurface aquifers at a site in
Sunnyvale, California. Some of these activities involve the participation of
state and local government agencies. The other five sites (including the four
Superfund sites) are associated with the operations of the Media subsidiaries
formerly owned by the Company. Although the Company sold Media in November 1995,
the Company may have continuing liability with respect to environmental
contamination at these sites if Media fails to discharge its responsibilities
with respect to such sites. During 1999, the Company spent a total of
approximately $0.1 million in connection with environmental investigation,
remediation and monitoring activities and expects to spend a similar amount in
fiscal 2000 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,
1999, the Company had an accrued liability of $1.6 million for pending
environmental liabilities associated with the Sunnyvale site and certain other
sites currently owned or leased by the Company. The Company has not accrued any
liability for contingent liabilities it may incur with respect to former Media
sites discussed above. Based on facts currently known to management, management
believes it has no contingent liability in connection with such pending matters,
either individually or in the aggregate, will be material to the Company's
financial condition or results of operations or material to investors.
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.
Pension Plan Matters
In 1994, the Company, the Pension Benefit Guaranty Corporation ("PBGC")
and certain affiliates ("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. See Note 18
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 any of the Company's potential termination
liabilities. Sale of Data Systems may be subject to approval of the PBGC with
respect to pension plan matters. 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.
16
ITEM 2. PROPERTIES
As of December 31, 1999, the Company's principal properties were as
follows:
Approximate
Square Footage
Location Activities Conducted of Facility
-------- -------------------- -----------
Redwood City, California Executive offices, RD&E,
manufacturing, sales and marketing (1)(9) 91,760
Colorado Springs, Colorado Manufacturing (9) 229,961
New York City, New York Executive offices, Internet
marketing, sales, operations and studio (2) 19,000
Irvine, California Engineering, manufacturing,
sales and marketing (3) 33,089
Chineham, Basingstoke, England Sales and service (4)(9) 7,184
Tokyo, Japan Sales and service (5)(9) 3,886
Sulzbach, Germany Sales and service (6) 13,530
Reston, Virginia Internet and post production marketing,
sales, operations and studios (7) 21,250
Woodland Hills, California Internet marketing, sales, operations
and studios (8) 10,568
Washington, DC Internet and post production marketing, 1,575
sales, operations (10)
(1) These facilities are leased until September 2008, with 31,987 square feet
sublet until July 31, 2004 and an option to extend the sublease to
September 2008.
(2) These facilities are leased under a ten-year lease that expires in April
2008.
(3) These facilities are leased under a five-year lease that expires in May
2005.
17
(4) These facilities are leased under a ten-year lease, which is terminable at
the option of the Company or landlord in December 2002.
(5) These facilities are leased under leases that expire during July 2000. The
current plan is to renew the lease on a year-to-year basis.
(6) The lease was terminated in January 2000.
(7) These facilities are leased under two agreements with expiration dates in
June 2001 and December 2004
(8) These facilities are leased under various leases expiring in March 2004.
(9) These properties are used primarily for the operations of Data Systems,
which is being held for disposition. If the proposed sale of Data Systems
is consummated, the Company anticipates that these properties will be sold
or the lease will be assigned to the acquiring company in connection with
the sale.
(10) These facilities are leased for a two-year term that expires on December
31, 2002.
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, Data Systems 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. One lease covers approximately 32,000 square
feet and a second lease covers a newly constructed building of 59,760 square
feet, which Data Systems first occupied in September 1998. Concurrently with
occupancy of the new building, the leases on three other buildings totaling
approximately 114,560 square feet were terminated.
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.
In response to a lawsuit filed by the Company against Mitsubishi Electric
Corporation and Mitsubishi Electric America Inc. ("Mitsubishi"), which has been
finally resolved as previously reported, Mitsubishi filed a lawsuit against
Ampex, alleging patent infringement by certain Ampex video and data recorder
products. In 1997, the U.S. District Court for the Central District of
California determined that Ampex has no liability to Mitsubishi patents, and
Mitsubishi appealed to the Court of Appeals for the Federal Circuit. On August
30, 1999, the Court of Appeals affirmed the judgment in favor of Ampex and
subsequently denied Mitsubishi's request for reconsideration. On January 31,
2000, Mitsubishi filed a petition for certiorari to the Supreme Court of the
United States. The Company has filed a brief opposing this petition, and it is
unknown when the Court will make its decision whether to hear Mitsubishi's
appeal.
On January 7, 2000, a suit was filed against the Company and others in the
Superior Court of the District of Columbia by Information Super Station ("ISS")
seeking an injunction and recovery of damages in connection with activities
related to an investment in a subsidiary of ISS made by the Company's
subsidiary, iNEXTV.
18
The Company has moved to dismiss this suit on the grounds of inconvenient forum.
On February 1, 2000, the Company filed suit against ISS and others in the United
States District Court for the Southern District of New York under the Federal
securities laws seeking contract rescission and damages in connection with
activities related to this investment. No answer has yet been received.
See also "Environmental Regulation and Proceedings" and Note 14 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,
2000 are as follows:
Name Age Position
Edward J. Bramson 48 Chairman and Chief Executive Officer
Craig L. McKibben 49 Vice President, Chief Financial Officer and
Treasurer
K. Michael Cooper 52 Vice President
Robert L. Atchison 62 Vice President
Joel D. Talcott 58 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. Mr. Bramson also serves as President of each of Ampex Holdings
Corporation and iNEXTV, as Vice President of MicroNet, and as Assistant
Secretary of Data Systems, which is being held for disposition. Mr. Bramson is a
director of each such subsidiary, and of TV onthe WEB, Inc. (a subsidiary of
iNEXTV Corporation) and Ampex Finance Corporation (a subsidiary of Ampex
Corporation). 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, LP 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.
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. Mr. McKibben also serves in the following capacities
with other Company subsidiaries: director, Vice President and Treasurer of Ampex
Holdings Corporation and iNEXTV, director and Vice President of Ampex Finance
Corporation and MicroNet; Treasurer of Alternative Entertainment Network, Inc.
and director and Interim Chief Financial Officer of TV onthe WEB, Inc. He also
serves as Vice President and Treasurer of Data Systems, which is being held for
disposition. 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, the Company's former parent.
>From 1983 to 1989, he was a partner at the firm of Coopers & Lybrand L.L.P., a
predecessor of PricewaterhouseCoopers LLP, independent public accountants.
19
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 Vice President and a
director of Data Systems, which is being held for disposition, and as President
and a director of Ampex International Sales Corporation, a wholly-owned
subsidiary of the Company. He has served as an executive officer of the Company
and various subsidiaries since 1987.
K. Michael Cooper, who joined the Company in June 1998, is Vice President
of the Company. He also serves as President and a director of MicroNet, and as
such has operating responsibility for this subsidiary. Mr. Cooper serves as Vice
President and a director of AENTV, a subsidiary of iNEXTV, and as President and
a director of Data Systems, which is being held for disposition. Previously, Mr.
Cooper served as President and Chief Executive Officer of a computer peripheral
company, and in a number of senior management positions with the Hiller Group.
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 1987
to 1991), and has supervisory responsibility for investor relations and
corporate communications functions. Mr. Talcott also serves as Vice President,
Secretary and a director of Ampex Finance Corporation, Ampex International Sales
Corporation and Data Systems, which is being held for disposition, and as Vice
President and Secretary of iNEXTV, Ampex Holdings Corporation and MicroNet,
wholly-owned subsidiaries of the Company, and as Vice President and General
Counsel of TV onthe WEB, Inc., a subsidiary of iNEXTV.
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 1999 and 1998.
Since January 16, 1996, the Class A Common Stock has been traded on the American
Stock Exchange under the symbol "AXC."
Fiscal Year High Low
1999
First Quarter $5.63 $1.06
Second Quarter 7.50 2.56
Third Quarter 6.00 2.50
Fourth Quarter 6.38 2.25
1998
First Quarter $3.25 $2.00
Second Quarter 3.13 1.75
Third Quarter 2.13 1.00
Fourth Quarter 1.19 .69
As of January 28, 2000, there were 821 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
its 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 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.
20
(b) Information as to equity securities sold by the Company during the
fiscal year ended December 31, 1999 which were not registered under the
Securities Act of 1933, as amended (the "Securities Act") is contained in the
Company's Quarterly Reports on Form 10-Q filed by the Company for such period.
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.
Strategic Repositioning of the Company
Beginning in 1999, the Company began a strategic repositioning by building
a network of Internet video businesses, focusing on programming, services and
technology. During the past year the Company, through its subsidiary, iNEXTV,
acquired equity interests in various Internet video businesses and started to
assemble its internal organization to support the iNEXTV network and to develop
additional Internet video-based websites.
In February 2000, in order to focus more sharply on its Internet video
businesses, the Company announced plans to sell Data Systems, its subsidiary
which makes high performance tape-based mass data storage products. The results
of operations of Data Systems have been classified as Discontinued Operations in
the Statements of Operations for all periods presented. The book value of the
net assets to be sold of this segment have been reflected in net assets of
business held for disposition in the Consolidated Balance Sheet as of December
31, 1999. Upon consummation of a successful sale, the Company intends to use the
proceeds for investment in iNEXTV and other Internet initiatives, as well as to
retire debt.
Following the planned sale of Data Systems, the Company's continuing
operations will include iNEXTV, its non-Internet technology licensing group, the
newly-formed Internet Technology Group and MicroNet, its wholly-owned subsidiary
that makes high performance disk arrays and SAN products (principally DataDock,
Genesis and SANCube products). These product groups are described below. No
other class of similar products, services or royalty arrangements accounted for
more than 10% of continuing revenues during the comparison periods discussed
below.
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.
Results of Operations for the Three Years Ended December 31, 1999
Total Revenue. Total revenue increased by 102.1% to $32.6 million in 1999
from $16.1 million in 1998, which increased by 28.3% from the total revenue of
$12.6 million in 1997. In 1999, the revenue increase over 1998 was primarily due
to the increased royalty income. In addition, there was an increase in total
revenue in 1999 as a result of the inclusion of the Company's Internet video
businesses and an increase in product sales from MicroNet reflecting the
inclusion of an entire twelve-month period in 1999 compared to the six-month
period since acquiring MicroNet in June 1998. In 1998, the revenue increase
compared to 1997 is attributed to the inclusion of MicroNet product sales for
the six-month period, offset in part by slightly lower royalty income.
Royalty Income. Royalty income was $19.9 million in 1999, $10.6 million in
1998 and $12.6 million in 1997. The increase in royalties in 1999 was positively
impacted by royalty income of approximately $10.0 million, representing the
portion of royalties earned through 1999 from a previously disclosed long-term
license agreement
21
extending through the year 2001. The Company's royalty income derives from
patent licenses, and the Company receives most of its royalty income from
licenses with companies that manufacture consumer video products (such as VCRs
and camcorders) and, in certain cases, professional video tape recorders. During
this period, a growing portion of royalty income related to 6-mm and 8-mm video
recorders and camcorders. The Company is assessing whether manufacturers of
video games, DVD recorders and digital television receivers are using its
patented technology. There can be no assurance that the manufacturers of these
products are utilizing the Company's technology or, if used, whether the Company
will be able to negotiate license agreements with the manufacturers. Royalty
income has historically fluctuated widely due to a number of factors that the
Company cannot predict or control such as the extent of use of the Company's
patented technology by third parties, the materiality of any nonrecurring
royalties received as the result of negotiated settlements for products sold by
manufacturers prior to entering into licensing agreements with the Company, the
extent which the Company must pursue litigation in order to enforce its patents,
and the ultimate success of its licensing and litigation activities. The costs
of patent litigation can be material, and the institution of patent enforcement
litigation may also increase the risk of counterclaims alleging infringement by
the Company of patents held by third parties or seeking to invalidate patents
held by the Company. See "Legal Proceedings," above.
Internet Revenue. The Company's Internet video programming and services
business began in early 1999, and in June 1999 were consolidated under its
subsidiary, iNEXTV. iNEXTV recorded revenue of $1.7 million in the year ended
December 31, 1999, principally from Internet video services conducted by TV
onthe WEB. Such revenues do not include revenues of TV1, which provides Internet
video services to European businesses, as TV1 is not a majority-owned affiliate.
iNEXTV currently anticipates that Internet video revenues will grow in 2000, but
that revenues from advertising and e-commerce are not expected to become
significant until the second half of 2000. The Company's two new websites,
EXBTV.com and iSTYLETV.com, which are expected to rely significantly on
advertising and e-commerce revenues, were launched in the first quarter of 2000.
Additionally, AENTV.com's new programming, on which it will be primarily
dependent for revenue, was introduced in the fourth quarter of 1999.
Product Sales. The Company has included the operations of MicroNet in its
consolidated results of operations since its acquisition effective June 30,
1998. Sales of MicroNet products for 1999 totaled $11.0 million compared to the
six-month period since acquisition of $5.5 million. The Company believes that
MicroNet sales levels have been adversely impacted by the decision to withdraw
from lower priced product lines, and MicroNet is refocusing on higher
performance disk-array products such as the DataDock 7000, and Genesis which was
introduced in 1999. In 2000, MicroNet has introduced SANCube which is
anticipated to further enhance MicroNet's position in the market for storage
area network products.
Intellectual Property Costs. Intellectual property costs relate to those
expenditures incurred by the Company's in-house patent department in procuring
royalty income and expenditures associated with patent enforcement litigation.
Intellectual property costs totaled $1.3 million, $1.5 million and $5.7 million
in 1999, 1998 and 1997, respectively. Expenditures in 1997 were higher than in
subsequent years as the Company filed a lawsuit alleging patent infringement
resulting in additional legal expenses.
Internet Video Programming and Site Development. Internet video
programming and site development costs of $7.9 million in 1999 represent costs
incurred for services rendered to customers, as well as costs incurred for the
development of made-for-the-Internet video programming and website hardware and
software purchases in preparation for the launch of EXBTV.com and iSTYLETV.com.
Such costs also include costs incurred by Ampex's Internet Technology Group to
develop improved Internet video technology that will be used by iNEXTV and its
affiliates. The Company anticipates that site development startup costs will
decline in the first quarter of 2000, but that expenditures for program
production, marketing and advertising will increase materially as the network
expands.
Cost of Product Sales. Product costs associated with MicroNet sales were
$8.6 million and $4.1million in 1999 and the six-month period since acquisition,
respectively. The Company has been transitioning MicroNet's product line to
focus on higher margin disk arrays and storage area network products. Gross
margins on such products are generally higher than on the Company's current
product lines.
Research, Development and Engineering Expenses. Research, development and
engineering expenses associated with MicroNet increased to $1.0 million (9.2% of
product sales) in 1999 from $0.4 million (7.0% of
22
product sales) in 1998. The majority of RD&E was focused on the development and
engineering on disk array products, specifically the development of the Genesis
and SANCube product lines which have been introduced to the market in 1999 and
early 2000, respectively. The Company did not have any RD&E expenses in 1997.
The Company is also committed to investing in research, development and
engineering programs which support iNEXTV's Internet video strategy.
Selling and Administrative. Selling and administrative expenses increased
to $15.4 million in 1999 from $7.1 million in 1998 and $3.9 million in 1997. In
addition to costs incurred for the Internet video programming and site
development discussed above, the Company's Internet video businesses incurred
sales, marketing and administrative expenses totaling $12.2 million in 1999. In
1998, there were no material Internet-related expenditures. MicroNet incurred
expenditures of $4.0 million in 1999 compared to $2.5 million for the six-month
period since acquisition. The Company anticipates that it will need to increase
its sales and marketing efforts to be successful in bringing together the
necessary capabilities to build the Company's presence in Internet video markets
and increase sales at MicroNet due to its new product offerings in early 2000.
Amortization of Goodwill and Asset Writedown. In connection with the
acquisitions of each of MicroNet, TV onthe WEB and AENTV, the purchase price
exceeded the fair value of assets acquired and liabilities assumed, resulting in
the recording of goodwill. Goodwill is being amortized on a straight-line basis
over a three-to-five year period from the respective dates of acquisition.
Additional goodwill may be recognized to the extent that future payments are
required to be paid on the MicroNet preferred stock, or if the Company exercises
options to acquire controlling equity interest in its other Internet video
affiliates. The rapid amortization policy results in material charges against
operations and increased losses being recognized. In the fourth quarter of 1999,
the Company elected not to exercise options to acquire additional ownership in
Executive Branch Webcasting Corporation ("EBWC") but to proceed with the
development of EXBTV.com as an iNEXTV-funded Internet video initiative. The
Company wrote off its minority investment in EBWC totaling $1.5million. Also in
the fourth quarter of 1999, the Company wrote off a minority investment in a
company providing web hosting and Internet consulting services, totaling $0.5
million, since the Company is no longer involved in the strategic direction of
that entity.
Acquisition of In-process Research and Development. In connection with the
acquisition of MicroNet, the independent appraisal of the in-process research
and development resulted in the recording of a one-time $0.9 million charge in
the second quarter of 1998. At the acquisition date, MicroNet was in the process
of developing four significant enhancements to its Data Dock product line which
had not reached technological feasibility and for which there was no future
alternative use. These projects included:
. the first generation Genesis product, a disk array with a scalable,
variable raid-configured disk array offering up to 1 terabyte of
capacity and fibre channel interface for broadband users,
. the second generation Genesis product that will incorporate a fibre
channel back plane to permit fibre channel connectivity to fibre
channel disk drives,
. DataDock products offering a low voltage differential compatible
back plane to connect to Ultra2 SCSI channels between the disk array
and host computer,
. DataDock products offering Ethernet connectivity permitting local
and remote monitoring via TCP/IP networks and standard web browsers
for multiple user workgroup environments.
The classification of each research and development project as "complete"
or "under development" was made in accordance with the guidelines of SFAS 86,
SFAS 2 and FIN4. The above development projects were estimated to be completed
within 18 months of the acquisition date and between 25% and 85% complete, based
on engineering estimates of hours incurred to date and hours expected to be
required to complete technological feasibility per project. The Company's
development effort involves storage subsystem design and includes software,
firmware and electronics designed to tie together disk drives and third party
hardware drive mechanisms. MicroNet's design philosophy is to incorporate
"off-the-shelf" technology as it becomes available and proven in the
marketplace, and to focus its design activities on ease of use, reliability,
security, durability and similar enhancements. As a result, its development
activities can be budgeted with a fair degree of precision.
23
All in-process R&D projects continue to progress, in all material
respects, consistently with the assumptions that MicroNet provided to the
independent appraiser for use in the valuation of the in-process R&D. The
Company used an independent appraisal firm to assist it with its valuation of
the fair market value of the purchased assets of MicroNet and the valuation of
the consideration issued. Fair market value is defined as the estimated amount
at which an asset might be expected to be exchanged between a willing buyer and
willing seller, assuming the buyer continues to use the assets in their current
operations. MicroNet provided assumptions by product line of revenue, cost of
goods sold and operating expense to the appraiser to assist in the valuation.
The appraisal considered three traditional approaches to valuation: the cost
approach, the market approach and the income approach. The incomplete technology
represents a mix of near and mid-term prospects for the business and imparts a
level of uncertainty to its prospects. It is the nature of the business to be
constantly developing enhanced products that offer improved storage capacity and
performance. A reasonable expectation of return on the incomplete technology
would be higher than that of completed technology due to these inherent risks.
As a result, the earnings associated with incomplete technology were discounted
at a rate of 39%, and included as in-process R&D only that portion of the
discounted revenues that had been completed at the acquisition date. The
valuation was based on the assumption that the estimated cost to complete all
products under development, measured as of the acquisition date, would be
approximately $500,000. The valuation approach also assumed that these products
would generate revenues through the year 2007. The inability of MicroNet to
complete this technology within the expected timeframes could materially impact
future revenues and earnings, which could have a material adverse effect on
MicroNet's business, financial condition and results of operations.
Operating Income (Loss). The Company incurred an operating loss of $6.2
million in 1999 compared to operating income of $1.5 million in 1998 and
operating income of $2.9 million in 1997. The operating loss in 1999 was
primarily due to the inclusion of the Company's Internet video activities,
including amortization of goodwill as a result of the acquisition of TV onthe
WEB and AENTV and the write off of two minority investments described above,
offset in part by royalty income of which approximately $10.0 million relates to
royalties earned from a previously disclosed license agreement. The Company
expects to make additional strategic acquisitions relative to its Internet video
strategy that will require significant expenditures in 2000 and future periods.
The Company may also incur material charges to goodwill amortization and that
will increase consolidated net losses while the Company is building its Internet
programming network.
Interest Expense. Interest expense, primarily due to the issuance of $44.0
million of 12% Senior Notes due 2003 and Warrants to purchase approximately 1.02
million shares of Common Stock in January and July 1998, increased between the
comparison periods. Interest expense was not material in 1997.
Amortization of Debt Financing Costs. These amounts reflect periodic
amortization of financing costs over the remaining terms of the debt. Financing
costs associated with the January and July 1998 issuance of the 12% Senior Notes
are being charged to expense over five years.
Interest Income. Interest income is earned on cash balances and short and
long-term investments. In 1999 and 1998 the Company, pending application of the
proceeds of the 12% Senior Notes, had significantly higher investment balances
compared to 1997, which resulted in higher interest income. In 1997, interest
income included imputed interest 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.
Other (Income) Expense, Net. In 1999, other (income) expense, net includes
a proportionate share of the net loss for the period the Company held a minority
interest in TV onthe WEB and AENTV.
Provision for (Benefit of) Income Taxes. The provisions for income taxes
in 1999 and 1997 consist primarily of foreign income taxes and withholding taxes
on royalty income. In the first quarter of 1998, the Company reversed $5.2
million previously reserved in connection with disputed state income taxes for
the prior years, following the favorable settlement of that dispute in March
1998. In the second and third quarters of 1998, the Company reversed $4.9 and
$5.2 million, respectively, previously reserved in connection with the
liquidation of its subsidiary in Italy. See Note 20 of Notes to Consolidated
Financial Statements. 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 carry forwards and timing differences.
At December 31, 1999, the Company had net operating loss carry forwards for
income tax purposes of $128.8 million, expiring in the years 2005 through 2014.
24
As a result of financing transactions that were completed in 1994 and 1995, the
Company is limited in the amount of net operating loss carry forwards that can
offset consolidated Federal taxable income in a given year. The Company derives
pretax foreign income from its international operations, which are conducted
principally by its foreign subsidiaries. In addition, the Company's royalty
income is subject, in certain cases, to foreign tax withholding. Such income is
taxed by foreign taxing authorities and the Company's domestic interest and
amortization expenses and operating loss carry forwards are not deductible in
computing such foreign taxes.
Gain (Loss) of Business Held for Disposition. In February 2000, the Board
of Directors of the Company authorized management to pursue a sale of Data
Systems, its wholly-owned subsidiary that manufacturers and sells high
performance, tape-based mass data storage products. As a result, for all periods
presented, the Company reported as a single line item in the Consolidated
Statements of Operations and Comprehensive Income (Loss), a gain (loss) of
business held for disposition, net of taxes of ($3.0) million, ($3.8) million
and 11.6 million in 1999, 1998 and 1997, respectively. Revenues of this segment
totaled $51.6 million, $57.8 million and $80.3 million in 1999, 1998 and 1997,
respectively. Total costs and operating expenses of this segment totaled $54.9
million, $62.2 million and $69.8 million in 1999, 1998 and 1997, respectively.
Other (income) expense of this segment totaled $(0.2) million, ($0.5) million
and ($1.5) million in 1999, 1998 and 1997, respectively. Prospective buyers have
only recently been approached by the Company's advisors. However, the Company
believes that it will recognize a gain on the sale of Data Systems some time in
fiscal 2000.
Net Income (Loss). The Company reported a net loss of $15.4 million in
1999 and net income of $10.4 million in 1998 and $14.8 million in 1997,
primarily as a result of the factors discussed above under "Operating Income
(Loss)", "Provision for (Benefit of) Income Taxes" and "Gain (Loss) of Business
Held for Disposition."
Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. On
April 28, 1999, the Company agreed to exchange 40,000 shares of its Common Stock
for 287 of its outstanding Redeemable Preferred Stock. The resultant $374,000
benefit on exchange has been recognized as a benefit available to the common
stockholders in the Consolidated Statements of Operations and Comprehensive
Income (Loss).
Liquidity and Capital Resources
Cash Flow. At December 31, 1999, the Company had cash and short-term
investments of $41.7 million and working capital of $38.5 million. At December
31, 1998, the Company had cash and short-term investments of $62.6 million and
working capital of $70.0 million. Data Systems, which is accounted for as a
Discontinued Operation, had working capital of $8.8 million and $16.8 million at
December 31, 1999 and 1998, respectively. Working capital of Data Systems has
been classified in net assets of business held for disposition at December 31,
1999, whereas such balances are included in the respective balance sheet
accounts of the Company at December 31, 1998. The decline in cash and short-term
investments from 1998 to 1999 results primarily from operating losses of the
Company's Internet video businesses, operations of the Internet Technology Group
and operating losses of MicroNet. These losses more than offset operating income
from the Company's non-Internet technology licensing activities. Cash used in
continuing operations totaled $ 11.9 million in 1999 and $5.8 million in 1998.
Cash provided from (used in) discontinued operations totaled $2.0 million in
1999 and $(2.9 million) in 1998.
Major items impacting income from continuing operations in 1999, which did
not affect cash, were goodwill amortization and asset write-downs associated
with acquired Internet businesses, totaling $4.6 million. Other non-cash charges
affecting 1999 operations included other depreciation and amortization of $1.2
million, the Company's equity in losses in Internet businesses prior to the
Company having acquired control in such affiliates totaling $0.7 million, and
stock issued to individuals for services rendered to the Company totaling $0.7
million.
During 1999, the Company, through its subsidiary iNEXTV, acquired majority
control of TV onthe WEB and AENTV in step acquisitions. The Company invested a
total of $14.4 million in such affiliates. The Company has included the value of
assets and liabilities of these majority-owned affiliates in its Consolidated
Financial Statements and has reported 100% of net losses reported by these
affiliates for periods after it acquired a majority interest. Also during 1999,
the Company acquired minority interests in Executive Branch Webcasting
Corporation ("EBWC") and TV1. The Company invested a total of $3.3 million in
such affiliates. The Company has elected not to exercise options to acquire
additional ownership in EBWC but to proceed with the development of EXBTV.com
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as an iNEXTV-funded Internet video initiative. Accordingly, in the fourth
quarter of 1999, the Company wrote off its minority investment in EBWC.
The Company's strategy is to grow Internet revenues from video
advertising, e-commerce partnerships, webcasting and technology licensing. In
order to do so, the Company will be required to incur substantial expenditures
to attract users to its video websites, which have only recently become
operational. Material advertising and e-commerce revenues are not likely to be
obtained until a significant base of users can be demonstrated. There can be no
assurance that the Company will be successful in obtaining sufficient revenues
from the above sources to make its Internet video businesses viable or
profitable.
T