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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
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
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Ampex Corporation
(Exact name of Registrant as specified in its charter)
Delaware 13-3667696
(State of incorporation) (I.R.S. employer
identification number)
1228 Douglas Avenue
Redwood City, California 94063-3199
(Address of principal executive offices, including zip code)
(650) 367-2011
(Registrant's telephone number, including area code)
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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:
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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 February 28, 2002 was approximately
$7,213,929 based on a price of $0.14 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 February 28, 2002 there were 61,652,996 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 2001 Annual Meeting of Stockholders
is incorporated by reference into Part III (Items 10, 11, 12 and 13) of this
Form 10-K.
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AMPEX CORPORATION
FORM 10-K
Year Ended December 31, 2001
INDEX
Page
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PART I
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 16
ITEM 3. LEGAL PROCEEDINGS.............................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 18
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT........................... 18
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 19
ITEM 6. SELECTED FINANCIAL DATA........................................ 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 31
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................ 32
ITEM 11. EXECUTIVE COMPENSATION......................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 32
SIGNATURES AND POWER OF ATTORNEY........................................ 37
i
PART I
ITEM 1. BUSINESS
Introduction
Ampex Corporation ("Ampex" or the "Company") is a leading innovator of
visual information technology. During its 57-year history, Ampex has developed
substantial proprietary technology relating to the electronic storage,
processing and retrieval of data, particularly images. Ampex currently holds
approximately 750 patents and patent applications covering digital
image-processing, data compression and recording technologies. The Company,
through its wholly-owned subsidiary, Ampex Data Systems Corporation ("Data
Systems"), incorporates this technology in the design and manufacture of very
high performance tape-based storage products, principally for digital
recording, archiving and rapid restore/backup applications. The Company also
leverages its investment in research and development through its Corporate
Licensing division that licenses Ampex patents to manufacturers of consumer
electronics products. In the past ten years, the Company has received royalty
payments in excess of $115 million.
In the second quarter of 2001, the Company determined that the Internet
video operations of its wholly-owned subsidiary, iNEXTV, were unlikely to
generate sufficient advertising revenues to achieve profitability within an
acceptable time frame. Accordingly, as of June 30, 2001, the Company closed
iNEXTV's operations in New York City and terminated development of Internet
video technology in Redwood City, California. The Company discontinued funding
its subsidiary, AENTV in Los Angeles and its partially-owned affiliate, TV1.de
in Munich, Germany. The Company's Internet operations have been classified as
discontinued operations for all periods presented.
Ampex had announced its intention to sell Data Systems, and in 2000 and
through September 2001, the Company's consolidated financial statements
included this subsidiary's operations as a discontinued business. Ampex did not
receive offers to purchase Data Systems that, in the opinion of the Company's
Board of Directors, were adequate. Accordingly, the Company has ceased its
efforts to sell Data Systems and has restated financial statements for all
periods included in this Form 10-K to include Data Systems as a component of
its continuing operations.
Subsequent to December 31, 2001, the Company completed previously announced
restructurings of its principal senior debt. The debt restructuring has
improved the Company's financial position by deferring significant debt
repayments which would otherwise have been due in 2002 and 2003. The Company
has agreed until such indebtedness is repaid in full it will apply
substantially all its future net patent royalty stream to the repayment of the
restructured indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Senior Notes
Restructuring."
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 1228 Douglas Avenue, 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".
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
1
"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 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 net losses in the three years ended December
31, 2001, primarily attributable to its Internet video programming activities.
As of June 30, 2001, the Company closed its Internet businesses and recorded
charges to write-off its investments in iNEXTV and its affiliates as well as to
provide for costs of closure, principally real estate leases. In prior years,
the Company's disk storage subsidiary, MicroNet incurred operating losses, and,
in 2000, the Company provided reserves to close down MicroNet. The Company no
longer operates either of these businesses and it has provided reserves for all
known costs that have been guaranteed by it.
The Company's continuing operations include the results of Data Systems and
the Company's corporate licensing division. In 2001, total revenues were not
sufficient to offset operating costs of these businesses. In addition, the
Company incurs substantial interest expense on its indebtedness. Although the
Company has restructured the operations of Data Systems in order to position it
to operate at a profit at lower sales levels, there is no assurance it will do
so in future periods. In addition, while the Company's licensing activities
have been historically profitable, the Company cannot predict the amount of
licensing royalties that it may realize in future periods. Future profitability
from licensing will be dependent upon obtaining new licensees of the Company's
patents for use in new products such as digital camcorders, digital cameras,
DVDs and other consumer products. Manufacturers of those products have
previously not licensed the Company's patents for such products. Licensing
negotiations can take as much as several years to conclude, and the Company to
date has held only preliminary discussions with prospective licensees of
products other than digital camcorders.
Accordingly, there is a material risk that the Company will incur operating
losses in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," below and the other Risk
Factors included in this section.
Risks of Declining Liquidity
The Company has experienced a substantial reduction in its cash and
marketable securities which declined from $15.4 million at December 31, 2000 to
$8.0 million at December 31, 2001.
To deal with its declining liquidity, the Company in 2001 restructured and
extended the maturity dates of its outstanding senior debt, discontinued
certain unprofitable Internet video operations, and borrowed funds from a
former affiliate to make required contributions to its employee retirement plan
which is substantially underfunded. See "Pension Plan Matters." Management
currently believes that these actions, coupled with anticipated royalty
collections under licensing agreements presently in effect, should be
sufficient to satisfy all projected cash obligations for at least the next 12
months.
During the past several years, the Company has initiated cost reduction
programs at Data Systems and continues to implement strategies to lower its
operating overhead. Data Systems currently believes that it should operate at a
cash flow breakeven at current sales levels and that it should have adequate
liquidity to satisfy its obligations for at least the next 12 months. However,
sales levels at Data Systems have declined in recent years and there can be no
assurance that this trend will not continue. The television production and
broadcast market,
2
which historically has been one of Data Systems' principal markets, has been
adversely affected by depressed advertising spending. In order for Data Systems
to realize substantial future sales growth, the Company believes that the
broadcast market must recover.
Data Systems obtained a short-term inventory line of credit in October 2001
that provided additional liquidity to enable it to develop a repayment plan for
its trade accounts payable, much of which had become past due by the end of the
third quarter of 2001. This facility is scheduled to expire by March 31, 2002,
and it is not expected to be renewed. Also, Data Systems' accounts receivable
line of credit, against which outstanding borrowings at December 31, 2001
totaled $1.0 million, is scheduled to expire in May 2002. Data Systems is
seeking to obtain a replacement accounts receivable line of credit to deal with
its seasonal changes in cash flow. If the accounts receivable facility is not
replaced or extended, Data Systems will be required to implement additional
cash conservation strategies, possibly including additional personnel or
inventory reductions or deferral of capital spending.
Risks Associated with Acquisition Strategy
Ampex is not currently seeking to make any acquisitions of new businesses.
At present, the terms of the Company's principal debt instruments substantially
restrict the Company's ability to make acquisitions or investments in new
businesses. However, Ampex has made, and may under certain circumstances in the
future make, acquisitions of, and/or investments in, other businesses. These
entities may be involved in new businesses in which Ampex has not historically
been involved. Ampex may not be able to identify or acquire additional
acquisition candidates in the future, or complete any further acquisitions or
investments on satisfactory terms.
Acquisitions and investments involve numerous additional risks, including
difficulties in the management of operations, services and personnel of the
acquired companies, and of integrating acquired companies with Ampex and/or
each other's operations. Ampex may also encounter problems in entering markets
and businesses in which it has limited or no experience. Acquisitions can also
divert management's attention from other business concerns. Ampex has made and
may make additional investments in companies in which it owns 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 the risk of potential conflicts with other investors.
Accordingly, there can be no assurance that any acquisitions or investments
that Ampex has made, or may make in the future, will result in any return, or
as to the timing of any return. All of the Company's acquisitions of Internet
companies have been written off during 2000 and 2001. In addition, Ampex
elected to discontinue the operations of MicroNet, which it acquired in 1998.
It is possible that Ampex could lose all or a substantial portion of any future
investments.
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. Ampex's expenditures
for research and development have been declining in recent years, which may
have a long-term adverse effect on Ampex's portfolio of licensable technologies.
Royalty income has historically fluctuated significantly from
quarter-to-quarter and year-to-year due to a number of factors that Ampex
cannot predict. These factors include the extent to which third parties use its
patented technology, the extent to which the Company must pursue litigation in
order to enforce its patents, and the ultimate success of its licensing and
litigation activities.
3
In recent years, a significant portion of the Company's royalty income
stream has been based on patents covering analog and digital VCRs. Sales of
analog VCRs are declining rapidly and several patents covering them are
scheduled to expire in 2003. In order for the Company to attain levels of
royalty income realized in prior years, it will be necessary for it to
successfully conclude licensing negotiations with manufacturers of digital
camcorders, digital still cameras, DVDs and/or other consumer products. The
Company's patents have historically not been licensed for use in many of these
products and there can be no assurance that negotiations will be successful.
The Company may be required to pursue litigation if its negotiations are not
successful. Management believes that the expected increase in royalties from
new digital products will not be sufficient to offset the expected decline in
analog VCR royalties during at least the first six months of 2002.
The costs of patent litigation can be material and litigation may not be
successful. 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.
As part of restructuring its senior long-term indebtedness, the Company has
agreed to apply substantially all proceeds of future royalties to repay
principal and accrued interest. The Company projects that for the foreseeable
future, net royalty income will be distributed first to the holders of the
Senior Secured Discount Notes and second to the holders of the Senior Notes for
the repayment of principal and interest on such indebtedness. In the event of
default, the holders of the Notes will be entitled to collect the proceeds of
patent royalties directly for application to repay the Notes.
Dependence on Licensed Patent Applications and Proprietary Technology
Ampex's success depends, in part, upon its ability to establish and maintain
the proprietary nature of its technology through the patent process. There can
be no assurance that one or more of Ampex's patents will not be successfully
challenged, invalidated or circumvented or that it will otherwise be able to
rely on such patents for any reason. In addition, there can be no assurance
that competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that prevent, limit or interfere with Ampex's ability to
make, use and sell its products either in the United States or in foreign
markets. If any of Ampex's patents are successfully challenged, invalidated or
circumvented or its right or ability to manufacture products were to be
proscribed or limited, Ampex's ability to continue to manufacture and market
its products could be adversely affected, which would likely have a material
adverse effect upon Ampex's business, financial condition and results of
operations.
Litigation may be necessary to enforce Ampex's patents, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings brought against, initiated by or otherwise involving
Ampex may require Ampex to incur substantial legal and other fees and expenses
and may require some of its employees to devote all or a substantial portion of
their time to the prosecution or defense of such litigation or proceedings.
Rapid Technological Change and Risks of New Product and Services Development
All the industries and markets from which Ampex derives revenues, directly
or through its licensing program, are characterized by continual technological
change and the need to introduce new products, product upgrades, services and
patentable technology. This has required, and will continue to require, that
Ampex spend substantial amounts for the research, development and engineering
of new products and advances to existing products. Research and development
spending has declined in recent years due to pressures to reduce spending at
Data Systems and further spending cuts may be necessary if sales levels
continue to fall. Continuance of this trend could adversely affect Ampex's
ability to remain competitive in the future. No assurance can be given that
4
Ampex's existing products will not become obsolete or that any new products,
services or technologies will win commercial acceptance. Obsolescence of
existing product lines, or inability to develop and introduce new products and
services, could have a material and adverse effect on the Company's sales and
results of operations in the future. The development and introduction of new
technologies, services and products are subject to inherent technical and
market risks, and there can be no assurance that Ampex will be successful in
this regard.
Competition
The market for Data Systems products and services is highly competitive and
characterized by multiple competitors, most of whom have greater financial
resources than Data Systems. Data Systems' products incorporate many high
performance features and functions in order to differentiate them from their
competitors. However, other companies may develop competing technologies or
products that render Data Systems products as inferior.
Dependence on Certain Suppliers
The Company's manufacturing subsidiaries purchase certain components from a
single domestic or foreign manufacturer for use in its products. Significant
delays in deliveries or defects in such components have adversely affected
Ampex's manufacturing operations in the past, pending qualification of an
alternative supplier. In addition, Ampex produces highly engineered products in
relatively small quantities. As a result, Ampex's ability to cause suppliers to
continue production of certain products on which it may depend may be limited.
Ampex does not generally enter into long-term raw materials or components
supply contracts. A significant portion of Data Systems trade accounts payable
had become past due during 2001. Data Systems has entered into agreements with
most of its trade creditors that provide for the systematic repayment of
accounts payable over several months and continued access to critical
manufacturing components in future periods. Certain suppliers have required
prepayment or payment at the time of delivery of materials or services.
Risks Related to International Operations
International operations are subject to a number of special risks, including
limitations on repatriation of earnings, restrictive actions by local
governments, and fluctuations in foreign currency exchange rates and
nationalization. Additionally, export sales are subject to export regulation
and restrictions imposed by U.S. government agencies. Fluctuations in the value
of foreign currencies can affect Ampex's results of operations. Ampex does not
normally seek to mitigate its exposure to exchange rate fluctuations by hedging
its foreign currency positions.
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 patent royalty revenues and operating results;
. developments in the status of the Company's patent licensing negotiations;
. announcements of acquisitions 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.
5
The stock market in general, and technology companies in particular, have
experienced a high degree of price volatility, which has had a substantial
effect on the market prices of many such companies for reasons that often are
unrelated or disproportionate to operating performance. These broad market and
industry fluctuations may adversely affect the price of Ampex's Common Stock,
regardless of its operating performance. The Company has been notified by the
American Stock Exchange ("Amex") that it will continue to list the Company's
Common shares pending a review of the Company's 2001 Form 10-K and public
disclosures. If the Company's Common Shares become delisted from Amex, the
share price might become more volatile and an active market may no longer be
maintained.
Dependence on Key Personnel
Ampex is highly dependent on its management. Ampex's success depends upon
the availability and performance of key executive officers and directors. The
Company has not entered into employment agreements with its key employees, and
the loss of the services of key persons could have a material adverse effect
upon Ampex. The Company does not maintain key man life insurance on any of
these individuals.
Anti-Takeover Consequences of Certain Governing Instruments
Ampex's Certificate of Incorporation provides for a classified Board of
Directors, with members of each class elected for a three-year term. The
Certificate of Incorporation provides for nullification of voting rights of
certain foreign stockholders in certain circumstances involving possible
violations of security regulations of the United States Department of Defense.
The instrument governing Ampex's outstanding Preferred Stock, which has an
aggregate liquidation value of approximately $30.2 million at December 31,
2001, requires that Ampex make mandatory offers to redeem those securities out
of legally available funds in the event of a change of control. For this
purpose, a change of control includes the following events: a person or group
of people acting together acquires 30% or more of Ampex's voting securities;
Ampex merges, consolidates or transfers all or substantially all of its assets;
or the dissolution of Ampex. The Certificate of Incorporation authorizes the
Board of Directors to issue additional shares of Preferred Stock without the
vote of stockholders. The indenture governing Ampex's outstanding Senior Notes,
in the total principal amount of approximately $49 million, requires Ampex to
offer to repurchase the Senior Notes at a purchase price equal to 101% of the
outstanding principal amount thereof together with accrued and unpaid interest
in the event of a change of control. Under the indenture, a change of control
includes the following events: a person or group of people acting together
acquires 50% or more of the Company's voting stock; or the transfer of
substantially all of the Company's assets to any such person or group, other
than to certain subsidiaries and affiliates of Ampex. In addition, the Senior
Discount Notes must be redeemed in certain events, including the sale of Data
Systems, certain asset sales or a change of control (as defined) of Ampex or
Data Systems.
These provisions could have anti-takeover effects by making an acquisition
of Ampex by a third party more difficult or expensive in certain circumstances.
Nonpayment of Dividends
Ampex has not declared dividends on its Common Stock since its incorporation
in 1992 and Ampex has no present intention of paying dividends on its Common
Stock. Ampex is restricted by the terms of certain agreements and of the
outstanding Preferred Stock as to the declaration of dividends.
Environmental
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
6
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.
Products
All of the Company's products are manufactured by Data Systems and are
comprised of its very high performance tape-based mass data storage and
instrumentation products. The Company's mass data storage products consist of
its DST and DIS series of 19-millimeter scanning recorders and robotic library
systems, and related tape and after-market parts. The Company's data
acquisition and instrumentation products consist of its DCRsi digital
instrumentation recorders and related tape and after-market parts. Data Systems
also continues to offer spare parts to repair professional video recorders and
other products that it previously manufactured and marketed to the television
production and post-production industries. Sales of spare parts of legacy
television products accounted for 5.6% of sales for the year ended December 31,
2001 and less than 10% of sales in the prior two years. For information
concerning net sales for each product group comprising in excess of 10% of net
sales see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
19-millimeter Products. In 1992, Ampex entered the high-performance mass
data storage market with its DST series of 19-millimeter data storage products,
including tape drives and robotic library systems. With the 2000 introduction
of its "Quad Density" product line, the DST series is in its third generation.
Based on its own evaluation and that of outside sources, the Company believes
that its DST and DIS mass data storage products offer a price/performance
advantage over alternative magnetic, optical, solid-state or disk-based storage
systems now available, providing fast data access times, rapid data transfer
rates and low cost per megabyte of storage.
Access time is one of the most important sustainable advantages of DST
products compared to alternative tape-based storage systems. Other tape-based
storage products achieve low-cost storage but trade off accessibility; since
the data stored is not available for most online or near-online applications,
such systems are generally limited to backup and archival storage applications.
DST products, in contrast, combine low storage cost per megabyte with fast
access to rapidly transferable information. DST products use software logic
that enables a library or even a single tape drive to organize information
using partitions, much as disk drives do. Individual segments can then be
accessed quickly and updated independently. This proprietary Ampex technology,
introduced in 1994, gives DST products the performance of a digital tape drive
and the efficiency and access speed of partitioned memory. DST systems also
provide rapid data transfer rates that exceed the speed of other mass storage
products such as optical disks, allowing a user to download stored information
to a computer at a sustained rate of 15 megabytes per second ("MB/sec"), with
an option available to increase to a rate of 20MB/sec without utilizing
compression.
DST and DIS tape drives use core technology developed by Ampex for its
digital video recorders. The drives use high-density metal particle tape
cartridges, which are available in a range of sizes providing storage
capacities from 100 to 660GB per cartridge in quad-density format. DST
automated library systems incorporate multiple tape cartridges and tape drives
and provide from 1.2 to 12.8 terabytes ("TB") of storage capacity while
occupying only a fraction of the floor space required by competing storage
systems. As each of the three generations of the product line was introduced,
the Company provided for the ability to upgrade to the new format. In early
2001, the Company began shipping expansion modules which expand DST library
storage capacities up to approximately 100 terabytes.
7
Ampex's quad-density DST product line currently includes the DST 314 tape
drive, the DST 414 automated cartridge library, the DST 714 and DST 814
automated library system. The DST 314 is a single cartridge tape drive that
provides rapid backup/restore applications for large databases or disk arrays.
The DST 314 is capable of accepting 100GB, 300GB and 660GB cartridges. The DST
414 automated cartridge library is an entry-level library with a storage
capacity of up to 4.8TB in less than eight square feet of floor space. The DST
714 automated library is designed to combine one or two tape drives, and
features a storage capacity of 12.8TB. This automated tape library product was
designed to fill the gap between the Company's DST 414 and DST 814 products.
The DST 814 library system is designed to combine from one to four tape drives
and is optimized for large file size applications and, accordingly, is suited
for image-based document storage, medical records, news archives, oil and gas
seismic data and CAD/CAM image data, as well as potential video-on-demand
applications. These products can deliver a sustained rate of 15MB/sec across a
SCSI-2 interface, search speeds of up to 1600MB/sec, average access time of
less than 16 seconds and capacity of up to 660GB on a single cartridge. The
Company also offers expansion modules for the DST 714 and DST 814 products,
which permit additional storage capacity for those products.
Although the Company believes that its DST drives and library systems offer
significant advantages over competitive systems, these products incorporate a
proprietary magnetic tape format that is not compatible with current industry
standard formats. The Company has not licensed its tape format to other
manufacturers and, as such, is the sole source of these products. In addition,
other factors relating to the markets for these products and to competition in
these markets may affect future sales of DST products. See "Markets--Mass Data
Storage and Instrumentation Products," "Markets--Distribution and Customers,"
"Markets--Competition," and "--New Product Development and Industry Conditions."
The Company's 19-millimeter tape-based instrumentation products currently
are the DIS 124i and DIS 164i instrumentation/data recorders and the DIS 224i
automated instrumentation/data library. The Company's DIS products are designed
for mass storage of instrumentation data. These recorders use the same 19-mm
helical scan recording technology used in the Company's DST products. Data from
DIS recorders can also be stored on DST cartridges, placed in DST libraries and
accessed using DST tape drives, so that all the benefits of DST mass storage
products are available, including rapid, random access to the data for
subsequent processing. The DIS 124i and 164i drives have capacities of 100, 300
or 660GB (depending on the DST cartridge used) and record/reproduce rates of
120 megabits ("Mb") and 160Mb per second, respectively.
Data Acquisition/Instrumentation Products. Ampex has been well established
for a number of years as a supplier of instrumentation recorders. Ampex has
supplied these recorders primarily to government agencies for use in data
collection, satellite surveillance and defense-related applications, as well as
to defense contractors and aerospace and other industrial users primarily for
test and measurement purposes. Ampex instrumentation recorders have been used
on almost every advanced commercial and U.S. military aircraft, as well as on
many foreign aircraft. The Company believes they are well suited to these
demanding aeronautical application and other applications involving comparable
data-gathering challenges in extreme environments, because of their performance
and reliability.
The Company's principal data acquisition/instrumentation products currently
are the DCRsi 240, DCRsi 120 and DCRsi 75 digital instrumentation recorders.
The DCRsi recorders are rugged, highly-reliable and compact recorders that
permit uninterrupted data capture over very long periods of time, such as
during test flights of new aircraft. The DCRsi 240 instrumentation recorder has
the capability of storing 48GB of data at a record/reproduce rate of up to 240
megabits ("Mb") per second. The DCRsi 120 instrumentation recorder has a
similar storage capacity and a record/reproduce rate of 120Mb per second. The
DCRsi 75 recorder is the Company's lowest cost DCRsi model with a
record-reproduce rate of 75Mb per second.
In 2001, the Company developed the DDRs 400, a new generation of airborne
instrumentation recorders utilizing hard disks rather than tape. The data and
control interface is fully compatible with the DCRsi product
8
line. The recorder is smaller, lighter, consumes less power, has a higher data
rate and larger storage capacity than the previous generation of tape-based
recorders. The Company has shipped Beta units to customers for evaluation and
testing.
A significant portion of data acquisition and instrumentation recorder sales
reflect purchases by prime contractors to the federal government, which can be
subject to significant fluctuations. See "Markets--Data
Acquisition/Instrumentation Recorders." In addition, other factors relating to
the markets for the Company's instrumentation products and to competition in
these markets may affect future sales of these products. See "Distribution and
Customers, Competition," and "New Product Development and Industry Conditions."
Data Systems' other products are primarily television after-market products
(including spare parts) relating to television products that the Company
manufactured in prior periods and continues to support.
Markets for Data Systems Products
Digital Archives and Mass Storage Libraries. The Company's 19-millimeter
mass storage tape drives and library systems are optimized for applications
that must handle large amounts of data, such as those that process and store
images, digital video and streaming data. The Company's markets are presently:
1. Government intelligence gathering and archiving. In recent years, the
Company's products were selected for use in certain large government
programs that required delivery of new systems over several years. The
Company has significant market share in government directed streaming
data applications, such as satellite telemetry and airborne intelligence
gathering. Sales of service, spare parts and tape have been an important
component of the Company's total revenues, and the Company projects that
they will represent an increasing percentage of future total revenues as
new system sales decline.
2. Broadcast digital video, which is projected to grow as broadcasters
re-equip to deliver new digital signals by 2006. The Company's digital
video archive systems have become the industry standard due to their
high performance and reliability, with installations at ABC, Viacom/CBS,
Fox Broadcasting, USA Networks and Public Broadcasting Stations. The
decline in advertising spending has caused this market to defer capital
spending, including plans to purchase digital archives from the Company
and its competitors.
3. Oil and gas seismic archives with a customer base that includes
Exxon/Mobil, Shell and Chevron/Texaco.
The Company believes that the emergence of applications that video, graphics
and other images over the Internet or private networks may create new markets
for the Company's data storage products. The Company's management realizes that
these applications will require bandwidth improvements to current information
delivery systems before the information storage systems offered by the Company
and others will be required. As these technical obstacles are overcome and
commercial markets ultimately develop, the Company believes that it will
experience aggressive competition from other companies, and there can be no
assurance that the Company will be able to remain competitive against products
ultimately offered by such companies.
Data Acquisition/Instrumentation Recorders. Data Systems' DCRsi recording
drives and magnetic media are designed to acquire large volumes of data in
stressful physical environments, and are used extensively in airborne and naval
intelligence acquisition and for the collection of test data during the design
and qualification of aircraft. DCRsi products are used by U.S. and foreign
military and intelligence agencies (including those of Germany, Japan and the
United Kingdom), as well as by manufacturers of commercial airplanes, such as
Boeing Corporation, and by Airbus, the consortium of European airframe
manufacturers. A significant portion of DCRsi products are also sold in
versions that are intended for use in ground facilities for the long-term
storage or analysis of data previously collected in mobile environments.
9
The storage capacity and data transfer rates of the Company's DCRsi products
can be varied continuously from fractions of a megabit per second up to 240
megabits per second on its highest performance versions. These products perform
in conditions of extreme shock and vibration, variations in gravitational force
and temperature, humidity and electronic interference, such as those found in
aircraft, helicopters and space vehicles. These products are designed for data
interchange between locations and agencies. In ground-based applications, which
generally are less harsh environments that do not require the ruggedness of a
DCRsi recorder, the storage and analysis functions of DCRsi products can also
be performed by the Company's 19-millimeter DST and DIS mass data storage
products.
The U.S and foreign government agencies continue to be the primary market
for the Company's DCRsi products. Sales to government agencies are subject to
fluctuation as a result of changes in government spending programs (including
defense programs) and could be adversely affected by pressure on government
agencies to reduce spending. Any material decline in the current level of
government purchases of the Company's products could have a material adverse
effect on the Company.
Distribution and Customers
The Company currently distributes its 19-millimeter products (including DST
and DIS recorders) directly through its internal sales force, as well as
through independent value-added resellers. The Company's DST products are sold
to customers such as oil and gas companies, imaging companies, information and
entertainment delivery companies and broadband telecommunications companies.
The Company is also pursuing opportunities for storage of very large databases
maintained by many commercial and government entities.
The Company's instrumentation recorders (including its DIS recorders) are
sold primarily to prime contractors who in turn sell to government agencies
involved in data collection, satellite surveillance and defense-related
activities, as well as to defense contractors and other industrial users for
testing and measurement purposes. Sales of instrumentation recorders are made
through the Company's internal domestic and international sales forces, as well
as through independent sales organizations in foreign markets.
The Company currently operates a total of six sales offices, including four
in the U.S., one in Japan and one in the United Kingdom.
Ampex's sales of systems to U.S. government agencies (either directly or
indirectly through government contractors) represented 57.4% of U.S. systems
sales in fiscal 2001 compared to 45.5% in fiscal 2000 and 44.2% in fiscal 1999.
Products sold for U.S. government use include primarily instrumentation
recording systems. Sales to government customers are subject to customary
contractual provisions permitting termination at the government's election. See
"Markets--Mass Data Storage and Instrumentation Products."
In 2001, two customers each individually accounted for more than 10% of
total net product sales and collectively accounted for 32.1% of total net
product sales. In 2000, three customers each individually accounted for more
than 10% of total net product sales and collectively accounted for 34.8% of
total net product sales. In 1999, one customer accounted for 10.5% of total
product sales.
Research, Development and Engineering
Scanning recording systems such as those developed by Ampex involve
extremely complex technology. As a result, Ampex has developed extensive
expertise in a wide area of technical disciplines and has developed fundamental
innovation in digital image processing, magnetic recording technology and
channel electronics. In 2001, the Company spent approximately 11.9% of total
revenue for research and development programs and engineering costs, compared
to 11.5% in 2000 and 11.8% in 1999. While the percentage of research,
development and engineering expense to total revenues has remained relatively
constant, the amount spent has declined substantially in response to lower
sales levels. Future research, development and engineering spending
10
may need to be reduced if Data Systems were to experience further declines in
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements. In prior years, the Company designed and manufactured a wide range
of professional television products, and the Company patented many of its
innovations. While the Company exited those markets several years ago, many
patents covering innovations in the field remain in force. These technologies
form the foundation of the Company's digital patent portfolio that it is
seeking to exploit with new licensing agreements covering digital cameras, DVDs
and computer games. In recent years, with respect to current products, the
Company has allocated a major portion of its research and development budget to
the 19-millimeter digital recording technology including the introduction of
double and then quad-density recorders and expansion modules for its DST and
DIS products and to sustaining engineering on all of its product lines. The
Company will continue its sustaining engineering processes and, with available
funds, develop lower cost versions of its data acquisition and instrumentation
products, such as the recently developed DDRs disk-based recorder, and to
improve the ability of these products to interface with other companies'
products. See "Products--Mass Data Storage and Instrumentation" above. Ampex
will also continue researching other new product opportunities that capitalize
on its expertise and patented technology in digital image processing, magnetic
recording and channel electronics. All of the Company's research, development
and engineering efforts are subject to certain risks and uncertainties
described below under "New Product Development and Industry Conditions," and
there can be no assurance that any of these efforts will be technologically or
commercially successful.
Patents, Licenses and Trademarks
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, 2001, Ampex held
over 750 patents and patent applications, including approximately 300 patents
in the U.S., approximately 400 corresponding patents in other countries, and
approximately 80 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 analog and digital video tape recorders. Several of
the Company's patents covering analog VCRs expire by 2003. Late in 2001, the
Company entered into an agreement with a major Japanese manufacturer of digital
camcorders to license its intellectual property which resulted in payments on
prior period shipments of products amounting to $3 million. The Company has
contacted other unlicensed manufacturers of digital camcorders and has
initiated licensing discussions with them. There can be no assurance that such
licensing efforts (including any necessary litigation) will be successful.
The Company also believes that it has patents that are used in the
manufacture of digital still cameras, DVDs, video games and other consumer
electronic products. The Company intends to offer licenses to major
manufacturers of these products. Ampex will continue to evaluate additional
products as potential licensing opportunities to the extent that its technical
and financial resources permit. Ampex has not granted any licenses under its
scanning recorder patents specifically for data storage applications, but it
may do so in the future if it determines that this would support the Company's
marketing strategy.
It is not possible to predict the amount of royalty income that will be
received in the future. Royalty income has historically fluctuated widely due
to a number of factors that the Company cannot predict, such as the extent of
use of the Company's patented technology by third parties, the extent to which
the Company must pursue litigation in order to enforce its patents, and the
ultimate success of its licensing and litigation activities. Moreover, there
can be no assurance that the Company will continue to develop patentable
technology that will generate significant patent royalties in future years.
11
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.
Ampex has not granted any 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. All
other trademarks and service marks used in this Report are the property of
Ampex or their respective owners.
Manufacturing
The Company's products are manufactured at Ampex's facilities in Redwood
City, California and Colorado Springs, Colorado. Products are designed and
engineered primarily in Redwood City. Because the Company's mass data storage
products incorporate many of the technologies and components of the Company's
19-mm-based videotape recorders, the manufacturing process of the mass data
storage products has benefited from the existing video recorder production
facilities and techniques.
The Company believes that its Colorado Springs, CO manufacturing facility is
larger than required or projected to be required to accommodate business growth
in the foreseeable future. Accordingly, the Company is seeking a tenant to
lease up to 150,000 square feet of presently underutilized space.
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
Ampex uses a broad variety of raw materials and components in its
manufacturing operations. While most materials are readily available from
numerous sources, Ampex purchases certain components, such as customized
integrated circuits and flexible magnetic media, from a single domestic or
foreign manufacturer. Significant delays in deliveries of, or defects in the
supply of, such components could adversely affect Ampex's manufacturing
operations pending qualification of an alternative supplier. In addition, the
Company produces highly-engineered products in relatively small quantities. As
a result, its ability to cause suppliers to continue production of certain
products on which the Company may depend may be limited. The Company does not
generally enter into long-term raw material supply contracts. In addition, many
of the components of Ampex's products are designed, developed and manufactured
by Ampex itself, and thus are not readily available from alternative sources.
12
Fluctuations in Operating Results; Seasonality and Backlog
Ampex's sales and results of operations are generally subject to quarterly
and annual fluctuations. Factors affecting operating results include: customer
ordering patterns; availability and market acceptance of new products; timing
of significant orders and new product announcements; order cancellations;
receipt of royalty income; and numerous other factors. Ampex's revenues are
typically dependent upon receipt of a limited number of customer orders
involving relatively large dollar volumes in any given fiscal period,
increasing the potential volatility of its sales revenues from quarter to
quarter. In addition, sales to government customers (primarily sales of DCRsi
instrumentation products) are subject to fluctuations as a result of changes in
government spending programs, which can materially affect the Company's gross
margin as well as its sales. Sales of most of the Company's products have
historically declined during the first and third quarters of its fiscal year,
due to seasonal procurement practices of its customers.
A substantial portion of the Company's backlog at a given time is normally
shipped within one or two quarters thereafter. Therefore, sales in any quarter
are heavily dependent on orders received in that quarter and the immediately
preceding quarter. Ampex's backlog of firm orders at December 31, 2001 was $4.6
million, compared to $3.4 million at December 31, 2000 and $3.0 million at
December 31, 1999. Ampex does not generally include foreign orders in backlog
until it has obtained requisite export licenses and other documentation. Orders
may be subject to cancellation in the event shipments are delayed. For all of
the foregoing reasons, results of a given quarter are not necessarily
indicative of results to be expected for a fiscal year.
Competition
Ampex encounters significant competition in all its product markets.
Although its competitors vary from product to product, many are significantly
larger companies with greater financial resources, broader product lines and
other competitive advantages.
Ampex competes in the mass data storage market with a number of
well-established competitors, such as IBM Corporation, Storage Technology
Corporation, Sony Corporation and ADIC as well as smaller companies. In
addition, other manufacturers of scanning video recorders may seek to enter the
mass data storage market in competition with the Company. In the mass data
storage market, the Company believes that the principal competitive factors are
product performance, cost of equipment and media, product reliability and
availability of service and support. The Company believes its strongest
competitive advantage is in the area of product performance. However, DST
products are relatively expensive in comparison to other competitive products,
and are generally cost effective only if the customer requires the high level
of performance and storage capacity of DST products. While the Company is
working to reduce the cost of its DST products, the prices of other storage
systems, such as disk drives, are also declining. In addition, although DST
products offer faster data access times than competing tape-based library
systems, magnetic disks deliver faster data access than DST products. There can
be no assurance that the Company can compete successfully on a long-term basis
in the mass data storage market.
In the instrumentation market, the Company competes primarily with companies
that depend on government contracts for a major portion of their sales in this
market, including Sony Corporation, L-3 Communications Corporation, Calculex
and Sypris Solutions, Inc. The number of competitors in this market has
decreased in recent years as the level of government spending in many areas has
declined. The principal competitive factors in this market are cost, product
reliability, product performance and the ability to satisfy applicable
government procurement requirements.
New Product Development and Industry Conditions
The data storage and instrumentation industries are characterized by
continual technological change and the need to introduce new products and
product upgrades. This requires a high level of expenditure for research and
13
development. Obsolescence of existing product lines, or the inability to
develop and introduce new products, could have a material adverse effect on
sales and results of operations. Although Ampex has completed development of
its third-generation mass data storage drives and robotic library systems, the
Company must continue to invest in research and development programs to improve
these products and develop new products. Due to declining sales levels, over
the past few years, Ampex has been required to reduce amounts invested in
research, development and engineering. If this trend continues, its ability to
remain competitive will be affected. No assurance can be given that existing
products will not become obsolete, that any new products will win commercial
acceptance or that Ampex's new products or technology will be competitive. See
"Competition." Furthermore, the introduction of new products or technologies
can be hampered by technical problems in design, manufacturing and test
procedures or the occurrence of other unforeseen events.
Sales of the Company's instrumentation products can be significantly
affected by changes in government spending levels. See "Markets--Mass Data
Storage and Instrumentation Products--Data Acquisition Instrumentation
Recorders" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
International Operations
Substantially all of the Company's licensing income is derived from foreign
customers. Sales of products to foreign customers accounted for approximately
19.6% of net sales in fiscal 2001, compared to 20.6% in fiscal 2000 and 28.1%
in 1999. Foreign marketing operations are conducted primarily through local
distributors and agents, with support from Ampex's internal marketing and sales
organization. See "Distribution and Customers."
Foreign operations are subject to the usual risk attendant upon investments
in foreign countries, including limitations on repatriation of earnings,
restrictive actions by local governments, fluctuation in foreign currency
exchange rates and nationalization. Additionally, export sales are subject to
export regulations and restrictions imposed by the U.S. Department of State and
the U.S. Department of Commerce.
In certain prior periods, declines in the value of the U.S. dollar in
relation to certain foreign currencies have favorably affected Ampex's
international operations, and in other periods the strength of the dollar
relative to such currencies has adversely affected its operations. Fluctuations
in the value of international currencies can be expected to continue to affect
Ampex's operations in the future, although the impact will be less significant
than it was in periods with a higher proportion of sales in foreign currencies.
The Company currently does not hedge its assets that are denominated in foreign
currencies. U.S. export sales are denominated in U.S. dollars.
See Note 21 of Notes to Consolidated Financial Statements for additional
information concerning the Company's foreign operations.
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 2003 or 2002 will be
material.
Owners and occupiers of sites containing hazardous substances, as well as
generators and transporters of hazardous substances, are subject to broad
liability under various federal and state environmental laws and
14
regulations, including liability for investigative and cleanup costs and
damages arising out of past disposal activities. The Company has been named as
a potentially responsible party by the United States Environmental Protection
Agency with respect to four contaminated sites that have been designated as
"Superfund" sites on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980. The Company is
engaged in six environmental investigation, remediation and/or monitoring
activities at sites located off Company facilities, including the removal of
solvent contamination from subsurface aquifers at a site in Sunnyvale,
California. Some of these activities involve the participation of state and
local government agencies. The other five sites (including the four Superfund
sites) are associated with the operations of the Media subsidiaries formerly
owned by the Company. Although the Company sold Media in November 1995, the
Company may have continuing liability with respect to environmental
contamination at these sites if Media fails to discharge its responsibilities
with respect to such sites. During 2001, 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 2002 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,
2001, the Company had an accrued liability of $1.2 million for pending
environmental liabilities associated with the Sunnyvale site and certain other
sites currently owned or leased by the Company. The Company has not accrued any
liability for contingent liabilities it may incur with respect to former Media
sites discussed above. Based on facts currently known to management, management
believes it is only remotely likely that the liability of the Company in
connection with such pending matters, either individually or in the aggregate,
will be material to the Company's financial condition or results of operations
or material to investors.
While the Company believes that it is generally in compliance with all
applicable environmental laws and regulations or has plans to bring operations
into compliance, it is possible that the Company will be named as a potentially
responsible party in the future with respect to additional Superfund or other
sites. Furthermore, because the Company conducts its business in foreign
countries as well as in the U.S., it is not possible to predict the effect that
future domestic or foreign regulation could have on Ampex's business, operating
results or cash flow. There can be no assurance that the Company will not
ultimately incur liability in excess of amounts currently reserved for pending
environmental matters, or that additional liabilities with respect to
environmental matters will not be asserted. In addition, changes in
environmental regulations could impose the need for additional capital
equipment or other requirements. Such liabilities or regulations could have a
material adverse effect on the Company in the future.
Employees
As of December 31, 2001 in its continuing operations, Ampex employed 156
people worldwide, compared to 260 at December 31, 2000 and 305 at December 31,
1999. Approximately 12% of Ampex's current worldwide workforce is employed in
the Company's international operations, compared to 8% at December 31, 2000 and
10% at December 31, 1999. No employees are covered by any collective bargaining
agreement. The Company is dependent on the performance of certain key members
of management and key technical personnel. The Company has not entered into
employment agreements with any such individuals. Edward J. Bramson, who has
served as the Company's Chief Executive Officer since 1991, is also engaged in
the management of certain companies affiliated with Sherborne Holdings
Incorporated, a privately-owned Delaware holding company and a Company
stockholder. Mr. Bramson currently devotes most of his time to the management
of the Company. The loss of the services of Mr. Bramson or other key
individuals could have a material adverse effect on the Company.
15
As of December 31, 2000, in its discontinued operations Ampex employed 75
people in its Internet affiliates and 53 people at MicroNet, as compared to 109
people and 51 people, respectively, at December 31, 1999.
Pension Plan Matters
In 1994, the Company, the Pension Benefit Guaranty Corporation (the "PBGC")
certain affiliates, including Hillside Capital Incorporated ("Hillside"), who
were members of a "group under common control" for purposes of the Employee
Retirement Income Security Act ("ERISA") entered into certain agreements in
connection with the liquidation of the Company's former parent, NH Holding
Incorporated ("NHI"), relating to the pension plans of the Company and of its
former Media subsidiaries, which are substantially underfunded. See Note 16 of
Notes to Consolidated Financial Statements. Pursuant to these agreements,
Hillside has advanced to the Company $1.3 million for pension contributions
that were scheduled in 2001 that the Company was unable to make. Ampex agreed
to repay such amounts in accordance with the terms of the agreements, and has
agreed to grant Hillside a security interest in certain assets as collateral
for advances which it is required to make pursuant to the agreement. The
agreement contains 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 transaction, with
certain related parties, breach of which could result in acceleration of the
Company's potential termination liabilities. In 1994, the Company discontinued
accrual of benefits under the pension plans, but has continued to fund its plan
in accordance with ERISA. The Company is also contingently liable to fund the
Media plan if Media fails to do so.
ITEM 2. PROPERTIES
As of December 31, 2001, the Company's principal properties were as follows:
Approximate
Square
Footage of
Location Activities Conducted Facility
- -------- -------------------- -----------
Redwood City, California...... RD&E, manufacturing,sales and marketing (1) 91,760
New York City, NY............. Executive offices (2) 19,000
Colorado Springs, Colorado.... Manufacturing (3) 229,961
Chineham, Basingstoke, England Sales and service (4) 7,184
Tokyo, Japan.................. Sales and service (5) 3,886
- --------
(1) The Company is attempting to sublet 60,000 square feet representing a
two-story building that the Company no longer occupies. The lease term
extends to September 2008.
(2) This facility lease terminates in April 2008. The Company is seeking to
sublet a substantial portion of these facilities previously used by its
former Internet video subsidiary.
(3) This property is subject to a deed of trust securing senior discount notes
issued by Data Systems in November 2000. The facility is underutilized by
Data Systems and it is seeking a tenant to lease up to 150,000 square feet
of the facility.
(4) These facilities are leased under a ten-year lease, which is terminable at
the option of the Company or the landlord in 2002.
(5) These facilities are leased under leases that expire during July 2002. The
current plan is to renew the lease on a year-to-year basis.
In addition to the properties and leased facilities listed above, Ampex
leases office space and warehouse facilities from time to time at various
domestic and foreign locations.
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.
16
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.
The State of California assessed income tax in the amount of $0.5 million
for the period 1983-1985 while the Company was a subsidiary of The Signal
Companies (currently Honeywell International Inc.). On January 2, 2002, the
Company was granted a deferral of its appeal until October 2002, in order for
it to enter into settlement discussions with the Franchise Tax Board regarding
the outstanding assessment that, with interest and penalty, totals $2.7 million
at December 31, 2001.
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 2002 or 2003 will be
material.
Owners and occupiers of sites containing hazardous substances, as well as
generators and transporters of hazardous substances, are subject to broad
liability under various federal and state environmental laws and regulations,
including liability for investigative and cleanup costs and damages arising out
of past disposal activities. The Company has been named as a potentially
responsible party by the United States Environmental Protection Agency with
respect to four contaminated sites that have been designated as "Superfund"
sites on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980. The Company is engaged in six
environmental investigation, remediation and/or monitoring activities at sites
located off Company facilities, including the removal of solvent contamination
from subsurface aquifers at a site in Sunnyvale, California. Some of these
activities involve the participation of state and local government agencies.
The other five sites (including the four Superfund sites) are associated with
the operations of the Media subsidiaries formerly owned by the Company.
Although the Company sold Media in November 1995, the Company may have
continuing liability with respect to environmental contamination at these sites
if Media fails to discharge its responsibilities with respect to such sites.
During 2001, 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 2002 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,
2001, the Company had an accrued liability of $1.2 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
17
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.
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 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, 2002
are as follows:
Name Age Position
---- --- --------
Edward J. Bramson. 50 Chairman and Chief Executive Officer
Craig L. McKibben. 51 Vice President, Chief Financial Officer and Treasurer
Robert L. Atchison 64 Vice President
Joel D. Talcott... 60 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 Chairman and Chief Executive Officer of
Sherborne Holdings Incorporated, Sherborne & Company Incorporated, First
Jeffson Corporation and Second Jeffson Corporation, is a limited partner of
Newhill Partners, L.P. 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 as Vice President and
Treasurer and a director of Ampex Holdings Corporation, and as Vice President
of each of Ampex Data Systems Corporation, and Ampex Finance Corporation. He is
also Vice President and a director of Sherborne Holdings Incorporated and of
Sherborne & Company Incorporated and is a Vice President of First Jeffson
Corporation and Second Jeffson Corporation. Mr. McKibben also serves as
disbursing agent 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.
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 Ampex Data Systems Corporation and as President and a director of
Ampex International Sales Corporation, wholly-owned subsidiaries of the
Company. He has served as an executive officer of the Company and various
subsidiaries since 1987.
18
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
1991 to 1987), and has supervisory responsibility for investor relations and
corporate communications functions. Mr. Talcott also serves as Chairman of
Ampex Data Systems Corporation, as Vice President and Secretary and a director
of Ampex Data Systems Corporation, Ampex Finance Corporation and Ampex
International Sales Corporation and as Vice President and Secretary of Ampex
Holdings Corporation, wholly-owned subsidiaries of the Company.
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 2001 and 2000. 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
----------- ----- -----
2001
First Quarter. $0.87 $0.26
Second Quarter 0.73 0.26
Third Quarter. 0.38 0.07
Fourth Quarter 0.20 0.10
2000
First Quarter. $5.50 $3.00
Second Quarter 3.44 1.50
Third Quarter. 1.75 1.00
Fourth Quarter 1.06 0.25
As of January 29, 2002, there were 859 holders of record of the Company's
Class A Common Stock.
The Company has not declared any dividends on its Common Stock since its
incorporation in 1992 and has no present intention of paying dividends on its
Common Stock. The Company is also restricted by the terms of the Indenture for
the Senior Notes, Senior Discount 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.
(b) On or about October 29, 2001, the Registrant issued and sold to
Sherborne & Company Incorporated (now named First Jeffson Corporation; ("FJC"),
1,000,000 shares of its Class A Stock having a market value at the time of
issuance of approximately $160,000. The shares were issued as a commitment fee
for the line of credit extended by FJC to the Registrant's subsidiary, Ampex
Data Systems Corporation, and no separate cash consideration was received by
the Registrant. The shares were not registered under the Securities Act of
1933, as amended (the "1933 Act") in reliance upon the exemption contained in
Section 4(2) thereof for any transaction not involving a public offering of
securities. FJC is wholly-owned by Edward J. Bramson, the Chairman and Chief
Executive Officer of the Registrant. The transaction was negotiated directly
between the Registrant and FJC, and no underwriter, broker or dealer was
involved in the transaction. The Registrant has agreed to register such shares
for resale under the 1933 Act.
19
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
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and
methods used in the preparation of our Consolidated Financial Statements. The
following is a brief discussion of the more significant accounting policies and
methods used by us. In addition, Financial Reporting Release No. 61 was
recently released by the SEC to require all companies to include a discussion
to address, among other things, liquidity, off-balance sheet arrangements,
contractual obligations and commercial commitments.
General
Ampex's discussion and analysis of its financial condition and results of
operations are based upon Ampex's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires Ampex
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The most significant estimates and assumptions relate to the
recoverability of receivables and inventories and the adequacy of allowances
for returns and doubtful accounts. Actual amounts could differ significantly
from these estimates.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as
amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is fixed
and determinable; and (4) collectibility is reasonably assured. Determination
of criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected. Products sold
are generally covered by a warranty for periods ranging from 90 days to one
year. The Company accrues a warranty reserve for estimated costs to provide
warranty services. The Company's estimate of costs to service its warranty
obligations is based on historical experience and expectation of future
conditions. To the extent the Company experiences increased warranty claim
activity or increased costs associated with servicing those claims, its
warranty accrual will increase resulting in decreased gross profit.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We
continuously monitor collections and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and
any specific customer collection issues that we have identified. While such
credit losses have historically been within our expectations and the provisions
established, we can not guarantee that we will continue to experience the same
credit loss rates that we have in the past. Since our accounts receivable are
concentrated in a relatively few number of customers, a significant
20
change in the liquidity or financial position of any one of these customers
could have a material adverse impact on the collectability of our accounts
receivables and our future operating results.
Inventories
We value our inventory at the lower of the actual cost to purchase and/or
manufacture the inventory or the current estimated market value of the
inventory. We regularly review inventory quantities on hand and record a
provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and production requirements for the next twelve
months. A significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the amount of excess
inventory quantities on hand. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. As a result of continuing sales declines, Data Systems further wrote
down it inventory by $2.1 million in the fourth quarter of 2001. Additionally,
our estimates of future product demand may prove to be inaccurate, in which
case we may have understated or overstated the provision required for excess
and obsolete inventory. If our inventory is determined to be overvalued, we
would be required to recognize such costs in our cost of goods sold at the time
of such determination. We make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory and our reported operating results.
Deferred Taxes
Ampex records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. We recognize deferred tax
assets and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly
review the deferred tax assets for recoverability and establish a valuation
allowance based on historical taxable income or loss, projected future taxable
income or loss, and the expected timing of the reversals of existing temporary
differences.
Warranty
Our warranty reserve is established based on our best estimate of the
amounts necessary to settle future and existing claims on products sold as of
the balance sheet date. While we believe that our warranty reserve is adequate
and that the judgment applied is appropriate, such amounts estimated to be due
and payable could differ materially from what will actually transpire in the
future.
Pension and Other Postretirement Benefits
The determination of our obligation and expense for pension and other
postretirement benefits is dependent on our selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions are described
in Note 16 to the consolidated financial statements and include, among others,
the discount rate, expected long-term rate of return on plan assets and rates
of increase in compensation and healthcare costs. In accordance with generally
accepted accounting principles, actual results that differ from our assumptions
are accumulated and amortized over future periods and therefore, generally
affect our recognized expense and recorded obligation in such future periods.
While we believe that our assumptions are appropriate, significant differences
in our actual experience or significant changes in our assumptions may
materially affect our pension and other postretirement obligations and our
future expense. The Company's domestic employees participate in a qualified
noncontributory defined benefit pension plan. In early 1994, the Company
amended the plan to terminate benefit service and compensation credit accruals
as of February 1, 1994. To the extent that there is an increase or decrease to
the Company's pension liabilities based on its annual actuarial valuation,
Ampex records the change directly to the minimum pension liability account,
which is part of stockholders' deficit. The Company remains the plan sponsor of
a pension plan ("Media Plan") although it disposed of the company ("Media") in
November 1995. Media is contractually required to provide funding for its
obligations. The Company includes a nominal reserve in its liabilities for the
Media Plan's unfunded status. Certain of the
21
Company's former employees of a closed foreign subsidiary were covered by a
contributory pension plan. The Company includes a reserve in its liabilities
for the Plan's unfunded status based on an actuarial valuation.
Valuation of Long-Lived Assets and Investments
We periodically review the carrying value of our long-lived assets and
investments for continued appropriateness. This review is based upon our
projections of anticipated future cash flows. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.
Contingencies
We account for contingencies in accordance with SFAS No. 5, "Accounting for
Contingencies." SFAS No. 5 requires that we record an estimated loss from a
loss contingency when information available prior to issuance of our financial
statements indicates that it is probable that an asset has been impaired or a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as environmental, legal and income tax matters requires us to use our
judgment. While we believe that our accruals for these matters are adequate, if
the actual loss from a loss contingency is significantly different than the
estimated loss, our results of operations may be over or understated.
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.
Licensing Revenue and Product Groups
The Company's principal product groups are Data Systems' mass data storage
and instrumentation recorder products.
Data Systems mass data storage and instrumentation products group includes:
(i) 19-millimeter scanning recorders and library systems (DST and DIS products)
and related tape and aftermarket parts; and (ii) data acquisition and
instrumentation products (primarily DCRsi instrumentation recorders) and
related tape and aftermarket parts. Other products consist principally of
television aftermarket products that the Company previously manufactured but
still supports. No other class of similar products accounted for more than 10%
of net sales during the comparison periods discussed below.
The following table shows licensing revenue and sales of Data System's
products by product group for the past three years.
2001 2000 1999
----- ----- -----
(in millions)
Ampex Corporation
Licensing revenue................................ $12.1 $12.3 $19.9
Ampex Data Systems Corporation
Mass data storage tape drives and Library systems $19.1 $25.7 $23.3
Data acquisition and Instrumentation recorders... 9.6 14.7 19.0
Other............................................ 5.3 7.2 9.3
----- ----- -----
Total net product sales.......................... $34.0 $47.6 $51.6
===== ===== =====
22
Results of Operations for the Three Years Ended December 31, 2001
Net Product Sales. Net sales decreased by 28.6% to $34.0 million in 2001
from $47.6 million in 2000, compared to $51.6 million in 1999. In 2001, the
sales decline was experienced across all of Data Systems' product lines. In
2000, the sales decline was primarily due to lower sales of instrumentation
products, offset in part by greater Data Systems' DST products. In 2000 and
2001, the majority of Data Systems' sales of 19-millimeter mass data storage
libraries and tape drives were to government customers who use the product for
imaging and intelligence gathering. These sales fluctuate as a result of
changes in government spending programs (including defense programs), and
seasonal procurement practices of government agencies. Data Systems' commercial
customer base consists primarily of television broadcasters and production
companies as well as the oil and gas industry. The television market has
declined in 2001 due to capital budget restrictions that have been imposed due
to a depressed advertising market. However, the Company believes this market
may represent its largest commercial opportunity for the sale of its DST
product line for the next several years as broadcasters install digital
archives for their content in order to achieve greater operational flexibility
and efficiency. In each of the past three years, government agencies and
defense contractors have been the largest market for Data Systems' mass data
storage and instrumentation recorders. This market has recently experienced an
increase in activity as additional funding has been granted for intelligence
gathering programs. However, the Company has no reason to believe that the
increase in spending will continue beyond 2002 and future periods may well
experience significant pressure to reduce spending.
The Company's backlog of firm orders increased to $4.6 million at December
31, 2001 from $3.4 million at December 31, 2000. The Company typically operates
with low levels of backlog, requiring it to obtain the vast majority of each
period's orders in the same period that they must be shipped to the customer.
Historically, a small number of large orders has significantly impacted sales
levels and often orders are received late in the quarter making it difficult to
predict sales levels in future periods. See "Business--Fluctuations in
Operating Results; Seasonality; Backlog."
Royalties. Royalty income was $12.1 million in 2001, $12.3 million in 2002
and $19.9 million in 1999. The Company's royalty income derives from patent
licenses. The Company receives most of its royalty income from licenses with
companies that manufacture consumer video products (such as VCRs and
camcorders) and, in certain cases, professional video tape recorders. Certain
license agreements are scheduled to expire during 2002 and there can be no
assurance that licensees will renew their license agreements. Also, in prior
years, the Company negotiated paid up license agreements with certain consumer
product manufacturers. In recent years, a significant portion of the Company's
royalty income stream has been based on patents covering analog and digital
VCRs. Sales of analog VCRs are declining rapidly and several patents covering
them are scheduled to expire in 2003. In order for the Company to attain levels
of royalty income realized in prior years, it will be necessary for it to
successfully conclude licensing negotiations with manufacturers of digital
camcorders, digital still cameras, DVDs and/or other consumer products. The
Company's patents have historically not been licensed for use in many of these
products and there can be no assurance that negotiations will be successful.
The Company may be required to pursue litigation if its negotiations are not
successful. Management believes that the expected increase in royalties from
new digital products will not be sufficient to offset the expected decline in
analog VCR royalties during at least the first six months of 2002. The Company
is assessing whether manufacturers of digital cameras, computer video games and
DVD recorders are using its patented technology and has entered into
preliminary discussions with certain manufacturers to license the Company's
patents for such use. There can be no assurance that the manufacturers of these
products are utilizing the Company's technology or, if used, whether the
Company will be able to negotiate license agreements with the manufacturers.
Royalty income has historically fluctuated widely due to a number of factors
that the Company cannot predict or control such as the extent of use of the
Company's patented technology by third parties, the materiality of any
nonrecurring royalties received as the result of negotiated settlements for
products sold by manufacturers prior to entering into licensing agreements with
the Company, the extent to which the Company must pursue litigation in order to
enforce its patents, and the ultimate success of its licensing and litigation
activities.
23
In the fourth quarter of 2001, the Company received $3.5 million of
royalties for past use of its technology from a manufacturer of 6 millimeter
digital camcorders and will also receive ongoing payments. The Company is in
licensing discussions with additional manufacturers of digital camcorders which
the Company believes use the same technology. There can be no assurance that
the Company will be successful in negotiating additional licenses.
Gross Profit. Gross profit as a percentage of net sales were 28.0% in 2001,
38.8% in 2000 and 35.5% in 1999. The decline in gross profit percentage in 2001
was due to a greater percentage of sales represented by Data Systems' sales of
lower margin mass data storage systems versus higher margin instrumentation
product sales and an overall decline in sales volume that resulted in lower
absorption of fixed manufacturing costs. In addition, in 2001 the Company
provided a $2.1 million reserve to write down the carrying value of inventory
that its current sales forecast indicates may not be utilized during the next
24 months. Further consolidation of manufacturing operations in Colorado
Springs and certain restructuring actions in the second half of 2001 are
expected to result in improved gross profit margins during 2002. However, the
Company has been notified that it may receive a substantial government order
that provides for future tape and service revenue in exchange for a reduced
equipment purchase price. Shipments against this order would result in
depressed gross margins in 2002 to be recovered in tape and service margins in
future years.
Intellectual Property Costs. Intellectual property costs relate to those
expenditures incurred by the Company's in-house patent department in procuring
royalty income and expenditures associated with patent enforcement litigation.
The costs of patent litigation can be material, and the institution of patent
enforcement litigation may also increase the risk of counterclaims alleging
infringement by the Company of patents held by third parties or seeking to
invalidate patents held by the Company. See "Legal Proceedings," below.
Selling and Administrative Expenses. Selling and administrative expenses
decreased to $14.2 million (30.9% of total revenue) in 2001 from $15.1 million
(25.3% of total revenue) in 2000 and $17.3 million (24.2% of total revenue) in
1999. Selling and administrative costs declined in 2001 compared to 2000 and
1999 as a result of savings realized due to a reduction in headcount and
relocation of certain administrative functions from Redwood City, CA to
Colorado Springs, CO.
Research, Development and Engineering Expenses. Research, development and
engineering expenses represented 11.9%, 11.5% and 11.8% of total revenue in
2001, 2000 and 1999, respectively. The Company does not capitalize any RD&E
expenditures. The majority of RD&E expenses in each of these years was incurred
in completing the third generation DST product line and sustaining engineering
on other products to enhance their price/performance levels. In recent years,
the Company has decreased the amount spent in research, development and
engineering programs due to declining sales levels. The Company may be required
to make additional cuts in R&D spending if Data System's sales continue to
decline. If this trend were to continue, the Company's ability to develop new
competitive products and renew its portfolio of licensable technology in future
years would be adversely affected.
Restructuring Charges (Credits). The Company recorded a net restructuring
charge with respect to its continuing operations of $3.5 million in 2001 and
$0.9 million in 1999. The charge in 2001 included $1.0 million in connection
with the Company's elimination of 86 positions in engineering, manufacturing
and administration in Redwood City, CA and Colorado Springs, CO all of whom
were terminated as of year-end. In the fourth quarter of 2001, the Company
consolidated its activities in Redwood City, CA and vacated one administrative
building. The restructuring reserve at December 31, 2001 includes future
rentals, net of estimated sublet income, associated with this property and the
write-off of leasehold improvements for $2.5 million. In 1999, Data Systems
relocated substantially all of its DCRsi manufacturing operations from Redwood
City to Colorado Springs, and eliminated 86 positions in manufacturing and
engineering. During 2001, the Company paid $1.5 million related to employee
termination benefits and lease costs of abandoned facilities. The remaining
balance of accrued restructuring costs at December 31, 2001 will substantially
be paid in 2002. The Company evaluates
24
the amount of accrued restructuring costs, including projected sublet income,
on a quarterly basis, and may make additional adjustments in future periods if
it determines that its actual obligations will differ significantly from
remaining amounts accrued.
Operating Income (Loss). The Company reported an operating loss of $2.3
million in 2001. In 2000 and 1999, the Company reported operating income of
$7.7 million and $10.2 million, respectively. The operating loss in 2001 was
primarily due to the decline in sales of Data Systems' products, a write-down
in inventory carrying values for potentially surplus material and a charge of
$3.5 million for restructuring of continuing operations.
Interest Expense. Interest expense increased between the comparison periods
due to the issuance of Senior Discount Notes in November 2000 that raised $8
million of net proceeds and that has accreted in value to $10.0 million at
December 31, 2001. The Company is seeking to refinance up to $6 million of the
Senior Discount Notes from a conventional mortgage or sale and leaseback of its
Colorado Springs, CO facility, but no commitments or agreements from any lender
have been received at the date of this Report. The Company anticipates that
interest expense may increase in fiscal 2002 reflecting increases in the
outstanding amount of 12% Notes and additional borrowing from Hillside.
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 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. Lower interest income in 2001 and 2000 from levels
realized in 1999 resulted from lower rates and significantly lower investment
balances in those periods.
Other (Income) Expense, Net. Other (income) expense, net consists primarily
of foreign currency transaction gains and losses resulting from the Company's
foreign operations. In 2000, other income included the value of the settlement
of certain litigation between the Company and a shareholder of a former
Internet investment.
Provision for Income Taxes. The provisions for income taxes in 2001, 2000
and 1999 consisted primarily of foreign income taxes and withholding taxes on
royalty income. The Company was not required to include any material provision
for U.S. Federal income tax in any of the last three fiscal years due to the
utilization of net operating loss carry forwards and timing differences. At
December 31, 2001, the Company had net operating loss carry forwards for income
tax purposes of $217 million, expiring in the years 2005 through 2021. 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.
Loss from Discontinued Operations and Loss on Disposal of Discontinued
Operations. In February 2001, the Board of Directors of the Company authorized
management to close MicroNet, its wholly-owned subsidiary that made high
performance disk arrays and Storage Area Networks, and to establish a reserve
of $2.1 million for the costs of closure and to write off its investment of
$4.2 million as of December 31, 2000. Ampex transferred MicroNet assets to an
entity that distributed the asset sale proceeds to MicroNet creditors.
Through December 31, 2001, the Company paid and charged $1.2 million against
the restructuring reserve. During 2001, the Company entered into sublease
agreements that reduced its estimated future lease costs by $0.4 million which
was recognized as income from discontinued operations. The remaining balance of
the MicroNet reserve totals $0.5 million which represents estimated lease
payments in excess of sublease income expected to be paid out over the lease
term which expires in 2004, and is included in its net liabilities of
discontinued operations. This obligation has not been discounted to present
value.
25
A summary of the operating results of MicroNet are as follows:
Years ended December 31,
-----------------------
2001 2000 1999
---- ------- -------
(in thousands)
Revenues........................................... -- 12,128 10,988
Costs and operating expenses excluding amortization -- (16,277) (13,732)
Goodwill amortization.............................. -- (1,213) (1,214)
Operating loss..................................... -- (5,362) (3,958)
Income (loss) from discontinued operations......... 378 (5,362) (3,958)
In July 2001, the Board of Directors of the Company authorized management to
close iNEXTV's operations in New York City and to cease future funding its
other Internet-based affiliates, AENTV in Los Angeles and TV1.de in Munich,
Germany. The Company established a reserve to write down its investment to net
realizable value and to provide for the costs of closure at the end of the
quarter ended June 30, 2001.
A summary of the loss on disposal of iNEXTV are as follows:
Years ended December 31,
------------------------
2001 2000 1999
------- ---- ----
(in thousands)
Impairment charge.......................... (4,602) -- --
Provision for closure...................... (5,736) -- --
Loss on disposal of discontinued operations (10,338) -- --
The impairment charge represents the write down of the Company's investment
in its Internet video businesses, including an additional investment in TV1
during the first quarter of 2001 of $1.7 million, to estimated net realizable
value. The net liabilities of iNEXTV reflected on its balance sheet after the
impairment charge, together with the provision for closure costs, are included
in the net liabilities of discontinued operations. The provision for closure
costs includes future payments to be made over a seven-year period for facility
rental commitments and related costs of $5.0 million, employee and contractor
severance costs of $0.6 million and other costs of $0.1 million. In addition to
the reserve for closure, the net liabilities of discontinued operations for
iNEXTV included the reclass of certain liabilities at the time of closure of
$1.1 million. During 2001, the Company paid and recorded charges of $2.0
million against the net liabilities of discontinued operations. The unamortized
balance in the net liabilities of discontinued operations totaled $4.8 million
at December 31, 2001.
A summary of the operating results of iNEXTV are as follows:
Years ended December 31,
------------------------
2001 2000 1999
------ ------- -------
(in thousands)
Revenues........................................... 188 2,896 1,851
Costs and operating expenses excluding amortization (6,277) (23,113) (14,230)
Goodwill amortization and writedown of assets...... (211) (5,412) (3,328)
Operating loss..................................... (6,300) (25,629) (15,707)
Equity in loss of unconsolidated subsidiary........ (999) (903) (197)
Loss from discontinued operations.................. (7,294) (26,536) (16,622)
Internet revenues in 2000 were principally from webcasting, video production
and event marketing services, substantially all of which were provided by the
Company's subsidiary, TV onthe WEB, which the Company ceased funding in October
2000. In 2000 and 1999, TV onthe WEB reported a net loss of $9.7 million and
$6.0 million, respectively.
26
Net Loss. The Company reported a net loss of $28.1 million in 2001, $36.7
million in 2000 and $15.6 million in 1999, primarily as a result of the factors
discussed above under "Loss from Discontinued Operations and Loss on Disposal
of Discontinued Operations."
Benefit from Extinguishment of Mandatorily Redeemable Preferred Stock. The
Company issued shares of Common Stock valued at $2.50 per share to satisfy its
redemption obligation on the Redeemable and Convertible Preferred Stock, which
was higher than fair value per share of Common Stock. As a result, the Company
recorded a benefit available to common stockholders in the year ended December
31, 2001, 2000 and 1999 of $5.7 million, $1.3 million and $0.4 million,
respectively, representing the difference between the fair value and $2.50 per
share for the number of shares issued, on the Consolidated Statements of
Operations.
Liquidity and Capital Resources.
General. As a result of continuing losses, the Company's liquidity has
declined materially in recent years. In response, the Company has been required
to restructure and extend the maturity date of its long-term senior debt, to
discontinue unprofitable Internet video operations and to borrow funds from a
former affiliate in order to make required contributions to its employee
retirement pension plans. The Company has also significantly restructured and
down-sized the operations of Data Systems and borrowed funds for working
capital purposes. Management believes that these actions, coupled with
anticipated royalty collections under licensing agreements presently in effect,
should be sufficient to satisfy all projected cash obligations for at least the
next 12 months.
Recent Senior De