| AMPEX CORP /DE/ ITEM 1A RISK FACTORS Risk Related to our Business Our operating results and income have fluctuated significantly in the past and will continue to fluctuate, and we may not be profitable in the future |
| Our revenues and results of operations are generally subject to quarterly and annual fluctuations |
| Various factors affect our operating results, some of which are not within our control, including: • receipt of lump sum, prepaid and ongoing licensing royalties; • product sales by licensees; • new licenses with licensees; • litigation expenses; • debt repayments and interest expense; • the amount and timing of pension contributions and related funding obligations; • customer ordering and government spending patterns; • availability and market acceptance of new products and services; • timing of significant orders and new product announcements; and • order cancellations |
| For example, our licensing revenue has historically fluctuated widely due to a number of factors that we cannot predict, such as the timing and negotiated terms of patent settlement agreements in any particular period, the extent to which third parties acknowledge use of our patented technology, the extent to which we must pursue litigation in order to enforce our patents to protect our business, and the ultimate success of our licensing and litigation activities |
| Licensing revenue also depends in part on fluctuating sales volumes and prices of licensees’ products that incorporate our technology |
| For 2005, we had licensing revenue of dlra28dtta9 million and net income of dlra6dtta7 million, as a result of the recognition of significant royalty receipts for past and, in some cases, future use of our patents |
| For 2004, however, we had licensing revenues of dlra72dtta9 million and reported net income of dlra46dtta4 million due to significant negotiated patent settlement agreements and in 2003, we had licensing revenues of dlra10dtta1 million and reported a net loss of dlra1dtta8 million |
| Similarly, our Recorders segment revenues may fluctuate significantly in future periods |
| While this segment reported operating income for 2005, 2004 and 2003, its business is dependent on the funding of government defense programs, which may come under increased pressure in the future, leading to a decline in sales |
| In addition, a substantial portion of our Recorders segment 15 ______________________________________________________________________ [44]Table of Contents backlog at a given time is normally shipped within one or two quarters thereafter, and revenues in any quarter are heavily dependent on orders received in that quarter and the immediately preceding quarter |
| However, at December 31, 2005 our backlog included the undelivered portion of an order from The Boeing Company for our new instrumentation recorders, totaling approximately dlra5dtta8 million, to be delivered over the next two years |
| Accordingly, results of a given quarter or year are not likely to be indicative of results to be expected for future periods, given the highly volatile nature of licensing revenue and other factors discussed above |
| In addition, fluctuations in operating results may negatively affect our debt service coverage, or our ability to issue debt or equity securities should we wish to do so, in any given fiscal period |
| In addition, material fluctuations in our operating results in future periods could have a material adverse effect on the price of our common stock |
| Our licensing revenue may be materially and adversely affected due to the expiration of one of our patents in April 2006 |
| Furthermore, if we are unable to protect our intellectual property adequately, our revenues will be reduced and we may not be able to compete effectively |
| Our licensing revenues may be adversely affected due to the expiration of our rapid image retrieval patent on April 11, 2006 |
| As of December 31, 2005, we have licensed substantially all of the major manufacturers of digital still cameras, the majority of whom have made prepayments covering their liability for the use of any of our patents through April 11, 2006 |
| After April 11, 2006, manufacturers of digital still cameras will be required to pay royalties only to the extent that their products incorporate any of our digital imaging patents, including our feed forward quantization patent, use of which is currently being studied |
| Although the potential royalties from digital still camera manufacturers could be substantial, if we are unable to prove infringement of our digital imaging patents, or if our patents are deemed invalid, our royalties from digital still cameras after April 11, 2006 could be materially and adversely affected |
| The success of our Licensing and Recorders segments depends, in part, upon our ability to establish and maintain the proprietary nature of our technology through the patent process |
| There can be no assurance that one or more of our patents will not be successfully challenged, invalidated or circumvented or that we will otherwise be able to rely on such patents for any reason |
| In addition, our competitors, many of whom have substantial resources and have made substantial investments in competing technologies, may seek to apply for and obtain patents that restrict our ability to make, use and sell our products either in the United States or in foreign markets |
| Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as the laws of the United States |
| If any of our patents are successfully challenged, invalidated or circumvented or our right or ability to manufacture our products becomes restricted, our ability to continue to manufacture and market our products could be adversely affected, which would likely have a material adverse effect upon our business, financial condition and results of operations |
| Unless we are able to develop or acquire new patents in the digital imaging field or other fields, our licensing revenues will expire in 2014 |
| Moreover, if other companies develop patented proprietary technology similar to ours or competing technologies, our competitive position will be weakened and we may experience reduced license revenues |
| Our revenues and operations may be adversely affected if we are not successful in our current and future legal actions or proceedings |
| The success of our Licensing segment depends upon the validity of our digital imaging patents, which are used by manufacturers of consumer digital imaging products |
| In 2004, we initiated litigation to enforce one of our digital still camera patents and we may decide to initiate additional litigation against other manufacturers of digital still cameras and other products to enforce our patents, to protect trade secrets or know-how owned by us 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 us, may require us to incur 16 ______________________________________________________________________ [45]Table of Contents substantial legal and other fees and expenses and may require some of our employees to devote all or a substantial portion of their time to the prosecution or defense of such litigation or proceedings |
| We also face the risk that a court could rule that our patents are invalid or not infringed, causing existing licensees to discontinue payments to us, and the risk of possible assertions of counterclaims |
| As a result, we have incurred significant litigation expenses and may incur additional costs in future periods if we bring new lawsuits or if existing litigation is not resolved through negotiations |
| Additionally, if we do not prevail in our patent litigation, our patent royalties could be negatively impacted, which would have an adverse impact on our business, revenues and operations |
| Our business depends materially on US government spending, and a decrease in that spending may adversely affect our revenues and earnings |
| Our Recorders segment depends materially on continued expenditures by the US government on intelligence and defense programs |
| Significant portions of data acquisition and instrumentation recorder sales reflect purchases by prime contractors to the federal government, which are subject to significant fluctuations |
| The large US budget deficit is expected to result in the cancellation of various defense programs |
| We do not know whether programs in which we participate will be affected by such cuts, program delays or deferred funding |
| The loss or significant decline in spending on various imaging and intelligence gathering programs, in which we are subcontractors to prime government contractors, or the lack of acceptance of our new products could have a material adverse effect on our revenues and earnings |
| In addition, other factors relating to the markets for our instrumentation products and to competition in these markets may affect future sales of these products |
| We have recently introduced our new DDRs disk-based data acquisition recorder and our new DSRs solid-state memory-based data acquisition recorder for use in intelligence gathering activities |
| These products have been designed to replace a large installed base of DCRsi tape-based data acquisition recorders over several years |
| However, there can be no assurance that these new products will be successful or achieve the same level of market acceptance |
| If sales of new systems decline in the future, we may be increasingly dependent upon revenues from the sale of spare parts, service and tape |
| We have substantial unfunded pension liabilities, which may adversely affect our liquidity and our ability to maintain or grow our operations |
| We are the Plan Sponsor for the Ampex and Media defined benefit pension plans, which were frozen in 1994 but remain substantially underfunded |
| At December 31, 2005, unfunded accumulated plan benefit obligations under these pension plans totaled dlra61dtta3 million and dlra25dtta4 million, respectively, and have been recognized as liabilities on our consolidated balance sheet |
| During 2004 and prior years, Media reimbursed us for some of the pension contributions we made on behalf of the Media pension plan based on a contractual obligation entered into at the time Media was sold |
| On January 10, 2005, Media filed under Chapter 11 of the Bankruptcy Code |
| Based on our assessment of Media’s financial condition, we do not anticipate any additional reimbursement of amounts paid to date or payable in the future on behalf of the Media pension plan |
| Future pension contributions payable under these pension plans will fluctuate based on actual investment performance, life expectancy of the participants and other factors versus such assumptions used to project future pension contributions |
| Under a Joint Settlement Agreement between us, Hillside and the Pension Benefit Guaranty Corporation, Hillside is required to advance pension contributions for our and Media’s pension plan in the event that we cannot make them |
| At our request, to date Hillside has made pension contributions totaling dlra20dtta7 million pertaining to the Ampex and the Media pension plans, which includes a pension contribution of dlra5dtta9 million in September 2005 |
| When Hillside advances pension contributions, we become indebted to Hillside, and we issue an equivalent amount of Hillside Notes |
| We have requested Hillside to advance pension contributions scheduled 17 ______________________________________________________________________ [46]Table of Contents for 2006 that are presently estimated to total dlra9dtta5 million pursuant to the Joint Settlement Agreement |
| In future years, we may request Hillside to fund additional pension contributions under the Ampex and/or Media pension plans depending on our liquidity |
| We believe that Hillside has sufficient assets to fund future pension contributions under the Joint Settlement Agreement, but we do not own or control Hillside and, except for the provisions of the Joint Settlement Agreement, our ability to borrow pension contributions from Hillside is beyond our control |
| Our substantial indebtedness could materially adversely affect our operations and financial results and prevent us from obtaining additional financing, if necessary |
| As of December 31, 2005, we had outstanding approximately dlra25dtta8 million of total borrowings, which includes approximately dlra5dtta8 million under our 12prca Senior Notes due 2008 and dlra19dtta9 million of Hillside Notes that at December 31, 2005 bear interest at 8dtta75prca per annum |
| The Hillside Notes were incurred in connection with pension contributions advanced by Hillside in 2005 and prior years |
| The 12prca Senior Notes are secured by liens on our future royalty receipts |
| We may incur additional indebtedness from time to time in the future, subject to certain restrictions imposed by our debt agreements, which could increase our interest expense in future periods |
| If we default in our obligations under the relevant loan agreements, the Noteholders would have the right to accelerate the indebtedness and foreclose on their liens, which would materially and adversely affect our financial condition |
| The degree to which we are leveraged could have other important consequences to investors, including the following: • a substantial portion of our cash flow from licensing operations must be dedicated to the payment of principal of and interest on our outstanding indebtedness until it is repaid in full, and until then will not be available for other purposes; • our ability to obtain additional financing in the future for working capital needs, capital expenditures, acquisitions and general corporate purposes may be materially limited or impaired by the terms of our existing debt agreements, and even if existing lenders consent to the issuance of new debt, such financing may not be available on terms favorable to us; • we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage; • our leverage may make us more vulnerable to a downturn in our business or the economy in general; and • the financial covenants and other restrictions contained in our indentures and other agreements relating to our indebtedness also restrict our ability to make new investments, dispose of assets or to pay dividends on or repurchase common stock |
| If we cannot service our indebtedness, we will be forced to adopt alternative strategies |
| These strategies may include reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital |
| We cannot give any assurance that any of these strategies will be successful or that they will be permitted under our debt indentures |
| Our substantial debt service and pension obligations may reduce our cash flow and our ability to operate our business |
| We have limited liquidity with which to conduct our operations |
| While we had cash and marketable securities of dlra13dtta1 million at December 31, 2005, substantially all cash generated by our Licensing segment in excess of related operating expenses and certain other expenses, including patent litigation costs, is first required to be applied to reduce debt, which totaled dlra25dtta8 million at December 31, 2005 |
| In addition to our debt service 18 ______________________________________________________________________ [47]Table of Contents obligations, we are obligated to make future pension contributions to our and Media’s pension plans, which we estimate will total dlra52dtta1 million over the next five years |
| While our management believes that our liquidity, coupled with anticipated patent licensing revenue and our ability to borrow pension contributions from Hillside, should be sufficient to satisfy our projected cash obligations through at least December 2006, there can be no assurance that we will be able to satisfy these obligations in future years |
| Furthermore, our limited liquidity may harm our ability to operate or grow our business |
| If we acquire companies in the future, we may experience integration costs and the acquired businesses may not perform as we expect |
| We have 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 we have not historically been involved |
| We may not be able to identify or acquire suitable acquisition candidates in the future, or complete any acquisitions or investments on satisfactory terms |
| While we are not currently seeking to make any acquisitions of a controlling interest in new businesses and our principal debt instruments substantially restrict our ability to make acquisitions or investments in new businesses, future acquisitions and investments involve numerous additional risks |
| These risks include difficulties in the management of operations, services and personnel of the acquired companies, and of integrating acquired companies with us and/or each other’s operations |
| We may also encounter problems in entering markets and businesses in which we have limited or no experience |
| Acquisitions can also divert our attention from other business concerns |
| We have made and may make additional investments in companies in which we own less than a 100prca interest |
| Such investments involve additional risks, including the risk that we may not be in a position to control the management or policies of such entities, and the risk of potential conflicts with other investors |
| For example, we have written off all of our acquisitions of Internet companies during 2000 and 2001 |
| It is possible that we could lose all or a substantial portion of any future investments |
| If we are unable to respond to rapid technological change or to develop new products, our revenues and results of operations will be adversely affected |
| All the industries and markets from which we derive or expect to derive revenues, directly or through our licensing program, are characterized by continual technological change and the need to introduce new products, product upgrades and patentable technology |
| This has required, and will continue to require, that we spend substantial amounts of capital on the research, development and engineering of new products and advances to existing products, as well as for assessing infringement of our patents by manufacturers of consumer digital video products |
| We cannot assure you that our existing products, technologies and services will not become obsolete or that any new products, technologies or services will win commercial acceptance |
| Obsolescence of existing product lines, or inability to develop and introduce new products and services, could have a material adverse effect on our revenues and results of operations in the future |
| The development and introduction of new technologies, products and services are subject to inherent technical and market risks, and there can be no assurance that we will be successful in this regard |
| In addition, reductions in our research and development programs could adversely affect our ability to remain competitive |
| Because our Recorders segment is primarily focused on our data acquisition and instrumentation products, we have devoted the majority of our research and development to producing our new solid state and disk based instrumentation recorders |
| We do not currently intend to invest additional development resources to extend the life of our 19-millimeter mass storage products beyond the quad density format other than as required to support the needs of our customers |
| If our Recorders segment were to experience further declines in product revenues, we may be required to reduce future research, development and engineering costs |
| 19 ______________________________________________________________________ [48]Table of Contents We have numerous significant competitors in our Recorders segment, some of which have greater financial resources than we do |
| Our Recorders segment encounters significant competition in all the markets for its products and services |
| Many of our competitors in this industry have greater resources and access to capital than us |
| In the instrumentation market, which currently is our Recorders segment’s major area of focus, we compete primarily with companies that depend on government contracts for a major portion of their revenues, including L-3 Communications Corporation, Calculex and Sypris Solutions, Inc |
| While the number of our competitors in this industry has decreased in recent years as the government spending in many areas has declined, many of these competitors have greater financial resources than we do |
| We rely on a limited number of key suppliers and vendors to operate our business |
| If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of products and services we require to operate our business successfully |
| Our Recorders segment purchases certain components such as customized integrated circuits, memory chips and magnetic media products from a single or a small number of domestic or foreign manufacturers |
| Significant delays in deliveries or defects in such components may, from time to time, adversely affect our manufacturing operations, pending qualification of an alternative supplier |
| In addition, we produce highly engineered products in relatively small quantities |
| As a result, our ability to cause suppliers to continue production of certain products on which we depend or to deliver those products to us on a timely basis, may be limited |
| These suppliers may require us to purchase lifetime quantities of their products or components, which may cause our inventories to increase beyond levels required to support current revenues |
| We do not generally enter into long-term raw materials or components supply contracts |
| Accordingly, if we experience problems with these manufacturers, we could fail to obtain sufficient resources to operate our business successfully |
| Our international operations subject us to social, political and economic risks of doing business in foreign countries |
| Although we significantly curtailed our Recorders segment’s international operations in prior years, sales to foreign customers (including US export sales) continue to be significant to our results of operations |
| However, international operations are subject to a number of special risks, including limitations on repatriation of earnings, restrictive actions by local governments, and nationalization |
| Additionally, export sales are subject to export regulation and restrictions imposed by US government agencies |
| Although fluctuations in the value of foreign currencies can affect our results of operations, we do not normally seek to mitigate our exposure to exchange rate fluctuations by hedging our foreign currency positions |
| Accordingly, our revenues from international operations are subject to numerous risks, any of which may have an adverse impact on our results of operations |
| We are dependent on certain key personnel and the loss of one or more these individuals could disrupt our operations and adversely affect our financial results |
| We are highly dependent upon the availability and performance of our executive officers and directors, including Edward J Bramson, who has been our chief executive officer since 1991, and the other senior executives of our corporate licensing division and Data Systems subsidiary |
| Bramson is also engaged in the management of certain other companies, but devotes most of his time to the management of our operations |
| We have not entered into employment agreements with Mr |
| Bramson or any of our key employees, and we do not maintain key man life insurance on any of these individuals |
| Accordingly, if we lose the services of Mr |
| Bramson or our other executive officers, our business, financial condition and operating results could be materially adversely affected |
| 20 ______________________________________________________________________ [49]Table of Contents We are subject to environmental regulation and could incur substantial costs as a result of violations of or liabilities under environmental laws |
| Our facilities are subject to numerous federal, state and local laws and regulations designed to protect the environment from waste emissions and hazardous substances |
| Owners and occupiers of sites containing hazardous substances, as well as generators and transporters of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including liability for investigative and cleanup costs and damages arising out of past disposal activities |
| We are currently engaged in various environmental investigations, remediation and/or monitoring activities at several sites located off our facilities |
| There can be no assurance we 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 us in the future |
| Although we sold Media in November 1995, we have continuing liability with respect to environmental contamination at manufacturing sites and disposal sites used by Media when it was our subsidiary |
| On January 10, 2005, Media filed under Chapter 11 of the Bankruptcy Code |
| At December 31, 2005, we have included an estimate of future clean up costs of Media sites of dlra2dtta4 million, which is included in net liabilities of discontinued operations |
| Complying with new regulatory and accounting requirements will be challenging and may adversely affect our business and operations, and the trading price of our securities |
| Financial scandals in recent years have led to new laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq market rules |
| Under these provisions, we are required to maintain adequate internal control over financial reporting, which has involved improving existing internal controls, implementing additional internal controls, and documenting and testing our internal controls |
| As a result, we have incurred significant costs to engage outside legal, accounting and advisory services |
| Compliance has also occupied substantial management time and attention, which might otherwise have been devoted to revenue-generating activities |
| Changes in accounting rules, including requirements to account for employee stock options as a compensation expense, are also expected to materially increase the expenses that we report under generally accepted accounting principles, which may adversely affect our operating results |
| If we are unable to comply with these new requirements, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities |
| Risks Related to the Ownership of our Common Stock The future price of our common stock may fluctuate significantly |
| The trading price of our common stock has been and can be expected to be subject to significant volatility, reflecting a variety of factors, including: • fluctuations in patent licensing revenues, developments in our patent licensing program and the success or failure of litigation that we initiate to defend our patents; • announcements relating to developments in our Recorders segment; • quarterly fluctuations in operating results; • modifications to our senior debt agreements and other events that affect our liquidity; • announcements of the introduction of new products, technologies or services by us or our competitors; • announcements of acquisitions of, or investments in, new businesses or other events; • sales of shares of our common stock by insiders pursuant to registration statements, Rule 144, Rule 10b5-1 plans or otherwise; 21 ______________________________________________________________________ [50]Table of Contents • reports and predictions concerning us by analysts and other members of the media; and • general economic or market conditions |
| In addition, the stock market in general, and technology companies in particular, have experienced a high degree of price volatility, which has had a substantial effect on the market prices of many such companies for reasons that often are unrelated or disproportionate to operating performance |
| Thus, these broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance |
| Future sales or the possibility of future sales of substantial amounts of our common stock by our officers and directors may cause the price of our common stock to decline |
| The resale of shares of our common stock by insiders pursuant to a registration statement or prospectus could cause the market price of our common stock to decline |
| In addition, our officers, directors and employees and certain other stockholders hold significant numbers of shares of our common stock that are not covered by a registration statement |
| Some of those shares are freely tradable without restriction under the federal securities laws, and those that are not may be sold in the future pursuant to newly filed effective registration statements, in compliance with the requirements of Rule 144 under the Securities Act or, in some cases, pursuant to a reoffer prospectus filed under an existing effective registration statement |
| Sales in the public market of substantial amounts of our common stock, whether by our officers, directors, employees or others, or the perception that such sales could occur, could materially adversely affect prevailing market prices for our common stock and our ability to raise additional capital through the sale of equity securities |
| Anti-takeover provisions in our certificate of incorporation and by-laws may reduce the likelihood of any potential change of control or unsolicited acquisition proposal that you might consider favorable |
| Our certificate of incorporation provides for a classified board of directors, with members of each class elected for a three-year term |
| It also 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 |
| Similarly, the indenture governing our outstanding Senior Notes requires us to offer to repurchase the Senior Notes at a purchase price equal to 101prca of the outstanding principal amount thereof together with accrued and unpaid interest in the event of a change of control, which includes the purchase by a person or group of 50prca or more of our outstanding voting stock or the transfer of substantially all of our assets to any such person or group, other than to certain of our subsidiaries and affiliates |
| These provisions could deter, delay or prevent a third-party from acquiring us, even if doing so would benefit our stockholders |
| Our board of directors may issue preferred stock without stockholder approval |
| Our charter authorizes our board of directors to authorize the issuance of up to 1cmam000cmam000 shares of preferred stock |
| Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders |
| These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption |
| The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our class A common stock, and therefore could reduce its value |
| In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party |
| The power of the board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders’ control |
| Our executive officers and directors will continue to have substantial control over our company, which may prevent you or other stockholders from influencing significant corporate decisions |
| As of December 31, 2005, our executive officers and directors beneficially owned or controlled, in the aggregate, approximately 15dtta9prca of our outstanding common stock |
| As a result, they may be able to influence 22 ______________________________________________________________________ [51]Table of Contents matters requiring stockholder approval |
| These matters include the election of directors and approval of significant corporate transactions, such as a merger, consolidation, takeover or other business combination involving us |
| Our existing principal stockholders, executive officers and directors may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests |
| This concentration of ownership could also adversely affect the market price of our common stock or reduce any premium over market price that an acquirer might otherwise pay |