Chairman's Letter - October 27, 1997

Dear Ampex Shareholder,

In past years, in addition to making our quarterly filings with the SEC, I have written a separate report to you.  I am not sure how many of you found these letters to be useful, and, occasionally, it has been difficult to find sufficient topics to justify such a letter.  This year, we have decided to write only one interim letter.  You probably received our annual report in March of this year and will receive the 1998 edition in March of next year.  Since we are roughly at the halfway point between these two, this seems a good opportunity to write to you.

Firstly, with respect to our financial performance for the year so far, I would characterize it as adequate rather than good.  Revenues have declined from those of last year, mostly, though not exclusively, because television sales dropped quite sharply.  These are not items that we support aggressively any longer, and, with the announcement of new television transmission standards early this year, we expect these older products to continue to decline.  Sales of data storage and instrumentation products have also declined somewhat for the year to date.  Some large orders received in earlier years provided us with a substantial backlog which we have now shipped.  It is reasonable to expect that these earlier sales will lead to follow-on business as well as to orders from new customers.  Additionally, recent favorable mention in technology publications such as Datamation and Data Management Review has increased the visibility of our commercial data storage products.  However, the sales cycle for large purchases like Ampex's
products is relatively long, and the orders that we actually have in hand have, as yet, only increased slightly from the beginning of the year.

The revenue declines were not entirely unexpected, and their impact on profits has been offset by increases in royalty income and in gross profit margins, and by managing our operating expenses to keep them in line with sales.  Net income for the nine months to date decreased slightly but, had it not been for an increase in patent litigation expense, our net income would actually have increased relative to the prior year.  The Company's employees deserve considerable credit for achieving these results in the circumstances prevailing.

Turning to the patent infringement litigation with Mitsubishi Electric, we have spent a sum equivalent to $0.08 per share on this matter so far in 1997.  The significance of this litigation is that it relates not only to videotape recorders, the traditional source of our royalty income, but also to television receivers from which we have not previously earned any royalties.  Earlier this year, we were understandably pleased to receive favorable jury verdicts not only in our suit against Mitsubishi but also in their counter-suit against us.  To our surprise, the judge in our case against Mitsubishi overruled the jury based on a legal technicality relating to enforceability of the patent in question.  Frankly, we believe that this decision was wrong and have initiated an appeal.  Litigation is intrinsically an uncertain exercise but we remain hopeful that this suit will ultimately be determined in our favor.  We do not expect a decision on the appeal until late next year, but we will keep you informed in future letters.

With respect to the keepered media development program, our initial strategy to sell keepered media with inductive recording heads as a lower cost competitor to magneto-resistive head disk drives has not been successful.  Although I believe that the economics support the production of inductive disk drives, the industry continues to move quite rapidly towards magneto-resistive technology.  There may still be some opportunities for inductive based programs but, if they do not occur relatively soon, the prospects for keepered media will depend entirely on our efforts to achieve performance gains with magneto-resistive heads.  While we have seen promising results in laboratory tests with magneto-resistive heads, I cannot yet tell you whether or not we will be able to obtain commercially significant capacity gains in a production disk drive.  At mid-year, we agreed with Samsung Information Systems to attempt to develop jointly a magneto-resistive based disk drive utilizing keepered media.  This provides us with a "real world" opportunity to evaluate the technology, and we shall report on results as they become available.

Our annualized rate of spending on keepered media development is approximately equivalent to $0.09 per share, roughly a quarter of our Research and Development budget.  This is a large part of the funds that we have available for discretionary projects aimed at growing the Company.  As you would expect, we are constantly identifying new opportunities in data storage and in digital imaging that we would like to fund from our limited pool of discretionary money.  Accordingly, while we remain reasonably optimistic about the prospects for keepered media, it will be necessary to generate some keepered media revenue in the reasonably near future to offset its development expense.  If this does not happen, we shall probably continue to fund long-term development but at a lower rate of expenditure.

Ampex is also continuing to invest in consolidating the technical lead that our existing products enjoy.  For example, at the beginning of the year, we introduced a new generation of 19mm, DST and DIS products with twice the capacity of their predecessors and we are currently working on a further doubling.  We are also considering further marketing investments and product line extensions in this area and will also consider acquisitions.

We are in the process of reviewing the Company's strategy for the coming year, and, in my annual report letter, I hope to outline it for you.  Obviously, in a letter such as this one, there are many items affecting the Company that I have not discussed.  I encourage you to obtain the detailed reports that we file with the SEC that contain considerably more detail about the Company and its progress.  One way in which these reports may be obtained is from our web site:  www.ampex.com, which offers, in addition, more information about the Company and Ampex products.

I look forward to writing to you in the New Year.

Yours sincerely,

 

Edward Bramson

Any statements contained herein that are not historical facts are forward-looking statements within the  meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties. Information on potential factors which could affect the Company's actual results of operations are included in its filings with the Securities and Exchange Commission, including but not limited to its Annual Report on Form 10-K for the fiscal year ended December 31,  1996, and its 1997 Quarterly Reports, on Form 10-Q.