Chairman's Annual Report Letter - 1997

Dear Ampex Shareholder,

I am pleased to report that Ampex Corporation earned a profit of $14.8 million for its 1997 fiscal year.  This resulted in earnings per diluted share of $0.32, an increase of 14% over the previous year. Cash and short-term investments at the end of the year increased to almost $42 million and rose further to approximately $70 million in January of this year, when we completed a new financing. These improvements in earnings and liquidity were achieved after absorbing significant expenses for patent litigation, and investing the equivalent of 19% of revenues in research, development and engineering.  In all, our financial performance in 1997 was, I believe, reasonably good.

Less satisfactory was our level of sales, which declined during the year. Revenues from our basic instrumentation business increased, while sales of broadcast television products continued their multi-year decline due to changing television standards and our substantial withdrawal of marketing support for these products. Sales of data storage products also declined in dollar terms, although the capacity in megabytes of the units shipped actually increased.  In part, this is due to the fact that early in the year, we doubled the capacity of our data storage devices, while keeping their prices unchanged. More needs to be done to grow product revenues, and I shall address this later in my letter.

At the end of the year, we announced the curtailment of our program to develop keepered media technology for use in hard disk drives, and provided a reserve of about $1 million for the cost of doing so. The decision was based on our evaluation that the disk drive industry would choose to meet its near-term capacity objectives by migrating to magneto-resistive head technology without keeper layers. We also felt that the recent collapse in the profitability of the disk drive industry would be a further impediment to the adoption of our technology. Keepered media may have an application in stabilizing magnetic recording at density levels much higher than those in use today, but until we see significant near-term revenue potential for the technology, we will continue to fund keepered media research at a relatively low level.

A detailed discussion of our markets, financial performance and other matters is contained elsewhere in this report, as well as in our 10K which has been filed with the SEC. I urge you to read them to obtain a fuller understanding of our current activities.

To reiterate, in l997, Ampex did quite well financially. Indeed, by some measures of efficiency such as return on investment, we compared favorably with some of the best companies in the country. Our products and technology are excellent, but our sales still went down. Frankly, we are positioned in market segments that, in general, are not expanding.  If we are to resume growing, this issue will have to be addressed. The following are our thoughts on how to accomplish the necessary transition. 

It is generally accepted that the market growth prospects for what Ampex calls visual technology are exciting and these markets are most likely to present our best opportunities.  Ampex has a significant technology base in processing, compressing and manipulating video and audio, and particularly in making it look and sound better.  In fact, the majority of the data storage devices that we sell are actually used to store images.

Some years ago, we believed that the biggest driver of demand for visual technologies would be the digitization of the broadcast television system. In fact, in a speech at the National Association of Broadcasters Convention in 1991, I predicted publicly that the industry would turn from its existing technology to computer-based systems, such as our subsequently introduced DST¨ products. Six years of humiliation finally ended in 1997 when the first such television network installation was actually completed.

Nowadays, broadcast television and the VCR are no longer the exclusive media for the distribution of visual information, and they may well become marginal factors if the rapid improvements in network and telecommunications technologies bring acceptable pictures to the Internet, and more choice to cable and satellite systems. In addressing such growing markets, we can draw on internal resources or we can acquire them from the outside. We expect  to employ both approaches.

Ampex's most immediate internal growth opportunity is for its 19-millimeter DST¨ and DIS™ products. When these systems were originally introduced, we envisaged them as a new class of storage device - one that is "virtually online." Some of the complementary hardware and software that we had counted on being available from other companies was delayed, and this held us back. In 1998, we plan to introduce a system that combines our DST systems with certain purchased components to finally make this virtually online performance available in an accessible form.  In order to grow, Ampex must develop more solutions of this kind that make it possible to penetrate markets beyond the relatively small niches that our products currently address.

Additional revenue growth in the near term will probably require us to explore external options - acquisitions or investments.  To prepare for this, in January of l998, we raised $30 million by issuing 12% Senior Notes.  The terms of these securities are unusually favorable, as they do not carry the customary restrictions on making acquisitions or investments.  The cost of this financing was also quite attractive, since raising a similar sum by issuing stock would have reduced earnings per common share by a significantly greater amount. This is the first time that Ampex has raised new capital in the securities markets since 1994, but if we become active in acquisitions, I do not expect it to be the last.

With regard to investing these funds, it is possible to establish some guidelines but realistically we will have to be opportunistic. Broadly, we will look for situations, preferably image related, that help to position us in markets that are faster growing than ours currently are. We are considering various opportunities but attractive candidates are not always immediately available.  Acquisitions often depress short-term earnings and carry other risks, but they could provide an important path to accelerating growth.  I will keep you informed as our plans become more definitive.

While pursuing growth, we will not divert attention from our existing businesses.  The chances are that revenues from our currently available products will decline in 1998, and so we intend to spend significantly more on marketing programs and on the roll-out of new products than we did last year.  We may also price more aggressively, which could reduce margins. We will work hard to maintain and increase earnings in 1998, but it will not necessarily be an easy year in which to do so.

As demonstrated above, my forecasts have frequently been premature.  However, markets may finally be moving in our direction. We have the financial flexibility to try some exciting new things and to evolve in radically new directions. For these reasons, I am more enthusiastic about the long term than I have been at the time of writing any previous annual letter.

As always, I would like to thank the people who work at Ampex, many of whom, like me, are also stockholders. Their brilliance and dedication is inspiring, and it is a privilege for me to be associated with them.

Ultimately, the purpose of the Corporation is to benefit its shareholders over time. That is what we are all working to do, and I hope and expect that our patience will be rewarded.

Yours sincerely,

Edward Bramson
Chairman

This Annual Report 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 (collectively, "forward-looking statements").  Forward-looking statements relate to various aspects of the Company's operations and strategies, including but not limited to: its sales forecasts for future periods; the development of application software for its 19-millimeter products; the success of the Company's marketing,  product development, acquisition, investment, licensing and other strategies; the effect of increased inventories; redemption of the Company's outstanding Noncumulative Preferred Stock; possible future issuances of debt or equity securities; the Company's liquidity and anticipated interest expenses; new business development and industry trends.  Important factors that could cause actual results to differ materially from those described in the forward-looking statements are described in cautionary statements included in this Annual Report and/or in the Company's Form 10-K for fiscal 1997 filed with the Securities and Exchange Commission.  In assessing forward-looking statements, readers are urged to consider carefully these cautionary statements.  Forward-looking statements speak only as of the date of this Annual Report, and the Company disclaims any obligation to update such statements.