Kevin,
The negative stockholder equity is a result of the massive restructuring a few years ago. The following Red CHIP Review article dated 7/95 explains Ampex's Saga.
Focus Report
You Can't Get There from Here or Momma's Little Alva
by Marcus W. Robins, C.F.A. - 7/12/95
As a youth of ten, I was mesmerized by Spencer Tracy's portrayal of Thomas
Alva Edison in the movie of the same name. Not only did I assemble a
chemistry lab in the basement responsible for many foul-smelling
concoctions, but constructed several "experiments" modeled after the great
genius' inventions. My awe for the "Wizard of Menlo Park" was so great, I
even tried to convince my folks to change my name by swapping with my
younger brother.
All has turned out for the better: Tom is the chemist, and just an
itsey-weensey mad, and I'm a worried and confused stock-picker. But I still
get just as excited about technology and especially "high-wreck" technology
stocks that have been ignored by the Street.
We've stumbled onto a new, down-trodden name that has earnings, some
underlying and hidden assets, scads of technology, and is more than midway
through its turnaround. The Company is headquartered in New York, but has
its main plant near San Francisco. Although it is too early to decree a Red
Chip "Recommendation," the shares at $2 1/4 neither reflect the
turnaround's progress nor the Company's technology potential.
Alex M. Poniatoff is to magnetically recorded signals (audio, video, and
digital) what Edison represents to the lightbulb. Founded in 1944 by the
Russian emigr‚, Ampex first produced audio recorders to meet the post-war
demand for hi-fi equipment. As consumer electronic advances progressed, the
Company pioneered many modern adaptations including recorded stereo, video
record and playback systems, special tape technology and recording system
advances, television production and processing equipment, as well as
digital recording technology.
In 1988, the Firm was purchased from Allied Signal via a LBO by current
management. The investment vision pivoted on the revolutionary transition
from analog to digital video signals and the potentially huge market need
for digital-broadcast, television production equipment and recorders
(television special effects require the multiple recopying of scenes, which
is more effectively executed by digital rather than analog editing). A
combination of the Gulf War, recession, and a reversal of the television's
secular fortunes dried-up equipment demand.
Responding to the more difficult environment, management focused on three
strategic goals: 1) downsize and economize operations to save the Firm or
at least prolong its existence; 2) focus and develop product offerings to
maximize data storage capabilities-not just capacity but access time,
transfer rate, reliability, and cost per megabyte; and 3) operate the
business to fund continuing magnetic recording R&D with the goal of
introducing new advanced technologies and products.
Suffice it to say, the Company has been dragged through the reorganization
knothole. Divisions, assets, inventory, and technology have been spun-out,
written-down, or sold-off. Today, Ampex is profitable ($15.5 million) on a
revenue base ($125 million) that is less than one-seventh its former size.
The Firm was essentially cash-flow-positive last year, and it appears
destined to generate positive cash flow in 1995. Although a substantial
equity deficit ($176 million) still exists on the balance sheet, this
financial blot should be washed-away via the combination of share-exchanges
(completed during the first quarter of 1995), asset sales (the media
division and most of the Redwood City campus should be sold this year,
netting $90 million), and 1995's profits. Moreover, the financial cleansing
should permit the shares to be re-listed on an established exchange. (Read:
More Efficient Market.)
The Company's current product line-up could be financially important-it
makes sense to me-or dribble away as a cash cow. Indeed, one could
characterize Ampex's current storage technology and equipment as a
"destination capability" just waiting for the information and data
superhighway to build to it. Computer processing speeds are accelerating.
The price of computer power is plummeting while processing demands are
increasing. With the greater capability and more intense utilization, data
storage demand is exploding. Yes, this is an old and well-worn story: We
used the same argument for recommending Iomega (IOMG-25 1/8). But, a new
twist and eventual consequence seems apparent.
Most home, business, and creative computer users poorly perceive and
understand raw data-they see a statistic but don't understand its meaning.
To assimilate or "get into" data, it often takes a picture or graph. As
data modeling becomes more complex, users need greater computer power, but
there is also an exponential jump in memory storage requirements.
For example, a simple, one-page letter requires 2,000 bytes of storage. If
the letter is scanned as a picture, not entered as a simple stream of data,
it requires 50,000 bytes of storage. But, one second of full-color,
compressed video uses a megabyte of storage. To put this into perspective,
the new gigabyte hard-drives would store just over 16 seconds of compressed
video.
Ampex now offers a series of mass-storage, tape-drive systems that address
these distinctive markets. The common traits between lines include large
capacity, fast transfer rate, and low-cost, per megabyte of storage.
The DCT provides high-quality, digital video storage with what is claimed
the purest video-signal compression capability.
Ampex's DCR instrumentation recorder is a ruggedized storage system used
for intelligence image collection, satellite communication, and data
streams generated from aircraft flight testing. This now stands as the
Company's largest business sector representing more than half of sales.
Ampex's DST archival backup systems are the goliath products. Starting at
$100,000, a complete recording system with robotic library capabilities can
store 6.4 terabytes of virtual, on-line data. As the Company's nascent
sales force becomes more expert, the sell-through of these systems and the
fortunes of the whole firm should improve.
Finally, there is a real interesting parallel between Ampex and Edison's
Menlo Park operations. Although sporting a somewhat tarnished patina, Ampex
is a treasure trove of technology and patentable innovations-7,000 in
total, 1,000 currently active to be exact. Indeed, its history, expertise,
and engineering results regarding magnetic recording and data storage
places the Company as the ultimate progenitor to many of today's
play/record products. This prowess is best described by the stream of
royalty payments attributable to the settlement of patent litigation and
other negotiated license agreements (which amounted to $5.1 million in 1994
and $6.0 million in the first quarter of 1995).
R&D continues to play an important role. Ampex engineers have developed a
patented, hard-disk, media that strengthens the magnetic field properties
of hard, disk drive record media, which enhances data density and reduces
the need to close the head/media fly height or air gap. OEM product
sampling is soon to begin and since disk drive design cycles are short-term
processes, feasibility and market success could be determined before
year-end. We mention this not only to expose the potential sizzle of a new
product arena (the worldwide market for disks is a couple billion-dollar
market) but illustrate the potential for more new, and meaningful products
arising from the Company's $15 million annual R&D budget.
Although the shares continue to be speculative, we believe they could
provide substantial long-term appreciation. Our guess is that per share
earnings will increase from $0.36 last year to $0.40 for 1995 (this is a
fully-diluted estimate, but does not consider backing out N.O.L.). The
shares may double before year-end, but could provide greater appreciation
if the disk media technology proves marketable.
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