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How Ampex Squeezes Out Cash


Just a couple of years ago, Ampex Corp. (AEXCA) looked like a long-fading technology pioneer finally slipping into oblivion. The Redwood City (Calif.) company, founded in 1944, proved itself one of Silicon Valley's greatest innovators in its early days. Among other things, it invented the commercial video recorder in 1956 and developed the first U.S. tape recorder in 1948. But Ampex lost its magic touch decades ago. A string of new ventures flopped. After losing money for years, Ampex was dumped from the American Stock Exchange at the end of 2003, with its stock at 68 cents.

Surprise, surprise -- Ampex is back. The forgotten innovator has one of the hottest stocks on earth, with the share price skyrocketing in the past year from $1 to $40. What happened? In a word, patents. Ampex dusted off a number of its patents and began filing lawsuits against a Who's Who of consumer-electronics giants, including Sony (SNE), Sanyo Electric (SANYY), and Eastman Kodak (EK). Ampex' claim: It holds the intellectual-property rights to how digital images are displayed in nearly every digital camera, camcorder, and camera phone on the market.

It's no empty bluff. Since last fall a string of Asian companies have cut licensing deals with Ampex, agreeing to pay a total of $77 million. Sony alone is spending $40 million for the right to use Ampex' patents through April, 2006, and then will pay ongoing royalties. The largest outstanding claim may be that against Kodak, which so far has refused to cut a deal. Ampex' prospects have improved to the point that the company says it will apply for a listing on NASDAQ by the end of April.

But this is no simple turnaround story. There are a number of unanswered questions about the continuing value of Ampex' patents and about the leadership of Edward J. Bramson, a press-shy British financier who serves as the company's chief executive. Bramson gained control of Ampex in 1987 when his investment firm, Sherborne & Co., acquired the company in a leveraged buyout for $479 million. Since then, Ampex has entered into a series of transactions with at least four investment companies Bramson owns or controls. In one case, Ampex lent two Bramson-controlled companies money to buy shares in Ampex. Then in 2002 the two Bramson entities defaulted on $2.8 million in outstanding loans. In addition, the Web site of one Bramson company said that he had worked at Goldman Sachs & Co., in corporate finance and mergers and acquisitions. However, after BusinessWeek notified Ampex that Goldman Sachs had no record of Bramson's employment, an Ampex spokesman said he had never worked for the Wall Street firm and that the statement would be removed from the Web site.

There are also questions about whether Ampex is disclosing enough information about its licensing deals. In filings with the Securities & Exchange Commission, the company provides the lump-sum payments from Sony and others. It doesn't disclose the actual terms of the licensing agreements or the expected ongoing royalties. It's unclear whether that violates SEC rules. However, some governance experts say it could leave investors in the dark about the company's financial prospects. "I think they should file the whole agreement," says Kevin J. Cameron, president of Glass, Lewis & Co., a research firm in San Francisco that analyzes issues of corporate integrity. The Ampex spokesman declined to comment on the issue.

Ampex has taken a step toward broader disclosure in recent days. On Apr. 5, during a rare public appearance, at an investor conference in San Francisco, Bramson gave estimated expiration dates for four groups of patents and a breakdown of royalty revenues from digital cameras, camcorders, and other devices. He also said that camera-equipped cell phones will provide a major opportunity for future licenses. "We notified the makers [of camera phones] at the end of last year, and we're starting discussions with them this year," said Bramson. He did not estimate total future royalty payments for the company.

DIGITAL GOLD MINE

Ampex' flurry of lawsuits is one example of the intensifying debate over intellectual-property rights in the U.S. As patent-infringement lawsuits have soared in recent years, critics have railed against what they call "patent terrorists" and "patent trolls," and complained that the litigation is a tax on innovation. "There's no socially useful purpose," says Ron E. Shulman, a lawyer at Palo Alto law firm Wilson Sonsini Goodrich & Rosati. Patent advocates disagree. They say patents are essential to protecting innovation and point out that many respected companies, including IBM, have been cashing in on them for years.

While Ampex has come under fire for its aggressive pursuit of royalties, there's no question its patents have become a gold mine. One patent covers the display of compressed digital images, individually or in a group of up to 16. Nearly every digital camera, and many other devices, let people view such thumbnails to help them navigate through a series of images quickly. Royalties from that broad patent helped Ampex turn a profit of $47.1 million in 2004 on revenues of $101.5 million, according to its preliminary financials, after losing money the five previous years.

A deal with Kodak could mean another rich payday. Kodak, which declined comment, was the top seller of digital cameras in the U.S. last year, with 21.4% of the market. J.M. Dutton & Associates, an El Dorado Hills (Calif.) research firm that charges Ampex and other companies it covers for research, estimates Ampex could bring in $275 million in royalty income over the next four years. Dutton's Richard W. West, the only analyst covering Ampex, has put a 12-month price target of $77 on the stock.

But a close examination of Ampex' financial and legal documents raises questions about how to predict the company's performance accurately. In its court filings, Ampex specifies only one patent that it claims has been infringed: U.S. Patent No. 4,821,121, typically referred to as the 121 patent. This is the patent that covers technology allowing people to view thumbnail images of photos rapidly. But the patent, granted in 1987, expires on Apr. 11, 2006. Bramson said in his presentation that that patent accounts for all the royalties Ampex is getting from digital camera sales.

Ampex says it holds more than 600 other patents, and royalties from those may be substantial in the future. The company says its other patents cover digital image processing, data compression, and image decoding, and those claims expire between 2012 and 2014. But it does not reveal which patents companies are licensing, beyond the 121 patent, and the specific terms of any agreements.

The company's lack of disclosure may run afoul of SEC rules. The commission requires companies to file a summary of commercial agreements at the time a deal is struck and the full agreement with its next quarterly statement, if the agreement is "material." There are exceptions to the rule, including measures to protect trade secrets. But experts are skeptical that something like the Sony deal, accounting for 40% of Ampex' revenues last year, would not have to be explained to investors. "More extensive disclosures may be required," says James R. Doty, a securities lawyer with the firm Baker Botts.

Can Ampex keep its stock soaring? Perhaps. But to do so, the company may have to give investors a closer look at its tightly guarded patent deals.

By Spencer E. Ante in New York, with Justin Hibbard in San Francisco


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