DTS, Inc.

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DTS, Inc.

5171 Clareton Drive
Agoura Hills, California 91301
U.S.A.
Telephone: (818) 706-3525
Fax: (818) 706-1868
Web site: http://www.dts.com

Public Company
Incorporated: 1990 as Digital Theater Systems Corporation
Employees: 314
Sales: $75.25 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: DTSI
NAIC: 334310 Audio and Video Equipment Manufacturing; 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works); 512240 Sound Recording Studios; 512199 Other Motion Picture and Video Industries; 512210 Record Production

DTS, Inc., formerly known as Digital Theater Systems Inc., is a leader in the field of digital audio, offering a high-quality playback format that enhances the realism of movies and music by splitting sound into multiple front and rear channels. The company licenses its technology to film producers and consumer electronics firms, and also produces equipment like the XD10 Cinema Media Player and related products that add pre-show programming, subtitles, or audio commentary to films. Other DTS units convert movies to high-definition video and release multi-channel audio discs.

EARLY YEARS

DTS traces its roots to 1990, when entrepreneur/inventor Terry Beard formed a California-based company called Digital Theater Systems Corporation to develop digital sound technology for motion pictures. Beard had earlier run a firm called Nuoptix that made optical sound recording equipment, and in the mid-1980s he and Jim Ketcham of Lorimar Pictures had begun developing digital multi-channel sound for use in theaters. By 1990 they had created a workable system and applied for several patents.

While multi-channel theater sound had been offered as early as 1940, when Walt Disney's Fantasia was presented in eight-channel "Fantasound," and some movies had been released with magnetic stereo soundtracks from the early 1950s, the format had typically only been used for prestigious releases and on a limited portion of the total number of film prints made. In 1975 Dolby Laboratories, Inc., began offering a new stereo playback system that could produce four (later five) channels of sound from a film's photographically-printed soundtrack, but digital audio technology that converted sound into computer code offered an even better prospect for high-fidelity reproduction, as it could be copied and played back without the generational loss and background noise associated with analog formats.

Because film prints were subject to wear during projection that could eventually render sensitive digital information unreadable, Beard and Ketcham decided to create a system that used a separate data storage medium. It would be synchronized to the film via a timecode printed at the unused edge of the soundtrack area, which would be durable enough to last for the life of a print. After abandoning digital audio tape (DAT) because reel changes and splices in the film caused the sound to lose synchronization, they settled on CD-ROM discs which were capable of quick re-synchronization and were cheap to produce. DTS-encoded films would have what the company called 5.1 audio tracks, which consisted of left, right, and center front channels; left and right rear "surround" channels; and an additional "subwoofer" channel, which included very low frequency sound to provide a visceral rumble for special effects and battle scenes.

In 1991 the small firm's audio system was demonstrated to director Steven Spielberg, who was highly impressed with the results. Believing it could enhance the impact of his forthcoming dinosaur epic Jurassic Park, Universal Studios allowed DTS to secretly test it on release copies of a low-budget horror film called Dr. Giggles before approving it for use with Jurassic Park.

1993: IMPORTANT NEW INVESTORS

In February 1993 Universal Studios, Spielberg, and a Beard-led group of investors split equity stakes in the firm, which became known as Digital Theater Systems L.P. Beard and his small staff immediately began working long hours to build playback units for hundreds of theaters in preparation for the June 11 opening of Jurassic Park. They were able to install 876 systems around the United States for clients like Cineplex Odeon Corporation, which bought 125 units for its chain of theaters. Exhibitors who did not purchase it were still able to show Jurassic Park with the analog Dolby Stereo track printed on the film as a backup in case the digital sound failed to work.

Jurassic Park was a huge hit and the sound got rave reviews, and sales of the company's systems quickly grew as major chains like Carmike Cinemas bought hundreds of units. Studios like Paramount, Warner Brothers, New Line, MGM/UA and others soon agreed to use DTS for some or all of their releases, further enhancing the format's viability. Competitor Dolby Laboratories had already unveiled its own digital sound system with the 1992 release Batman Returns, but the optically-printed format offered what some considered lower quality due to the four-times greater digital compression required, while the cost of adding it to a theater already set up for multi-channel sound was more than twice DTS's price of under $6,000 per screen.

In 1994 the firm opened an office in Belgium to facilitate European sales, and by year's end over 3,000 systems were in use and more than 60 films had been released with DTS audio. 1995 saw the company introduce a system that helped visually-impaired persons enjoy films via a separate narrated version of the soundtrack broadcast to wireless headsets. The firm, which now employed more than 40, recorded sales of $12.5 million for the year.

By the start of 1996 DTS systems had been installed in more than 5,800 theaters worldwide, including 3,400 in North America. Dolby Digital was in close to 3,300, and newer rival Sony Dynamic Digital Sound (SDDS) was in just over 1,800. The firm's equipment still cost about half as much as its competitors' systems, though the licensing fee it charged studios for major releases was $40,000, as opposed to $10,000 for Dolby and $9,000 for Sony (which had originally been offered for free). Sales were particularly strong in multi-lingual regions like Asia, Europe, and India, where dubbed versions of films could be produced cheaply by making new CD-ROM audio discs, rather than creating expensive new film prints with different soundtracks. Despite such advantages the firm was falling behind in the number of films released with its sound format—67 in 1995, versus 122 for Dolby Digital.

COMPANY PERSPECTIVES

Dedicated to delivering the "Ultimate Entertainment Experience," DTS created a format that makes audio tracks more dynamic, more realistic and more closely matching the original audio master than other digitally encoded soundtracks. Coupled with the multidimensional benefit of surround sound technology, the audio quality dramatically improves and enhances content. Today, DTS continues to develop and expand its technology and services in its current markets and beyond, including the broadcast arena and broadband entertainment.

COHERENT ACOUSTICS DEBUTS IN 1996

Following the pattern set by rival Dolby, DTS had also begun seeking home applications for its technology, and after several years of development the Coherent Acoustics format was introduced in 1996. It enabled playback of up to 8 discrete sound channels for video or music discs, though it was only used in limited-production, high-end equipment as little content was initially available.

In 1997 the company reached an agreement with Image Entertainment for that firm to put DTS sound mixes on laser videodiscs it produced as well as granting it exclusive distribution rights to DTS audio discs. DTS had recently formed a record label called DTS Entertainment to release licensed 5.1 remixes of albums like The Eagles' "Hell Freezes Over," Boyz II Men's "II," and Marvin Gaye's "Greatest Hits."

In October the firm sold a $12 million ownership stake to a group of private equity investors including Eos Partners and Westin Presidio Capital, using the funds to help build infrastructure and increase research and marketing. The year also saw Dan Slusser named CEO and an office opened in Tokyo, Japan.

In early 1998 the company made a renewed push to sell DTS-enabled audio gear to consumers, with companies like Yamaha, Matsushita, and Kenwood licensing its technology for their product lines. By April some 44 compact discs and 48 laserdiscs that incorporated DTS audio tracks were available, and about 50,000 DTS-enabled home audio devices had been sold. After several delays Image Entertainment also began releasing Universal Studios DVDs with DTS soundtracks, the first of which was Kevin Costner's Dances With Wolves. The discs could only play on special machines that incorporated DTS circuitry, as the industry's DVD standards required Dolby's format for all equipment but made DTS optional. Because DTS sound required about four times the data storage space of Dolby Digital (and many reviewers believed it sounded better as a result), DVDs that included it typically came without bonus features like alternate audio tracks or documentaries. For some high-profile titles both standard DVDs and DTS-enhanced versions were released, the latter of which typically cost $5 to $10 more per disc.

Frustrated that its bid to be included as a mandatory audio format on video DVD players had failed, the company fought hard during 1998 to be included in new DVD-Audio disc standards, which would use the much larger storage capacity of DVDs for more finely-rendered sound. When Dolby and Meridian Laboratories formats were chosen DTS threatened legal action, but the firm was unable to reverse the decision of the industry's standards group. Nonetheless, many manufacturers subsequently agreed to license the company's format for their players, typically paying a dollar per unit.

In 1999 DTS began selling encoding equipment that let content providers make their own audio mixes, rather than requiring it be done at DTS-approved facilities. Yielding to market pressure, the company also began allowing encoding with a lower data bit-rate, which would enable DVDs to have both DTS and Dolby sound plus some bonus features. The year 1999 saw 242 films released to theaters with DTS audio, compared to Dolby's 703, while CEO/vice-chairman Dan Slusser took over the president's duties from the departing Bill Neighbors.

In 2001 the firm brought out its first DVD-Audio discs and worked to promote its consumer 5.1 audio recordings via a month-long national bus tour to retailers, which offered DTS sound demonstrations on-site. In September, eight-year company veteran Jon Kirchner was appointed president and CEO, and he subsequently reorganized the company's management, adding several new positions and expanding others. Dan Slusser would continue to serve as board chair.

The year 2001 also saw the introduction of a software developer's kit for video game makers that enabled them to mix their audio for 5.1 channels, while Electronic Arts, Inc., released several games for Sony's Playstation2 using DTS technology. The DTS-CSS Cinema Subtitling System debuted during the year as well, which used a video projector to add captions to films so that expensive subtitled prints need not be made. Revenues for 2001 hit $28.7 million, and a profit of $3.9 million was recorded. Sales of consumer audio products topped those of cinema equipment for the first time.

KEY DATES

1990:: Terry Beard founds Digital Theater Systems to develop digital movie sound.
1993:: Universal Studios and Steven Spielberg invest in firm to fund growth; the first product, DTS-6, is introduced and the first DTS-encoded film, Jurassic Park, is released.
1994:: European office opens in Belgium.
1997:: DTS Entertainment is founded to release music mixed for multi-channel sound.
2001:: Consumer audio tops cinema sales for the first time.
2003:: The company goes public.
2004:: DTS audio is selected as a mandatory format for new High-Definition DVDs.
2005:: Firm shortens name to DTS, Inc.

In 2001 the firm introduced a new higher-quality digital audio format it called 96/24, for the sampling rate of 96 herz and resolution of 24 bits, as compared to compact disc sound with 44.1 herz and 16 bits. The following year the first DVD-video disc was released using this audio format, rock group Queen's "Greatest Video Hits I," while the DVD-Audio release of that group's "A Night At The Opera" became the best-selling disc of its type to date. Also during 2002, the company expanded its Agoura Hills, California, headquarters.

2003: INITIAL PUBLIC OFFERING

In July 2003 DTS went public on the NASDAQ, raising $63.2 million with a sale of 3.84 million shares. The price quickly jumped from the opening level of $17 to more than $24, making it one of the most successful initial public offerings (IPOs) of the year. In the fall, a 1.5 million-share secondary offering was made, with existing shareholders selling twice that amount. Universal Studios' pre-IPO stake would drop from 18 to 7 percent, Spielberg-affiliated Forth Investors LLC from 18 to 6.6 percent, and the firm's largest shareholder, Westin Presidio Partners, reduced its ownership stake from 33.5 to 16 percent.

Another 2003 introduction was that of the new XD10 Cinema Media Player, which was capable of playing up to ten channels of sound in the 96/24 format, using a computer hard drive that could store up to 30 feature film soundtracks. In the fall a new Acura model became the first U.S. automobile to feature DTS sound as standard equipment, and a David Bowie concert was broadcast live from London mixed in DTS 5.1 sound. The year also saw record industry giant EMI begin releasing DTS-encoded DVD-Audio discs, the introduction of products incorporating DTS sound for home computers, and the opening of an office in Guangzhou, China.

By this time DTS equipment was installed at 23,000 cinema screens as compared to Dolby's 40,000, but consumer products incorporating the firm's audio technology or intellectual property had zoomed past 200 million units. Consumer audio accounted for 69 percent of DTS's sales by 2003.

In 2004 the company added software-based security enhancements to its cinema sound systems to help allay concerns about piracy, while introducing a new "lossless" technology that made cinema soundtracks identical to master recordings bit for bit, rather than omitting some information in the compression process. The firm was also battling a host of Chinese electronics companies making equipment with DTS technology without paying royalties, and won a $2.6 million judgment against a firm called Mintek that had used its trademark without authorization.

In September 2004 DTS's 5.1 format was chosen as a mandatory audio technology for both of the next-generation DVD systems Blu-ray Disc and HD-DVD, with the firm's recently introduced DTS-ES extended surround sound allowed as an option. December saw the company pay $11 million to acquire Lowry Digital Images, a four-year old firm that enhanced film and digital video for High-Definition television broadcasts and similar uses. Lowry was subsequently renamed DTS Digital Images. The company had also opened an office in Hong Kong and acquired a Canadian audio/visual research and development firm, QDesign, during the year. Earnings reached a record $61.4 million and profits hit $10 million.

In 2005 the company signed a deal to install XD10 Cinema Media Players in the entire Regal Entertainment theater chain in the United States, and added offices in Paris and Rome. Sound encoding facilities were also opened in China and Argentina, bringing the total to 15 worldwide, and the firm introduced its first product for digital imaging, the JPEG2000 Variable Bit Rate Encoder. The company settled several infringement lawsuits with Chinese firms and shortened its name to DTS, Inc., during the year as well.

In early 2006 the firm upgraded the XD10 Cinema Media Player to automate scheduling, delivery, and screening of pre-show digital advertising and other content via the newly-introduced Cinema Media Network. The movie industry was now gearing up for a shift from film to digital video projection, and DTS was working to define its place in the new paradigm.

More than a dozen years after the release of Jurassic Park, the audio format created by DTS, Inc., could be found in cinemas, home theaters, videogames, computers, and automobiles. The firm was busy laying the groundwork for future growth via High-Definition videodiscs and through the movie industry's conversion to digital imaging.

PRINCIPAL SUBSIDIARIES

Digital Theater Systems (UK) Ltd. (United Kingdom); DTS (BVI) Ltd. (British Virgin Islands); DTS Canada Holdings, Inc.; dts Japan KK (Japan); International Cinema Services, Inc.; DTS AZ Research, LLC; DTS Digital Images, Inc.

PRINCIPAL COMPETITORS

Dolby Laboratories, Inc.; Sony Corp.; USL, Inc.; Smart Devices, Inc.; Fraunhofer Institut Integrierte Schaltungen; Royal Philips Electronics N.V.; Meridian Audio Limited; Microsoft Corporation; The Thomson Corporation; SRS Labs, Inc.