DTS FILES FOR PUBLIC OFFERING; SPIELBERG'S STAKE OBSCURE

Number of shares to be offered in IPO and their value have yet to be determined, but DTS said it planned to use $21.3 million of proceeds to redeem 7,800,891 outstanding preferred shares at their original price of $2.019 per share, plus accrued but unpaid dividends. Remaining proceeds will be used for general corporate purposes or possibly to acquire or invest in “complementary businesses, products or technologies,” although no such commitments are in place, filing said. Company said it raised $14.7 million in cash through Dec. 31 from sale of preferred shares. Other funding sources used to support operations since company’s 1990 inception have included borrowings on its outstanding line of credit and more recently internally generated cash flows. It said as of Dec. 31, it had no outstanding borrowings under its credit facility, which expires June 30, 2004.

Prospectus said DTS’s first profitable year was 2001, when it generated $2.06 million net income on revenue of $28.6 million, following successive net losses of $6.34 million, $2.61 million and $1.89 million in 1998, 1999 and 2000, respectively. Blossoming of DTS consumer operations easily was biggest contributor to overall turnaround. Revenue from consumer business grew to account for 63% of total in 2002 compared with only 40% in 2000, company’s most recent unprofitable year, filing said. Moreover, consumer business generated higher and higher operating profits in last 3 years ($12.72 million in 2002 alone) vs. mounting losses in theatrical business that reached $2.43 million deficit in 2002. Hand in hand with growth in consumer operations has been meteoric rise in revenue generated outside U.S., presumably from payments of per-unit royalties on shipments of DTS-equipped home theater gear. Internationally generated revenue accounted for 75% of total in 2002 compared with 63% in 2001 and 45% in 2000.

Of $25.66 million revenue from consumer operations in 2002, largest share is believed to be from royalty payments on shipments of DTS hardware, but royalties paid by IC manufacturers and sales of music content marketed under DTS Entertainment label also are included. However, prospectus had no breakdown on those various activities. Navarre is exclusive U.S. distributor of DTS Entertainment products to major retail accounts, and consultants are used to coordinate sales to independent retailers, prospectus said. Company said it was in process of establishing DTS Entertainment distribution outside U.S., and expected that sales in Asia and Europe would be handled by established distributor in each territory.

Prospectus said DTS was conceived in 1990 and received “key strategic investment” from Universal and others in 1993, same year first DTS digital multichannel audio soundtrack was created for Spielberg’s Jurassic Park. DTS sold equipment and provided services to Universal worth $364,000, $622,000 and $569,000 in 2000, 2001 and 2002, respectively, and expects to continue to do so “in the normal course of our business,” filing said. Equipment and services supplied to DreamWorks in same 3 years totaled $372,000, $275,000 and $369,000. According to prospectus, a DreamWorks “principal,” not identified, was beneficial owner of L.A.-based Forth Investments LLC, which holds 17.88% share in DTS. It said Forth Investments had been granted warrants to buy 1,149,651 shares of DTS common stock, as had Universal. At our deadline, we were awaiting reply from DTS spokeswoman to our question confirming that unidentified DreamWorks and Forth Investments principal was Spielberg. Meanwhile, largest DTS shareholder, with 33.45% stake, was Weston Presidio Capital II, of Menlo Park, Cal., whose general partner, James McElwee, is a DTS dir. As for key executive compensation, CEO Jon Kirshner drew 2002 salary of $236,538 plus 115,000 shares and long-term options to buy 930,000 shares, filing said. Chmn. Dan Slusser earned $192,308 salary last year plus $100,000 bonus and options for 465,000 shares.

To shore up its sagging theatrical operations, DTS is relying heavily on DTS-CSS (for “Cinema Subtitling System") technology as “key” new product, filing said. Sales generated from DTS-CSS for subtitles, captions and descriptive narration for films have been “immaterial” thus far, although significant DTS-CSS sales and revenue are projected for future. Filing said DTS had signed agreement with unnamed supplier of projection equipment for DTS-CSS under which it was obligated to buy $7.9 million worth of orders in 2-year period ending March 2004, of which it had spent only $1.8 million through Dec. 31, 2002.