This letter is a direct communication from Con Brosnan to the Shareholders of American Technology Corporation (NASDAQ: ATCO). The purpose of this letter is to provide Shareholders with an update on ATCO's business strategy and to summarize recent developments at the company.
CHAIRMAN'S MESSAGE
February 29, 2000
To the Shareholders of American Technology Corporation:
I am pleased to provide this update on matters important to shareholder value. The following will address our recent technological breakthroughs, marketing strategies, marketing activities and provide an outline of the potential applications for some of ATC's technologies.
HyperSonic? Sound Emitter Technology
During the last six months we have made significant progress with our HyperSonic? Sound (HSS?) technology. As we have reported, we had an issue impeding our commercialization of HSS. Over the past year, our hard work paid off. Our work on emitter designs and experiments with new materials produced a breakthrough that enabled us to speed up our research efforts on a particular emitter. Furthermore it gave us the confidence to move forward with other key elements necessary for the development of a commercial HSS system. There has been a matrix of possible combinations of materials, configurations and electronics that we have had to work through to finalize our research. The company announced major progress on HSS research in Press Releases issued November 16 and 22, 1999.
At the core of what we have announced is a breakthrough for ATC. First, we announced that we have a proprietary emitter technology for HSS designed through internal leadership and utilizing both internal and external resources. The design, construction and materials are unique. The United States Patent Office has issued the patent (#6,011,855) and allowed every claim included in the application. You, the shareholders, own a technology that we believe exceeds all prior attempts to create a parametric (directional) speaker, that has better cost-to-output performance, is more rugged and durable, is louder for each size increment than anything before and is exclusively ours. Our HSS emitter allows creation of audible sound without the inherent distortions of prior attempts. All of this represents a strong intellectual property portfolio owned by our shareholders. Since the application for the aforesaid patent our internal team has furthered our cause with advancements in transducer technology and has filed additional patent applications on these advancements.
HyperSonic? Sound Modulation Technology
Another breakthrough we have made concerns our patent pending modulation technology for HSS. This is part of our complete electronics solution needed to commercialize HSS. Our patent-pending methodology removes distortions heard in previous attempts and enables the system to produce the higher sound pressure levels desired by customers.
In the 1980s Japanese researchers used a technique called square rooting as a preprocessing method to reduce distortion. The small community of scientists familiar with parametric speakers believed and still believes that to create audible sound from a parametric speaker one must increase bandwidth to attain low distortion. The problem with wide bandwidth is that it is inefficient in power usage and forces an operating mode that limits the maximum output available and/or causes audible artifacts that you hear as distortion. Our technology does not require the use of a square root process on the emitted signal and therefore we can achieve lower distortion without reducing output capability. We believe that this is an important breakthrough in the science of parametric systems and clearly separates HSS from any other attempts at reducing this type of system to practice.
We have completed the first generation modulation technology for HSS using our proprietary technology, and are very close to realization of a second generation digital implementation promising even greater efficiency and lower distortion.
Patents
We have been granted several patents over the last two years and continue to file for complete protection of our proprietary technologies. Both the HSS emitter and the HSS modulation technologies have United States and international filings. We have done our best to keep them out of the limelight to allow us to make further improvements and additional patent applications before the rest of the world focuses on our breakthroughs.
We now move to a new marketing stage as we bring attention to the value of our technologies, but it is still in our best interests not to disclose all the proprietary features of our technology.
Marketing
We are executing our marketing strategy for HSS. We have now had communications with over 400 companies from around the world. Our next marketing step involves a world press and trade tour in the near future to introduce markets to our technology and the opportunities we afford. We will develop evaluation kits scheduled for delivery so that prospective licensees can determine the applications they wish to introduce first. When the development kits are prepared we will hold developers' conferences to educate prospective licensees in the integration and use of HSS.
Our first generation of HSS is only the beginning. Future generations are expected to open even more applications for ATC to increase its revenues. What is most important to our shareholders is that our first generation HSS development is commercially viable. We believe it provides us access to applications and markets that can produce significant future revenues for ATC. These markets could consume millions of units of speakers!
Applications
We believe HSS enables a whole new generation of products heretofore unknown. The ability to place sound where you want it will spawn creative applications that will expand the audio market. Our ability to create virtual speakers or personal, non-intrusive communications is unique. HSS offers a replacement for many existing applications.
We have had companies come forward over the last three years with scores of new, creative applications. The one thing that I know for sure is that we have conceived only a fraction of the possible applications for our technology.
Many of you have speculated from some of our talks and writings that there are also military applications for HSS. Suffice it to say that there is a great deal of interest by the military and military contractors. Some of the potential military applications for HSS are:
õ Communications with others at 100+ meters without creating excessive ambient sound at the point of origin or without breaking radio silence.
õ Using HSS to make a distant object "talk" to confuse adversaries as to the actual location of personnel.
If you can imagine some of these applications you can see a small segment of what the military might consider. General Dynamics' Bath Iron Works has been working with us as we announced in November. We will supply to them commercial prototypes for testing for a number of applications in Navy ships. Bath Iron Works is a great company and we are excited about this opportunity to work closely with them on some of the first military applications for HSS.
Among prospective civilian/commercial customers, some of the applications other manufacturers are considering are:
õ Talking billboards along sidewalks, in train stations or at bus stops that are not intrusive to people only a few meters away
õ Museum installations where you can hear about the exhibit while others nearby hear different information about other exhibits without intruding on you
õ Theaters (sweeping sound or synchronized sound to locations on the screen)
õ Amusement parks
õ Drive-through destinations
õ Zoos
õ Retail stores & point-of-purchase advertising
õ Background audio that varies over an area
õ Trade Show announcements and special effects
õ Home theater with Surround Sound where all of the speakers are built into the TV. No wires or boxes on the rear or side walls.
There are multiple, global applications for HSS in traditional environments as well as opportunities to create completely new environments through the use of HSS's pinpoint sound capabilities. The value to our shareholders is the revenue potential of this technology. We are just beginning to realize the market potential for HSS, and we believe that the market opportunities will grow over the next several years.
SFTâ Thin-Panel Speaker Technology
As announced in January, we had a very productive Consumer Electronics Show in Las Vegas. There we continued to reveal our second generation SFT technology to major global consumer electronics companies. Their response was universally positive and we are continuing to provide evaluation samples with custom modifications for their applications. We expect to move many of the current discussions to licenses. The improvements in SFT in the last year have been truly significant. Continuous exchanges with the key target customers aided us in modifying the technology to address their specific requirements for applications. Those of you who heard the demonstrations last year found the technology superior to what you were using at home. I agree that there might have been a consumer market that a company could have developed. The development and marketing to the retail trade has aspects outside our current capabilities and interests. However, we are not selling to consumers and the audio engineering world is demanding on its specifications and individual preferences of the engineers of the collective companies must be satisfied. Therefore it took us what appeared to you to be a very long time to resolve manufacturing issues and develop a technology platform to meet those requirements. In truth each licensee may still have some particular specification it prefers that we will have to adapt to as we work closely together.
The major development work is over. We are actively engaged in sample builds for specific licensees and are engaging in active license talks. We remain committed to our business model as a licensing company. The margins in branded sales of audio and consumer products, the cash flow for inventories, receivables and marketing are not attractive and the need for scale in the light of a market crowded with brands makes it even more unappealing. I still believe we have the correct business model for each of our technologies and for the company as a whole. We have the potential to continue to be a low cost provider of technology with virtually unlimited income potential by being a vendor of choice to branded companies that have the sales, marketing and logistics capabilities that we can compliment.
Many prestigious companies have come to realize that SFT enables a revolution in Industrial Design. Those designs can catch the consumers' eyes, inspire expectations of fine products and then SFT's sound quality will deliver on the promise. For Home Theater, Audio and Multimedia this design revolution can enable manufacturers to create market differentiation in meaningful ways. Our path to success is to work closely with Branded OEMs who we can enable to improve their business and to create a win-win relationship profitable to each of us. The audio market is still measured in the hundred's of millions of speakers per year. As I have stated before, a few percentage points of penetration for each of our technologies will mean substantial revenue to the company.
Subwoofer Technologies
Over the last year we have made great strides with our subwoofer technologies. We have a unique, patent pending design that perfectly compliments our SFT technology. It allows a cross over at frequencies that optimize the dynamic range and frequency response of SFT performance. Moreover it will allow manufacturers to produce smaller, less expensive satellite speakers to go with our subwoofer without compromising overall system sound quality. We are introducing this first generation Magnified Forceâ Subwoofer technology this Spring.
Engineering Staff Enhancements
As we move from research to development and commercialization, we will have to provide superior support to the world class companies we will license.
In February, Tom Tulowitzki became our Senior Vice President of R&D. Tom brings over 25 years of R&D management experience from large corporations like Xerox to smaller start-up companies. His knowledge of managing R&D, organization, process, testing and quality control as well as his experience in both manufacturing and R&D environments make him a key asset moving forward. Tom has a degree in Electrical Engineering and MBA from Rochester Institute of Technology. Jim Croft is now the Vice President of Research and will work on projects to further refine our existing portfolio as well as work on our future portfolio additions and patents.
In November, we added Rob Williamson as Senior Electrical Engineer. Rob has been in the audio business for over 20 years in positions as a consultant and staff engineer and most recently worked at THX.
In December, Craig Robinson joined ATC as Senior Mechanical Engineer with a specialty in material science. Much of our work has to do with mechanical solutions and new materials for improved product performance and economics. Craig has been in engineering and engineering management for over 20 years. He has a Masters of Science in Materials Science from Vanderbilt.
This month we added Dr. Seenu Reddi to our engineering team. Dr. Reddi is an expert in DSPs and mathematics with a strong Electrical Engineering background, including his Doctorate from the University of Texas and his Masters from Stanford. Seenu will primarily support HSS technology for the modulation as well as transducers. Although we are a small company we are developing strong overall assets to continue to create value and to greatly improve our performance.
Overall we have made great progress on both HSS and SFT, and expect significant business developments for ATC this year. Thank you for your continued support.
Sincerely yours,
Con Brosnan
Chairman, President & CEO
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FOR FURTHER INFORMATION CONTACT:
Robert Putnam or Wendy Ravenel
858-679-2114
robert@atcsd.com or wendy@atcsd.com
_____________________________________________________
Wendy Ravenel
Shareholder Relations/Public Relations
American Technology Corp.
13114 Evening Creek Drive South
San Diego, CA 92128
(858) 679-2114 PHONE
(858) 679-0545 FAX
Note new area code (858) as of June 1999
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