E-DATA LETTER TO SHAREHOLDERS
October 6, 2000
Dear Fellow Shareholders:
This is my first report to you since becoming president of our company earlier this year. Although, as a “non-reporting” company, E-Data is under no legal obligation to publish reports to shareholders, I would, nevertheless, like to bring you up to date within the limits of prudent disclosure. Bear in mind that the Goliath-sized defendants in our patent infringement suits, prospective partners and competitors, as well as potential adversaries, will be weighing my words. Considering E-Data’s troubled past and its present litigation posture, I must be sparing with details for now.
We all recognize that E-Data is a uniquely interesting company -- after all, that’s why we invested in it (I purchased about 70,000 shares on the open market soon after I first learned about the company several months before our new management team took over). But it is not without its challenges arising from a history of ineffective, inattentive and often absentee management; an adverse court ruling (now being appealed); and the limited opportunities inherent in having only a single patent (the Freeny patent).
Over the past several years, E-Data has spent its slim resources struggling to defend its patent position, and the company has never had enough funds to retain full-time personnel or even operate a normal office. Meanwhile, previous management’s efforts to keep the ship afloat created complications in the capital structure which we are now trying to untangle and properly resolve. Because of this uncertainty, the company has been unable to offer shares to raise new capital and has had to rely solely upon small loans and limited license revenues to meet its most basic needs. We must continue to operate on a “shoestring” until we close a transaction with one or more partners which will make the company financially viable and bankable going forward.
But, ever the optimists, we believe these problems are outweighed by E-Data’s opportunities. At the time we assumed management in February, it appeared that our only opportunity depended upon a successful appeal. And we remain hopeful that, when the ruling is finally issued, our lawyers will have been successful in persuading the Court of Appeals of our point-of-view. But we recognize and respect the Court’s prerogative to decide otherwise as it construes our patents.
Therefore, rather than relying upon an unpredictable result from the Court of Appeals, we are developing a new business model that is supported by the District Court ruling issued by Judge Jones. We are building our plans around what the District Court ruling says the patent does cover—the use of our patented method for the distribution of digital products through kiosks in retail locations. While this ruling is not legally binding throughout the land, it is highly persuasive that our patent covers at least what the ruling says it does. Under the ruling, some kiosk operators appear to infringe the patent. Those and other kiosk operators would benefit by partnering or licensing with us. We are focusing on a strategy that we believe would not be compromised even if E-Data’s appeal is unsuccessful. We expect the best, but are preparing for the worst.
While the Freeny patent is a cornerstone patent in the digital product distribution market, particularly through kiosks, it would be stronger still if pooled with other patents affecting this market. Therefore, the company has identified more than a dozen other patents which we are targeting to pool with the Freeny patents in connection with a broader long term strategy that strengthens the company’s prospects beyond the expiration of the Freeny patents. We aim to organize a development team to acquire and develop more patents in the fast-growing digital product distribution market and to partner with and license other firms who share the same goals. With a pool of patents, we will be positioned to leverage the pool into business opportunities with partner companies who can use them. In furtherance of this aim, we have undertaken discussions with potential partners able to benefit from not only the Freeny patents but some of the others we intend to aggregate and develop as well.
Like many of you, I have been an investor in several small public companies. I understand the frustration of being unable to obtain as much information as I might like concerning an investment that has failed to meet expectations. While I am sensitive to this, I am even more sensitive to the need for information to be accurate and reliable and not to raise misleading expectations by unduly optimistic statements. The small amount of public information about us is also due to the fact that E-Data is not an operating company but a holding company with only one patent and limited operating capital. So there is not the usual flow of news one expects from an operating company that is actively hiring staff and making deals. We have only a single patent, the value of which can best be realized by aggregating it with other patents and leveraging the pool of patents with a few partners in a position to use them. That takes a plan, a team, and some capital. All of these we are beginning to organize even though hindered by a long history of problems and an impaired capital structure.
My main purpose in writing to you now is to let you know that E-Data is up against significant obstacles, but that there is a future even if we receive an unfavorable result from the Court of Appeals. Since 1995, when we filed our first lawsuits for patent infringement, digital distribution of books, music, video, software and similar content has increased significantly and appears likely to become an enormous industry. Distribution through kiosks, using our method, ultimately will not match distribution via PC (our original target), but it is likely to become a large market in which we can participate with substantial partners poised to play leading roles in it.
But this market is just now beginning to evolve and will require a new vision, a good team and significant financing and partners. It will also take time. We are working diligently to put it together right now and, while it is too soon to say what to expect, we are optimistic.
Meanwhile, our General Counsel, Dan Stack, and I have examined many accounts and claims by and against E-Data in an effort to determine our true financial condition. It is our aim to get things in order and to comply with all requirements to become relisted as soon as possible. But it is also possible that taking advantage of opportunities might make restructuring (e.g. merger, assets sale, etc.) more profitable for the shareholders. In the next few months we hope to determine what course we can best recommend to the shareholders. At that time, we will submit any proposals to you for your consideration and decision.
I have a lot of confidence that E-Data will enjoy a bright future if we ride out some rough waters in the next year. But it is still a long pull to the far shore. The other directors and I work only to earn equity in the company and we receive no other compensation. In fact, I have gone so far as to supply E-Data with small interest free bridge loans when no other funds were available to it. Like you, I have no prospect of any gain from our efforts unless the shares I am earning become valuable enough to make my investment worthwhile. While there is a long way still ahead, I am pleased with the progress, considering the hurdles we have had to surmount and I am optimistic that we will surmount those that lie ahead. Now, if we can develop a new and creative business model that gives the company a future beyond the life of the patent, we will be poised to turn E-Data into a success story.
You have been exceedingly patient, and your continued patience is appreciated. Before current management began, the company was in business for nearly five years resulting only in a costly lawsuit; proposed transactions that were never brought to fruition; and a few licenses that were purchased by licensees before the Jones ruling excluded the activities for which most bought licenses and due to which more licensees will not now purchase licenses. Fortunately, the kiosk market has since begun to emerge creating important new opportunities. But the kiosk market is in its infancy and addressing the opportunities effectively won’t take five years but it will take some time.
Meanwhile, we have retained The Cavior Organization to assist you with information. Warren Cavior has followed the company since 1995, even attending the trial court hearings on our patents. Please feel free to avail yourself of his guidance at (212) 687-6070 or caviorg@aol.com.
I want to conclude this progress report by thanking you for your loyalty and letting you know that as E-Data continues to move in a better direction, slowly but surely, I will keep in touch with you as we reach our milestones.
Sincerely yours,
Scott D. Hillstrom, J.D.
President and CEO
E-DATA CORPORATION
270 GREENWICH AVENUE
GREENWICH, CT 06830 |
