A Letter to Our Shareholders
Dear Shareholder:
Our vision is becoming reality in the rapidly emerging digital world. Everywhere you look - magazines, newspapers, TV and radio programs - all are heralding the new age of digital products, the Internet, convergent technologies and mobility. This is a world we were focused on before it was "cool". In 1994 we innovated the use of digital flash memory in a handheld recorder. We were the first to use removable digital recording media in a handheld device and the first to interface a portable digital recorder with PCs and the Internet.
When I was appointed President in 1997 the company faced serious challenges. In spite of our poor financial condition, we focused our limited resources on our Lanier contract knowing that it would be the most sophisticated digital recorder in the world and serve as our calling card for future business for years to come.
Now we stand in June 1999 having overcome critical financial difficulties, having solved serious technical challenges and we are now delivering product to Lanier against an initial $3 million purchase order. This is a major milestone for e.Digital, one that could not have been achieved without the dedication of our engineering and support staff, the belief of investors and the patience and support of our shareholders. Corresponding with the filing of our annual report with the SEC, this shareholder letter summarizes our accomplishments in fiscal 1999 and our vision for the future.
Accomplishments During the Last Year
For e.Digital, fiscal 1999 was an extraordinary year. Our early entry into the digital world and our record of accomplishments positions us as an industry leader in providing portable digital recording solutions. Our selection by Lanier, Intel and Lucent for state-of-the-art projects is evidence of the strength of our core technology and our experience in implementing hardware and software solutions. We are now aggressively exploiting our industry position. Major events in the past year have aided in furthering our industry leadership:
m We recently began shipping Lanier product against $3 million of initial production orders.
m We are designing and developing an advanced digital voice recorder under contract to Intel.
m We have completed a second-generation digital music player in cooperation with Lucent and we are marketing the technology to the industry.
m We have worked to establish strategic and industry relationships with major companies in the digital music and portable device markets.
m We were recently selected by IBM to be an inaugural member of the VoiceTIMES alliance to develop standards for voice technologies in handheld mobile devices.
m Our engineering team is serving as a technical advisor to Lucent at meetings of the SDMI (Secure Digital Music Initiative), a group--founded by the five major music recording labels--which is establishing standards for secure delivery of digital music over the Internet.
m We have been granted four U.S. patents on our core technology, our MicroOS™ file management system.
We are especially proud of the Lanier product. (Go to lanier.com docutivity/voicewrite-mobile.html/ to see a photo and description of the product.) This full-featured handheld digital voice recorder with PC docking station began shipping in mid June, and is being sold exclusively by Lanier under the brand name Cquence Mobile. This remarkable product is being installed in Lanier's medical and legal customer base, fulfilling the needs of high-volume dictation users with hand-held convenience and quick connection to a facility file management and transcription package through the PC docking station.
While we are dependent on Lanier to market this product, we are confident in their ability to do so. Lanier is a premier worldwide marketing company with $1.6 billion in annual revenue.
Our Intel product design will also be an important technical achievement for our team. A number of prototypes are being developed to Intel's specifications; they include PC downloading capabilities and can interact with third-party software that performs voice-to-text functions and text-to-voice functions. The integration of these functions with convenient hand-held devices is proving to be a rapid growth area for both business and personal use. We are positioned to take advantage of these growth areas with a highly advanced, full-featured product.
Our accomplishments, experience and technological advances gained during research and development over the last 2½ years are very valuable assets, and will be applied to many future products and technologies.
Strategic and Industry Relationships
During the last year we have developed and nurtured a growing base of strategic and industry relationships in the digital music and mobile enterprise markets. These relationships enhance our ability to participate in explosive new fields of business. While we are often precluded from discussing certain negotiations and relationships due to limitations set by our customers, the following achievements highlight relationships developed in the last year:
m We are collaborating with Lucent to jointly offer OEMs a reference design incorporated in a new handheld solid-state Internet music player. The new SDMI-compliant music player features the MicroOS file management system and plays music stored in Lucent's EPAC audio compression format that offers high security and CD-transparent sound quality. Initia0l designs incorporate a 32 Megabyte CompactFlash card produced by SanDisk. We are collaborating on the marketing of this product design to a wide range of participants in the digital music industry.
m Our EPAC music player uses a new generation of Digital Signal Processor manufactured by Texas Instruments. We are serving as the DSP engineering specialist to port EPAC software to this new generation of Texas Instrument DSPs.
m We are working with Cognicity and Lucent to use Cognicity's AudioKey as a security feature to watermark digital music content providing a means for copyright protection. A watermark is an embedded digital tag on a CD or digital music file providing a means of tracking its source and use.
m The current demonstrations of the EPAC player use Celestial's Audio Library software to manage digital music on the PC, function as a personal music server (jukebox) and manage the transfer of digital music to the portable EPAC player.
m We are working with Intel on an advanced voice recorder design. Intel is also an inaugural member of the VoiceTIMES alliance.
m IBM is leading the VoiceTIMES alliance and we are working to expand our relationship with IBM through this and other activities.
Through SDMI members and others, we are actively pursuing relationships with additional digital music industry participants including other compression and protection technology providers. The worldwide electronics industry is quickly evolving to provide more content in a variety of formats for portable consumer devices.
The VoiceTIMES alliance is focused on research studies to identify enterprise solutions where voice technology can change the way companies do business by providing plug and play compatible mobile devices. Initial focus is on the medical, law enforcement, insurance, service, field sales and ERP (Enterprise Resource Planning) markets.
We want to maintain flexibility to adapt to rapidly changing industry trends and to focus on our strength - meeting the needs for more complex memory management in mobile devices.
Fiscal 1999 Results
In the past fiscal year we have made substantial progress in cleaning up our balance sheet and reducing the company's liabilities. We reported revenues of $426,000 for fiscal 1999. Although a reduction from the prior year--due to discontinuance of product sales and a winding up of the non-recurring engineering fees portion of the Lanier agreement--we reduced our operating loss from $2.7 million to $1.8 million. Certain non-cash expenses contributed to the net loss of $2.6 million or $0.04 per share for fiscal 1999. Since the December 31, 1998 financial report, the company has increased common stockholder's equity by over $1.67 million through the conversion of redeemable preferred stock, conversion of debt to equity and the exercise of other outstanding securities. We have also received notice that a contingent liability for prior taxes has been resolved with the government without payment or liability of any kind.
The Technology, Personnel and Financial Resources to Compete
It would be an understatement to say that we have gone through some difficult financial times. Today we announced an equity investment from a single institutional investor in the amount of $3 million. This investment marks a turning point in the confidence of institutional investors in e.Digital and enables us to take advantage of opportunities in the voice, text, image and music recording markets. This investment strengthens our financial status with partners, vendors and customers. We intend to stay lean and focus on our strengths.
In the past, a significant barrier to new business has been our financial position. Our balance sheet should no longer be a stumbling block in business negotiations. This investment is expected to account for less than 2% dilution in our share structure, a reasonable price for improved financial status.
For the first time since I have been President, we are positioned with the technology, personnel and the financial resources to compete effectively in the rapidly growing digital marketplace.
Designing Our Future
While we're proud of our accomplishments, our future is full of potential. So, what's next? We are aggressively going after new opportunities in markets for voice, text, music and image file management. MicroOS has the ability to support any number of music compression formats, any type of data file, and can manage voice-to-text, text-to voice, and security algorithms used for protecting content.
We receive many phone calls and e-mails concerning the Internet music market. While we are very excited about our OEM Internet music player design and its potential impact to our bottom line, we expect the balance of revenues in future reporting periods to come from a wide variety of projects. Voice-to-text and text-to-voice capabilities have improved dramatically in the last eighteen months, and our contract with Intel represents a major growth opportunity. In addition, our participation in VoiceTIMES, along with Intel, IBM, and several other companies, represents the opportunity to have our MicroOS, hardware and software designs, and solutions included in voice technology standards for many products spanning several platforms and applications. We believe the industry has only begun to scratch the surface in innovating mobile devices.
While we can expect many competitors to develop designs and products, we are focusing on particular solutions by leveraging our patented MicroOS, engineering talent, design expertise, and product development experience.
The Internet has stimulated the greatest boom in the history of electronics and computing. Being connected to the Internet and going digital and mobile are now at the center of business and consumer requirements. Rapid change has intensified competition, adding risk and volatility to business. But through this we believe our direction is clear: offer OEM customers core technology and experienced services to rapidly implement innovative digital solutions in the emerging mobile device markets.
We look forward to this fiscal year as an exciting year of growth for the company. Thanks again to our customers, supporters, employees and you, our shareholders, for your continued support.
Sincerely,
Alfred H. Falk
President & CEO
June 28, 1999
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Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements relating to future performance, technology and product development that may impact on future results and the future viability of the company. Actual results could be affected or differ materially from those projected in the forward-looking statements as a result of risk factors such as: future products and results; technological shifts; potential technical difficulties that could delay new products; competition; general economic conditions in the markets in which the company operates; the ability of the company, its customers, and suppliers to become Year 2000 compliant; pricing pressures; and the uncertainty of market acceptance of new products by OEM's and end-user customers.
Note: Lanier, Cquence, and Cquence Mobile are trademarks or registered trademarks of Lanier Worldwide, Inc. VoiceTIMES is a trademark or registered trademark of IBM Corporation. EPAC and Lucent are trademarks or registered trademarks of Lucent Technologies. CompactFlash and SanDisk are trademarks or registered trademarks of SanDisk Corporation. All other company, product, and service names are the property of their respective owners.
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Wendy Ravenel
Investor Relations/Public Relations
e.Digital Corporation
13114 Evening Creek Drive South
San Diego, CA 92127
(619)679-1504 PHO
(619)486-3922 FAX
edig.com
investor@edig.com |
