cAPSLOCK ~ This is for you.
Dear Shareholder:
On occasion I have addressed the shareholders of e.Digital to provide an update on our progress. Because many of you are new shareholders of the company, please allow me to summarize our recent progress and answer some of the questions we are fielding about e.Digital, its technology and its future.
CES (The Consumer Electronics Show) 2000
Because of the successful showing of our technology at the Consumer Electronics Show (CES) 2000 in Las Vegas earlier this month, we have received unprecedented interest from new OEMs (Original Equipment Manufacturers). At CES, our MicroOS(TM)-enabled Internet music player design was shown by IBM and Texas Instruments in their respective technology suites. Our technology news releases from CES received strong response from OEMs interested in e.Digital's technology and its importance in the rapidly emerging Internet music industry.
At CES, we met with companies in the home audio and the automotive audio industries who recognize that portable digital audio player technology is quickly merging into their markets. These companies see the advantages of our design and technology across multiple platforms. I anticipate new business opportunities will emerge for our Internet music player technology in these two large industries in addition to the portable player industry.
NASDAQ
Many of you have called or e-mailed us asking about the timing of our NASDAQ application. I am pleased to report that we believe e.Digital meets all the requirements for a NASDAQ listing and we are filing our NASDAQ application this week. A NASDAQ listing will be important for e.Digital to attract mainstream analyst coverage, as well as institutional investors beyond our current base. Please remember, the listing process and the timing of our planned listing is determined by NASDAQ.
Quarterly Results for the period ended December 31, 1999
Because our latest financials are important for our NASDAQ application, we have filed our Form 10-Q for the quarter ended December 31, 1999 today, ahead of our normal filing schedule. The complete report is on file with the SEC and can be viewed online at www.sec.gov by searching their EDGAR financial database for ``e Digital'. Revenues of $118,000 for the quarter reflect that some OEM shipments were temporarily delayed by industry-wide year-end shortages of flash memory and technical start-up issues by one of our contract manufacturers. We expect these conditions to be temporary and believe the December shortages will not materially impact planned total shipments for our fiscal year ending March 31, 2000. We continue to control our operating costs while maximizing the innovations from our technical team.
e.Digital's revenue results from a combination of fees from licensing, non-recurring engineering services, manufacturing services, warranty services, industrial design services, and royalty payments (per unit). The majority of our revenue stream will come from up front licensing fees and ongoing royalty payments from contracts with licensees like the one announced January 5 with Maycom. We believe this business model provides the highest return for our shareholders.
Strategic Relationships and Business Opportunities
Over the past two years we have announced strategic relationships with a number of industry leaders who share our vision of a new generation of powerful digital devices that incorporate, voice, music, data, images and full-motion video. We have forged and cultivated relationships with Lucent, IBM, Intel, Texas Instruments, Liquid Audio, Lydstrom, QDesign, SanDisk, Toshiba, Matsushita, RioPort and others. These relationships are opening multiple revenue opportunities for our technology.
Through our participation in the recording industry's Secure Digital Music Initiative (SDMI) over the last year, and our membership in IBM's VoiceTIMES alliance, e.Digital is helping build the foundation for the portable Internet devices industry. Different beneficial technologies are converging in ever-more-compact portable devices. Compatibility between future products is insured when standards are set and agreed to in the development stage. These portable devices will include Flash memory and IBM Microdrive(TM) technology as the storage media. Our MicroOS file management system supplies the intelligence inside this new generation of digital products.
Through our patented MicroOS technology, we enable the convergence of multiple standards and technologies into small, powerful, hand-held devices. We offer our OEM customers and licensees a full menu of options. We work with--and plan to continue working with--the companies and organizations that set these standards.
We are also a full service OEM technology provider with the capability to incorporate our technology, perform the Industrial Design, and oversee manufacturing of the finished, OEM-branded product.
MicroOS(TM)
When flash memory became available for data storage several years ago, it was primarily used as backup memory. Data or code written to flash was WORM (write once, read many), difficult to edit, erase, or write data. In 1995, e.Digital was the first company to create and market a voice recorder using removable flash memory, a product that was later branded and sold by Sanyo. Out of these efforts, we developed a proprietary flash file management system named MicroOS(TM) that is the basis of our designs to this day. MicroOS is protected by four patents containing dozens of claims. All of these patents and their rights are the exclusive property of e.Digital.
MicroOS simplifies the design of products that use flash memory to store voice, image, text, or full-motion video files in portable devices. It also enables the portable devices we develop to easily exchange information with desktop computers, and through desktops, with intranets and the Internet. According to Semico Research, the global growth of flash memory devices will grow from sales of $4 billion in 1999 to sales of $8.5 billion in 2001.
MicroOS is a pure software flash file management system that is compact yet robust, and incorporates such features as:
Wear leveling - dictates use of cells within the flash to prevent
uneven wear
Power management - important in portable, battery-powered devices
User interface - enables record, edit, insert, delete, play, fast
forward and rewind functions with an intuitive command set
Bad block management - enables use of flash even if sectors
become unusable
Portable device companies and consumer electronics companies recognize the importance of having an effective and robust flash file management system that enables all of these functions to take place in microseconds, while remaining transparent to the end user. MicroOS is proven effective and is extremely well suited for use in portable devices where physical space, cost, and memory are at a premium, but where maximum flexibility and functionality are a must.
Internet Music Industry
As projected by Forrester Research, 32 million portable Internet music player units will be sold by 2003.
Our licensing agreement with Maycom is especially significant, not only because they are the first licensee of our portable Internet music player design, but also because of their manufacturing reputation and capabilities. Maycom has the proven ability to get branded, quality products to the consumer market quickly. We expect this arrangement to produce licensing fees and ongoing royalties for e.Digital. Royalties from Maycom and future licensees of our portable Internet music player design are expected to range up to $10 per unit.
e.Digital's Internet music player design offers native multi-codec (coder/decoder) support that does not require transcoding music files. Transcoding is the practice of recompressing audio files through software to fit a single codec, resulting in reduced sound quality. Our designs have the ability to support several codecs natively, including Lucent's ePAC(TM), Dolby's AAC(TM), Microsoft's WMA(TM), MP3(TM), and others, making sure each file is decoded directly, without copying or further compression. This is very important to artists and the recording industry who desire to have the best audio fidelity possible in these new second generation Internet music players. The January 29, 2000 issue of BILLBOARD magazine includes a special insert about Lucent Technologies and features e.Digital's multi-codec Internet music player design.
Because we work with the SDMI on supporting emerging technologies and standards, we have the opportunity to guide our OEMs in bringing to market second generation Internet music players. We have in place the industrial designs, partners, and manufacturing relationships to support secure desirable music content from the mainstream artists and record labels as soon as it is posted. Our SDMI participation is valuable as we are aware of the latest developments in digital rights management systems (DRMS), music codecs, and watermarking technology. Our MicroOS-enabled Internet music player design manages music files seamlessly and transparently, so that the consumer need not be concerned with codecs, etc.
Several recent events are significant to the development of secure music distribution over the Internet. The Time Warner/AOL merger represents major progress toward joining mainstream music content with secure Internet distribution. The Time Warner/EMI merger paves the way for established musicians and major record labels to distribute their content over the Internet for download. In an article entitled ``A Little Net Music?', in the February 7 issue of Business Week Magazine, AOL President Robert Pittman predicts, ``Just like the record industry got a shot in the arm when CDs came along, they'll get another shot in the arm with online music.' With AOL's 22 million subscribers and Time Warner's 12 million cable subscribers and close to 30% ownership of the world record industry, we believe that between Warner/EMI and the other major record labels, the Internet music industry is poised for explosive growth. We have been working diligently to position our technology to bring OEM-branded players to market to support the Internet music revolution.
Voice and Full Motion Video Applications
e.Digital is also pursuing opportunities in the digital dictation arena. We are active in IBM's VoiceTIMES Initiative, whose goals include developing standards for the use of voice technology in a variety of products and platforms. We have built compatibility into our product designs not only for music but also for dictation and audio books.
As voice-to-text and text-to-voice technology improves we again state our vision that devices that talk and listen--rather than relying on typing, miniature keyboards, or pen-based systems--are the wave of the future.
With Apple Computers currently positioning the iMac as a movie machine, users are beginning to store video files in quantity on their PCs and Macs. We are developing reference designs of our technology to support downloaded video files in portable products. With the recent emergence of IBM's 340 MB Microdrive(TM), and increases in flash memory capacity, these types of applications are now possible in portable devices.
Emerging Standards
We are closely monitoring developments such as Bluetooth(TM), NTT DoCoMo(TM), and other emerging protocols that give people wireless Internet access away from their desks. We welcome new technologies like Transmeta's recently introduced Crusoe(TM) Processor. We readily embrace these types of new standards, maintain contact with their developers and advocates, and strive to incorporate relevant technologies and standards into our designs for the benefit of our OEM customers and licensees.
As wireless phones add more features, that industry is beginning to include removable storage media. This represents a substantial opportunity for e.Digital to incorporate our technology into future generations of wireless phones.
Final Thoughts
I believe that the current portable Internet products industry is at the same point in its growth as the wireless phone industry was approximately seven years ago. We are just beginning to see markets develop for portable products converging voice, music, video, and text data. Our goal is to make e.Digital a standard in millions of Internet-related digital products. The Internet-enabled handheld revolution has begun and e.Digital is positioned to participate in the rewards of this revolution this year and for years to come.
Sincerely,
Alfred H. Falk President and CEO
Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: This document 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: e.Digital and MicroOS are trademarks of e.Digital Corporation. EPAC and Lucent are trademarks or registered trademarks of Lucent Technologies. IBM, Microdrive, and VoiceTIMES are trademarks or registered trademarks of IBM Corporation. All other company, product, and service names are the property of their respective owners.
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