October 30, 2000
LETTER FROM THE PRESIDENT
Dear Shareholder:
While I share your disappointment in the decision reached by Nasdaq on Friday, I would like to take this opportunity to assure you that in no way was their decision a judgement of e.Digital and our present and future business. Nasdaq stated that the only reason that we were denied a listing was because of the company’s current failure to satisfy the minimum bid price requirement for initial inclusion. We applied in February under the following minimum criteria (Nasdaq National Market Listing Standard 3):
Net Tangible Assets not applicable
Market Capitalization $75 million
Pretax Income not applicable
Public Float (Shares) 1.1 million
Operating History not applicable
Market Value of Public Float $20 million
Minimum Bid Price $5
Shareholders (Round Lot holders) 400
Market makers 4
Corporate Governance Yes
We meet or greatly exceed all of these criteria today except for the minimum bid price, and we met or exceeded that for many months during the application review process. As to the extraordinary length of the review, they stated to us that this has been an unusual year in the number of applications that they have had to process, ours included.
We did not apply to Nasdaq for a quick spike in the stock price or even a guarantee that we would get such; we applied because we qualified at that time and we wanted access to the doors that Nasdaq could open for us to potential analysts’ coverage and volume buying from institutions and funds. A Nasdaq listing would not have guaranteed that these doors would have swung wide open upon acceptance, but it would have put us in a position to have access to them. For these reasons, based on anticipated improving market conditions, business developments and our increasing revenue, we intend to re-apply for a Nasdaq listing upon improvement in our share price. These expected developments will determine when we re-apply.
OEM Business and Products
Nasdaq’s decision will not affect any of our OEM business, products or partnerships. While a Nasdaq listing is important to us, it is not the focus of our business or a concern of our OEMs and partners. They care about our
MicroOS ™ technology, full menu of technology partnerships and standards, engineering services, and supporting them in all aspects of the design and customized integration of their technology and the software and hardware standards they’ve selected. The OEMs also care about our ability to quickly get them to market with products that could be very successful in this new Internet-enabled digital devices industry. Please remember, our OEMs control the schedules for the product launches which in turn are impacted by parts availability, manufacturing issues, marketing issues and competitive forces. In some cases, we will have completed our work several months before an OEM’s product is announced and launched. In other cases, we will be racing the clock to support them and those announcements could come quickly. In OEM deals such as those in place with Maycom and Remote Solution/HanGo, we are working with companies who will be launching their own products as well as working with us on marketing and building the devices for other OEMs. We are also working with OEMs who may compete against each other with product offerings designed by e.Digital. Our non-disclosure agreements with our OEMs are in place to ensure that we are not disclosing any details of their product and our agreements to other OEMs and the public until they are ready to have this information made available. Since our OEMs are launching products using new technology into a new industry, in many instances, projected revenue, beyond the initial product orders, will be difficult to gauge until the OEMs see the rate of acceptance from consumers.
Equity Financing
There were three reasons we deemed it important and necessary to raise $4 million this month. In order of importance they were:
1. To show our OEM customers that we have the necessary cash to complete their current projects and products and to entrust us with significant future business.
2. To remove the “going concern opinion” that has been on our financial statements for the last several years.
3. To satisfy Nasdaq’s request that we improve our balance sheet.
While we expect increasing revenue from our OEM customers as their products are launched and marketed, this equity financing gives us the ability to attract even more OEM business and continue to hire the engineering talent necessary to work on these projects and products as well as augment our ongoing research and development activities. The structure of the financing is similar to the one completed in June 1999. Details of this financing will soon be filed with the SEC and will be available through their EDGAR on-line financial database.
e.Digital Today
Today, the company is in much better shape financially and fundamentally than when we applied for Nasdaq. Beyond our previously announced relationships with Lanier, Intel, IBM, Lucent, Texas Instruments, SanDisk, Liquid Audio, QDesign, Maycom, RioPort, Sony, Intertrust, Microsoft, Remote Solution/HanGo, DataPlay and others, we are currently working with a variety of multi-billion dollar consumer electronics companies who will be bringing e.Digital-powered products to market. Three of these companies are close to launching products into the consumer marketplace. As in all of our OEM relationships, the exact timing of those product launches will determine when we can disclose details to you.
We have expanded MicroOS’ capability beyond flash memory-based devices to products that will use rotating media such as miniature hard drives, IBM’s Microdrive technology and DataPlay’s exciting new optical drive technology.
We have added two new Board members with impressive credentials, Victor Ramsauer and Bob Jecmen. Allen Cocumelli has become our Chairman. All of our Board members are devoting significant time and attention to the company.
We have added several key engineers to our staff to support our growing OEM business.
All of this adds up to a company that is in the process of fulfilling its promise in becoming a worldwide standard.
All of us at e.Digital, the engineering staff, officers and directors have great confidence in the present and future of the company. In that regard, on September 12, 2000, I exercised options on 648,316 shares of e.Digital common stock, increasing my holdings to 1,115,000 shares. I incurred substantial alternative minimum tax liability based upon the closing share price on that date ($5.625). I took this action for two reasons: First, I wanted to begin a long-term capital gains holding period. I believe that e.Digital will reward long-term investors. Second, I felt that the share price on that date was attractive given the names of OEMs we are working with and the general time frame of expected announcements. In spite of Friday’s decision from Nasdaq, I am more enthused than ever about e.Digital and the value of our shares based on what I know will come.
We look forward to sharing more details and information about your company with you at the Shareholders meeting on November 9th.
Sincerely,
Alfred H. Falk
President and CEO |
