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(UPDATE)
This is still a work in progress so please excuse any incompleteness.
EDIG 10K filed 19960628
Part I, Item 1, History, Paragraph 3
On January 15, 1993, the Company sold 300,000 common shares of JABRA stock for $750,000, and JABRA sold 500,000 newly issued common shares with warrants for $1.25 million. The Company retained 2,300,000 common shares or 74.2% of JABRA stock and the Company agreed to surrender operating control of JABRA pursuant to the stock sale agreement[REF A]. On July 15, 1993, the Company sold an additional 500,000 common shares for $1.625 million and JABRA sold 1,000,000 newly issued common shares for $3.25 million. The Company’s 1,800,000 common shares represented 42.8% of the outstanding shares of JABRA and as a result of the lack of operating control, the Company ceased consolidating JABRA’s operations and recorded its investment on the cost basis because it no longer had significant influence over the operations of JABRA. At March 31, 1996, the Company had a zero cost basis in its 1,800,000 JABRA common shares[REF B]. During fiscal 1995 and 1996, JABRA reported to the Company the sale of 1,154,671 newly issued common shares for proceeds of $4.0 million. As a result of these transactions, the Company’s ownership in JABRA at March 31, 1996, represented by 1,800,000 common shares, is 23.1% (or 20.1% on a fully diluted basis). The Company has granted an option to purchase 300,000 of the JABRA common shares to CVD Financial Corporation (“CVD”)[REF C].
Notes:
1. Implied value is derived from dividing the value received for the sale of JABRA stock by the number of shares sold by EDIG/JABRA. Example: sold 300,000 common shares of JABRA stock for
$750,000 ($750,000 / 300,000 shares = $2.50 per share multiplied by the total JABRA shares outstanding, pertaining to this example, 3,100,000 = an implied value of $7,775,000).
2. e.Digital agrees to surrender operating control of JABRA.
3. Per the filing, JABRA shares outstanding increase by 1,000,000 to 4,100,000. JABRA shares held by EDIG decreases by 500,000 to 1,800,000. 1,800,000 divided by 4,100,000 equals a controlling percentage of 43.9%. The filing cites the controlling percentage to be 42.8%. In order to reconcile between EDIG’s percentage of ownership and total shares held relative to outstanding shares, JABRA’s shares outstanding must be increased by 105,607 to 4,205,607 (1,800,000 / 4,205,607 = 42.8%).
4. e.Digital ceases consolidating JABRA’s operations and records the JABRA investment at a cost basis of zero because “it no longer had significant influence over the operations of JABRA.”
5 & 6. Per the filing, JABRA shares outstanding increase by 1,154,671 to 5,360,278. JABRA shares held by EDIG remain at 1,800,000. 1,800,000 divided by 5,360,278 equals a controlling percentage of 33.6%. The filing cites the controlling percentage to be 23.1%. In order to reconcile between EDIG’s percentage of ownership and total shares held relative to outstanding shares, JABRA’s shares outstanding must be increased by 2,431,929 to 7,792,207 (1,800,000 / 7,792,207 = 23.1%).
7. The same calculations as notes 5 & 6 on a fully-diluted basis.
EDIG 10K filed 19970626
Part I, Item 1, History, 2nd paragraph from the bottom, INVESTMENT IN JABRA
Between January 15, 1993 and March 31, 1996 the Company sold an aggregate of 800,000 common shares of JABRA stock for $2,375,000 and owned 1,800,000 JABRA shares with a zero cost basis. On or about December 31, 1996 and January 2, 1997, the Company sold an additional 859,266 common shares of JABRA stock for $276,300. As a result of these transactions, the Company's ownership in JABRA at March 31, 1997, represented by 940,734 common shares, was 12.1%. Accordingly, the
Company exercises no control over the shares of JABRA. [REF D] JABRA is a private company engaged in developing, manufacturing and marketing cellular, desktop, mobile and wireless communications products. JABRA's principal technology is the patented "all-in-the-ear" EarPHONE technology originally conceived and developed by the Company when JABRA was a wholly owned subsidiary. As a minority shareholder in JABRA, which has reported operating losses since its inception, there can be no assurance as to when or if the Company's remaining shares can
produce any financial return to the Company. The Company's investment in JABRA shares is carried on its balance sheet at a cost of nil. CVD Financial Corporation has an option (until July 31, 1997) to purchase 300,000 of the Company's JABRA shares at a price of $1.50 per share granted in connection with a prior loan financing.
8. Per the filing, EDIG sells 859,266 shares of JABRA and retains 940,734 shares representing a controlling interest of 12.1%. This figures indicate the JABRA shares outstanding are 7,774,661 (940,734 / .121 = 7,774,661) and creates a discrepancy with our previous calculations of JABRA shares outstanding, on both the undiluted and fully-diluted basis. Clearly e.Digital has made a reporting error on either one or more of “items” labeled x,y and z. The current inferred JABRA float (z) correlates best to the JABRA float calculated in item x.
9. Per the filing, EDIG sells 859,266 shares of JABRA raising proceeds of $276,300. JABRA’s implied value has dropped to $0.32 ($276,300 / 859,266 shares = $0.32 per share) or a total implied value of $2,499,969 based on the JABRA shares outstanding calculated using the data in this filing (item z). This is the lowest implied value on record and a 90% drop from the implied value calculated in item x and a 92% drop from the implied value calculated in item z. This significant drop in implied value has occurred over a one year period.
EDIG S3 filed 19980220
The Company, 2nd Paragraph from the Bottom
The Company also holds as an investment 62,000 common shares (less than 5%) of JABRA. JABRA is a former wholly-owned subsidiary of which control was sold in 1993.[REF E] JABRA is a developer and manufacturer of communication products for desktop, mobile and wireless applications.
11. Per the filing, e.Digital’s controlling percentage of e.Digital has dropped to less than 5%, or 62,000 shares, equating to a maximum possible number of JABRA shares outstanding of no more than 1,200,000. Over the course of eight months, between filing dates of the SEC documents referenced, e.Digital’s percentage of ownership in JABRA has dropped from 12.1% to “less than 5%”. This drop in ownership is not accounted for in this SEC filing.
12. Although not disclosed in any e.Digital SEC filings, e.Digital management has recently stated that JABRA instituted a “number” of reverse-splits during the company’s time prior to being acquired. One or more of these stated reverse-splits apparently, judging by the drop in the calculated JABRA shares outstanding, occurred during a period between June 1997 and February 1998. For illustration purposes, using a calculation based on e.Digital’s ratio of ownership of 12.1% prior to this filing and drawing the assumption this ratio remained constant during the reverse-splits (in reality either EDIG sold shares or JABRA issued new shares as reflected by the drop in EDIG’s percentage owned) e.Digital would have retained 145,200 after the reserve-split(s) were effective ([1,200,000 * 940,734] / 7,774,661) or illustrating that one share of JABRA was exchanged for appoximately 0.15 shares as a result of the reverse-split(s).
EDIG 10K filed 19980626
Notes to consolidated financial statements, Item 8, Investment in JABRA, Page 43.
The Company owns 58,600 common shares of JABRA or approximately 2.5% of JABRA's common shares with a carrying value of $Nil on the Company's consolidated balance sheets[REF F]. During 1997, the Company sold 859,266 common shares of JABRA for cash proceeds of $276,300 and recorded a gain on sale of investment of $276,300.
EDIG 10K filed 19990628
INVESTMENT
The Company owns 58,600 common shares of JABRA or approximately 2.5% of JABRA's common shares with a carrying value of $Nil on the Company's consolidated balance sheets.
May 22, 2000
GN Netcom Acquires JABRA Corporation
The purchase price for JABRA is $40 million plus earn-out payments totaling a maximum of $35 million.
EDIG 10K filed 20000627
No reference to JABRA or investment position in JABRA.
EDIG 10Q filed 20010214
For the period ending June 30th, 2000 e.Digital recorded a “gain on the sale of investment” of $30,124.
This is still a work in progress so please excuse any incompleteness.
EDIG 10K filed 19960628
Part I, Item 1, History, Paragraph 3
On January 15, 1993, the Company sold 300,000 common shares of JABRA stock for $750,000, and JABRA sold 500,000 newly issued common shares with warrants for $1.25 million. The Company retained 2,300,000 common shares or 74.2% of JABRA stock and the Company agreed to surrender operating control of JABRA pursuant to the stock sale agreement[REF A]. On July 15, 1993, the Company sold an additional 500,000 common shares for $1.625 million and JABRA sold 1,000,000 newly issued common shares for $3.25 million. The Company’s 1,800,000 common shares represented 42.8% of the outstanding shares of JABRA and as a result of the lack of operating control, the Company ceased consolidating JABRA’s operations and recorded its investment on the cost basis because it no longer had significant influence over the operations of JABRA. At March 31, 1996, the Company had a zero cost basis in its 1,800,000 JABRA common shares[REF B]. During fiscal 1995 and 1996, JABRA reported to the Company the sale of 1,154,671 newly issued common shares for proceeds of $4.0 million. As a result of these transactions, the Company’s ownership in JABRA at March 31, 1996, represented by 1,800,000 common shares, is 23.1% (or 20.1% on a fully diluted basis). The Company has granted an option to purchase 300,000 of the JABRA common shares to CVD Financial Corporation (“CVD”)[REF C].
Notes:
1. Implied value is derived from dividing the value received for the sale of JABRA stock by the number of shares sold by EDIG/JABRA. Example: sold 300,000 common shares of JABRA stock for
$750,000 ($750,000 / 300,000 shares = $2.50 per share multiplied by the total JABRA shares outstanding, pertaining to this example, 3,100,000 = an implied value of $7,775,000).
2. e.Digital agrees to surrender operating control of JABRA.
3. Per the filing, JABRA shares outstanding increase by 1,000,000 to 4,100,000. JABRA shares held by EDIG decreases by 500,000 to 1,800,000. 1,800,000 divided by 4,100,000 equals a controlling percentage of 43.9%. The filing cites the controlling percentage to be 42.8%. In order to reconcile between EDIG’s percentage of ownership and total shares held relative to outstanding shares, JABRA’s shares outstanding must be increased by 105,607 to 4,205,607 (1,800,000 / 4,205,607 = 42.8%).
4. e.Digital ceases consolidating JABRA’s operations and records the JABRA investment at a cost basis of zero because “it no longer had significant influence over the operations of JABRA.”
5 & 6. Per the filing, JABRA shares outstanding increase by 1,154,671 to 5,360,278. JABRA shares held by EDIG remain at 1,800,000. 1,800,000 divided by 5,360,278 equals a controlling percentage of 33.6%. The filing cites the controlling percentage to be 23.1%. In order to reconcile between EDIG’s percentage of ownership and total shares held relative to outstanding shares, JABRA’s shares outstanding must be increased by 2,431,929 to 7,792,207 (1,800,000 / 7,792,207 = 23.1%).
7. The same calculations as notes 5 & 6 on a fully-diluted basis.
EDIG 10K filed 19970626
Part I, Item 1, History, 2nd paragraph from the bottom, INVESTMENT IN JABRA
Between January 15, 1993 and March 31, 1996 the Company sold an aggregate of 800,000 common shares of JABRA stock for $2,375,000 and owned 1,800,000 JABRA shares with a zero cost basis. On or about December 31, 1996 and January 2, 1997, the Company sold an additional 859,266 common shares of JABRA stock for $276,300. As a result of these transactions, the Company's ownership in JABRA at March 31, 1997, represented by 940,734 common shares, was 12.1%. Accordingly, the
Company exercises no control over the shares of JABRA. [REF D] JABRA is a private company engaged in developing, manufacturing and marketing cellular, desktop, mobile and wireless communications products. JABRA's principal technology is the patented "all-in-the-ear" EarPHONE technology originally conceived and developed by the Company when JABRA was a wholly owned subsidiary. As a minority shareholder in JABRA, which has reported operating losses since its inception, there can be no assurance as to when or if the Company's remaining shares can
produce any financial return to the Company. The Company's investment in JABRA shares is carried on its balance sheet at a cost of nil. CVD Financial Corporation has an option (until July 31, 1997) to purchase 300,000 of the Company's JABRA shares at a price of $1.50 per share granted in connection with a prior loan financing.
8. Per the filing, EDIG sells 859,266 shares of JABRA and retains 940,734 shares representing a controlling interest of 12.1%. This figures indicate the JABRA shares outstanding are 7,774,661 (940,734 / .121 = 7,774,661) and creates a discrepancy with our previous calculations of JABRA shares outstanding, on both the undiluted and fully-diluted basis. Clearly e.Digital has made a reporting error on either one or more of “items” labeled x,y and z. The current inferred JABRA float (z) correlates best to the JABRA float calculated in item x.
9. Per the filing, EDIG sells 859,266 shares of JABRA raising proceeds of $276,300. JABRA’s implied value has dropped to $0.32 ($276,300 / 859,266 shares = $0.32 per share) or a total implied value of $2,499,969 based on the JABRA shares outstanding calculated using the data in this filing (item z). This is the lowest implied value on record and a 90% drop from the implied value calculated in item x and a 92% drop from the implied value calculated in item z. This significant drop in implied value has occurred over a one year period.
EDIG S3 filed 19980220
The Company, 2nd Paragraph from the Bottom
The Company also holds as an investment 62,000 common shares (less than 5%) of JABRA. JABRA is a former wholly-owned subsidiary of which control was sold in 1993.[REF E] JABRA is a developer and manufacturer of communication products for desktop, mobile and wireless applications.
11. Per the filing, e.Digital’s controlling percentage of e.Digital has dropped to less than 5%, or 62,000 shares, equating to a maximum possible number of JABRA shares outstanding of no more than 1,200,000. Over the course of eight months, between filing dates of the SEC documents referenced, e.Digital’s percentage of ownership in JABRA has dropped from 12.1% to “less than 5%”. This drop in ownership is not accounted for in this SEC filing.
12. Although not disclosed in any e.Digital SEC filings, e.Digital management has recently stated that JABRA instituted a “number” of reverse-splits during the company’s time prior to being acquired. One or more of these stated reverse-splits apparently, judging by the drop in the calculated JABRA shares outstanding, occurred during a period between June 1997 and February 1998. For illustration purposes, using a calculation based on e.Digital’s ratio of ownership of 12.1% prior to this filing and drawing the assumption this ratio remained constant during the reverse-splits (in reality either EDIG sold shares or JABRA issued new shares as reflected by the drop in EDIG’s percentage owned) e.Digital would have retained 145,200 after the reserve-split(s) were effective ([1,200,000 * 940,734] / 7,774,661) or illustrating that one share of JABRA was exchanged for appoximately 0.15 shares as a result of the reverse-split(s).
EDIG 10K filed 19980626
Notes to consolidated financial statements, Item 8, Investment in JABRA, Page 43.
The Company owns 58,600 common shares of JABRA or approximately 2.5% of JABRA's common shares with a carrying value of $Nil on the Company's consolidated balance sheets[REF F]. During 1997, the Company sold 859,266 common shares of JABRA for cash proceeds of $276,300 and recorded a gain on sale of investment of $276,300.
May 22, 2000
GN Netcom Acquires JABRA Corporation
The purchase price for JABRA is $40 million plus earn-out payments totaling a maximum of $35 million.
EDIG 10Q filed 20010214
For the period ending June 30th, 2000 e.Digital recorded a “gain on the sale of investment” of $30,124.
If the market has overvalued a stock, I would put the onus on the broker community, not the individual investor, who was told to continue buying even when the financial community was looking at PEs of 100-400 based on inflated future earnings. All of that was pure nonsense.
While the late nineties witnessed a large inflow of new capital into the financial markets, largely due in part to the advent and popularity of online brokers (lowering the transactional cost of investing in equities) and capital creation as a result of the longest peacetime economic expansion, the mutual fund industry is largely to blame for what we now define as the malinvestment of the equity market bubble.
The impact of capital flows from individual investors, influenced by the Wall Street analyst community, is miniscule in comparison to that of mutual funds and pension funds. We would like to believe these institutions invest with a higher level of sophistication than the individual investor but the inflation and subsequent deflation of the equity market bubble appears to have quashed that theory for the time being. During the latter part of the nineties these institutions, who historically invest on sound principles, began to base their philosophy on chasing performance rather than espousing a top-down or bottom-up analysis. The investment criteria evolved from investing in a company to investing in those companies that have appreciated the greatest over the calendar quarter. The actual fundamentals or future expectations began to mean very little.
This methodology of chasing performance turned self-feeding and self-fullfiling and ultimately resolved in capital flowing into a narrow classification of equities, specifically large cap stocks and stocks in the technology sector. The most liquid stocks and the stocks within a industry and sector experiencing the greatest degree of growth.
One of my current projects is analyzing the capital flow of the mutual fund industry and its impact on the equity markets.
This is a graph of the ratio of capital inflows to outflows into equity mutual funds and the 12 month rate-of-change of the net assets of equity mutual funds.
As the navy blue line illustrates, though commencing from a lower base, in April of 1993 outflows began to increase at a greater rate than inflows. This applies a negative influence on the ratio. Ignoring the anolamaly in 1998 when LTCM failed, Russia defaulted and the economic storm clouds from the Asian contagion were approaching our economic shores; the ratio approaching one (outflows matching inflows) coincides with the end of the secular bull market.
Put simply, in April of 1993 and thereafter the rate of individuals pulling money out of stock mutual funds increased relative to individuals putting money in stock mutual funds.
This is a graph of the liquidity ratio of equity mutual funds (cash and equivelants expressed as a percentage of net assets), the monthly closing value of the S&P500 and the monthly closing value of the Volatility Index.
Most notable is as the pace of the decline in the liquidy ratio increases the S&P500 begins to appreciate at a greater rate and the Volatility Index reacts by maintaining a higher absolute level.
Please note that the liquidity ratio is largely dependent on the direction of interest rates. As rates decline the opportunity cost of investments in short term liquid investment increase.
So what fueled the bubble in equities?
1.) Commencing in 1993, outflows increasing at a higher rate than inflows threatened revenue growth to the mutual fund industry (the growth of their net assets, and thus fees, independent of market gyrations, begins to diminish).
2.) In response mutual funds began to allocate a greater percentage of their cash into the stock market.
3.) Boosting stock prices
4.) And helping to offset the negative influence of an increasing rate of outflows on their net assets (and associated fees as a percentage of assets).
This data also argues that we are no where near the necessary dynamics to spark a secular bull market. A environment for a secular bull market will exist when:
1.) mutual fund liquidity ratios move to a higher plateau
2.) mutual fund inflows increase at a greater rate than increases in outflows (or outflows decrease at a greater rate than decreases in inflows).
Number one is largely dependent on number two unless mutual funds increase their liquidity ratios by selling stocks, which will apply a negative influence on stock prices and stunt any potential bull market.
Number two is largely dependent on the interest rate environment, specifically a consistent trend of lower interest rates must continue (unfortunately though there is not much additional room to fall) and capital creation through economic expansion (increases in employment, income, savings etc) and thus a growing pool of capital looking for home of which a percentage will find its way into mutual funds.
e.Digital Dollar Volume Cratering..
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