E.Digital Paying 49% Interest on Loan to Finance New Products
By David Evans
Las Vegas, Jan. 9 (Bloomberg) -- E.Digital Corp. is paying an annual interest rate of 49 percent on a $1 million, 15-month loan to finance marketing of a new line of Internet music players it displayed this week at the Consumer Electronics Show in Las Vegas.
In a November 14 letter to the San Diego company's 80,000 shareholders, President Alfred Falk disclosed the financing, though not the interest rate.
On Monday, E.Digital's shares touched $1.91, giving the company's 131 million shares a market value of $250 million. That was more than 500 times their book value. The stock closed Tuesday at $1.58.
``It's a cult following,'' said Falk at the company's booth at the trade show. ``I can't tell you how many people I've met who bought our stock who don't know what we do.'' He said many first discovered the company on the Raging Bull Internet message board.
``It sounds like a phenomenon that I'd thought had ended with the dot-coms,'' said Martin Fridson, managing director of global high-yield strategy at Merrill Lynch & Co. ``Hope springs eternal.''
He said the rate was ``about double'' the interest paid ``by the riskiest companies issuing straight debt with warrants'' and tends to occur when lenders believe a default is possible.
Falk explained at the trade show that the money was borrowed soon after the terrorist attacks of Sept. 11. ``If we had said no to the terms, we might not have been able to get any money,'' he said.
`Effective' Funding
``In the current capital environment, this is an effective means of funding inventory, with a minimum of dilution and financial risk to the company,'' Falk wrote to shareholders in November. The actual terms were buried in the company's 10-Q report, filed the same day with the Securities and Exchange Commission.
The loan, secured by inventory and receivables, was for more than double the company's net worth of $445,324 on Sept. 30, according to its 10-Q.
E.Digital has lost more than $54 million since it was founded in 1988. For the six months ended Sept. 30, its loss widened to 2 cents a share from 1 cent, or to $2.1 million from $1.3 million in the year-earlier period. Sales were flat at $1.2 million.
Fans of the company's stock, which trades on the OTC Bulletin Board, are more confident about the company's future than its lenders. They have posted more than 870,000 messages discussing the company on the Internet message board. Thousands were posted in the days before the show began.
Discreet Lenders
E.Digital's stock has at least doubled in January each of the past two years around the time of the Consumer Electronics Show, after issuing press releases about its music player designs, only to decline in subsequent months.
In 2000, the shares soared from $2.92 to an all-time high of $24.50 on Jan. 28, after E.Digital displayed a prototype of its music player at the show, and announced that it licensed its design to Maycom Co. Ltd. of Korea. By yearend, they were trading below $2.
E.Digital borrowed the $1 million on Sept. 28, agreeing to pay 12 percent interest in addition to 750,000 five-year warrants to buy its stock at 75 cents a share, which the company valued at $496,770. That amounts to an interest rate of 49 percent per year on the loan, which is due on Dec. 31.
The four individuals who lent the $1 million don't want their names disclosed, said Robert Putnam, E.Digital vice president for investor relations. He said they've provided funds to the company before.
Customers
E.Digital markets music players to consumers on its Web site. The products compete with players from much larger companies, including Apple Computer Inc., which sells the iPod, and Creative Technology Ltd. of Singapore, which sells the Rio line of portable players.
E.Digital also licenses its designs to companies including Bang & Olufsen A/S of Denmark and Musical Electronics Ltd. of Hong Kong.
E.Digital's contract to provide digital recorders to its largest customer, Lanier Healthcare -- which accounted for 67 percent of the company's business for the six months ended Sept. 30 --ended on Dec. 31.
As of Sept. 30, E.Digital had $985,428 in accounts receivable, which amounted to eight months of revenue. Bills unpaid by Lanier amounted to 80 percent of the total.
``They're slow, but they're paying their bills,'' said Falk.
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