-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hsl+7KwoLk1ZNMiUxeZzmVC+Iru3CFMQALcII2xRYrrWIlH6Tf9oxiifWQUd6Z6w 2dH7ms5bzHtfbiqosCEppQ== 0000909143-01-500109.txt : 20010524 0000909143-01-500109.hdr.sgml : 20010524 ACCESSION NUMBER: 0000909143-01-500109 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 DATE AS OF CHANGE: 20010523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDGE TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: 7812 IRS NUMBER: 133778895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20995 FILM NUMBER: 1640763 BUSINESS ADDRESS: STREET 1: 901 YAMATO ROAD SUITE 175 CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5617507559 MAIL ADDRESS: STREET 1: 901 YAMATO ROAD SUITE 175 STREET 2: SUITE 175 CITY: BOCA RATON STATE: FL ZIP: 33431 FORMER COMPANY: FORMER CONFORMED NAME: VISUAL EDGE SYSTEMS INC DATE OF NAME CHANGE: 19960604 10QSB 1 edge10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _________________ Commission file number: 0-20995 EDGE TECHNOLOGY GROUP, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 13-3778895 (State or other jurisdiction (IRS Employer incorporation or organization) Identification No.) 901 YAMATO ROAD, SUITE 175, BOCA RATON, FLORIDA 33431 (Address of principal executive offices) (214) 999-2245 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of April 15, 2001 the issuer had 16,016,335 shares of Common Stock outstanding. EDGE TECHNOLOGY GROUP, INC. TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1. Financial Statements: Balance Sheets as of December 31, 2000 and March 31, 2001 (unaudited)...................... 3 Unaudited Statements of Operations for the Three Months Ended March 31, 2001 and 2000...... 4 Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000...... 5 Notes to Unaudited Interim Financial Statements...................................... 6 ITEM 2. Management's Discussion and Analysis or Plan of Operations.............................. 7-12 PART II OTHER INFORMATION ITEM 1. Legal Proceedings............................... 13 ITEM 2. Changes in Securities and Use of Proceeds....... 13 ITEM 3. Defaults Upon Senior Securities................. 14 ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 15 ITEM 5. Other Information............................... 15 ITEM 6. Exhibits and Reports on Form 8-K................ 16-18 Signatures.............................................. 20 2 EDGE TECHNOLOGY GROUP, INC. BALANCE SHEETS December 31, March 31, 2000 2001 ------------ ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents........ $ 169,846 $ 82,984 Accounts receivable.............. 13,504 6,056 Inventories...................... 9,096 9,804 Prepaid expenses - advance royalties....................... 5,024 -- Other current assets............. 85,390 78,155 ----------- ----------- Total current assets........ 282,860 176,999 Fixed Assets, net................ 67,394 44,102 Other Assets..................... -- 14,906 Investment - Related Party....... 4,587,262 4,587,262 Note Receivable.................. 1,400,000 1,400,000 ----------- ----------- Total Assets........... $ 6,337,516 $ 6,223,269 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................. $ 390,991 $ 371,021 Accrued expenses................. 345,011 430,065 Other current liabilities........ 73,496 42,719 Notes Payable-related parties.... -- 939,000 ----------- ----------- Total Current Liabilities... 809,498 1,782,805 Notes Payable-related parties.... 839,000 -- ----------- ----------- Total Liabilities...... $ 1,648,498 $ 1,782,805 =========== =========== Stockholders' Equity: Common Stock, $.01 par value, 22,500,000 shares authorized, 16,016,335 shares issued and outstanding at December 31, 2000 and March 31, 2001................. 160,163 160,163 Additional paid in capital.......... 37,978,720 38,090,637 Deferred stock option compensation...................... (316,696) (287,008) Accumulated deficit................. (33,133,169) (33,523,328) ----------- ----------- Total Stockholders' Equity Total liabilities and .......... 4,689,018 4,440,464 ----------- ----------- stockholder's equity.......... $ 6,337,516 $ 6,223,269 =========== =========== The accompanying notes are an integral part of these financial statements. 3 EDGE TECHNOLOGY GROUP, INC. STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, -------------------------- 2000 2001 ----------- ------------- Sales................................ $ 105,252 $ 100,055 Cost of Sales........................ 203,585 32,148 ---------- ----------- Gross Profit (Loss).................. (98,333) 67,907 ---------- ----------- Operating Expenses: General and administrative...... 358,071 398,138 Selling and marketing........... 113,321 40,289 ---------- ----------- Total operating expenses... 471,392 438,427 ---------- ----------- Operating loss............. (569,725) (370,520) ---------- ----------- Other income (Expense): Interest income................. 1,860 700 Interest expense................ (83,956) (18,116) Amortization of deferred financing fees................. (43,690) -- Gain (loss) on sale of fixed assets......................... (63,032) 589 Financing fees.................. (2,773) (2,813) ---------- ----------- Total other income (expense).................. (191,591) (19,640) ---------- ----------- Net loss................... (761,316) (390,160) Provision for Preferred Stock Dividends 123,750 -- ---------- ----------- Net loss to common stockholders...... $(885,066) $ (390,160) ========= =========== Net loss per share, basic and diluted............................. $ (0.34) $ (0.02) ========= =========== Weighted average common shares outstanding........................ 2,598,832 16,016,335 ========== =========== The accompanying notes are an integral part of these financial statements. 4 EDGE TECHNOLOGY GROUP, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, ----------------------- 2000 2001 ---------- ---------- Operating activities: Net loss................................ $(761,316) $(390,160) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash stock compensation expense........................... -- 141,605 Depreciation and amortization...... 169,169 9,706 Amortization of deferred financing expenses.......................... 43,690 -- Loss (gain) on disposal of fixed 63,032 (589) assets............................ Changes in assets and liabilities: Decrease in accounts receivable................... 30,131 7,448 Decrease in other current assets....................... 27,751 7,235 Decrease in prepaid expense - advance royalties............ 5,194 5,024 Decrease (increase) in inventories.................. 3,376 (708) Increase in other assets -- (14,906) Decrease in accounts payable.. (33,515) (19,970) Increase in accrued expenses.. 84,464 85,054 (Decrease) increase in other current liabilities.......... 95,211 (30,777) --------- --------- Net cash used in operating activities....... (272,813) (201,038) --------- --------- Investing activities: Capital expenditures............... (13,403) -- Proceeds from the sale of assets... 77,405 14,176 Proceeds from the sale of short-term investments............ 200,000 -- --------- --------- Net cash provided by investing activities................... 264,002 14,176 --------- --------- Financing activities: Repayment of borrowings............ (210,111) -- Borrowings on short-term notes payable, net...................... 209,682 100,000 --------- --------- Net cash (used in) provided by financing activities......... (429) 100,000 --------- --------- Net change in cash and cash equivalents.................. (9,240) (86,862) --------- --------- Cash and cash equivalents at beginning of period................... 19,724 169,846 --------- --------- Cash and cash equivalents at end of period................................ $ 10,484 $ 82,984 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest............. $ 2,043 $ 237 ========= ========= The accompanying notes are an integral part of these financial statements. 5 EDGE TECHNOLOGY GROUP, INC. NOTES TO FINANCIAL STATEMENTS UNAUDITED (1) BASIS OF PRESENTATION The financial statements included herein have been prepared by Edge Technology Group, Inc. ("Edge" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements include all necessary adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company. The results of operations and cash flows for the three month period ended March 31, 2001 are not necessarily indicative of the results of operations or cash flows that may be reported for the year ended December 31, 2001. The unaudited financial statements included herein should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Form 10-KSB for the year ended December 31, 2000. (2) Uncertainty of Proposed Plan of Operation The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $33.5 million at March 31, 2001. The Company's recent focus on information technology consulting services, business process software applications and application services is a new business concept for the Company and the Company cannot predict the nature and extent of demand for its services. During the past two years Edge has experienced declining sales and increasing operating losses. Should this trend continue, it will be necessary to secure additional financing to continue operations. There can be no assurance that any additional financing will be available on acceptable terms. Should Edge be unable to obtain additional financing, it may be unable to develop, enhance, and market products, retain qualified personnel, take advantage of future opportunities, respond to competitive pressures, or continue operations, any of which could have a material adverse effect on its business, operating results, financial condition and liquidity. (3) Reverse stock split During September 2000, Edge effected a four (4) for one (1) reverse stock split. All share and per share amounts have been restated accordingly. 6 (4) Investment - Related Party In September 2000, the Company issued 2,644,841 shares of its common stock to PurchasePooling Investment Fund in return for 9,593,824 shares of Series A Convertible Preferred Stock of Purchase Pooling Solutions, Inc. ("Purchase Pooling"). In December 2000, the Company invested an additional $620,000 with PurchasePooling in return for 2,214,285 shares of Series C Convertible Preferred Stock. As a result, the Company now has an approximately 18% ownership interest in PurchasePooling, a web-based demand aggregator enabling government and educational entities to save significantly on large-ticket capital items by combining their purchasing power nationwide and globally. The Company is accounting for this investment under the cost method of accounting. The Company's President and CEO is also the CEO of PurchasePooling. In 2000, the Company entered into an agreement to acquire from Odyssey Ventures Online S.A. 975,000 shares of Series A Convertible Preferred Stock of PurchasePooling in exchange for 268,789 shares of the Company's common stock. In April 2001, the agreement was finalized and the shares of common stock were issued. PurchasePooling is in its development stage and is not generating any cash flow. Should PurchasePooling be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operations. The Company has entered into a management agreement with PurchasePooling in which PurchasePooling pays the Company a management fee of $20,000 per month in return for the services provided by the Company's President and other employees of Edge. During the three month period ended March 31, 2001, the Company received $60,000 of management fees from PurchasePooling which is reflected as a reduction in general and administrative expenses in the statement of operations. (5) Loss per Share The Company follows SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and presenting basic and diluted earnings per share. Basic loss per share is calculated by dividing loss attributed to common stockholders by the weighted average number of shares of common stock outstanding during each period. For all periods presented basic and diluted net loss per share are the same. As of March 31, 2000 and 2001, due to the Company's net losses, shares of common stock issuable upon conversion of convertible debt and Preferred Stock and the exercise of outstanding options and warrants have been excluded from the computation of diluted loss per share in the accompanying statements of operations as their impact is antidilutive. (6) Note Receivable In September 2000, the Company loaned $1.4 million to Hencie, Inc. ("Hencie") in the form of a Promissory Note (the "Note"). The Note accrues interest at a rate of 8% per annum and the principal and interest is due on or before November 21, 2001. The Note was convertible into 885,543 shares of Hencie's common stock through November 22, 2000, however, the Company did not exercise the conversion option. The Note is unsecured and guaranteed by Hencie's President. Should Hencie be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operations. (7) FINANCINGS a. 2000 Infinity Loans In 2000 and the first quarter of 2001, Infinity Investors Limited, a related party, made certain loans to the Company for working capital purposes. These loans totaled $319,000. As part of the reorganization of the Company effective September 1, 2000, Infinity Investors Limited became entitled to the repayment of these loans. In April 2001, the loan agreement was renegotiated to extend the payment date to January 31, 2002. 7 Catalyst Loans In December 2000, the Company entered into a loan agreement with Catalyst Master Fund, L.P. (the "Catalyst Loan"), a related party, to borrow $620,000. The Catalyst Loan was originally due on June 30, 2001 and bears interest at a rate equal to eight percent (8%) per annum. The Company used the proceeds of the Catalyst Loan to purchase 2,214,285 shares of Series C Convertible Preferred Stock of PurchasePooling. Catalyst Master Fund is a shareholder of the Company and certain of the Company's directors are also officers of an entity that manages Catalyst Master Fund. The Catalyst Loan is convertible at the option of the holder into the Company's common stock at a conversion price of $1.50 per share. The Catalyst Loan is also secured by a pledge of substantially all of Edge's assets. Effective April 16, 2001, the Company entered into an amended loan agreement with Catalyst that increased the borrowings available under the original loan agreement from $620,000 to a total of $2,120,000. Under the amended loan agreement, the Company can draw down amounts under the loan agreement as the Company has need for funds, subject to the Company being in compliance with the covenants contained in that loan agreement. The amended loan agreement bears interest at eight percent (8%) per annum and is due March 31, 2002. The additional amount available under the amended loan agreement is also convertible into the Company's common stock at a conversion price of $1.50 per share and is secured by a pledge of substantially all of the Company's assets. (8) Common Stock In September 2000, the Company issued 2,644,841 shares of its common stock to PurchasePooling Investment Fund in return for 9,593,824 shares of Series A Convertible Preferred Stock of Purchase Pooling. In December 2000, the Company invested an additional $620,000 with PurchasePooling in return for 2,214,285 shares of Series C Convertible Preferred Stock. As a result, the Company now has an approximate 18% ownership interest in PurchasePooling. The Company's President and CEO is also the CEO of PurchasePooling. In 2000, the Company entered into an agreement to acquire from Odyssey Ventures Online S.A. 975,000 shares of Series A Convertible Preferred Stock of PurchasePooling in exchange for 268,789 shares of the Company's common stock. In April 2001, the agreement was finalized and the shares of common stock were issued. (9) Stock Options In July 2000, the Company granted 1,275,000 options to purchase the Company's common stock, 225,000 to an employee and 850,000 to a consultant of the Company at an exercise price of $2.31 per share. Later in July 2000, the Company granted 82,000 options to purchase the Company's common stock to employees of the Company at an exercise price of $2.32 per share. In both instances, the grants were made with exercise prices equal to the fair market value of the Company's stock at the time of the grant. For the 850,000 options to a consultant, the fair value of the options were $1,343,000, of which $223,833 was recorded as expense in 2000 and $111,917 was recorded as expense during the three months ended March 31, 2001. (10) Proceedings with Former Officers and Directors In September 1999, former officers of the Company filed suit against Edge and certain other parties, asserting claims for breach of contract and other matters. In October 1999, the Company counter-sued the former officers for, among other items, breach of fiduciary duty and breach of employment agreements. In April 2001, the Company, the former officers, and the other individuals and entities named in the lawsuits, entered into a settlement agreement whereby Edge agreed to issue 100,000 shares of restricted common stock and pay a cash amount of $30,000 to the former officers in satisfaction of any outstanding claims or claims to options. Accordingly, the Company recorded an accrual for $84,000 related to this settlement which is included in accrued expenses as of March 31, 2001. (11) Employment Agreements The Company has entered into employment agreements with several of its executive officers for periods ranging from three to four years. The agreements provide the employees with salary, bonuses and the right to terminate their agreements and receive certain lump sum payments of compensation if there is a change of control of the Company. In connection with two of the employment agreements, in January 2001, the Company granted stock 8 options to certain executive officers to purchase up to 2,250,000 shares of the Company's common stock at an exercise price of $1.50 per share. 25% of the options are exercisable upon grant and an additional 18.75% vest annually each anniversary date. The options expire 10 years from the date of grant. The Company will not be required to record any compensation expense in 2001 as a result of the grant of these options. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Edge's actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements as a result of certain factors including those set forth in Edge's filings with the Securities and Exchange Commission, specifically including the risk factors set forth below. GENERAL Edge Technology Group, Inc. operates, acquires and invests in technology products and services including information technology consulting services, business process software applications and application service providers. We are in the early stages of continuing to broaden and expand the scope of its business to include business opportunities beyond our historical golf training technology products. As part of this expansion, we intend to seek opportunities in technology products and services for acquisition by Edge to include in an overall business strategy of developing a complete business process software application and delivery targeted primarily towards middle market businesses. We have historically developed, marketed and sold personalized CD-ROM and videotape golf lessons featuring One-on- One instruction by leading professional golfer Greg Norman. Edge also effected the following changes in management during the first part of 2001: * Pierre Koshakji served as our President from September 5, 2000 until January 23, 2001 when he began serving in his current position of Vice President. * On January 18, 2001, Johan Schotte resigned his position as Chairman of the Board of Directors. The Board of Directors of Edge is currently engaged in a search for a Chairman. On January 19, 2001, Mr. Peters and Mr. Koshakji resigned from their positions as members of the Board of Directors. * On January 23, 2001, Edge entered into an employment agreement effective January 2, 2001 with Graham C. Beachum II for Mr. Beachum to serve as our President and Chief Executive Officer. Mr. Beachum has assembled other personnel to develop and expand Edge's business model. * On January 23, 2001, Mr. Beachum was also elected to our Board of Directors. As of May 15, 2001, our Board of Directors consisted of Graham C. Beachum II, J. Keith Benedict and John A. Wagner. As a result of our reorganization in September 2000, our business strategy is changing. We have expanded our business model to include developing additional technology solutions through organic growth, investments in other businesses or acquisitions of other businesses. These strategies will require significant amounts of capital to undertake. We will be entirely dependent on raising additional capital through public or private offerings of our debt or equity securities. We can give no assurance that we will be able to raise any additional capital for the purposes of funding the historical business operations of Edge or any contemplated businesses we may desire to enter. The majority of our cost of sales is contributed to Edge's fixed operating costs which includes operator salaries, vehicle storage and depreciation and our fixed overhead expenses. Approximately 25% of the cost of sales are variable costs related to sales and production. These costs include the cost of the videotapes and CD-ROMs, royalties to Greg Norman and sales commissions. We believe that significantly higher sales levels are needed before we may be able to generate profits on the One-on-One with Greg Norman product. We believe that will not achieve such sales levels in 2001 and we can give no assurance that we will ever achieve such sales levels, that our variable costs will remain constant as a percent of sales or that we will not incur additional fixed costs. 9 RESULTS OF OPERATIONS Quarter ended March 31, 2001 compared with quarter ended March 31, 2000. Sales for the three months ended March 31, 2001 decreased 4.9% to $100,055, as compared to $105,252 for the three months ended March 31, 2000. This decrease in sales in 2001, as compared to 2000, is due to fewer events being performed in 2001. The cost of sales for the three months ended March 31, 2001 decreased 84.2% to $32,148, as compared to $203,585 for the three months ended March 31, 2000. This decrease in the cost of sales is primarily attributable to the lower cost of sales associated with the management and consulting services Edge performed. Operating expenses for the three months ended March 31, 2001 decreased 6.9% to $438,427, as compared to $471,392 for the three months ended March 31, 2000. This decrease was primarily attributable to a decrease in executive salaries and salaries relating to personnel associated with Edge's strategy of acquiring and operating technology businesses. As of April 15, 2001, Edge had two executive employees and six employees. Interest expense for the three months ended March 31, 2001 decreased 78.4% to $18,116 from $83,956 for the three months ended March 31, 2000. This decrease is primarily attributable to the elimination of penalty interest payable on the convertible notes that were converted into common stock in September 2000. As a result of the above, operating loss for the three months ended March 31, 2001 decreased 35.0% to $370,520 as compared to $569,725 for the three months ended March 31, 2000. The Provision for Preferred Stock Dividends of $123,750 for the three months ended March 31, 2000 relates to the dividends on the Company's Series A-2 Convertible Preferred Stock. The dividends commenced on January 1, 2000. As of December 31, 2000, all of the outstanding preferred stock had been converted into common stock. LIQUIDITY AND CAPITAL RESOURCES The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $33.5 million at March 31, 2001. The Company's plan of operation and prospects are largely dependent upon the Company's ability to achieve significant market acceptance for its products, establish and maintain satisfactory relationships with those who arrange golf events, successfully hire and retain skilled technical, marketing and other personnel, and successfully implement its new business plan and strategy. There can be no assurance that the Company will be able to continue to implement its business plan. Failure to implement its business plan would have a material adverse effect on the Company. Demand and market acceptance for the Company's One-on-One personalized CD-ROM and videotape golf lesson continues to be subject to a high level of uncertainty. Achieving market acceptance for the Company's One-on-One products will require significant efforts and expenditures by the Company to create awareness and demand. The Company's prospects will be significantly affected by its ability to successfully build an effective sales organization and successfully implement its business plan. The Company has limited marketing and technical experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. The Company's strategy and preliminary and future marketing plans may be subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts and changes in market conditions. To the extent that the Company enters into third-party marketing and distribution arrangements in the future, it will be dependent on the marketing efforts of such third parties and in certain instances on the popularity and sales of their products. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's products. If the Company's strategy is unsuccessful, it could have a significant impact on the Company's operations. The Company's recent focus on information technology consulting services, business process software 10 applications and application services is a new business concept for the Company and the Company cannot predict the nature and extent of demand for its services. Edge does not currently maintain a bank credit facility. Edge has historically financed its operations primarily through the sale of equity securities or instruments convertible into equity securities. On March 31, 2001, Edge had cash and cash equivalents of $82,984, and a working capital deficit of $1,605,806, as compared to cash and cash equivalents of $169,846, and a working capital deficit of $526,638 at December 31, 2000. Net cash used in operating activities for the three months ending March 31, 2001 was $201,038. Net cash provided by investing activities was $14,176 and $100,000 was provided by financing activities for a total decrease in cash and cash equivalents of $86,862. Net cash used in operating activities for the three months ending March 31, 2000 was $272,813. Net cash provided by investing activities for the three months ending March 31, 2000 was $264,002, and $429 was used in financing activities, for a total decrease in cash and cash equivalents for the three months ending March 31, 2000 of $9,240. Edge has entered into an Amended Loan Agreement with Catalyst Master Fund L.P., a related party, for borrowings up to $2,120,000. Under the Amended Loan Agreement, Edge can draw down amounts as Edge has needs for funds, subject to Edge being in compliance with the covenants contained in the Amended Loan Agreement. The loan bears interest at 8.0% per annum and is due March 31, 2002. Further, the loan is convertible into Edge common stock at a conversion price of $1.50 per share and is secured by a pledge of substantially all of Edge's assets. As of April 12, 2001, Edge has $1,200,000 available under the Amended Loan Agreement. Edge believes that this facility will be adequate to fund Edge's needs for at least twelve months, although additional financing for acquisitions as part of Edge's business plan will be necessary. In addition, Edge owes $319,000 of principal as of March 31, 2001 to Infinity, a related party, as a result of loans that were not repaid in our September 2000 reorganization, as well as additional $100,000 borrowed in the first quarter of 2001. These loans are due January 31, 2002. Edge has no current source for the repayment of these loans. Edge expects to meet future liquidity requirements through cash flows generated from operations and cash reserves and maturities or sales of marketable securities and utilization of its Amended Loan Agreement. It is anticipated that those sources of funds will also fund capital expenditure programs. These capital expenditure programs can be suspended or delayed at any time with minimal disruption to Edge's operations if cash is needed in other areas of Edge's operations. The expected operating cash flow, current cash reserves and the Amended Loan Agreement are expected to allow Edge to meet working capital requirements during periods of low cash flows resulting from the seasonality of the industry. During the past two years Edge has experienced declining sales and increasing operating losses. Should this trend continue, it will be necessary to secure additional financing to continue operations. There can be no assurance that any additional financing will be available on acceptable terms. Should Edge be unable to obtain additional financing, it may be unable to develop, enhance, and market products, retain qualified personnel, take advantage of future opportunities, respond to competitive pressures, or continue operations, any of which could have a material adverse effect on its business, operating results, financial condition and liquidity. On March 31, 2001, Edge had stockholders equity of $4,440,464, as compared to stockholders equity of $4,689,018 at December 31, 2000. SEASONALITY Edge's One-on-One product business has historically been seasonal with higher sales in the second and third quarters of each fiscal year. THIRD-PARTY REPORTS AND PRESS RELEASES Edge does not make financial forecasts or projections nor does Edge endorse the financial forecasts or projections of third parties or comment on the accuracy of third-party reports. Edge does not participate in the preparation of the reports or the estimates given by analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of our securities based on financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser. 11 Edge periodically issues press releases to update shareholders on new developments relating to Edge and our business. These releases may contain certain statements of a forward-looking nature relating to future events or the future financial performance of Edge within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may materially differ with those statements. In evaluating such statements, readers should specifically consider the various risk factors identified which could cause actual results to differ materially from those indicated by such forward-looking statements. RISK FACTORS Readers of this report or any of our press releases should carefully consider the following risk factors, in addition to the other information contained herein. This report and our press releases contain statements of a forward-looking nature relating to future events or the future financial performance of Edge within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may differ substantially. In evaluating those statements, readers should specifically consider the various factors identified in this annual report, including the matters set forth below, which could cause actual results to differ substantially from those indicated by those forward-looking statements. WE HAVE EXPERIENCED SIGNIFICANT AND CONTINUING LOSSES. As of March 31, 2001, we had an accumulated deficit of approximately $33.5 million. For the quarter ended March 31, 2001, we recorded a net loss of $390,160. For each of the five years ended December 31, 2000, we have recorded an operating loss; in certain cases, a substantial operating loss. We incurred a net loss of $8,959,625 for the year ended December 31, 2000. We believe that we will continue to incur losses until we are able to generate sufficient revenues to offset the operating costs associated with commercializing our products. These losses could limit our ability to grow and to raise new funds and could ultimately jeopardize our ability to remain in business. WE ARE AT A RELATIVELY EARLY STAGE WITH OUR REVISED BUSINESS MODEL AND THEREFORE OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE. Our corporate reorganization and related shift in our business strategy commenced in September 2000 and is ongoing. Since that time, we have been engaged principally in (1) assembling our senior management team, (2) managing our existing portfolio companies, (3) developing our revised business plan, and (4) attending to various capital raising activities. As such, we have not begun to establish, on any meaningful basis, the strategic relationships and/or to identify the potential businesses, products, or technologies that will be necessary for us to ultimately succeed in the business segment in which we now expect to compete. Accordingly, we do not have any meaningful operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early states of development, particularly companies participating in new and rapidly evolving markets. Some of the risks and difficulties we expect to encounter include our ability to: * adapt and successfully execute our revised business plan; * overcome the negative market stigma associated with certain over-the- counter technology companies; * manage and adapt to changing and expanding operations; * implement and improve operational, financial and management systems and processes; * locate, negotiate with, close and ultimately integrate additional attractive portfolio investments; * attract, retain and motivate qualified personnel; and * numerous other risks and difficulties experienced by early state business models generally. 12 Because of our recent reorganization and our shift away from a single product enterprise, we may have limited insight into trends and conditions that may exist or might emerge and affect our business. We cannot be certain that our revised business strategy will be successful or that we will successfully address these risks. As a result of our continuing losses, the low market price of our common stock and the delisting of our common stock from the Nasdaq SmallCap Market, we believe that it will be very difficult, if not impossible, for Edge to raise additional capital in the future. As of March 31, 2001, Edge had a total of cash and cash equivalents of approximately $82,984. Edge is unlikely to become profitable in the reasonably foreseeable future. Accordingly, if Edge cannot raise new funds, Edge may exhaust its cash resources and be unable to continue in business. WE NEED ADDITIONAL FINANCING. As of March 31, 2001, we had a total of cash and cash equivalents of only $82,984. Accordingly, we need additional financing immediately to implement our business strategy and are relying entirely on the Catalyst Loan for working capital. We do not currently maintain a credit facility with any bank or financial institution. We believe that our ability to raise additional financing, as either debt or equity, is further hindered by our continuing operating losses, the low market price of our common stock and our delisting from Nasdaq. If we are unable to arrange additional financing as needed, we are likely to reduce the scope of our operations or cease operations altogether. SUBSTANTIALLY ALL OF OUR ASSETS ARE PLEDGED. The Catalyst Loan is secured by a pledge of substantially all of our assets. Therefore, there is a risk that upon material default of that loan, we could lose substantially all of our assets through a foreclosure proceeding. THE SHARES ELIGIBLE FOR FUTURE SALE MAY FURTHER DECREASE THE PRICE OF OUR COMMON STOCK. If our stockholders sell substantial amounts of their common stock in the public market, including shares issued upon the exercise of outstanding options, then the market price of our common stock could fall. As of March 31, 2001 there were a substantial number of outstanding options and warrants to purchase shares of our common stock. The exercise of any of these options or warrants will also have a dilutive effect on our stockholders. Furthermore, holders of such options or warrants are more likely to exercise them at times when Edge could obtain additional equity capital on terms that are more favorable to us than those provided in the options or warrants. As a result, exercise of the options or warrants may adversely affect the terms of such financing and would require us to issue significant amounts of common stock at the time of exercise. The sale of a substantial number of our common stock may adversely affect the prevailing price of such common stock in the public market and may impair our ability to raise capital through the sale of its equity securities. EDGE RELIES SIGNIFICANTLY ON ITS LICENSE WITH GREG NORMAN FOR ITS ONE-ON-ONE PRODUCT. In connection with the production and promotion of our products, Edge uses, under a worldwide license, Greg Norman's name, likeness, endorsement and certain trademarks. The initial term of the Greg Norman license expires on December 31, 2001 subject to earlier termination pursuant to the terms thereunder. Our business may be adversely affected if the Greg Norman license is terminated in the future or if Greg Norman dies, becomes disabled, retires from tournament play, experiences a significant decline in his performance at golf tournaments, reduces his participation in golf tournaments, commits a serious crime or performs any act which adversely affects his reputation. OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALLCAP MARKET AND IS SUBJECT TO ADDITIONAL SIGNIFICANT RISKS. Because we were unable to meet Nasdaq's minimum ongoing listing requirements, Edge was delisted from the Nasdaq SmallCap Market as of June 1, 1999. The delisting of our common stock means that, among other things, fewer investors have access to trade our common stock which will limit our ability to raise capital through the sale of our securities. In addition, our common stock is subject to penny stock regulations, which could cause fewer brokers and market makers to execute trades in our common stock. This is likely to hamper our common stock trading with sufficient volume to provide liquidity and could cause our stock price to further decrease. The penny stock 13 regulations require that broker-dealers who recommend penny stocks to persons other than institutional accredited investors must make a special suitability determination for the purchaser, receive the purchaser's written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents which identify risks associated with investing in penny stocks. Furthermore, the broker-dealer must obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in penny stock. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules. Holders of our common stock may find it more difficult to sell their shares of common stock, which is expected to have an adverse effect of the market price of the common stock. WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK PRICE VOLATILITY. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation. Securities litigation may result in substantial costs and divert management's attention and resources, which may seriously harm our business, prospects, financial condition and results of operations. WE MUST BE ABLE TO IMPLEMENT OUR BUSINESS PLAN. Our business plan will succeed only if we are able to identify, acquire and integrate companies to expand our product and service offerings. Our plan of operation and prospects are largely dependent upon our ability to achieve significant market acceptance for our products and services, establish and maintain relationships with our customers, successfully hire and retain skilled technical, marketing and other personnel, and successfully develop, market and sell our products and services on a timely and cost effective basis. There can be no assurance that Edge will be able to continue to implement our business plan. Failure to implement effectively our business plan will have a material adverse effect on Edge. WE MAY NOT BE ABLE TO CARRY OUT OUR ACQUISITION STRATEGY. While we have no current agreements with respect to any acquisition, we may make acquisitions of products, services, technologies, systems or entire businesses in the future. This strategy currently focuses on technology companies with products or services such as information technology consulting, software applications and application service providers. To be suitable for acquisition by Edge, these companies must be small enough to be affordable yet profitable. These candidates may be few in number and may attract offers from companies with greater financial resources than Edge. Acquisitions involve numerous risks, including, among others, loss of key personnel of the acquired company, the difficulties associated with assimilating the personnel and operations of the acquired company, the potential disruption of our ongoing business and the maintenance of uniform standards, controls, procedures and polities. We cannot assure you that Edge will be able to locate suitable acquisition targets or that Edge will be able to complete any acquisitions. 14 OUR CURRENT FINANCIAL CONDITION PREVENTS EDGE FROM FINANCING AN ACQUISITION INDEPENDENTLY. Our current financial condition will not allow Edge to finance an acquisition independently. If Edge locates an acquisition opportunity, it will have to depend on the profitability of the target company and the efforts of some of our major stockholders to attract and obtain financing. We cannot assure you that Edge will be able to obtain financing on acceptable terms or at all. If we cannot obtain financing, we will not be able to complete any acquisitions. CERTAIN OF OUR PRODUCTS MAY BE SUBJECT TO PRODUCT OBSOLESCENCE. The markets for our Greg Norman One-on-One product may be characterized by rapidly changing technology which could result in product obsolescence or short product life cycles. Our competitors could develop technologies or products that render this product obsolete or less marketable. Accordingly, our ability to compete in this segment may be depend upon our ability to continually enhance and improve our product. 15 WE DEPEND ON OUR OFFICERS AND KEY PERSONNEL. The prospects of Edge depend on the personal efforts of Graham C. Beachum II, our President and Chief Executive Officer, and other key personnel to implement our operating and growth strategies. The loss of the services of these executives could have a material adverse effect on our business and prospects because of their experience and knowledge in the industry. EDGE HAS A LIMITED PRODUCT LINE. Edge currently depends entirely on the sales of a limited product line to generate revenues. Edge may develop other products in the future that may or may not be similar to our current products. Edge cannot assure that our current or future products will prove to be commercially viable. Failure to achieve commercial viability on a timely basis would cause Edge to close our business. OUR INVESTMENTS MAY INCUR LOSSES AND MAY NOT HAVE ANY FUTURE PROFITS. Companies into which Edge makes investments may have operating losses. As start- up companies, these businesses may continue to incur significant increases in expenses. These increases may adversely impact our business and their financial condition. WE HAVE AN UNPROVEN BUSINESS MODEL. Our ability to generate revenues depends upon whether we can generate revenues from our operations and invest in or establish strategic relationships with operating companies to provide us with an adequate revenue stream. If we cannot achieve or sustain an adequate revenue stream or if our products and services, or the products and services of companies in which we invest, do not achieve or sustain broad market acceptance, our business, operating results and financial condition will be materially adversely affected. Our ability to generate future revenues depends on a number of factors, many of which are beyond our control, including among other things, the risk factors described in this Report. Therefore, we are unable to forecast our revenues with any degree of accuracy. OUR INVESTMENTS GIVE US LIMITED CONTROL OVER THE BUSINESSES IN WHICH WE HAVE INVESTED. We hold approximately 18% of the outstanding capital stock of PurchasePooling, a related party, and have an unsecured loan to Hencie, Inc. We may not be able to direct the management and policies of these companies or influence their future direction in a manner that will result in increased value to Edge for the securities Edge holds. Further, PurchasePooling and Hencie, Inc. are in their development stages and are not generating any cash flow. Should PurchasePooling and/or Hencie, Inc. be unable to generate sufficient future revenue and cash flow, it could have a negative impact on the Company's operation. IF WE FAIL TO MANAGE OUR GROWTH AND INTEGRATE OUR ACQUIRED BUSINESSES, OUR BUSINESS WILL BE ADVERSELY AFFECTED. If the reorganization and business strategy discussed in this Report results in significant growth of our operations, we will be required to implement and improve our operating and financial systems and controls, and to expand, train and manage our employee base to manage this growth. We will be dependent upon our management to assume and perform the management functions formerly performed by management of each of the parties to the reorganization. To the extent that our management is unable to assume or perform these combined duties, our business, results of operations and financial condition could be adversely affected. There can be no assurance that the management, systems and controls currently in place or any steps taken to improve such management, systems and controls will be adequate in the future. In addition, the integration of the acquired entities and their operations will require our management to make and implement a number of strategic operational decisions. The timing and manner of the implementation of these decisions will materially impact our business operations. 16 WE MUST RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL TO BE COMPETITIVE. Our success depends to a significant extent on the continued contributions, experience and knowledge of our senior management team and key technical and marketing personnel. Our success also depends upon our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. No assurance can be given that we will be able to successfully attract, assimilate or retain a sufficient number of qualified personnel. The failure to do so could have a material adverse effect on our business, results of operation and financial condition. A SMALL NUMBER OF STOCKHOLDERS, SOME OF WHICH ARE AN AFFILIATE GROUP, HOLD LARGE AMOUNTS OF OUR COMMON STOCK AND COULD EXERCISE CONTROL OVER EDGE, WHICH MAY RAISE CONFLICTS OF INTEREST. A small number of stockholders, some of which are an affiliate group, own a sufficient amount of our common stock to exercise significant control over our business, policies and affairs and, in general, determine the outcome of any corporate transaction or other matters submitted to the stockholders for approval, all in a manner that could conflict with the interests of other stockholders. WE MAY BECOME SUBJECT TO INCREASED REGULATORY OVERSIGHT AS A RESULT OF OUR INVESTMENTS IN OTHER COMPANIES. As a result of our investments in other companies, we may be or become subject to the Investment Company Act of 1940 and other laws that regulate investing activities. Any such regulation may negatively impact our cost of doing business, may restrict our business and may materially adversely affect our business, financial condition, operating results and future prospects. WE MAY BECOME SUBJECT TO INCREASED GOVERNMENTAL OVERSIGHT. There can be no assurance that technology-related products and services which are sold by us or the companies into which we invest will not be actively regulated. Increased regulation of technology-related products and services may slow our growth, particularly if other countries also impose similar regulations. Any regulation may negatively impact our cost of doing business and may materially adversely affect our business, financial condition, operating results and future prospects. Increased regulation in one or more countries could materially adversely affect our business, financial condition, operating results and prospects. OUR RIGHT TO ISSUE PREFERRED STOCK AND ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW COULD MAKE A THIRD PARTY ACQUISITION OF US DIFFICULT. Our certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval. The issuance of preferred stock could make it more difficult for a third party to acquire us without the approval of Edge's board. Additionally, Delaware corporate law imposes certain restrictions on corporate control transactions that could make it more difficult for a third party to acquire us without the approval of our board. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Unchanged since originally reported in our Annual Report on Form 10-K for the year ended December 31, 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.23 Note and Security Agreement dated as of April 16, 2001 between Edge and Catalyst Master Fund, L.P. (filed herewith) (b) Reports on Form 8-K None 18 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Edge Technology Group INC. By: /s/ Graham C. Beachum II ------------------------------ Graham C. Beachum II Chairman and Chief Executive Officer and Principal Financial Officer May 14, 2001 19 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - - ------ ----------- 10.23 Note and Security Agreement dated as of April 16, 2001 between Edge and Catalyst Master Fund, L.P. (filed herewith) 20 EX-10.23 2 ex1023.txt ` Exhibit 10.23 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, OR (C) IF REGISTERED UNDER THE SECURITIES ACT. $2,120,000.00 DATE OF ISSUANCE: April 16, 2001 EDGE TECHNOLOGY GROUP, INC. Amended and Restated Convertible Note EDGE TECHNOLOGY GROUP, INC., a Delaware corporation (together with its successors, the "Corporation"), for value received hereby promises to pay to: CATALYST MASTER FUND, L.P. (the "Holder") and registered assigns, the principal sum of Two Million One Hundred Twenty Thousand Dollars ($2,120,000.00) ("Total Principal Amount"), or such amount less than the Total Principal Amount which is outstanding from time to time if the total amount outstanding under this Amended and Restated Convertible Note ("Convertible Note') is less than the Total Principal Amount, on March 31, 2002 (the "Maturity Date") and to pay interest at such times and on such terms and conditions as specified herein. 1. CERTAIN DEFINITIONS. The following terms as used herein shall have the following meanings: "Asset Sale" means any sale, transfer or other disposition (or series of related sales, transfers or dispositions) of the assets of the Corporation or any Subsidiary of the Corporation (including any sales or transfers of equity interests of other entities owned by the Corporation or any Subsidiary of the Corporation which equity interests do not constitute Subsidiaries of the Corporation), or sales of capital stock of any Subsidiary of the Corporation, including any disposition by means of a merger, consolidation or similar transaction other than a disposition of property or assets at fair market value in the ordinary course of business. "Change of Control" means (i) when any person or group of persons (within the meaning of Sections 13 and 14 of the Securities and Exchange Act of 1934 (the "Exchange Act") and the rules and regulations of the Securities and Exchange Commission (the "Commission") relating to such Sections) other than the stockholders of the Corporation existing as of the date of this Convertible Note shall have acquired beneficial ownership (within the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 50.1% or more of the outstanding shares of Common Stock of the Corporation after the date hereof, or (ii) when individuals constituting the Board of Directors of the Corporation on the date hereof (together with any new Directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Corporation was approved by a vote of at least 66% of the Directors then still in office whose election or nomination for election was previously so approved), cease for any reason to constitute at least two-thirds of the Board of Directors of the Corporation then in office. "Closing Bid Price" shall mean for any security as of any date, the lowest closing bid price as reported by Bloomberg, L.P. ("Bloomberg") on the principal securities exchange or trading market where such security is listed or traded or, if the foregoing does not apply, the lowest closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no lowest trading price is reported for such security by Bloomberg, then the average of the bid prices of any market- makers for such securities as reported in the "pink sheets" by the National Quotation Bureau, Inc. (as applicable, the "Principal Market"). If the lowest closing bid price cannot be calculated for such security on such date on any of the foregoing bases, the lowest closing bid price of such security on such date shall be the fair market value as mutually determined by the Holder and the Corporation for which the calculation of the closing bid price requires, and in the absence of such mutual determination, as determined by the Board of Directors of the Corporation in good faith. "Common Stock" means the common stock of the Corporation, par value $.01 per share. "Financing" means any public or private financing consummated through the issuance of debt or equity securities (including Derivative Securities, as such term is defined in Section 4.3(b) below) of the Corporation or any Subsidiary of the Corporation. "Person" means an individual, partnership, joint venture, corporation, trust, Tribunal, unincorporated organization, and government, or any department, agency, or political subdivision thereof. "Sale Event" means one of the following: (i) the occurrence of a Change of Control of the Corporation, (ii) a transfer of all or substantially all of the assets of the Corporation to any person or entity in a single transaction or series of related transactions, or (iii) a consolidation or merger of the Corporation with or into another person or entity in which the Corporation is not the surviving entity or survives solely as a wholly-owned subsidiary of another entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Corporation and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock). "Subsidiary" of any Person means any corporation, partnership, joint venture, trust or estate of which (or in which) 50% or more of: 2 (a) the outstanding capital stock having voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership or joint venture, or (c) the beneficial interest of such trust or estate, is at the time directly or indirectly owned by such Person, by such Person and one or more of its Subsidiaries or by one or more of such Person's Subsidiaries. "Trading Day" shall mean any business day in which at least 100 shares of Common Stock are traded on the Principal Market, or any business day in which any other automated quotation system or exchange on which the Common Stock is then traded is open for trading for at least four (4) hours, as applicable. 2. INTEREST AND PRINCIPAL. 2.1. Interest Rate, Payment of Interest and Calculation. The Corporation promises to pay interest in cash on the Total Principal Amount of this Convertible Note outstanding from time to time at the rate of Eight Percent (8%) per annum (the "Interest Rate") or, if less, the maximum rate permitted by applicable law. Past due amounts (including interest, to the extent permitted by law) will also accrue interest at the Interest Rate plus four percent (4%) per annum or, if less, the maximum rate permitted by applicable law, and will be payable on demand. Interest on this Convertible Note will be calculated on the basis of a 360-day year of twelve 30 day months. The Corporation will pay interest on (i) the Maturity Date, (ii) each Conversion Date (as hereafter defined), and (iii) the date the principal amount of this Convertible Note shall be declared to be or shall automatically become due and payable, on the principal sum hereof outstanding, until payment in full of the principal sum hereof has been made. 2.2. Payment of Principal. (a) The Corporation shall repay the unpaid principal balance of this Convertible Note on the Maturity Date. (b) The Corporation shall be obligated to prepay all or a portion of this Convertible Note from 100% of the net cash proceeds available from any consummated Asset Sale or Financing. (c) The Corporation may voluntarily prepay this Convertible Note prior to the Maturity Date upon twenty (20) days prior notice to the Holder, whereupon the Holder shall have the right to convert this Convertible Note pursuant to Article 4 hereof. 2.3. Advances. The Corporation may request advances hereunder on the basis set forth in the letter agreement dated the date hereof between the Corporation and the Holder. 3 2.4. Method of Payment. The Corporation will pay in cash all sums becoming due on this Convertible Note for principal, interest or otherwise by wire transfer of immediately available funds to the Holder of this Convertible Note in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts at the address specified for such purpose below the Holder's name above, or by such other method or at such other address as such Holder shall have from time to time specified to the Corporation in writing for such purpose, without the presentation or surrender of this Convertible Note. 2.5. Collateral Security. Payment of the Convertible Note is secured by the Security Agreement dated December 14, 2000 between the Holder and the Corporation (as the same may be amended or modified from time to time, the "Security Agreement"). 3. REGISTRATION. 3.1. Record Ownership. The Corporation shall maintain a register of the Holder of this Convertible Note (the "Register") showing its name and address and the serial number and principal amount of Convertible Note issued to or transferred of record by it from time to time. The Register may be maintained in electronic, magnetic or other computerized form. The Corporation may treat the Person named as the Holder in the Register as the sole owner of this Convertible Note. The Holder (as properly noted in the Register) is the Person exclusively entitled to receive payments on this Convertible Note, receive notifications with respect to this Convertible Note, convert it into Common Stock and otherwise exercise all of the rights and powers as the absolute owner hereof. 3.2. Registration of Transfer. Transfers of this Convertible Note may be registered on the Register. Transfers shall be registered when this Convertible Note is presented to the Corporation with a request to register the transfer hereof and the Convertible Note is accompanied by a written instrument of transfer in form reasonably satisfactory to the Corporation, duly executed by the Holder thereof or his attorney duly authorized in writing, reasonable assurances are given that the endorsements are genuine and effective, and the Corporation has received evidence reasonably satisfactory to it that such transfer is rightful and in compliance with this Convertible Note and all applicable laws, including state and Federal securities laws. When this Convertible Note is presented for transfer and duly transferred hereunder, it shall be canceled and a new Convertible Note showing the name of the transferee as the record holder thereof shall be issued in lieu hereof. When this Convertible Note is presented to the Corporation with a reasonable request to exchange it for an equal principal amount of Convertible Notes of other denominations, the Corporation shall make such exchange and shall cancel this Convertible Note and issue in lieu thereof Convertible Notes having a total principal amount equal to the outstanding principal amount of this Convertible Note in the denominations requested by the Holder. 3.3. Worn and Lost Securities. If this Convertible Note becomes worn, defaced or mutilated but is still substantially intact and recognizable, the Corporation or its agent may issue a new Convertible Note in lieu hereof upon its surrender bearing a number not 4 contemporaneously outstanding. Where the Holder claims that the Convertible Note has been lost, destroyed or wrongfully taken, the Corporation shall issue a new Convertible Note in place of the original Convertible Note bearing a number not contemporaneously outstanding if the Holder so requests by written notice to the Corporation actually received by the Corporation before it is notified that the Convertible Note has been acquired by a bona fide purchaser and the Holder has delivered to the Corporation an indemnity bond in such amount and issued by such surety as the Corporation deems reasonably satisfactory together with an affidavit of the Holder setting forth the facts concerning such loss, destruction or wrongful taking and such other information in such form with such proof or verification as the Corporation may reasonably request. 4. CONVERSION AT THE OPTION OF THE HOLDER 4.1. (a) Optional Conversion. At the option of the Holder and at any time or from time to time, all or any portion of the outstanding principal balance of this Convertible Note may be converted into that certain number of fully paid and nonassessable shares of Common Stock as is determined by dividing such applicable balance of this Convertible Note by the Conversion Price (the "Conversion Shares"). (b) Conversion Price. Subject to adjustment pursuant to Section 4.3 below, the "Conversion Price" shall be One Dollar and Fifty Cents ($1.50) per share of Common Stock. 4.2. Conversion Procedures. (a) The conversion of this Convertible Note will be deemed to have been effected as of the close of business on the date on which the Holder delivers a notice of conversion (including via telecopy) to the Corporation of the conversion of this Convertible Note (the "Conversion Date"). Within five (5) Business Days of the Conversion Date, the Holder shall surrender this Convertible Note at the principal office of the Corporation. On the Conversion Date, the rights of the Holder of this Convertible Note will cease and the Person or Persons in whose name or names any certificate or certificates for Conversion Shares are to be issued upon such conversion will be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. (b) As soon as possible after a conversion has been effected (but in any event within five (5) Business Days), the Corporation will deliver to the converting Holder a certificate or certificates representing the number of shares of Common Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting Holder has specified. 5 (c) The issuance of certificates for shares of Common Stock upon conversion of this Convertible Note will be made without charge to the Holder for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Common Stock. Upon conversion of this Convertible Note, the Corporation will take all such actions as are necessary in order to insure that the Common Stock issuable with respect to such conversion will be validly issued, fully paid and nonassessable. (d) If any fractional interest in a share of Common Stock would, except for the provisions of this subparagraph (d), be deliverable upon any conversion of this Convertible Note, the Corporation, in lieu of delivering the fractional share therefor, will pay an amount to the Holder thereof equal to the fair market value of such fractional interest as of the date of conversion. (e) All accrued unpaid interest on this Convertible Note shall be payable upon conversion in cash; provided, however, at the sole option of the Holder, such accrued unpaid interest may be added to principal and converted into Conversion Shares in connection with any conversion of this Convertible Note. 4.3. Adjustments. The Conversion Price shall be subject to adjustment from time to time as follows: (a) Share Reorganization. If and whenever the Corporation shall: (i) subdivide the outstanding shares of Common Stock into a greater number of shares; (ii) consolidate the outstanding shares of Common Stock into a smaller number of shares; (iii) issue Common Stock or securities convertible into or exchangeable for shares of Common Stock as a stock dividend to all or substantially all the holders of Common Stock; or (iv) make a distribution on the outstanding Common Stock to all or substantially all the holders of Common Stock payable in Common Stock or securities convertible into or exchangeable for Common Stock; (any of such events being herein called a "Share Reorganization"), then in each such case the Conversion Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for the purposes of the Share Reorganization or, if no record date is fixed, the effective date of the Share Reorganization, by multiplying the applicable Conversion Price in effect on such record or effective date, as the case may be, by a fraction of which: 6 (I) the numerator shall be the number of shares of Common Stock outstanding on such record or effective date (without giving effect to the transaction); and (II) the denominator shall be the number of shares of Common Stock outstanding after giving effect to such Share Reorganization, including, in the case of a distribution of securities convertible into or exchangeable for shares of Common Stock, the number of shares of Common Stock that would have been outstanding if such securities had been converted into or exchanged for Common Stock on such record or effective date. (b) Rights Offering. If and whenever the Corporation shall issue to all or substantially all the holders of Common Stock, rights, options or warrants under which such holders are entitled, during a period expiring not more than forty-five (45) days after the record date of such issue, to subscribe for or purchase Common Stock (or securities convertible into or exchangeable or exercisable for equity securities (collectively, the "Derivative Securities")), at a price per share (or, in the case of Derivative Securities, at an exchange or conversion price per share at the date of issue of such securities) of less than 95% of the Market Price of the Common Stock on such record date (any such event being herein called a "Rights Offering"), then in each such case the Conversion Price shall be adjusted, effective immediately after the record date at which holders of Common Stock are determined for the purposes of the Rights Offering, by multiplying the Conversion Price in effect on such record date by a fraction of which: (i) the numerator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) a number obtained by dividing: (A) either, (x) the product of the total number of shares of Common Stock so offered for subscription or purchase and the price at which such shares are so offered, or (y) the product of the maximum number of shares of Common Stock into or for which the convertible or exchangeable securities so offered for subscription or purchase may be converted or exchanged and the conversion or exchange price of such securities, or, as the case may be, by (B) the Market Price of the Common Stock on such record date; and 7 (ii) the denominator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) the number of shares of Common Stock so offered for subscription or purchase (or, in the case of Derivative Securities, the maximum number of shares of Common Stock for or into which the securities so offered for subscription or purchase may be converted or exchanged). To the extent that such rights, options or warrants are not exercised prior to the expiry time thereof, the Conversion Price shall be readjusted effective immediately after such expiry time to the Conversion Price which would then have been in effect upon the number of shares of Common Stock (or Derivative Securities) actually delivered upon the exercise of such rights, options or warrants. For purposes of this Convertible Note, "Market Price" shall mean the lowest Closing Bid Price of the Common Stock during the twenty (20) Trading Day period ending one (1) Trading Day prior to the applicable date. (c) Special Distribution. If and whenever the Corporation shall issue or distribute to all or substantially all the holders of Common Stock: (i) shares of the Corporation of any class, other than Common Stock; (ii) rights, options or warrants; or (iii) any other assets (excluding cash dividends and equivalent dividends in shares paid in lieu of cash dividends in the ordinary course); and if such issuance or distribution does not constitute a Share Reorganization or a Rights Offering (any such event being herein called a "Special Distribution"), then in each such case the Conversion Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for purposes of the Special Distribution, by multiplying the Conversion Price in effect on such record date by a fraction of which: (I) the numerator shall be the difference between: (x) the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date; and (y) the fair market value, as determined by the Directors (whose determination shall be conclusive), to the holders of Common Stock of the shares, rights, options, warrants, evidences of indebtedness or other assets issued or distributed in the Special Distribution (net of any consideration paid therefor by the holders of Common Stock), and 8 (II) the denominator shall be the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date. (d) Capital Reorganization. If and whenever there shall occur: (i) a reclassification or redesignation of the shares of Common Stock or any change of the shares of Common Stock into other shares, other than in a Share Reorganization; (ii) a consolidation or merger of the Corporation with, or into another entity; or (iii) the merger of the Corporation with another entity in which the Corporation survives as a wholly-owned subsidiary of another entity; or (iv) the transfer of all or substantially all of the assets of the Corporation to another entity; (any such event being herein called a "Capital Reorganization"), then in each such case the Holder who exercises the right to convert this Convertible Note after the effective date of such Capital Reorganization shall be entitled to receive and shall accept, upon the exercise of such right, in lieu of the number of shares of Common Stock to which such Holder was theretofore entitled upon the exercise of the conversion privilege, the aggregate number of shares or other securities or property of the Corporation or of the entity resulting from such Capital Reorganization that such Holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, such Holder had been the holder of the number of shares of Common Stock to which such Holder was theretofore entitled upon conversion of this Convertible Note; provided, however, that no such Capital Reorganization shall be consummated unless all necessary steps shall have been taken so that such Holder shall thereafter be entitled to receive such number of shares or other securities of the Corporation or of the entity resulting from such Capital Reorganization, subject to adjustment thereafter in accordance with provisions the same, as nearly as may be possible, as those contained above. (e) Purchase Price Adjustments. In case at any time and from time to time the Corporation shall issue any shares of Common Stock or Derivative Securities (the number of shares so issued, or issuable upon conversion or exercise of such Derivative Securities, as applicable, being referred to as the "Additional Shares of Common Stock") for consideration less than the Conversion Price at the date of issuance of such shares of Common Stock or Derivative Securities, as applicable, in each such case the Conversion Price shall, concurrently with such issuance, be reduced to a price determined by multiplying the Conversion Price immediately prior to such event by a fraction: (I) the numerator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common 9 Stock plus (y) the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of such Additional Shares of Common Stock so issued would purchase at the Conversion Price and (II) the denominator of which shall be the sum of (x) the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Shares of Common Stock plus (y) the number of such Additional Shares of Common Stock so issued or sold. (f) Adjustment Rules. The following rules and procedures shall be applicable to adjustments made in this Article 4: (i) no adjustment in the Conversion Price shall be required unless such adjustment would result in a change of at least 1% in the Conversion Price then in effect; provided, however, that any adjustments which, but for the provisions of this clause would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustment; (ii) if any event occurs of the type contemplated by the adjustment provisions of this Article 4 but not expressly provided for by such provisions, the Corporation will give notice of such event as provided herein, and the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Price so that the rights of the Holder shall not be diminished by such event; and (iii) if a dispute shall at any time arise with respect to any adjustment of the Conversion Price, such dispute shall be conclusively determined by the auditors of the Corporation or, if they are unable or unwilling to act, by a firm of independent certified public accountants selected by the Board of Directors of the Corporation and any such determination shall be binding upon the Corporation and the Holder. (g) Certificate as to Adjustment. The Corporation shall from time to time promptly after the occurrence of any event which requires an adjustment in the Conversion Price deliver to the Holder a certificate specifying the nature of the event requiring the adjustment, the amount of the adjustment necessitated thereby, the Conversion Price after giving effect to such adjustment and setting forth, in reasonable detail, the method of calculation and the facts upon which such calculation is based. (h) Notice to Holders. If the Corporation shall fix a record date for: (i) any Share Reorganization (other than the subdivision of outstanding Common Stock into a greater number of shares or the consolidation of outstanding Common Stock into a smaller number of shares), (ii) any Rights Offering, (iii) any Special Distribution, 10 (iv) any Capital Reorganization (other than a reclassification or redesignation of the Common Stock into other shares), (v) any cash dividend, or (vi) any Sale Event; then the Corporation shall, not less than ten (10) days prior to such record date or, if no record date is fixed, prior to the effective date of such event, give to the Holder notice of the particulars of the proposed event or the extent that such particulars have been determined at the time of giving the notice. 4.4. Reservation of Shares. The Corporation hereby represents and warrants that (i) the Board of Directors of the Corporation has duly authorized the issuance of this Convertible Note by the Corporation and the Corporation has reserved for issuance from the authorized but unissued Common Stock of the Corporation a sufficient number of shares of Common Stock to provide for conversion in full of this Convertible Note (giving effect to the option of the Holder to accept payment of all accrued and unpaid interest as shares of Common Stock) into Conversion Shares, and (ii) Holder shall receive upon conversion in full of this Convertible Note duly authorized and unissued shares of Common Stock, which shall be fully paid, non-assessable and issued free and clear of all liens, claims and encumbrances. 5. EVENTS OF DEFAULT. 5.1. Events of Default. Any one or more of the following shall constitute an Event of Default ("Event of Default") hereunder: (a) failure of the Corporation to pay any installment of principal of or interest on this Convertible Note or on any other indebtedness of the Corporation to Holder when due; or (b) failure of the Corporation to comply with any covenant, agreement or other obligation set forth in the Security Agreement; or (c) the bankruptcy or insolvency of, the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of, or the liquidation, termination, dissolution or death or legal incapacity of, the Corporation or any other party liable for the payment of this Convertible Note, whether as maker, endorser, guarantor, surety or otherwise. If any Event of Default shall have occurred and be continuing, then, and in every such occurrence, the Holder may, by notice to the Corporation, declare this Convertible Note to be, and the Convertible Note shall thereon become, immediately due and payable at the Repayment Price (as hereafter defined); provided that in the case of any of the Events of Default specified in Section 5.1(c) above, then, without any notice to the Corporation or any other act by Holder, the entire amount of the Convertible Note shall become immediately due and payable at the 11 Repayment Price; provided further, if any Event of Default has occurred and is continuing, and irrespective of whether this Convertible Note has been declared immediately due and payable hereunder, the Holder may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein, or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any power granted hereby or by law or otherwise. The Repayment Price shall mean the sum of (i) the principal amount of, and all accrued and unpaid interest on, the Convertible Note outstanding and (ii) if a positive number, the Premium Amount, where Premium Amount means the difference, if a positive number, between (A) the product of (x) the number of shares of Common Stock into which the Convertible Note is then convertible at the then current Conversion Price and (y) the average Closing Bid Price for the five (5) Trading Days through and including the Trading Day immediately preceding the applicable date the Convertible Notes are repaid and (B) the principal amount of, and accrued and unpaid interest on, the Convertible Note outstanding. 5.2. Powers and Remedies Cumulative. No right or remedy herein conferred upon or reserved to Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Every power and remedy given by this Convertible Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Holder. 5.3. Payment of Additional Amounts. (a) Any and all payments by the Corporation hereunder to the Holder and each "qualified assignee" thereof shall be made free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes") unless such Taxes are required by law or the administration thereof to be deducted or withheld. If the Corporation shall be required by law or the administration thereof to deduct or withhold any Taxes from or in respect of any sum payable with respect to the Convertible Note (i) the sum payable shall be increased as may be necessary so that after making all required deductions or withholdings (including deductions or withholdings applicable to additional amounts paid under this Paragraph) such Holder receives an amount equal to the sum it would have received if no such deduction or withholding had been made; (ii) the Corporation shall make such deductions or withholdings; and (iii) the Corporation shall forthwith pay the full amount deducted or withheld to the relevant taxation or other authority in accordance with applicable law. A "qualified assignee" of the Holder is a person that is organized under the laws of (I) the United States or (II) any jurisdiction other than the United States or any political subdivision thereof and that (y) represents and warrants to the Corporation that payments of the Corporation to such assignee under applicable law would not be subject to any Taxes and (z) from time to time, 12 as and when requested by the Corporation, executes and delivers to the Corporation and the Internal Revenue Service forms, and provides the Corporation with any information, necessary to establish such assignee's continued exemption from Taxes under applicable law. (b) The Corporation shall forthwith pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (all such taxes, charges and levies hereinafter referred to as "Other Taxes") which arise from any payment made under this Convertible Note or the transactions contemplated hereby. (c) The Corporation shall indemnify the Holder or its qualified assignee, for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Paragraph) paid by the Holder or its qualified assignee, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within thirty (30) days from the date such Holder or assignee makes written demand therefor. A certificate as to the amount of such Taxes or Other Taxes submitted to the Corporation by such Holder or its assignee shall be conclusive evidence of the amount due from the Corporation to such party. (d) Within thirty (30) days after the date of any payment of Taxes, the Corporation will furnish to the Holder the original or a certified copy of a receipt evidencing payment thereof. 5.4. Modification of Convertible Note. This Convertible Note may be modified with the written consent of the Holder and the Corporation. 5.5. Notices. Any notice or communication to the Corporation shall be duly given if in writing and delivered in the manner and at the addresses specified in the Security Agreement. 5.6. Successors. All agreements of the Corporation in this Convertible Note shall bind its successors. 5.7. Severability. In case any provision in this Convertible Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. 5.8. Representations and Warranties of Original Holder. The original Holder of this Convertible Note represents and warrants to the Corporation as follows: (a) The Holder is an "accredited investor" within the meaning of Rule 501(a) promulgated under the Securities Act and this Convertible Note is being acquired for its 13 own account and, as of the date hereof, not with a view toward any distribution thereof except in compliance with applicable United States federal and state securities laws. (b) The Holder understands that neither the Convertible Note nor the shares of Common Stock issuable upon conversion hereof, have been registered under the Securities Act of 1933, as amended, and, accordingly, such securities may not be transferred or sold except in compliance with the terms of this Convertible Note or pursuant to an exemption from the registration requirements of applicable United States federal and state securities laws. 5.9. Miscellaneous. This Convertible Note shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of said State. The parties hereto, including all guarantors or endorsers, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Convertible Note, except as specifically provided herein, and assent to extensions of the time of payment, or forbearance or other indulgence without notice. The Corporation hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Convertible Note. This Convertible Note is given in amendment of the terms of and in renewal and extension, but not extinguishment, of all amounts left owing and unpaid under that certain Convertible Note issued on December 14, 2000 (the "Prior Note") by the Corporation to the Holder. All of the rights, remedies, liens, equities, powers and privileges securing the payment of the indebtedness under the Prior Note hereby renewed and extended are hereby recognized, renewed, extended and preserved in full to secure payment of this Convertible Note. The Holder by acceptance of this Convertible Note agrees to be bound by the provisions of this Convertible Note which are expressly binding on such Holder. [Signature Page Follows] 14 IN WITNESS WHEREOF, the Corporation has caused this instrument to be duly executed. Dated: April 16, 2001. EDGE TECHNOLOGY GROUP, INC. By: /s/ Graham C. Beachum II ------------------------------- Name: Graham C. Beachum II ------------------------------ Title: ----------------------------- CATALYST MASTER FUND, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 April 16, 2001 Edge Technology Group, Inc. 901 Yamato Road, Suite 175 Boca Raton, Florida 33431 Gentlemen: We refer to the Convertible Note dated December 14, 2000 (the "Existing Note") in the stated principal amount of $620,000 issued by Edge Technology Group, Inc. ("Edge") to Catalyst Master Fund, L.P. ("Catalyst"), which evidences a loan by Catalyst to Edge in such amount. Edge has requested Catalyst to lend up to an additional $1,500,000 to it in multiple advances for general working capital purposes, which Catalyst is willing to do on the basis and subject to the provisions hereinafter set forth. The parties hereto agree as follows: 1. Existing Indebtedness. Edge acknowledges and agrees that as of the date of this letter, the unpaid principal balance of the indebtedness of Edge payable to Catalyst evidenced by the Existing Note is $620,000 with accrued unpaid interest thereon since the date of issuance. Edge hereby agrees that such amounts (the "Outstanding Indebtedness") are unconditionally owing by Edge to Catalyst, without offset, defense or counterclaim of any kind, nature or description whatsoever. 2. Additional Advances. Catalyst agrees to make additional advances of up to $1,500,000 in the aggregate (the "Additional Advances") to Edge on the following basis: advances may be requested by Edge, during the period beginning on the date of this letter and ending on February 1, 2002, upon not fewer than three (3) business days notice, using the form attached hereto as Exhibit A, properly completed. Such advances shall be in the minimum principal amount of $50,000. Catalyst shall not be obligated to make any advance hereunder if, in its reasonable judgment, (a) any Event of Default (as defined in the Amended and Restated Note (as hereinafter defined)) then exists or would occur by reason of the making of the requested advance or (b) a material adverse change has occurred in the financial condition or business operations of Edge since the date of this letter. The Outstanding Indebtedness and the Additional Advances shall be evidenced by the Amended and Restated Convertible Note executed by Edge as of the date of this letter in the stated principal amount of $2,120,000 (the "Amended and Restated Note"). Amounts repaid under the Amended and Restated Note may not be reborrowed. 3. Confirmation of Security Interests. Edge hereby acknowledges, confirms and agrees that Catalyst has and shall continue to have valid, enforceable and perfected first priority liens upon and security interests in the collateral security previously granted by Edge to Catalyst, including without limitation the Collateral set forth in the Security Agreement dated as of December 14, 2000 (the "Security Agreement") between Edge and Catalyst. In such regard, the Security Agreement is amended as follows, effective as of the date of this letter: (a) The term "Note" as used therein shall mean the Amended and Restated Convertible Note dated the date hereof in the stated principal amount of $2,120,000 payable by the Debtor to the Secured Party, as the same may be amended, renewed, extended, restated, replaced, substituted, supplemented, or otherwise modified from time to time; and (b) the term "Obligations" as used therein shall mean all obligations, indebtedness and liabilities of the Debtor under the Note and under this Security Agreement. The terms and provisions of the Security Agreement, as amended pursuant to this paragraph, are ratified and confirmed and shall continue in full force and effect. Edge acknowledges and agrees that the Security Agreement and all agreements and instruments executed in connection therewith are and shall remain in full force and effect and are and shall continue to be the legal, valid and binding obligations of Edge, enforceable against it in accordance with their respective terms. 4. Representations and Warranties. In order to induce Catalyst to enter into this letter agreement and make the Additional Advances, Edge hereby represents and warrants to Catalyst that, as of the date hereof, (a) no Event of Default is in existence and (b) all representations and warranties contained in Article III of the Security Agreement are true and correct. CATALYST MASTER FUND, L.P. By: /s/ J. Keith Benedict ------------------------------ Name: J. Keith Benedict ------------------------------ Title: ----------------------------- ACKNOWLEDGED AND AGREED: EDGE TECHNOLOGY GROUP, INC. By: /s/ Graham C. Beachum II ------------------------------ Name: Graham C. 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