-----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, O2AtQcjhSRcNvVc/hU+6ZmpaIsX6734j5pGmU8KPw76wOeqzmbKKDcWyj6M3VHpm YlhEeuTzPpNbeDY8ICbaAA== 0000909143-01-500142.txt : 20010821 0000909143-01-500142.hdr.sgml : 20010821 ACCESSION NUMBER: 0000909143-01-500142 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDGE TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133778895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20995 FILM NUMBER: 1719385 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 June 30, 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 August 15, 2001 the issuer had 16,385,143 shares of Common Stock outstanding. 1 EDGE TECHNOLOGY GROUP, INC. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page No. ITEM 1. Financial Statements: Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000...................................... 3 Unaudited Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000... 4 Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000............. 5 Notes to Unaudited Interim Financial Statements......... 6 ITEM 2. Management's Discussion and Analysis or Plan of Operations........................................... 10 PART II OTHER INFORMATION ITEM 1. Legal Proceedings..................................... 18 ITEM 2. Changes in Securities and Use of Proceeds............. 18 ITEM 3. Defaults Upon Senior Securities....................... 18 ITEM 4. Submission of Matters to a Vote of Security Holders... 18 ITEM 5. Other Information..................................... 18 ITEM 6. Exhibits and Reports on Form 8-K...................... 18 Signatures.................................................... 19 2 EDGE TECHNOLOGY GROUP, INC. BALANCE SHEETS December 31, June 30, 2000 2001 ----------- ---------- ASSETS (unaudited) Current Assets: Cash and cash equivalents........ $ 169,846 $ 117,937 Accounts receivable.............. 13,504 7,201 Inventories...................... 9,096 9,849 Prepaid expenses - advance royalties....................... 5,024 -- Other current assets............. 85,390 49,838 ------------ ------------ Total current assets............. 282,860 184,825 Fixed Assets, net................ 67,394 102,770 Other Assets..................... -- 16,929 Investment - Related Party....... 4,587,262 2,280,000 Note Receivable.................. 1,400,000 1,400,000 ------------ ------------ Total Assets............ $ 6,337,516 $ 3,984,524 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................. $ 390,991 $ 373,875 Accrued expenses................. 345,011 243,552 Other current liabilities........ 73,496 35,301 Notes Payable-related parties.... -- 1,239,000 ------------ ------------ Total Current Liabilities........ $ 809,498 $ 1,891,728 Notes Payable-related parties.... 839,000 -- ------------ ------------ Total Liabilities....... $ 1,648,498 $ 1,891,728 ------------ ------------ Stockholders' Equity: Common Stock, $.01 par value, 22,500,000 shares authorized, 16,016,335 shares issued and outstanding at December 31, 2000 and 16,385,143 shares issued and outstanding at June 30, 2001.... 160,163 163,851 Additional paid in capital....... 37,978,720 41,607,532 Deferred stock option compensation.................... (316,696) (257,290) Deferred offering costs.......... -- (2,966,666) Accumulated deficit.............. (33,133,169) (36,454,631) ------------ ------------ Total Stockholders' Equity.. 4,689,018 2,092,796 ------------ ------------ Total liabilities and stockholder's equity.................. $ 6,337,516 $ 3,984,524 ============ ============ 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 For the Six Months Ended June 30, June 30, 2000 2001 2000 2001 ------------- ------------- ----------- ------------ Sales.................................. $ 540,643 $ 164,243 $ 645,895 $ 264,297 Cost of Sales.......................... 417,343 42,250 557,398 74,398 ------------- ------------ ------------ ------------ Gross Profit .......................... 123,300 121,993 88,497 189,899 ------------- ------------ ----------- ------------ Operating Expenses: General and administrative........ 271,962 442,460 692,191 850,284 Selling and marketing............. 112,318 37,390 225,639 58,250 ------------- ------------ ----------- ------------ Total operating expenses..... 384,280 479,850 917,830 908,534 ------------- ------------ ----------- ------------ Operating loss............... (260,980) (357,857) (829,333) (718,635) ------------- ------------ ----------- ------------ Other income (Expense): Interest income................... 541 281 2,400 981 Interest expense.................. (222,238) (19,234) (306,193) (37,350) Amortization of deferred financing fees............................. (42,176) -- (85,866) -- (Loss) on sale of fixed assets........................... (36,313) (951) (26,719) (362) Financing fees.................... (2,450) (2,680) (5,224) (5,705) Unusual and non-recurring expenses (177,627) (54,875) (178,999) (64,437) Impairment of assets.............. -- (2,495,954) -- (2,495,954) ------------- ------------ ------------ ------------ Total other income (expense). (407,637) (2,573,413) (600,601) (2,602,827) ------------- ------------ ------------ ------------ Net loss..................... (668,617) (2,931,270) (1,429,934) (3,321,462) Provision for Preferred Stock Dividends............................ (393,570) -- (393,570) -- ------------- ------------ ------------ ------------ Net loss to common stockholders....... $ (1,062,187) $(2,931,270) $ (1,823,504) $ (3,321,462) ============= ============ ============ ============ Net loss per share, basic and diluted.. $ (0.21) $ (0.18) $ (0.36) $ (0.21) ============= ============ ============ ============ Weighted average common shares 4,998,324 16,385,143 4,998,324 16,200,739 outstanding.......................... ============= ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4
EDGE TECHNOLOGY GROUP, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, --------------------------- 2000 2001 ------------- ------------ Operating Activities: Net cash used in operating activities.......... (153,635) (606,174) ------------- ------------ Investing activities: Capital expenditures................................... (28,127) (60,429) Proceeds from the sale of assets....................... 122,958 14,694 ------------- ----------- Net cash provided by (used in) investing activities...................................... 94,831 (45,735) Financing activities: Equity contributions................................... -- 200,000 Repayment of borrowings................................ (174,779) -- Borrowings on short-term notes payable, net............ 231,209 400,000 ------------- ------------ Net cash provided by financing activities......... 56,430 600,000 ------------- ------------ Net change in cash and cash equivalents........... (2,374) (51,909) ------------- ------------ Cash and cash equivalents at beginning of period............ 19,724 169,846 ------------- ------------ Cash and cash equivalents at end of period.................. $ 17,350 $ 117,937 ============= ============ Supplemental disclosure of cash flow information: Cash paid for interest................................. $ 24,563 $ 275 ============= ============
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 six month period ended June 30, 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. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company will be required to adopt these standards as of January 1, 2002. As the Company does not have any recorded intangible assets, the adoption of these standards is not expected to have an impact on the Company's operations. (2) Uncertainty of Proposed Plan of Operation The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $36.5 million at June 30, 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 anticipated products and 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 6 competitive pressures, or continue operations, any of which could have a material adverse effect on its business, operating results, financial condition and liquidity. (3) 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 PurchasePooling Solutions, Inc. ("PurchasePooling"). 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 268,808 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. Based on valuation obtained on PurchasePooling in July 2001, the Company determined that the investment was impaired. Accordingly, the Company recorded an impairment charge of $2,495,954 which is included in impairment of assets in the Statement of 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 and six-month periods ended June 30, 2001, the Company received $60,000 and $120,000, respectively, of management fees from PurchasePooling which is reflected as a reduction in general and administrative expenses in the statement of operations. (4) 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 June 30, 2000 and 2001, due to the Company's net losses, shares of common stock issuable upon conversion of convertible debt and the exercise of outstanding 7 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. (5) 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. (6) Financings a. Infinity Loans In 2000, Infinity Investors Limited, a related party, made certain loans to the Company for working capital purposes. These loans totaled $219,000. 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. b. 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. As of June 30, 2001, the total amount outstanding under this loan agreement is $1,020,000. 8 c. Infinity Option On May 31, 2001, Edge issued to Infinity Investors Limited an option to put to Edge a certain secured note of Aura Systems, Inc. totaling approximately $10 million (the "Aura Note") held by Infinity (the "Infinity Option"). Pursuant to the Infinity Option, Infinity may elect on May 31, 2002 to exercise its option to put the Aura Note to Edge in exchange for 3,333,333 shares of Edge common stock. As consideration for the Infinity Option, Infinity is obligated to pay to Edge cash consideration of $1 million, consisting of $200,000 due every three months beginning May 31, 2001 through May 5, 2002. If Infinity exercises the Infinity Option, Infinity is obligated to transfer the Aura Note and related security agreements to the Company, and pay to the Company any cash payments of the Current Principal Amount (as defined in the operative documents) received by Infinity after May 31, 2001 and prior to exercise of the Infinity Option. The Company received the first $200,000 payment during the three-month period ended June 30, 2001. As a result of issuing this option, the Company recorded deferred offering expense of $3,166,666 related to the fair value of the option. The deferred offering expense will be reduced as an offset to the proceeds from Infinity as they are received. As of June 30, 2001, the remaining deferred offering expenses is $2,966,666, which is reflected as a contra equity amount in the June 30, 2001 Balance Sheet. (7) Common Stock a. Reverse Stock Split During September 2000, Edge effected a four(4)for one(1) stock split. All share and per share amounts have been restated accordingly. b. Reorganization 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 268,808 shares of the Company's common stock. In April 2001, the agreement was finalized and the shares of common stock were issued. (8) 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 $227,436 was recorded as expense during the six months ended June 30, 2001. (9) 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 issued 100,000 shares of restricted common stock and paid 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 of which $54,000 is included in accrued expenses as of June 30, 2001. (10) 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 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. Of these options, 25% 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. 9 (11) Recent Developments - Planned Sale of Certain Assets The Company's Board of Directors has unanimously approved, subject to stockholder approval, the sale of assets related to the Company's "One-on-One" golf lesson CD-ROM and video production business (the "One-on-One Business") to Visual Edge, Inc. ("Visual Edge") under the terms of an Asset Purchase and Assignment and Assumption Agreement (the "Asset Purchase Agreement"). This transaction involves the sale of a significant portion of the Company's assets, business and operations and, arguably constitutes a sale of substantially all of the assets of the Company. Because a transaction constituting a sale of substantially all of assets requires approval of a majority of a corporation's outstanding voting shares under Delaware law, the Board of Directors decided to seek approval by the Company's stockholders for the sale of the assets to Visual Edge. Visual Edge is not a related party; however, the President of Visual Edge, Ronald Seale, is a former President of the Company. The Company will receive (a) an initial cash payment of $300,000 (offset by $53,000 by Visual Edge for One-on-One Business expenses paid)]; (b) a promissory note in the amount of $250,000 payable October 24, 2001, and bearing an interest rate of 8% per annum, secured by all of the assets of Visual Edge; and (c) future royalties not to exceed $3,000,000, payable as an increasing percentage of revenues. 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 Recent Developments ------------------- (a) Planned Sale of One-on-One Business. ----------------------------------- Background. Edge 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 our 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. 10 The One-on-One Business. We developed several personalized "One-on-One" golf lessons for both right- and left-handed golfers. Our personalized products include a lesson stressing basic golf fundamentals for either males or females, a lesson geared towards senior golfers, an advanced lesson for lower-handicap players and a "follow-up" lesson which measures a golfer's improvement from prior lessons. Our One-on-One personalized golf lesson analyzes a golfer's swing by comparing it to a professional golfer's swing at several different club positions from two camera angles. The golfer receives a CD-ROM at the time of filming and receives, within a few days, an e-mail containing a link to that golfer's processed golf swing. The CD-ROM, once installed on the golfer's home computer, captures the e-mailed swing and integrates it into the lesson for the side-by-side comparison with the professional golfer. A professional golfer's pre-recorded instructional commentary, analysis and computer graphics highlight important golf fundamentals intended to improve a golfer's performance. In addition, the CD-ROM features an additional golf instructor who provides pre-recorded drills and instruction designed to correct the specific errors made by the golfer. Reasons for Selling the One-on-One Business. In September 2000, our board of directors began to explore a range of strategic alternatives while, at the same time, attempting to develop the One-on-One Business. In early 2001, we began exploring the possibility of our former President, Ronald Seale, acquiring the One-on-One Business. Discussions began informally, and as our focus began to shift toward the proposed business as described above, negotiations with Mr. Seale (Visual Edge's President) commenced in earnest late in the first quarter. Although we held discussions with other interested parties, Visual Edge sustained the highest level of interest in acquiring this business. During this time, the Board of Directors increasingly believed that the best possibility for profitability of Edge was to divest the One-on-One Business and its related expenses and focus on the new business strategy. The One-on-One Business, which we are selling to Visual Edge, contributed substantially to our operating loss for the fiscal year ended December 31, 2000, and the three and six months ended March 31, 2001 and June 30, 2001. In July 2001, we resolved the principal terms for a sale of the One-on-One Business to Visual Edge. (b) Other Developments. ------------------ Edge also effected the following changes in management during the first part of 2001: * Effective August 6, 2001, Edge appointed David Pilotte as our Executive Vice President and Chief Financial Officer. 11 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. RESULTS OF OPERATIONS Quarter ended June 30, 2001 compared with quarter ended June 30, 2000. Sales for the three months ended June 30, 2001 decreased 70% to $164,243, as compared to $540,643 for the three months ended June 30, 2000. This decrease in sales in 2001 as compared to 2000 is due to the Company's decision to participate in fewer events while pursuing other opportunities to develop licensing revenues for its software. The cost of sales for the three months ended June 30, 2001 decreased 90% to $42,250, as compared to $417,343 for the three months ended June 30, 2000. This decrease in the cost of sales is primarily attributable to the lower cost of sales associated with the reduction of events being performed. Operating expenses for the three months ended June 30, 2001 increased 25% to $479,850, as compared to $384,280 for the three months ended June 30, 2000. Even though the event business has decreased, the operating expenses have not proportionately decreased due to overhead costs. In addition, under Edge's new business concept, operating expenses and salary expenses have increased to develop the new business plan going forward. This increase is primarily attributable to additional executive salaries and salaries relating to personnel associated with Edge's strategy of acquiring and operating technology businesses. As of August 15, 2001, Edge has four executive employees and nine employees. Interest expense for the three months ended June 30, 2001 decreased 91% to $19,234 from $222,238 for the three months ended June 30, 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. 12 As a result of the above, operating loss for the three months ended June 30, 2001 increased 37% to $357,857 as compared to $260,980 for the three months ended June 30, 2000. The Provision for Preferred Stock Dividends of $393,570 for the three months ended June 30, 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. Six months ended June 30, 2001 compared to the six months ended June 30, 2000. Sales for the six months ended June 30, 2001 decreased $381,598 or 59% to $264,297 from $645,895 for the six months ended June 30, 2000. This decrease in sales is primarily due to the Company's decision to participate in fewer events while pursuing other opportunities to develop licensing revenues for its software. The cost of sales for the six months ended June 30, 2001 decreased $483,000 or 87% to $74,398 from $557,398 for the six months ended June 30, 2000. This decrease in the cost of sales is attributable to Visual Edge's reduced sales and the Company's efforts to reduce direct costs related to the events. Operating expenses for the six months ended June 30, 2001 decreased $8,846 or 1% to $908,534 from $917,380 for the six months ended June 30, 2000. Operating expenses for the two periods have remained relatively flat even though the One-on-One expenses have decreased because of cost cutting efforts. The new Edge business strategy has incurred operating expenses to develop its business plan. As a result of the factors described above, the operating loss for the six months ended June 30, 2001 decreased $110,698 or 13% to $718,635 from $829,333 for the six months ended June 30, 2000. 13 Interest expense for the six months ended June 30, 2001 decreased $268,843 or 88% to $37,350 from $306,193 for the six months ended June 30, 2000. This decrease in interest expense is primarily attributable to the elimination of penalty interest payable on the convertible notes that were converted into common stock in September 2000. Net loss before preferred stock dividends for the six months ended June 30, 2001 increased $1,703,528 or 119% to $3,133,462 from $1,429,934 for the six months ended June 30, 2000. Net loss per share, basic and diluted, for the six months ended June 30, 2001 decreased 47% to $0.19 from $0.36 for the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES The Company has suffered recurring losses from operations and has an accumulated deficit of approximately $36.5 million at June 30, 2001. The Company's plan of operation and prospects are largely dependent upon the Company's ability to achieve significant market acceptance for its proposed products, successfully hire and retain skilled technical, marketing and other personnel, and successfully implement its new business plan and strategy. Although implementation of the new plan is progressing, the can be no assurance that the Company will be able to continue to fully implement its new 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. The Company's sale of the One-on-One Busniess will help reduce the consistent losses incurred by the business operations related to the golf product. The Company's new business focus on information technology consulting services, business process 14 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. 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 June 30, 2001, Edge had cash and cash equivalents of $117,937, and a working capital deficit of $1,760,903, 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 six months ending June 30, 2001 was $606,174. Net cash provided by investing activities was $45,735 and $600,000 was provided by financing activities for a total decrease in cash and cash equivalents of $51,909. 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 August 15, 2001, Edge has approximately $1,100,000 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 $219,000 of principal as of June 30, 2001 to Infinity Investors Limited ("Infinity"), a related party, as a result of loans that were not repaid in our September 2000 reorganization. These loans are due January 31, 2002. On May 31, 2001, Edge issued to Infinity an option to put to Edge a certain secured note of Aura Systems, Inc. totaling approximately $10 million (the "Aura Note") held by Infinity (the "Infinity Option"). Pursuant to the Infinity Option, Infinity may elect on May 31, 2002 to exercise its option to put the Aura Note to Edge in exchange for 3,333,333 shares of Edge common stock. As consideration for the Infinity Option, Infinity is obligated to pay Edge cash consideration of $1 million, consisting of $200,000 due every three months beginning May 31, 2001 through May 5, 2002. If Infinity exercises the Infinity Option, Infinity is obligated to transfer the Aura Note and related security agreements to Edge, and pay to Edge any cash payments of the Current Principal Amount (as defined in the operative documents) received by Infinity after May 31, 2001 and prior to exercise of the Infinity Option. Edge received the first $200,000 payment during the three-month period ended June 30, 2001. Edge expects to meet future liquidity requirements through (i) cash reserves and maturities or sales of marketable securities, (ii) income from the Infinity Option, and (iii) utilization of its Amended Loan Agreement. It is anticipated that those sources of funds will also fund capital expenditure programs, if any. 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. 15 During the past two years Edge has experienced declining sales and increasing operating losses resulting from the One-on- One Business. Edge has accordingly entered into an agreement to sell its One-on-One Business. Edge must be successful in implementing its new business strategy in order to reverse the decline trend. 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 fail to implement successfully its business strategy or 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 June 30, 2001, Edge had stockholders equity of $2,038,796, as compared to stockholders equity of $4,689,018 at December 31, 2000. SEASONALITY With the planned sale of the One-on-One Business, Edge does not anticipate a seasonal component to its business. 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. 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. 16 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. Only risk factors that have materially changed from those contained in our Form 10-KSB for the fiscal year ended December 31, 2000 are included below, and readers are encouraged to read the following risk factors in conjunction with those in the Form 10-KSB for the fiscal year ended December 31, 2000. Readers are cautioned that such statements are only predictions and that actual events or resultsmay differ substantially. In evaluating those statements, readers should specifically consider the various factors identified in this quarterly report, as well as our filing with the Securities and Exchange Commission, including our Form 10-KSB for the fiscal year ended December 31, 2000 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 June 30, 2001, we had an accumulated deficit of approximately $36.5 million. For the six months ended June 30, 2001, we recorded a net loss of $3,133,462. 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 implementing the revised business model. 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, including the sale of the One-on-One Business, 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; 17 * 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 generally experienced by early stage business models. Because of our recent reorganization and our sale of the One- on-One Business, 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 June 30, 2001, Edge had a total of cash and cash equivalents of $117,937. 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. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Unchanged since originally reported in our Annual Report on Form 10-KSB 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 10.24 Option Agreement dated as of May 31, 2001 between Infinity Investors Limited and Edge Technology Group, Inc. (filed herewith) (b) Reports on Form 8-K None 19 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 August 20, 2001 20 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.24 Option Agreement dated as of May 31, 2001 between Infinity Investors Limited and Edge Technology Group, Inc. (filed herewith) 21 EX-10.24 3 exhibit1024.txt Exhibit 10.24 OPTION AGREEMENT This Option Agreement (this "Agreement") is made as of this 31st day of May 2001, by and between INFINITY INVESTORS LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity") and EDGE TECHNOLOGY GROUP, INC. (formerly known as Visual Edge Systems Inc.), a Delaware corporation (the "Company"). WHEREAS, Infinity is the holder of a certain Secured Note (the "Note") in the current principal amount of $9,995,456 (the "Current Principal Amount") due November 30, 2002 (the "Maturity Date") issued by Aura Systems, Inc., a Delaware corporation ("Aura"), in the original principal amount of $10,441,928 on February 22, 2000, the payment of which is secured by the collateral security described in that certain Security Agreement and Stock Pledge Agreement each dated February 22, 2000 and each by and among Aura and various other parties in favor of Infinity and various other parties (the Security Agreement, Stock Pledge Agreement and all other documents, certificates and instruments executed and delivered in connection with any of the foregoing, to be collectively referred to as the "Security Documents"); and WHEREAS, in exchange for Infinity's agreement to (i) pay to the Company $200,000 contemporaneous herewith, (ii) pay to the Company $200,000 on each of August 5, 2001, November 5, 2001, February 5, 2002 and May 5, 2002 (each a "Payment Date") (such amounts representing approximately the quarterly interest receivable by Infinity on the Note) and (iii) contemporaneous with any exercise of the Option (as hereafter defined), (x) transfer and assign to the Company all of Infinity's right, title and interest in the Note and Security Documents and (y) pay to the Company any cash payments of the Current Principal Amount of the Note received by Infinity after the date hereof and prior to the time of exercise of the Option ("Principal Prepayments") (collectively, the "Option Consideration"), the Company has agreed to grant Infinity an option to purchase 3,333,333 shares of common stock ("Common Stock") of the Company pursuant to the terms set forth herein. NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows: 1. Grant of Option. In exchange for the Option Consideration, the Company hereby grants to Infinity an option (the "Option") to purchase from the Company 3,333,333 shares of Common Stock (the "Option Shares") on the terms described herein. 2. Term and Exercise. (a) This Option may be exercised by Infinity for all of the Option Shares on May 31, 2002, but not otherwise (the "Exercise Date"). (b) Infinity may exercise this Option (which shall be effective as of the Exercise Date) by delivering to the Company a Notice of Exercise in the form attached hereto as Exhibit A (the "Notice of Exercise") on or immediately prior to the Exercise Date and by transferring to the Company (I) all of its right, title and interest in, to and under the Note and Security Documents pursuant to the Assignment and Note Purchase Agreement in the form attached hereto as Exhibit B (the "Assignment Agreement") and (II) the amount of any Principal Prepayments previously received by Infinity. (c) Infinity and the Company shall each utilize all commercially reasonable efforts to consummate as promptly as practicable (and in all events within five (5) days of the Exercise Date), the closing of the transfer of the Note and Security Documents in exchange for the Option Shares upon exercise of the Option. In furtherance thereof, Infinity and the Company each covenant and agree to execute all commercially reasonable documents necessary to cause such transfers, including, without limitation, each party's execution of the Assignment Agreement. (d) This Agreement and the Option granted hereby shall terminate on the earlier to occur of (i) the failure of Infinity to make a payment of $200,000 to the Company on each Payment Date (which failure is not cured within ten (10) days of the delivery of written notice thereof by the Company to Infinity), (ii) Infinity, by its voluntary actions, materially and adversely alters the payment terms of the Note (such as Infinity accepting prepayments of principal prior to the Maturity Date or Infinity voluntarily agreeing to materially extend the Maturity Date) or (iii) an event of default under the Note or Security Documents has occurred and Infinity has exercised its remedies thereunder and has either converted the Note to common stock of Aura or has exercised its remedies and foreclosed on the collateral granted pursuant to the Security Documents. Upon any such termination, (x) the Company shall be entitled to retain any portion of the Option Consideration previously paid to the Company as its sole recourse for such termination and (y) Infinity shall have no further liability whatsoever to the Company for any failure to pay to the Company any portion of the Option Consideration. 3. Stock Splits and Reorganizations. The provisions of this Agreement relating to the number of Option Shares shall be appropriately adjusted for any stock split, corporate reorganization or similar transaction of the Company which may occur after the date hereof. By way of example, if the Company consummates a 1 for 2 reverse stock split after the date hereof, the number of Option Shares shall be decreased from 3,333,333 to 1,666,667. 4. Non-Transferability. Without the prior written consent of the Company, which consent may be withheld by the Company in its sole discretion, this Agreement and the Option granted hereby may not be assigned, pledged, hypothecated, sold or otherwise transferred or encumbered by Infinity; provided, however, Infinity may assign the Option to any affiliate or to any of its shareholders without the Company's prior consent. An attempted assignment of the Agreement or the Option in contravention of this Agreement shall be null and void and of no force or effect. 5. Entire Agreement. The provisions herein constitute the entire agreement among the Company and Infinity and supersede all previous expectations, understandings, communications, representations and agreements whether verbal or written among the parties with respect to the subject matter hereof. 2 6. Notice. Unless otherwise specified herein, any notice required to be given hereunder by any party shall be deemed to have been well and sufficiently given if mailed by prepaid registered mail, faxed to, or delivered at, the address of the other party hereinafter set forth: If to the Company: Edge Technology Group, Inc. 901 Yamato Road, Suite 175 Boca Raton, Florida 33431 Attention: Graham C. Beachum II If to Infinity: Infinity Investors Limited Hunkins Waterford Plaza Main Street P.O. Box 556 Charlestown, Nevis, West Indies Attention: Gwen McLaughlin or at such other address as the other party may from time to time direct in writing, and any such notice shall be deemed to have been received: (a) if by regular mail, on the seventh business day after the time of mailing; (b) if couriered by a recognized domestic overnight courier with next day delivery requested, the next business day after the time of receipt of pick up by such courier; (c) if faxed, upon the date of such fax, subject to receipt of transmission confirmation; and (d) if delivered in person, upon the date of delivery. 7. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the each of the parties and their respective heirs, executors, administrators, successors and permitted assigns, as the case may be. 8. Governing Law. This Agreement shall in all respects be governed by and be construed in accordance with the laws of the State of Delaware without regard to conflicts of laws principles and the parties hereto submit to the exclusive jurisdiction of the Courts of Delaware. 9. Severability. If any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction, the validity, legality and enforceability of such provision or provisions shall not in any way be affected or impaired thereby in any other jurisdiction and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 10. Number and Gender. Wherever the singular or the masculine is used herein the same shall be deemed to include the plural or the feminine or the body politic or corporate where the context or the parties so require. 3 11. Headings. The headings of the parts of this Agreement are inserted for convenience only and shall not affect the construction hereof. 12. Counterparts. This Agreement may be signed in one or more counterparts, each of which when executed and delivered will be considered an original and all of which together will constitute one and the same agreement. (signature page follows) 4 IN WITNESS WHEREOF the parties hereto have duly executed this Agreement as of the date above written. EDGE TECHNOLOGY GROUP, INC. By: /s/ James A. Loughran ---------------------- Name: James A. Loughran Title: Director INFINITY INVESTORS LIMITED By: /s/ Graham C. Beachum II ------------------------- Name: Graham C. Beachum II Title: President and Chief Executive Officer 5 EXHIBIT A --------- NOTICE OF EXERCISE Gentlemen: The undersigned hereby exercises its option for 3,333,333 shares of Common Stock of Edge Technology Group, Inc. (formerly known as Visual Edge Systems Inc.), pursuant to and in accordance with the terms and conditions of the Option Agreement dated as of May 31, 2001, and hereby sells and assigns all of its right, title and interest in the Note and Security Documents pursuant to the Assignment and Note Purchase Agreement dated of even date herewith, and requests that a certificate for such shares be issued in the name of the undersigned and delivered to the undersigned. INFINITY INVESTORS LIMITED By: ------------------------------ Name: ------------------------------ Title: ----------------------------- Dated: May 31, 2002 6 EXHIBIT B --------- ASSIGNMENT AND NOTE PURCHASE AGREEMENT THIS ASSIGNMENT AND NOTE PURCHASE AGREEMENT (this "Agreement") dated May 31, 2002 among INFINITY INVESTORS LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Assignor") and EDGE TECHNOLOGY GROUP, INC., a Delaware corporation (the "Assignee"). W I T N E S S E T H: ------------------- WHEREAS, Assignor is the holder of a Secured Note due November 30, 2002 (the "Note") issued by Aura Systems, Inc., a Delaware corporation (the "Company") the payment of which is secured by the collateral security described in that certain Security Agreement and Stock Pledge Agreement listed on Schedule A attached hereto (the "Security Documents"); and WHEREAS, pursuant to the terms of that certain Option Agreement dated May 31, 2001 by and between Assignor and Assignee (the "Option Agreement"), Assignor has agreed to sell and assign to Assignee, and Assignee has agreed to purchase from Assignor, on the basis provided herein, all of Assignor's right, title and interest in the Note and the Security Documents for the consideration and on the terms and conditions hereinafter set forth. A G R E E M E N T S: ------------------- NOW, THEREFORE, in consideration of the recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Assignor and Assignee agree as follows: Assignment and Sale of Notes and Security Documents. Assignor hereby GRANTS, CONVEYS, TRANSFERS and ASSIGNS (the "Assignment") to Assignee, effective May 31, 2002, all of Assignor's right, title and interest in, to and under the Note and the Security Documents, together with all other liens, security interests, financing statements, security agreements, covenants, agreements, assignments, rights, benefits and privileges in any way now or hereafter belonging or accruing to the benefit of Assignor in respect of the Note and the Security Documents and any indebtedness now or hereafter evidenced thereby and any security therefor. The Assignment by Assignor to Assignee is made WITHOUT RECOURSE to Assignee. Payment for Assignment. As consideration for the Assignment made herein and any other consideration received by Assignee from Assignor pursuant to the terms of the Option Agreement, Assignee shall issue on the date hereof to Assignor 3,333,333 (subject to adjustment for stock splits, etc.) shares of common stock of Assignee (the "Shares"). 7 Representations and Warranties of Assignors. Assignor hereby represents and warrants to Assignee that as of the date hereof: Assignor is the sole owner and holder of the Note and is a party to or the beneficiary of the Security Documents, all of which are, to Assignor's knowledge, in full force and effect. To Assignor's knowledge, none of the provisions of the Note or any of the Security Documents have been amended, modified, extended, waived, released or renewed. Assignor has not previously sold, transferred or assigned any of its right, title or interest in the Note or Security Documents to any other person or entity. The unpaid principal balance of the Note as of May 31, 2002 is $9,995,456 and accrued and unpaid interest thereon as of such date is approximately $65,000. To the knowledge of Assignor, the Company has no defenses to, or rights of offset against its obligations under, the Notes or the Security Documents. Assignor has taken all requisite corporate or other action to authorize Assignor to execute and deliver this Agreement and to permit it make the Assignment as contemplated hereby. This Agreement has been duly executed by Assignor and constitutes the valid, binding and enforceable obligation of Assignor, except as may be limited by applicable bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. No authorization, approval or consent of, or notice to, any person under the provisions of the organizational documents of Assignor, or under any other relevant agreements, documents or instruments of Assignor, or under applicable law that has not been obtained or given is required to be obtained or given as of the date hereof with respect to the execution and delivery by Assignor of this Agreement, the consummation by Assignor of any transaction contemplated hereby or the performance and discharge by Assignor of its obligations hereunder. Assignor is acquiring the Shares for its own account and for investment purposes only; provided, however, nothing contained herein shall limit or prohibit Assignor from making a pro rata distribution of such Shares to its shareholders. Assignor is not acquiring the Shares with a view to dividing its participation with others or with a view to or in connection with any offering or distribution in violation of Section 5 of the Securities Act of 1933, as amended (the "Act"), or any other applicable federal or state securities laws; provided, however, nothing contained herein shall limit or prohibit Assignor from making a pro rata distribution of such Shares to its shareholders. Assignor has not been induced to acquire the Shares by the use of advertisements or any form of public solicitation by Assignee or its agents or representatives, and Assignor has not and does not intend to pay any commission or other remuneration to any person in connection with its acquisition of the Shares. The Shares will be held by Assignor or its shareholders subject to all applicable provisions of the Act, the Rules and Regulations of the Securities and Exchange Commission thereunder, and all applicable state securities laws and rules thereunder. Assignor understands that the Shares have not been registered under the Act, or under the securities laws of any state, and that the Shares cannot be sold unless they are subsequently registered under the Act and/or applicable state securities laws or unless exemptions from such registration provisions are available. Assignor understands that the certificates representing the Shares and any and all securities issued in replacement therefor or exchanged therefor shall bear the following legend, or one substantially similar thereto: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED UNLESS THEY ARE SO REGISTERED OR, IN THE OPINION OF COUNSEL ACCEPTABLE TO THIS CORPORATION, SUCH TRANSFER IS EXEMPT FROM REGISTRATION. Assignor understands that ownership of the Shares involves substantial risk. Assignor acknowledges that Assignor has evaluated such risk and has determined that the Shares are suitable investments. Assignor considers itself sophisticated in financial and business matters and is capable of evaluating the merits and risks of an investment of this type and of protecting its own interests in connection with this transaction. Assignor and its shareholders are each "accredited investors" as such term is defined in Rule 501(a) of the Act. Assignor understands that Assignee is relying on the accuracy of the representations made herein and, but for the existence of this letter, Assignee would not issue the Shares. Assignor has been provided access to business and financial information regarding Assignee and has had the opportunity to attend a meeting with representatives of Assignee for the purpose of asking questions of and receiving answers from the officers and directors of Assignee, concerning Assignee's financial position, valuation, opportunities and/or business and to discuss such information with Assignor's advisors to enable Assignor to make an informed investment decision regarding the acquisition of the Shares. Representations and Warranties of Assignee. ------------------------------------------ Assignee represents and warrants to Assignor that Assignee has taken all requisite corporate and other action to authorize Assignee to execute and deliver this Agreement 9 and issue the Shares and to permit it to perform its obligations hereunder and thereunder. This Agreement has been duly executed by an authorized officer of Assignee and constitutes the valid, binding and enforceable obligations of Assignee. No authorization, approval or consent of, or notice to, any person under the provisions of the certificate of incorporation or bylaws, or any amendments thereof, of Assignee, or under any other relevant agreements, documents or instruments of Assignee, or under applicable law that has not been obtained or given by Assignee is required to be obtained or given by Assignee as of the date hereof with respect to the execution and delivery by Assignee of this Agreement, the issuance of the Shares, the consummation by Assignee of any transaction contemplated hereby or thereby or the performance and discharge by Assignee of its obligations hereunder or thereunder. Assignee has made its own credit analysis and decision to enter into this Agreement and acquire the Note and the Security Documents and has not relied on any statements or representations whatsoever from Assignor associated with the financial status of the maker of the Note or its collectibility. Assignee is acquiring the Note for its own account, for investment and not with a view to distribution. Assignee represents and warrants that the Shares, when issued and delivered in accordance with the terms of this Agreement against the Assignment therefor, will be duly and validly issued, fully paid, non-assessable and free and clear of all liens, charges, claims and encumbrances. Effect of Assignment. Assignor acknowledges and agrees that upon consummation of the Assignment, the Assignment will vest in and convey to Assignee all claims, rights and causes of action of Assignor known to Assignor and existing on the date hereof against the maker of the Note which arise out of or are in any way related in and to the Note and the Security Documents. Assignee acknowledges and agrees that upon consummation of this Assignment, HW Partners, L.P. shall continue to act as the Agent for the Funds (as such terms are defined in the Note and Security Documents) and shall become the Agent for Assignee for purposes of the Note and Security Documents. Assignee hereby grants to Assignor (and its shareholders if the Shares are distributed to Assignor's shareholders) registration rights associated with the Shares as "Registrable Securities" to the same extent as set forth in that certain Registration Rights Agreement dated June 13, 1997, as subsequently amended, between Assignee, Assignor and the other parties named therein. Further Assurances. Assignor hereby agrees to execute and deliver or cause to be executed and delivered hereafter any and all further instruments or documents as Assignee may reasonably request to evidence and vest in Assignee all interests of Assignor in, to and under the Note, Security Documents, and all collateral and agreements related thereto, including, without limitation, endorsement and delivery of the Note to Assignee, and execution and delivery of a financing statement or financing statements and any related assignment assigning the Security Documents to Assignee, each as of the date of consummation of the Assignment. 10 Miscellaneous. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTURED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELWARE WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Notification of the Company. Assignor hereby covenants and agrees that, upon execution of this Agreement, Assignor shall deliver a copy of this Agreement to the Company. Severability. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term thereof, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Counterparts. This Agreement may be executed in a number of identical counterparts, each of which, for all purposes, shall be deemed an original, and all of which shall constitute, collectively, one agreement. Entire Agreement; Amendments. This instrument, together with the other agreements, documents and instruments executed in connection therewith, embodies the entire agreement among the parties hereto and supersedes all prior and contemporaneous agreements, representations and understandings, if any, relating to the subject matter hereof (except documents, agreements and instruments delivered or to be delivered in accordance with the express terms hereof). This Agreement may be amended only by a written instrument signed by the parties against whom enforcement is sought. Parties Bound. This Agreement shall be binding upon, and shall inure to the benefit of, each party and its respective successors and assigns. Assignee may assign its rights or obligations hereunder to any affiliate; provided, any such assignment shall not relieve Assignee of its obligations hereunder. (Signature page follows) 11 EXECUTED as of the day and year first written above. Assignor: INFINITY INVESTORS LIMITED By: ------------------------------ Name: ------------------------------ Title: ----------------------------- Assignee: EDGE TECHNOLOGY GROUP, INC. By: ------------------------------ Name: ------------------------------ Title: ---------------------------- 12 SCHEDULE A SCHEDULE OF NOTE AND SECURITY DOCUMENTS A. Secured Note payable by Aura Ceramics, Inc. (the "Company") ----------------------------------------------------------- - ----------------------------------------------------------------- A. B. C. D. Original Stated Unpaid Principal Note Date of Note Principal Amount Balance at 5/30/02 - ----------------------------------------------------------------- Secured Note 2/22/00 $10,411,928 $9,995,456 - ----------------------------------------------------------------- B. Security Documents ------------------ 1. Security Agreement dated February 22, 2000 by and among Aura and various other parties in favor of the Funds and HW Partners, LP, as agent. 2. Stock Pledge Agreement dated February 22, 2000 by and among Aura in favor of the Funds and HW Partners, LP, as agent. -----END PRIVACY-ENHANCED MESSAGE-----