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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 8, 2002
Date of Report (Date of earliest event reported)
Edge Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-20995 13-3778895
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
6611 Hillcrest Avenue, # 223
Dallas, TX 75205
(Address of principal executive (Zip Code)
offices)
(214) 999-2245
Registrant's telephone number, including area code
N/A
(Former name or former address, if changed since last report)
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Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Edge Technology Group's Acquisition Strategy
As a holding company, Edge provides the strategic vision,
operational and management expertise, access to capital and
leadership for business growth that will facilitate its
subsidiaries' ability to deliver end-to-end ("E2E") solutions
comprised of products and professional services that meet the
information technology ("IT") needs of middle market companies.
To succeed with this mission, Edge will continue to acquire
professional services ("PS") firms and business application
software ("BAS") companies. Our decisions to effect the
following acquisitions were based on the following factors:
* Strategic compatibility;
* Operating experience;
* Valuation;
* Transaction structure;
* Audited financial statements; and
* Earnings per share analysis.
There can be no assurances that these acquisitions will achieve
the objectives of management. Nearly all operations will
continue within each OBU while a small corporate staff will
interface with the capital markets, formulate and manage the
Company's overall strategic objectives and oversee all mergers
and acquisitions. As such, the corporate staff will operate
separately at the holding company level, and the results of
operations of each OBU will be included in our consolidated
results.
Acquisition of The Visionary Group, Inc.
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On April 8, 2002, we acquired The Visionary Group, Inc., a
professional services firm providing IT consulting services
related to Oracle applications software. Headquartered in
Dallas, Texas, The Visionary Group has operations in Dallas and
Austin, Texas. We paid $840,000 in cash and paid approximately
$70,000 of existing debt in exchange for all the outstanding
shares of The Visionary Group as a result of arms-length
negotiations with The Visionary Group shareholders. The cash
portion of the merger consideration was funded from the proceeds
of our April 2002 offering of our Series A Convertible Preferred
Stock (See "Recent Sales of Unregistered Securities - April 2002
Series A Convertible Preferred Stock"). The acquisition will be
accounted for using the purchase method of accounting. As such,
the assets and liabilities of The Visionary Group will be recorded
at their estimated fair value and the results of operations will be
included in our consolidated result of operations from the date
of acquisition. The Visionary Group has 14 employees and
generated revenues of $3.4 million and break even net income in
2001. We intend to expand the operations of The Visionary Group
through the introduction of the proprietary software products we
intend to acquire as we further implement our business plan.
Founded in March 1997, The Visionary Group is an e-business
consulting and integration services firm that specializes in
implementing, customizing, upgrading and supporting the Oracle
suite of business applications. The Visionary Group provides a
full line of application development, system upgrades and
integration of Oracle products. With a strong focus and loyalty,
The Visionary Group is able to provide its clients with a wide
range of business solutions, products and services.
-1-
The Visionary Group's IT professional services practice
consists of project management, full life-cycle development
utilizing a broad range of Oracle's development tools, as
well as functional and technical consulting for the Oracle
CRM, Manufacturing and Financial applications. Additionally,
The Visionary Group's consultants are recognized for
their senior-level consulting expertise and knowledge.
Further, The Visionary Group has developed PRISM (Planning
Resource Implementing Solutions Methodology), a proprietary
business methodology to aid in the understanding of each client's
e-business strategy and to systematically perform packaged
solution implementations. This technology provides a proven
formula to help companies in accelerating the installation,
integration, ramp-up and application of Oracle solutions.
The Visionary Group's reputation in the business community,
extensive Oracle partnerships and strong consulting experience
makes it an excellent cornerstone for our IT Services business
unit. The Visionary Group's focus on middle market companies,
aided by their proprietary PRISM business methodology, further
differentiates it as a leading Oracle business solution provider.
Competitors of The Visionary Group include the dozen or so
similarly situated privately owned IT professional service firms
located primarily throughout the North Texas region. Marketing
of The Visionary Group's services is accomplished through an in-
house sales staff of two and referral from its more than 50
established customers. Revenues are derived from providing IT
Services on a project basis, and in 2001, approximately 15% of
revenues were from repeat clients.
Much of the Visionary Group's business is recurring in nature.
Although no single customer represents a concentration on an
ongoing basis, because of the project nature of its work,
occasionally, a customer may become significant for a period of
time.
The Visionary Group operates from an office in Dallas of 1,985
square feet under a lease through March 2006.
A copy of the Agreement and Plan of Merger whereby we acquired
The Visionary Group was filed with the Securities and Exchange
Commission as Exhibit 10.1 of our Form 8-K filed April 23, 2002.
Acquisition of Media Resolutions, Inc.
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On April 11, 2002, we acquired Media Resolutions, Inc., an
Application Service Provider ("ASP") and website hosting company
located in Dallas, Texas. We paid $330,000 in cash and 500,000
restricted shares of our Common Stock valued at $306,250 in
exchange for all the outstanding shares of Media Resolutions as
a result of arms-length negotiations with the shareholders of
Media Resolutions. The cash portion of the merger consideration
was funded from the proceeds of our April 2002 offering of our
Series A Convertible Preferred Stock (See "Recent Sales of
Unregistered Securities - April 2002 Series A Convertible
Preferred Stock"). The acquisition will be accounted for using
the purchase method of accounting. As such, the assets and
liabilities of Media Resolutions will be recorded at their
estimated fair value and the results of operations will be
included in our consolidated result of operations from the date
of acquisition. Media Resolutions has four employees and
generated revenues of approximately $283,000 and breakeven net
income in 2001. We will use Media Resolutions to develop and
host websites and deliver the proprietary software products we
intend to acquire as we further implement our business plan.
-2-
Media Resolutions was established in February 1999, and
specializes in application hosting while also providing an array
of other products and services including: HTML and Cold Fusion
website development, graphic design, streaming video and custom
scripting. Media Resolutions operates from a co-location site
maintained by Allegiance Telecom, Inc. in Dallas, Texas under a
short-term master service agreement.
Media Resolutions is an important component of our business
model. Using Media Resolutions, we plan to host both our own
proprietary software, once acquired, as well as our partners'
software. This will provide us with greater control over the
security, cost and feasibility of providing solutions to middle
market customers. It will also allow us to form tighter
relationships with our technology partners, as we will be able to
offer services that other software partners cannot.
Additionally, Media Resolutions has developed several products
for its customer base that we expect to be able to turn into
products offered within the Business Application Software product
group.
Competitors of Media Resolutions include the hundreds of
similarly situated privately owned ASP's located throughout the
North Texas region. Marketing of Media Resolution's services is
accomplished primarily through referral from its more than 500
established customers. In 2001, 88% of revenues were derived
from hosting services provided on a month-to-month basis.
Many of the customers of Media are repeat customers. Although
no single customer represents a concentration on an ongoing
basis, because of the project nature of its work, occasionally,
a customer may become significant for a period of time.
A copy of the Agreement and Plan of Merger whereby we acquired
Media Resolutions was filed with the Securities and Exchange
Commission as Exhibit 10.2 of our Form 8-K filed April 23, 2002.
Acquisition of VirtuallyThere, Inc.
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On May 30, 2002, we acquired VirtuallyThere, Inc. In exchange
for the outstanding shares of VirtuallyThere, Inc, we paid
$120,000 in cash, issued 1,153,846 shares of our restricted
Common Stock valued at $450,000 to the shareholders of
VirtuallyThere, assumed approximately $185,000 of VirtuallyThere's
existing liabilities as of the date of closing, as a result of
arms length negotiations between the parties. The cash portion of
the merger consideration was funded from the proceeds of our
April 2002 offering of our Series A Convertible Preferred Stock
(See "Recent Sales of Unregistered Securities - April 2002 Series
A Convertible Preferred Stock").
The terms of the Merger Agreement provided that VT Acquisition
Corp., a newly created and wholly owned subsidiary of Edge
Technology Group, was merged into VirtuallyThere, with
VirtuallyThere as the surviving entity. The acquisition will be
accounted for using the purchase method of accounting. As such,
the assets and liabilities of VirtuallyThere will be recorded at
their estimated fair value and the results of operations will be
included in our consolidated results of operations from the date
of acquisition.
-3-
Founded in 1997, VirtuallyThere is an applications service
provider and website hosting company located in Fort Worth,
Texas. VirtuallyThere currently has twelve employee and
generated revenues of approximately $1,000,000 with a net loss of
approximately $79,000 for the year ended December 31, 2001.
Many of the customers of VirtuallyThere are repeat customers.
Although no single customer represents a concentration on an
ongoing basis, because of the project nature of its work,
occasionally, a customer may become significant for a period of
time.
A copy of the Agreement and Plan of Merger whereby we acquired
VirtuallyThere was filed with the Securities and Exchange
Commission as Exhibit 10.1 of our Form 8-K filed June 14, 2002.
Asset Purchase from Universal Data Technology, Inc.
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On May 31, 2002, our newly created and wholly owned subsidiary,
UDT Consulting, Inc., acquired the assets of Universal Data
Technology, Inc., pursuant to an asset purchase agreement by and
among Universal Data Technology, Inc., its shareholders, Edge
Technology Group, Inc. and UDT Consulting, Inc. Universal Data
Technology, Inc. is a professional services company which was
founded in 1998, headquartered in Dallas Texas, with additional
operations in Arkansas and Florida. As a member of the Microsoft
Partner Program, UDT Consulting provides a full range of
e-business services varying from Fortune 500 to small start-up
businesses. UDT Consulting is a regional provider of
full-service, high quality software integration services that
focuses on high-end database technologies and e-business
applications. With a primary focus on the retail and
telecommunications industries, UDT Consulting's main geographical
markets are in the South Central and Southeast United States.
UDT Consulting's consulting practice offers solutions ranging
from Internet/Intranet content management to full-scale portal
and e-commerce development.
Our total purchase price for substantially all of Universal Data
Technology's assets will be the sum of $1,127,750 and the product
of multiplying two times UDT Consulting's earnings before
interest, taxes depreciation and amortization for the twelve
months immediately following the closing date of the acquisition
(the "Measurement Period"). The calculation of the purchase
price is subject to certain deductions and offset provisions, all
as set forth in the asset purchase agreement. An initial payment
of $227,500 and the forgiveness of a $150,000 promissory note
from Universal Data Technology to Edge were applied toward the
purchase price as of the date of the closing. The remainder of
the purchase price will be paid out monthly pursuant to an earn-
out schedule, with any remaining payments to be delivered after
the end of the Measurement Period, pursuant to the terms and
conditions of the asset purchase agreement. The cash portion of
the purchase price paid at closing was funded from the proceeds
of our April 2002 offering of Series A Convertible Preferred
Stock (See "Recent Sales of Unregistered Securities - April 2002
Series A Convertible Preferred Stock"). The purchase price for
the acquired assets was reached as a result of arms length
negotiations between the parties.
The assets of Universal Data Technology will be recorded at their
estimated fair value and the results of operations will be
included in our consolidated results of operations from the date
of acquisition. For the year ended December 31, 2001, Universal
Data Technology generated revenues of approximately $5,600,000
with a net loss of approximately $390,000. As of the date of
this report, UDT Consulting employs 32 full-time consultants and
support staff.
Much of UDT Consulting's business is recurring in nature.
Although no single customer represents a concentration on an
ongoing basis, because of the project nature of its work,
occasionally, a customer may become significant for a period of
time.
-4-
A copy of the Asset Purchase Agreement was filed with the
Securities and Exchange Commission as Exhibit 10.2 of our 8-K
filed June 14, 2002.
History
Edge Technology Group, Inc., formerly known as Visual Edge
Systems Inc., was incorporated in Delaware in July 1994 and
commenced operations in January 1995. Prior to our current
emphasis on IT consulting services, software applications and
application services, the business consisted primarily of
developing, marketing and selling personalized videotape golf
lessons featuring One-on-One golf video instruction ("One-on-
One") by leading professional golfer Greg Norman, sold under the
name "One-on-One with Greg Norman." We developed video production
technology that digitally combined actual video footage of a
golfer's swing with a synchronized "split-screen" comparison to
Greg Norman's golf swing to produce a One-on-One golf lesson. The
assets of the One-on-One business were sold to members of its
prior management in September 2001.
We are in the early stage of revamping our business model beyond
our historical golf training technology products. Our new
business model is to acquire software related technology
companies that deliver software products and related information
technology services to middle market companies. We intend to
offer products and services that improve the utilization of
business information for middle market companies, initially
within the United States. We expect that client organizations
will benefit from integrated business process applications that
are delivered on a fully outsourced basis through portal
technology or, if needed, as traditional licensed products. Our
acquisitions will target companies with existing strategic
relationships with Oracle, IBM or Microsoft that will
additionally allow us to take advantage of partnership
opportunities available only to select parties. The technology
companies targeted for acquisition are those that operate within
the following business sectors: (1) professional services, (2)
business application software comprised of six product groups and
(3) application services and management.
BUSINESS STRATEGY
Our business strategy is to bring together complementary
professional services firms and business application software-
related companies to offer our clients a complete end-to-end
solution for their software needs. Our targeted customers are an
estimated 150,000 middle-market companies in the U.S. with
software and consulting needs. We will initially focus primarily
on the U.S. market and plan to specifically serve the needs of
middle market businesses. Middle market companies are defined as
those that generate between $10 million and $2 billion in annual
revenue and typically employ between 100 and 10,000 persons. Of
the 3 million middle market companies in the United States (1997
data), there were approximately 150,000 companies that we would
target.
-5-
Business Risk Factors
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Investors considering acquiring the shares of our Common Stock
should consider carefully the following business risk factors.
Any of the following risks, as well as other risks and
uncertainties that are not yet identified or that we currently
believe are immaterial, could harm our business, financial
condition and operating results, and could result in the complete
loss of any investment.
RISKS RELATED TO OUR BUSINESS
We are an early stage company and therefore our business and
prospects are difficult to evaluate.
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The Visionary Group, Media Resolutions and VirtuallyThere, our
operating subsidiaries, commenced initial operations in 1997,
1999 and 1997, respectively. Universal Data Technology, from
which UDT Consulting acquired assets, commenced operations in
1998. Though each of the acquired companies has an operating
history on its own, they have not operated collectively for any
appreciable period of time; therefore 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
stages of development.
Our common stock is subject to the "penny stock" rules which may
make it a less attractive investment.
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Our common stock currently trades on the OTC Bulletin Board.
Although we intend to file an application to list our stock on
the NASDAQ Stock Market's National Market or SmallCap Market at
some point in the future, we may not meet the initial listing
standards for either of these markets if at all for some time to
come. Therefore, we can provide no assurances that a liquid
trading market will exist at the time any investor desires to
dispose of any shares of our common stock. In addition, our
common stock may at any time be subject to the so-called "penny
stock" rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than
established customers and accredited investors. An accredited
investor is generally defined as an investor with a net worth in
excess of $1 million or annual income exceeding $200,000 or
$300,000 together with a spouse. For transactions covered by the
penny stock rules, a broker-dealer must make a suitability
determination for the purchase and must have received the
purchaser's written consent to the transaction prior to sale.
Consequently, both the ability of a broker-dealer to sell our
common stock and the ability of holders of our common stock to
sell their securities in the secondary market may be adversely
affected. The Securities and Exchange Commission has adopted
regulations that define a "penny stock" to be an equity security
that has a market price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule relating to the penny stock
market. The broker-dealer must disclose the commissions payable
to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer
is to sell the securities as a market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in
the account and information on the limited market in penny
stocks. As a result of the additional suitability requirements
and disclosure requirements imposed by the "penny stock" rules,
an investor may find it more difficult to dispose of our common
stock.
-6-
Our success depends on our ability to implement our business
plan.
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Our business plan will succeed only if we are able to identify,
acquire and manage acquisitions in addition to Media Resolutions,
The Visionary Group, VirtuallyThere and the assets of Universal
Data Technology. There can be no assurance that we will be able
to implement our business plan, and failure to effectively
implement our business plan will have a material adverse effect
on Edge.
Our business depends on growth through business combinations and
internal expansion.
- ----------------------------------------------------------------
As an integral part of our business strategy, we intend to
continue to expand by acquiring information technology businesses
and software related technology companies. We regularly evaluate
potential business combinations and aggressively pursue
attractive transactions. The success of this strategy depends not
only upon our ability to identify and acquire businesses on a
cost-effective basis, but also upon our ability to successfully
integrate the acquired business with our organization and
culture. Business combinations involve numerous risks, including:
the difficulty in managing geographically remote operations; the
diversion of management's attention from other business concerns;
risks of losing clients and employees of the acquired business
and the risks of entering markets in which we have limited or no
direct experience. There can be no assurance we will be able to
acquire additional business or that any business combination will
result in benefits to us. In addition, we may open new offices in
attractive markets with our own personnel. Many of our
subsidiaries' branch offices were originally start-up operations.
Not all branch offices, whether start-up or acquired, have been
successful. There can be no assurances that we will be able to
successfully start up, identify, acquire, or integrate future
successful branch office operations. While we believe Media
Resolutions, The Visionary Group, VirtuallyThere and UDT
Consulting are compatible with our business plan, we can provide
no assurance that we will be able to locate other suitable
acquisition targets or that we will be able to complete
additional acquisitions.
Our current financial condition prevents us from financing an
acquisition independently.
- -------------------------------------------------------------
Our current financial condition will not allow us to finance
additional acquisitions independently. We cannot assure you that
Edge will be able to obtain financing in addition to that secured
in connection with the issuance of the Series A Convertible
Preferred stock which closed in April 2002, on acceptable terms
or at all. If we cannot obtain additional financing, we will not
be able to complete future acquisitions and therefore, will not
be able to fully implement our business plan.
We do not currently maintain a credit facility with any bank or
financial institution. We believe that our ability to raise
additional financing, either as debt or equity, is further
hindered by our continuing operating losses, the low market price
of our Common Stock and the lack of a listing for our stock on a
national exchange.
We depend on our officers and key personnel.
- -------------------------------------------
Our prospects depend on the personal efforts of Graham C. Beachum
II, our President and Chief Executive Officer, Graham C.
"Scooter" Beachum III, our Vice President and General Manager,
and other key personnel throughout Edge and its operating
subsidiaries to implement our acquisition and operating
strategies. The loss of the services of these executives could
have a material adverse effect on our business and prospects
because of their knowledge, experience and contacts within the
industry.
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 and the key
personnel of our operating subsidiaries. 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.
-7-
If we fail to manage our growth and integrate our acquired
businesses, our business will be adversely affected.
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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. To the extent that our management is
unable to manage the growth and integration effectively, our
business, results of operations and financial condition could be
adversely affected. 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 could
materially affect our business operations.
A small number of stockholders could exercise control over Edge,
which may raise conflicts of interest.
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A small number of stockholders, some of which comprise an
affiliate group, own a sufficient amount of our capital stock
(both shares of our Common Stock as well as shares of our Series
A Convertible Preferred Stock) to exercise significant control
over our business and its 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. The ability of the holders of our Series A
Convertible Preferred Stock to vote on certain matters on an as-
converted basis permits these preferred stockholders to have
considerable influence over matters which come before our common
stockholders (See "Description of Our Capital Stock - April 2002
Series A Convertible Preferred Stock" below). The interests of
these holders could conflict with the interests of the holders of
our Common Stock.
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 our Board of
Directors. 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 of Directors.
RISKS RELATED TO OUR INDUSTRY
PROFESSIONAL SERVICES INDUSTRY
We must attract and retain qualified consultants.
- -------------------------------------------------
Our future success depends, in part, on our ability to attract
and retain adequately trained personnel who can address the
changing and increasingly sophisticated technology needs of our
clients. While the current employment conditions have resulted
in a greater pool of potential personnel and have lessened our
risk somewhat in attracting high caliber consultants, there can
be no assurance that such conditions will continue and we will be
successful in attracting and retaining the personnel we require
to conduct and expand our operations in the future.
-8-
We do not rely on long-term contracts.
- --------------------------------------
Although we have many long-standing relationships with our
clients, our business depends upon those relationships and our
ability to develop new clients rather than upon long term
contracts. If any significant client terminates its relationship
with us or substantially decreases its use of our services, it
could have a material adverse effect on our business, financial
condition and results of operations.
Our business continues to change rapidly.
- -----------------------------------------
Our market is characterized by rapidly changing technologies,
such as the evolution of the Internet, frequent new product and
service introductions and evolving industry standards. If we
cannot keep pace with these changes, our business could suffer.
Our success depends, in part, on our ability to develop service
offerings that keep pace with continuing changes in technology,
evolving industry standards and changing client preferences. Our
success will also depend on our ability to develop and implement
ideas for the successful application of existing and new
technologies. We may not be successful in addressing these
developments on a timely basis or our ideas may not be successful
in the marketplace. Products and technologies developed by our
competitors may also make our services or product offerings less
competitive or obsolete.
We are dependent upon our relationship with Oracle and IBM.
- ----------------------------------------------------------
We have a significant relationship with Oracle as an
implementation partner. In the event Oracle or IBM products
become less desirable or competitive in the marketplace, the need
for our implementation services would lessen and we could suffer
a material adverse effect.
Our services are provided in the form of projects.
- -------------------------------------------------
We provide and intend to continue to provide project services to
our clients. Projects are distinguishable from the provision of
other professional services by the level of responsibility we
assume. In a typical project, we assume major responsibilities
for the management of the project and/or the design and
implementation of specific deliverables based upon client-defined
requirements. As our project engagements become larger and more
complex and often must be completed in shorter time frames, it
becomes more difficult to manage the project and the likelihood
of mistakes increase. In addition, our projects often involve
applications that are critical to our client's business. Our
failure to timely and successfully complete a project and meet
our client's expectations could have a material adverse effect on
our business, results of operations or financial condition. Such
adverse effects may include delayed or lost revenues, additional
services being provided at no charge and a negative impact to our
reputation. In addition, claims for damages may be brought
against us, regardless of our responsibility, and our insurance
may not be adequate to cover such claims. Our contracts
generally limit our liability for damages that may arise in
rendering our services. However, we cannot be sure these
contractual provisions will successfully protect us from
liability if we are sued. We sometimes undertake projects on a
fixed-fee basis or cap the amount of fees we may bill on a time
and materials basis. Any increased or unexpected costs or
unanticipated delays could make such projects less profitable or
unprofitable and could have a material adverse effect on our
business, results of operations and financial condition.
ASP INDUSTRY
Our limited history of offering ASP services to customers and the
fact that we operate in a new industry for application services
expose us to risks that affect our ability to execute our
business model.
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-9-
Because the ASP model is relatively new, it continues to evolve.
Furthermore, the market for Internet services, private network
management solutions and widely distributed Internet-enabled
application software has only recently begun to develop and is
now evolving rapidly. We believe that many of our potential
customers are not fully aware of the benefits of hosted and
managed solutions. It is possible that these solutions will never
achieve market acceptance. It is also possible that potential
customers will decide that the risks associated with hiring ASPs
in general (or smaller ASPs in particular) to implement and
manage their critical systems and business functions outweigh the
efficiencies associated with the products and services we
provide. Concerns over transaction security and user privacy,
inadequate network infrastructure for the entire Internet and
inconsistent performance of the Internet and the financial
viability of ASPs could also limit the growth of Internet-based
business software solutions.
Special Note Regarding Forward Looking Statements
- -------------------------------------------------
Some of the information discussed under the captions "Business
Risk Factors," "Business," "Plan of Operation" and elsewhere in
this Current Report on Form 8-K/A contain "forward-looking
statements" made under the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. These forward-
looking statements are based on the beliefs of our management as
well as assumptions made by and information currently available
to our management. These statements include without limitation,
the following:
* statements regarding our future capital requirements
and our ability to satisfy our capital needs;
* statements regarding our recent acquisitions and their
prospects;
* statements regarding our ability to implement our
plans; and
* other statements which speak to projections of future
conditions or our anticipated performance which contain
the words the words "anticipate" "believe," "expect,"
"intend" and words or phrases of similar import, as
they relate to us or our management.
You should be aware that these "forward-looking" statements are
subject to certain risks, uncertainties and assumptions related
to certain factors including, without limitation, the ability to:
* adapt and successfully execute our revised business
plan;
* overcome the possible negative market stigma associated
with over-the-counter 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
* overcome numerous other risks and difficulties
generally experienced by early stage business models
generally, including, but not limited to those factors
set forth under the heading "Business Risk Factors"
above.
-10-
BUSINESS
General Background
- ------------------
Commencing with the acquisition of The Visionary Group, Media
Resolutions, VirtuallyThere, and the assets of Universal
Data Technology, Inc., we have become an operating group of
companies. Examples of our professional services customers
include Hilton Hotels, Medical Information Corp., State of
Texas, Madix, Cygnet Technologies and Ocular. Examples of
our ASP customers include American Airlines, Pier 1 Imports,
La Madeline and Justin Brands. Although we may perform project
work in other regions, we currently maintain operations and
sales offices in Dallas and Fort Worth, Texas.
The management teams of our corporate group and subsidiaries have
over 20 years of experience in technology and software companies.
We intend to serve the IT needs of middle market companies by (1)
acquiring companies that offer professional services and / or BAS
products, (2) developing BAS product strategies and (3)
cultivating business efficiencies amongst subsidiaries.
Our current operating subsidiaries, The Visionary Group, Media
Resolutions, VirtuallyThere and UDT Consulting's predecessor
(Universal Data Technology, Inc.) commenced initial operations in
1997, 1999, 1997 and 1998, respectively, and we revised our
business model in the first part of 2001 and only began the
implementation of this business model in the second part of 2001.
Consequently, we are properly regarded as an early stage company.
We have a very limited combined operating history upon which
investors and others can evaluate our newly integrated company,
our current business and our prospects.
INDUSTRY BACKGROUND
Professional Services
- ---------------------
Edge and its professional services subsidiaries which are The
Visionary Group and UDT Consulting, Inc. (our "PS Subsidiaries")
provide IT professional services, and to a lesser extent, resell
certain hardware and software products. Our services are offered
on a project or strategic staffing basis in both custom and
enterprise resource planning ("ERP") package environments, and
across all technology platforms, operating systems and
infrastructures. Our clients consist primarily of middle market
companies.
The market demand for Edge's services is dependent on
discretionary spending by middle market companies in the area of
IT. Due to current macroeconomic conditions, the demand for IT
services has softened compared to prior years. Beginning in 1998
through the middle of 1999, major corporations spent heavily on
IT services in order to prepare their information systems for the
potential problems presented by the year 2000 ("Y2K"). Companies
with information systems applications that were not "Y2K
compliant" either fixed those systems by re-writing software code
or implemented new systems that were Y2K compliant.
After this period of spending on Y2K compliance, existing major
corporations and well funded startup entities spent heavily on
systems that supported the conduct of business over the Internet.
For major corporations this spending on "e-business initiatives"
was, in part, a defensive tactic against new businesses entering
the market. These new "dot.com" business entities raised a great
deal of money in both the private and public equity markets and
used a significant portion of those proceeds on information
systems to support their new business models.
-11-
Along with these dot.com businesses came IT professional services
firms that provided information technology services to support
the e-business initiatives of both new dot.com business entities
and existing corporations wanting to conduct business over the
Internet. Several of these Internet consultancies were
successful raising capital in the public equity markets and were
also successful gaining acceptance as experts in the newer
Internet technologies. As a consequence, a disproportionate
share of the dollars spent on e-business initiatives by both new
dot.coms and existing corporations went to these new Internet
consultancies.
Beginning in the latter part of 2000 and into 2001, many of these
dot.com entities exhausted the capital raised in the equity
markets, were not able to raise additional capital and did not
have a cash flow stream to support their businesses as going
concerns. Consequently, many of these firms went out of
business, and the threat of these dot.coms to traditional
business models waned, negatively affecting IT spending on e-
business initiatives. As dot.com entities began failing and IT
spending declined, many of the new Internet consultancies that
entered the market failed as well.
By the middle of 2001, the U.S. economy was in recession, and
major corporations further curtailed discretionary IT spending.
As 2002 progresses, we are hopeful that the U.S. economic
recession will be short lived, and that spending on IT
initiatives will grow at normal historical rates. In that event,
we believe that Edge is competitively positioned to take
advantage of improving conditions.
Edge Value Proposition in the Professional Services Industry
- ------------------------------------------------------------
Integrated solutions require planning, design, deployment,
consulting and integration services. Edge delivers these
capabilities through its PS Subsidiaries and the broad array of
professional services offered by its subsidiaries. This
expertise encompasses many disciplines enabling the Company to
cover each of the targeted industries that Edge has committed to
serve. Edge enhances this integration capability through the use
of its ASPs and offers services to develop, implement and
integrate custom technology applications. This professional
services offering addresses the unique elements demanded by
middle market companies. The prevalent practice of extensive
customization typical of Global 2500 firms does not exist in the
middle market. The same strict requirements involving the
skills, scope of work, the implementation and integration of
applications and systems, however, is the same. To this point,
we believe that the level of experience for Edge's PS consultants
is on par with larger PS companies
ASP Industry
- ------------
Traditionally, organizations have installed, operated and
maintained enterprise software applications internally. The
ongoing costs of operating these applications, including
patching, upgrading, training and management expenses, are often
significant, unpredictable and inconsistent and may increase over
time. The emergence of the Internet, the increased communications
bandwidth and the re-writing of enterprise software to be
delivered over Internet protocol networks are transforming the
way enterprise software applications are being provided to
customers. Instead of in-house installations, these applications
are beginning to be hosted by third parties in which the hosting
company maintains the applications on an off-site server,
typically in a data center, and delivers the applications to
customers over the Internet as a service. In addition,
competitive pressures have led to a renewed focus on core
competencies with many businesses concluding that building and
maintaining IT capabilities across their entire set of
applications are not core competencies. In response to these
factors, companies are adopting hosted and managed applications
rather than managing them in-house.
-12-
New e-commerce business models have increased demand for
e-commerce software applications. E-commerce applications range
from electronic procurement systems to business-to-business
exchanges connecting communities of buyers and sellers across
entire supply chains. These applications are designed to be
Internet-hosted and may be deployed quickly. The appeal of these
e-commerce applications has extended beyond emerging high-growth
and middle-market companies to larger enterprises as enterprises
of all size recognize the need to adopt and rapidly deploy
e-commerce applications for their businesses.
Edge Value Proposition in the ASP Industry
- ------------------------------------------
A fundamental component of Edge's strategic vision is the ASP
delivery mechanism to implement IT solutions to the middle
market. Edge intends to deliver BAS products through an ASP
model. Edge will also offer third-party software and
applications through either an ASP or license agreement. ASPs
enable middle market companies to link end-users to applications
with significantly lower cost. Internal or custom applications
are not replaced; they are accessed through a universal external
point. This allows for new technologies or applications to be
deployed "along side" of the internal applications without
"shutdowns" in the network. ASP hosting creates a revenue-
generating vehicle for Edge's PS Subsidiaries to provide ongoing
maintenance and upgrades. To date, Edge has acquired Media
Resolutions, Inc. and VirtuallyThere, Inc. (our "ASP
Subsidiaries").
OUR SERVICE AREA
Edge provides professional services and application hosting and
development for middle market companies in the Southeast United
States. The Company currently serves customers in Texas,
Arkansas, Louisiana and Florida.
SALES AND MARKETING
Professional Services
- ---------------------
We currently maintain a direct sales force of approximately six
employees at who market our services to senior business
executives, chief information officers, information systems
managers and others who purchase IT services. New client contacts
are generated through a variety of methods, including client
referrals, trade shows, personal sales calls and direct mailings
to targeted clients.
ASP
- ---
We sell and market our services primarily through a direct sales
force and referrals from software vendors, systems integrators
and current customers. We currently have two sales and marketing
employees. We focus our marketing efforts on achieving brand
recognition, market awareness and lead generation. We market our
services through magazine advertising, directed advertising and
targeted events including tradeshows, conferences and seminars.
We feature customer recommendations in our magazine advertising
and other promotional activities.
-13-
SEASONALITY
The PS Subsidiaries experience a moderate amount of seasonality.
The first quarter revenues tend to be the lowest, higher revenues
are generally reflected in the second and third quarters and
revenues in the fourth quarter declines from the mid-year levels.
Revenues for ASP Subsidiaries do not reflect a discernable
pattern of seasonality.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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 are subject
to at least an annual assessment for impairment by applying a
fair value based test. We adopted these standards as of January
1, 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 144 retained substantially all of the
requirements of SFAS No. 121 while resolving certain
implementation issues. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. Management believes the
impact of this pronouncement on our operations, if any, will not
be material.
POTENTIAL COMPETITION
Edge has identified several categories of potential competitors
related to its E2E offering of products and professional
services. Although participants in each of these categories
could become actual competitors, we believe it would require a
significant shift in their product and service offerings and/or
strategic focus.
Top-Tier Consulting Firms and Software Consulting Divisions - Top
tier consulting firms make up the closest group of competitors in
terms of the breadth of their product offerings. Companies such
as Accenture, PricewaterhouseCoopers and EDS provide many of the
same services but focus on the Global 2500. Similarly, Oracle,
IBM and Computer Associates all field professional services
divisions that implement their solutions. However, many middle
market customers are not able to afford the services of these
companies.
Best of Breed Software Companies - Firms like Seibel, PeopleSoft
and SAP offer specific products to their customers, but in each
instance, these companies focus on a single product offering.
Their strategy is to be the best at a single offering. As such,
Edge's customers may require implementation of these best of
breed products from time to time. However, these companies are
not direct competitors because of Edge's focus on a complete E2E
solution.
Packaged Software - Companies such as Intuit, Great Plains and
Lotus offer limited off-the-shelf applications that have a much
narrower scope than Edge offers. These companies market to both
the Small Office Home Office ("SOHO") and lower end of the middle
market where customers require little, if any, customization at
all. In fact, Edge has found that its PS Subsidiaries are
replacing these applications with more robust, customizable
solutions for growing middle market customers. These
applications are vertically aligned in specific industries.
Professional service support is rarely offered.
-14-
Resellers - iPlanet, JamCracker and WebMethods resell hardware
and software products of others where margins are thin. As a
result, many resellers are attempting to expand their business
offering by including professional services. These companies are
finding it difficult to operate outside of their core
competencies and to obtain the necessary funds to acquire new
business units.
EMPLOYEES
As of June 19, 2002, we had a total of 54 full-time employees,
including nine employed by The Visionary Group, four by Media
Resolutions, 11 by VirtuallyThere and 20 by UDT Consulting. In
addition, we typically have 15-20 independent contractors working
with our various operating subsidiaries.
FACILITIES
As of June 19, 2002, we have 6,735 square feet under long-term
non-cancelable lease for our operations. Our current properties
are:
Location Size Description
- ---------------------------- ---------- --------------------------
12222 Merit Drive, Dallas, 1,985 Visionary Group Offices,
Dallas, Texas 75251 expires March 31, 2006
513 Main Street, Suite 300, 4,750 VirtuallyThere Offices,
Fort Worth, Texas 76102 expires September 30, 2006
Although the hardware of Media Resolutions, Inc. is located in a
co-location facility managed by Allegiance Telecommunications
under a service agreement, the employees currently share office
space with an unrelated company on a month-to-month basis.
As is typical of the professional services industry, the
consultants of UDT Consulting, Inc. generally work in the offices
of their clients. The company is currently evaluating lease
spaces to serve as its administrative office.
Edge is currently negotiating a lease for approximately 6,500
square feet for its corporate headquarters.
LEGAL PROCEEDINGS
Proceedings with Debtors
- ------------------------
On September 22, 2000, we made an unsecured loan of $1.4 million
to Hencie, Inc. ("Hencie"), a Texas-based IT Services business.
The loan was guaranteed by a related company, Hencie Consulting
Services, Inc. and personally guaranteed by Hencie's CEO.
-15-
The $1.4 million loan to Hencie matured November 22, 2001, and
went into default. On January 8, 2002, we filed suit for
collection against Hencie, Inc., as debtor, and its CEO Adil Kahn
and Hencie Consulting Services, Inc., both as guarantors.
On May 22, 2002, we entered into a Settlement Agreement and
Release with Hencie and the guarantors whereby we received an
agreed judgment and will receive monthly payments of principal
and interest through April 2004 totaling approximately $1.3
million. If the sale of Hencie occurs as publicly announced by
Alternate Marketing Networks, Inc. (ALTM) on April 23, 2002,
the amounts due under the Settlement Agreement and Release will
be secured by shares of ALTM stock. Otherwise, amounts due
under the Settlement Agreement and Release will be unsecured.
Proceedings against The Visionary Group
- ---------------------------------------
On June 4, 2002, we were notified The Visionary Group and Edge
had been sued for non-payment of approximately $110,000 due to a
former sub-contractor. We intend to defend the matter vigorously.
PLAN OF OPERATION
This Current Report contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in forward-looking statements
for many reasons, including the risks described in "Business Risk
Factors" and elsewhere in this filing. See "Special Note
Regarding Forward-Looking Statements." You should read the
following discussion with our consolidated financial statements
and related notes included elsewhere in this Current Report.
Overview
- --------
Our primary activities since January 1, 2001, have included:
* Creating Edge's new business model and plan;
* Raising capital necessary to operate under Edge's new
business model;
* Identifying acquisition candidates that will fit into
Edge's business model; and
* Closing the first four acquisitions in April and May
2002.
Accordingly, the revenue and income potential of our business
model is unproven, and our limited operating history makes it
difficult to evaluate our prospects. You must consider our
prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of
development. Such risks for us include, but are not limited to,
an evolving and unpredictable business model and management of
growth. To address these risks, we must, among other things,
implement and successfully execute our business and marketing
strategy and attract, retain and motivate qualified personnel. We
cannot assure you that we will be successful in addressing such
risks, and our failure to do so could have a material adverse
effect on our business, prospects, financial condition and
results of operations.
-16-
We operate through four direct and wholly-owned subsidiaries,
including:
* The Visionary Group, Inc., a Texas corporation formed
in 1997, which provides professional services that
include project management, integration services and
full life-cycle development utilizing a broad range of
consulting expertise and knowledge of Oracle's CRM,
manufacturing and financial applications;
* Media Resolutions, Inc., a Texas corporation formed in
1999 which provides application hosting and management
services;
* VirtuallyThere, Inc., a Texas corporation formed in
1997, which offers custom web application development,
complete website design, interactive multimedia
development and database construction; and
* UDT Consulting, Inc. a Texas corporation, the
predecessor of which (Universal Data Technology, Inc.)
was formed in 1998, which provides e-business, system
and storage management and database management
professional services supporting IBM/Informix, Oracle
and Microsoft.
Our 12-Month Plan
- -----------------
Our plan of operation for the upcoming 12 months calls for the following:
* Additional fundraising activities to continue our
acquisition strategy;
* Additional acquisitions to fill in Edge's E2E offering
of BAS products and professional services to meet the
needs of middle market companies; and
* Operating the businesses that Edge has acquired to
date.
Employees
- ---------
As of June 19, 2002, we had a total of 54 full-time employees,
including nine employed by The Visionary Group, four by Media
Resolutions, 11 by VirtuallyThere and 20 by UDT Consulting.
In addition, we typically have 15-20 independent contractors
working with the various subsidiaries.
The number of employees that Edge will have by the end of 2002 is
dependent upon the number of acquisitions that Edge will be able
to complete during that timeframe, and as a result, this number
is difficult to ascertain. Edge's corporate staff will look to
hire additional employees as the business warrants, which may
include additional executives.
Liquidity and Capital Resources
- -------------------------------
We have experienced continuing losses and working capital
deficits. These factors, among others, raise substantial doubt
about our ability to continue as a going concern. Our plans in
this regard are to continue fundraising efforts and to implement
our new business plan as described herein and in recent press
releases.
We do not maintain a bank credit facility. We expect our
liquidity to remain tight throughout 2002. We will look to our
current cash reserves, cash reserves created by our April 2002
Series A Convertible Preferred Stock financing and cash flows
generated by our newly acquired companies (Media Resolutions, The
Visionary Group, VirtuallyThere and UDT Consulting) to meet
liquidity requirements in the coming year. While we have a level
of comfort as to the projected cash flows generated by our newly
acquired companies, we are relying on projections based upon
assumptions and forecasts, including factors beyond our control.
Actual results could vary from our projections and such variance
could have a significant adverse effect on our liquidity.
-17-
We have historically financed our operations primarily through
the sale of equity securities or instruments convertible into
equity securities. Although we just completed such a financing
as described below (See "Recent Sales of Unregistered Securities
- - April 2002 Series A Convertible Preferred Stock"), there can be
no assurance that future financings can be completed.
Our forecast of the period of time through which our financial
resources will be adequate to support our operations under our
current plan of operation is a forward-looking statement that is
subject to risks and uncertainties, and we may be required to
raise additional capital prior to that time and afterwards.
Management's Discussion
- -----------------------
During 2001, we produced no material revenues from current
operations. We expect to derive substantially all of our
revenues from our four operating subsidiaries during 2002.
The Company provides consulting services under time-and-material
and fixed-priced contracts. The majority of service revenues are
recognized under time-and-material contracts as hours and costs
are incurred. Revenues include reimbursable expenses separately
billed to clients. For fixed-priced contracts, revenue is
recognized on the basis of the estimated percentage of completion
based on costs incurred relative to total estimated costs. The
cumulative impact of any revisions in estimated revenues and
costs are recognized in the period in which they become known.
Losses, if any, on fixed-price contracts are recognized when the
loss is determined.
Unbilled accounts receivable represent amounts recognized as
revenue based on services performed in advance of billings in
accordance with contract terms. Any deferred revenues consist of
amounts received or billed in advance of services to be provided.
Much of our business is recurring in nature. Although no single
customer represents a concentration on an ongoing basis, because
of the project nature of our work, occasionally, a customer may
become significant for a period of time.
In the future, the level of our net revenues will depend on a
number of factors including, but not limited to, the following:
* the number of customers we are able to obtain;
* the price we charge for our services;
* the extent of sales incentives we offer; and
* the number of additional markets we enter.
No assurances can be given that we will be able to either
maintain or grow existing revenues.
Cost of revenues consist primarily of the salary expense of
consultants in the PS and ASP Subsidiaries.
Edge's subsidiaries typically extend payment terms to customers
in keeping with general industry practice. This varies by
subsidiary, customer and OBU. The terms for invoices of the
Company's PS Subsidiaries include invoices due upon receipt or
within 30 days as negotiated, and these invoices are sent weekly
or bi-weekly, based upon timesheets. Our ASP Subsidiaries
typically have customer contracts where recurring services are
paid for in advance on a monthly basis. Custom programming
projects are billed based upon a retainer and progress payments.
-18-
Our operating expenses are comprised of:
* Corporate-level administrative salaries;
* Legal and accounting fees, much of which are related to
acquisitions; and
* General and administrative expenses, which consists
primarily of compensation and related expenses for our
administrative and accounting staff and occupancy
costs.
We anticipate that our operating expenses will increase
substantially in future periods as the Company completes more
acquisitions. Our limited operating history makes it difficult
for us to predict future operating results and, accordingly,
there can be no assurance that we will achieve or sustain revenue
growth or profitability.
Executive Officers
- ------------------
The executive officers, their ages and backgrounds are as
follows:
Graham C. Beachum II Age 54, President, CEO and Director since
January 2001.
Mr. Beachum has been the President and Chief
Executive Officer of Edge since January 2001.
From January 2000 to December 2000, Mr.
Beachum was a private investor. From
September 1996 to January 2000, Mr. Beachum
was the Chairman and Chief Executive Officer
of Axtive Corporation, a maker of customer
relationship management software which was
sold to Remedy Corporation in 2000. From
March 1991 to September 1996, Mr. Beachum was
a private investor. On May 28, 1998 Mr.
Beachum filed a voluntary petition under
Chapter 7 of the Federal Bankruptcy Code and
was discharged in September 1998 from certain
tax liens arising from business interests
during the time from 1991 to 1996 in which he
was primarily a private investor. From 1988
to 1991, Mr. Beachum was an executive officer
of or consultant to personal computer start-
up companies such as Wang Microsystems,
Northgate Computers, Gateway 2000 and Digital
Equipment. From 1985 to 1988, Mr. Beachum
was Executive Vice President of Sales and
Operations for PC's Limited and its successor
Dell Computer Systems. From 1984 to 1985,
Mr. Beachum was the Vice President and
General Manager of the Business Products
Division of Tandy Corporation. From 1968 to
1984, Mr. Beachum held a variety of positions
with International Business Machines
Corporation including his final position as
Director of Worldwide Sales and Marketing for
the personal computer division of IBM.
-19-
David N. Pilotte Executive Vice President and Chief Financial
Officer since August 2001.
Mr. Pilotte's business and consulting career
spans more than 20 years of successful
financial management. From June 1998 until
after its sale in November 2000, Mr. Pilotte
was Vice President and Corporate Controller
of American Pad & Paper Company, a publicly
held converter of paper products with
revenues approaching $700 million annually.
From April 1997 to April 1998, and prior to
its sale to National Semiconductor, Mr.
Pilotte was Corporate Controller of Cyrix
Corporation, a publicly held company
designing microprocessors for personal
computers. From February 1992 to October
1996, Mr. Pilotte had Treasurer
responsibilities for Baldor Electric Company,
a publicly held manufacturer of industrial
electric motors and drives. In the
intervening months between positions listed
above, Mr. Pilotte served as an advisor to
small and mid-sized businesses effecting
financial and operational restructurings,
raising private capital and serving as
interim CFO.
Board of Directors
- ------------------
Below are the names and ages of the directors of Edge Technology
Group, Inc., the years they became directors, their principal
occupations or employment for at least the past five years and
certain of their other directorships, if any.
Graham C. Beachum II Age 54, President and Chief Executive
Officer and Director Since January 2001.
See the biography of Mr. Beachum under
"Executive Officers and Directors" above.
J. Keith Benedict Age 30, a director since August 1999.
Mr. Benedict has been Vice President of the
general partner of HW Capital, L.P., the
investment manager for several affiliated
investment funds that are stockholders of
Edge, since April 1999. From September 1996
to March 1999, Mr. Benedict served as an
attorney in the corporate and securities
section at the law firm of Bracewell &
Patterson, L.L.P. Mr. Benedict received a
J.D. degree from the Washington & Lee
University School of Law in May 1996.
John A. Wagner Age 45, a director since August 1999.
Mr. Wagner serves as President of the Hunt
Sports Group, L.L.C., and has been an officer
of Hunt Sports Group, L.L.C. since January
1997. Mr. Wagner has been a Vice President of
the general partner of HW Capital, L.P., the
investment manager for several affiliated
investment funds which are stockholders of
Edge, since July 1999. Prior to January 1997,
Mr. Wagner was a CPA and served 12 years in
the public accounting industry, predominantly
with Coopers and Lybrand, L.L.P. His area of
expertise was federal and state tax issues for
entrepreneurial and sports related interests.
-20-
Significant Employees
- ---------------------
Graham C. "Scooter" Age 32, Vice President and General
Beachum III Manager since January 2001
Mr. Beachum began his career as the
founder of "StreetSmart," a
technology product and pricing
report that provided competitive
intelligence to Dell Computer
Corporation, IBM Corporation,
Digital Equipment Corporation and
other personal computer companies.
In 1993 he sold his first
entrepreneurial venture and shortly
thereafter founded Axtive Software
Corporation, with the development of
"ART," an embedded customer
relationship solution that captures
customer registration data and
initiates ongoing licensing,
marketing and service relationships.
The "ART" product line was followed
by "e.Monogram," an e-business
personalization application suite
for business-to-business
enterprises. After supporting
client organizations such as IBM and
Lotus Development, Axtive's
technology and development
operations were acquired by Remedy
Corporation in 2000. From January
2000 to December 2000, Mr. Beachum
was a private investor. Mr. Beachum
earned a BS in Management
Information System and a BS in
Marketing from Southern Methodist
University and an MBA from the
McLaren Business School at the
University of San Francisco. Scooter
Beachum is the son of our Chief
Executive Officer, Graham C.
Beachum II.
In January 2001, we entered into an
employment agreement with Mr.
Graham C. "Scooter" Beachum III to
serve as our Vice President and
General Manager. The Agreement
expires on January 2, 2005, unless
terminated earlier. Under the
Agreement, Scooter Beachum is
entitled to receive an annual base
salary of $95,000 that shall be
increased to $165,000 upon the
successful conclusion of an equity
offering by Edge of at least $10
million. The annual base salary
shall be increased by 5% each
fiscal year. In addition, Scooter
Beachum was granted options to
purchase 750,000 shares of Edge's
Common Stock at an exercise price
of $1.50 per share, of which 25%
vested upon the grant date and the
remainder vesting at the rate of
18.75% on January 2 of each
successive year. Pursuant to the
agreement, Scooter Beachum will
also be eligible to receive a bonus
based on our performance, as
determined by the Board of
Directors or its Compensation
Committee. In the event that
Scooter Beachum is terminated
without cause, including a change
of control (as defined in the
Agreement), he will be entitled to
receive as severance the amount of
his base salary for (i) the
remainder of his term of
employment, or (ii) six months,
whichever period is shorter. The
Agreement also contains customary
nondisclosure and non-competition
covenants, as well as an assignment
of inventions. We were not
required to record any compensation
expense in 2001 as a result of the
grant of these options.
-21-
EXECUTIVE COMPENSATION
Summary Compensation Table from 10-K
- ------------------------------------
The following table provides summary information concerning
compensation paid by us to our Chief Executive Officer and other
named executive officers, if any, who earned more than $100,000
in salary and bonus for all services rendered in all capacities
during the fiscal year ended December 31, 2001.
Long-Term
Annual Compensation Awards
Compensation ---------------------
------------ Securities Underlying All Other
Name and Principal Position(s) Year Salary Options(#) compensation
- ------------------------------ ------ ------------ --------------------- ------------
<s> <c> <c> <c> <c>
Graham C. Beachum II(1) 2001 $ 95,833 1,500,000 -
President and Chief 2000 - - -
Executive Officer (since 1999 - - -
January 2001)
In accordance with the rules of the SEC, other compensation in
the form of perquisites and other personal benefits has been
omitted for the named executive officer because the aggregate
amount of these perquisites and other personal benefits was less
than the lesser of $50,000 or 10% of the total of annual salary
and bonuses for the named executive officer in 2001.
(1)Mr. Beachum's principal positions are described above under
"Your Board of Directors."
Employment Agreements; Executive Compensation
- ---------------------------------------------
In January 2001, we entered into an employment agreement with Mr.
Graham C. Beachum II to serve as our President and Chief
Executive Officer. Mr. Beachum has assembled other personnel to
develop and expand our business plan. The Agreement expires on
January 2, 2005, unless terminated earlier. Under the Agreement,
Mr. Beachum is entitled to receive an annual base salary of
$100,000 that shall be increased to $240,000 upon the successful
conclusion of an equity offering by Edge of at least $10 million.
The annual base salary shall be increased by 5% each fiscal year.
In addition, Mr. Beachum was granted options to purchase
1,500,000 shares of Edge's Common Stock at an exercise price of
$1.50 per share, of which 25% vested upon the grant date with the
remainder vesting at the rate of 18.75% on January 2 of each
successive year. Pursuant to the agreement, Mr. Beachum will
also be eligible to receive a bonus based on our performance, as
determined by the Board of Directors or its Compensation
Committee. In the event that Mr. Beachum is terminated without
cause, including a change of control (as defined in the
Agreement), he will be entitled to receive as severance the
amount of his base salary for (i) the remainder of his term of
employment, or (ii) six months, whichever period is shorter. The
Agreement also contains customary nondisclosure and non-
competition covenants, as well as an assignment of inventions.
We were not required to record any compensation expense in 2001
as a result of the grant of these options.
-22-
1996 Employee Stock Option Plan
- -------------------------------
In April 1996, we adopted the 1996 Stock Option Plan (the "1996
Plan") and it was amended most recently in August 2000. The 1996
Plan provides for the granting to directors, officers, key
employees and consultants of up to 500,000 shares of Common Stock
in a year. Grants of options may be incentive stock options or
non-qualified stock options and will be at such exercise prices,
in such amounts, and upon such terms and conditions, as
determined by the Board of Directors or the compensation
committee of the Board of Directors. The term of any option may
not exceed ten years. In August 2000, the 1996 Plan was amended
to increase the number of shares reserved for issuance to
1,000,000 shares of Edge's Common Stock outstanding.
The 1996 Plan also provides for the automatic grant of 5,000 non-
qualified stock options upon commencement of service of a non-
employee director and 2,500 options per year per director
thereafter. The exercise price of the option may not be less than
100% of the market value of Edge's Common Stock at the time of
grant. Such options vest one-third on the date of the grant and
one-third on the first two anniversary dates and have a term of
five years. Because of their relationship with a stockholder of
Edge, each of our current non-employee directors has declined
such option grants.
Beginning in 2000, stock option grants were made by the Board of
Directors that would cause the number of options issued under the
1996 Plan to exceed the number authorized under the plan. Such
grants were made subject to stockholder approval at the next
annual meeting of stockholders.
As of June 19, 2002, there were 4,860,400 option shares outstanding
with strike prices ranging from $.42 to $2.32 per share, of which
1,845,433 were outstanding under the 1996 Employee Stock Option and
none available for future grants.
Stand-Alone Option Agreements
- -----------------------------
In connection with the acquisitions described above and in
addition to the above-referenced stock option plans, the Company
issued stand-alone option agreements to the key managers (former
executives) of the companies we acquired to become our operating
subsidiaries. Under these stand-alone plans, Edge granted
non-qualified stock options to purchase our $.01 par value Common
Stock at fair market value on the date of grant (ranging from
$.42 to $.77 per share), vesting ratably over three years and
expiring ten years from the date of grant. As of June 19, 2002,
there were 1,900,000 options outstanding under stand-alone plans,
of which 1,305,000 are currently vested.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership of Certain Stockholders, Directors and
Executive Officers
The following table sets forth information as of June 19, 2002
with respect to the beneficial ownership of our Common Stock and
our Series A Convertible Preferred Stock by:
* each of our named executive officers and directors;
* all of our executive officers and directors as a group;
and
* each person or group of affiliated persons, known to us
to own beneficially more than 5% of our Common Stock or
our Series A Convertible Preferred Stock.
-23-
In accordance with the rules of the Securities and Exchange
Commission ("SEC"), the table gives effect to the shares of
Common Stock that could be issued upon the exercise of
outstanding options and Common Stock purchase warrants within 60
days of June 19, 2002. Unless otherwise noted in the footnotes to
the table, and subject to community property laws where
applicable, the following individuals have sole voting and
investment control with respect to the shares beneficially owned
by them. The address of each executive officer and director is
c/o Edge Technology Group, Inc., 1445 Ross Avenue, Suite 4500,
Dallas, Texas 75202. We have calculated the percentages of shares
beneficially owned based on 18,539,622 shares of Common Stock and
4,200 shares of Series A Convertible Preferred Stock outstanding
at June 19, 2002.
Shares of Series A
Convertible Preferred Stock
Shares of Common Stock beneficially owned (1) Percentage of
------------------------ ---------------------------- All Voting
Person or Group Number Percent Number Percent Securities (2)
- ---------------------------------------------- ---------- --------- ---------- ------------- ---------------
<c> <c> <c> <c> <c> <c> <c>
Named Executive Officers and Directors:
Graham C. Beachum II (3) 656,250 3.4% -- -- 2.6%
J. Keith Benedict (4)(5) -- -- -- -- --
John A. Wagner (4)(5) -- -- -- -- --
All executive officers and directors
as a group (4 persons) 731,250 3.8% -- -- 2.9%
Beneficial Owners of 5% or More of Our
Outstanding Common Stock or our Series A
Convertible Preferred Stock:
Glacier Capital Limited (4)(5) 1,156,679 6.2% -- -- 4.8%
Summit Capital Limited (4)(5) 1,156,679 6.2% -- -- 4.8%
Sandera Partners, L.P. (4)(5) 2,380,357 12.8% 2,000 47.6% 20.9%
Global Capital Funding Group, L.P.; Strategic
Investment Fund Limited (6) -- -- 1,250 29.8% 6.9%
Infinity Investors Limited (7) 7,327,786 39.5% -- -- 30.3%
GCA Strategic Investment Fund Limited (8) -- -- 750 17.9% 4.1%
- --------------------------------------------------------------------------------------------------------------------------------
(1) Unless otherwise indicated, we believe that all persons
named in the table have sole voting and investment power
with respect to all shares of the Common Stock and Series A
Convertible Preferred Stock beneficially owned by them. A
person is deemed to be the beneficial owner of securities
that may be acquired by such person within 60 days from the
record date upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that (a) options that
are held by such person (but not those held by any other
person) and which are exercisable within 60 days of June 19,
2002, have been exercised and (b) securities convertible
into shares of Common Stock that are held by such person
(but not those held by any other person) and which are
convertible within 60 days of record date have been
converted.
-24-
(2) Holders of Common Stock are entitled to one vote per share.
Holders of Series A Convertible Preferred Stock are entitled
to vote on an "as converted" basis. Since the "initial
conversion price" has been set at $0.75 per share, each
share of Series A Convertible Preferred Stock is considered
to be convertible into 1,333.33 shares of Common Stock as of
June 19, 2002. Therefore, for purposes of calculating the
percentage of voting power held by any person or entity
identified in the chart above, the total votes outstanding
are equal to 24,139,608, being the result of the addition of
the total votes attributable to the Common Stock as of June
19, 2002 (18,539,622) plus the total votes attributable to
the Series A Convertible Preferred Stock as of June 19, 2002
(5,599,986).
(3) Includes options to purchase 656,250 shares of Common Stock
which are exercisable within 60 days from June 19, 2002.
(4) J. Keith Benedict and John A. Wagner are representatives of
the investment manager (or its affiliates) of Glacier
Capital Limited, Summit Capital Limited and Sandera
Partners, L.P.
(5) Summit Capital Limited, Glacier Capital Limited, and Sandera
Partners, L.P. have affirmed the existence of a "group" as
such term is used in Rule 13d-5 promulgated under the
Securities Exchange Act of 1934, as amended. Information
regarding these entities has been obtained from the Schedule
13D/A, filed January 7, 2002, with respect to the "group" in
which these entities are included. J. Keith Benedict and
John A. Wagner are representatives of the investment manager
(or its affiliates) of the other funds in the group. The
address of each of the entities in this group is 1601 Elm
Street, Suite 4000, Dallas, Texas 75201.
(6) Includes options to purchase 731,250 shares of Common Stock,
75,000 of which belong to David N. Pilotte, all of which are
exercisable within 60 days from June 19, 2002.
(7) The address of Global Capital Funding Group, L.P; Strategic
Investment Fund Limited is 106 Colony Park Drive, Suite 900
Cummings, GA 30040.
(8) The address of for Infinity Investors Limited is Hunkins
Waterfront Plaza, Main Street, P.O. Box 556, Charlestown,
Nevis, West Indies.
(9) The address of GCA Strategic Investment Fund Limited is c/o
Prince Management Limited Mechanics Building 12 Church
Street Hamilton Bermuda, HMII.
DESCRIPTION OF CAPITAL STOCK
Common Stock
- ------------
Our Common Stock is traded on the Over-The-Counter (OTC) Bulletin
Board under the symbol "EDGE." We completed our initial public
offering (IPO) in July 1996 at an offering price of $5.00 per
share for our Common Stock and $.10 per warrant. The IPO
warrants expired in August 2000 at a time when our Common Stock
was trading below the warrant exercise price.
-25-
On September 2, 2000, we affected a four-for-one reverse stock
split which had the effect of reducing the number of issued and
outstanding shares by 75% without changing the relative ownership
in Edge of any stockholder. For purposes of meaningful
comparison, the stock prices in the table below set forth the
stock prices that would have resulted had the four-for-one
reverse stock split occurred before the dates listed in the
table.
The following table sets forth for the period from January 1,
2000, through March 31, 2002, the range of high and low closing
bid prices for the Common Stock reported on the OTC Bulletin
Board. The quotations from the OTC Bulletin Board reflect
interdealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
Common Stock High Low
------- -------
Fiscal Year 2000
First Quarter $ 3.12 $ 0.26
Second Quarter 1.96 0.60
Third Quarter 3.32 1.52
Fourth Quarter 2.00 0.25
Fiscal Year 2001
First Quarter $ 2.06 $ 0.75
Second Quarter 1.56 0.53
Third Quarter 2.10 0.54
Fourth Quarter 0.75 0.41
Fiscal Year 2002
First Quarter $ 1.00 $ 0.50
April 2002 Series A Convertible Preferred Stock
- -----------------------------------------------
On April 1, 2002, we issued 4,200 shares of Series A Convertible
Preferred Stock ("Series A Preferred") at $1,000 per share
providing proceeds to us of $2,669,876 calculated as $4,200,000,
less $1,530,124 of the Sandera debt (see "Recent Sales of
Unregistered Securities - Catalyst Loans" below) converted to
Series A Preferred. The Series A Preferred shares carry an 8%
cumulative dividend and are convertible, at the option of the
holder, into shares of $.01 par value Common Stock of Edge any
time after one year at an initial conversion price of $.75 per
share. The preferred shares have voting rights pari passu with
the Common Stock and as a separate class on certain matters. The
shares also have an antidilution provision whereby the price and
number of shares issuable upon conversion adjusts for stock
splits, stock dividends and future share issuances below the
conversion price of the Series A Preferred. The Series A
Preferred have demand registration rights after one year
following closing of the financing transaction and the right to
elect one member to our Board of Directors.
In connection with the issuance of Series A Preferred, each
purchaser received warrants entitling the holder to purchase 20
shares of Edge's $.01 par value Common Stock for each 100 shares
of Common Stock the holder is entitled to receive upon
conversion. The warrants entitle the holder to purchase common
shares at the price of $1.15 per share. The warrants become
exercisable on the second anniversary of the issuance of the
Series A Preferred and, unless exercised earlier, will expire on
the fourth anniversary of the issuance. We issued warrants
exercisable for a total of 1,119,998 shares of Common Stock in
the offering. We paid no commissions in connection with issuance
of Series A Preferred. Proceeds from the offering were used to
acquire Media Resolutions, The Visionary Group, VirtuallyThere,
the assets of Universal Data Technology and for general corporate
purposes.
-26-
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Edge Technology Group, Inc.
is American Stock Transfer & Trust Company, located at 6201 15th
Avenue, Brooklyn, New York 11219.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 1, 1999, our common stock has been eligible for trade
Over-the-Counter ("OTC") Bulletin Board.
The OTCBB is a regulated quotation service for subscribing
members that displays real-time quotes, last sales prices and
volume information for over-the-counter equity securities. OTCBB
securities are limited to the securities of issuers that are
current in their reports filed with the U.S. Securities and
Exchange Commission, although no other maintenance standards are
imposed.
We have not paid any cash dividends on our common stock and we do
not anticipate declaring dividends in the foreseeable future. We
intend to retain future earnings, if any, for reinvestment in our
business.
As of June 11, 2002, there were 130 holders of record of our
common stock holding an aggregate of 18,539,622 shares.
Our common stock is subject to the so-called "penny stock" rules
that impose additional sales practice requirements on broker-
dealers who sell such securities to persons other than
established customers and accredited investors. As a result of
these additional requirements, an investor may find it more
difficult to dispose of our common stock. See "Business Risk
Factors - Our common stock is subject to the `penny stock' rules
which may make it a less attractive investment."
RECENT SALES OF UNREGISTERED SECURITIES
For the past several years, we have sought financing through
private sources. In general, we raised capital through a
combination of debt and equity issuances to private investor
groups. All the financing transactions described below were
deemed to be exempt from registration under the Securities Act of
1933 in reliance on Section 4(2) of such act as transactions by
an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued
in such transactions.
Infinity Financing and Conversion
- ---------------------------------
On June 13, 1997, we arranged a three-year $7.5 million debt and
convertible equity facility (the "Infinity Financing") with a
group of investment funds led by Infinity Investors Limited
("Infinity"), a related party, which resulted in net proceeds to
us of approximately $7.2 million. Under the Securities Purchase
Agreement dated June 13, 1997, including the amendments that have
since been made to this agreement, we issued to the investment
funds 1,039,388 shares of our Common Stock, 6,000 shares of
Series A-2 Convertible Preferred Stock with a liquidation
preference of $1,000 per share and 8.25% Convertible Notes in the
original principal amount of $1.5 million.
-27-
Under the terms of the investment agreements, the investment
funds were granted the right to convert their Series A-2
Convertible Preferred Stock and Convertible Notes into additional
shares of our Common Stock, subject to our right to prepay or
redeem any of those convertible instruments at any time. Because
our Common Stock was delisted from the NASDAQ SmallCap Market, an
Event of Default existed under the Infinity Financing. As a
result, the investment funds attained the rights to convert each
share of Series A-2 Convertible Preferred Stock into a number of
shares of Common Stock based on a formula using a percentage of
the market price of the Common Stock. On August 30, 1999, one of
the investment funds delivered a notice to us to convert 1,627 of
its 4,400 shares of our Series A-2 Convertible Preferred Stock
into 2,398,714 shares of our Common Stock. The conversion was
disputed, and litigation ensued in the Delaware Court of
Chancery. In January 2000, the court dismissed the action
stating that the claim relating to the conversion was moot
because parties to the dispute had resigned from their positions
with Edge.
In addition, because of the existence of an Event of Default
under the Infinity Financing, the investment funds also attained
the rights to convert the Convertible Notes into Common Stock
based on the same formula used to convert the Series A-2
Convertible Preferred Stock into shares of Common Stock during an
Event of Default. Dividends on the Series A-2 Convertible
Preferred Stock began accruing on January 1, 2000, at the rate of
8.25% annually and were payable quarterly in cash or in shares of
Common Stock. We paid no dividends on the Series A-2 Convertible
Preferred Stock. The Convertible Notes matured in June 2000 and
interest on the notes was due in cash. The Convertible Notes
were secured by all of our significant assets.
In June 2000, we recognized Infinity's conversion of 1,627 shares
of its Series A-2 Convertible Preferred Stock into 2,398,714
shares of Edge's Common Stock and approved the issuance of those
shares of Common Stock to Infinity as a result of such
conversion.
As part of the reorganization of Edge effective September 1,
2000, Infinity, Glacier Capital Limited and Summit Capital
Limited, which were the holders of the Convertible Notes and
shares of Series A-2 Convertible Preferred Stock issued by Edge,
converted all their convertible securities and accrued interest
and dividends based on a formula of one (1) share of Common Stock
for each $1.00 of principal and interest outstanding under the
convertible notes and for each $1.00 of liquidation amount of the
Series A-2 Convertible Preferred Stock and of unpaid dividends.
The number of shares of Common Stock issued upon this conversion
was 6,689,165. As a result of these actions, as of September
2000, Edge had no shares of preferred stock outstanding and no
outstanding convertible notes and was no longer in default under
the documents governing the convertible notes and the Series A-2
Convertible Preferred Stock. In connection with these actions,
we recognized a conversion loss and a provision for preferred
stock dividends on the conversion of debt and preferred stock of
$4,796,403 in 2000.
2000 Infinity Loans
- -------------------
During 2000, Infinity, a related party, made certain loans to us
for working capital purposes. These loans totaled approximately
$219,000 and bear interest at a rate equal to 8.5% per annum. As
part of the reorganization of Edge effective September 1, 2000,
Infinity became entitled to the repayment of these loans. The
loan agreement was renegotiated in April 2001 and again in
January 2002 to extend the due date to March 31, 2002. As of
December 31, 2001, there was $219,000 in principal outstanding.
Upon maturity, as of April 1, 2002, Infinity elected to convert
the outstanding principal and interest totaling $258,464 into
$.01 par value Common Stock at $.65 per share resulting in
397,637 shares issued by us. We claimed an exemption for this
issuance under section 4(2) of the Securities Act of 1933.
-28-
September 2000 Equity Issuance
- ------------------------------
In September 2000, we issued to private accredited investors an
aggregate of 1,458,667 shares of our Common Stock for an
aggregate purchase price of $2,187,999 pursuant to Rule 506,
Regulation D of the Securities Act of 1933. In April 2000, we
also issued warrants to private accredited investors to purchase
729,333 shares of Common Stock at an exercise of $3.00 per share
pursuant to Rule 506, Regulation D of the Securities Act of 1933.
Effective September 1, 2000, we acquired from PurchasePooling, a
related party, 9,593,824 shares of Series A Convertible Preferred
Stock of PurchasePooling in exchange for 2,644,841 shares of Edge
Common Stock. In 2000, we entered into an agreement to acquire
from Odyssey Ventures Online Holdings S.A. 975,000 shares of
Series A Convertible Preferred Stock of PurchasePooling in
exchange for 268,789 shares of Edge Common Stock. In April 2001,
the agreement was finalized and the shares of Common Stock were
issued. Our President and CEO is also the interim President of
PurchasePooling. No underwriting discounts were paid in
connection with any of the above sales. We paid approximately
$6,000 in commissions in connection with the above sales. For
all of the above sales, we claimed an exemption from registration
under Section 4(2) of the Securities Act of 1933.
Infinity Option
- ---------------
On May 31, 2001, we sold to Infinity an option in return for the
payment of $1.0 million payable in five payments of $200,000 each
commencing on May 31, 2001 ("Infinity Option"). Pursuant to the
Infinity Option, Infinity could elect on May 31, 2002, to
exercise its option by assigning its interest in a note
receivable of $10.0 million in exchange for 3,333,333 shares of
Edge Common Stock. We received $600,000 during 2001 which was
recorded as paid in capital.
In March 2002, Infinity and Edge mutually agreed to terminate the
option.
Catalyst Loan
- -------------
On December 13, 2000, we entered into a loan agreement with
Catalyst Master Fund, L.P. ("Catalyst"), a related party, to
borrow $620,000 (the "Catalyst Loan"). The Catalyst Loan was
originally due on June 30, 2001, and bears interest at a rate
equal to eight percent (8%) per annum. We used the proceeds of
the Catalyst Loan to purchase 2,214,285 shares of Series C
Convertible Preferred Stock of PurchasePooling. Catalyst Master
Fund L.P. is a stockholder of ours and certain of our directors
are officers of an entity that manages Catalyst Master Fund L.P.
The Catalyst Loan was convertible at the option of the holder
into Edge Common Stock at a conversion price of $1.50 per share.
The Catalyst Loan was also secured by a pledge of substantially
all of our assets. Effective April 16, 2001, we 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, we could draw down amounts under the loan agreement as
we have a need for funds, subject to our being in compliance with
the covenants contained in that loan agreement. The amended loan
agreement bears interest at eight percent (8%) per annum and was
due March 31, 2002. The additional amount available under the
amended loan agreement is also convertible into Edge Common Stock
at a conversion price of $1.50 per share and was secured by a
pledge of substantially all of our assets. On December 31, 2000
and 2001, the principal balance outstanding on the Catalyst Loan
was $620,000 and $1,420,000, respectively.
On December 28, 2001, Catalyst Master Fund, L. P. assigned the
Catalyst Loan, and its rights thereunder, to Sandera Partners, L.
P. ("Sandera") as part of a redemption of Sandera's limited
partnership interest in Catalyst. Certain of our directors are
officers of an entity that manages Sandera.
-29-
As of April 1, 2002, as part of the April 2002 Series A Convertible
Preferred Stock financing described below, Sandera converted all
outstanding principal and interest due on the loan (total of
$1,530,124) and contributed an additional amount of approximately
$470,000 in cash in exchange for 2,000 shares of Series A
Convertible Preferred Stock.
April 2002 Series A Convertible Preferred Stock
- -----------------------------------------------
On April 1, 2002, we issued to private accredited investors 4,200
shares of Series A Convertible Preferred Stock ("Series A
Preferred") at $1,000 per share providing proceeds to us of
$2,669,876 calculated as $4,200,000, less $1,530,124 of the pre-
existing Sandera debt converted to Series A Preferred. The
Series A Preferred shares carry an 8% cumulative dividend and are
convertible, at the option of the holder, into shares of $.01 par
value Common Stock of Edge any time after one year at an initial
conversion price of $.75 per share. The preferred shares have
voting rights pari passu with the Common Stock and as a separate
class on certain matters. The shares also have an antidilution
provision whereby the price and number of shares issuable upon
conversion adjusts for stock splits, stock dividends and future
share issuances below the conversion price of the Series A
Preferred. The Series A Preferred have demand registration
rights after one year following closing of the financing
transaction and the right to elect one member to our Board of
Directors.
In connection with the issuance of Series A Preferred, each
purchaser received warrants entitling the holder to purchase 20
shares of Edge's $.01 par value Common Stock for each 100 shares
of Common Stock the holder is entitled to receive upon
conversion. The warrants entitle the holder to purchase common
shares at the price of $1.15 per share. The warrants become
exercisable on the second anniversary of the issuance of the
Series A Preferred and, unless exercised earlier, will expire on
the fourth anniversary of the issuance. We issued warrants
exercisable for a total of 1,119,998 shares of Common Stock in
the offering. We paid no commissions in connection with the
issuance of Series A Preferred. Proceeds from the offering were
used to acquire Media Resolutions, The Visionary Group,
VirtuallyThere, the assets of Universal Data Technology and for
general corporate purposes.
Other Issuances
- ---------------
In September 2000, we issued 83,333 shares of Common Stock to
Marion Interglobal, Ltd. as a result of the conversion by Marion
of $125,000 of indebtedness owed to Marion by Edge, and 142,005
shares of Common Stock to Great White Shark Enterprises, Inc.
upon its conversion of approximately $284,000 of indebtedness
owed to Great White Shark Enterprises by us.
In December 2001, we learned that $91,095 in preferred dividends
and interest were not paid in the September 2000 corporate
reorganization. As a result, 91,095 common shares of Edge were
issued, as of December 31, 2001, to Infinity, Glacier Capital
Limited and Summit Capital Limited on the original terms of one
share of Common Stock for each $1.00 of principal and interest
converted in satisfaction of the obligation. This was recorded
in General and Administrative expense in the Statement of
Operations.
In 1999 and 2001, the Company issued 20,000 and 11,920 shares of
common stock respectively for payment of services.
On April 11, 2002, we acquired Media Resolutions, Inc., an ASP
and website hosting company located in Dallas, Texas. We paid
$330,000 in cash and 500,000 restricted shares of our Common
Stock in exchange for all the outstanding shares of Media
Resolutions as a result of arms-length negotiations with Media
Resolutions (See "Acquisition or Disposition of Assets-
Acquisition of Media Resolutions, Inc." above for more
information).
-30-
On May 30, 2002, we acquired VirtuallyThere, Inc. pursuant to a
merger agreement among Edge Technology Group, Inc., VT
Acquisition Corp., VirtuallyThere, Inc. and the shareholders of
VirtuallyThere, Inc. In exchange for the outstanding shares of
VirtuallyThere, Inc, we paid $120,000 in cash, issued 1,153,846
shares of our restricted Common Stock to the shareholders of
VirtuallyThere, assumed approximately $185,000 of
VirtuallyThere's existing liabilities as of the date of closing,
as a result of arms length negotiations between the parties (See
"Acquisition or Disposition of Assets- Acquisition of
VirtuallyThere, Inc." above for more information).
Indemnification of Directors and Officers
- -----------------------------------------
Section 145 of the Delaware General Corporation Law ("DGCL")
contains provisions entitling the Company's directors and
officers to indemnification from judgments, fines, amounts paid
in settlement, and reasonable expenses (including attorneys'
fees) as the result of an action or proceeding in which they may
be involved by reason of having been a director or officer of the
Company. In its Certificate of Incorporation, the Company has
included a provision that limits, to the fullest extent now or
hereafter permitted by the DGCL, the personal liability of its
directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors.
Under the DGCL as currently in effect, this provision limits a
director's liability except where such director (i) breaches his
duty of loyalty to the Company or its stockholders, (ii) fails to
act in good faith or engages in intentional misconduct or a
knowing violation of law, (iii) authorizes payment of an unlawful
dividend or stock purchase or redemption as provided in Section
174 of the DGCL, or (iv) obtains an improper personal benefit.
This provision does not prevent the Company or its stockholders
from seeking equitable remedies, such as injunctive relief or
rescission. If equitable remedies are found not to be available
to stockholders in any particular case, stockholders may not have
any effective remedy against actions taken by directors that
constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the
effect that (subject to certain exceptions) the Company shall, to
the maximum extent permitted from time to time under the law of
the State of Delaware, indemnify, and upon request shall advance
expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under
such law, as it may from time to time be in effect. In addition,
the Company's By-Laws require the Company to indemnify, to the
full extent permitted by law, any director, officer, employee or
agent of the Company for acts which such person reasonably
believes are not in violation of the Company's corporate purposes
as set forth in the Certificate of Incorporation. At present, the
DGCL provides that, in order to be entitled to indemnification,
an individual must have acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the Company's
best interests.
Unless the Board of Directors otherwise determines in a specific
case, expenses incurred by a Director or officer in defending a
civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf
of the Director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be
indemnified by the Corporation.
Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate. The Board of Directors may authorize
the Corporation's legal counsel to represent such Director,
officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or
proceeding.
-31-
Where to Find More Information
- ------------------------------
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission. The filings of the Commission are available to the
public from commercial document retrieval services and at the web
site maintained by the SEC at www.sec.gov.
-----------
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
Historical Financial Statements of Business Acquired
- ----------------------------------------------------
Audited Financial Statements of The Visionary Group, Inc.,
Media Resolutions, Inc., VirtuallyThere, Inc. and
Universal Data Technology, Inc. as of and for the year
ended December 31, 2001.
Unaudited interim financial information for VirtuallyThere, Inc.
and Universal Data Technology, Inc. for the three months
ended March 31, 2002.
Pro forma Financial Information (Unaudited)
- -------------------------------------------
Unaudited combined pro forma Balance Sheets of Edge Technology
Group, Inc., The Visionary Group, Inc., Media Resolutions, Inc.,
VirtuallyThere, Inc. and Universal Data Technology, Inc. as of
March 31, 2002, and the related unaudited combined pro forma
Statements of Operations for the year ended December 31, 2001,
and the three months ended March 31, 2002.
Exhibits
- --------
The following Exhibits are filed as part of this Report as
required by Item 601 of Regulation S-B.
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------
3.1 Certificate of Incorporation of Edge, as
amended (Incorporated by reference to Exhibit
3.1 to Amendment No. 2 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
3.2 Amended and Restated By-Laws of Edge
(Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
4.1 Form of Specimen Common Stock
Certificate (Incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.2 Form of Specimen Redeemable Warrant
Certificate (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.3 Form of Warrant Agreement between Edge
and Whale Securities Co., L.P. (Incorporated
by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.4 Form of Warrant among American Stock
Transfer & Trust Company, Edge and Whale
Securities Co., L.P. (Incorporated by
reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
-32-
4.7 Form of Convertible Note issued to
investors in the Infinity Bridge Financing
(Incorporated by reference to Exhibit 99.5 to
the Registrant's Current Report on Form 8-K
filed June 23, 1997)
4.8 Form of Common Stock Purchase Warrant
issued to Vision Financial Group, Inc.
(Incorporated by reference to Exhibit 4.8 to
the Registrant's Quarterly Report on Form 10-
QSB filed November 14, 1997)
4.9 Form of Subscription and Securities
Purchase Agreement dated April 1, 2002,
between Edge Technology Group, Inc. and
Purchasers as named therein. (Previously
filed on April 16, 2002, with the
Registrant's Report on Form 10-KSB for the
year ended December 31, 2001.)
4.10 Certificate of Designation, Preference
and Rights of Series A Convertible Preferred
Stock of Edge Technology Group, Inc. dated
April 1, 2002. (Previously filed on April
16, 2002, with the Registrant's Report on
Form 10-KSB for the year ended December 31,
2001.)
4.11 Form of Common Stock Purchase Warrant
dated April 1, 2002, issued to purchasers of
Series A Convertible Preferred Stock.
(Previously filed on April 16, 2002, with the
Registrant's Report on Form 10-KSB for the
year ended December 31, 2001.)
4.12 Registration Rights Agreement dated
April 1, 2002 pertaining to Series A
Convertible Preferred Stock (Previously filed
on April 16, 2002, with the Registrant's
Report on Form 10-KSB for the year ended
December 31, 2001.)
4.13 Letter Agreement dated April 1, 2002
pertaining to conversion of Infinity Note
into shares of Common Stock (Previously filed
on April 16, 2002, with the Registrant's
Report on Form 10-KSB for the year ended
December 31, 2001.).
10.1 License Agreement, dated March 1, 1995,
between Great White Shark Enterprises, Inc.
and Edge, as supplemented (Incorporated by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
10.2 Amendment to License Agreement, dated as
of June 3, 1997, by and among Edge, Greg
Norman and Great White Shark Enterprises,
Inc. (Incorporated by reference to Exhibit
99.1 to the Registrant's Current Report on
Form 8-K/A filed June 27, 1997)
10.3 Amendment to License Agreement, dated as
of January 1, 2000, by and among Edge, Greg
Norman and Great White Shark Enterprises,
Inc. (Previously filed on April 14, 2000 with
Registrant's Report on Form 10-K for fiscal
year ended December 31, 1999)
*10.4 Employment Agreement, dated as of
May 1, 1996, between Thomas S. Peters and
Edge, as amended (Incorporated by reference
to Exhibit 10.5 to the Registrant's
Registration Statement on Form SB-2
Registration No. 333-5193) effective July 24,
1996)
*10.5 Amended and Restated 1996 Stock
Option Plan (Incorporated by reference to our
1996 definitive Proxy Statement filed on
April 7, 1997)
10.6 Lease Agreement by and between Fairfax
Boca 92, L.P., a Georgia limited partnership,
and Visual Edge Systems, Inc. for offices
located at 901 Yamato Road, Boca Raton,
Florida (Previously filed on April 14, 2000
with Registrant's Report on Form 10-K for
fiscal year ended December 31, 1999)
-33-
10.7 Assignment, dated April 19, 1996 from
Thomas S. Peters to Visual Edge (Incorporated
by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.8 Share and Warrant Purchase Agreement,
dated as of February 27, 1997, between Edge
and Status-One Investments Inc. (Incorporated
by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24675) filed April
7, 1997)
10.10 Registration Rights Agreement,
dated as of June 13, 1997, among Edge and the
Funds (Incorporated by reference to Exhibit
99.2 to the Registrant's Current Report on
Form 8-K filed June 23, 1997)
10.12 Purchase Agreement, dated as of
March 27, 1998, among Edge and Marion
Interglobal, Ltd. (Incorporated by reference
to Exhibit 10.16 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997)
10.13 Registration Rights Agreement,
dated as of March 27, 1998, among Edge and
Marion Interglobal, Ltd. (Incorporated by
reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997)
10.18 Form of Warrant Certificate.
(Incorporated by reference to Exhibit 99.3 to
the Registrant's Current Report on Form 8-K
filed February 9, 1998)
10.19 Amendment, dated as of December 31,
1998, to License Agreement dated as of March
1, 1995, by and between Greg Norman and Great
White Shark Enterprises, Inc. and Edge, as
amended on April 19, 1996, October 18, 1996
and June 3, 1997 (Incorporated by reference
to Exhibit 10.19 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year
ended December 31, 1998)
10.21 Sublease Agreement, dated as of
September 29, 1999, by and between Edge and
Sensormatic Electronics Corporation
(Previously filed on April 14, 2000 with
Registrant's Report on Form 10-K for fiscal
year ended December 31, 1999)
10.22 Note and Security Agreement dated
as of December 14, 2000 between Edge and
Catalyst Master Fund, L.P. (Previously filed
on April 17, 2001, with the Registrant's
Report of Form 10-KSB for the year ended
December 31, 2000.)
10.23 Agreement and Plan of Merger Among
Edge Technology Group, Inc., Visionary
Acquisition Corp., The Visionary Group, Inc.
and The Visionary Group Shareholders dated
April 8, 2002. (Previously filed on April
16, 2002, with the Registrant's Report on
Form 10-KSB for the year ended December 31,
2001.)
10.24 Agreement and Plan of Merger Among
Edge Technology Group, Inc., Media
Resolutions Acquisition Corp., Media
Resolutions, Incorporated and Media
Resolutions Shareholders dated April 11,
2002. (Previously filed on April 16, 2002,
with the Registrant's Report on Form 10-KSB
for the year ended December 31, 2001.)
10.25 Agreement and Plan of Merger Among
Edge Technology Group, Inc., VT Acquisition
Corp., Virtually There, Inc. and the
shareholders of Virtually There, Inc. dated
May 30, 2002. (Previously filed on June 14,
2002 with the Registrant's Current Report on
Form 8-K)
-34-
10.26 Asset Purchase Agreement by and
among Universal Data Technology, Inc., its
Shareholders, Edge Technology Group, Inc. and
UDT Consulting, Inc. (Previously filed on
June 14, 2002 with the Registrant's Current
Report on Form 8-K)
21.1 Subsidiaries of the Registrant dated
June 19, 2002 (filed herewith).
*Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
On April 23, 2002, we filed a report on Form 8-K disclosing under
Item 2 that on April 8, 2002, we acquired The Visionary Group,
Inc. pursuant to an Agreement and Plan of Merger among Edge
Technology Group, Inc., Visionary Acquisition Corp., The
Visionary Group, Inc. and The Visionary Group Shareholders.
Additionally, the report disclosed that on April 11, 2002, we
acquired Media Resolutions, Inc. pursuant to the Agreement and
Plan of Merger among Edge Technology Group, Inc., ETG Acquisition
Corp., Media Resolutions, Inc. and Media Resolutions
Shareholders.
On June 14, 2002, we filed a report on Form 8-K disclosing under
Item 2 that on May 30, 2002, Edge closed the acquisition of
Virtually There, Inc. pursuant to a Merger Agreement among Edge
Technology Group, Inc., VT Acquisition Corp., Virtually There,
Inc. and the shareholders of Virtually There, Inc. Additionally,
the report disclosed that on May 31, 2002, our newly created and
wholly owned subsidiary, UDT Consulting, Inc., acquired the
assets of Universal Data Technology, Inc., pursuant to an Asset
Purchase Agreement by and among Universal Data Technology, Inc.,
its shareholders, Edge Technology Group, Inc. and UDT Consulting,
Inc.
-35-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
EDGE TECHNOLOGY GROUP, INC.
Date: June 24, 2002
By: /s/ DAVID N. PILOTTE
-----------------------------
David N. Pilotte
Executive Vice President and
Chief Financial Officer
-36-
INDEX TO FINANCIAL STATEMENTS
Index to Financial Statements............................ F-1
HISTORICAL FINANCIAL STATEMENTS
The Visionary Group, Inc.
- -------------------------
Report of Independent Certified Public Accountants....... F-3
Balance Sheet as of December 31, 2001.................... F-4
Statement of Operations for the year ended
December 31, 2001..................................... F-5
Statement from Stockholders' Equity for the
year ended December 31, 2001.......................... F-6
Statement of Cash Flows for the year ended
December 31, 2001..................................... F-7
Notes to Financial Statements........................... F-8
Media Resolutions, Inc.
- -----------------------
Report of Independent Certified Public Accountants...... F-11
Balance Sheet as of December 31, 2001................... F-12
Statement of Operations for the year ended
December 31, 2001..................................... F-13
Statement from Stockholders' Equity for the
year ended December 31, 2001.......................... F-14
Statement of Cash Flows for the year ended
December 31, 2001..................................... F-15
Notes to Financial Statements........................... F-16
VirtuallyThere, Inc.
- --------------------
Report of Independent Certified Public Accountants...... F-18
Balance Sheet as of December 31, 2001................... F-19
Statement of Operations for the year ended
December 31, 2001..................................... F-20
Statement from Stockholders' Equity (Deficit)
for the year ended December 31, 2001.................. F-21
Statement of Cash Flows for the year ended
December 31, 2001..................................... F-22
Notes to Financial Statements........................... F-23
Unaudited Balance Sheet as of March 31, 2002............ F-27
Unaudited Comparative Interim Statements
of Operations for the three months ended
March 31, 2001 and 2002............................... F-28
Unaudited Statement of Cash Flows for the
three months ended March 31, 2001 and 2002............ F-29
Note to Unaudited Financial Statements.................. F-30
Universal Data Technology, Inc.
- -------------------------------
Report of Independent Certified Public Accountants...... F-31
Balance Sheet as of December 31, 2001................... F-32
Statement of Operations for the year ended
December 31, 2001..................................... F-33
Statement from Stockholders' Equity (Deficit)
for the year ended December 31, 2001.................. F-34
Statement of Cash Flows for the year ended
December 31, 2001..................................... F-35
Notes to Financial Statements........................... F-36
F-1
Unaudited Balance Sheet as of March 31, 2002............ F-40
Unaudited Comparative Interim Statements of
Operations for the three months ended
March 31, 2001 and 2002............................... F-41
Unaudited Statement of Cash Flows for
the three months ended March 31, 2001
and 2002.............................................. F-42
Note to Unaudited Financial Statements.................. F-43
UNAUDITED COMBINED PRO FORMA CONDENSED FINANCIAL INFORMATION
Edge Technology Group, Inc. and
Acquired Companies Unaudited Combined
Pro Forma Condensed Financial Information
- -------------------------------------------
Basis of Presentation................................... F-44
Unaudited Combined Pro Forma Condensed Balance
Sheets as of March 31, 2002........................... F-45
Unaudited Combined Pro Forma Condensed
Statements of Operations for the year ended
December 31, 2001, and the three months
ended March 31, 2002.................................. F-46
Notes to Unaudited Combined Pro Forma Condensed
Financial Statements.................................. F-48
F-2
Report of Independent Certified Public Accountants
To the Stockholders
The Visionary Group, Inc.
We have audited the accompanying balance sheet of The Visionary
Group, Inc. as of December 31, 2001, and the related statements
of operations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of The Visionary Group, Inc. as of December 31, 2001, and the
results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally
accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
January 31, 2002, except for Note F, as to
which the date is March 6, 2002
F-3
The Visionary Group, Inc.
BALANCE SHEET
December 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,381
Accounts receivable, less allowance
for doubtful accounts of $62,325 556,104
Notes receivable - stockholders 18,000
---------
Total current assets 602,485
PROPERTY AND EQUIPMENT, at cost
Office equipment 62,376
Furniture and fixtures 20,538
---------
82,914
Less accumulated depreciation (25,137)
---------
57,777
OTHER ASSETS 3,309
---------
$ 663,571
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 220,000
Accounts payable 211,618
Accrued liabilities 68,927
Deferred income taxes 29,215
---------
Total current liabilities 529,760
DEFERRED INCOME TAXES 3,303
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized,
10,000 shares; issued and outstanding,
1,100 shares 1,000
Retained earnings 129,508
---------
Total stockholders' equity 130,508
---------
$ 663,571
=========
The accompanying notes are an integral part of this statement
F-4
The Visionary Group, Inc.
STATEMENT OF OPERATIONS
Year ended December 31, 2001
Revenues $ 3,375,840
Costs and expenses
Employee compensation 1,508,547
Contract labor 1,485,640
Other general and administrative expenses 358,166
Depreciation 11,846
-----------
3,364,199
-----------
Operating profit 11,641
Other income (expense)
Interest expense (19,540)
Other 1,592
-----------
(17,948)
-----------
Loss before income taxes (6,307)
Deferred income tax expense (1,632)
-----------
NET LOSS $ (7,939)
===========
The accompanying notes are an integral part of this statement
F-5
The Visionary Group, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 2001
Common Stock
---------------- Retained
Shares Amount earnings Total
------ ------- --------- ---------
<s> <c> <c> <c> <c>
Balance at December 31, 2000 1,000 $ 1,000 $ 137,447 $ 138,447
Net loss - - (7,939) (7,939)
------ ------- --------- ---------
Balance at December 31, 2001 1,000 $ 1,000 $ 129,508 $ 130,508
====== ======= ========= =========
The accompanying notes are an integral part of this statement
F-6
The Visionary Group, Inc.
STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Cash flows from operating activities
Net loss $ (7,939)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 11,846
Loss on disposal of assets 4,060
Changes in operating assets and liabilities
Accounts receivable (44,627)
Accounts payable 73,888
Accrued liabilities 20,442
Deferred income taxes 1,632
---------
Net cash provided by operating activities 59,302
Cash flows from investing activities
Expenditures for capital assets (42,327)
Proceeds from sale of capital assets 950
Issuance of note receivable (6,000)
---------
Net cash used in investing activities (47,377)
---------
Net increase in cash and
cash equivalents 11,925
Cash and cash equivalents at beginning of year 16,456
---------
Cash and cash equivalents at end of year $ 28,381
=========
Supplemental cash flow information
Cash paid during the period for interest $ 19,540
Cash paid during the period for income taxes -
=========
The accompanying notes are an integral part of this statement
F-7
The Visionary Group, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
------------------
The Visionary Group, Inc. (the "Company") is an e-Business
consulting firm specializing in implementing, customizing,
upgrading and supporting the Oracle suite of business
applications. With offices in Dallas and Austin, Texas, the
Company provides expertise to multi-national companies as well
as small and mid-market companies primarily in the South
Central region of the United States.
Cash Equivalents
----------------
The Company considers investments with original maturity dates
when purchased of ninety days or less to be cash equivalents.
Income Taxes
------------
The Company accounts for income taxes under the asset and
liability method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amount and the tax basis of existing assets
and liabilities.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation of
property and equipment is computed using the straight-line
method over the estimated useful lives of such property and
equipment, which range from five to ten years.
Revenue Recognition
-------------------
Revenue is recognized when the services are performed.
Contract labor is recorded when the related revenue for
contracted consultants is recognized.
Advertising Expense
-------------------
The Company expenses advertising costs as incurred. Total
advertising expense was approximately $50,000 for the year
ended December 31, 2001.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
NOTE B - LINE OF CREDIT
The Company has a $300,000 line of credit with a bank due upon
demand, with interest payable monthly at the bank's prime rate
plus 1.75% (6.5% at December 31, 2001). The balance
outstanding under the line of credit at December 31, 2001 was
$220,000 and is collateralized by all assets of the Company.
NOTE C - INCOME TAXES
The deferred tax liability at December 31, 2001 relates to the
difference between book and tax bases of accounts receivable,
accounts payable, and property and equipment, less the tax
effect of net operating loss carryforwards. The provision for
Federal income tax differs from the statutory rate due to
nondeductible expenses. At December 31, 2001, the Company has
net operating loss carryforwards of approximately $81,000
expiring in 2020.
NOTE D - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan under section
401(k) of the Internal Revenue Code. All employees over the
age of 21 are allowed to participate. The Company contributes
25% of each employee's contribution up to legal limits, and
employees become vested in Company contributions after two
years of service. The Company's contributions under the plan
during the year ended December 31, 2001, were approximately
$18,700.
NOTE E - COMMITMENTS
Operating Leases
----------------
The Company leases certain office facilities and vehicles under
non-cancelable operating leases which expire through March
2006. Future minimum lease payments under non-cancelable
leases with initial lease terms greater than one year are as
follows:
Year ending
December 31,
2002 $ 63,207
2003 49,674
2004 39,700
2005 39,700
2006 9,925
---------
$ 202,206
=========
Rent expense under all operating leases was approximately
$68,000 for the year ended December 31, 2001.
F-9
NOTE F - LIQUIDITY MATTERS
The Company incurred a net loss for the two months ended
February 28, 2002 of approximately $188,000, which has resulted
in a stockholders' deficit and a working capital deficit at
February 28, 2002. The continued existence of the Company is
dependent upon attaining profitability or raising additional
capital. Management has taken steps to reduce operating
expenses and believes this will be sufficient for the Company
to meet its obligations as they become due and continue in
existence.
F-10
Report of Independent Certified Public Accountants
To the Stockholders
Media Resolutions Incorporated
We have audited the accompanying balance sheet of Media
Resolutions Incorporated as of December 31, 2001, and the related
statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Media Resolutions Incorporated as of December 31, 2001, and
the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
January 31, 2002
F-11
Media Resolutions Incorporated
BALANCE SHEET
December 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,627
Accounts receivable, net of allowance
for doubtful accounts of $2,200 8,625
Marketable securities 75,424
---------
Total current assets 113,676
EQUIPMENT, at cost
Computer equipment 77,652
Less accumulated depreciation (33,598)
---------
44,054
---------
$ 157,730
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,730
Accrued liabilities 4,489
Deferred revenue 8,813
Deferred income taxes 11,221
---------
Total current liabilities 29,253
DEFERRED INCOME TAXES 1,657
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 1,000 shares
authorized, issued and outstanding 1,000
Additional paid-in capital 38,200
Retained earnings 23,510
Accumulated other comprehensive income 64,110
---------
Total stockholders' equity 126,820
---------
$ 157,730
=========
The accompanying notes are an integral part of this statement
F-12
Media Resolutions Incorporated
STATEMENT OF OPERATIONS
Year ended December 31, 2001
Revenues
Hosting $ 248,063
Design 3,754
Coding 24,260
Other 6,497
---------
282,574
Costs and expenses
Bandwidth 30,081
Employee compensation 162,466
Contract labor 28,435
Other general and administrative 80,959
Depreciation 16,977
---------
318,918
---------
Loss from operations (36,344)
Realized gain on sale of investments 24,819
---------
Loss before income taxes (11,525)
Deferred income tax benefit 1,720
---------
NET LOSS $ (9,805)
=========
The accompanying notes are an integral part of this statement
F-13
Media Resolutions Incorporated
STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 2001
Accumulated
Common Stock Additional other
---------------- paid-in Retained comprehensive
Shares Amount capital earnings income Total
------ ------ ----------- -------- ------------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance at January 1, 2001 1,000 $1,000 $ 38,200 $ 33,315 $ 24,462 $ 96,977
Comprehensive income
Net loss - - - (9,805) - (9,805)
Unrealized gain on marketable
securities, net of income
taxes of $11,324 - - - - 60,744 60,744
Reclassification of realized
gains, net of income taxes
of $3,723 - - - - (21,096) (21,096)
Total 29,843
------ ------ ---------- -------- ------------- ----------
Balance at December 31, 2001 1,000 $1,000 $ 38,200 $ 23,510 $ 64,110 $126,820
====== ====== ========== ======== ============= =========
The accompanying notes are an integral part of this statement
F-14
Media Resolutions Incorporated
STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Cash flows from operating activities
Net loss $ (9,805)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 16,977
Realized gain on sale of marketable securities (24,819)
Deferred income taxes (1,720)
Changes in operating assets and liabilities
Accounts receivable 5,245
Accounts payable 3,038
Accrued expenses (2,821)
Deferred revenue 8,813
---------
Net cash used in operating activities (5,092)
Cash flows from investing activities
Purchase of equipment (12,085)
Proceeds from sale of marketable securities 24,819
---------
Net cash provided by investing activities 12,734
---------
Net increase in cash and cash equivalents 7,642
Cash and cash equivalents at beginning of year 21,985
---------
Cash and cash equivalents at end of year $ 29,627
=========
Supplemental cash flow information
Cash paid during the period for income taxes $ 4,326
=========
The accompanying notes are an integral part of this statement
F-15
Media Resolutions Incorporated
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
------------------
Media Resolutions Incorporated (the "Company") provides web
hosting, website design and ColdFusion coding services to
customers throughout the United States and abroad.
Cash Equivalents
----------------
The Company considers investments with maturity dates when
purchased of 90 days or less to be cash equivalents.
Marketable Securities
---------------------
The Company accounts for its marketable securities, which are
designated as available for sale, using Statement of Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Securities
available for sale are reported at fair value, with unrealized
gains and losses, net of tax, excluded from earnings and
reported as a separate component of stockholders' equity.
Realized gains and losses on securities available for sale are
reported in income in the year of sale.
The Company's investment in marketable securities consists of
common stock with no cost basis.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation of
property and equipment is computed using the double-declining
balance method over the estimated useful lives of such property
and equipment, generally seven years. Gains and losses on the
disposal of such assets are recognized as incurred.
Income Taxes
------------
The Company accounts for income taxes under the asset and
liability method required by Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amount and the tax basis of existing assets
and liabilities.
F-16
Revenue Recognition
-------------------
Web hosting is billed in advance and recorded as deferred
revenue if payment is received; revenue is recognized when
hosting services have been performed. Design and coding
revenue is recognized when the services are performed.
Comprehensive Income and Accumulated Other Comprehensive Income
---------------------------------------------------------------
Comprehensive income presented in the statement of
stockholders' equity consists of net loss and unrealized gains
on marketable securities held for sale. At December 31, 2001,
accumulated other comprehensive income consists entirely of
unrealized gains on marketable securities held for sale.
Advertising Expense
-------------------
The Company expenses advertising costs as incurred. Total
advertising expense was approximately $8,500 for the year ended
December 31, 2001.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - INCOME TAXES
The net deferred tax liability at December 31, 2001 relates to
net operating loss carryforwards and the difference between
book and tax bases of accounts receivable, marketable
securities, accounts payable and equipment. At December 31,
2001, the Company had net operating loss carryforwards of
approximately $8,000 expiring in the year 2021.
F-17
Report of Independent Certified Public Accountants
To the Stockholders
VirtuallyThere, Inc.
We have audited the accompanying balance sheet of VirtuallyThere,
Inc. as of December 31, 2001, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the
year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of VirtuallyThere, Inc. as of December 31, 2001, and the results
of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As of
December 31, 2001, the Company had current liabilities of
$187,252, and current assets of $104,545, and a stockholders'
deficit of $54,200. The Company incurred a net loss of $79,301
for the year ended December 31, 2001. These matters raise
substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters
are discussed in Note G. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
GRANT THORNTON LLP
Dallas, Texas
April 11, 2002
F-18
Virtually There, Inc.
BALANCE SHEET
December 31, 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,419
Accounts receivable, less allowance
for doubtful accounts of $2,881 65,086
Notes receivable 9,030
Refundable income taxes 11,010
----------
Total current assets 104,545
PROPERTY AND EQUIPMENT, at cost
Office equipment 141,765
Furniture and fixtures 31,617
----------
173,382
Less accumulated depreciation (90,654)
----------
82,728
OTHER ASSETS 824
----------
$ 188,097
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Line of credit $ 28,181
Notes payable 36,046
Current maturities of long-term debt 4,004
Current maturities of capital lease
obligations 35,285
Accounts payable 56,208
Accrued liabilities 27,528
----------
Total current liabilities 187,252
LONG-TERM DEBT, less current maturities 8,290
CAPITAL LEASE OBLIGATIONS, less current
maturities 46,755
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIT
Common stock, no par value; authorized,
1,000,000 shares; issued and outstanding,
100,000 shares 1,000
Accumulated deficit (49,100)
----------
(48,100)
Treasury stock, at cost - 4,000 shares (6,100)
----------
Total stockholders' deficit (54,200)
----------
$ 188,097
==========
The accompanying notes are an integral part of this statement
F-19
Virtually There, Inc.
STATEMENT OF OPERATIONS
Year ended December 31, 2001
Revenues $ 1,051,288
Costs and expenses
Employee compensation 723,899
Contract labor 23,345
Other general and administrative expenses 348,354
Depreciation 32,893
-----------
1,128,491
-----------
Operating loss (77,203)
Other income (expense)
Interest income 699
Interest expense (23,807)
Other 10,000
-----------
(13,108)
-----------
Loss before income taxes (90,311)
Current income tax benefit 11,010
-----------
NET LOSS $ (79,301)
===========
The accompanying notes are an integral part of this statement
F-20
Virtually There, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 2001
Retained
Common Stock Treasury Stock earnings
--------------- ----------------- (accumulated
Shares Amount Shares Amount deficit) Total
------- ------ ------- ------- ------------ --------
<s> <c> <c> <c> <c> <c> <c>
Balance at January 1, 2001 100,000 $1,000 - $ - $ 30,201 $ 31,201
Treasury stock purchased - - 20,000 (9,300) - (9,300)
Treasury stock issued to employees
for no consideration - - (16,000) 3,200 - 3,200
Net loss - - - - (79,301) (79,301)
------- ------ ------- ------- ------------ --------
Balance at December 31, 2001 100,000 $1,000 4,000 $(6,100) $ (49,100) $(54,200)
======= ====== ======= ======= ============ ========
The accompanying notes are an integral part of this statement
F-21
Virtually There, Inc.
STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Cash flows from operating activities
Net loss $ (79,301)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 32,893
Stock-based compensation 3,200
Changes in operating assets and liabilities
Accounts receivable 5,045
Refundable income taxes (11,010)
Other assets 16,754
Accounts payable 41,691
Accrued liabilities (4,899)
---------
Net cash provided by operating activities 4,373
Cash flows from investing activities
Expenditures for capital assets (12,857)
Cash flows from financing activities
Proceeds from issuance of notes payable 31,579
Net change in line of credit 28,181
Payments on notes payable and long-term debt (10,338)
Payments on capital lease obligations (27,795)
---------
Net cash provided by financing activities 21,627
---------
Net increase in cash and cash equivalents 13,143
Cash and cash equivalents at beginning of year 6,276
Cash and cash equivalents at end of year $ 19,419
=========
Supplemental cash flow information
Cash paid during the year for interest $ 27,674
Cash paid during the year for income taxes 11,010
Noncash investing and financing activities:
During the year ended December 31, 2001, the Company incurred
capital lease obligations of approximately $64,000 for computer
equipment and software.
The accompanying notes are an integral part of this statement
F-22
Virtually There, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
------------------
Virtually There, Inc. (the Company) is an Internet development
firm focused on assisting businesses with the development and
implementation of an on-line strategy and presence. With
offices in Fort Worth, Texas, the Company provides expertise to
multinational companies as well as small and mid-market
companies in Texas.
Cash Equivalents
----------------
The Company considers investments with original maturity dates
when purchased of ninety days or less to be cash equivalents.
Income Taxes
------------
The Company accounts for income taxes under the asset and
liability method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amount and the tax basis of existing assets
and liabilities.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation of
property and equipment is computed using the straight-line
method over the estimated useful lives of such property and
equipment, which range from three to seven years.
Revenue Recognition
-------------------
Revenue is recognized when the services are performed.
Advertising Expense
-------------------
The Company expenses advertising costs as incurred. Total
advertising expense was approximately $3,700 for the year ended
December 31, 2001.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-23
NOTE B - INCOME TAXES
The Company has deferred tax assets of $6,376 that consist
primarily of net operating loss carryforwards. A valuation
allowance has been provided because of uncertainties regarding
recovery. The provision for Federal income tax differs from
the statutory rate due to nondeductible expenses and a change
in the valuation allowance. At December 31, 2001, the Company
has net operating loss carryforwards of approximately $23,000
expiring in 2021.
NOTE C - LINE OF CREDIT
The Company has a $30,000 line of credit with a bank due upon
demand, with interest payable monthly at a rate of 9.75%. The
balance outstanding under the line of credit at December 31,
2001 was $28,181 and is collateralized by all assets of the
Company.
NOTE D - NOTES PAYABLE
The Company has notes payable to three stockholders and one
former employee. The notes payable to stockholders,
aggregating $30,536, carry an interest rate of 22% compounded
daily, are payable on demand and are uncollateralized. The
note payable to a former employee bears no interest and is
uncollateralized.
NOTE E - LONG-TERM DEBT
Long-term debt at December 31, 2001, consists of the following:
Note payable to a bank bearing interest at 13.1%,
monthly payments of principal and interest
through February 2005, collateralized by office
equipment $ 8,571
Note payable to a bank bearing interest at 12.1%,
monthly payments of principal and interest
through January 2004, collateralized by office
equipment 3,723
-------
12,294
Less current maturities (4,004)
-------
$ 8,290
=======
F-24
Future maturities of notes payable at December 31, 2001 are as
follows:
Year ending
December 31,
------------
2002 $ 4,004
2003 4,544
2004 3,197
2005 549
--------
$ 12,294
========
NOTE F - COMMITMENTS
Operating Leases
----------------
The Company leases certain office facilities and equipment
under non-cancelable operating leases which expire through
September 2006. Future minimum lease payments under non-
cancelable leases with initial lease terms greater than one
year are as follows:
Year ending
December 31,
------------
2002 $ 86,634
2003 77,942
2004 66,344
2005 65,312
2006 48,984
---------
$ 345,216
=========
Rent expense under all operating leases was approximately
$99,000 for the year ended December 31, 2001.
Capital Leases
--------------
The Company leases office furniture, computer equipment and
software under capital leases expiring through July 2004. The
assets are carried at $124,102 less accumulated depreciation of
$53,868 at December 31, 2001. Future minimum lease payments
are as follows:
F-25
Year ending
December 31,
------------
2002 $ 44,912
2003 39,704
2004 11,392
---------
96,008
Amount representing interest (13,968)
---------
82,040
Less current maturities (35,285)
---------
$ 46,755
=========
NOTE G - LIQUIDITY MATTERS
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
Company as a going concern. However, as of December 31, 2001,
the Company had current liabilities of $187,252, and current
assets of $104,545, and a stockholders' deficit of $54,200.
The Company incurred a net loss of $79,301 for the year ended
December 31, 2001.
The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing,
and ultimately to attain profitability. Management's plans
with regards to these matters is to implement further cost-
cutting measures, aggressively market its services, develop new
products and revenue streams and seek additional sources of
financing.
The financial statements do not include any adjustments
relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE H - SUBSEQUENT EVENT
In January 2002, the Company issued a promissory note to a
related party in the amount of $60,000. The note matures in
May 2004 with interest payable monthly. The note is secured by
42,500 shares of the Company's common stock owned by officers.
F-26
Virtually There, Inc.
UNAUDITED BALANCE SHEET
March 31, 2002
ASSETS
- ------
Current assets: March 31, 2002
Cash and cash equivalents $ 27,784
Accounts receivable, net 66,155
Other current assets 11,247
Total current assets 105,186
--------------
Fixed assets 174,328
Accum Dep (100,539)
Other assets 265
--------------
Total assets $ 179,240
==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ----------------------
Current liabilities:
Accounts payables $ 20,988
Accrued expenses
Other current liabilities 247,798
--------------
Total current liabilities 268,786
--------------
Other long-term liabilities 52,837
--------------
Total liabilities 321,623
--------------
Shareholders' equity/(deficit):
Common stock 1,000
Accumulated deficit (136,683)
Treasury stock (6,700)
--------------
Total shareholders' equity/(deficit) (142,383)
--------------
Total liabilities and shareholders' equity $ 179,240
==============
The accompanying notes are an integral part of this statement
F-27
Virtually There, Inc.
UNAUDITED STATEMENTS OF OPERATIONS
Three months ended March 31, 2001 and 2002
Three Months Ended
----------------------------------
March 31, 2001 March 31, 2002
-------------- --------------
<s> <c> <c>
Web services $ 208,038 $ 131,929
-------------- --------------
Total revenues 208,038 131,929
-------------- --------------
Cost of sales 81,245 61,408
Selling, general and administrative expenses 181,064 149,171
--------------- --------------
Operating income (loss) (54,271) (78,650)
Other income (expense), net (1,541) (8,934)
Loss from continuing operations
before income taxes (55,812) (87,584)
--------------- --------------
Income tax expense (benefit) -
--------------- --------------
Loss from continuing operations $ (55,812) $ (87,584)
=============== ==============
The accompanying notes are an integral part of this statement
F-28
Virtually There, Inc.
UNAUDITED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2002
Three Months Ended
----------------------------------
March 31, 2001 March 31, 2002
-------------- --------------
<s> <c> <c>
Cash flow from operating activities
Net loss $ (55,812) $ (97,572)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 1,548 45,443
Changes in operating assets and liabilities
Accounts receivable 19,635 (1,069)
Other current assets 13,520 (1,687)
Accounts payable 4,001 (205)
Other current liabilities 37,204 148,583
-------------- --------------
Net cash provided by operating activities 20,095 93,493
Cash flows from investing activities
Purchase or sale of property and equipment - (102,717)
Cash flows from financing activities
Proceeds from long-term debt (2,063) 22,109
Repurchase of treasury stock - (4,520)
-------------- --------------
Net cash used in financing activities (2,063) 17,589
-------------- --------------
Net decrease in cash and cash equivalents 18,031 8,365
Cash and cash equivalents at beginning of period 6,276 19,419
-------------- --------------
Cash and cash equivalents at end of period $ 24,308 $ 27,784
============== ==============
The accompanying notes are an integral part of this statement
F-29
Virtually There, Inc.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by us
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 VirtuallyThere,
Inc. The results of operations and cash flows for the three
months ended March 31, 2002, are not necessarily indicative of
the results of operations or cash flows that may be reported for
the year ended December 31, 2002.
F-30
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
Universal Data Technology, Inc.
We have audited the accompanying balance sheet of Universal Data
Technology, Inc. as of December 31, 2001, and the related
statements of operations, changes in shareholders' deficit and
cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Universal Data Technology, Inc. as of December 31, 2001, and
the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note J to the financial statements, the Company had current
liabilities of $1,846,379, and current assets of $658,923, and a
shareholders' deficit of $822,756 at December 31, 2001. The
Company incurred a net loss of $389,656 for the year ended
December 31, 2001. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described
in Note J. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
GRANT THORNTON LLP
Dallas, Texas
January 25, 2002
F-31
Universal Data Technology, Inc.
BALANCE SHEET
December 31, 2001
ASSETS
CURRENT ASSETS
Accounts receivable, net of allowance for
doubtful accounts of $15,000 $ 652,559
Other current assets 6,364
-----------
Total current assets 658,923
Property and equipment - at cost, net 139,094
Goodwill, net 312,500
-----------
Total assets $ 1,110,517
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ 35,104
Line of credit 300,000
Current portion of long-term debt 140,560
Payable to factor 257,491
Accounts payable 304,313
Accrued expenses 808,911
-----------
Total current liabilities 1,846,379
LONG-TERM DEBT, net of current portion 86,894
COMMITMENTS -
SHAREHOLDERS' DEFICIT
Common stock - $0.01 par value; authorized
1,000,000 shares; issued and outstanding,
750,000 shares 7,500
Additional paid-in capital 2,800
Accumulated deficit (833,056)
-----------
Total shareholders' deficit (822,756)
-----------
Total liabilities and shareholders' deficit $ 1,110,517
===========
The accompanying notes are an integral part of this statement
F-32
Universal Data Technology, Inc.
STATEMENT OF OPERATIONS
Year ended December 31, 2001
Revenue $ 5,641,758
Cost of services sold 3,743,727
------------
Gross profit 1,898,031
Operating expenses
General and administrative expenses 2,109,252
Depreciation and amortization 99,603
------------
2,208,855
------------
Operating loss (310,824)
Other income (expense)
Other income 1,321
Interest expense (80,153)
------------
(78,832)
------------
NET LOSS $ (389,656)
============
The accompanying notes are an integral part of this statement
F-33
Universal Data Technology, Inc.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Year ended December 31, 2001
Common stock Additional
---------------- paid-in Accumulated
Shares Amount capital deficit Total
------- ------ ---------- ----------- ----------
<s> <c> <c> <c> <c> <c>
Balances at January 1, 2001 750,000 $7,500 $ 2,800 $ (98,400) $ (88,100)
Distributions to shareholders - - - (345,000) (345,000)
Net loss - - - (389,656) (389,656)
------- ------ ---------- ----------- ----------
Balances at December 31, 2001 750,000 $7,500 $ 2,800 $ (833,056) $ (822,756)
======= ====== ========== =========== ==========
The accompanying notes are an integral part of this statement
F-34
Universal Data Technology, Inc.
STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Cash flows from operating activities
Net loss $(389,656)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 99,603
Changes in operating assets and liabilities
Accounts receivable 339,957
Other current assets (1,974)
Bank overdraft 35,104
Accounts payable (161,563)
Accrued expenses 258,621
---------
Net cash provided by operating activities 180,092
Cash flows from investing activities
Purchases of property and equipment (16,833)
Cash flows from financing activities
Decrease in payable to factor (359,701)
Payments on debt (332,546)
Proceeds from issuance of debt 610,000
Distributions to shareholders (345,000)
---------
Net cash used in financing activities (427,247)
---------
Net decrease in cash and cash equivalents (263,988)
Cash and cash equivalents at beginning of year 263,988
---------
Cash and cash equivalents at end of year $ -
=========
Supplemental disclosure of cash paid for:
Interest $ 80,153
Income taxes $ -
The accompanying notes are an integral part of this statement
F-35
Universal Data Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
------------------
Universal Data Technology, Inc. (the Company) was formed in
1998 to provide a full range of e-Business consulting services
to customers throughout the United States. The Company offers
solutions ranging from enterprise web content management to
full-scope portal and e-Commerce development.
Income Taxes
------------
Federal income taxes are payable personally by the shareholders
of the Company pursuant to an election under Subchapter S of
the Internal Revenue Code not to have the Company taxed as a
corporation. Accordingly, federal income taxes are not
reflected in the accompanying financial statements.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation of
property and equipment is computed using the straight-line
method over the estimated useful lives of such property and
equipment, which range from three to ten years.
Goodwill
--------
Goodwill, which represents the excess of the cost of purchased
net assets over their fair value at the date of acquisition, is
being amortized on a straight-line basis over eight years.
Amortization expense charged to operations was $62,500 for the
year ended December 31, 2001.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Intangible Assets, which addresses the accounting
for goodwill and other intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no
longer be amortized, but will be tested for impairment annually
and also in the event of an impairment indicator. SFAS 142 is
effective for fiscal years beginning after December 31, 2001.
The adoption of SFAS 142 will decrease amortization expense by
approximately $62,500 per year.
Revenue Recognition
-------------------
Revenue is recognized when the services are performed.
F-36
Advertising Expense
-------------------
The Company expenses advertising costs as incurred. Total
advertising expense was approximately $5,000 for the year ended
December 31, 2001.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December
31, 2001:
Furniture and equipment $ 214,306
Leasehold improvements 10,921
----------
225,227
Less accumulated depreciation (86,133)
----------
$ 139,094
==========
Depreciation expense was $37,103 for the year ended December
31, 2001.
NOTE C - PAYABLE TO FACTOR
The Company has an accounts receivable factoring arrangement
with a financial services company. The agreement provides for
advances on accounts receivable equal to the face value less a
discount equal to 0.80% of the face amount. An additional
discount of 0.20% is added for each additional 30-day period.
Interest is charged on the advanced amount of receivables at a
rate equal to the prime rate plus 2% (6.75% at December 31,
2001). Net advances on accounts receivable were approximately
$257,000 at December 31, 2001. Interest and fees paid under
this arrangement were $42,804 for the year ended December 31,
2001.
NOTE D - LONG-TERM DEBT
Note payable to Western Arkansas Planning and
Development District, Inc., bearing interest at
8.25%, payable in equal monthly installments of
principal and interest through August 2004,
collateralized by real property owned by a
shareholder $134,121
Note payable to a vendor, interest imputed at 8%,
payable in monthly installments through June
2002, uncollateralized 93,333
--------
227,454
Less current maturities (140,560)
--------
$ 86,894
========
F-37
Future maturities of debt at December 31, 2001 are as follows:
Year ending
December 31,
------------
2002 $ 140,560
2003 51,274
2004 35,620
---------
$ 227,454
NOTE E - LINE OF CREDIT
The Company has a $300,000 line of credit with a bank.
Interest is payable monthly at prime plus 1% (5.75% at December
31, 2001), and the outstanding principal is due in May 2002.
The line is collateralized by substantially all assets of the
Company.
NOTE F - ACCRUED EXPENSES
The Company is delinquent in remitting payroll taxes to the
Internal Revenue Service for the period July through December
2001 in the amount of $482,000 at December 31, 2001. The
Company has accrued approximately $86,000 of December 31, 2001,
for total estimated penalties and interest.
NOTE G - OPERATING LEASES
The Company leases office facilities under non-cancelable
operating leases which expire in April 2002. Future aggregate
minimum lease payments under operating leases with initial
lease terms in excess of one year are approximately $32,000.
Rent expense under all operating leases was approximately
$89,000 for the year ended December 31, 2001.
NOTE H - EMPLOYEE BENEFITS
The Company has a Simple Individual Retirement Plan (the Plan)
under section 408(b) of the Internal Revenue Code. All
employees are eligible to participate. Participants may make
contributions to the Plan up to $6,000 per year. The Company
will match the employee's elective deferral up to 1% of the
employee's compensation up to $6,000. The Company's
contributions were approximately $16,000 for the year,
including approximately $12,000 which had been accrued but not
paid at December 31, 2001. Contributions made by employees
during 2001 in the approximate amount of $31,000 had not been
paid by the Company to the Plan at December 31, 2001.
F-38
NOTE I - RELATED PARTY TRANSACTIONS
The Company leases real property from a shareholder under a
month-to-month lease. Rent expense was approximately $33,000
for the year ended December 31, 2001.
NOTE J - LIQUIDITY MATTERS
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the
Company as a going concern. However, the Company had current
liabilities of $1,846,379 and current assets of $658,923, and a
shareholders' deficit of $822,756 at December 31, 2001. For
the year ended December 31, 2001, the Company incurred a net
loss of $389,656.
A major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued
operation of the Company, which in turn is dependent upon the
Company's liquidity and its ability to succeed in its future
operations. The financial statements do not include any
adjustments relating the recoverability and classification of
recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be
unable to continue in existence.
To improve operations and liquidity, the Company has
implemented various measures including cost reduction programs
and increased sales efforts. Management believes that
additional financing will be available to satisfy existing debt
maturities. Although the effect of these measures is not
assured, the Company believes that these measures will be
sufficient to meet its operating requirements.
F-39
Universal Data Technology, Inc.
UNAUDITED BALANCE SHEET
March 31, 2002
ASSETS March 31, 2002
- ------ --------------
Current assets:
Cash and cash equivalents $ (38,298)
Accounts receivable, net 429,941
--------------
Total current assets 391,643
--------------
Fixed assets, net 130,213
Goodwill 312,500
Other assets 4,390
--------------
Total assets $ 838,746
==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ----------------------
Current liabilities:
Accounts payables $ 381,480
Accrued expenses 287,191
Other current liabilities 904,982
--------------
Total current liabilities 1,573,653
--------------
Long-term notes payable 218,804
--------------
Total liabilities 1,792,457
--------------
Shareholders' equity/(deficit):
Common stock 5
Additional paid-in capital 10,295
Accumulated deficit (964,011)
--------------
Total shareholders' equity/(deficit) (953,711)
--------------
Total liabilities and shareholders' equity $ 838,746
==============
The accompanying notes are an integral part of this statement
F-40
Universal Data Technology, Inc.
UNAUDITED STATEMENTS OF OPERATIONS
Three months ended March 31, 2001 and 2002
Three Months Ended
--------------------------------
March 31, 2001 March 31, 2002
-------------- --------------
Web services $ 1,342,341 $ 1,023,288
-------------- --------------
Total revenues 1,342,341 1,023,288
-------------- --------------
Cost of sales 827,672 567,073
Selling, general and
administrative expenses 488,073 461,816
-------------- --------------
Operating income (loss) 26,596 (5,601)
Other income (expense), net (141,291) (35,354)
-------------- --------------
Loss from continuing operations
before income taxes (114,695) (40,955)
Income tax expense (benefit) -
-------------- --------------
Loss from continuing operations $ (114,695) $ (40,955)
============== ==============
The accompanying notes are an integral part of this statement
F-41
Universal Data Technology, Inc.
UNAUDITED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2002
Three Months Ended
----------------------------------
March 31, 2001 March 31, 2002
-------------- --------------
<s> <c> <c>
Cash flow from operating activities
Net loss $ (114,694) $ (130,955)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 8 1,974
Changes in operating assets and liabilities
Accounts receivable 89,534 222,618
Accounts payable 76,611 77,167
Accrued expenses (22,586) (521,720)
Other current liabilities 16,345 171,827
-------------- --------------
Net cash provided by operating activities 45,218 (179,089)
Cash flows from investing activities
Purchase or sale of property and equipment 207 8,881
Cash flows from financing activities
Proceeds from long-term debt - 131,910
-------------- --------------
Net cash used in financing activities - 131,910
-------------- --------------
Net decrease in cash and cash equivalents 45,425 (38,298)
Cash and cash equivalents at beginning of period 321,511 -
-------------- --------------
Cash and cash equivalents at end of period $ 366,936 $ (38,298)
============== ==============
The accompanying notes are an integral part of this statement
F-42
Universal Data Technology, Inc.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by us
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 Universal Data
Technology, Inc. The results of operations and cash flows for
the three months ended March 31, 2002, are not necessarily
indicative of the results of operations or cash flows that may be
reported for the year ended December 31, 2002.
F-43
Edge Technology Group, Inc.
Introduction to
Unaudited Combined Pro Forma Condensed Financial Statements
The unaudited combined pro forma condensed financial information
set forth below gives effect to the acquisition of The Visionary
Group, Inc., Media Resolutions, Inc., VirtuallyThere, Inc. and
Universal Data Technology, Inc. ("Acquisition Group") by Edge
Technology Group, Inc. as if it had been completed on January 1,
2001, for purposes of the statements of operations, and as if it
had been completed on March 31, 2002, for balance sheet purposes.
The pro forma condensed financial statements are derived from the
historical financial statements of Edge and the Acquisition
Group.
Edge will account for the acquisitions under the purchase method
of accounting. Accordingly, Edge will establish a new basis for
the Acquisition Group's assets and liabilities based upon the
fair values thereof and the Edge purchase price, including costs
of the acquisition. The purchase accounting adjustments made in
connection with the development of the pro forma condensed
financial statements are preliminary and have been made solely
for the purposes of developing such pro forma financial
information and are based upon the assumptions described in the
notes hereto. The pro forma adjustments do not reflect any
operating efficiencies and cost savings that may be achieved with
respect to the combined companies nor any adjustments to expenses
for any future operating changes. Edge may incur integration-
related expenses not reflected in the pro forma financial
statements such as the elimination of duplicate facilities,
operational realignment and workforce reductions. The following
pro forma condensed financial information is not necessarily
indicative of the financial position or operating results that
would have occurred had the acquisition been completed on the
dates discussed above.
Edge is unaware of events, other than those disclosed in the pro
forma notes that would require a material change to the
preliminary purchase price allocation. However a final
determination of the required purchase accounting adjustments
will be made after completion of the acquisition and the actual
financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein
because of a variety of factors, including access to additional
information, changes in value not currently identified and
changes in operating results between the dates of the pro forma
financial information and the date on which the acquisition took
place.
F-44
Edge Technology Group, Inc.
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
Note 1
Historical
--------------------------------------------------------------------------------------
Edge Technology The Visionary UDT VirtuallyThere Media
Group, Inc. Group, Inc. Inc. Inc. Resolutions,Inc.
--------------- -------------- ----------- -------------- ----------------
ASSETS
- ------
<s> <c> <c> <c> <c> <c>
Current assets:
Cash and cash equivalents $ 489,819 $ 69,306 $ (38,298) $ 27,784 $ 13,441
Accounts receivable, net - 122,250 429,941 66,155 44,558
Other current assets 20,370 3,309 - 11,247 -
--------------- -------------- ----------- -------------- ----------------
Total current assets 510,189 194,865 391,643 105,186 57,999
--------------- -------------- ----------- -------------- ----------------
Fixed assets, net 31,631 54,297 130,213 73,789 45,854
Goodwill - - 312,500 - -
Other assets 56,278 18,000 4,390 265 75,424
--------------- -------------- ----------- -------------- ----------------
Total assets $ 598,098 $ 267,162 $ 838,747 $ 179,240 $ 179,277
=============== ============== =========== ============== ================
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ----------------------
Current liabilities:
Accounts payables $ 473,455 $ 199,632 $ 381,481 $ 20,988 $ 15,139
Accrued expenses 234,582 67,094 287,191 - -
Other current liabilities 470,507 102,518 904,982 247,798 727
--------------- -------------- ----------- -------------- ----------------
Total current liabilities 1,178,544 369,244 1,573,654 268,786 15,866
--------------- -------------- ----------- -------------- -----------------
Long-term notes payable 1,639,000 - 218,804 - -
Other long-term liabilities - - - 52,837 12,878
--------------- -------------- ----------- -------------- -----------------
Total liabilities 2,817,544 369,244 1,792,458 321,623 28,744
--------------- -------------- ----------- -------------- -----------------
Shareholders' equity/(deficit):
Series A preferred stock - - - - -
Common stock 164,881 1,000 5 1,000 1,000
Additional paid-in capital 40,248,615 - 10,295 38,200
Accumulated deficit (42,632,941) (103,083) (964,011) (136,683) 111,333
Treasury stock - - - (6,700)
--------------- -------------- ----------- -------------- -----------------
Total shareholders'
equity/(deficit) (2,219,446) (102,083) (953,712) (142,383) 150,533
--------------- -------------- ----------- -------------- -----------------
Total liabilities and
shareholders' equity $ 598,098 $ 267,162 $ 838,747 $ 179,240 $ 179,277
=============== ============== =========== ============== =================
Pro Forma
Adjustments Note Total
----------- ----------- --------------
ASSETS
- ------
<s> <c> <c> <c>
Current assets:
Cash and cash equivalents $ 1,305,674 (2),(3),(4) $ 1,867,726
Accounts receivable, net (429,941) (4) 232,963
Other current assets - 34,926
----------- --------------
Total current assets 875,733 2,135,615
----------- --------------
Fixed assets, net - 335,783
Goodwill 3,010,919 (4),(5),(6) 3,323,419
Other assets (60,668) (4),(6) 93,689
----------- --------------
Total assets $ 3,825,983 $ 5,888,507
=========== ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
- -----------------------
Current liabilities:
Accounts payables $ (412,899) (4),(6),(7) $ 677,796
Accrued expenses (519,630) (2),(4),(7) 69,237
Other current liabilities (904,982) (4) 821,550
----------- --------------
Total current liabilities (1,837,511) 1,568,583
----------- --------------
Long-term notes payable (957,804) (2),(4) 900,000
Other long-term liabilities 358,940 (3),(7) 424,655
----------- --------------
Total liabilities (2,436,375) 2,893,238
----------- --------------
Shareholders' equity/(deficit):
Series A preferred stock 4,458,464 (2) 4,458,464
Common stock 13,534 (8),(11) 181,419
Additional paid-in capital 691,216 (8),(11) 40,988,326
Accumulated deficit 1,092,444 (8) (42,632,941)
Treasury stock 6,700 (8) -
----------- --------------
Total shareholders' equity/(deficit) 6,262,358 2,995,268
----------- --------------
Total liabilities and shareholders' equity $ 3,825,983 $ 5,888,507
=========== ==============
See accompanying notes to pro forma condensed financial statements.
F-45
Edge Technology Group, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
Note 1
Historical
--------------------------------------------------------------------------------------
Edge Technology The Visionary UDT VirtuallyThere Media
Group, Inc. Group, Inc. Inc. Inc. Resolutions,Inc.
--------------- ------------- ----------- -------------- -----------------
<s> <c> <c> <c> <c> <c>
Consulting services $ - $ 3,375,840 $ 5,641,758 $ - $ -
Web services - - - 1,051,288 282,574
Other revenue 8,672 - - - -
--------------- ------------- ----------- -------------- -----------------
Total revenues 8,672 3,375,840 5,641,758 1,051,288 282,574
--------------- ------------- ----------- -------------- -----------------
Cost of sales - 2,994,187 3,743,727 747,244 58,516
Selling, general and
administrative expenses 1,317,656 370,012 2,208,855 381,247 260,402
Bad debt expense 1,400,000 - - - -
Impairment of assets 5,175,954 - - - -
--------------- ------------- ----------- -------------- -----------------
Operating income (loss) (7,884,938) 11,641 (310,824) (77,203) (36,344)
Other income (expense), net (136,622) (17,948) (78,832) (13,108) 24,819
Loss from continuing
operations before income --------------- ------------- ----------- -------------- -----------------
taxes (8,021,560) (6,307) (389,656) (90,311) (11,525)
Income tax expense (benefit) - (1,632) - 11,010 1,720
--------------- ------------- ----------- -------------- -----------------
Loss from continuing
operations (8,021,560) (7,939) (389,656) (79,301) (9,805)
Provision for preferred
stock dividend - - - - -
--------------- ------------- ----------- -------------- -----------------
Loss from continuing
operations attributed to
common stockholders $ (8,021,560) $ (7,939) $ (389,656) $ (79,301) $ (9,805)
=============== ============= =========== ============== =================
Loss per share from continuing
operations to common
stockholders - basic and diluted $ (0.49)
Weighted average shares - basic
and diluted 16,279,316
Pro Forma
Adjustments Note Total
----------- ----------- --------------
<s> <c> <c> <c>
Consulting services $ - $ 9,017,598
Web services - 1,333,862
Other revenue - 8,672
----------- --------------
Total revenues - 10,360,132
----------- --------------
Cost of sales - 7,543,674
Selling, general and administrative expenses - 4,538,172
Bad debt expense - 1,400,000
Impairment of assets - 5,175,954
----------- --------------
Operating income (loss) - (8,297,668)
Other income (expense), net - (221,691)
Loss from continuing operations ----------- --------------
before income taxes - (8,519,359)
Income tax expense (benefit) (11,098) (9) -
----------- --------------
Loss from continuing operations (11,098) (8,519,359)
Provision for preferred stock dividend (356,677) (10) (356,677)
Loss from continuing operations ----------- --------------
attributed to common stockholders $ (367,775) $ (8,876,036)
=========== ==============
Loss per share from continuing operations
to common stockholders - basic and diluted $ (0.49)
Weighted average shares - basic and diluted 1,653,846 (11) 17,933,162
See accompanying notes to pro forma condensed financial statements.
F-46
Edge Technology Group, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Note 1
Historical
--------------------------------------------------------------------------------------
Edge Technology The Visionary UDT VirtuallyThere Media
Group, Inc. Group, Inc. Inc. Inc. Resolutions,Inc.
--------------- ------------- ----------- -------------- ----------------
<s> <c> <c> <c> <c> <c>
Consulting services $ - $ 182,348 $ 1,023,288 $ - $ -
Web services - - - 131,929 69,310
------------- ------------- ----------- -------------- ----------------
Total revenues - 182,348 1,023,288 131,929 69,310
------------- ------------- ----------- -------------- ----------------
Cost of sales - 220,808 567,073 61,408 -
Selling, general and
administrative expenses 248,382 186,897 461,816 149,171 83,428
------------- ------------- ----------- -------------- ----------------
Operating income (loss) (248,382) (225,358) (5,601) (78,650) (14,118)
Other income (expense), net (35,151) (2,946) (35,354) (8,934) 29,654
------------- ------------- ----------- -------------- ----------------
Net loss $ (283,533) $ (228,304) $ (40,955) $ (87,584) $ 15,536
Provision for preferred
stock dividend - - - - -
Net loss attributed to ------------- ------------- ----------- -------------- ----------------
common stockholders (283,533) (228,304) (40,955) (87,584) 15,536
============= ============= =========== ============== ================
Loss per share attributed
to common stockholders
- basic and diluted $ (0.02)
Weighted average shares
- basic and diluted 16,279,316
Pro Forma
Adjustments Note Total
----------- ----------- --------------
<s> <c> <c> <c>
Consulting services $ - $ $ 1,205,636
Web services - 201,239
----------- --------------
Total revenues - 1,406,875
----------- --------------
Cost of sales - 849,289
Selling, general and
administrative expenses - 1,129,694
----------- --------------
Operating income (loss) - (572,109)
Other income (expense), net - (52,731)
----------- --------------
Net loss - (624,840)
Provision for preferred
stock dividend (89,169) (10) (89,169)
----------- --------------
Net loss attributed to
common stockholders $ (89,169) $ (714,009)
============ ==============
Loss per share attributed
to common stockholders
- basic and diluted $ (0.04)
Weighted average shares
- basic and diluted 1,653,846 (11) 17,933,162
See accompanying notes to pro forma condensed financial statements.
F-47
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) The Company completed the acquisitions of four companies
during April and May 2002 (see section "Item 2. Acquisition
or Disposition of Assets"). Proceeds from the sale of
preferred stock in April 2002 were used to make these
acquisitions. The pro forma statements of these businesses
reflect the sale of the Series A Convertible Preferred stock
and the acquisitions as if they had occurred at March 31,
2002, for the Balance Sheet and at the beginning of the
periods for the Statements of Operations.
(2) The Company issued $4,458,464 in Series A Preferred shares
as described above (see section "April 2002 Series A
Convertible Preferred Stock"). Net cash proceeds were
$2,669,876, and Edge's notes to Sandera Partners, L.P. and
Infinity Investors Limited were converted into Series A
Preferred stock, including $1,639,000 of principal and
$149,588 of interest. For more information about the
Sandera and Infinity notes, please refer to Edge's 10-K
filed with the Securities and Exchange Commission on April
16, 2002.
(3) Edge paid $1,402,500 in cash for its four acquisitions. In
addition, the Company has recorded $370,000 in Other long-
term liabilities to account for holdback provisions related
to three of the transactions.
(4) To eliminate the assets not acquired and the liabilities not
assumed of Universal Data Technology. The only assets
acquired were Fixed assets of $130,213 and the only
liabilities assumed were $72,390 of Accrued vacation
expense.
(5) Goodwill increased by $3,010,918 as a result of the four
acquisitions.
Cash $ 1,402,500
Common stock 756,250
Deferred purchase obligations (holdbacks) 1,270,000
Transaction costs (see Note 5 below) 113,735
Liabilities assumed 72,390
------------
Total purchase price 3,614,875
Less fair value of net assets acquired 36,281
Liabilities paid 255,176
------------
Ending goodwill 3,323,418
Historical goodwill (312,500)
------------
Pro forma adjustment to goodwill $ 3,010,918
============
(6) Edge reclassified $56,278 of pre-March 31, 2002 acquisition-
related expenses to goodwill. Additionally, the Company
recognized $57,457 incurred as acquisition-related expenses
subsequent to March 31, 2002 as Accounts payable and
increased Goodwill by the same amount to fully account for
all transaction costs.
(7) Edge paid accounts payable of $88,875, accrued expenses of
$155,241 and other long-term liabilities of $11,060 as part
of the acquisition price it paid for the four companies.
(8) Eliminations of the equity accounts of the acquired
companies.
(9) Income tax expenses of purchased companies would be
eliminated due to the net loss reflected by the combined
companies.
F-48
(10) Preferred dividends have been included based upon the
assumption that the Series A Convertible Preferred financing
occurred at the beginning of the periods. The pro forma 8%
preferred dividend was $356,667 for 2001 and $89,169 for the
first three months of 2002. These dividends have been
included in the calculation of loss per share attributed to
common stockholders.
(11) Edge issued 500,000 common shares (valued at $306,250) in
the acquisition of Media Resolutions and 1,153,846 common
shares (valued at $450,000) in the acquisition of
VirtuallyThere.
F-49
INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------
3.1 Certificate of Incorporation of Edge, as
amended (Incorporated by reference to Exhibit
3.1 to Amendment No. 2 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
3.2 Amended and Restated By-Laws of Edge
(Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
4.1 Form of Specimen Common Stock
Certificate (Incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.2 Form of Specimen Redeemable Warrant
Certificate (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.3 Form of Warrant Agreement between Edge
and Whale Securities Co., L.P. (Incorporated
by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.4 Form of Warrant among American Stock
Transfer & Trust Company, Edge and Whale
Securities Co., L.P. (Incorporated by
reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
4.7 Form of Convertible Note issued to
investors in the Infinity Bridge Financing
(Incorporated by reference to Exhibit 99.5 to
the Registrant's Current Report on Form 8-K
filed June 23, 1997)
4.8 Form of Common Stock Purchase Warrant
issued to Vision Financial Group, Inc.
(Incorporated by reference to Exhibit 4.8 to
the Registrant's Quarterly Report on Form 10-
QSB filed November 14, 1997)
4.9 Form of Subscription and Securities
Purchase Agreement dated April 1, 2002,
between Edge Technology Group, Inc. and
Purchasers as named therein. (Previously
filed on April 16, 2002, with the
Registrant's Report on Form 10-KSB for the
year ended December 31, 2001.)
4.10 Certificate of Designation, Preference
and Rights of Series A Convertible Preferred
Stock of Edge Technology Group, Inc. dated
April 1, 2002. (Previously filed on April
16, 2002, with the Registrant's Report on
Form 10-KSB for the year ended December 31,
2001.)
4.11 Form of Common Stock Purchase Warrant
dated April 1, 2002, issued to purchasers of
Series A Convertible Preferred Stock.
(Previously filed on April 16, 2002, with the
Registrant's Report on Form 10-KSB for the
year ended December 31, 2001.)
4.12 Registration Rights Agreement dated
April 1, 2002 pertaining to Series A
Convertible Preferred Stock (Previously filed
on April 16, 2002, with the Registrant's
Report on Form 10-KSB for the year ended
December 31, 2001.)
4.13 Letter Agreement dated April 1, 2002
pertaining to conversion of Infinity Note
into shares of Common Stock (Previously filed
on April 16, 2002, with the Registrant's
Report on Form 10-KSB for the year ended
December 31, 2001.).
10.1 License Agreement, dated March 1, 1995,
between Great White Shark Enterprises, Inc.
and Edge, as supplemented (Incorporated by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2
(Registration No. 333-5193) effective July
24, 1996)
10.2 Amendment to License Agreement, dated as
of June 3, 1997, by and among Edge, Greg
Norman and Great White Shark Enterprises,
Inc. (Incorporated by reference to Exhibit
99.1 to the Registrant's Current Report on
Form 8-K/A filed June 27, 1997)
10.3 Amendment to License Agreement, dated as
of January 1, 2000, by and among Edge, Greg
Norman and Great White Shark Enterprises,
Inc. (Previously filed on April 14, 2000 with
Registrant's Report on Form 10-K for fiscal
year ended December 31, 1999)
*10.4 Employment Agreement, dated as of
May 1, 1996, between Thomas S. Peters and
Edge, as amended (Incorporated by reference
to Exhibit 10.5 to the Registrant's
Registration Statement on Form SB-2
Registration No. 333-5193) effective July 24,
1996)
*10.5 Amended and Restated 1996 Stock
Option Plan (Incorporated by reference to our
1996 definitive Proxy Statement filed on
April 7, 1997)
10.6 Lease Agreement by and between Fairfax
Boca 92, L.P., a Georgia limited partnership,
and Visual Edge Systems, Inc. for offices
located at 901 Yamato Road, Boca Raton,
Florida (Previously filed on April 14, 2000
with Registrant's Report on Form 10-K for
fiscal year ended December 31, 1999)
10.7 Assignment, dated April 19, 1996 from
Thomas S. Peters to Visual Edge (Incorporated
by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.8 Share and Warrant Purchase Agreement,
dated as of February 27, 1997, between Edge
and Status-One Investments Inc. (Incorporated
by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24675) filed April
7, 1997)
10.10 Registration Rights Agreement,
dated as of June 13, 1997, among Edge and the
Funds (Incorporated by reference to Exhibit
99.2 to the Registrant's Current Report on
Form 8-K filed June 23, 1997)
10.12 Purchase Agreement, dated as of
March 27, 1998, among Edge and Marion
Interglobal, Ltd. (Incorporated by reference
to Exhibit 10.16 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997)
10.13 Registration Rights Agreement,
dated as of March 27, 1998, among Edge and
Marion Interglobal, Ltd. (Incorporated by
reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997)
10.18 Form of Warrant Certificate.
(Incorporated by reference to Exhibit 99.3 to
the Registrant's Current Report on Form 8-K
filed February 9, 1998)
10.19 Amendment, dated as of December 31,
1998, to License Agreement dated as of March
1, 1995, by and between Greg Norman and Great
White Shark Enterprises, Inc. and Edge, as
amended on April 19, 1996, October 18, 1996
and June 3, 1997 (Incorporated by reference
to Exhibit 10.19 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year
ended December 31, 1998)
10.21 Sublease Agreement, dated as of
September 29, 1999, by and between Edge and
Sensormatic Electronics Corporation
(Previously filed on April 14, 2000 with
Registrant's Report on Form 10-K for fiscal
year ended December 31, 1999)
10.22 Note and Security Agreement dated
as of December 14, 2000 between Edge and
Catalyst Master Fund, L.P. (Previously filed
on April 17, 2001, with the Registrant's
Report of Form 10-KSB for the year ended
December 31, 2000.)
10.23 Agreement and Plan of Merger Among
Edge Technology Group, Inc., Visionary
Acquisition Corp., The Visionary Group, Inc.
and The Visionary Group Shareholders dated
April 8, 2002. (Previously filed on April
16, 2002, with the Registrant's Report on
Form 10-KSB for the year ended December 31,
2001.)
10.24 Agreement and Plan of Merger Among
Edge Technology Group, Inc., Media
Resolutions Acquisition Corp., Media
Resolutions, Incorporated and Media
Resolutions Shareholders dated April 11,
2002. (Previously filed on April 16, 2002,
with the Registrant's Report on Form 10-KSB
for the year ended December 31, 2001.)
10.25 Agreement and Plan of Merger Among
Edge Technology Group, Inc., VT Acquisition
Corp., Virtually There, Inc. and the
shareholders of Virtually There, Inc. dated
May 30, 2002. (Previously filed on June 14,
2002 with the Registrant's Current Report on
Form 8-K)
10.26 Asset Purchase Agreement by and
among Universal Data Technology, Inc., its
Shareholders, Edge Technology Group, Inc. and
UDT Consulting, Inc. (Previously filed on
June 14, 2002 with the Registrant's Current
Report on Form 8-K)
21.1 Subsidiaries of the Registrant dated
June 19, 2002 (filed herewith).