<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 333-89815
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
eMerge INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3698 65-0534535
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NUMBER)
</TABLE>
10315 102ND TERRACE
SEBASTIAN, FL 32958
561/589-5310
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES L. ABRAHAM
CHIEF EXECUTIVE OFFICER
eMerge INTERACTIVE, INC.
10315 102ND TERRACE
SEBASTIAN, FL 32958
561/589-5310
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
JAMES A. OUNSWORTH, ESQUIRE N. JEFFREY KLAUDER, ESQUIRE PHILIP P. ROSSETTI, ESQUIRE
SAFEGUARD SCIENTIFICS, INC. MORGAN, LEWIS & BOCKIUS LLP HALE AND DORR LLP
800 THE SAFEGUARD BUILDING 1701 MARKET STREET 60 STATE STREET
435 DEVON PARK DRIVE PHILADELPHIA, PA 19103-2921 BOSTON, MA 02109
WAYNE, PA 19087 215/963-5694 617/526-6000
610/293-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed.
Underwriters may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not
soliciting offers to buy these securities in any state in which the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1999
8,000,000 SHARES
[LOGO]
eMERGE INTERACTIVE, INC.
CLASS A COMMON STOCK
------------------------
This is an initial public offering of class A common stock of eMerge
Interactive, Inc. We are offering 6,500,000 shares of class A common stock in
this offering and several stockholders identified in this prospectus are selling
an additional 1,500,000 shares. As part of this offering, we are offering
2,850,000 shares of our class A common stock at the public offering price to
shareholders of Safeguard Scientifics, Inc., one of our principal stockholders,
that owned at least 100 shares of common stock of Safeguard as of October 20,
1999 and Safeguard is offering up to 650,000 shares to its shareholders.
Safeguard or its designees will purchase any shares of class A common stock that
are not purchased by Safeguard shareholders under the Safeguard Subscription
Program. See the section entitled Plan of Distribution -- Safeguard Subscription
Program. We expect the initial public offering price will be between $10.00 and
$12.00 per share.
SAFEGUARD IS AN UNDERWRITER WITH RESPECT TO THE SHARES OFFERED TO THE
SHAREHOLDERS OF SAFEGUARD. SAFEGUARD IS NOT AN UNDERWRITER WITH RESPECT TO ANY
OTHER SHARES OFFERED AND IS NOT INCLUDED IN THE TERM UNDERWRITER AS USED
ELSEWHERE IN THIS PROSPECTUS.
Prior to this offering, there has been no public market for the class A
common stock. We have applied to list the class A common stock on the Nasdaq
National Market under the symbol EMRG.
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
PLEASE SEE THE SECTION ENTITLED RISK FACTORS STARTING ON PAGE 9 TO READ ABOUT
RISKS THAT YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR CLASS A
COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
Underwritten Public Offering --------- -----------
<S> <C> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts................................. $ $
Proceeds to eMerge Interactive......................... $ $
Proceeds to Selling Stockholders....................... $ $
</TABLE>
<TABLE>
<CAPTION>
PER SHARE TOTAL
Safeguard Subscription Program --------- -----------
<S> <C> <C> <C>
Public Offering Price....................................... $ $
Management Fee......................................... $ $
Proceeds to eMerge Interactive......................... $ $
Maximum proceeds, before expenses, to Safeguard
Scientifics, Inc...................................... $ $
</TABLE>
<TABLE>
<CAPTION>
TOTAL
Aggregate Offering Proceeds -----------
<S> <C> <C> <C>
Proceeds to eMerge Interactive from Underwritten Public
Offering and Safeguard Subscription Program................. $
</TABLE>
At our request, the underwriters have reserved 350,000 shares of our class
A common stock for sale at the public offering price to our employees, directors
and other persons with relationships with us. See the section entitled Plan of
Distribution for more information. The underwriters have an option to purchase
675,000 additional shares of class A common stock from us at the initial public
offering price to cover any over-allotments of shares.
------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
PROSPECTUS DATED
<PAGE> 3
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our class A common stock.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 9
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 28
Selected Consolidated Financial Data........................ 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 38
Management.................................................. 54
Related Party Transactions.................................. 61
Principal and Selling Stockholders.......................... 64
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 71
Plan of Distribution........................................ 73
Legal Matters............................................... 78
Experts..................................................... 78
Additional Information...................................... 78
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
Until , all dealers that buy, sell or trade in our class A
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to its unsold
allotments or subscriptions.
-------------------------
We maintain a Web site at www.emergeinteractive.com, which includes
information relating to eMerge Interactive. Information contained on our Web
site does not constitute a part of this prospectus.
Cyberstockyard(TM) and NutriCharge(TM) are trademarks of eMerge
Interactive. This prospectus also contains trademarks and tradenames of other
companies.
<PAGE> 4
PROSPECTUS SUMMARY
eMERGE INTERACTIVE, INC.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our products and services to cattle industry
participants through our family of integrated Web sites, our proprietary
information management application and our direct sales force. Our products and
services are designed to create an efficient market for the purchase and sale of
cattle and to improve quality and productivity in the cattle industry. Our
current products and services include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement products.
THE ONLINE LIVESTOCK OPPORTUNITY
We believe that the production chain of the cattle industry, which includes
cattle producers, feedlots, packers and suppliers, contains inefficiencies that
reduce animal health and value. These inefficiencies, which include excessive
animal transportation and handling, result in additional transaction costs and
reduced beef quality. Further, we believe that inadequate access to current and
accurate data and a lack of integrated information management tools have limited
the ability of industry participants to optimize their operating results and
performance.
Due to its functionality, scalability and accessibility, the Internet is
emerging as a single destination for commerce and information related to the
livestock industry. Many of the variables that affect beef quality can be
addressed by using the Internet's open architecture, universal accessibility and
ability to provide more timely and comprehensive information. According to
Forrester Research, business-to-business electronic commerce in the United
States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003.
THE eMERGE INTERACTIVE EXPERIENCE
We offer commerce, information and technology to cattle industry
participants. Our complementary products and services are designed to reduce
inefficiencies throughout the cattle production chain, improve cattle quality
and improve overall productivity in the cattle industry. Our current products
and services include the following:
- Cyberstockyard.com, our online cattle sales and auction services Web
site, allows our customers to participate in our live cattle sales and
auctions, thereby providing efficient and effective access to an
inventory of cattle by directly connecting buyers and sellers of cattle.
We believe a less fragmented market for cattle sales may reduce the
excessive handling of cattle that results from transportation and
commingling during transactions, thereby reducing animal stress, which
can lead to improved cattle
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quality. In addition, by reducing the need for multiple transactions, we
seek to lower overall transaction costs associated with cattle sales.
- The Feedlot Information System, our cattle information management
product, is designed to assist in the effective daily management of our
customers' cattle operations. Using our proprietary information
management application, subscribing feedlot customers transmit raw
operating data to us on a daily basis over the Internet. We then use this
data to compile customer-specific information and performance data and
analyses, such as feed consumption data, feed-to-gain ratios and a
comprehensive summary of health results, which we disseminate daily to
our customers over the Internet.
- PCC-online.com, our Professional Cattle Consultants service, is designed
to provide our customers with national, regional and customer-specific
industry analysis services that are derived from our proprietary
centralized database of cattle industry information. These services
include feed performance benchmarking services and monthly market
analysis that we provide to subscribing customers on a periodic basis.
- NutriCharge, our therapeutic product for livestock, is a restorative feed
supplement designed to reduce the effects of stress on the animals caused
by transportation, handling and commingling. We sell our NutriCharge
product over our Web sites and through our direct sales force.
Our customers can access our family of integrated Web sites through our
platform site, CattleInfoNet.com. This industry-specific Web site features
general industry information, such as current industry news, links to
commodities pricing and weather updates, as well as personalized information
based upon customers' individual preferences and geographic location. We also
provide customers with an online community to facilitate the exchange of
information among livestock producers, feedlots and packers and to provide
access to our in-house cattle industry experts.
FINANCIAL INFORMATION
We currently derive our revenue from:
- Purchasing and selling cattle through our online cattle sales and auction
services;
- Subscription fees for our information management services; and
- Sales of our proprietary products.
You should be aware that we incurred net losses of approximately $7.8
million for the year ended December 31, 1998 and approximately $10.7 million for
the nine months ended September 30, 1999, resulting in an accumulated deficit of
approximately $27.5 million at September 30, 1999. We expect to continue to
incur substantial losses in the future related to expanding our network,
expanding our product and service offerings, establishing brand recognition and
upgrading and enhancing our technology.
------------------------
We are a Delaware corporation originally incorporated on September 12, 1994
under the name Enhanced Vision Systems, Inc. On June 11, 1999, we changed our
name to eMerge Interactive, Inc. Our principal executive offices are located at
10315 102nd Terrace, Sebastian, Florida 32958 and our telephone number is
561-589-5310.
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THE OFFERING
Class A common stock offered by:
eMerge Interactive.......................... 6,500,000 shares
The Selling Stockholders.................... 1,500,000 shares
Common stock to be outstanding after the
offering......................................... 31,724,772 shares
Use of proceeds.................................. For repayment of debt,
working capital and general
corporate purposes,
including sales and
marketing expenditures,
research and development
expenditures and capital
expenditures. See the
section entitled Use of
Proceeds.
Proposed Nasdaq National Market symbol........... EMRG
In addition to the 31,724,772 shares of common stock to be outstanding
after this offering, there are:
- 2,729,744 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
November 30, 1999 at a weighted average exercise price of $2.78 per
share, of which options to purchase 742,775 shares of class A common
stock were exercisable at a weighted average exercise price of $1.67 per
share;
- 1,645,375 additional shares of class A common stock available for
issuance under our 1996 and 1999 equity compensation plans as of November
30, 1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
For a description of our equity compensation plans, please see the section
entitled Management -- Equity Compensation.
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SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares of our class A common
stock to shareholders of Safeguard Scientifics, Inc. that owned at least 100
shares of Safeguard common stock on October 20, 1999 in the Safeguard
Subscription Program. The program is described in greater detail in the section
of this prospectus entitled Plan of Distribution -- Safeguard Subscription
Program.
------------------------
Unless otherwise noted, the information in this prospectus takes into
account the conversion of preferred stock into shares of common stock, which
will automatically occur immediately before this offering is completed. Each
outstanding share of series A preferred stock, series B preferred stock and
series C preferred stock will convert into 1.25 shares of class A common stock
and each outstanding shares of series D preferred stock will convert into 1.25
shares of class B common stock. All shares offered by this prospectus are shares
of class A common stock. The holders of class A common stock are entitled to one
vote per share. Holders of our class B common stock are entitled to two and
one-half votes per share. Unless otherwise indicated, the references to common
stock in this prospectus refer to both our class A and class B common stock.
The information in this prospectus also takes into account a 5-for-4 common
stock split which was authorized by the Company's Board of Directors on December
6, 1999 and will be effective on December 23, 1999.
The references to Safeguard in this prospectus refer to Safeguard
Scientifics, Inc. and its affiliates. The information throughout this prospectus
also assumes that all of the shares offered in the Safeguard Subscription
Program are purchased by shareholders of Safeguard Scientifics, Inc. and, as a
result, no shares are shown as purchased by Safeguard under the Standby Stock
Purchase Agreement. In addition, the information in this prospectus assumes that
the underwriters will not exercise their over-allotment option.
Please see the section entitled Capitalization for more information
regarding the outstanding shares of our common stock and options to purchase our
common stock.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes consolidated statements of operations data
for our business. The pro forma consolidated statements of operations data gives
effect to our acquisition of CIN, LLC and Professional Cattle Consultants,
L.L.C. as if we had consummated these acquisitions at the beginning of each
period. Cyberstockyard, Inc. is not included because the pro forma effects are
not significant. We acquired CIN, LLC in February 1999 for an aggregate purchase
price of approximately $2.3 million, which consisted of cash, shares of our
class A common stock, assumption of liabilities, future contingent payments
relating to sales of products over the CIN Web site and transaction costs. We
acquired Professional Cattle Consultants, L.L.C. in May 1999 for an aggregate
purchase price of approximately $1.8 million, which consisted of cash, the
assumption of liabilities and transaction costs. We acquired Cyberstockyard,
Inc. in March 1999 for an aggregate purchase price of approximately $542,000,
which consisted of shares of our class A common stock and transaction costs.
Business activities related to our continuing operations began on January 1,
1997. From our inception in 1994 until January 1997, our business activities
related to the development and commercialization of infrared products focused on
the transportation industry, primarily the maritime transportation industry. The
historical data for the nine months ended September 30, 1998 and the pro forma
data for the year ended December 31, 1998 and the nine months ended September
30, 1999 are unaudited.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED NINE MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
----------------- ------------------ 1998 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- ------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue............................ $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................... -- 2,623 1,629 18,283 2,801 18,354
Operating expenses................. 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income,
net.............................. 141 332 231 443 315 454
------- ------- ------- -------- ------- --------
Profit (loss) from continuing
operations....................... $(1,497) $(5,932) $(3,941) $(10,683) $(7,099) $(11,087)
======= ======= ======= ======== ======= ========
Profit (loss) from continuing
operations per common share --
basic and diluted................ $ (3.91) $ (1.36) $ (.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======= ======== ======= ========
Weighted average number of common
shares outstanding -- basic and
diluted.......................... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======= ======== ======= ========
</TABLE>
The following table summarizes our balance sheet data as of September 30,
1999.
The unaudited pro forma consolidated balance sheet data give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock at an
exercise price equal to the initial public offering price, for $38.8
million ($18.0 million of cash and a $20.8 million note receivable) under
a securities purchase agreement dated October 27, 1999, and the
application of a portion of the proceeds from that agreement which repaid
indebtedness to XL Vision of approximately $4.5 million;
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- The automatic conversion of all outstanding shares of series A, series B,
series C and series D preferred stock into shares of our common stock,
which will occur immediately prior to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc., which is due upon the completion of this offering.
The unaudited pro forma as adjusted consolidated balance sheet data below
give effect to:
- The events described in the four preceding paragraphs; and
- The sale of 6,500,000 shares of class A common stock in this offering and
our application of the estimated net proceeds from the sale of these
shares, as described in the section entitled Use of Proceeds.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEET DATA:
Cash........................................... $ 1,650 $13,750 $71,421
Total assets................................... 16,229 28,329 85,658
Total indebtedness............................. 15,133 9,233 --
Total stockholders' equity..................... (3,907) 14,499 81,061
</TABLE>
Total indebtedness as of September 30, 1999 includes amounts due to XL
Vision totaling $6.1 million and to Safeguard totaling $7.3 million. We intend
to use a portion of the net proceeds from this offering to pay in full amounts
due to XL Vision and Safeguard. As of November 30, 1999, approximately $1.5
million was owed to XL Vision after repayment of $4.5 million with the net
proceeds from the sale of series D preferred stock and a warrant to purchase
1,138,889 shares of class B common stock to Internet Capital Group, Inc.; the
remaining $1.5 million will be paid with a portion of the net proceeds from this
offering. The principal amount owed to Safeguard as of November 30, 1999 was
approximately $10.3 million, and is to be repaid with the net proceeds of this
offering. Safeguard owns approximately 14% of the outstanding common stock of
Internet Capital Group, Inc., and owns approximately 55% of the outstanding
capital stock of XL Vision.
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RISK FACTORS
You should carefully consider the risks described below before investing in
our class A common stock. The factors discussed below may harm our business,
financial condition and results of operations and could result in a complete
loss of your investment.
RISKS RELATED TO OUR BUSINESS
WE BEGAN OPERATIONS IN OUR CURRENT LINE OF BUSINESS IN JANUARY 1997 AND FACE
SIGNIFICANT RISKS TYPICAL OF EARLY STAGE COMPANIES, WHICH COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We commenced operations in 1994 and commercially released our initial
product in November 1997. Accordingly, we have only a limited operating history
upon which you can evaluate our business. In addition, our business strategy and
revenue model have changed significantly during the past year. Prior to this
change, we generated revenue primarily from the sale and licensing of our AMIRIS
product, a maritime navigational thermal imaging system. We have sold the AMIRIS
product line and have changed our business strategy to focus on
business-to-business Internet commerce for the livestock industry. We only
recently launched our commercial Web site for the cattle industry in August
1999. Our limited operating history, combined with our recent shift in business
strategy, makes predicting our future results of operations difficult. Our new
business model has not been tested and, accordingly, we cannot be certain that
our business strategy will be successful.
Specific uncertainties relating to our new business model include our
ability to:
- Achieve acceptance of our Web site as a marketplace for electronic
commerce;
- Expand the number of cattle producers, feedlots and packers that utilize
our services;
- Develop and upgrade our products and technologies more effectively and
rapidly than our competitors; and
- Successfully implement our sales and marketing strategy.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE. IF WE CONTINUE TO INCUR LOSSES, OUR BUSINESS MAY NOT
ULTIMATELY BE FINANCIALLY VIABLE.
We have incurred significant net losses since inception. We reported a net
loss of approximately $7.8 million for the year ended December 31, 1998, or 437%
of total revenue, and approximately $10.7 million for the nine months ended
September 30, 1999, or 58% of total revenue. We expect to continue to incur
significant losses for the foreseeable future. As of September 30, 1999, we had
accumulated net losses totaling approximately $27.5 million and a stockholders'
deficit of $3.9 million. Our operating expenses have increased significantly in
each year of our operation, and we anticipate that such expenses will continue
to increase over the next several years as we expand our operations. Our revenue
may not grow or may not even continue at its current level and, as a result, our
financial condition and results of our operations may be harmed and our business
may not be financially viable in the future. To achieve profitability, we must
successfully address the following risks:
- Lack of commercial acceptance of our online cattle sales and auction
services;
- Failure to expand the number of livestock industry participants using our
network;
- Failure to obtain access to data from feedlots to adequately address the
information needs of our customers;
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- Inability to respond to competitive developments;
- Failure to achieve brand recognition;
- Failure to introduce new products and services; and
- Failure to upgrade and enhance our technologies to accommodate expanded
product and service offerings and increased customer traffic.
If we are unable to successfully address any of these risks, our business
may be harmed.
THE INTERNET LIVESTOCK PRODUCTS AND SERVICES MARKET, INCLUDING, IN PARTICULAR,
THE ONLINE CATTLE SALES AND AUCTION MARKET, IS NEW AND UNCERTAIN AND OUR
BUSINESS MAY NOT DEVELOP AS WE ANTICIPATE.
The Internet market for livestock products and services, including, in
particular, the online cattle sales and auction market, has only recently
developed, and its continued development is subject to substantial uncertainty.
To date, we have not realized adequate revenues from this market to achieve
profitability. We cannot assure you that this market will continue to develop as
we expect, if at all. Our revenue model depends on the commercial acceptance of
our Internet-based products and services. We do not know if our target customers
will use the Internet as a means of purchasing products and services. Even if
potential customers choose to purchase livestock products and services over the
Internet, they may not choose our online services to do so. If the market for
livestock products and services over the Internet does not develop as we
anticipate, our business and the results of our operations will be harmed.
For the nine months ended September 30, 1999, we relied on online cattle
sales and auction services for over 90% of our revenue and we expect to rely on
the success of our online cattle sales and auction services for a significant
majority of our revenue for the foreseeable future. As a result, our ability to
achieve commercial acceptance of our cattle sales and auction services is
critical to our ability to obtain future revenue. To date, we have not achieved
revenues from cattle sales and auction services over the Internet that are
sufficient for us to determine whether these services will achieve commercial
acceptance. Any failure to successfully gain commercial acceptance of these
services would harm our business and the results of our operations.
WE RECENTLY COMPLETED SIGNIFICANT ACQUISITIONS OF BUSINESSES AND TECHNOLOGIES
AND WE MAY MAKE OTHER BUSINESS ACQUISITIONS IN THE FUTURE, WHICH MAY BE
DIFFICULT TO INTEGRATE INTO OUR BUSINESS AND MAY DISRUPT OR NEGATIVELY IMPACT
OUR BUSINESS.
We recently made, and will continue to make, investments in and
acquisitions of complementary companies, technologies and assets that constitute
critical aspects of our current and future business operations. If we fail to
successfully integrate the operations of these companies, technologies or assets
into our business, we may not be able to successfully execute our business
strategy. We acquired substantially all of the assets of CIN, LLC in February
1999, and Professional Cattle Consultants, L.L.C. in May 1999. In connection
with our acquisition of CIN, we hired Scott Crain, one of our key employees. We
also acquired all of the issued and outstanding stock of Cyberstockyard, Inc. in
March 1999. Each of these acquired businesses is critical to our current
business operations and growth strategy.
These and any future acquisitions may result in:
- Difficulties in assimilating technologies, products, personnel and
operations;
- Diversion of our management's attention;
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- Entering markets in which we have no or limited prior experience;
- Loss of key employees of acquired organizations; and
- Capital requirements in excess of what we anticipate.
In the future, acquiring companies, assets or technologies may also require
us to make cash payments, assume debt, incur large write-offs related to
intangible assets and issue equity, which will dilute ownership interest.
IF WE FAIL TO GENERATE SUFFICIENT CASH FLOWS IN THE FUTURE, WE MAY BE UNABLE TO
RECOVER THE CARRYING AMOUNT OF OUR INTANGIBLE ASSETS, WHICH WOULD HARM OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
As a result of our recent acquisitions of companies, technologies and
assets, we have recorded $6.3 million of intangible assets on our balance sheet
as of September 30, 1999. If we are unable to generate sufficient cash flows
that are attributable to these intangible assets, we may be unable to recover
all or a portion of the carrying amount of such assets. Therefore, we may be
required to reduce the value of these assets as recorded on our balance sheet.
This would require us to record an expense in our statement of operations. This
would also reduce our net assets and increase our losses, or reduce our profits,
as the case may be. Any negative impact on our results of operations or balance
sheet could reduce the price of your common stock.
A DECLINE IN THE DEMAND FOR BEEF COULD HARM OUR RESULTS OF OPERATIONS.
For the nine months ended September 30, 1999, we derived over 90% of our
revenue from products and services relating to the sale of cattle. If the demand
for beef declines, the demand for our products and services would likely
decline, and our results of operations would be harmed.
In addition, because the economic benefit to a customer of using
NutriCharge is based on receiving a substantial premium for higher quality beef
over lower grade beef, if the price of prime beef declines relative to that of
choice or select beef, the lower grades of beef as determined by the U.S.
Department of Agriculture, our sales of NutriCharge could decline and our
results of operations could be harmed. Generally, the difference between the
value of prime grade beef, the most desirable grade, and choice grade beef, the
next highest grade, represents a loss of value of approximately 80%, with an
additional loss of value of 10-15% between choice and select beef.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
We cannot assure you that we will be able to effectively or successfully
manage our growth. If we are unable to manage our growth effectively, our
business operations would suffer. We seek to grow by increasing transaction and
subscription volume, adding new products and services and by hiring additional
employees. In particular, we are currently seeking to hire a Vice President of
Human Relations and additional order buyers for our cattle auction and sales
services. Our growth is likely to place a significant strain on our resources
and systems. As we continue to increase the scope of our operations, we will
need an effective planning and management process to implement our business
strategy successfully and we will need to implement new and improve existing
systems, procedures and controls. We will also need to expand, train and manage
our workforce.
WE CURRENTLY DO NOT HAVE AN ADEQUATE CORPORATE INFRASTRUCTURE TO SUPPORT OUR
OPERATIONS AND WE DEPEND UPON XL VISION AND SAFEGUARD TO PROVIDE SUCH SERVICES.
We depend upon XL Vision and Safeguard for accounting, management and
administrative resources. We are currently in the process of establishing our
own corporate
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infrastructure. If our management team fails to manage this growth effectively,
successfully establish our corporate infrastructure or if there are
unanticipated costs or delays in the improvement and implementation of new and
existing systems, procedures and controls, our business and financial condition
may be harmed.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
COMPETITIVE POSITION WILL BE HARMED.
Proprietary rights are important to our success and our competitive
position. We protect our intellectual property through a combination of patent,
copyright, trade secret and trademark law and confidentiality agreements with
third parties. We currently have three pending U.S. patent applications, which
relate to (i) the early detection of inflammation using our infrared imaging
camera, (ii) feedlot information systems and methods and (iii) the cattle
transaction process. We also have 31 pending U.S. trademark applications
relating to our corporate identity, products and services. We cannot guarantee
that any of our pending patent or trademark applications will be approved. Even
if they are approved, the patents or trademarks may be challenged by other
parties or invalidated. Because brand recognition is an important component of
our business strategy, the protection of our trademarks is critical to our
success. We also depend upon patents licensed to us by the Canadian government
and trade secret law to protect the proprietary nature of our NutriCharge
products. In addition, we depend upon our proprietary database of industry and
client information to provide our clients with our information services. Despite
our efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and technology or obtain access to our confidential
proprietary database. Other parties may also breach confidentiality agreements
and other protective contracts. We may not become aware of these breaches or
have adequate remedies available. In addition, effective copyright, patent and
trademark protection may be unavailable in certain countries to which we might
expand our operations.
In technology markets generally, there is frequent and substantial
intellectual property litigation. We may be subject to legal proceedings and
claims, including claims that we infringe third-party proprietary rights. While
we are not aware of any patents, copyrights or other rights that would prevent
us from manufacturing and commercializing our products or services in the United
States and abroad, there can be no assurance that other parties will not assert
infringement claims against us. There also can be no assurance that former
employers of our present and future employees will not claim that our employees
have improperly disclosed confidential or proprietary information to us. Any of
these claims, with or without merit, could subject us to costly litigation and
divert the attention of our personnel.
WE TYPICALLY ASSUME THE OWNERSHIP OF CATTLE SOLD THROUGH OUR INTERNET CATTLE
MARKETPLACE AND ARE SUBJECT TO THE RISK OF LOSS WHILE WE HOLD TITLE AND MARKET
RISK.
In the sales transactions conducted through our Internet cattle sales and
auction services network, we typically contract to purchase cattle from a
seller, identify a buyer for the cattle, take title to the cattle from the
seller and then resell the cattle to the buyer. In this process, we enter into a
contract to purchase cattle in advance of entering into a contract to sell the
cattle. Therefore, until we actually complete a sale transaction, we are subject
to the risk that we may be unable to sell cattle that we are contractually
obligated to purchase. In addition, once we purchase the cattle, we assume title
to the cattle for generally up to 48 hours. As a result, we assume all risk
relating to the ownership of the cattle during that period. Although we review
the background and credit history of our customers, we cannot assure you that we
will receive full and timely payment in each instance. If the buyer does not
accept the cattle, we may not be able to sell the cattle to other buyers on the
same terms, and our
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profitability may be harmed. If the cattle suffer from health deterioration or
weight loss while in our ownership, the purchasers may assert claims against us.
Our business and financial condition may be harmed if we have to defend any
claims or pay any refunds. If the cattle are destroyed while we have ownership,
we may be held responsible for the loss or may be obligated to purchase
additional cattle to fulfill our delivery commitments. As a result, our business
may be harmed.
WE RELY ON TECHNOLOGY LICENSED FROM THE CANADIAN GOVERNMENT, THE LOSS OF WHICH
MAY HARM OUR ABILITY TO SELL OUR NUTRICHARGE PRODUCT.
We incorporate technology licensed exclusively from the Canadian government
under a portfolio of patents relating to animal food science technology into our
NutriCharge product. If we are unable to maintain this license on commercially
favorable terms or need to replace the technology upon termination of the
license, our ability to sell our NutriCharge product may be harmed. The license
agreement expires in July 2018. The Canadian government can terminate the
license agreement prior to its expiration if we breach a material term of the
license agreement and fail to cure such breach, commence bankruptcy or
insolvency proceedings or assign the license agreement without the Canadian
government's prior written consent. If the license is terminated, we must return
all acquired confidential information, including all licensed technologies, to
the Canadian government and pay all costs due under the agreement. In such
event, it may be impossible to develop or otherwise obtain rights to equivalent
noninfringing technology.
WE HAVE SELECTED ARCHER-DANIELS-MIDLAND COMPANY AS OUR CURRENT SINGLE SOURCE OF
SUPPLY FOR THE BASE COMPONENTS OF NUTRICHARGE. IF THIS RELATIONSHIP IS
TERMINATED OR IF ARCHER-DANIELS-MIDLAND COMPANY IS UNABLE TO MEET OUR NEEDS ON A
TIMELY BASIS, WE MAY INCUR SIGNIFICANT COSTS WHILE SEEKING AN ALTERNATIVE SOURCE
OF SUPPLY AND MAY SUFFER DELAYS IN DELIVERING OUR PRODUCTS, WHICH COULD HARM OUR
BUSINESS AND THE RESULTS OF OUR OPERATIONS.
We currently have an agreement with a division of Archer-Daniels-Midland
Company, or ADM, to provide us with the base components for NutriCharge. The
agreement expires in August 2000, and will be automatically renewed for
successive 12-month periods. If ADM fails to meet its obligations under the
agreement and does not supply us in a timely fashion, we will be delayed in
shipping products to our customers. ADM may terminate the agreement with 90
days' notice before the end of a term. If ADM terminates our relationship, we
could experience a significant delay in providing NutriCharge as we seek other
suppliers. As a result, we may realize reduced revenue during this period and
may lose NutriCharge customers. In addition, we may incur significant costs
while seeking an alternative source of supply. If we are delayed in delivering
or are unable to deliver products to our customers, our business, financial
condition and operating results would be adversely affected.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR SUCCESS. THE LOSS OF ANY OF THESE PERSONS
COULD HARM OUR ABILITY TO COMPETE.
Our success depends on the continued services of the following executive
officers and key employees:
- Charles L. Abraham;
- T. Michael Janney;
- Scott L. Mathews;
- Marvin L. Slosman;
- Arvind Subramanian;
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- J. Tom Brink;
- Scott Crain, D.V.M.; and
- Jim Gibb, Ph.D.
The loss of the services of any of these persons could harm our business,
including our ability to compete effectively. Our performance also depends on
our ability to attract, retain and motivate additional key officers and
employees. We may be unable to retain our employees or to attract, assimilate
and retain other qualified employees with relevant livestock and electronic
commerce industry skills in the future. If we fail to attract, retain and
motivate qualified employees, our business will be harmed.
WE MAY FACE COSTLY PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
AWARDS AGAINST US OR IMPAIR OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND
SERVICES.
A successful product liability claim brought against us could harm our
financial condition and reputation in the industry. We may face product
liability claims in connection with our cattle sales and auction services,
feedlot operations analysis, comparative cattle industry analysis and
benchmarking studies, cattle inventory management tools and NutriCharge, as well
as future products and services. Even if unsuccessful, a product liability claim
could result in costly litigation and divert management's attention and
resources. We do not maintain product liability insurance.
WE EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE. IF WE FAIL TO MEET THE
EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE.
We expect that our revenue and operating results will vary in the future as
a result of a number of factors. Our quarterly results of operations may not
meet the expectations of securities analysts and investors, which could cause
the price of our common stock to decline. Our operating results in the future
may not follow any prior trends. You should not rely on our historical results
as an indication of future results. The factors that affect our quarterly
operating results include:
- Our ability to retain existing customers and attract new customers;
- Our ability to develop and market new and enhanced products and services
on a timely basis;
- The introduction of new or enhanced Web sites, products and services by
us;
- Continued purchases by our existing customers; and
- Future revenues from our equine imaging system, a decline in which may
result in disproportionate fluctuations in our results of operations,
since related manufacturing costs to a large extent remain fixed
regardless of the number of units sold.
In addition, a number of factors that are beyond our control will also
affect our quarterly operating results, such as:
- Demand for our products and services;
- Product and price competition;
- The introduction of new or enhanced Web sites, products and services by
our competitors; and
- Significant downturns in our targeted markets.
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OUR QUARTERLY RESULTS COULD FLUCTUATE AS A RESULT OF SEASONAL FLUCTUATIONS IN
THE CATTLE INDUSTRY.
The cattle industry has historically experienced, and may continue to
experience, seasonal fluctuations. These seasonal patterns may cause quarterly
fluctuations in our operating results. In particular, a disproportionate number
of cattle are sold to feedlots during the third and fourth quarters of each
calendar year. Therefore, a greater number of sales transactions occur during
these two calendar quarters. Due to our limited operating history and the recent
changes in our business as a result of acquisitions, it is difficult to predict
the effect that this seasonal pattern will have on our revenue and quarterly
operating results.
FAILURE OF OUR COMPUTER SYSTEMS TO PROPERLY RECOGNIZE THE YEAR 2000 COULD
DISRUPT THE OPERATION OF OUR BUSINESS AND TECHNICAL SYSTEMS.
Many currently installed computer systems are not capable of accepting four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, prior to January 1, 2000, computer systems and software used by many
companies, modified or upgraded to process information correctly or risk system
failure or miscalculations causing disruptions of normal business activities. We
believe our software and products are year 2000 compliant; that is, they are
capable of accurately distinguishing 21st century dates from 20th century dates.
However, we face the risk that systems which we depend on to conduct our
operations are not year 2000 compliant and we are currently attempting to
identify specific areas of risk for remediation. Our potential areas of exposure
include products purchased from other parties, computers, software, telephone
systems and other equipment used internally. Although we host our own Web site,
we also rely on an Internet service provider for a connection to the Internet.
If our remedial efforts are not successful or if distributors, suppliers and
other parties with which we conduct business do not successfully address such
issues, we could be unable to deliver services to our customers, and our
business, operating results and financial position could be materially and
adversely affected.
Our results of operations and business could be harmed in the event of a
disruption of the Internet caused by year 2000 issues. Although we could
continue to provide cattle sales services over the telephone, approximately
25-35% of our revenues are currently derived from online commerce. If the
Internet is not available as a result of year 2000 issues, we would not be able
to provide customers with our online sales and auction services or our
information management products and services.
OUR BACK-UP MECHANISMS ARE UNPROVEN, AND THEREFORE ARE VULNERABLE TO DAMAGE OR
INTERRUPTION WHICH WOULD HARM OUR ABILITY TO RELIABLY SERVICE OUR CUSTOMERS.
Our network server, satellites, computers and facilities are vulnerable to
damage or interruption from a number of sources, including fire, flood, power
loss, earthquakes, telecommunications failures, system failures, Internet
brownouts, computer viruses, electronic break-ins and similar disruptions. We
depend on these systems to provide our customers with online cattle sales and
auction services, feedlot and cattle industry analyses, cattle inventory
management tools and the sale of NutriCharge. During the past year, we
experienced a system interruption caused by adverse weather conditions, which
resulted in our system shutting down for approximately 24 hours. We may
experience such an interruption in the future. Any substantial interruptions
could result in the loss of data and could impair our ability to provide our
products and services to customers and to generate revenues. Presently, we do
not have a formal disaster recovery plan in effect. Moreover, our
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business interruption insurance may not be sufficient to compensate us for
losses that may occur if any of our Internet-based services are interrupted.
RISKS RELATED TO THE INTERNET
IF ELECTRONIC COMMERCE DOES NOT CONTINUE TO GROW AS EXPECTED, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Our long-term success depends on widespread market acceptance of the
Internet and online commercial services as a medium for commerce. If the
Internet commerce market does not grow or grows more slowly than anticipated,
our business, financial condition and results of operations will be harmed. A
number of factors could prevent such acceptance, including:
- The early stage of the Internet;
- The lack of continued development of the Internet's technological
infrastructure; and
- Consumer concern about the security of electronic commerce transactions.
IF THE INTERNET OR OUR WEB SITES AND SYSTEMS CANNOT SUPPORT THE GROWTH IN
ELECTRONIC COMMERCE, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WILL BE HARMED.
If the Internet fails to evolve to support growth in electronic commerce,
our business, financial condition and results of operations will be harmed.
Specifically, we would be harmed if:
- The infrastructure of the Internet does not evolve to sufficiently
support the substantial growth in usage of the Internet and therefore
cannot process a growing number of transactions; and
- The availability of telecommunication services is insufficient or
telecommunication services do not evolve promptly to support real-time
interactions with customers.
If we do not continue to develop our Web sites and systems to sufficiently
support growth in the demand for our services, our business will also be harmed.
Specifically, we would be harmed if:
- We fail to expand our infrastructure, including our Web sites, internet
software and servers to accommodate an increased number of users; and
- We fail to adapt our products and services to be compatible with new
technology, and are therefore unable to provide our services to users of
the new technology.
We may also need to devote substantial resources to updating our Web sites
and online services to support the growth of online commerce.
RISKS ASSOCIATED WITH THE SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT OUR ELECTRONIC COMMERCE
BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet, such as credit card numbers and proprietary data,
may prevent many potential customers from engaging in online transactions and
may harm our business. We intend to use authentication technology, which
requires passwords and other information to prevent unauthorized persons from
accessing a customer's information, or encryption, which transforms information
into a code designed to be unreadable by third parties, to protect
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confidential information. In addition, despite the measures we intend to take,
our infrastructure is potentially vulnerable to physical or electronic
break-ins, viruses or similar problems. If our security measures are
circumvented, proprietary information could be misappropriated or our operations
could be interrupted. Security breaches that result in access to confidential
information could expose us to a risk of loss or liability. If we do not
adequately address these concerns or face any claims in connection with a breach
of security, our business, financial condition and operating results could be
harmed.
WE COULD FACE LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED THROUGH
OUR WEB SITES, WHICH COULD RESULT IN HIGH LITIGATION OR INSURANCE COSTS.
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute on our Web sites. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
Claims have been successfully brought against online services. Although we carry
general liability insurance, our insurance may not cover claims of these types
or may not be adequate to cover us for all liability that may be imposed.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD RESULT IN ADDITIONAL BURDENS
TO DOING BUSINESS ON THE INTERNET.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws including those governing intellectual property,
privacy, libel and taxation apply to the Internet. Our business, results of
operations and financial condition could be harmed by the adoption or
modification of laws or regulations relating to the Internet that result in the
imposition of additional cost on conducting business over the Internet or impose
additional restrictions on our ability to conduct our business operations.
In 1998, the Internet Tax Freedom Act placed a three-year moratorium on
state and local taxes on Internet access, except for taxes imposed prior to
October 1, 1998, and on taxes which discriminate against online commerce.
However, Congress may not renew this legislation in 2001 and state and local
governments would be able to impose Internet-specific taxes on goods purchased
electronically, in addition to taxes that are otherwise imposed on sales
transactions.
Laws and regulations that apply to Internet communications, commerce and
advertising could increase the costs of communicating on the Web and adversely
affect the demand for our products and services and thereby harm our business,
results of operations and financial conditions. In addition, as a general
matter, laws and regulations may also be adopted in the future covering
e-commerce issues such as user privacy, pricing, content, copyrights,
distribution, antitrust matters, taxation and quality of products and services
that may increase the cost of e-commerce. Several telecommunications carriers
have asked the Federal Communications Commission to regulate telecommunications
connections to the Internet, which could result in higher costs of doing
business over the Internet. Legislation of these kinds could hinder growth in
the use of the Internet generally and decrease the acceptance of the Internet as
a communications and commercial medium.
Due to the global nature of the Internet, it is possible that governments
of foreign countries might attempt to regulate our transmissions or levy sales
or other taxes relating to our activities and we may incur significant costs to
comply with foreign laws. Furthermore, the European Union recently adopted a
directive addressing data privacy that may result in limits on the collection
and use of user information. In addition, the growth and development of the
market for Internet commerce may prompt calls for more stringent
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consumer protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet.
THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES, WHICH COULD
REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE.
Competition for Internet products and services and electronic commerce is
intense. We expect that competition will continue to intensify. Barriers to
entry are minimal, and competitors can launch new Web sites at a relatively low
cost. Our competitors, such as traditional cattle auction services, video cattle
auction providers, online cattle auction services, cattle and livestock
information services and cattle industry product manufacturers, may develop
Internet products or services that are superior to, or have greater market
acceptance, than our products and services. If we are unable to compete
successfully against our competitors, our business, financial condition and
operating results will be harmed.
RISKS RELATED TO THE OFFERING
INTERNET CAPITAL GROUP, SAFEGUARD AND XL VISION WILL BE ABLE TO CONTROL MATTERS
REQUIRING STOCKHOLDER APPROVAL AND MAY VOTE AGAINST MATTERS THAT YOU VOTE IN
FAVOR OF OR MAY VOTE IN FAVOR OF MATTERS THAT YOU VOTE AGAINST.
The concentration of ownership of our common stock may delay, deter or
prevent acts that would result in a change of control, which could reduce the
market price of our common stock. Internet Capital Group and Safeguard are
affiliated entities and Safeguard and XL Vision are affiliated entities.
Following the closing of this offering, Internet Capital Group, Safeguard and XL
Vision together will have the power to vote approximately 79.4% of the aggregate
number of votes to which the holders of our common stock are entitled. In
addition, Safeguard and Internet Capital Group are parties to a joint venture
agreement under which they have agreed to use their best efforts to vote
together on matters submitted to stockholders for approval. As a result, these
stockholders will be able to control all matters requiring stockholder approval.
These stockholders may have interests that differ from yours. Matters that
typically require stockholder approval include:
- Election of directors;
- Approval of a merger or consolidation; and
- Approval of a sale of all or substantially all of our assets.
Of the seven members of our board of directors, the following four
directors also serve as directors and/or officers of Internet Capital Group,
Safeguard or XL Vision:
- John S. Scott, Chairman of our board of directors, is the Chief Executive
Officer and the Chairman of the board of directors of XL Vision;
- Douglas A. Alexander, a member of our board of directors, is the Managing
Director of Internet Capital Group;
- E. Michael Forgash, a member of our board of directors, is a Vice
President of Safeguard, a member of the board of directors of Internet
Capital Group and a member of the board of directors of XL Vision; and
- John W. Poduska, Sr., Ph.D., a member of our board of directors, is a
member of the board of directors of Safeguard and a member of the board
of directors of XL Vision.
In addition, Internet Capital Group has the right to elect two directors to
our board, one of which has not yet been designated. Under the joint venture
agreement, Safeguard and Internet Capital Group have agreed to vote for two
designees of Safeguard and two
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designees of Internet Capital Group in all future elections of directors.
Safeguard, XL Vision and Internet Capital Group will therefore have the ability
to significantly influence our management.
SINCE WE HAVE NO PLANS FOR THE USE OF THE MOST OF THE PROCEEDS OF THIS OFFERING,
WE WILL HAVE BROAD DISCRETION IN THE USE OF THESE PROCEEDS AND MAY USE THE
PROCEEDS FOR PURPOSES NOT CURRENTLY CONTEMPLATED BY US AND FOR WHICH YOU DO NOT
AGREE, SUCH AS ACQUISITIONS.
Our primary purpose for this offering is to create a public market for our
common stock. We will have broad discretion in how we use the proceeds of this
offering and you will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions on how to use the
proceeds. We plan to use the proceeds from this offering to repay outstanding
debt relating to a recent acquisition and for working capital and general
corporate purposes. We may also use the proceeds in future strategic
acquisitions of, or investments in, businesses that offer products, services and
technologies that further our ability to provide products and services to
businesses or increase our ability to sell our products and offer services to
new markets. Until the need arises to use the proceeds from this offering, we
plan to invest the net proceeds in investment grade, interest-bearing
securities.
THE SALE OF OUTSTANDING SHARES IN THE MARKET BY OUR EXISTING STOCKHOLDERS IN THE
FUTURE MAY ADVERSELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Of the shares that will be outstanding on the
consummation of this offering:
- The shares offered through this prospectus will be freely tradable in the
public market;
- shares that may be sold as of the date of this prospectus
under Rule 144(k) and additional shares that may be sold
under Rule 144, subject to volume restrictions;
- shares that may be sold 90 days following the date of this
prospectus under Rule 701; and
- additional shares may be sold after the expiration of
180-day lock-up agreements.
In addition, after the consummation of this offering, there will be options
and warrants to purchase shares of common stock outstanding, of
which are subject to 180-day lock-up agreements.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD NEGATIVELY
IMPACT THE VALUE OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock. Accordingly, the market price of our common stock, like the market for
Internet-related and technology companies in general, could be highly volatile.
The initial public offering price for our shares will be determined by us and
the representatives of the underwriters and may not be indicative of the price
that will prevail in the public market after our shares begin trading. Any
significant fluctuations in the future might result in a material decline in the
market price of our common stock.
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The price at which our common stock will trade after this offering is
likely to be highly volatile and may fluctuate substantially due to factors such
as:
- Actual or anticipated variations in quarterly operating results;
- Announcements of technological innovations;
- Conditions or trends in the cattle industry;
- New sales formats of new products or services;
- Changes in or failure by us to meet financial estimates of securities
analysts;
- Conditions or trends in the Internet industry;
- Announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
- Capital commitments;
- Additions or departures of key personnel; and
- Sales of common stock.
In addition, the U.S. stock markets have from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the common stock of technology companies, particularly Internet companies.
In the past, these broad market fluctuations have been unrelated or
disproportionate to the operating performance of these companies. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future.
Litigation is often expensive and diverts the attention and resources of
management, which could harm our business and operating results.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing our common stock in
this offering will, therefore, incur immediate dilution of $8.64 in net tangible
book value per share of our common stock. This dilution figure deducts the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us from the initial public offering price. Investors will incur
additional dilution upon the exercise of outstanding stock options.
OUR UNDESIGNATED PREFERRED STOCK MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR
BUSINESS, INCLUDING BIDS THAT MAY BE BENEFICIAL TO YOU.
Our board of directors may issue up to 15,000,000 shares of preferred stock
in one or more series. The board of directors can fix the number of shares of
each class and the voting rights, preferences, limitations and special rights,
if any, without any further vote or action by our stockholders. The issuance of
shares of preferred stock without further action by our stockholders may delay
or prevent a change in control transaction. The issuance of shares of preferred
stock may adversely affect your relative voting and other rights relating to
your shares of common stock.
DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING
BIDS WHICH MAY BE BENEFICIAL TO YOU.
Delaware law may deter potential bids for our business. We are subject to
the anti-takeover provisions of the Delaware General Corporation Law, which
regulates corporate
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acquisitions. Delaware law prevents us from engaging in a business combination
with any interested stockholder for three years following the date that the
stockholder became an interested stockholder. For purposes of Delaware law, a
business combination includes a merger or consolidation involving us and the
interested stockholder and the sale of more than 10% of our assets. In general,
Delaware law defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a corporation
and any entity or person affiliated with or controlling or controlled by such
entity or person. Under Delaware law, a Delaware corporation may opt out of the
anti-takeover provisions. We do not intend to opt out of these anti-takeover
provisions.
21
<PAGE> 23
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address electronic
commerce strategy, acquisition and expansion strategy, development of services,
use of proceeds, projected capital expenditures, liquidity, development of
additional revenue sources, development and maintenance of strategic alliances,
market acceptance of the Internet, technological advancement, ability to develop
brand identification and global expansion. These statements may be found in the
sections of this prospectus entitled Prospectus Summary, Risk Factors, Use of
Proceeds, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Business and in this prospectus generally. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
Risk Factors and elsewhere in this prospectus.
22
<PAGE> 24
USE OF PROCEEDS
We expect to receive approximately $66.7 million in net proceeds from the
sale of the 6,500,000 shares of class A common stock in this offering, assuming
an initial public offering price of $11.00 per share, underwriters' discount of
$3.7 million and our offering expenses of $1.3 million. We expect to receive
approximately $6.9 million in net proceeds if the underwriters' over-allotment
option is exercised in full. We will not receive any proceeds from the sale of
class A common stock by the selling stockholders.
The primary purpose of this offering is to obtain additional capital,
create a public market for the common stock and facilitate future access to
public markets.
We intend to use a portion of the net proceeds from this offering to pay
outstanding debt owed to XL Vision and Safeguard.
- We intend to repay approximately $1.5 million of principal and interest
owed to XL Vision as of November 30, 1999 with the net proceeds from this
offering. The debt owed to XL Vision is evidenced by a promissory note,
which bears interest at an annual rate of 7% and matures upon
consummation of our initial public offering or a sale of the company.
- We intend to repay approximately $10.3 million of principal and interest
owed to Safeguard as of November 30, 1999 with the proceeds of this
offering. The debt owed to Safeguard is evidenced by two promissory
notes, which bear interest at an annual rate equal to the prime lending
rate plus 1%. The note covering $3.0 million matures in January 2000 and
the note covering the remainder matures in October 2000.
In addition, we intend to use proceeds from this offering to repay any
additional debt that may be incurred by us prior to the completion of this
offering to XL Vision pursuant to our revolving promissory note, which bears
interest at an annual rate equal to the prime lending rate plus 1% and matures
upon consummation of our initial public offering or the sale of the company or
to Safeguard. The actual amount of the proceeds used for the repayment of debt
will depend upon the amount of interest accrued and any additional borrowings or
payments that are made prior to the completion of this offering.
In addition, we intend to use the net proceeds of this offering for payment
of $1.4 million representing a deferred payment of a portion of the purchase
price of a 19% investment in Turnkey Computer Systems, Inc. The payment is due
and payable upon the earlier of the consummation of this offering or in payments
of $500,000 due on December 31, 1999, $500,000 due on December 31, 2000 and
$400,000 due on December 31, 2001. We also intend to use the proceeds from this
offering for working capital and other general corporate purposes.
We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies or to establish joint ventures that we
believe will complement our current or future business. However, we have no
specific plans, agreements or commitments, oral or written, to do so. We are not
currently engaged in any negotiations for any acquisition or joint venture. The
amounts that we actually expend for working capital purposes will vary
significantly depending on a number of factors, including future revenue growth,
if any, the amount of cash we generate from operations and the progress of our
product development efforts. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will invest the net proceeds in short-term interest-bearing,
investment-grade securities.
23
<PAGE> 25
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
future.
24
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
We present capitalization:
- On an actual basis;
- On a pro forma basis to give effect to:
- The issuance of 4,555,556 shares of series D preferred stock and a
warrant to purchase 1,138,889 shares of class B common stock for
$38.8 million ($18.0 million of cash and a $20.8 million note
receivable) under a securities purchase agreement with Internet
Capital Group Inc. dated October 27, 1999 and the application of a
portion of the proceeds therefrom to repay indebtedness to XL Vision
of approximately $4.5 million; and
- The automatic conversion of all outstanding shares of series A,
series B and series C preferred stock into shares of class A common
stock and all outstanding shares of series D preferred stock into
shares of class B common stock, which will occur immediately prior
to the consummation of the offering;
- The termination of the redemption right relating to 62,500 shares of
class A common stock, which will occur immediately prior to the
consummation of the offering; and
- The repayment of $1,400,000 of a note payable to Turnkey Computer
Systems, Inc. which is due upon the completion of this offering.
- On a pro forma as adjusted basis to give effect to:
- The events described in the four preceding paragraphs; and
- The sale of the 6,500,000 shares of class A common stock in this
offering and application of the estimated net proceeds from the sale
of these shares, as described in the section entitled Use of
Proceeds, at an assumed initial public offering price of $11.00 per
share, after deducting underwriting discounts and commissions and
our estimated offering expenses.
25
<PAGE> 27
This table should be read in conjunction with the section entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes to those
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total indebtedness.................................. $ 15,133 $ 9,233 $ --
Class A common stock, subject to redemption; 62,500
shares issued and outstanding actual; no shares
issued and outstanding pro forma or pro forma as
adjusted............................................ 406 -- --
-------- -------- ---------
Stockholders' equity:
Preferred stock, par value $0.01 per share,
15,000,000 shares authorized:
Series A preferred stock; 6,500,000 shares
designated; 6,443,606 shares issued and
outstanding actual and no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 64 -- --
Series B junior preferred stock; 2,400,000
shares designated; 2,400,000 shares issued
and outstanding actual and no shares issued
and outstanding pro forma or pro forma as
adjusted..................................... 24 -- --
Series C preferred stock; 1,300,000 shares
designated; 1,100,000 shares issued and
outstanding actual; no shares issued and
outstanding pro forma or pro forma as
adjusted..................................... 11 -- --
Series D preferred stock; 4,555,556 shares
designated; no shares issued and outstanding
actual, pro forma or pro forma as adjusted... -- -- --
Common stock, par value $.008 per share;
125,000,000 shares authorized:
Class A common stock; 115,888,887 shares
designated; 6,957,694 shares issued and
outstanding actual; 19,449,702 shares issued
and outstanding pro forma; 25,949,702 shares
issued and outstanding pro forma as
adjusted..................................... 56 156 208
Class B common stock; 9,111,113 shares
designated; no shares issued and outstanding
actual; 5,694,445 shares issued and
outstanding pro forma and pro forma as
adjusted..................................... -- 46 46
Additional paid-in capital........................ 23,454 62,628 129,138
Accumulated deficit............................... (27,453) (27,453) (27,453)
Note receivable from Internet Capital Group,
Inc. .......................................... -- (20,815) (20,815)
Unearned compensation............................. (63) (63) (63)
-------- -------- ---------
Total stockholders' equity................... (3,907) 14,499 81,061
-------- -------- ---------
Total capitalization...................... $ 11,632 $ 23,732 $ 81,061
======== ======== =========
</TABLE>
26
<PAGE> 28
This table does not include the following:
- 2,488,494 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
September 30, 1999 at a weighted average exercise price of $1.54 per
share, of which options to purchase 716,369 shares of class A common
stock were exercisable at a weighted average exercise price of $1.06 per
share;
- 747,250 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of September 30,
1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
27
<PAGE> 29
DILUTION
As of September 30, 1999, our net tangible book value on a pro forma basis
giving effect to the issuance of 4,555,556 shares of series D preferred stock
and a warrant to purchase 1,138,889 shares of class B common stock for an
aggregate of $18.0 million in cash and a note receivable on October 27, 1999 and
the conversion of our preferred stock into shares of our common stock, the
termination of the redemption right related to the 62,500 shares of class A
common stock, which will automatically occur immediately prior to the
consummation of this offering, was approximately $8.2 million or $0.33 per share
of common stock. Net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities. As of
September 30, 1999, our net tangible book value, on a pro forma basis as
adjusted for the sale of the 6,500,000 shares of our class A common stock, based
on an assumed initial public offering price of $11.00 per share, and after
deducting the underwriting discounts and commissions and our estimated offering
expenses, would have been approximately $2.36 per share. This represents an
immediate increase of $2.03 per share to existing stockholders and an immediate
dilution of $8.64 share to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $11.00
Pro forma net tangible book value per share at September
30, 1999................................................. $ 0.33
Increase in pro forma net tangible book value per share
attributable to new investors....................... 2.03
------
Pro forma net tangible book value per share after the
offering............................................... 2.36
------
Dilution per share to new investors...................... $ 8.64
======
</TABLE>
The following summarizes on a pro forma basis as of September 30, 1999 the
differences between the total consideration paid and the average price per share
paid by the existing stockholders and the new investors with respect to the
number of shares of common stock purchased from us based on an assumed initial
public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 25,144,147 79.5% $ 42,271,589 37.2% $ 1.68
New investors................ 6,500,000 20.5 71,500,000 62.8 11.00
---------- ----- ------------ -----
Total................... 31,644,147 100.0% $113,771,589 100.0%
========== ===== ============ =====
</TABLE>
The total consideration does not include the non-cash portion of the
consideration for the series D preferred stock or the proceeds allocated to the
warrant totaling $24.1 million described above.
The information set forth above does not include the following:
- 2,488,494 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
September 30, 1999 at a weighted average exercise price of $1.54 per
share, of which options to purchase 716,369 shares of class A common
stock were exercisable at a weighted average exercise price of $1.06 per
share;
- 747,250 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of September 30,
1999; and
- 1,138,889 shares of class B common stock issuable on the exercise of a
warrant that will be exercisable upon consummation of this offering at an
exercise price equal to the initial public offering price.
28
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999
are derived from our consolidated financial statements which have been audited
by KPMG LLP, independent certified public accountants, and are included
elsewhere in this prospectus. All business activities from inception through
1996 related to the transportation business segment which was disposed of in
January 1999. As a result, we have not included operations data for the years
ended December 31, 1994, 1995 and 1996.
We prepared the unaudited pro forma consolidated financial information for
the year ended December 31, 1998 and for nine months ended September 30, 1999 by
combining the historical results of two of the three companies we acquired, CIN,
LLC and Professional Cattle Consultants, L.L.C., with our historical results
using the purchase method of accounting. Cyberstockyard, Inc. is not included
because the pro forma effects are not significant. We acquired CIN, LLC in
February 1999, Professional Cattle Consultants, L.L.C. in May 1999 and
Cyberstockyard, Inc. in March 1999. This is described in the notes accompanying
the pro forma consolidated financial information included elsewhere in this
prospectus. We have presented this information to give you a better picture of
what our business might have looked like if we had owned CIN, LLC and
Professional Cattle Consultants, L.L.C. during the periods presented. These
companies may have performed differently if they had actually been combined with
our operations. You should not rely on the unaudited pro forma information as
being indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions.
You should read the selected consolidated financial data together with our
historical and pro forma consolidated financial statements and notes thereto and
the section of the prospectus entitled Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ENDED
----------------- ------------------- 1998 SEPTEMBER 30, 1999
1997 1998 1998 1999 PRO FORMA PRO FORMA
------- ------- -------- -------- ------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.......................................... $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505
Cost of revenue.................................. -- 2,623 1,629 18,283 2,801 18,354
Operating expenses:
Selling, general and administrative............ 628 3,660 2,428 7,540 4,815 7,992
Research and development....................... 728 1,109 759 2,756 1,451 2,792
------- ------- -------- -------- -------- --------
Total operating expenses..................... 1,356 4,769 3,187 10,296 6,266 10,784
Interest expense/other income, net............... 141 332 231 443 315 454
------- ------- -------- -------- -------- --------
Profit (loss) from continuing operations......... $(1,497) $(5,932) $ (3,941) $(10,683) $ (7,099) $(11,087)
======= ======= ======== ======== ======== ========
Profit (loss) per common share from continuing
operations -- basic and diluted................ $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62)
======= ======= ======== ======== ======== ========
Weighted average number of common shares
outstanding -- basic and diluted............... 382 4,357 5,846 6,710 5,107 6,854
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
----- ------- ------- ------- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash........................................................ $ -- $ -- $ 2 $ -- $ -- $ 1,650
Total assets................................................ -- 6 260 2,165 6,602 16,229
Total indebtedness.......................................... 411 1,747 3,636 8,040 5,572 15,133
Total stockholders' equity (deficit)........................ (411) (1,742) (3,457) (6,875) 3 (3,907)
</TABLE>
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
information included elsewhere in this prospectus. The following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results contemplated by these
forward-looking statements as a result of many factors, including those
discussed below and elsewhere in this prospectus.
OVERVIEW
We are a business-to-business electronic commerce company combining
content, community and transaction services to create an online marketplace for
the cattle industry. We offer our comprehensive cattle products and services
through our integrated family of Web sites, our proprietary information
management application, and our direct sales force. Our products and services
are designed to create an efficient market for the purchase and sale of cattle
and to improve quality and productivity in the cattle industry. Our revenue is
derived from cattle sales through Cyberstockyard, subscriptions to our
information management products and services and sales of NutriCharge and equine
imaging systems.
We were incorporated in 1994 as a subsidiary of XL Vision, Inc. to develop
and commercialize infrared technology applications. XL Vision is a private
company that provides strategic, technical and business support to create
technology companies. Our initial focus was on the transportation market in
which we sold our navigational infrared imaging system, the AMIRIS system. The
AMIRIS system uses infrared technology to create an image based on small
differences in the temperatures of the objects being viewed, such as an iceberg
in water. In 1997, we expanded our infrared applications to the animal sciences
industry with the development of an equine imaging system to detect health
problems. The equine imaging system enables veterinarians to visualize small
differences in the surface temperature of horses, and therefore identify heat, a
common sign of inflammation associated with injury at early stages. In July
1997, we also completed our first round of private financing and began our
direct relationship with Safeguard Scientifics, Inc., which was the largest
single purchaser of our series A preferred stock, Safeguard beneficially owns
approximately 55% of the outstanding capital stock of XL Vision.
To expand our product base, in July 1998, we licensed a portfolio of
patents from a division of the Canadian government relating to the application
of infrared technology to the animal science field and a restorative feed
supplement called NutriCharge.
In order to focus on the cattle industry, we discontinued production of the
AMIRIS system. In January 1999, we entered into a license agreement with Sperry
Marine, Inc., a subsidiary of Litton Industries, Inc., which granted them the
right to become the sole producer of the AMIRIS system. In connection with this
license, we will receive a royalty of 8% of sales of the AMIRIS system up to a
maximum royalty of $4.3 million over a four year period or up to a maximum
royalty of $5.0 million if $4.3 million is not received within four years. Upon
receipt of the maximum amount, we will transfer all rights, title and interest
to the licensed intellectual property to Sperry. To date, we have not received
any royalties from this license. Results from this line of business and the
related loss on disposal have been segregated from continuing operations and
included in discontinued operations in our financial statements. In November
1999, we sold 4,555,556 shares of our Series D preferred stock to Internet
Capital Group, as a result of which Internet Capital Group became one of our
principal stockholders. Internet Capital Group is an Internet holding company
that invests in business-to-business electronic commerce companies. Safeguard
owns approximately 14% of the outstanding common stock of Internet Capital
Group.
30
<PAGE> 32
REVENUE RECOGNITION
We recognize revenue in accordance with the terms of the sale or contract,
generally as products are shipped or services are provided. In cattle sales
transactions we act as principal when purchasing cattle from suppliers and
reselling them to customers. We take title when the supplier delivers the cattle
to us, arrange for shipment to our customer, and own as inventory until
delivered to and accepted by the buyer, typically a 24 to 48 hour period. We are
responsible for the resale of the cattle, bear all risk associated with the
cattle until resold, and bear the credit risk until full payment is received
from our customers. We recognize revenue when cattle are shipped to the customer
equal to the purchase price paid by the customer. Gross profit on cattle sale
transactions is determined by the mark-up that we add to the price that we pay
to purchase the cattle. Revenue from the sale of livestock health management and
quality enhancement products, equine imaging cameras and NutriCharge, is
recognized on shipment to the customer. Revenue from our information management
products is recognized in the period in which the information or analysis is
delivered to the customer, normally on a monthly basis.
ACQUISITIONS
In February 1999, we purchased substantially all of the tangible and
intangible assets of CIN, LLC for an aggregate purchase price of approximately
$2.3 million. These assets included the Feedlot Information System, a
proprietary, patent pending, information system for cattle feedlots. In
addition, we acquired tangible assets including computers and office equipment
and furnishings, which we are currently utilizing. The purchase price for the
assets consisted of 750,000 shares of our class A common stock valued at
$720,000, the assumption of $812,000 of liabilities, a cash payment due in
October 1999 of $358,000, and an agreement to pay the first $350,000 from
Internet sales of third-party products over the Web site and transaction costs
of $57,000.
In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc.
for approximately $542,000. The purchase price consisted of 200,000 shares of
our class A common stock valued at $450,000, the assumption of $90,000 of
liabilities and transaction costs of $2,000. Through this acquisition, we
obtained Cyberstockyard.com, our online cattle sales and auction services, and
related software applications. Cyberstockyard.com has been integrated into our
suite of products and services. During the three months ended June 30, 1999, we
began executing cattle sales utilizing Cyberstockyard.com.
In May 1999, we purchased substantially all of the tangible and intangible
assets of Professional Cattle Consultants, L.L.C., a leading cattle industry
information resource and database for approximately $1.8 million. The purchase
price consisted of $1.8 million in cash, the assumption of approximately $3,000
in liabilities and transaction costs of $25,000. In June 1999, we began selling
comparative analysis and market information for the feedlot industry with the
assets acquired from Professional Cattle Consultants, L.L.C.
We have presented pro forma results of operations as if the acquisition of
CIN, LLC and Professional Cattle Consultants, L.L.C. had occurred on January 1,
1998. Cyberstockyard, Inc. is not included because the pro forma effects are not
significant. The pro forma loss from continuing operations for the year ended
December 31, 1998 was $7.1 million compared to the actual net loss of $5.9
million. The increase in the net loss results primarily from the net losses of
the acquired companies and the pro forma amortization of the intangible assets
associated with these acquisitions. The pro forma loss from continuing
operations for the nine months ended September 30, 1999 was $11.1 million
compared to the actual loss from continuing operations of $10.7 million. The
increase in the loss is primarily related to the losses of the companies
acquired and the pro forma amortization of the intangible assets associated with
the acquisitions.
31
<PAGE> 33
Because of the significance of these acquisitions and the resulting
additions to our products and services, the historical financial results are not
indicative of future performance.
We have incurred significant net losses since our inception. At September
30, 1999, we had an accumulated deficit of $27.5 million. The net losses and
accumulated deficit resulted from our lack of substantial revenues, the costs of
the significant personnel infrastructure and other costs incurred for the
development and marketing of our initial products. We may never achieve
significant revenue or profitability, or if we achieve significant revenue or
profitability they may not be sustained.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue increased from $1.1 million for the nine months ended September 30,
1998 to $18.3 million for the nine months ended September 30, 1999. Revenue from
our cattle sales segment increased to $17.0 million for the nine months ended
September 30, 1999. There was no revenue from the cattle sales segment in 1998.
Revenue from the animal sciences segment increased by 19% from $1.0 million for
the nine months ended September 30, 1998 to $1.3 million for the nine months
ended September 30, 1999. This growth is due primarily to the increased sales of
NutriCharge and the sale of subscriptions to our comparative feedlot analysis
and market information service. Revenue from sales of our equine imaging system
was flat, as increased average selling prices offset a decline in units sold.
Cost of revenue consists primarily of the direct cost to acquire cattle,
NutriCharge and equine imaging systems components and indirect manufacturing
overhead costs such as support personnel, facilities costs, supplies and
depreciation, which were primarily associated with the production of the equine
imaging system. Direct costs attributed to our cattle sales segment increased to
$16.9 million for the nine months ended September 30, 1999. There were no direct
costs from the cattle sales segment in 1998. Direct costs attributed to the
animal sciences segment decreased by 23% from $603,000 for the nine months ended
September 30, 1998 to $492,000 for the nine months ended September 30, 1999.
This decrease is due principally to the decline in unit sales of equine imaging
systems. We generated a gross loss of $522,000 for the nine months ended
September 30, 1998 and a gross profit of $56,000 for the nine months ended
September 30, 1999. The change from a gross loss to a gross profit is due
primarily to the increase in revenue, while cost of goods, principally
manufacturing overhead, did not increase in proportion to the increase in
revenue.
Selling, general and administrative expenses increased 211% from $2.4
million for the nine months ended September 30, 1998 to $7.5 million for the
nine months ended September 30, 1999.
Sales and marketing expenses consist primarily of salaries and related
costs, commissions for sales and marketing personnel, consulting fees, travel
and entertainment, advertising and trade shows. Sales and marketing expenses
increased 250% from $1.3 million for the nine months ended September 30, 1998 to
$4.6 million for the nine months ended September 30, 1999. The increase is due
primarily to expenses associated with expanding the number of personnel from 11
people at September 30, 1998 to 38 people at September 30, 1999 and consulting,
travel and advertising costs to effect our business strategy. We expect these
costs to continue to increase significantly as we continue to pursue additional
sales and marketing opportunities.
Our general and administrative expenses consist primarily of salaries,
bonuses and related costs for executives, amortization of intangibles and
administrative and professional service fees, including administrative support
fees to XL Vision and Safeguard. We have contractual service agreements with XL
Vision and Safeguard Scientifics. Under an administrative services agreement
dated December 15, 1997, as amended on August 17,
32
<PAGE> 34
1999, XL Vision and Safeguard provide us with management consultation, investor
relations, financial management, human resource management, legal services,
insurance programs, and administrative services. We pay a fee calculated
pursuant to a formula that is based on a percentage of our revenue, not to
exceed $300,000 annually. The fee is not due until we achieve positive cash flow
from operations. The agreement extends through December 31, 2002 and continues
unless terminated by either party. In addition, under a direct charge
administrative services agreement dated April 14, 1997, XL Vision also provides
us with management services on a time and materials basis. This agreement
continues on a month-to-month basis, and may be terminated at any time by either
party.
General and administrative expenses increased 99% from $1.1 million for the
nine months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. The increase was primarily due to increased amortization of
intangibles, increased expenses associated with expanding the number of
personnel from 5 people at September 30, 1998 to 9 people at September 30, 1999
and increased legal and travel expenses required to support and grow our
business. We expect these expenses to continue to increase as additional
personnel are hired and additional expenses are incurred to support future
growth.
Our research and development expenses consist of salaries and related
costs, payments to outside consultants, material costs for prototype imaging
systems and, to a lesser extent, depreciation on equipment used for development.
Our expenses increased 263% from $759,000 for the nine months ended September
30, 1998 to $2.8 million for the nine months ended September 30, 1999. This
increase in expenses was primarily due to increased consulting costs, increased
expenses associated with expanding the number of personnel from 14 people at
September 30, 1998 to 33 people at September 30, 1999, and increased spending
for materials and supplies. The increase in expenses was required to integrate
and expand our product lines such as our online cattle sales and auction
software, Feedlot Information System software, and continued development efforts
on imaging systems. We expect these costs to increase significantly as we plan
to invest heavily to develop and commercialize new products, expand our
offerings and adapt our technologies to new markets.
Interest expense/other income, net increased 92% from $231,000 for the nine
months ended September 30, 1998 to $443,000 for the nine months ended September
30, 1999. This increase was primarily due to a higher average level of
borrowing.
Due to the losses incurred, we did not have any income tax expense in the
first nine months of 1998 or the first nine months of 1999. As of September 30,
1999, we had approximately $21.0 million of federal income tax loss carry
forwards that can be used to offset future taxable income. Our tax loss carry
forwards begin to expire in 2010 and we are not currently aware of any
limitation on our ability to offset future taxable income.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Substantially all of our 1998 revenue of $1.8 million was from the sale of
equine imaging systems that we began selling in March of 1998. There was no
revenue from equine imaging systems sales in 1997.
Our gross loss of $831,000 in 1998 was due primarily to a substantial
increase in manufacturing overhead as we built our manufacturing infrastructure.
There was no manufacturing activity related to the production of equine imaging
systems in 1997.
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<PAGE> 35
Selling, general and administrative expenses increased 483% from $628,000
in 1997 to $3.7 million in 1998.
Our sales and marketing expenses increased 527% from $344,000 in 1997 to
$2.2 million in 1998. The increase in these expenses was due primarily to
increased staffing and related costs, advertising, travel, trade shows and
consulting fees in these areas to effect our business strategy.
Our general and administrative expenses increased 430% from $284,000 in
1997 to $1.5 million in 1998. The increase in these expenses from 1997 to 1998
was primarily due to increases in the number of personnel and related support
costs to expand and grow our business and increased administrative support fees
to XL Vision and Safeguard.
Our research and development expenses increased 52% from $728,000 in 1997
to $1.1 million in 1998. This increase was driven primarily by increased
staffing of research and development personnel, related costs, and depreciation
of development equipment costs necessary to further develop our products.
Interest expense/other income, net increased 134% from $141,000 in 1997 to
$332,000 in 1998. This increase was primarily due to a higher average level of
borrowing.
Due to the losses incurred, we did not have any income tax expense in 1997
or 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
There was no business activity in 1996 related to our equine imaging
systems. All sales, cost of goods sold, general and administrative expenses,
sales and marketing expenses and research and development expenses in 1996
related to our transportation segment which has been reported as a discontinued
operation.
Selling, general and administrative expenses were $628,000 in 1997.
There was no revenue from sales of equine imaging systems or manufacturing
activity related to equine imaging systems in 1997. All general and
administrative expenses, sales and marketing expenses and research expenses
during 1997 related to our initial activities associated with equine imaging
systems.
Sales and marketing expenses of $344,000 in 1997 were principally for
salaries and related costs of personnel shifted from the transportation business
segment to support the equine imaging system operations. Additionally we
initiated spending for costs such as advertising, travel, trade shows and
consulting fees.
General and administrative expenses of $284,000 in 1997 were principally
for salaries and related costs for executives and administrative and
professional service fees including administrative support fees to XL Vision
shifted from the transportation operations to support the equine imaging system
operations.
Research and development expenses of $728,000 in 1997 were principally for
salaries and related costs of personnel shifted from the transportation business
segment to support the equine imaging system development. Additionally, we
initiated spending costs to develop prototype equine imaging systems.
Interest expense/other income, net was $141,000 in 1997.
Due to the losses incurred, we did not have any income tax expense in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the quarters ended March 31, 1998, June 30, 1998, September
30, 1998, December 31, 1998,
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<PAGE> 36
March 31, 1999, June 30, 1999 and September 30, 1999. The information for each
quarter has been prepared on substantially the same basis as the audited
statements included in other parts of this prospectus and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments necessary for a fair presentation of the results of operations for
such periods. Historical results are not necessarily indicative of the results
to be expected in the future, and the results of the interim periods are not
indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Revenue...................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973 $15,761
Cost of revenue.............. 459 578 649 937 540 2,228 15,514
Operating expenses........... 930 948 1,237 1,654 1,962 3,557 4,777
Interest expense/other
income, net................ 77 85 85 85 127 162 155
------- ------- ------- ------- ------- ------- -------
Profit (loss) from continuing
operations................. $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974) $(4,685)
======= ======= ======= ======= ======= ======= =======
Profit (loss) from continuing
operations per common
share -- basic and
diluted.................... $ (0.35) $ (0.39) $ (0.30) $ (0.34) $ (0.33) $ (0.58) $ (0.67)
======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operating and investing cash requirements
principally through private equity financings and through borrowings from XL
Vision and Safeguard Scientifics. As of November 30, 1999, we have raised
approximately $45.6 million from the sale of our common stock and preferred
stock. On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock to
Internet Capital Group for aggregate consideration of $38.8 million. We received
$18.0 million of this amount in cash on November 16, 1999 and $20.8 million in
the form of a non-interest bearing note, which is due on November 16, 2000.
Interest on the promissory note was imputed at 9.5%, or $2.2 million over the
life of the note. At September 30, 1999, we had approximately $1.7 million in
cash and indebtedness to XL Vision and its affiliates of $13.4 million. We
repaid $4.5 million of this outstanding debt balance on November 16, 1999 from
the cash proceeds of the sale of our series D preferred stock and warrant.
We have had significant negative cash flows from operating activities for
each fiscal and quarterly period to date. Net cash used in operating activities
was $1.7 million in 1996, $6.0 million in 1997, $8.9 million in 1998 and $10.5
million for the nine months ended September 30, 1999. Cash used in operating
activities from inception through September 30, 1999 consisted mostly of net
operating losses offset by increases in accrued liabilities.
Net cash used in investing activities was $157,000 in 1996, $507,000 in
1997, $892,000 in 1998, and $1.2 million for the nine months ended September 30,
1999. Net cash used in investing activities in these periods consisted mostly of
business acquisitions and capital expenditures.
Net cash provided by financing activities was $1.9 million in 1996, $6.5
million in 1997, $9.8 million in 1998 and $13.4 million for the nine months
ended September 30, 1999. Cash provided by financing activities consisted
primarily of the sale of our stock and borrowings from XL Vision and Safeguard.
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<PAGE> 37
In December 1998, XL Vision agreed to cancel $7.5 million of indebtedness,
and convert $4.8 million of indebtedness into 2,400,000 shares of our series B
preferred stock.
In May 1999, we raised $5.5 million through the issuance of 1,000,000
shares of our series C preferred stock to Safeguard and 100,000 shares of series
C preferred stock to individuals.
In July 1999, we obtained a revolving credit line from Safeguard evidenced
by a promissory note for working capital advances associated with our cattle
sales operations of up to $3.0 million. Amounts borrowed under the promissory
note, as amended, bear interest at the prime lending rate plus 1%, or 9.5% on
November 30, 1999, and are payable on January 31, 2000.
In August 1999, we entered into an agreement to acquire a 19% interest in
the common stock of Turnkey Computer Systems, Inc. for a purchase price of
62,500 shares of our common stock valued at $400,000 and additional cash
payments totaling $1.4 million. The cash payments are due in full upon the
completion of our initial public offering or in periodic payments of $500,000 at
December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31,
2001, whichever occurs first.
In August 1999, we signed a demand note with Safeguard in the principal
amount of $2.5 million. The note bears interest at the prime rate plus 1%, or
9.5% on November 30, 1999, and is payable on demand. In September 1999, we
signed a demand note with Safeguard in the principal amount of $2.0 million. The
note bears interest at the prime rate plus 1% and is payable on demand. In
October 1999, we signed a demand note with Safeguard in the principal amount of
$2.5 million. The note bears interest at the prime rate plus 1%, or 9.5% on
November 30, 1999, and is payable on demand. In October 1999, we cancelled these
outstanding notes in exchange for a note in the amount of $7.1 million. The note
bears interest at the prime rate plus 1%, or 9.5% on November 30, 1999, and is
payable in full in October 2000, when we complete an initial public offering or
when the note issued to us in connection with the series D preferred stock is
repaid, whichever occurs earlier.
We believe that our existing cash balances, together with the proceeds from
the sale of series D preferred stock and the warrant to purchase class B common
stock, the revolving line of credit provide adequate liquidity and capital
resources to support operations for the next twelve months. Additionally, we
believe that these sources of liquidity and capital combined with the net
proceeds from this offering will be sufficient to meet our working capital and
capital expenditures needs for at least the next 24 months under our current
business plan, which may change. To the extent we are required to raise
additional capital, we may need to issue additional equity securities or incur
additional debt.
YEAR 2000 COMPLIANCE
We have taken active steps to ensure our internal systems are year 2000
ready. Our potential areas of exposure include products purchased from third
parties, computers, software, telephone systems and other equipment used
internally. We have examined our non-information and non-transaction related
systems and have addressed all potential material risks relating to year 2000
compliance. All new programs are being tested and validated for year 2000
compliance. We expect to resolve any year 2000 compliance issues primarily
through normal upgrades of our software or, when necessary, through replacement
of existing software with year 2000 compliant applications.
The cost of these upgrades or replacements is included in our capital
expenditure budget and is less than $25,000. These upgrades and replacements
will be completed on schedule. We have received certification from our critical
vendors and suppliers that they are either year 2000 compliant or, if they are
not presently compliant, that they are taking the
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<PAGE> 38
necessary steps and have provided a description of their plan to become year
2000 compliant before January 1, 2000. Our contingency plans related to vendors
and suppliers include maintaining adequate safety stocks and developing
alternative sources of supply.
In the event that our physical facilities that house our Web sites are not
year 2000 compliant, our Web sites may become unavailable. Because we are
hosting our own Web sites, we believe that we can quickly address any
difficulties that may arise. Our contingency plans include having sufficient
numbers of technical employees and consultants available in the event of a
failure related to physical facilities or Web sites. We have received statements
from our hardware and software vendors certifying that their products are year
2000 compliant. We are in the process of establishing redundant systems at a
physically secure year 2000 compliant third party backup site, which will be
fully-operational prior to December 31, 1999. Any disruption at our physical Web
hosting site and our third party backup site could adversely affect our cattle
auctions, brokering, subscriber services and purchase transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivatives and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
adoption of SFAS No. 133 is not expected to have a material impact on our
results of operations, financial position or cash flows.
In June 1999, the FASB issued SFAS No. 137 which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
MARKET RISK
We had no derivative securities as of September 30, 1999. We are exposed to
changes in interest rates as a result of our borrowings from XL Vision and
Safeguard, which are based on the prime lending rate.
A 10% increase in interest rates related to our borrowings would not have a
material effect on our results of operations over the next fiscal year or the
fair value of our borrowings.
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<PAGE> 39
BUSINESS
OVERVIEW
eMerge Interactive, Inc. is a business-to-business electronic commerce
company combining content, community and transaction services to create an
online marketplace for the cattle industry. We offer our products and services
through our family of integrated Web sites, our proprietary information
management software, and our direct sales force. Our products and services are
designed to create an efficient market for the purchase and sale of cattle and
to improve quality and productivity in the cattle industry. Our current products
and services include:
- Livestock procurement services consisting of cattle sales and auctions;
- Daily performance analyses of a customer's feedlot operations;
- Comparative cattle industry analysis and feedlot operations benchmarking
studies;
- Cattle inventory management tools; and
- Livestock health management and quality enhancement products.
INDUSTRY BACKGROUND
BEEF INDUSTRY
According to the National Cattlemen's Beef Association, or NCBA, the cattle
industry is the largest single segment of the American agricultural economy. The
U.S. Department of Agriculture reports that sales of cattle accounted for
approximately $34 billion in 1998. On an annual basis, the U.S. beef production
industry spends over $6 billion for feed and, based on our estimates,
approximately $600 million for medication. At the retail level, the cattle
industry generates over $51 billion in sales of beef. Furthermore, the NCBA
estimates that worldwide cattle production is three times greater than U.S.
production.
INDUSTRY PARTICIPANTS
The U.S. beef production chain can be classified into three primary
segments: producers, feedlots, and packers.
Producers
According to the NCBA, there are approximately one million producers
comprised of ranchers and small farm owners who breed and raise cattle. Most of
the producers are independently owned and are dispersed throughout the United
States. Each year these producers market approximately 35 million head of cattle
that are eventually harvested for food, of which approximately 27 million are
processed through feedlots. These cattle, raised for 12-18 months in an average
herd size of approximately 35 head, are often located in different geographic
regions, aggregated into larger herds and then sold to centralized feedlots to
increase their weight and value.
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<PAGE> 40
Feedlots
Feedlots typically purchase cattle weighing 300 to 900 pounds and manage
the health and growth of the cattle for a period of 110 to 250 days. During this
time, each animal is fed on average 20-30 lbs. of grain per day. There are
approximately 700 major feedlot operations concentrated in 10 Midwestern states.
These feedlots can manage from 4,000 to 115,000 head of cattle at any given
time. After reaching a weight of approximately 900 to 1,400 pounds, the animal
is typically sold to a packer for harvesting.
Packers
Packers usually hold the cattle for 2 to 24 hours before harvesting and
fabricating them for sale and eventual consumption. In addition to processing
beef, packers inspect beef for cleanliness in preparation for quality grading.
There are currently 64 major beef packing operations in the United States, which
in total process approximately 35 million head of cattle into roughly 25 billion
pounds of beef annually. Approximately 82% of the beef processed in the United
States is processed by beef packing operations owned by IBP, Inc., Cargill,
ConAgra, Inc., and Farmland Industries, Inc.
LIMITATIONS OF THE CURRENT SYSTEM
The current cattle production chain contains a number of inefficiencies
that reduce livestock quality and increase cost. These inefficiencies include
multiple transaction costs, exposure to stress and disease, and the loss of
important feeding and medication information.
INEFFICIENCIES IN THE CATTLE SALES PROCESS CREATE TRANSACTION COSTS
As cattle move through the beef production chain, from an individual
producer's ranch to a feedlot to a meat packing facility, the cattle may be
bought, sold and transported three or four times. Due to the highly fragmented
nature of the cattle producer segment, the majority of cattle are sold through
traditional livestock sales and auctions, which bring together regional buyers
and sellers. The cattle are then sold either directly to feedlots or sold once
again to larger buyers and then onto feedlots. Typically, cattle sales and
auctions are hosted at sale barns, where livestock brokers act as agents in the
buying and selling of animals. The livestock broker is paid a fee or commission
each time an individual lot of cattle is bought or sold. As a result of the
geographic dispersion of producers and sale barns, buyers often purchase cattle
from livestock brokers without having the opportunity to visually survey the
cattle. In addition, this current method of exchange does not facilitate easy
access to real-time price information or a geographically broad marketplace for
the product.
REPETITIVE TRANSPORTATION CREATES ANIMAL STRESS, REDUCING BEEF QUALITY AND
PROFITABILITY
The combination of the method of exchange used in traditional cattle sales
and auctions and the fragmentation of the producer segment of the industry
results in the repetitive transportation and handling of cattle. As cattle are
moved from one environment to another throughout the production chain, they are
commingled multiple times and can be exposed to contagious diseases. In
addition, the transportation, handling and commingling of cattle often results
in a predictable stress response, which may cause significant health
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deterioration. However, because there is currently no convenient or
cost-effective method available to measure an animal's stress level, stress is
not assessed today as a meaningful measure of health. Stress and exposure to
disease often result in sub-optimal performance at the feedlot and reduced beef
quality. A study conducted by researchers at Texas A&M University estimated that
sick animals yield approximately $80 per head less than comparable healthy
animals, which represents a significant loss based on the average value cited by
the U.S. Department or Agriculture of $600 per head.
THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
We believe that industry participants generally collect and analyze
information on cattle that go through the beef production process inconsistently
and in a manual and time-consuming manner. Due to the nature of data collection
and dissemination, cattle industry participants are unable to exchange critical
information in an efficient and timely manner to optimize performance and beef
quality. We believe that businesses in the cattle industry have not maximized
the use of information to effectively address health, quality and performance
issues.
Producers
Cattle producers typically do not receive data related to the weight of
their animals upon arrival to and departure from feedlots or the quality grades
of their animals, making herd management difficult. Animal-specific health and
medication information is generally not passed on to subsequent buyers at or
prior to the feedlot, which may result in unnecessary additional medication.
Feedlots
Feedlots are the primary source of information currently used in livestock
management. As a general practice, information is collected manually on a daily
basis and subsequently entered into multiple information systems that are
typically not integrated. Given the time-intensive nature of aggregating data
under the current process, it is difficult to collect, analyze and interpret
this data in a meaningful way. Historically, feedlots collect and share
industry-wide information for benchmarking and performance purposes by
submitting reports to data warehouse services that aggregate and disseminate the
combined results in monthly reports. Although these data warehouse services are
valuable as general strategic and analytical tools, because of the delay in
disseminating the information, they are less effective for daily cattle
management decisions, such as decisions relating to feed and medication.
Packers
Packers, at the end of the cattle production chain, collect critical
carcass and quality information such as weight, dimension, yield and meat
quality grade after the animal is harvested. However, in 1997, only 47.5% of
cattle harvested were purchased based on these measures. Therefore, feedlots
receive carcass and quality data on less than half of harvested cattle. The
remaining harvested cattle are sold to packers based strictly on live weight,
and
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consequently very little health and quality data is provided to feedlots or
producers on these cattle.
U.S. BEEF PRODUCTION CHAIN
[PRODUCERS, FEEDLOTS, PACKERS GRAPHIC]
We believe improved information flow between and within the three main
groups of industry participants can significantly enhance product quality. There
is currently no network or method for compiling and communicating information
rapidly throughout all stages of the cattle production chain. Product
performance information gathered by packers and feedlots will help refine and
improve handling practices earlier in the production chain. Information relating
to an animal's medical history will minimize redundant medication. In addition,
we believe that information about an animal's genealogy disseminated by
producers and feedlots will enable more accurate differentiation among breeds of
cattle at the packer level and a more easily implemented quality branding
strategy at the retail level. Finally, information linking handling, feeding and
medication techniques and the ensuing performance results, gathered and
disseminated on a daily basis by feedlots, can help the entire segment rapidly
adopt best practices.
THE ONLINE CATTLE MANAGEMENT OPPORTUNITY
We believe that the cattle industry is well-suited for Internet commerce
and information sharing due to the industry's size and fragmentation and the
inefficiencies associated with the current cattle production chain. The
Internet's widespread and growing acceptance make it an optimal foundation for
business-to-business interaction. Many of the variables that affect cattle
performance can be addressed by the Internet's open architecture, universal
accessibility and ability to provide more timely and comprehensive information.
We believe the Internet can create a more efficient marketplace for the exchange
of cattle by directly connecting buyers and sellers and providing information
related to the cattle for sale. A report by the National Association of Farm
Broadcasters showed that as of February 1999,
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45.5% of producers and 53.4% of feedlots used a personal computer for farm
business, and 19.7% of producers and 29.1% of feedlots accessed Web sites for
farm-related topics. According to a Gallup and Agricultural Publisher's Survey,
it is estimated that by 2001 over 55% of large producers in the beef industry
will use the Internet for primary information in the conduct of their daily
business.
THE eMERGE INTERACTIVE EXPERIENCE
We combine content, community and commerce to create an online marketplace
for the cattle industry. We offer our comprehensive cattle products and services
through our integrated Web sites, our proprietary information management
application, and our direct sales force. Our products and services are designed
to create an efficient market for the purchase and sale of cattle and to improve
quality and productivity in the cattle industry. We believe our solution
provides the following benefits throughout the cattle production chain.
BENEFITS TO CATTLE INDUSTRY PARTICIPANTS
<TABLE>
<CAPTION>
PRODUCERS FEEDLOTS PACKERS
--------- -------- -------
<S> <C> <C> <C>
ONLINE CATTLE SALES AND AUCTION MARKETPLACE
- -----------------------------------------------
Broader Access to Buyers and Sellers........... -- --
Reduced Transportation and Transaction Costs... -- --
Convenience and Ease of Use.................... -- --
Healthier Cattle............................... -- -- --
Cattle Source Information...................... -- --
Access to Additional Products and Services..... -- --
Quality Certification.......................... -- -- --
PROPRIETARY INFORMATION SERVICES AND MANAGEMENT
TOOLS
- -----------------------------------------------
Performance Information........................ -- --
Detailed Operational Comparisons............... --
Historical Best Practices...................... -- -- --
Analytical and Consulting Feedback............. -- -- --
Comprehensive Content.......................... -- --
</TABLE>
THE eMERGE ONLINE CATTLE MARKETPLACE
Through our Cyberstockyard.com Web site, we enable cattle producers and
feedlot operators to participate in daily online sales and auctions of cattle.
We believe that because online procurement results in fewer cattle shipments and
less handling, transaction costs are reduced and animals arrive at their
destination healthier and less stressed, thereby increasing the value of the
animals. We also believe that online cattle procurement creates a powerful
medium for obtaining access to market pricing from various buyers and sellers
located throughout the United States. We believe that this may eventually reduce
the amount of commission fees paid by the cattle industry as a whole, and
thereby reduce the cost to
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produce cattle. Through this comprehensive online marketplace, we also have the
ability to sell products and services that are designed to improve productivity
within the livestock industry. We currently offer NutriCharge through our online
marketplace to help our customers reduce the effects of pre-harvest stress in
their cattle.
PROPRIETARY INFORMATION MANAGEMENT PRODUCTS AND SERVICES
We provide cattle producers, feedlots and packers with information
management products and services designed for the more efficient and profitable
production of cattle. Through our integrated Web sites, users can access a broad
range of database services and information related to the cattle industry,
including general industry news, regional weather, commodity prices and industry
analyses and proprietary data. We provide our customers with monthly detailed
pricing, operations and benchmarking data on the cattle industry. In addition,
through our proprietary information application, which is installed on our
customers' systems, we collect cattle data, such as feeding and medication
history, from each customer's disparate systems over the Internet. We then
analyze the data and compile daily reports, which customers subscribing to our
feedlot information systems receive over the Internet and use to improve their
daily management decisions.
We also provide an online community for the cattle industry where users can
actively communicate with our staff of industry experts through e-mails, which
our staff generally respond to within 24 hours. We believe this proactive
approach can improve overall meat quality and reduce health-related losses of
cattle.
OUR BUSINESS STRATEGY
Our objective is to expand our position as a provider of
business-to-business electronic commerce products and services for the livestock
industry. Our business strategy includes the following key elements:
LEVERAGE OUR MARKET POSITION TO BUILD BRAND AWARENESS AND FURTHER ESTABLISH OUR
ONLINE MARKETPLACE
We seek to combine our industry expertise with the first Internet-based
cattle information and commerce network to attract industry participants to our
growing online marketplace. By offering industry participants tools to make
better informed purchasing decisions, improve cattle health, and operate more
efficiently, we believe that we will be able to bring users to our Web sites and
build loyalty and future demand for our products, services and solutions. We
seek to increase the supply of cattle offered through our online marketplace by
continuing to build relationships with cattle producers and to stimulate demand
for our marketplace and information services by nurturing relationships with
feedlots. We believe that by attracting additional industry participants to our
marketplace, we will enhance the value of our online community.
DRIVE COMMUNITY LOYALTY THROUGH THE USE OF MANAGEMENT INFORMATION TOOLS AND
PROPRIETARY CONTENT
By providing an online, comprehensive source of cattle-related news,
industry data and management tools, we intend to increase our customers' daily
usage of the eMerge Interactive marketplace. Our electronic commerce marketplace
is prominently featured throughout our integrated Web sites that provide
information management products and services to our customers. We believe our
May 1999 acquisition of Professional Cattle
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Consultants, L.L.C., serving over 90 feedlots, provides us with a strong
customer base and the credibility to develop a trading community and
marketplace. Also, our Feedlot Information System, which is designed to be the
principal management system for daily feedlot operations, will continuously
expose feedlot managers to our online marketplace.
LEVERAGE OUR STRONG CUSTOMER RELATIONSHIPS AND INDUSTRY EXPERTISE TO EXPAND OUR
ONLINE COMMUNITY
Historically, relationships among industry participants have played a key
role in conducting business within the cattle industry. We believe that we have
strong existing customer relationships with key cattle producers, feedlots and
packers. Through our acquisition strategy and human resources strategy, we have
acquired companies and hired individuals with long-standing expertise and
relationships in the cattle industry. Our industry experts and advisers consist
of veterinarians, cattle buyers, nutritionalists, data analysts, cattle
producers and former feedlot managers. We seek to leverage our current customer
base, existing relationships and industry expertise to attract additional
industry participants. We also seek to market and sell additional products and
services to our existing customers.
DEVELOP NEW PRODUCTS AND SERVICES
We intend to increase revenue through offering additional products and
services that complement our existing offerings. We seek to obtain new products
and services through strategic acquisitions of technologies or businesses,
internal development and research and development relationships. We currently
have research relationships for the development of proprietary technologies
relating to the cattle and livestock industry with the U.S. Department of
Agriculture, Iowa State University, and the Canadian government. We also intend
to invest in the research and development of new data collection systems to
increase our proprietary electronic commerce offerings to the livestock
industry. For example, we are developing infrared imaging solutions for use in
identification of stress in live animals and fluorescence imaging for use in
improving food safety through the detection of fecal contamination on beef. Our
lead infrared product candidate is still in the development phase and we do not
anticipate that it will be released for commercial use in the foreseeable
future.
EXPAND INTO NEW MARKET SEGMENTS
Expand Internationally
We believe the international appeal of the Internet and the global demand
for cattle products and services present opportunities to expand our
comprehensive cattle solution globally. We believe opportunities exist to offer
our products and services within other regions of North and South America,
Asia/Pacific and Europe. We intend to expand beyond the United States through
strategic acquisitions or by expanding our capabilities and sales personnel into
the international market.
Extend Our Products and Services to Beef Retailers
As part of our comprehensive products and services, we are developing the
capability to track and manage health and performance information related to
individual animals from birth to harvest. The ability to trace the progress of
individual cattle from the producer through the feedlot, and through grading at
the packer should enable industry participants to improve health and feed
management practices, lowering costs and ultimately improving product quality.
In addition, this capacity to track individual cattle from producer through
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packer will allow beef retailers to verify the source, history and quality of
their beef, thereby enabling them to develop a variety of brands of beef for
sale to consumers.
Expand into other Markets Within the Livestock Industry
We intend to expand our products and services into other market segments
within the livestock industry. In particular, we believe that opportunities may
exist to apply our integrated electronic commerce and information products and
services to the swine and dairy markets.
OUR PRODUCTS AND SERVICES
We offer our customers a comprehensive set of Internet-based business
products and services designed to address the needs of the livestock industry.
Our products and services can be accessed through our integrated Web sites.
These sites include:
- CattleInfoNet.com, the platform from which our customers can access our
comprehensive product and services offerings;
- Cyberstockyard.com, our online cattle sales and auction site; and
- PCC-online.com, our cattle industry-specific information Web site.
In addition, through our Feedlot Information System, we provide our feedlot
customers with daily analyses of their feedlot operations as well as information
management products and services.
THE eMERGE MARKETPLACE
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
CATTLEINFONET.COM
- Industry news
- Regional weather
- Links to commodity pricing
- Expert corner
- Reports online
- Links to industry information
----------------------------------------------------------------------------------
ONLINE MARKETPLACE MANAGEMENT INFORMATION SOLUTIONS
Cyberstockyard.com Feedlot Information System
- Cattle sales - Feedlot specific content
- Cattle auctions - Daily performance data
- Order fulfillment - Web-enabled with graphical user
eMerge Online Store interface
- eMerge branded products - Analytical services
- Health products * Professional Cattle Consultants
- General store * - Regional feedlot benchmarking data
Specialized Database Services
Advanced Commodities Content *
Advanced Weather Services *
----------------------------------------------------------------------------------
</TABLE>
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* Expected to be offered in the first quarter of 2000
CATTLEINFONET.COM
CattleInfoNet.com is our industry-specific Web site that serves as the
platform from which participants in the cattle industry can access our
comprehensive product and service offerings. This site features content to
facilitate cattle management, including industry news, weather and links to
commodities pricing. Also, through this site, our customers can access
Cyberstockyard.com to purchase or sell cattle, and PCC-online.com, our
information resource and database. In addition, our customers can use this Web
site to purchase our NutriCharge product.
CYBERSTOCKYARD.COM
Cyberstockyard.com is our cattle sales and auction service Web site.
Through Cyberstockyard.com, our customers utilize our online listing of cattle
to obtain access to inventory and market pricing from various buyers and sellers
located throughout the United States in an efficient and effective manner. In
addition, our customers can access scheduled online video cattle auctions. We
transmit inventory lists with detailed product descriptions to our customers by
both e-mail and facsimile and periodically post schedules for live video
auctions on the Web site.
Cattle Sales
We have developed a detailed posting and transaction process to ensure that
adequate information is provided to the purchaser prior to the transaction. We
verify the identity of a purchaser through use of a secure password system and
verify credit-worthiness of each participant prior to enabling access to our
system. Our expert livestock brokers in the field certify all cattle offered for
sale through Cyberstockyard.com. We provide a detailed description of each lot
of cattle, which can be accessed by a purchaser online. We update our inventory
of cattle for sale daily and customers can review our full inventory listings.
In addition, customers can post descriptions, quantity and pricing criteria for
cattle they would like to purchase and our system will automatically search for
a match. If a match is found, the customer is notified immediately online. If no
match is found, the customer can choose to have our system perform a daily
search for a match as new inventory is added to our system. Notification of a
match is sent to the customer by email or facsimile. Our livestock brokers and
online producers also have access to these postings and may respond with
potential matches. After identifying particular cattle to purchase, our
customers complete the transaction through e-mail or the telephone. Once cattle
have been purchased, we manage the shipment logistics through our sales and
customer service organization.
Cattle Auctions
In addition to our online cattle sales, we offer cattle for sale through
our online video auctions. Although not necessary to facilitate cattle sales
transactions, video is available to customers who have installed our satellite
dish system. We offer a mock auction to help our customers get acquainted with
the auction process. We have developed a system that allows participants to
automatically bid in set increments up to a predetermined limit. Once a bid is
accepted, the purchaser is notified online. Our customer service team then
follows-up by telephone and e-mail with specific shipment logistics regarding
the cattle.
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MANAGEMENT INFORMATION SOLUTIONS
The Feedlot Information System
The Feedlot Information System provides feedlot customers daily information
services. This secure proprietary information management application resides on
our customers' operating systems and interfaces with our centralized database
over the Internet. Our system integrates information contained in their
disparate legacy systems into our database daily to create relevant
customer-specific analyses and graphical presentations. Customers' information
is automatically integrated into our database, analyzed and available for use on
the following day. The analyses created include information and performance data
designed to assist in the effective daily management of a feedlot business.
These analyses include:
- Feed consumption data;
- Feed-to-gain ratios; and
- A comprehensive summary of health results.
The Feedlot Information System also enables our customers to compare their
performance against other regional and national feedlot data and provides useful
proprietary content for business management decisions. Our customers can use our
system to manage their feedlot operations on a real-time basis using numerous
performance variables and individual parameters. Customers can also access data
and product performance results posted by practicing veterinarians to further
refine their business practices. All of our Internet applications are easily
accessible from our Feedlot Information System. In addition, our staff provides
valuable analysis and interpretation of the information contained in the
database.
Professional Cattle Consultants
Through PCC-online.com, our Professional Cattle Consultants service, we
provide our customers access to services that are based on our confidential and
proprietary database of cattle industry information. This database has been
compiled over the last 26 years from over 90 different feedlots representing
over 20% of the total cattle processed annually through U.S. feedlots. As part
of their subscription, our customers submit information to our analysts twice
per month to update our database. Each month these customers receive our Cattle
Gram, a marketing report that analyzes and reports cattle market related
information, and our newsletter, a feed performance report containing compiled
data relating to over 100 different feed performance parameters. In our
newsletter, we provide national, regional and customer-specific analyses.
Customers may use a password to view these reports online or receive them via
e-mail or mail.
Specialized Database Services
We offer specialized database management and Internet-based networking
services that target specific customer requirements, including individual animal
tracking through the entire production chain. We can also provide customized
data management and formatting services designed to enable suppliers to better
understand product performance in the field. Our analysts are available to
assist customers in understanding how to derive the most value from the
information being acquired.
STRESS MANAGEMENT PRODUCTS AND SERVICES
As part of our comprehensive solution, we offer our proprietary NutriCharge
restorative feed supplement for sale to our customers through our Web sites and
direct sales force. NutriCharge is designed to reduce the effects of stress on
the animals caused by transportation, handling and commingling, which can result
in a loss of product quality. In
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addition, we offer educational materials and services to assist our customers to
reduce handling of animals and therefore reduce stress.
EQUINE IMAGING SYSTEMS
We have developed our infrared imaging thermography system and image
management software for use in the equine industry. Infrared thermography is a
non-invasive diagnostic imaging technique that is used to detect surface
temperature differences. The camera is lightweight, portable and has a high
degree of resolution and sensitivity. Our infrared camera and software allow a
user to download thermal images to the user's computer to be viewed, catalogued,
annotated and measured. Our system is used by veterinarians to detect heat, one
of the first indicators of inflammation or injury, in horses and exotic animals.
PRODUCT DEVELOPMENT RELATIONSHIPS
We have entered into agreements for the development of technology with a
division of the Canadian government as represented by the Minister of
Agriculture and Agri-Food Canada. We license patents and technology related to
NutriCharge and our Animal Science Tracker infrared camera, which is currently
under development. This agreement also gives us and the Canadian government,
through the Lacombe Research Centre, the right to collaborate with the other on
any project which relates to the license. Any improvements will be owned by
Canada and licensed to us on an exclusive basis. Please see the section entitled
Intellectual Property for a description of the license.
We have entered into a Research Support Agreement with the Canadian
government, under which we provide the Lethbridge Research Centre with one of
our infrared imaging systems, analytical software, and technical support in
exchange for a right of first refusal to license any resulting technology. The
Canadian government may terminate this agreement at any time.
We have entered into a cooperative research and development agreement with
the USDA Agricultural Research Service and Iowa State University of Science and
Technology, in which we have been granted exclusive rights and responsibilities
for product development and commercialization of technology developed and
patented by them for the detection of small, diluted quantities of mammalian
fecal matter on animal carcasses. We will provide design and engineering
expertise. When commercialized, we believe that this technology may reduce
safety inspection and processing costs at packing plants while reducing e-coli
contamination risks. The parties to the agreement may only terminate in the
event of a breach by another party. In connection, with this agreement, we have
also entered into an exclusive license agreement with Iowa State for patent
rights relating to the research and development agreement. The license will
expire when the last of the patents covered by the license expire, unless we
terminate earlier.
BUSINESS ACQUISITIONS
CIN, LLC
In February 1999, we purchased substantially all of the assets of CIN, LLC,
a company which collected, analyzed and distributed information for use in
animal food sciences markets, for an aggregate purchase price of approximately
$2.3 million. The purchase price consisted of 750,000 shares of our class A
common stock valued at $720,000, the assumption of $812,000 of liabilities, a
cash payment due in October 1999 of $358,000, an agreement to pay the first
$350,000 from Internet sales of third-party products over the Web site and
transaction costs of $57,000.
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CYBERSTOCKYARD, INC.
In March 1999, we purchased all of the outstanding stock of Cyberstockyard,
Inc., a company selling cattle and other products through auction software over
the Internet for approximately $542,000. The purchase price consisted of 250,000
shares of our class A common stock valued at $450,000, the assumption of $90,000
of liabilities and transaction costs of $2,000.
PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
In May 1999, we purchased substantially all of the assets of Professional
Cattle Consultants, L.L.C. for an aggregate purchase price of approximately $1.8
million. The purchase price consisted of $1.8 million of cash, the assumption of
$3,000 of liabilities and transaction costs of $25,000. The primary asset of
Professional Cattle Consultants, L.L.C. was a proprietary database of cattle and
market information and analysis. For the past 26 years, Professional Cattle
Consultants, L.L.C. has collected a variety of performance and other data from
its subscribers' feedlot operations and provided subscribers with periodic
analyses of certain performance characteristics of their feedlot operations and
comparative analysis related to the performance of feedlots within their
regions.
INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
In August 1999, we entered into an agreement to acquire 19% of the common
stock of Turnkey Computer Systems, Inc., a provider of administrative/accounting
legacy systems to feedlots, for an aggregate purchase price of $1.8 million. The
purchase price consisted of 62,500 shares of our class A common stock, which is
subject to redemption, $1.4 million of cash and $23,000 of transaction costs. In
connection with this investment, we obtained the exclusive right to provide
cattle sales and auction services and feed sales services to customers of
Turnkey through Turnkey's system.
RESEARCH AND DEVELOPMENT
We intend to continue to devote significant time and resources to enhance
our current core technology to improve our existing products, expand our product
line and enter into other market segments. Approximately $1.1 million during the
period ended December 31, 1998 and approximately $2.7 million for the nine
months ended September 30, 1999 were related to research and development. As of
September 30, 1999, we had 36 employees dedicated to product development. We
intend to continue to invest in research and development and focus on the
recruitment of experienced scientists and engineers. Our current research and
development activities are primarily focused on the development of information
technologies to complement our products and services for the animal sciences
industry.
SALES AND MARKETING
SALES
Our sales organization is structured around a direct sales team and an
electronic commerce sales team. We have a staff of 13 account managers who are
responsible for sales of products and services through our electronic commerce
platform to feedlot and packer customers in given geographic territories. We
have a staff of cattle buying representatives who, along with independent buyer
representatives with whom we have entered into relationships, are responsible
for obtaining inventory for livestock sales from producers. We are assembling a
dedicated team to increase advertising revenue and to add third party products
to our electronic commerce offering.
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MARKETING
We seek to establish broad customer awareness of our technologies, products
and services within the industries we serve. Our marketing efforts include
direct advertising through trade journals and press releases coordinated by our
communications and public relations firm. We also participate in professional
societies and university programs and have developed strategic marketing
relationships with industry professionals and academic institutions. Much of the
initial interest in our products and services has been created through the
extensive network of relationships we have in the cattle industry as well as
through our sales organization. We are developing an international marketing
effort to promote our products and services worldwide.
OUR CUSTOMERS
Our initial customer focus is the 300 largest feedlots in the United
States. These feedlots manage 20.1 million head of cattle annually, accounting
for 74% of cattle processed through feedlots in the United States. Currently, we
sell our products and services to approximately 130 of those feedlots, which
account for approximately 30% of the total cattle harvested in the U.S. We also
offer our products and services to participants throughout the cattle production
chain.
CUSTOMER SERVICE
Our current customer service organization consists of four individuals who
are responsible for delivering service to our customers. Currently our order
entry, e-commerce transactions and hardware and software support functions are
conducted at our Sebastian, Florida facility. Our current field support
organization is based in Meade, Kansas. We have a dedicated toll free number for
customer calls, which is staffed from 8:00 a.m. to 8:00 p.m. EST.
INFRASTRUCTURE AND TECHNOLOGY INFORMATION SYSTEMS
SYSTEM ARCHITECTURE
Our Web sites use multiple front-end servers and a master database located
at our Sebastian, Florida facility. We have implemented scalable Web site
management, search, customer interaction, transaction processing and fulfillment
services and systems. Our Web site and extranet provide customization,
interactivity and performance required for business-to-business electronic
commerce. We utilize applications for:
- Accepting and validating customer orders;
- Placing and managing orders with suppliers and manufacturers;
- Notifying and updating customer order status; and
- Management of shipment of products.
All data communication between remotely located computers uses secure
socket layer, or SSL, encryption technology. This allows the transfer of a local
database from a feedlot to our main database which uses a Sun Enterprise 4500
server.
DATA COLLECTION
The data collection system for our Feedlot Information System gathers
information from the accounting, feedbunk and hospital systems at the feedlot.
This information is compared to a local database, and the changes and additions
are encrypted and transmitted securely to our main database storage along with
any orders that are being processed in the off-line
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batch mode. Once received, we add the data to our master database for
statistical analysis and generate reports for individual site locations. The
results are encrypted and sent back to the individual feedlots. All
confirmations of placed orders are sent back to the feedlot that generated the
order. Professional Cattle Consultants data is collected on a monthly basis
using a variety of interfaces with feedlot software vendors. Data is transmitted
electronically or by hard copy. This information is then imported into the
Professional Cattle Consultants architecture where it is stored and utilized as
necessary.
DATA DISSEMINATION
The data that is sent back to the feedlots includes video data for
Cyberstockyard and daily content and statistical data for our information
management products and services. This information is then stored in our local
databases, which function as a backup for off-line operation. Professional
Cattle Consultants provides information back to feedlots on a monthly basis
either through electronic mail, a password-protected Internet site, or in hard
copy form. Surveys are available only in hard copy form.
DATA DISPLAY AT THE FEEDLOT
Our system uses a standard browser to connect to the CattleInfoNet.com Web
site. A secure login is required for full access to Cyberstockyard.com,
PCC-online.com and the Feedlot Information System. When logged on, the system
downloads display applets, written in Java, to the user's system to display
relevant information. The user can view auction videos and bid on cattle in
real-time.
INTELLECTUAL PROPERTY
Our ability to protect and utilize our intellectual property rights is
important to our continued success. We have filed applications to register
Cyberstockyard and NutriCharge as trademarks of eMerge Interactive with the U.S.
Patent and Trademark Office. We currently have three patent applications that
are pending before the U.S. Patent and Trademark Office relating to:
- Early detection of inflammation using our infrared imaging camera;
- Feedlot information systems and methods; and
- The cattle transaction process.
The intellectual property rights to use several patents that are critical
to our products and services are licensed to us by third parties. The U.S.
patents and corresponding international patent applications related to our
NutriCharge products and infrared animal screening methods are licensed to us by
the Canadian government under a master license agreement dated July 29, 1998.
The master license provides us with an exclusive worldwide license to develop
and sell products and services that utilize the inventions contained in the
patents. The license continues until July 2018 and may be renewed after that
time unless the license is terminated by the Canadian government upon our breach
of and failure to cure a fundamental term of the license agreement, our
commencement of bankruptcy or insolvency proceedings, or the assignment of the
license agreement without Canada's prior written consent. In exchange for the
license, we must pay the Canadian government a royalty on a semi-annual basis
that is calculated as a percentage of the revenues we receive from the sale of
products and services related to the license. Our obligation to pay this royalty
begins July 29, 2000. Under the master license, we must achieve milestones in
order to maintain the master license. To date we are achieving all required
milestones.
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The U.S. patents relating to technology for detecting fecal contamination
on meat carcasses during and after slaughter are licensed to us by the Iowa
State University Research Foundation and the USDA under a license agreement
entered into August 1999. The license provides us with an exclusive worldwide
license until the patents expire on a country by country basis to develop and
sell products and services that utilize the inventions contained in the patents.
In exchange for the license, we are obligated to pay Iowa State University a
royalty on revenues we receive from the sale of products and services related to
the license.
We believe our commercial success depends on our ability to protect our
proprietary technology and enforce our rights in the technology we license to
other parties. We currently rely on a combination of patents, copyrights and
trade secrets to protect our proprietary technology. We are not aware of any
patents held by others that would prevent us from manufacturing and
commercializing our technology in the United States and abroad.
PURCHASE AND LICENSE AGREEMENT
In January 1999, we granted a license to Sperry Marine, Inc., a subsidiary
of Litton Industries, Inc., to design, manufacture and assemble infrared marine
systems for worldwide sale. The license is exclusive and nontransferable and
applies to infrared technology that is unrelated to our products and markets.
Although we have not received any royalties to date, under the agreement, we
will receive a royalty of 8% of system sales up to a maximum royalty of $4.3
million over a four year period or up to a maximum royalty of $5.0 million if
$4.3 million is not received within four years. Upon receipt of the maximum
amount, we will transfer all rights, title and interests to the licensed
intellectual property. In connection with this license agreement, we also
entered into an asset purchase agreement with Sperry for the sale of assets
relating to the infrared systems for approximately $1.9 million.
COMPETITION
In the cattle sales and auction services market, we compete against
traditional cattle auction services, as well as video cattle auction providers
and other online cattle auction services. Currently, the majority of cattle and
calf sales transactions occur through auctions held at traditional sale barns.
These sale barn operations are highly fragmented and vary in size. We believe
that the primary competitive factors in the cattle sales and auction services
market include:
- Availability and quality of inventory;
- Pricing;
- Reliability of service;
- Efficiency;
- Brand awareness;
- Customer service; and
- Convenience and ease of use.
We believe that we compete favorably based on these factors, particularly
due to our access to inventory, our focus on ensuring quality and reliability,
the brand awareness developed through our comprehensive solution and the
convenience and ease of use of our Web site.
We compete against other companies in the information services segment,
including established cattle and livestock information services. We also face
competition from cattle
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industry product manufacturers who use information technology to promote the
effectiveness of their products. These services are often provided in connection
with the sale of products to industry participants. In addition, providers of
software to feedlots also offer information services to their feedlot customers.
We believe that the primary competitive factors in the information services
market include:
- Breadth of available data;
- Quality of analyses;
- Timeliness of information;
- Brand recognition;
- Value-added consulting services; and
- Convenience and ease of use.
We believe that we compete favorably based on these factors particularly
due to the size and quality of our proprietary database, the timeliness of our
service offerings, the expertise of our professionals and the convenience and
ease of use of our Web sites.
Our current competitors may include large companies that have substantially
greater market presence, brand-name recognition and financial resources than we
do. Some of our smaller competitors may also enjoy greater recognition and close
relationships within a particular community.
EMPLOYEES
As of September 30, 1999, we employed a total of 99 persons, including 36
persons in product development and engineering, 35 persons in marketing and
sales, 18 persons in production and 10 persons in administration. We are not
subject to any collective bargaining agreements and we believe that our
relationship with our employees is good.
FACILITIES
Our corporate facilities located in Sebastian, Florida, occupy
approximately 17,000 square feet. We lease our facilities from XL Vision, which
leases the entire facility from XL Realty, Inc., a subsidiary of Safeguard. We
believe that the rent that we pay pursuant to our lease is consistent with the
market rent for similar space in the area. Our lease terminates on January 1,
2001, at which time we have the option to renew the lease for an additional one
year term. We believe that this space is adequate to support our needs for the
foreseeable future.
We also maintain offices in Meade, Kansas; Denver, Colorado; and
Weatherford, Oklahoma.
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MANAGEMENT
This table sets forth information with respect to our executive officers,
directors and key employees with significant industry expertise as of December
10, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham................... 44 Chief Executive Officer and Director
T. Michael Janney.................... 50 Chief Financial Officer and Treasurer
Scott L. Mathews..................... 42 President and Chief Operating Officer
Marvin L. Slosman.................... 35 Executive Vice President, Sales
Arvind Subramanian................... 38 Executive Vice President, Marketing and
E-Business
John S. Scott, Ph.D.................. 48 Chairman of the Board
Douglas A. Alexander................. 38 Director
E. Michael Forgash................... 41 Director
Thomas C. Lynch...................... 57 Director
Christopher Moller, Ph.D............. 46 Director
John W. Poduska, Sr., Ph.D........... 62 Director
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY
EXPERTISE
J. Tom Brink......................... 38 Director, Analytical Services
Scott Crain, D.V.M................... 41 Executive Vice President, Professional
Services
Jim Gibb, Ph.D....................... 47 Director, Advanced Technologies
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Charles L. Abraham has served as Chief Executive Officer and as a member of
the board of directors of eMerge Interactive since July 1998. From July 1997
until July 1998, Mr. Abraham was Vice President and General Manager with the
Home Care Division of Nellcor Puritan Bennett Incorporated. From 1994 until July
1997, Mr. Abraham was Manager of the Global Vascular Business of General
Electric Medical Systems, located in Paris, France.
T. Michael Janney has served as Chief Financial Officer and Treasurer of
eMerge Interactive since November 1998. From March 1993 until October 1998, Mr.
Janney was Senior Vice President and Chief Financial Officer of Datamax
Corporation, a privately held company that designs, develops, manufactures and
sells bar code printers worldwide.
Scott L. Mathews has served as President of eMerge Interactive since
November 1999, and as Chief Operating Officer of eMerge Interactive since April
1999. From May 1996 until April 1999, Mr. Mathews was Vice President and General
Manager for Key Technology, Inc., a manufacturer of machine vision and material
handling products for the food processing and pharmaceutical industries. From
January 1994 until May 1996, Mr. Mathews was Manager of the Global Positron
Emission Tomography business of General Electric Medical Systems, located in
Waukesha, Wisconsin and Uppsala, Sweden.
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Marvin L. Slosman has served as the Executive Vice President, Sales of
eMerge Interactive since August 1998. From May 1996 until July 1998, Mr. Slosman
was a Division Manager for Cordis, Johnson and Johnson. From April 1995 until
May 1996, Mr. Slosman was a Vice President at GE Capital Corporation. From 1993
until April 1995, he served as a Programs Manager at General Electric Medical
Systems. Mr. Slosman currently serves on the board of directors of ReMar, Inc.
Arvind Subramanian has served as Executive Vice President, Marketing and
E-business of eMerge Interactive since December 1999. From January 1997 until
December 1999, Mr. Subramanian was a General Manager for General Electric
Information Services. From September 1994 until December 1996, Mr. Subramanian
was a Global Product Line Manager for General Electric Medical Systems.
John S. Scott, Ph.D. has served as Chairman of the Board of eMerge
Interactive since September 1994 and has served as Chief Executive Officer and
Chairman of the Board of XL Vision, Inc. since its inception in May 1993. From
August 1991 until July 1993, Dr. Scott was President of Lenzar Electro-Optics,
Inc., a manufacturer of imaging devices. Dr. Scott also currently serves as
Chairman of the Board of ChromaVision Medical Systems, Inc., a public company,
and Who?Vision Systems, Inc., both of which are affiliated with Safeguard.
Douglas A. Alexander has served as a member of the board of directors of
eMerge Interactive since April 1999. Mr. Alexander is a managing director of
Internet Capital Group, Inc., an affiliate of Safeguard and is chairman of the
Board of VerticalNet, Inc., a public company, and serves as a director of
Arbinet Communications, Inc., Blackboard Inc., ComputerJob.com, Inc., Deja.com,
Inc., LinkShare Corporation, SageMaker, Inc. and Star-Cite! Solutions, Inc. Mr.
Alexander co-founded Reality Online, Inc., a company that developed financial
planning tools and online services aimed at the individual investor, and
continued to serve as its President and Chief Executive Officer after its
acquisition by Reuters Group PLC until September 1997.
E. Michael Forgash has served as a member of the board of directors of
eMerge Interactive since March 1999 and has held the position of Vice President,
Operations at Safeguard Scientifics, Inc. since January 1998. From August 1996
until October 1997, Mr. Forgash was President and Chief Executive Officer of
Creative Multimedia, an interactive marketing agency that consulted, designed
and delivered Web solutions for businesses. From November 1994 until July 1996,
Mr. Forgash served as President of Continental Healthcare Systems, Inc., a
leading supplier of departmental healthcare information systems and consulting
in the United States and England. Mr. Forgash currently serves as a director of
Internet Capital Group, Inc. and US Interactive, Inc., both public companies,
4anything.com, Inc., Who?Vision Systems, Inc. and XL Vision, Inc., all of which
are affiliated with Safeguard. Mr. Forgash is the Safeguard designee on our
board of directors under a stockholders' agreement dated July 17, 1997.
Thomas C. Lynch has served as a member of the board of directors of eMerge
Interactive since June 1997 and currently serves as the President, Chief
Operating Officer and a member of the board of directors of CompuCom, Inc., a
public company, which is affiliated with Safeguard. From November 1995 until
October 1998, Mr. Lynch held the position of Senior Vice President at Safeguard
Scientifics, Inc. From September 1994 until October 1995, Mr. Lynch was Director
of the Navy Staff, where he was responsible for coordinating Navy defense
issues. Prior to August 1994, Mr. Lynch held several positions in the United
States Navy, including Superintendent of the U.S. Naval Academy.
Christopher Moller, Ph.D. has served as a member of the board of directors
of eMerge Interactive since June 1997. Since 1990, he has served as Vice
President of TL Ventures, a company which manages a series of private equity
funds and is affiliated with Safeguard. Since 1994, Dr. Moller has served as a
Managing Director of the following funds managed by
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TL Ventures: Radnor Venture Partners, Technology Leaders, Technology Leaders II,
TL Ventures III and TL Ventures IV. He is also a Managing Director of TL Leaders
Management II L.P. Dr. Moller is a director of Who?Vision Systems, Inc., an
affiliate of Safeguard, Adolor Corporation and OraPharma, Inc. Dr. Moller serves
on the medical advisory board of Lankenau Research Institute. Dr. Moller is the
TL Ventures designated director on our board of directors, under a stockholder
agreement dated July 17, 1997.
John W. Poduska, Sr., Ph.D. has served as a member of the board of
directors of eMerge Interactive since January 1997. Since 1992, Dr. Poduska, Sr.
has served as the Chairman of Advanced Visual Systems Inc., a provider of
visualization software. From December 1989 until December 1991, Dr. Poduska was
President and Chief Executive Officer of Stardent Computer Inc., a computer
manufacturer. Dr. Poduska is also a member of the board of directors of
Safeguard Scientifics, Inc., Cambridge Technology Partners, Inc., an affiliate
of Safeguard, and Union Pacific Resources Group Inc., all public companies, and
XL Vision, Inc., an affiliate of Safeguard.
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERTISE
J. Tom Brink has served as the Director, Analytical Services of eMerge
Interactive since April 1999. Mr Brink focuses on marketing methods, feedlot and
grid value and cow production costs, and has conducted extensive research on
cattle markets and price cycles. His articles have been featured in many key
industry publications. From December 1996 to April 1999, Mr. Brink served as the
Executive Director of the American Gelbvieh Association, a leading breed
value-based marketer of fed cattle and the largest breed-coordinated alliance in
the United States. From July 1992 until December 1996, Mr. Brink was the
Director of Market Research of Cattle-Fax.
Scott Crain, D.V.M. has served as the Executive Vice President,
Professional Services of eMerge Interactive since March 1999. Since 1990, Dr.
Crain has also maintained a veterinary feedlot practice. In 1995, Dr. Crain
founded CIN, LLC, a company that established an information system for the beef
industry, and served as its President and Chief Executive Officer until that
company was acquired by eMerge Interactive in 1999.
Jim Gibb, Ph.D. has served as the Director, Advanced Technologies for
eMerge Interactive since June 1999. Dr. Gibb identifies opportunities to
implement and integrate new technology into eMerge Interactive's informations
system. From May 1996 until June 1999, he served as the Vice President at the
Center for Quality of the National Cattlemen's Beef Association. From 1991 until
May 1996, Dr. Gibb served as the Executive Director of the American Gelbvieh
Association.
BOARD OF DIRECTORS
Our board of directors is composed of seven members. All of our directors
are elected to serve for one-year terms and are elected at each annual meeting
of our stockholders.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. Our
audit committee consists of three independent directors. Currently our audit
committee consists of Douglas A. Alexander, Christopher Moller, Ph.D. and John
W. Poduska, Sr., Ph.D. The audit committee reviews the scope and result of the
audit and other services provided by our independent auditors and reviews and
evaluates our internal control functions.
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<PAGE> 58
Our compensation committee consists of at least three disinterested
directors who are non-employee directors. Currently, our compensation committee
consists of John S. Scott, Ph.D., E. Michael Forgash and Thomas C. Lynch. The
compensation committee evaluates and approves the compensation and benefits for
our executive officers and administers our equity compensation plans and makes
recommendations to the board of directors regarding such matters.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of eMerge Interactive and administering various incentive compensation
and benefit plans. During the 1998 fiscal year, our compensation committee
consisted of Dr. Scott and Messrs. E. Scott Blackwell and Lynch. Dr. Scott is
the Chief Executive Officer and Chairman of the Board of XL Vision. Mr.
Blackwell is an executive officer of XL Vision. At the end of fiscal 1998, we
owed XL Vision $8.0 million.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We do not pay our
directors cash compensation for attending meetings of the board of directors and
committee meetings. Directors are eligible to receive options to purchase common
stock under our equity compensation plan. All options granted to directors have
been approved by unanimous vote of the board of directors. In each of October
1997 and March 1999, we granted Dr. Poduska options to purchase 31,250 shares of
our common stock under our 1996 Equity Compensation Plan at an exercise price of
$0.80 and $1.60 per share, respectively. In April 1999, we granted Mr. Alexander
options to purchase 100,000 shares of our common stock under our 1996 Equity
Compensation Plan at an exercise price of $2.40 per share.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the compensation we paid
to our chief executive officer and a former executive officer who was paid
compensation greater than $100,000 in 1998. In 1998, we did not pay any of our
other executive officers salary and bonus exceeding $100,000. Mr. Abraham joined
eMerge Interactive in April 1998 and is paid a base salary of $175,000 per year
and a bonus of $70,000 per year. The amount appearing in the All Other
Compensation column for Mr. Abraham consists of $35,412 for reimbursement of
relocation expenses, $4,775 for car allowance and $1,414 for 401(k) employer
contributions.
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<PAGE> 59
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS COMPENSATION
- --------------------------- ------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles L. Abraham......... 1998 $ 86,159 $35,000 750,000 $41,601
Chief Executive Officer
Ottmar Dippold............. 1998 100,968 -- -- --
Former President and
Chief Operating Officer
</TABLE>
The following table sets forth information regarding options granted in
1998 to the executive officers named in the Summary Compensation Table above.
Mr. Dippold was not granted any stock options during 1998.
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SHARES PRICE APPRECIATED FOR
UNDERLYING PERCENTAGE OF OPTION TERM
OPTIONS TOTAL OPTIONS EXERCISE EXPIRATION ---------------------
NAME GRANTED(#) GRANTED PRICE($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles L. Abraham... 500,000 30.0% 0.80 7/1/08 651,500 1,037,500
125,000 7.6% 0.80 7/1/08 162,875 259,375
125,000 7.6% 0.80 10/30/08 162,875 259,375
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1998 for the executive officers named in the Summary
Compensation Table above. There were no option exercises by these officers in
fiscal 1998. The value of unexercised in-the-money options is calculated based
on an assumed value equal to the assumed initial public offering price of $11.00
per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles L. Abraham........... 187,500 562,500 1,912,500 5,737,500
Ottmar Dippold............... 15,625 46,875 159,375 478,125
</TABLE>
EMPLOYMENT, CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Charles L. Abraham holds the position of Chief Executive Officer and
receives an annual salary of $175,000 per year, and a bonus of up to $70,000 per
year based on performance objectives established by the board of directors. Mr.
Abraham will receive continued salary and benefits for a period of six months if
we terminate his employment without cause. Mr. Abraham also holds options to
purchase 750,000 shares of common stock at $0.80 per share, of which 25% or
187,500 shares, vest at the grant date with the remaining options
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<PAGE> 60
vesting in three annual installments of 25% each. If we experience a change of
control, 100% of the options will automatically vest.
Marvin L. Slosman holds the position of Executive Vice President, Sales and
receives an annual salary of $150,000 and a bonus of up to $60,000 based on the
achievement of annual objectives. Mr. Slosman will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Slosman also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
T. Michael Janney holds the position of Chief Financial Officer and
receives an annual salary of $150,000 and a bonus of up to $45,000 based on the
achievement of annual objectives. Mr. Janney will receive continued salary and
benefits for a period of six months if we terminate his employment without
cause. Mr. Janney also holds options to purchase 156,250 shares of common stock
at $0.80 per share and 31,250 shares of common stock at $2.40 per share. These
options vested 25% on the day of grant with the remaining options vesting in
three annual installments of 25% each. If we experience a change of control,
100% of the options will automatically vest.
Scott L. Mathews holds the position of President and Chief Operating
Officer and receives an annual salary of $160,000 and a bonus of up to $64,000
based on the achievement of annual objectives. Mr. Mathews will receive
continued salary and benefits for a period of six months if we terminate his
employment without cause. Mr. Mathews also holds options to purchase 225,000
shares of our common stock at $2.40 per share. These options vested 25% on the
day of grant with the remaining options vesting in three annual installments of
25% each. If we experience a change of control, 100% of the options will
automatically vest.
Arvind Subramanian holds the position of Executive Vice President, Sales
and E-Business and receives an annual salary of $150,000 and a bonus of up to
$52,500 based on the achievement of annual objectives. Mr. Subramanian will
receive continued salary and benefits for a period of twelve months if we
terminate his employment without cause. Mr. Subramanian also holds options to
purchase 187,500 shares of our common stock at $11.20 per share. These options
vested 25% on the day of grant with the remaining options vesting in three
annual installments of 25% each. If we experience a change of control, 100% of
the options will automatically vest.
EQUITY COMPENSATION
AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN
Our Amended and Restated 1996 Equity Compensation Plan was approved by our
stockholders on January 26, 1996. The aggregate number of shares of common stock
available for awards under the 1996 plan was 2,168,750 shares. No more than
625,000 shares in the aggregate may be granted to any individual in any calendar
year. As of November 30, 1999, there were 1,875,119 shares issuable upon the
exercise of outstanding options granted under the 1996 plan.
1999 EQUITY COMPENSATION PLAN
Our 1999 Equity Compensation Plan was approved by our stockholders on May
10, 1999. The aggregate number of shares of common stock available for awards
under the 1999 plan is 2,500,000 shares. No more than 625,000 shares in the
aggregate may be granted to
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<PAGE> 61
any individual in any calendar year. As of November 30, 1999, there were 854,625
shares issuable upon the exercise of outstanding options granted under the 1999
plan.
GENERAL
The 1996 and 1999 equity compensation plans provide for grants of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock and performance units to our designated employees, advisors and
consultants, and to non-employee directors. The compensation committee of the
board of directors administers and interprets the plans. The compensation
committee consists of two or more persons appointed by the board of directors
from among its members, each of whom must be a non-employee director as defined
by Rule 16b-3 under the Securities Exchange Act of 1934, and an outside director
as defined by section 162(m) of the Internal Revenue Code of 1986 and related
Treasury Regulations.
ELIGIBILITY FOR PARTICIPATION
Grants may be made to any of our employees or to employees of any of our
subsidiaries, to any non-employee member of the board of directors or, under the
1999 plan, to individuals to whom an offer of employment has been extended. Key
consultants and advisers who perform services for us or any of our subsidiaries
are eligible if they render bona fide services, not as part of the offer or sale
of securities in a capital-raising transaction.
401(k) PLAN
We have adopted a tax qualified employee savings and retirement plan, the
401(k) plan, for eligible employees. We make matching contributions on behalf of
all participants who have elected to make deferrals to the 401(k) plan. Any
contributions to the 401(k) plan by us or by the participants are paid to a
trustee. The 401(k) plan, and the accompanying trust, is intended to qualify
under Section 401(k) of the Internal Revenue Code, so that contributions and
income earned, if any, are not taxable to employees until withdrawn. The
contributions made by us vest in increments according to a vesting schedule. At
the direction of each participant, the trustee invests the contributions made to
the 401(k) plan in any number of investment options.
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RELATED PARTY TRANSACTIONS
EQUITY AND DEBT FINANCING AGREEMENTS AND LICENSE AGREEMENT WITH XL VISION
We were incorporated in September 1994 as a subsidiary of XL Vision, Inc.,
a private company that provides strategic, technical and business support to
create imaging-related technology companies. From our inception through June
1999, we have funded our operating and investing cash requirements principally
through private placements of common stock and preferred stock and from
borrowings from XL Vision. As of the date of this prospectus, XL Vision owns
24.0% of our outstanding capital stock.
In July 1997, we signed a subordinated purchase money note with XL Vision
for $4.4 million. The note bears interest at an annual rate of 7% and is due in
full when we complete an initial public offering or sell all of our assets or
stock.
In December 1998, we issued 2,400,000 shares of series B junior preferred
stock to XL Vision, one of our significant stockholders, at a purchase price of
$2.00 per share. As payment for the shares, XL Vision cancelled our debt of $4.8
million owed to XL Vision. As a result of that transaction, XL Vision's
ownership of our capital stock increased from 22.0% to 35.8%. XL Vision also
canceled $7.5 million of debt as a contribution of debt to equity. The
registration rights agreement executed in connection with the series A preferred
stock extends to the series B junior preferred stock. See the section entitled
Description of Capital Stock for a description of the registration rights
agreement. The shares of series A and series B preferred stock convert into
shares of class A common stock immediately prior to completion of this offering.
In January 1999, we signed a revolving promissory note with XL Vision for
up to $3.0 million. The revolving promissory note bears interest at the prime
lending rate plus 1% and is due in full when we complete an initial public
offering or sell all of our assets or stock.
EQUITY AND DEBT FINANCING AGREEMENTS WITH AFFILIATES OF SAFEGUARD SCIENTIFICS,
INC.
In April 1999, we signed two promissory notes, totaling $1.1 million with
Safeguard Delaware, Inc., a wholly-owned subsidiary of Safeguard Scientifics,
Inc. and the sole general partner of Safeguard XL Capital and Safeguard 99
Capital L.P., two of our significant stockholders. Safeguard Scientifics, Inc.
owns a majority of the outstanding shares of preferred stock of XL Vision. These
promissory notes were paid in full with the proceeds of the sale of our series C
preferred stock.
In May 1999, we issued 1,000,000 shares of series C preferred stock to
Safeguard 99 Capital L.P., an affiliate of Safeguard Scientifics, Inc., at a
price of $5.00 per share. The registration rights agreement executed in
connection with the series A preferred stock extends to the series C preferred
stock. The shares of series C preferred stock convert into shares of class A
common stock immediately prior to completion of this offering.
In July 1999, we signed a revolving promissory note with Safeguard
Delaware, Inc. for up to $3.0 million. At September 30, 1999, $3.0 million had
been advanced by Safeguard. The revolving promissory note bears interest at the
prime lending rate plus 1%. In December 1999, we amended the note to extend the
maturity date until January 31, 2000.
In August 1999, we signed a demand note with Safeguard Delaware, Inc. in
the principal amount of $2.5 million. The note bears interest at the prime rate
plus 1% and is payable on demand. In September 1999, we signed a demand note
with Safeguard Delaware, Inc. in the principal amount of $2.0 million. The note
bears interest at the prime rate plus 1% and is payable on demand. In October
1999, we signed a demand note with Safeguard Delaware, Inc. in the principal
amount of $2.5 million. The note bears interest at the prime rate plus 1% and is
payable on demand. In October 1999, we cancelled these
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<PAGE> 63
outstanding notes in exchange for a note in the amount of $7.1 million. The note
bears interest at the prime rate plus 1% and is due in full in one year, when we
complete an initial public offering or when Internet Capital Group repays its
note to us, whichever occurs earlier. As of November 30, 1999, we owed a total
of $10.3 million to Safeguard.
ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC.
On November 16, 1999, we issued 4,555,556 shares of series D preferred
stock and a warrant to purchase 1,138,889 shares of class B common stock for the
aggregate consideration of $38.8 million to Internet Capital Group, Inc.
We received $18.0 million of the total purchase price in cash and $23.0
million in the form of a promissory note. The note will be due and payable one
year after its issue and does not bear interest. The note is secured by
2,555,556 shares of series D preferred stock. Interest on the promissory note
was imputed at 9.5% and amounts to $2.2 million over the life of the note. In
connection with the issuance of the stock and the warrant, we granted Internet
Capital Group registration rights that are substantially the same as those that
apply to our series A preferred stock.
The series D preferred stock will automatically convert into shares of
class B common stock immediately prior to completion of this offering. Class B
common stock is entitled to two and one-half votes per share. The warrant
expires three years from the date of issuance, and is exercisable at the initial
public offering price of the class A common stock. The class B common stock
automatically converts into class A common stock upon transfer by Internet
Capital Group to a non-affiliated party.
Douglas A. Alexander, one of our directors, is an executive officer of
Internet Capital Group. E. Michael Forgash, one of our directors, is also a
member of the board of directors of Internet Capital Group. Additionally,
Safeguard Scientifics, Inc. beneficially owns approximately 14.3% of the
outstanding shares of common stock of Internet Capital Group.
Internet Capital Group and Safeguard are parties to a joint venture
agreement under which each has agreed to:
- Use best efforts to agree and vote on a course of action that is in the
best interest of both parties in all matters submitted to the
stockholders for approval;
- Vote its shares for the election of two designees of Safeguard and two
designees of Internet Capital Group in any election of directors of
eMerge Interactive;
- Offer shares of eMerge Interactive stock to the other party at the fair
market price of the shares before offering the shares to any unaffiliated
party, other than in a sale of all of its shares; and
- Discuss its intentions with the other party before selling all of its
shares to an unaffiliated party and use its best efforts to provide the
other party with the opportunity to purchase or participate in the
purchase of the shares.
SERVICE AGREEMENTS WITH XL VISION AND SAFEGUARD SCIENTIFICS
We have contractual service agreements with XL Vision and Safeguard
Scientifics. Under an administrative services agreement dated December 15, 1997,
as amended on August 17, 1999, XL Vision and Safeguard provide us with
management consultation, investor relations, financial management, human
resource management, legal services, insurance programs, and administrative
services. We pay a fee pursuant to a formula that is based on a percentage of
our revenue, not to exceed $300,000 annually. The fee is not due until we
achieve positive cash flow from operations. We owe XL Vision and Safeguard each
$18,600 under this agreement for fiscal 1998, and $21,750 for the nine months
ended September 30, 1999. The
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agreement extends through December 31, 2002 and continues unless terminated by
either party.
Under a direct charge administrative services agreement dated April 14,
1997, XL Vision also provides us with management services on a time and
materials basis. We owe XL Vision $460,000 under this agreement for fiscal 1998,
and $390,000 for the nine months ended September 30, 1999. This agreement
continues on a month-to-month basis, and may be terminated at any time by either
party.
REAL ESTATE LEASE WITH XL VISION
We currently lease our facilities in Sebastian, Florida from XL Vision,
Inc., which leases the entire facility from XL Realty, Inc., a subsidiary of
Safeguard Scientifics, Inc. We believe that the rent that we say pursuant to our
lease is consistent with the market rent for similar space in the area. Our
lease terminates on January 1, 2001 and we will have the option to renew the
lease for an additional one year term.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of eMerge Interactive's common stock as of November 30, 1999 by:
- Each person or entity who is known by us to beneficially own more than 5%
of eMerge Interactive's outstanding common stock;
- Each of the executive officers set forth on the summary compensation
table;
- Each director of eMerge Interactive;
- All directors and executive officers as a group; and
- All other selling stockholders.
In addition, we are voluntarily disclosing information for each of our
other executive officers.
A person has beneficial ownership of shares if the individual has the power
to vote or dispose of shares. This power can be exclusive or shared, direct or
indirect. In addition, a person beneficially owns shares underlying options that
are presently exercisable or will become exercisable within 60 days of November
30, 1999 and shares acquirable upon conversion of our preferred stock.
Applicable percentage ownership in the following table is based on 25,224,772
shares of common stock outstanding as of November 30, 1999. To the extent that
any shares are issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding, granted in the future
or reserved for future issuance under our equity plans, there will be further
dilution to new public investors. Because of the disparate voting rights between
the class A and class B common stock, we have also presented beneficial
ownership as a percent of total voting power in the table below.
The table below assumes that the underwriters have not exercised their
over-allotment option. In addition, the symbol * means that the percentage is
less than one percent.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER THE OFFERING
------------------------------------- CLASS A --------------------------------------
PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF
NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER
------------------------ --------- ---------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS:
Internet Capital Group,
Inc.(1)(10)...................... 8,083,334 30.7% 50.1% -- 8,083,334 24.6% 42.5%
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
XL Vision, Inc.(2)(3)............ 6,058,125 24.0 17.9 500,000 5,558,125 17.5% 13.8%
10315 102nd Terrace Sebastian,
FL 32958
Safeguard XL Capital
L.P.(4)(10).................... 5,226,644 20.7 15.5 650,000 4,576,644 14.4% 11.4%
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
XL Partners, L.P.(3)............. 3,058,125 12.1 9.1 -- 3,058,125 9.6% 7.6%
10315 102nd Terrace Sebastian,
FL 32958
Safeguard 99 Capital
L.P.(4)(5)(10)................. 1,675,000 6.5 4.9 -- 1,675,000 5.2 4.1
800 The Safeguard Building 435
Devon Park Drive Wayne, PA
19087
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED NUMBER OF SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER THE OFFERING
------------------------------------- CLASS A --------------------------------------
PERCENT OF PERCENT OF COMMON PERCENT OF PERCENT OF
NUMBER OF BENEFICIAL TOTAL VOTING STOCK NUMBER OF BENEFICIAL TOTAL VOTING
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP POWER OFFERED SHARES OWNERSHIP POWER
------------------------ --------- ---------- ------------ --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Biegert Family Trust(6)...... 1,250,000 5.0% 3.7% -- 1,250,000 3.9% 3.1%
c/o Judith Ackland P.O. Box 197
Shickley, NE 68436
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
Charles L. Abraham(9)............ 370,000 1.5% 1.1% -- 370,000 * *
Ottmar Dippold................... 28,125 * * -- 28,125 * *
John S. Scott, Ph.D.(11)......... 25,000 * * -- 25,000 * *
Douglas A. Alexander............. -- * * -- -- * *
E. Michael Forgash............... -- * * -- -- * *
Thomas C. Lynch.................. -- * * -- -- * *
Christopher Moller, Ph.D......... -- * * -- -- * *
John W. Poduska, Ph.D............ 65,938 * * -- 65,938 * *
OTHER EXECUTIVE OFFICERS:
T. Michael Janney (9)............ 78,125 * * -- 78,125 * *
Scott L. Mathews (9)............. 56,250 * * -- 56,250 * *
Marvin L. Slosman (9)............ 78,125 * * -- 46,875 *
Arvind Subramanian (9)........... 46,875 * * -- * * *
All directors and executive
officers as a group (11
persons)....................... 720,313 2.8% 2.1% -- 720,313 1.8% 1.4%
OTHER SELLING STOCKHOLDERS:
Technology Leaders II(7)......... 920,000 3.6% 2.7% 150,000 770,000 2.4% 1.9%
Technology Leaders I(8).......... 725,313 2.9% 2.1% 150,000 575,313 1.8% 1.4%
Scott Calhoun(12)................ 62,500 * * * *
Richard Stanley, D.V.M.(9)(13)... 46,413 * * * *
</TABLE>
- -------------------------
(1) The share numbers for Internet Capital Group represent 4,555,556 shares of
class B common stock and a warrant to purchase 1,138,889 shares of class B
common stock. There are no other shares of class B common stock
outstanding. Holders of class B common stock are entitled to two and
one-half votes per share. These numbers also include 1,250,000 shares of
class A common stock.
(2) The share numbers for XL Vision, Inc. include 625,000 shares that are
subject to an option to holders of its 6% convertible subordinated notes.
The options become exercisable when we complete an initial public offering,
subject to restrictions.
(3) XL Vision, Inc. is the sole general partner of XL Partners, L.P. Therefore,
the share numbers for XL Vision include 3,058,125 shares owned by XL
Partners, L.P.
(4) Safeguard Delaware, Inc. holds approximately a 91.6% general partnership
interest in Safeguard XL Capital L.P. and an 89.8% general partnership
interest in Safeguard 99 Capital L.P. Safeguard Delaware, Inc., a
wholly-owned subsidiary of Safeguard Scientifics, Inc., is the sole general
partner of Safeguard XL Capital L.P. and Safeguard 99 Capital L.P.
Safeguard Delaware, Inc. has sole authority and responsibility for all
investments, voting and disposition decisions regarding such shares. The
limited partnership interests are held by executives and employees of
Safeguard, subject to vesting. These numbers exclude any shares that may be
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purchased by Safeguard Scientifics, Inc. that have not been purchased by
its shareholders in the Safeguard Subscription Program.
(5) The share numbers for Safeguard 99 Capital L.P. include options to acquire
425,000 shares of our stock that are currently owned by XL Vision. These
options become exercisable when we complete an initial public offering,
subject to restrictions.
(6) We have a proxy to vote the 1,250,000 shares owned by the Biegert Trust
until the completion of the series D preferred stock and warrant purchase
by Internet Capital Group.
(7) Technology Leaders II Management L.P., a limited partnership, is the sole
general partner of Technology Leaders II L.P. and a co-general partner of
Technology Leaders II Offshore C.V. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are venture capital partnerships that
are required by their governing documents to make all investment, voting
and disposition actions in tandem. Technology Leaders II L.P. and
Technology Leaders II Offshore C.V. are referred to as Technology Leaders
II. Technology Leaders II Management L.P. has sole authority and
responsibility for all investment, voting and disposition decisions for
Technology Leaders II. The general partner of Technology Leaders II
Management, L.P. is Technology Leaders Management, Inc., a wholly-owned
subsidiary of Safeguard. Robert E. Keith, Jr., Gary J. Anderson, M.D., Mark
J. DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive,
are the officers of Technology Leaders Management, Inc. Technology Leaders
II Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, which consists of nine voting
members including (i) Warren V. Musser, who is a designee of Technology
Leaders Management, Inc., (ii) Mr. Keith, Dr. Anderson, Mr. DeNino, Dr.
Moller, individually, and (iii) one designee of each of four other
corporations (the TLA Corporations) and (as a non-voting member) Clayton S.
Rose. Technology Leaders Management, Inc. is the administrative manager of
Technology Leaders II, subject to the control and direction of the
executive committee of Technology Leaders II Management L.P. Mr. Keith is
Vice Chairman of Safeguard.
(8) Technology Leaders Management L.P., a limited partnership, is the sole
general partner of Technology Leaders L.P. and a co-general partner of
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are venture capital partnerships that are required by
their governing documents to make all investment, voting and disposition
actions in tandem. Technology Leaders MI Corp. is wholly-owned by
Technology Leaders Offshore C.V. Technology Leaders L.P. and Technology
Leaders Offshore C.V. are referred to collectively as Technology Leaders I.
Technology Leaders Management L.P. has sole responsibility for all
investment, voting and disposition decisions for Technology Leaders I. The
general partners of Technology Leaders Management L.P. are (i) Technology
Leaders Management, Inc., a wholly-owned subsidiary of Safeguard, (ii)
Technology Leaders Partners I, a partnership among Technology Leaders
Management, Inc. and the Managing Directors of Technology Leaders
Management, Inc., other than Mark J. DeNino, and four other corporations
(the TLA Corporations) owned by individuals, one of whom serves as a
director of Safeguard, and three of whom are not currently otherwise
affiliated with Safeguard or eMerge Interactive. Technology Leaders
Management L.P. is managed by an executive committee, by whose decisions
the general partners have agreed to be bound, that consists of seven voting
members including (i) Warren V. Musser, Robert E. Keith, Jr. and Gary J.
Anderson, M.D., each of whom are designees of Technology Leaders
Management, Inc., and (ii) one designee of each of the TLA Corporations.
Clayton S. Rose is a non-voting member of that executive committee.
Technology Leaders Management, Inc. is the administrative manager of
Technology Leaders, subject to the control and direction of the executive
committee of Technology Leaders Management L.P. Mr. Musser is the chairman
and Mr. Keith is president and chief executive officer of Technology
Leaders Management, Inc. and Mr. Keith, Dr. Anderson, Mr. DeNino and
Christopher Moller, Ph.D., a director of eMerge Interactive, are the
managing directors of Technology Leaders Management, Inc. Mr. Keith
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and Dr. Anderson are former officers of Safeguard and Mr. Keith is Vice
Chairman of Safeguard.
(9) Includes options to purchase the following shares of class A common stock:
- 337,500 shares by Mr. Abraham;
- 78,125 shares by Mr. Janney;
- 56,250 shares by Mr. Mathews
- 78,125 shares by Mr. Slosman;
- 6,250 shares by Mr. Stanley; and
- 46,875 shares by Mr. Subramanian.
(10) Internet Capital Group and Safeguard are parties to a joint venture
agreement under which they have agreed to use best efforts to agree to vote
together on matters submitted to the stockholders for approval and for two
designees of Safeguard and two designees of Internet Capital Group in any
elections of directors.
(11) John S. Scott, Ph.D. is Chief Executive Officer and Chairman of the Board
of XL Vision, and disclaims beneficial ownership of the 6,058,125 shares
held by XL Vision.
(12) Scott Calhoun was a stockholder of Cyberstockyard, Inc., which was acquired
by eMerge Interactive in March 1999. Mr. Calhoun is not currently engaged
by us in any capacity.
(13) Richard Stanley was President and a stockholder of STS Agriventures, Ltd.,
which was acquired by eMerge Interactive in July 1998. Mr. Stanley
currently serves as a consultant to eMerge Interactive. Mr. Stanley
disclaims beneficial ownership of 30,713 shares of our class A common stock
owned by his wife, Sylvia Doerksen.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
125,000,000 shares of common stock, $.008 par value per share, consisting of
115,888,887 shares of class A common stock and 9,111,113 shares of class B
common stock, and 15,000,000 shares of preferred stock, $.01 par value per
share. All outstanding shares of preferred stock will automatically convert into
common stock immediately prior to the closing of this offering as follows:
- Shares of series A, series B and series C preferred stock will convert
into shares of class A common stock; and
- Shares of series D preferred stock will convert into shares of class B
common stock.
COMMON STOCK
As of November 30, 1999, there were 25,224,772 shares of common stock
outstanding, assuming the conversion of the shares of preferred stock then
outstanding. After giving effect to the sale of the 6,500,000 shares of our
class A common stock in this offering, there will be 31,724,772 shares of common
stock outstanding.
Holders of class A common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Holders of
class B common stock are entitled to two and one-half votes for each share held
of record. The shares of class A and class B common stock are identical in all
other respects. The election of directors is determined by a plurality of the
votes cast and, except as otherwise required by law, all other matters are
determined by a majority of the votes cast. Our stockholders do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors. Holders of common stock are entitled to receive any dividends
declared by the board of directors out of funds legally available for that
purpose, subject to any preferential dividend rights of outstanding shares of
preferred stock. Upon the liquidation, dissolution or winding up of eMerge
Interactive, the holders of common stock are entitled to receive pro-rated
shares of our net assets after we have paid all debts and other liabilities.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of common
stock may be adversely affected by the rights of the holders of shares of any
class or series of preferred stock which we may designate and issue in the
future.
In the event of a sale or transfer of any shares of class B common stock to
a party that is not affiliated with the original purchaser, the shares will
automatically convert into class A common stock.
PREFERRED STOCK
Under our second amended and restated certificate of incorporation, our
board of directors, without further action by our stockholders, is authorized to
issue up to an aggregate of 15,000,000 shares of preferred stock in one or more
classes or series. Our board of directors may, without stockholder approval,
issue any class or series of preferred stock with dividend rights, dividend
rates, conversion rights, redemption rights, preferences on liquidation or
dissolution, voting rights and any other preferences, which could adversely
affect the voting power of the holders of common stock. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate purposes, could make it more difficult for a
third party to acquire, or could discourage or delay a third party from
acquiring, a majority of our outstanding stock. Following this offering, after
the conversion of all outstanding shares of series A, series B and series C
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preferred stock into class A common stock, and the conversion of all outstanding
shares of series D preferred stock into class B common stock, there will be no
shares of preferred stock outstanding. We have no plans to issue any additional
shares of preferred stock.
REGISTRATION RIGHTS
Some holders of our class A common stock and all holders of preferred stock
have been granted registration rights. Under a registration rights agreement, as
amended, beginning six months after an initial public offering, the holders of
series A, series B, series C and series D preferred stock can, on two occasions,
demand that we register their shares, so long as the shares covered by each
registration have an aggregate market value of more than $5.0 million.
The holders of series A, series B, series C and series D preferred stock
are also entitled to piggyback registration rights, which may be reduced at the
discretion of an underwriter. Piggyback registration rights entitle stockholders
to include shares in a registered public offering initiated by us. We intend to
obtain a waiver of the piggyback registration rights from all of the holders of
series A, series B, series C and series D preferred stock in connection with
this offering, except from those participating as selling stockholders in this
offering.
In a stockholders' agreement, we granted the former stockholders of STS
Agriventures, Ltd. and the partners of NutriCharge piggyback registration rights
for their shares of our common stock. In a stockholders' and registration rights
agreement, we granted CIN, LLC (now Lost Pelican, LLC) piggyback registration
rights for its shares of our class A common stock. In a joinder and correction
to the stockholders' and registration rights agreement, we granted the former
stockholders of Cyberstockyard, Inc. piggyback registration rights for their
shares of our common stock. In a common stock purchase agreement, we granted
Turnkey Computer Systems, Inc. piggyback registration rights for its shares of
our class A common stock, except for in an initial public offering. We intend to
obtain waivers of the piggyback registration rights from these holders of class
A common stock, except from those participating as selling stockholders in this
offering.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our second amended and restated certificate of incorporation
and bylaws could make the acquisition of eMerge Interactive and the removal of
incumbent officers and directors more difficult. These provisions are expected
to discourage coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of eMerge Interactive to negotiate
with us first.
Our board of directors has the authority to issue and to establish the
rights of substantial amounts of preferred stock without stockholder approval,
upon such terms and conditions, and having such rights, privileges and
preferences, as our board of directors may determine. This authority may be used
to create voting impediments, hinder changes in control or to dilute the stock
ownership of holders of common stock seeking to obtain control of eMerge
Interactive. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions, financings and other
corporate transactions, may have the effect of discouraging, delaying or
preventing a change in control.
DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, or the anti-takeover law, which regulates corporate
acquisitions. The law generally
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prohibits business combinations between a publicly held Delaware corporation and
an interested stockholder.
- An interested stockholder is a person who, together with any affiliates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a corporation.
- A business combination includes mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation.
Section 203 prohibits any business combination that results in a financial
benefit to an interested stockholder for three years following the date the
person became an interested stockholder.
WARRANT
In November 1999, we issued a warrant to Internet Capital Group to purchase
up to 1,138,889 shares of class B common stock. The warrant is exercisable upon
the earlier of:
- The consummation of this offering;
- The closing date of a round of equity financing of at least $20.0
million; and
- The one year anniversary of the issue date of the warrant.
In the event that the warrant becomes exercisable as a result of this
offering or as a result of a private equity offering, the exercise price will be
equal to the offering price per share. If the warrant becomes exercisable as a
result of the one year anniversary of its issue, the exercise price will be
$9.00 per share. The warrant terminates on the third anniversary of its issue.
The warrant is transferable, but once transferred, it will be exercisable for
shares of class A common stock.
LIMITATION ON LIABILITY
Our second amended and restated certificate of incorporation and bylaws
contain provisions relating to the limitation of liability and indemnification
of directors and officers. Our amended and restated certificate of incorporation
specifies that none of our directors shall be personally liable to us or our
shareholders for monetary damages for a breach of fiduciary duty, except for
liability:
- For any breach of the duty of loyalty;
- For acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- For the payment of unlawful dividends and other actions prohibited by
Delaware General Corporation Law; and
- For any transaction resulting in receipt of an improper personal benefit
by the director.
Our bylaws require us to indemnify our directors and officers, so long as
their actions are in good faith, are in the best interests of the corporation,
and are not unlawful. Our bylaws also permit us to purchase and maintain
insurance on behalf of our directors, officers and agents. We intend to obtain
directors' and officers' liability insurance to provide our directors and
officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park,
New Jersey 07660.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 31,724,772 shares of our
common stock outstanding. Of the 31,724,772 shares which will be outstanding
after the offering, the shares sold in this offering and
additional shares that are eligible for resale under Rule 144(k) will be freely
tradeable, and additional shares will be eligible for resale subject
to the volume, manner of sale and other provisions of Rule 144.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an affiliate, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- One percent of the then outstanding shares of our common stock
(approximately shares immediately following the offering); or
- The average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale.
After the offering, shares will be held by affiliates. For purposes
of Rule 144, an affiliate of an issuer is a person that, directly or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, such issuer. Shares held by affiliates are control
securities under Rule 144 and may be sold in the public market upon the
expiration of a one-year holding period under Rule 144, subject to the volume,
manner of sale and other limitations of Rule 144, but may not be sold in
reliance upon Rule 144(k). Shares held by persons deemed not to have been
affiliates of ours at any time during the 90 days preceding a sale and who have
beneficially owned the shares for at least two years are restricted securities
under Rule 144 and can be sold under Rule 144(k) without regard to the volume
limitations, manner of sale provisions or other limitations of Rule 144.
LOCK-UP AGREEMENTS
All officers and directors, and the holders of common stock and options to
purchase common stock who collectively account for shares of our common
stock have agreed, pursuant to lock-up agreements, that they will not offer,
sell, contract to sell, or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible or exchangeable for common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Adams, Harkness & Hill, Inc.
RULE 701
We have granted options and issued underlying shares of common stock to our
employees through our equity compensation plans. Under Rule 701, non-affiliated
who purchased shares upon the exercise of options granted under the plans prior
to this offering are entitled to sell their shares 90 days after the date of
this prospectus without having to comply with the holding period, volume
limitations or other restrictions of Rule 144. Rule 701 also permits shares
subject to unexercised options granted under our plans to be sold upon exercise
without having to comply with the provisions of Rule 144. As of ,
1999, approximately shares of common stock and shares of common stock
subject to unexercised options will be eligible for sale under Rule 701 by our
employees.
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STOCK OPTIONS
As of November 30, 1999, there were outstanding options to purchase an
aggregate of 2,729,744 shares of our common stock, at a weighted average
exercise price of $2.78 per share, of which 742,775 were exercisable at a
weighted average of $1.67 per share. The holders of options to purchase a total
of shares exercisable upon the offering have executed lock-up agreements
and agreed to restrict their ability to sell or otherwise dispose of common
stock acquired upon the exercise of options for 180 days after the date of this
prospectus without the prior consent of Adams, Harkness & Hill, Inc.
As of November 30, 1999, we had an additional 1,645,375 shares of common
stock available for future grant under the 1996 and 1999 equity compensation
plans. Prior to the expiration of the lock-up agreements, we intend to file a
registration statement on Form S-8 to register the shares of common stock that
may be issued pursuant to the options granted under the plans. Therefore, the
shares of common stock that are acquired and offered thereafter pursuant to that
registration statement may be resold in the public market without restriction or
limitation, except in the case of our affiliates, who may only resell such
shares in accordance with the provisions of Rule 144.
WARRANT
On November 16, 1999, we issued a warrant to Internet Capital Group to
purchase up to 1,138,889 shares of class B common stock upon completion of the
series D preferred stock purchase. This warrant is exercisable upon closing of
this offering and will expire on the third anniversary of its issuance. Internet
Capital Group has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any of its shares, the warrant, or the
shares acquired as a result of exercising the warrant, for 180 days after the
date of this prospectus, other than through a bona fide pledge of these
securities to its creditors.
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PLAN OF DISTRIBUTION
Of the 8,000,000 shares offered by this prospectus, 4,500,000 shares are
being offered by means of an underwritten public offering and 3,500,000 shares
are being offered by means of the Safeguard Subscription Program to shareholders
of Safeguard Scientifics, Inc., one of our principal stockholders.
UNDERWRITTEN PUBLIC OFFERING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each underwriter named
below, for whom Adams, Harkness & Hill, Inc., First Union Securities, Inc. and
FAC/Equities, a division of First Albany Corporation are acting as
representatives, has agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF CLASS A
UNDERWRITER COMMON STOCK
- ----------- -----------------
<S> <C>
Adams, Harkness & Hill, Inc. ..............................
First Union Securities, Inc. ..............................
FAC/Equities, a division of First Albany Corporation.......
--------
Total.................................................
========
</TABLE>
Of the 4,500,000 shares to be purchased by the underwriters, 3,650,000
shares will be purchased from us and 850,000 shares will be purchased from the
selling stockholders. Of the 3,500,000 shares to be offered by means of the
Safeguard Subscription Program, 2,850,000 shares will be sold by us and 650,000
shares will be sold by Safeguard.
The underwriting agreement provides that the underwriters' obligation to
purchase shares of class A common stock depends on the satisfaction of the
conditions contained in the underwriting agreement and that, if any of the
shares of class A common stock are purchased by the underwriters under the
underwriting agreement, all of the shares of class A common stock that the
underwriters have agreed to purchase under the underwriting agreement must be
purchased. The conditions contained in the underwriting agreement include the
requirement that the representations and warranties made by us to the
underwriters are true, that all of the shares offered in the Safeguard
Subscription Program have been purchased, that there is no material change in
the financial markets and that we deliver to the underwriters customary closing
documents.
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The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of class A common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to dealers, who may include the underwriters, at the public
offering price less a selling concession not in excess of $ per share. The
underwriters may also allow, and dealers may reallow, a concession not in excess
of $ per share to brokers and dealers. After the offering, the underwriters
may change the offering price and other selling terms.
Adams, Harkness & Hill, Inc., First Union Securities, Inc. and FAC/Equities
have informed us that they do not intend to confirm sales of shares of common
stock offered by this prospectus to any accounts over which they exercise
discretionary authority. In addition, the other underwriters have informed us
that they do not intend to confirm sales to discretionary accounts that exceed
5% of the total number of shares of common stock offered by them.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us and the selling stockholders. This information is
presented assuming both no exercise and full exercise by the underwriters of
their overallotment option.
<TABLE>
<CAPTION>
TOTAL
--------------------------
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ----------- -----------
<S> <C> <C> <C>
Public offering price........................ $ $ $
Underwriting discount........................ $ $ $
Proceeds before expenses to eMerge
Interactive................................ $ $ $
Proceeds before expenses to the selling
stockholders............................... $ $ $
</TABLE>
The total proceeds before expenses to be received by us from both the
underwritten public offering and the Safeguard subscription program will be
approximately $67.8 million, assuming no exercise of the over-allotment option.
The expenses of the underwritten offering, exclusive of the underwriting
discount, are estimated at $703,000 and are payable by us. The following table
details these expenses. All amounts shown are estimates, with the exception of
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee......................... $ 13,566
NASD filing fee.............................. 5,161
Nasdaq filing fee............................ 53,400
Printing and engraving expenses.............. 112,500
Legal fees and expenses...................... 253,100
Accounting fees and expenses................. 196,900
Blue Sky fees and expenses (including legal
fees)...................................... 5,600
Transfer agent and registrar fees and
expenses................................... 8,400
Miscellaneous................................ 54,373
----------
Total................................... $ 703,000
==========
</TABLE>
The total expenses for the offering, including the expenses associated with
the Safeguard Subscription Program, are estimated at $1,250,000.
We have granted to the underwriters an option to purchase up to 675,000
additional shares of class A common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this
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prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of class A
common stock proportionate to the underwriters' initial commitment as indicated
in the preceding table and we will be obligated, under the over-allotment
option, to sell the shares of class A common stock to the underwriters.
We have agreed that, without the prior consent of Adams, Harkness & Hill,
Inc., we will not directly or indirectly, offer, sell or otherwise dispose of
any shares of common stock or any securities which may be converted into or
exchanged for any such shares of common stock for a period of 180 days from the
date of this prospectus. All of our executive officers and directors, Safeguard,
XL Vision, Technology Leaders and Internet Capital Group, have agreed under
lock-up agreements that, without the prior written consent of Adams, Harkness &
Hill, Inc., they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of common stock or any securities that may be converted
into or exchanged for any such share for the period ending 180 days after the
date of this prospectus. All other stockholders who beneficially own over 25,000
shares of common stock, including all of the key employees named in this
prospectus, have agreed under lock-up agreements that, without the prior consent
of Adams, Harkness & Hill, Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities that
may be converted into or exchanged for any such share for the period ending 180
days after the date of this prospectus. These restrictions will also apply to
any shares that Safeguard purchases under the Safeguard share subscription
program. See the section entitled Shares Eligible for Future Sale.
Prior to the offering, there has been no public market for the shares of
class A common stock. The initial public offering price was negotiated between
the representatives and us. In determining the initial public offering price of
the common stock, we and the representatives considered, in addition to
prevailing market conditions, our historical performance and capital structure,
estimates of our business potential and earning prospects, an overall assessment
of our management and the consideration of the above factors in relation to the
market valuation of companies in related businesses.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EMRG."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
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The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, the representatives may reclaim the
amount of the selling concession from the underwriters and selling group members
who sold those shares as part of the offering. In addition, the representatives
reserve the right to reclaim selling concessions from underwriters and selling
group members if the representatives receive a report that clients of the
underwriters and selling group members have sold the stock they purchased in
this offering, generally within 30 days following this offering. The
representatives reserve this right even if the representatives do not purchase
shares in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it might discourage resales of the security by purchasers in an
offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase (outside of the United States), in addition to the
offering price listed on the cover of this prospectus.
The underwriters have reserved up to 350,000 shares of the common stock
offered by this prospectus for sale to our officers, directors, employees and
their family members and to our business associates at the initial public
offering price set forth on the cover page of this prospectus. These persons
must commit to purchase no later than the close of business on the day following
the date of this prospectus. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares.
SAFEGUARD SUBSCRIPTION PROGRAM
As part of this offering, we are offering 2,850,000 shares of our class A
common stock in the Safeguard Subscription Program to shareholders of Safeguard,
one of our principal stockholders, and Safeguard is offering 650,000 shares to
its shareholders. Safeguard's shareholders may subscribe for one share of class
A common stock for every ten shares of Safeguard common stock held by them, and
may not transfer the opportunity to subscribe to another person except
involuntarily by operation of law. Persons who owned at least 100 shares of
Safeguard common stock as of October 20, 1999 are eligible to purchase shares
from us under the program. Shareholders who own less than 100 shares of
Safeguard common stock will be ineligible to participate in the Safeguard
Subscription Program.
Under a standby stock purchase agreement, which is filed as an exhibit to
this registration statement relating to this prospectus, Safeguard will purchase
from us any of the shares offered by us under the program that are not purchased
by the shareholders of Safeguard. Distribution of share certificates purchased
through the Safeguard Subscription Program will be made to the purchasers as
soon as practicable following closing of the sale of the shares to the public.
It is expected that sales under the Safeguard Subscription Program will be
reflected in purchasers' book-entry accounts at the Depository Trust Company, if
any, upon the closing of these sales. After the closing of these sales, we will
mail stock certificates to all purchasers who do not maintain book-entry
accounts at the Depository Trust Company. Prior to this offering, Safeguard
beneficially owned 27.3% of our common stock. After this offering, Safeguard
will beneficially own approximately 19.6% of our common stock, assuming that all
3,500,000 shares are purchased by shareholders of
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Safeguard, and will beneficially own approximately 32.7% of our common stock
assuming that none of the 3,500,000 shares are purchased by the shareholders of
Safeguard. The purchase price under the program, whether paid by Safeguard or
its shareholders, will be the same price per share as set forth on the cover
page of this prospectus. All shares will be sold either to Safeguard or to
shareholders of Safeguard. The underwriters, as a group, will receive a 2.8%
management fee on all shares offered through the Safeguard Subscription Program,
including any shares actually purchased by Safeguard. The management fee
represents compensation for the underwriters' role as it relates to due
diligence, participation in the drafting of this prospectus, and general
coordination of the overall offering. Safeguard will not receive any
compensation from eMerge Interactive or any other person, with respect to this
offering, including any underwriting discounts or commissions.
The following table shows the per share and total offering price,
management fee to be paid by us to the underwriters and the proceeds before
expenses to us.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price..............................
Management fee.....................................
Proceeds before expenses to eMerge Interactive.....
Proceeds before expenses to Safeguard..............
</TABLE>
The total proceeds before expenses to be received by eMerge Interactive
from both the underwritten public offering and the Safeguard Subscription
Program will be approximately $67.8 million, assuming no exercise of the
over-allotment option.
The expenses of the Safeguard Subscription Program, exclusive of the
management fee to be paid to the underwriters, are estimated at $547,000 and are
payable by us. The following table details these expenses. All amounts shown are
estimates, with the exception of the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 10,551
NASD filing fee............................................. 4,014
Nasdaq filing fee........................................... 41,600
Printing and engraving expenses............................. 87,500
Legal fees and expenses..................................... 196,900
Accounting fees and expenses................................ 153,100
Blue Sky fees and expenses (including legal fees)........... 4,400
Transfer agent and registrar fee and expenses............... 6,600
Miscellaneous............................................... 42,335
--------
Total....................................................... $547,000
========
</TABLE>
The total expenses for the offering, including the expenses associated with
the underwritten public offering, are estimated at approximately $1.3 million.
Safeguard is an underwriter with respect to the shares included in the
Safeguard Subscription Program. Safeguard is not an underwriter with respect to
the other shares offered by this prospectus. Safeguard is not included in the
term "underwriter" as used in this prospectus. Safeguard's sole condition to
purchase any shares that are not purchased by its shareholders in the Safeguard
Subscription Program is that the conditions to the underwriter's obligations
have been met. This means that Safeguard will be required to purchase these
shares if, and only if, the underwriters are obligated to purchase shares.
Safeguard has not participated in any discussions or negotiations with the
Company and the
77
<PAGE> 79
underwriters regarding the initial public offering price. Safeguard will not
have any right to seek indemnification from eMerge Interactive regarding its
agreement to accept underwriter liability with respect to the shares included in
the Safeguard Subscription Program.
LEGAL MATTERS
An opinion as to the validity of the shares of class A common stock offered
hereby will be provided to us by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and September 30,
1999 and for each of the years in the three-year period ended December 31, 1998
and the nine months ended September 30, 1999 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Lost Pelican, L.L.C. (d/b/a Cattlemen's
Information Network) as of December 31, 1997 and 1998 and for each of the years
in the two-year period ended December 31, 1998 have been included in this
Prospectus and the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of QDD Investment Company, L.L.C. (d/b/a
Professional Cattle Consultants, L.L.C.) as of December 31, 1998 and for the
year then ended have been included in this Prospectus and the Registration
Statement in reliance upon the report of KPMG LLP, independent certified public
accountants and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to eMerge
Interactive and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto. You may read and copy any
document we file at the SEC's public reference rooms located at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices in Chicago,
Illinois and New York, New York. Copies of these materials can be obtained from
the SEC at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov. Upon completion of
this offering, we will become subject to the information and periodic reporting
requirements of the Securities Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the SEC's public reference rooms, and the Web site of
the SEC referred to above.
78
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
eMerge INTERACTIVE, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, September 30, 1999 and pro forma September 30, 1999
(unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 (unaudited) and September 30, 1999..... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1999.................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998, and the nine months
ended September 30, 1998 (unaudited) and September 30,
1999...................................................... F-7
Notes to Consolidated Financial Statements.................. F-9
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998........... F-24
Unaudited Pro Forma Condensed Combined Statement of
Operations for the nine months ended September 30, 1999... F-25
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ F-26
LOST PELICAN, L.L.C. (FORMERLY CIN, LLC) D/B/A CATTLEMEN'S
INFORMATION NETWORK
Independent Auditors' Report................................ F-28
Balance Sheets as of December 31, 1997 and 1998 and February
23, 1999.................................................. F-29
Statements of Operations for the years ended December 31,
1997 and 1998, the nine months ended September 30, 1998
(unaudited), and for the period January 1, 1999 through
February 23, 1999 (unaudited)............................. F-30
Statements of Members' Equity (Deficit) for the years ended
December 31, 1997 and 1998 and for the period January 1,
1999 through February 23, 1999 (unaudited)................ F-31
Statements of Cash Flows for the years ended December 31,
1997 and 1997, the nine months ended September 30, 1998
(unaudited), and for the period January 1, 1999 through
February 23, 1999 (unaudited)............................. F-32
Notes to Financial Statements............................... F-33
QDD INVESTMENT COMPANY, L.L.C. D/B/A PROFESSIONAL CATTLE
CONSULTANTS, L.L.C.
Independent Auditors' Report................................ F-36
Balance Sheets as of December 31, 1998 and May 19, 1999
(unaudited)............................................... F-37
Statements of Operations for the year ended December 31,
1998, the nine months ended September 30, 1998 (unaudited)
and for the period January 1, 1999 through May 19, 1999
(unaudited)............................................... F-38
Statements of Members' Equity for the year ended December
31, 1998 and for the period January 1, 1999 through May
19, 1999 (unaudited)...................................... F-39
Statements of Cash Flows for the year ended December 31,
1998, the nine months ended September 30, 1998 (unaudited)
and for the period January 1, 1999 through May 19, 1999
(unaudited)............................................... F-40
Notes to Financial Statements............................... F-41
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
eMerge Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of eMerge
Interactive, Inc. as of December 31, 1997 and 1998 and September 30, 1999 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998, and for the nine months ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of eMerge
Interactive, Inc. at December 31, 1997 and 1998 and September 30, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, and for the nine months ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
December 6, 1999
F-2
<PAGE> 82
eMERGE INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PROFORMA
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 1(B))
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 400 $ 268 $ 1,650,134 $ 1,650,134
Trade accounts receivable................................. -- 368,421 2,790,427 2,790,427
Inventories (note 3)...................................... 635,963 706,557 655,129 655,129
Cattle deposits........................................... -- -- 489,760 489,760
Prepaid expenses.......................................... 33,642 27,837 103,242 103,242
Net assets of discontinued operations (note 12)........... 1,066,804 2,285,341 390,336 390,336
----------- ------------ ------------ ------------
Total current assets................................ 1,736,809 3,388,424 6,079,028 6,079,028
Property and equipment, net (note 4)........................ 428,140 513,837 1,711,404 1,711,404
Capitalized offering costs.................................. -- -- 341,967 341,967
Investment in Turnkey Computer Systems, Inc. (note 5)....... -- -- 1,822,833 1,822,833
Intangibles, net (note 6)................................... -- 2,699,828 6,273,309 6,273,309
----------- ------------ ------------ ------------
Total assets........................................ $ 2,164,949 $ 6,602,089 $ 16,228,541 $ 16,228,541
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of capital lease obligation with
related party (note 10)................................. $ -- $ 79,852 $ 83,917 $ 83,917
Note payable (note 5) -- -- 500,000 500,000
Accounts payable.......................................... 725,369 423,946 1,633,132 1,633,132
Accrued liabilities: --
Salaries and benefits................................... 175,597 283,103 908,271 908,271
Other................................................... 98,704 319,989 1,435,987 1,435,987
Advanced payments from customers.......................... -- -- 619,270 619,270
Due to related parties (note 10).......................... 8,040,304 5,187,334 13,405,957 13,405,957
----------- ------------ ------------ ------------
Total current liabilities........................... 9,039,974 6,294,224 18,586,534 18,586,534
Capital lease obligation with related party, excluding
current installments (note 10)............................ -- 305,018 242,673 242,673
Note payable (note 5)....................................... -- -- 900,000 900,000
----------- ------------ ------------ ------------
Total liabilities................................... 9,039,974 6,599,242 19,729,207 19,729,207
----------- ------------ ------------ ------------
Commitments and contingencies (notes 6, 10 and 13)
Redeemable Class A common stock, issued and outstanding. No
shares issued and outstanding in 1997 and 1998, 62,500
shares issued and outstanding in 1999. No shares issued
and outstanding pro forma (note 5)........................ -- -- 406,000 --
----------- ------------ ------------ ------------
Stockholders' equity (deficit) (notes 7, 9 and 14):
Preferred stock, $.01 par value, authorized 15,000,000
shares:
Series A preferred stock, (aggregate involuntary
liquidation preference of $6,741,954 in 1997,
$7,386,314 in 1998 and $7,545,198 in 1999), designated
6,500,000 shares, issued and outstanding 6,443,606
shares in 1997, 1998 and 1999. No shares designated,
issued and outstanding pro forma...................... 64,436 64,436 64,436 --
Series B junior preferred stock, (aggregate involuntary
liquidation preference of $-0- in 1997, $4,801,315 in
1998 and $4,919,671 in 1999), designated 2,400,000
shares, issued and outstanding -0- shares in 1997,
2,400,000 shares in 1998 and 1999. No shares
designated, issued and outstanding pro forma.......... -- 24,000 24,000 --
Series C preferred stock, designated 1,300,000 shares,
issued and outstanding -0- shares in 1997 and 1998 and
1,100,000 shares in 1999. No shares designated, issued
and outstanding pro forma............................. -- -- 11,000 --
Series D preferred stock, designated 4,555,556 shares,
no shares issued and outstanding in 1997, 1998 and
1999. No shares designated, issued and outstanding pro
forma................................................. -- -- -- --
Common stock, $.008 par value, authorized 125,000,000
shares:
Class A common stock, designated 115,888,887 shares,
issued and outstanding 3,258,125 shares in 1997,
5,845,625 shares in 1998 and 6,957,694 shares in 1999
and 19,449,702 shares pro forma....................... 26,065 46,765 55,662 155,723
Class B common stock, designated 9,111,113 shares; no
shares issued and outstanding in 1997, 1998, 1999 or
pro forma............................................. -- -- -- --
Additional paid-in capital................................ 1,982,986 16,648,286 23,454,170 23,859,545
Accumulated deficit....................................... (8,948,512) (16,780,640) (27,452,825) (27,452,825)
Unearned compensation..................................... -- -- (63,109) (63,109)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit)................ (6,875,025) 2,847 (3,906,666) (3,500,666)
----------- ------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)......................................... $ 2,164,949 $ 6,602,089 $ 16,228,541 $ 16,228,541
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 83
eMERGE INTERACTIVE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ -- $ -- $ 1,792,471 $ 1,106,452 $ 18,338,645
Cost of revenue (including $0, $0,
$511,000, $388,000 and $255,000 to
related parties -- note 10).............. -- -- 2,623,447 1,628,757 18,282,330
----------- ----------- ----------- ----------- ------------
Gross profit (loss)................. -- -- (830,976) (522,305) 56,315
----------- ----------- ----------- ----------- ------------
Operating expenses:
Selling, general and administrative
(including $0, $219,000, $627,000,
$507,000, and $600,000 to related
parties -- note 10)................. -- 627,606 3,659,810 2,427,944 7,539,689
Research and development (including $0,
$51,000, $119,000, $95,000 and
$171,000 to related parties -- note
10)................................. -- 727,753 1,109,382 759,434 2,756,262
----------- ----------- ----------- ----------- ------------
Total operating expenses............ -- 1,355,359 4,769,192 3,187,378 10,295,951
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations........................ -- (1,355,359) (5,600,168) (3,709,683) (10,239,636)
Related party interest expense (note
10).................................... -- (141,167) (331,594) (231,000) (458,624)
Other income............................. -- -- -- -- 15,655
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations before income taxes.... -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Income tax expense (benefit) (note 8).... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Profit (loss) from continuing
operations........................ -- (1,496,526) (5,931,762) (3,940,683) (10,682,605)
Discontinued operations (note 12):
Income (loss) from operations of
discontinued transportation segment
(including $468,000, $814,000,
$370,000, $287,000, and $171,000 to
related parties -- note 10)......... (1,719,492) (3,987,097) (1,808,951) (1,721,060) 10,420
Loss on disposal of transportation
segment............................. -- -- (91,415) -- --
----------- ----------- ----------- ----------- ------------
Net profit (loss)................... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
=========== =========== =========== =========== ============
Profit (loss) from continuing operations
per common share -- basic and
diluted................................ $ -- $ (3.91) $ (1.36) $ (0.67) $ (1.59)
=========== =========== =========== =========== ============
Net profit (loss) per common
share -- basic and diluted............. $ (9.24) $ (14.34) $ (1.80) $ (0.97) $ (1.59)
=========== =========== =========== =========== ============
Weighted average number of common shares
outstanding -- basic and diluted....... 186,096 382,273 4,356,926 5,845,625 6,709,854
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 84
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C SERIES D
------------------- ------------------- ------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... -- $ -- -- $ -- -- $ -- -- $ --
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share............... -- -- -- -- -- -- -- --
Issuance of common stock for
cash at $.008 per share...... -- -- -- -- -- -- -- --
Exercise of stock options for
cash at $.008 per share...... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1996......................... -- -- -- -- -- -- -- --
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share.............. -- -- -- -- -- -- -- --
Sale of Series A preferred
stock for cash at $1.00 per
share (note 7)............... 6,443,606 64,436 -- -- -- -- -- --
Transfer of technology by XL
Vision, Inc. (note 10)....... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1997......................... 6,443,606 64,436 -- -- -- -- -- --
Contribution of debt to equity
by XL Vision, Inc. (note
10).......................... -- -- -- -- -- -- -- --
Issuance of Series B preferred
stock in exchange for
contribution of debt to
equity by XL Vision, Inc. at
$2.00 per share (notes 7 and
10).......................... -- -- 2,400,000 24,000 -- -- -- --
Issuance of common stock in
connection with Nutri-Charge
transaction at $0.80 per
share (note 6)............... -- -- -- -- -- -- -- --
Contribution of put rights by
XL Vision, Inc. (note 6)..... -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at December 31,
1998......................... 6,443,606 64,436 2,400,000 24,000 -- -- -- --
Exercise of stock options for
cash at $0.80 per share...... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with CIN
transaction at $0.96 per
share (note 6)............... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with
Cyberstockyard transaction at
$1.80 per share (note 6)..... -- -- -- -- -- -- -- --
Issuance of Series C preferred
stock at $5.00 per share
(note 7)..................... -- -- -- -- 1,100,000 11,000 -- --
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
------------------- --------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- ------ ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 1,250 $ 10 -- $ -- $ 3,816 $(1,745,397) $ -- $(1,741,571)
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share............... 248,750 1,990 -- -- -- -- -- 1,990
Issuance of common stock for
cash at $.008 per share...... 175,000 1,400 -- -- -- -- -- 1,400
Exercise of stock options for
cash at $.008 per share...... 25,000 200 -- -- -- -- -- 200
Net profit (loss)............. -- -- -- -- -- (1,719,492) -- (1,719,492)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1996......................... 450,000 3,600 -- -- 3,816 (3,464,889) -- (3,457,473)
Issuance of common stock to XL
Vision, Inc., for cash at
$.008 per share.............. 2,808,125 22,465 -- -- -- -- -- 22,465
Sale of Series A preferred
stock for cash at $1.00 per
share (note 7)............... -- -- -- -- 6,379,170 -- -- 6,443,606
Transfer of technology by XL
Vision, Inc. (note 10)....... -- -- -- -- (4,400,000) -- -- (4,400,000)
Net profit (loss)............. -- -- -- -- -- (5,483,623) -- (5,483,623)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1997......................... 3,258,125 26,065 -- -- 1,982,986 (8,948,512) -- (6,875,025)
Contribution of debt to equity
by XL Vision, Inc. (note
10).......................... -- -- -- -- 7,500,000 -- -- 7,500,000
Issuance of Series B preferred
stock in exchange for
contribution of debt to
equity by XL Vision, Inc. at
$2.00 per share (notes 7 and
10).......................... -- -- -- -- 4,776,000 -- -- 4,800,000
Issuance of common stock in
connection with Nutri-Charge
transaction at $0.80 per
share (note 6)............... 2,587,500 20,700 -- -- 2,049,300 -- -- 2,070,000
Contribution of put rights by
XL Vision, Inc. (note 6)..... -- -- -- -- 340,000 -- -- 340,000
Net profit (loss)............. -- -- -- -- -- (7,832,128) -- (7,832,128)
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at December 31,
1998......................... 5,845,625 46,765 -- -- 16,648,286 (16,780,640) -- 2,847
Exercise of stock options for
cash at $0.80 per share...... 112,069 897 -- -- 88,758 -- -- 89,655
Issuance of common stock in
connection with CIN
transaction at $0.96 per
share (note 6)............... 750,000 6,000 -- -- 714,000 -- -- 720,000
Issuance of common stock in
connection with
Cyberstockyard transaction at
$1.80 per share (note 6)..... 250,000 2,000 -- -- 448,000 -- -- 450,000
Issuance of Series C preferred
stock at $5.00 per share
(note 7)..................... -- -- -- -- 5,489,000 -- -- 5,500,000
</TABLE>
F-5
<PAGE> 85
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C SERIES D
------------------- ------------------- ------------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accretion to redemption value
of Class A common stock issued
in connection with the Turnkey
Computer Systems, Inc. (note
5)............................ -- -- -- -- -- -- -- --
Net profit (loss)............. -- -- -- -- -- -- -- --
Unearned compensation
(note 9)..................... -- -- -- -- -- -- -- --
Amortization of unearned
compensation (note 9)........ -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------ -------
Balances at
September 30, 1999........... 6,443,606 $64,436 2,400,000 $24,000 1,100,000 $11,000 -- $ --
========= ======= ========= ======= ========= ======= ====== =======
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL
------------------- --------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
--------- ------- ------ ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accretion to redemption value
of Class A common stock issued
in connection with the Turnkey
Computer Systems, Inc. (note
5)............................ -- -- -- -- (6,000) -- -- (6,000)
Net profit (loss)............. -- -- -- -- -- (10,672,185) -- (10,672,185)
Unearned compensation
(note 9)..................... -- -- -- -- 72,126 -- (72,126) --
Amortization of unearned
compensation (note 9)........ -- -- -- -- -- -- 9,017 9,017
--------- ------- ---- ---- ----------- ------------ -------- -----------
Balances at
September 30, 1999........... 6,957,694 $55,662 -- $ -- $23,454,170 $(27,452,825) $(63,109) $(3,906,666)
========= ======= ==== ==== =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 86
eMERGE INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net profit (loss).................... $(1,719,492) $(5,483,623) $(7,832,128) $(5,661,743) $(10,672,185)
Adjustments to reconcile net profit
(loss) to net cash used in
operating activities:
Depreciation and amortization.... 1,503 122,486 438,576 230,964 1,176,431
Amortization of unearned
compensation................... -- -- -- -- 9,017
Changes in operating assets and
liabilities:
Trade accounts receivable,
net......................... -- -- (368,421) (138,705) (2,405,456)
Inventories.................... -- (635,963) (70,594) (30,741) 51,428
Cattle deposits................ -- -- -- -- (489,760)
Prepaid expenses and other
assets...................... (1,304) (32,338) 5,805 (77,079) (75,405)
Net assets of discontinued
operations.................. (96,209) (853,501) (1,140,425) (1,477,150) --
Accounts payable............... 5,675 719,694 (301,423) (32,037) 1,038,877
Accrued liabilities............ 75,542 198,759 328,791 151,016 214,739
Advanced payments from
customers................... -- -- -- -- 619,270
----------- ----------- ----------- ----------- ------------
Net cash used by operating
activities.................. (1,734,285) (5,964,486) (8,939,819) (7,035,475) (10,533,044)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Business combinations, net of cash
acquired of $737................. -- -- -- -- (1,799,263)
Purchases of property and
equipment........................ (56,861) (506,540) (460,290) (269,831) (1,228,432)
Purchase of intangibles............ (100,000) -- (431,923) (431,923) --
Proceeds from discontinued
operations....................... -- -- -- -- 1,825,407
Investment in Turnkey Computer
Systems, Inc..................... -- -- -- -- (22,833)
----------- ----------- ----------- ----------- ------------
Net cash used by investing
activities.................. (156,861) (506,540) (892,213) (701,754) (1,225,121)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Net borrowings from related
parties.......................... 1,889,101 3,810 9,447,030 7,737,227 8,218,623
Proceeds from capital lease
financing with related party..... -- -- 440,832 -- --
Payments on capital lease
obligations...................... -- -- (55,962) -- (58,280)
Offering costs..................... -- -- -- -- (341,967)
Sale of preferred stock............ -- 6,443,606 -- -- 5,500,000
Sale of common stock............... 3,590 22,465 -- -- 89,655
----------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities.................. 1,892,691 6,469,881 9,831,900 7,737,227 13,408,031
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in
cash........................ 1,545 (1,145) (132) (2) 1,649,866
Cash -- beginning of period.......... -- 1,545 400 400 268
----------- ----------- ----------- ----------- ------------
Cash -- end of period................ $ 1,545 $ 400 $ 268 $ 398 $ 1,650,134
=========== =========== =========== =========== ============
</TABLE>
F-7
<PAGE> 87
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest............. $ -- $ -- $ 23,594 $ 13,517 $ 20,628
Non-cash investing and financing
activities:
Transfer of technology by XL
Vision, Inc. (note 10)......... -- 4,400,000 -- -- --
Contribution of debt to equity by
XL Vision, Inc. (note 10)...... -- -- 7,500,000 -- --
Issuance of preferred stock in
exchange for contribution of
debt to equity by XL Vision,
Inc. (note 10)................. -- -- 4,800,000 -- --
Non-cash issuance of Class A
common stock in connection with
Nutri-Charge transaction (note
6)............................. -- -- 2,070,000 2,070,000 --
Contribution of put rights by XL
Vision, Inc. (note 6).......... -- -- 340,000 340,000 --
Issuance of Class A common stock
in connection with CIN
transaction (note 6)........... -- -- -- -- 720,000
Issuance of Class A common stock
with Cyberstockyard transaction
(note 6)....................... -- -- -- -- 450,000
Issuance of redeemable Class A
common stock with Turnkey
Computer Systems, Inc.
transaction (note 5)........... -- -- -- -- 400,000
Issuance of note payable to
Turnkey Computer Systems, Inc.
(note 5)....................... -- -- -- -- 1,400,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 88
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO SEPTEMBER 30, 1998 OR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
(1) ORGANIZATION
(a) OVERVIEW
eMerge Interactive, Inc. (the "Company") is a Delaware corporation that was
incorporated on September 12, 1994 as Enhanced Vision Systems, a wholly owned
subsidiary of XL Vision, Inc. ("XL Vision"). The Company's name was changed to
eMerge Vision Systems, Inc. on July 16, 1997 and to eMerge Interactive, Inc. on
June 11, 1999.
The Company was incorporated to develop and commercialize infrared
technology focused on the transportation segment. In 1997, the Company entered a
new business segment, animal sciences, by developing an infrared camera system
for use primarily by veterinarians. The Company further expanded its operations
in 1998 by licensing NutriCharge and infrared technology (see note 5) for
commercialization. In December 1998, the Company's Board of Directors decided to
dispose of the transportation segment. The Company's AMIRIS thermal imaging
system, which was the sole product sold by the transportation segment, was sold
on January 15, 1999.
(b) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of eMerge
Interactive, Inc. and its wholly-owned subsidiaries, STS Agriventures, Ltd.
("STS"), a Canadian corporation and Cyberstockyard, Inc. ("Cyberstockyard").
All significant intercompany balances and transactions have been eliminated
upon consolidation.
The pro forma balance sheet as of September 30, 1999 assumes the conversion
of all preferred stock to Class A common stock upon the Company's planned
initial public offering ("IPO").
(c) MANAGEMENT'S PLANS
As of September 30, 1999, the Company had a working capital deficiency of
$12,507,506 and stockholders' deficit of $3,906,666. Management expects
additional working capital requirements as the Company continues its marketing
and development efforts for its products. Subsequent to September 30, 1999, the
Company obtained equity financing (see note 14). The Company also plans an IPO.
Although management believes that its IPO will be successful, there can be no
assurances that it will be completed.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
The Company recognizes revenue in accordance with the terms of the sale or
contract, generally as products are shipped or services are provided. The
Company bears both the inventory and credit risk with respect to sales of all of
its products. In cattle sales transactions, the Company purchases cattle from
the seller, takes title at shipment and records the cattle as inventory until
delivered to and accepted by the buyer, typically a 24 to 48 hour period. In
both cattle auction and resale transactions, the Company acts as a principal in
purchasing cattle from suppliers and sales to customers so that the Company
recognizes revenue equal to the amount paid by customers for the cattle.
F-9
<PAGE> 89
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) INVENTORIES
Inventories are stated at standard cost which approximates the lower of
first-in, first-out cost or market.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Amortization of equipment under capital lease is computed
over the shorter of the lease term or the estimated useful life of the related
assets.
(d) INTANGIBLES
Intangibles are stated at amortized cost. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of". This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of their carrying
amount or fair value less costs to sell.
(f) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB Opinion No. 25") and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
F-10
<PAGE> 90
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) USE OF ESTIMATES
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
(i) NET PROFIT (LOSS) PER SHARE
Net profit (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share," by dividing the net profit (loss) allocable to common
stockholders (net profit (loss) less accretion related to redeemable Class A
common stock) by the weighted average number of shares of common stock
outstanding less the 62,500 shares of redeemable Class A commom stock. The
Company's stock options (338,125 at December 31, 1997, 1,632,500 at December 31,
1998 and 2,488,494 at September 30, 1999) and convertible preferred stock
(6,443,606 at December 31, 1997, 8,843,606 at December 31, 1998 and 9,943,606 at
September 30, 1999), have not been used in the calculation of diluted net profit
(loss) per share because to do so would be anti-dilutive. As such, the numerator
and the denominator used in computing both basic and diluted net profit (loss)
per share allocable to common stockholders are equal.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 and SEC staff policy, all common stock and common stock
equivalents issued for nominal consideration during the periods presented herein
and through the filing of the registration statement for the IPO are to be
reflected in a manner similar to a stock split or stock dividend for which
retroactive treatment is required in the calculation of net profit (loss) per
share; the Company did not have any such issuances.
(j) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, trade accounts receivable, accounts payable,
accrued liabilities and amounts due to related parties reflected in the
consolidated financial statements approximates fair value due to the short-term
maturity of these instruments.
(k) INTERIM FINANCIAL INFORMATION
The consolidated financial statements for the period ended September 30,
1998 are unaudited but reflect only normal and recurring adjustments which are,
in the opinion of management, necessary for the fair presentation of financial
position and results of operations. Operating results for the nine months ended
September 30, 1999 and 1998 are not necessarily indicative of the results that
may be expected for the full year.
F-11
<PAGE> 91
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Raw materials......................... $346,335 $424,130 $594,337
Work-in-process....................... 289,628 282,427 60,792
-------- -------- --------
$635,963 $706,557 $655,129
======== ======== ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30, ESTIMATED
1997 1998 1999 USEFUL LIVES
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Engineering and manufacturing
equipment....................... $258,082 $366,150 $ 634,625 5 years
Office and computer equipment..... 179,315 259,462 1,532,298 3 years
Furniture and fixtures............ 67,282 104,706 112,122 7 years
Leasehold improvements............ 46,865 46,865 80,430 7 years
Automobiles....................... -- -- 54,717 5 years
-------- -------- ----------
551,544 777,183 2,414,192
Less accumulated depreciation and
amortization.................... 123,404 263,346 702,788
-------- -------- ----------
Property and equipment, net....... $428,140 $513,837 $1,711,404
======== ======== ==========
</TABLE>
Assets under capital lease amounted to $-0-, $440,832 and $440,832 as of
December 31, 1997, 1998 and September 30, 1999, respectively. Accumulated
amortization for assets under capital lease totaled approximately $-0-, $152,300
and $217,500 as of December 31, 1997, 1998 and September 30, 1999, respectively.
(5) INVESTMENT IN TURNKEY COMPUTER SYSTEMS, INC.
On August 16, 1999, the Company acquired 19% of the common stock of Turnkey
Computer Systems, Inc. ("Turnkey") for $1,822,833. The purchase price consisted
of 62,500 shares of the Company's redeemable Class A common stock valued at
$400,000, $1,400,000 in cash and $22,833 of transaction costs. The $1,400,000 is
payable upon the earlier of the completion of the Company's IPO or $500,000 at
December 31, 1999, $500,000 at December 31, 2000 and $400,000 at December 31,
2001. This investment is carried on the cost method since the Company does not
have significant influence over Turnkey. The common stock purchase agreement
with Turnkey contains a put right which allows Turnkey to have a one time right
to put to the Company its 50,000 redeemable Class A common shares with a fixed
purchase price of $500,000. The put right can only be exercised upon a change in
control or after December 31, 2001, if the Company has not completed an IPO.
This redeemable Class A common stock is classified outside of stockholders'
equity (deficit). The difference between the carrying amount and the redemption
amount of $500,000 is
F-12
<PAGE> 92
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
being accreted to redeemable Class A common stock as a charge to additional
paid-in capital from issuance to December 31, 2001 using the effective interest
method.
(6) INTANGIBLES
Intangibles consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30, ESTIMATED
1997 1998 1999 USEFUL LIFE
---- ---------- ------------- -----------
<S> <C> <C> <C> <C>
NutriCharge license.................. $ -- $2,273,538 $2,273,538 10 years
Infrared technology license.......... -- 568,385 568,385 5 years
Goodwill -- CIN...................... -- -- 2,076,368 5 years
Non-compete agreement -- CIN......... -- -- 100,000 5 years
Goodwill -- Cyberstockyard........... -- -- 427,274 3 years
Non-compete agreement --
Cyberstockyard..................... -- -- 100,000 3 years
Goodwill -- PCC --................... -- -- 1,487,791 5 years
Non-compete agreement -- PCC......... 100,000 4 years
---- ---------- ----------
-- 2,841,923 7,133,356
Less accumulated amortization........ -- 142,095 860,047
---- ---------- ----------
Intangibles, net..................... $ -- $2,699,828 $6,273,309
==== ========== ==========
</TABLE>
On July 29, 1998, the Company acquired licenses for NutriCharge and
infrared technology. The purchase price of $2,841,923 (consisting of $300,000 in
cash, 2,070,000 of the Company's Class A common shares valued at $1 per share,
$131,923 in acquisition costs and the estimated fair value of put rights granted
by XL Vision) was allocated to the acquired NutriCharge and infrared technology
licenses based on estimated fair values determined by estimated cash flows from
the underlying licensed product. In connection with the transaction, XL Vision
granted a put right that allows the sellers to require XL Vision to purchase up
to 1,250,000 shares of the Company's Class A common stock at $3.00 per share.
The fair value of the put was estimated to be $340,000 and was credited to
additional paid-in capital. The put right may only be exercised thirty days
prior to or after the fourth anniversary of the agreement. The ultimate amount
payable under the put agreement is reduced by the amount, if any, of
indemnification obligations related to the transaction. The estimated fair value
of the put was determined with the assistance of an independent, third party
valuation expert by calculating the net present value (at 10% interest) of the
product of the $2,000,000 intrinsic value of the put adjusted for the 25%
probability that the put would be exercised.
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of CIN, LLC d/b/a/ Cattlemen's Information
Network ("CIN") for $2,296,610. The purchase price for the assets consisted of
750,000 shares of the Company's Class A common stock valued at $720,000, the
assumption of $812,021 of liabilities, a cash payment due in October 1999 of
$357,816, and an agreement to pay the first $350,000 from Internet sales of
third party products over the Company's Web site and transaction costs of
$56,773. CIN is in the business of selling access to its cattle feedlot
performance measurements database. Immediately after the closing, CIN changed
its name to Lost Pelican, L.L.C.
F-13
<PAGE> 93
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 29, 1999, the Company acquired 100% of the stock of
Cyberstockyard, Inc. for $542,265. The purchase price consisted of 250,000
shares of the Company's Class A common stock valued at $450,000, the assumption
of $89,972 of liabilities and transaction costs of $2,293. Cyberstockyard, Inc.
is in the business of selling cattle through its proprietary auction software
over the Internet.
On May 19, 1999, the Company acquired substantially all of the tangible and
intangible assets of PCC, LLC d/b/a Professional Cattle Consultants, L.L.C.
("PCC") for $1,827,861. The purchase price consists of a cash payment of
$1,800,000 and an assumption of $2,861 of liabilities and transaction costs of
$25,000. PCC is in the business of providing comparative analysis and market
information for the feedlot industry. Immediately after the closing, PCC changed
its name to QDD Investment Company, L.L.C.
Each acquisition was accounted for as a purchase and the results of
operations of the acquired companies is included in the statement of operations
since the respective date of acquisition.
The aggregate purchase price of the above acquisitions was approximately
$4,690,600, which included related acquisition costs of approximately $84,000
and was allocated as follows:
<TABLE>
<S> <C>
Goodwill....................................... $3,991,433
Non-compete agreements......................... 300,000
Equipment...................................... 358,016
Current assets, including cash acquired of
$737......................................... 17,287
----------
$4,666,736
==========
</TABLE>
Unaudited pro forma information for the Company as if the acquisitions
above had been consummated as of January 1, 1998 and 1999 follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Revenue............................... $ 1,687,077 $ 18,560,565
=========== ============
Net profit (loss)..................... $(4,987,862) $(11,097,329)
=========== ============
Net profit (loss) per common share.... $ (0.97) $ (1.61)
=========== ============
</TABLE>
(7) EQUITY
COMMON STOCK
As of September 30, 1999, the Company had authorized the issuance of
125,000,000 shares of common stock.
CLASS A -- In 1999, the Company designated 115,888,887 shares as Class A
common stock.
CLASS B -- In 1999, the Company designated 9,111,113 shares as Class B
common stock. Holders of Class B common stock are entitled to two and one-half
votes for each share. The shares of Class A and Class B are identical in all
other respects.
F-14
<PAGE> 94
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PREFERRED STOCK
As of September 30, 1999, the Company had authorized the issuance of
15,000,000 shares of preferred stock and had designated 6,500,000 as Series A
shares, and 2,400,000 as Series B shares, 1,300,000 as Series C shares and
4,555,556 as Series D shares. Each share of preferred stock is convertible into
1.25 shares of Class A common stock at the option of the holder or upon the vote
of holders of two-thirds of the respective preferred stock class outstanding
except for Series D shares which is convertible at the offering price into 1.25
shares Class B common stock. Preferred stock is automatically converted into
common stock upon a qualified IPO of at least $10 million with a Company
valuation of at least $30 million or upon a public rights offering of the
Company to shareholders of Safeguard Scientifics, Inc.
SERIES A -- The Series A shares are entitled to a liquidation preference
before any distribution to common stockholders equal to the greater of (a) $1.00
per share plus an additional $.10 per year (pro rated for partial years) from
July 16, 1997 or (b) the amount which would be distributed if all of the
preferred stock of the Company were converted to Class A common stock prior to
liquidation. The holders of Series A preferred stock are entitled to vote as a
separate class to elect two directors to the Board of Directors of the Company.
SERIES B -- Series B shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $2.00 per
share plus an additional $.20 for each year (pro rated for partial years) from
December 31, 1998 or until the date of distribution of available assets or (b)
the amount which would be distributed if all of the preferred stock of the
Company were converted to Class A common stock prior to liquidation. Series B
shares are junior to Series A, C and D shares.
SERIES C -- Series C shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $5.00 per
share plus an additional $.50 for each year (pro rated for partial years) from
April 15, 1999 or until the date of distribution of available assets or (b) the
amount which would be distributed if all of the preferred stock of the Company
were converted to Class A common stock prior to liquidation. Series C shares are
on parity with Series A and D shares except as to voting rights.
SERIES D -- Series D shares are entitled to a liquidation preference before
any distribution to common stockholders equal to the greater of (a) $9.00 per
share plus an additional $1.00 for each year (pro rated for partial years) from
October 27, 1999 or until the date of distribution of available assets or (b)
the amount which would be distributed if all the preferred stock of the Company
were converted to Class B common stock prior to liquidation. Series D shares are
on parity with Series A and C shares except as to voting rights. Series D
stockholders are entitled to two and one-half votes per share.
F-15
<PAGE> 95
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards................ $3,237,000 $5,967,000 $ 8,057,000
Amortization of acquired
technology from XL
Vision (note 10)........ 1,829,000 1,704,000 1,704,000
Research and
experimentation tax
credits................. 294,000 448,000 718,000
Other...................... 125,000 596,000 1,524,000
---------- ---------- -----------
5,485,000 8,715,000 12,003,000
Less valuation allowance... 5,370,000 8,715,000 12,003,000
---------- ---------- -----------
Net deferred tax
assets................ 115,000 -- --
Deferred tax liability:
Imputed interest........... (115,000) -- --
---------- ---------- -----------
Net deferred tax asset
(liability)........... $ -- $ -- $ --
========== ========== ===========
</TABLE>
The Company has available at September 30, 1999 for federal income tax
purposes, unused net operating loss carryforwards of approximately $21,000,000
which may be applied against future taxable income and expires in years
beginning in 2010. The Company also has approximately $718,000 in research and
experimentation credits carryforwards. The research and experimentation credits,
which begin to expire in 2010, can also be used to offset future regular tax
liabilities. A valuation allowance for deferred tax assets is provided when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The difference between the "expected" tax benefit (computed by applying the
federal corporate income tax rate of 34% to the loss before income taxes) and
the actual tax benefit is primarily due to the effect of the valuation
allowance.
(9) STOCK PLAN
In January 1996, the Company adopted an equity compensation plan (the "1996
Plan") pursuant to which the Company's Board of Directors may grant shares of
common stock or options to acquire common stock to certain directors, advisors
and employees. The Plan authorizes grants of shares or options to purchase up to
2,168,750 shares of authorized but unissued common stock. Stock options granted
have a maximum term of ten years and have vesting schedules which are at the
discretion of the Compensation Committee of the Board of Directors and
determined on the effective date of the grant.
F-16
<PAGE> 96
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1999, the Company's stockholders approved the 1999 Equity
Compensation Plan (the "1999 Plan"). Under the 1999 Plan, an additional
1,250,000 shares of authorized, unissued shares of common stock of the Company
are reserved for issuance to employees, advisors and for non-employee members of
the Board of Directors. Option terms under the 1999 Plan may not exceed 10
years.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE WEIGHTED REMAINING
PRICES PER AVERAGE CONTRACTUAL
SHARES SHARE EXERCISE PRICE LIFE (IN YEARS)
--------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance outstanding, December 31,
1996.............................. 3,125 $ 0.80 $ 0.80 4.85
====
Granted........................... 335,000 0.80 0.80
--------- ---------- ------
Balance outstanding, December 31,
1997.............................. 338,125 0.80 0.80 9.64
====
Granted........................... 1,692,500 0.80-1.60 0.84
Canceled.......................... (398,125) 0.80 0.80
--------- ---------- ------
Balance outstanding, December 31,
1998.............................. 1,632,500 0.80-1.60 .84 9.48
====
Granted........................... 1,010,250 1.60-6.40 2.58
Exercised......................... (112,069) 0.80 0.80
Canceled.......................... (42,188) 0.80-1.60 1.04
--------- ---------- ------
Balance outstanding, September 30,
1999.............................. 2,488,494 $0.80-6.40 $ 1.54 9.08
========= ========== ====== ====
</TABLE>
At December 31, 1997, 1998 and September 30, 1999, there were 76,719,
414,375 and 716,369 shares exercisable, respectively at weighted average
exercise prices of $0.80, $0.82 and $1.06, respectively.
At December 31, 1997 and 1998 and September 30, 1999, 99,375, 511,250 and
747,250 shares were available for grant, respectively.
The per share weighted-average fair value of stock options granted was $0
in 1996, $0 in 1997 and $0.08 in 1998 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Volatility............................................ 0% 0% 0%
Dividend paid......................................... 0% 0% 0%
Risk-free interest rate............................... 6.35% 6.11% 4.73%
Expected life in years................................ 5.77 6.75 5.57
</TABLE>
No volatility was assumed due to the use of the Minimum Value Method of
computation for options issued by the Company as a private entity as prescribed
by SFAS No. 123.
F-17
<PAGE> 97
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All stock options granted, except as noted in the paragraph below, have
been granted to directors or employees with an exercise price equal to the fair
value of the common stock at the date of grant. The Company applies APB Opinion
No. 25 for issuances to directors and employees in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements through December 31, 1998.
On March 19, 1999, the Company granted 360,625 stock options with an
exercise price of $1.60 and a fair value of $1.80. The Company recorded $72,126
of unearned compensation at the date of grant and is amortizing the unearned
compensation over the vesting period. Compensation expense amounted to $9,017
for the nine months ended September 30, 1999.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss as reported................... $(1,719,492) $(5,483,623) $(7,832,128)
=========== =========== ===========
Pro forma net loss..................... $(1,719,492) $(5,483,623) $(7,964,078)
=========== =========== ===========
Net loss per share, as reported:
Basic and diluted.................... $ (9.24) $ (14.34) $ (1.80)
=========== =========== ===========
Pro forma net loss per share:
Basic and diluted.................... $ (9.24) $ (14.34) $ (1.83)
=========== =========== ===========
</TABLE>
(10) RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Due to related parties consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
XL Vision............................... $8,029,995 $5,158,436 $ 6,057,978
Safeguard Scientifics, Inc. and
Safeguard Delaware, Inc................. 10,309 28,898 7,347,979
---------- ---------- -----------
$8,040,304 $5,187,334 $13,405,957
========== ========== ===========
</TABLE>
F-18
<PAGE> 98
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMOUNTS DUE TO XL VISION
<TABLE>
<S> <C>
Amounts due to XL Vision consist of:
Balance as of December 31, 1996............................. $ 3,636,494
Allocation of costs and funding of working capital to
the Company........................................... 6,318,405
Technology transfer fee................................ 4,400,000
Interest charges on technology transferred............. 141,167
Proceeds from Series A Preferred Stock................. (6,443,606)
Issuance of Class A common stock....................... (22,465)
-----------
Balance as of December 31, 1997........................... 8,029,995
Allocation of costs and funding of working capital to
the Company........................................... 9,120,441
Interest charges on technology transferred............. 308,000
Contribution of debt to equity......................... (7,500,000)
Contribution of debt to equity in exchange for Series B
Preferred Stock....................................... (4,800,000)
-----------
Balance as of December 31, 1998........................... 5,158,436
Allocation of costs and funding of working capital to
the Company........................................... 668,542
Interest charges on technology transferred............. 231,000
-----------
Balance as of September 30, 1999.......................... $ 6,057,978
===========
</TABLE>
The average outstanding balance due to XL Vision was approximately
$2,690,900 in 1996, $6,239,600 in 1997, $12,782,400 in 1998 and $7,342,435 in
1999.
On January 1, 1999, the Company signed a revolving promissory note with XL
Vision for up to $3,000,000. The revolving promissory note bears interest at the
prime rate plus 1% and is due in full when the Company completes an IPO or sells
all of its assets or stock.
NOTE PAYABLE TO SAFEGUARD DELAWARE, INC.
On July 21, 1999, the Company obtained a $3,000,000 revolving note payable
from Safeguard Delaware, Inc ("Safeguard"). The revolving note payable, as
amended, bears interest payable monthly at the prime rate plus 1% and is due
December 31, 1999.
In August, September and October 1999, the Company signed demand notes with
interest payable monthly at the prime rate plus 1% with Safeguard for
$2,500,000, $2,000,000 and $2,500,000, respectively. These notes were cancelled
in October 1999, in exchange for a $7,050,000 note due in full on October 25,
2000, the repayment of a promissory note issued concurrently with the sale of
Series D preferred stock or an IPO, whichever is earlier.
TECHNOLOGY FEE
On July 15, 1997, the Company entered into an agreement with XL Vision for
the transfer of certain technology that is used by the Company in the sale of
its products for a $4,400,000 note payable. The transfer was accounted for as a
distribution to XL Vision as it represented amounts paid for an asset to an
entity under common control in excess of the cost of such asset. The note
payable bears interest at 7% per annum. Interest expense was $141,167 in 1997,
$308,000 in 1998 and $231,000 in 1999.
F-19
<PAGE> 99
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIRECT CHARGE FEE
Prior to April 1, 1997 personnel, and other services were provided by XL
Vision and the costs were allocated to the Company. The Company believes that
the allocation method used by XL Vision was reasonable. Effective April 1, 1997,
the Company entered into a direct charge fee agreement with XL Vision which
allows for cost-based charges based upon actual hours incurred. Costs allocated
by or service fees charged by XL Vision were approximately $468,000 in 1996,
$720,000 in 1997, $460,000 in 1998 and $390,000 in 1999. A portion of the fees
in 1998 and 1999 and all of the costs and fees in 1996 and 1997 were allocated
to the discontinued transportation segment.
ADMINISTRATIVE SERVICES FEE
Effective December 15, 1997, the Company entered into an agreement which
requires accrual of an administrative services fee based upon a percentage of
gross revenues. The fee for administrative support services, including
management consultation, investor relations, legal services and tax planning, is
payable monthly to XL Vision and Safeguard Scientifics, Inc., the largest
shareholder of XL Vision, based upon an aggregate of 1.5% of gross revenues with
such service fees to be not more than $300,000 annually. Effective August 17,
1999, the agreement was amended such that the administrative services fee is
applied to net contribution margin on cattle sales and gross revenue for all
other sales. The fee is accrued monthly but is only payable in months during
which the Company has achieved positive cash flow from operations. The agreement
extends through December 31, 2002 and continues thereafter unless terminated by
any party. Administrative service fees were approximately $10,300 in 1997,
$37,200 in 1998 and $43,500 in 1999.
LEASES
The Company leases equipment under a capital lease, effective April 20,
1998, with an affiliated entity, XL Realty, Inc. Future minimum lease payments,
including imputed interest at 7.53%, are $79,852 in 1999, $85,765 in 2000,
$92,684 in 2001, $100,154 in 2002 and $26,415 in 2003. Interest expense was
$23,594 in 1998 and $20,627 in 1999.
The Company rents its facility from XL Vision. Rent expense varies based on
space occupied by the Company and includes charges for base rent, repairs and
maintenance, telephone and networking expenses, real estate taxes and insurance.
Rent expense is approximately $68,000 in 1996, $354,000 in 1997, $1,129,000 in
1998, and $528,000 in 1999.
LICENSE AGREEMENT WITH XL VISION, INC.
In February 1999, the Company signed a license agreement with XL Vision,
granting XL Vision a license to use Company software for the limited purpose of
evaluating whether the software could provide the basis for a new company that
would operate in the agricultural industry. The license agreement terminated on
November 30, 1999. If XL Vision forms a new company, the Company will negotiate
a long-term license agreement. In addition, XL Vision is obligated to give the
Company at least 25% of the new company. The Company is obligated to transfer
all amounts up to 25% of the company to Lost Pelican, LLC.
(11) SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, which requires the reporting of
segment information using the "management approach" versus the "industry
approach" previously
F-20
<PAGE> 100
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required. The management approach requires the Company to report certain
financial information related to continuing operations that is provided to the
Company's chief operating decision-maker. The Company's chief operating
decision-maker receives revenue and contribution margin (revenue less direct
costs and excluding overhead) by source, and all other statement of operations
data and balance sheet on a consolidated basis. The Company's reportable
segments consist of cattle sales and animal sciences products and services.
While the Company operates entirely in the animal science marketplace, the
contribution margin associated with cattle sales and the related prospects for
this portion of the Company's business differ from the rest of the Company's
product offerings.
The following summarizes revenue, cost of revenue and gross profit and
contribution margin information related to the Company's two operating segments:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
DECEMBER 31, 1998 1998 1999
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Cattle.................... $ -- $ -- $17,022,862
Animal sciences......... 1,792,471 1,106,452 1,315,783
---------- ---------- -----------
Total............ $1,792,471 $1,106,452 $18,338,645
========== ========== ===========
Cost of revenue:
Direct costs:
Cattle............. $ -- $ -- $16,860,452
Animal sciences.... 900,824 603,410 492,115
---------- ---------- -----------
Total direct
costs.......... 900,824 603,410 17,352,567
Unallocated overhead.... 1,722,623 1,025,347 929,763
---------- ---------- -----------
Total............ $2,623,447 $1,628,757 $18,282,330
========== ========== ===========
Gross profit (loss):
Contribution margin:
Cattle............. $ -- $ -- $ 162,410
Animal sciences.... 891,647 503,042 823,668
---------- ---------- -----------
Total............ 891,647 503,042 986,078
Unallocated
overhead........... (1,722,623) (1,025,347) (429,763)
---------- ---------- -----------
Gross profit
(loss)......... $ (830,976) $ (522,305) $ 56,315
========== ========== ===========
</TABLE>
The Company's assets, and other statement of operations data are not
allocated to a segment.
(12) DISCONTINUED OPERATIONS
In December 1998, the Company's Board of Directors decided to dispose of
its transportation segment. The Company's AMIRIS thermal imaging system, which
was the sole product sold in the transportation segment, was sold on January 15,
1999 to Sperry Marine,
F-21
<PAGE> 101
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inc. for approximately $1,900,000. The Company received $200,000 of cash at
closing and collected an additional $1,388,000 through September 30, 1999. The
remaining balance of approximately $312,000 is expected to be collected by
December 31, 1999. The Company is entitled to a royalty of 8% of net AMIRIS
system sales, up to a maximum royalty of $4.3 million over a four year period or
up to a maximum royalty of $5.0 million, if $4.3 million is not received within
four years.
Net assets of the discontinued transportation segment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Accounts receivable................ $ 145,500 $ 381,435 $ 419,784
Inventory, net..................... 1,076,043 2,020,625 123,093
Property and equipment, net........ 22,650 134,098 --
Intangibles, net................... 94,444 61,108 36,106
Accounts payable................... (271,833) (80,510) (63,647)
Accrued liabilities including
provision for operating loss
during phase out period of
$72,667 in 1998 and $18,748 in
1999............................. -- (231,415) (125,000)
---------- ---------- ---------
Net assets....................... $1,066,804 $2,285,341 $ 390,336
========== ========== =========
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
VOLUNTARY EMPLOYEE SAVINGS 401(k) PLAN
The Company established a voluntary employee savings 401(k) plan in 1997
which is available to all full time employees 21 years or older. The plan
provides for a matching by the Company of the employee's contribution to the
plan for 50% of the first 6% of the employee's annual compensation. The
Company's matching contributions were $6,300 in 1996, $38,195 in 1997, $62,108
in 1998 and $54,229 in 1999.
ROYALTIES
In connection with the NutriCharge license, the Company is obligated to a
royalty of 5% of gross revenues from the sale of NutriCharge products and
infrared technology related to the Company's Canadian license agreement.
The Company is also obligated to a royalty of 6% of net revenues from
product or services related to technology patented by Iowa State University.
(14) SUBSEQUENT EVENTS
SALE OF SERIES D PREFERRED STOCK
On October 27, 1999, the Company agreed to issue 4,555,556 shares of Series
D preferred stock and a warrant to acquire 1,138,889 shares of Class B common
stock for $38,815,000. Series D preferred shares convert into Class B common
stock at the offering price. The warrants are exercisable at the Company's IPO
price and are valued at $3,325,553 using the Black-Scholes method and assuming a
strike price of $11.20, expiration of three years, 90% volatility and 5.8%
interest. In the event the Company does not complete an IPO
F-22
<PAGE> 102
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the warrants may be exercised after November 16, 2000 or earlier if the Company
has an equity financing of not less than $20,000,000 from private investors. In
return for these instruments the Company received $18,000,000 in cash in
November 1999 and a non-interest bearing, promissory note in the amount of
$23,000,000 due on October 27, 2000. Imputed interest at 9.5% amounts to
$2,185,000 over the life of the note. The note receivable will be shown as a
reduction of stockholders' equity, net of imputed interest.
STOCK SPLIT
On December 6, 1999, the Board of Directors of the Company authorized a
five-for-four stock split. The stock split has been reflected in these financial
statements as if it had occurred on the first day of the first period presented.
F-23
<PAGE> 103
eMERGE INTERACTIVE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
LOST PELICAN, L.L.C.
eMerge --------------------------------------
INTERACTIVE, PRO FORMA
INC. HISTORICAL ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $ 1,792,471 $ 157,692 $ -- $ 157,692
Cost of revenue................................ 2,623,447 25,736 -- 25,736
----------- --------- --------- ----------
Gross profit (loss)........................ (830,976) 131,956 -- 131,956
----------- --------- --------- ----------
Operating expenses:
Selling, general and administrative.......... 3,659,810 231,883 435,274(4a) 667,157
Research and development..................... 1,109,382 341,588 -- 341,588
----------- --------- --------- ----------
Total operating expenses................... 4,769,192 573,471 435,274 1,008,745
----------- --------- --------- ----------
Profit (loss) from continuing operations... (5,600,168) (441,515) (435,274) (876,789)
Other income................................... -- 245 -- 245
Interest expense............................... (331,594) (20,077) -- (20,077)
----------- --------- --------- ----------
Profit (loss) from continuing operations
before income taxes...................... (5,931,762) (461,347) (435,274) (896,621)
Income tax expense (benefit)................... -- -- -- --
----------- --------- --------- ----------
Profit (loss) from continuing operations... $(5,931,762) $(461,347) $(435,274) $ (896,621)
=========== ========= ========= ==========
Profit (loss) from continuing operations per
common share -- basic and diluted............ $ (1.36)
===========
Weighted average number of common shares
outstanding -- basic and diluted............. 4,356,926
===========
<CAPTION>
QDD INVESTMENT COMPANY, L.L.C.
-------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA COMBINED
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenue........................................ $332,730 $ -- $332,730 $ 2,282,893
Cost of revenue................................ 152,158 -- 152,158 2,801,341
-------- --------- --------- -----------
Gross profit (loss)........................ 180,572 -- 180,572 (518,448)
-------- --------- --------- -----------
Operating expenses:
Selling, general and administrative.......... 162,428 325,790(4b) 488,218 4,815,185
Research and development..................... -- -- -- 1,450,970
-------- --------- --------- -----------
Total operating expenses................... 162,428 325,790 488,218 6,266,155
-------- --------- --------- -----------
Profit (loss) from continuing operations... 18,144 (325,790) (307,646) (6,784,603)
Other income................................... 36,548 -- 36,548 36,793
Interest expense............................... (1,927) 1,927(4c) -- (351,671)
-------- --------- --------- -----------
Profit (loss) from continuing operations
before income taxes...................... 52,765 (323,863) (271,098) (7,099,481)
Income tax expense (benefit)................... -- -- -- --
-------- --------- --------- -----------
Profit (loss) from continuing operations... $ 52,765 $(323,863) $(271,098) $(7,099,481)
======== ========= ========= ===========
Profit (loss) from continuing operations per
common share -- basic and diluted............ $ (1.39)
===========
Weighted average number of common shares
outstanding -- basic and diluted............. 5,106,926(4d)
===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-24
<PAGE> 104
eMERGE INTERACTIVE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
eMerge LOST PELICAN, L.L.C.
INTERACTIVE, ----------------------------------------------
INC. HISTORICAL
------------- -----------------
NINE MONTHS FOR THE PERIOD
ENDED JANUARY 1, 1999-
SEPTEMBER 30, FEBRUARY 23, PRO FORMA PRO
1999 1999 ADJUSTMENTS FORMA
------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue................................. $ 18,338,645 $ 11,758 $ -- $ 11,758
Cost of revenue......................... 18,282,330 4,176 -- 4,176
------------ --------- -------- ---------
Gross profit (loss)................. 56,315 7,582 -- 7,582
------------ --------- -------- ---------
Operating expenses:
Selling, general and administrative... 7,539,689 182,814 65,590(4a) 248,404
Research and development.............. 2,756,262 35,596 -- 35,596
------------ --------- -------- ---------
Total operating expenses............ 10,295,951 218,410 65,590 284,000
------------ --------- -------- ---------
Profit (loss) from continuing
operations........................ (10,239,636) (210,828) (65,590) (276,418)
Other Income............................ 15,655
Interest expense........................ (458,624) (11,619) -- (11,619)
------------ --------- -------- ---------
Profit (loss) from continuing
operations before income taxes.... (10,682,605) (222,447) (65,590) (288,037)
Income tax expense (benefit)............ -- -- -- --
------------ --------- -------- ---------
Profit (loss) from continuing
operations........................ $(10,682,605) $(222,447) $(65,590) $(288,037)
============ ========= ======== =========
Profit (loss) from continuing operations
per common share -- basic and
diluted............................... $ (1.59)
============
Weighted average number of common shares
outstanding -- basic and diluted...... 6,709,854
============
<CAPTION>
QDD INVESTMENT COMPANY, L.L.C.
---------------------------------------------
HISTORICAL
----------------
FOR THE PERIOD
JANUARY 1,
1999- PRO FORMA PRO PRO FORMA
MAY 19, 1999 ADJUSTMENTS FORMA COMBINED
---------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenue................................. $154,901 $ -- $154,901 $ 18,505,304
Cost of revenue......................... 67,752 -- 67,752 18,354,258
-------- --------- --------- ------------
Gross profit (loss)................. 87,149 -- 87,149 151,046
-------- --------- --------- ------------
Operating expenses:
Selling, general and administrative... 79,683 124,067(4b) 203,750 7,991,843
Research and development.............. -- -- -- 2,791,858
-------- --------- --------- ------------
Total operating expenses............ 79,683 124,067 203,750 10,783,701
-------- --------- --------- ------------
Profit (loss) from continuing
operations........................ 7,466 (124,067) (116,601) (10,632,655)
Other Income............................ 15,655
Interest expense........................ (1,272) 1,272(4c) -- (470,243)
-------- --------- --------- ------------
Profit (loss) from continuing
operations before income taxes.... 6,194 (122,795) (116,601) (11,087,243)
Income tax expense (benefit)............ -- -- -- --
-------- --------- --------- ------------
Profit (loss) from continuing
operations........................ $ 6,194 $(122,795) $(116,601) $(11,087,243)
======== ========= ========= ============
Profit (loss) from continuing operations
per common share -- basic and
diluted............................... $ (1.62)
============
Weighted average number of common shares
outstanding -- basic and diluted...... 6,854,298
============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-25
<PAGE> 105
eMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(1) OVERVIEW
The pro forma condensed combined financial statements are unaudited and
give effect to the acquisition of Lost Pelican L.L.C. (formerly CIN, LLC) d/b/a
Cattlemen's Information Network ("Lost Pelican") on February 24, 1999, the
acquisition of QDD Investment Company L.L.C. d/b/a Professional Cattle
Consultants ("QDD") on May 19, 1999 and the issuance of Series "C" preferred
stock by eMerge Interactive, Inc. (the "Company") on May 4, 1999, a portion of
the proceeds of which were used to acquire QDD.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1998 is based on the historical financial statements of
the Company, Lost Pelican and QDD, giving effect to the transactions under the
purchase method of accounting and the assumptions and adjustments discussed
below. The pro forma condensed combined statement of operations for the nine
months ended September 30, 1999 is based on the historical financial statements
of the Company, Lost Pelican (for the period from January 1, 1999 to February
23, 1999, date prior to acquisition) and QDD (for the period from January 1,
1999 to May 19, 1999, date prior to acquisition), giving effect to the
transactions under the purchase method of accounting and the assumptions and
adjustments discussed below. The Company's purchase of Cyberstockyard, Inc. on
March 29, 1999 is not included because the pro forma effects are not
significant. The pro forma adjustments give effect to the transactions as if
they occurred as of January 1, 1998 for both periods presented.
These unaudited pro forma financial statements may not be indicative of the
results of operations that actually would have occurred if the combination had
been in effect on January 1, 1998 or which may be obtained in the future. The
pro forma financial statements should be read in conjunction with the audited
financial statements of the Company, Lost Pelican and QDD contained elsewhere
herein.
(2) ACQUISITION OF LOST PELICAN
On February 24, 1999, the Company acquired substantially all of the
tangible and intangible assets of Lost Pelican for $2,296,610. The purchase
price for the assets consisted of 750,000 shares of the Company's Class A common
stock valued at $720,000, the assumption of $812,021 of liabilities, a cash
payment due in October 1999 of $357,816, and an agreement to pay the first
$350,000 from Internet sales of third party products over the Company's Web site
and transaction costs of $56,773.
(3) ACQUISITION OF QDD
On May 19, 1999, the Company acquired substantially all of the tangible and
intangible assets of QDD for a cash payment of $1,800,000, an assumption of
$2,361 of liabilities and transaction costs of $25,000.
(4) PRO FORMA ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE
MONTHS ENDED SEPTEMBER 30, 1999
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1998 and the nine months ended September 30, 1999
combines the
F-26
<PAGE> 106
eMERGE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
statements of operations of the Company, Lost Pelican and QDD. In combining the
companies, the pro forma adjustments reflect the following:
(a) Record amortization of goodwill ($415,274 in 1998 and $62,576 in 1999)
and non-compete agreements ($20,000 in 1998 and $3,014 in 1999) for
Lost Pelican over estimated useful lives of five years.
(b) Record amortization of goodwill ($300,790 in 1998 and $114,547 in 1999)
and non-compete agreements ($25,000 in 1998 and $9,520 in 1999) for QDD
over estimated useful lives of five years and four years, respectively.
(c) To eliminate interest on debt of QDD not acquired of $1,927 in 1998 and
$1,272 in 1999.
(d) Record the issuance of 750,000 shares of Class A common stock in
connection with Lost Pelican transaction.
There is no income tax effect on the above pro forma adjustments due to
the full valuation allowance on net deferred tax assets.
F-27
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
To the Board of Members
Lost Pelican, L.L.C.:
We have audited the accompanying balance sheets of Lost Pelican, L.L.C.
(d/b/a Cattlemen's Information Network) as of December 31, 1997 and 1998 and the
related statements of operations, members' equity (deficit) and cash flows for
each of the two years ended December 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
As discussed in note 1 to the financial statements, on February 23, 1999,
Lost Pelican, L.L.C. sold substantially all of its assets and trade names to
eMerge Interactive, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lost Pelican, L.L.C. at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for each of the two years ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
April 13, 1999
F-28
<PAGE> 108
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ FEBRUARY 23,
1997 1998 1999
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ -- $ -- $ 737
Trade accounts receivable, net of
allowance for uncollectible accounts of
$-0-, $9,135, and $8,500 as of December
31, 1997 and 1998 and February 23,
1999, respectively..................... -- 8,548 6,497
--------- ----------- -----------
Total current assets.............. -- 8,548 7,234
Property and equipment, net (notes 3 and
5)........................................ 1,288 102,233 105,247
--------- ----------- -----------
Total assets...................... $ 1,288 $ 110,781 $ 112,481
========= =========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit (note 4)................... $ -- $ 293,983 $ 267,109
Current installments of long-term debt
(note 5)............................... 60,544 91,471 241,950
Accounts payable.......................... 7,991 3,710 1,518
Accrued liabilities....................... 2,614 15,481 18,646
--------- ----------- -----------
Total current liabilities......... 71,149 404,645 529,223
Long-term debt, excluding current
installments (note 5)..................... -- 112,944 109,854
--------- ----------- -----------
Total liabilities................. 71,149 517,589 639,077
--------- ----------- -----------
Commitment (note 6)
Subsequent event (note 8)
Members' equity (deficit) (note 7):
Unit capital.............................. 879,419 1,003,819 1,106,478
Accumulated deficit....................... (949,280) (1,410,627) (1,633,074)
--------- ----------- -----------
Total members' equity (deficit)... (69,861) (406,808) (526,596)
--------- ----------- -----------
Total liabilities and members'
equity (deficit)................ $ 1,288 $ 110,781 $ 112,481
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 109
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD
DECEMBER 31, NINE MONTHS JANUARY 1, 1999
--------------------- ENDED THROUGH
1997 1998 SEPTEMBER 30, 1998 FEBRUARY 23, 1999
--------- --------- ------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue...................... $ 43,672 $ 157,692 $ 68,415 $ 11,758
Cost of revenue.............. 13,789 25,736 10,804 4,176
--------- --------- --------- ---------
Gross profit............ 29,883 131,956 57,611 7,582
Selling, general and
administrative............. 377,504 231,883 179,939 182,814
Research and development..... 124,043 341,588 227,773 35,596
--------- --------- --------- ---------
Profit (loss) from
operations............ (471,664) (441,515) (350,101) (210,828)
Other income (expense):
Other income............... -- 245 90 --
Interest expense........... (4,764) (20,077) (15,178) (11,619)
--------- --------- --------- ---------
Net other income
(expense)............. (4,764) (19,832) (15,088) (11,619)
--------- --------- --------- ---------
Net profit (loss)....... $(476,428) $(461,347) $(365,189) $(222,447)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 110
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
UNIT CAPITAL
------------------------- ACCUMULATED
UNITS AMOUNT DEFICIT TOTAL
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1997........... 600,000 $ 473,380 $ (472,852) $ 528
Non-cash contribution of services by
members (note 7)...................... -- 222,557 -- 222,557
Cash contribution by majority members
(note 7)............................ -- 183,482 -- 183,482
Net profit (loss)..................... -- -- (476,428) (476,428)
------- ---------- ----------- ---------
Balances at December 31, 1997......... 600,000 879,419 (949,280) (69,861)
Non-cash contribution of services by
members (note 7).................... -- 39,583 -- 39,583
Cash contribution by majority members
(note 7)............................ -- 84,817 -- 84,817
Net profit (loss)..................... -- -- (461,347) (461,347)
------- ---------- ----------- ---------
Balances at December 31, 1998......... 600,000 1,003,819 (1,410,627) (406,808)
Non-cash contribution of services by
members (unaudited) (note 7)........ -- 102,659 -- 102,659
Net profit (loss) (unaudited)......... -- -- (222,447) (222,447)
------- ---------- ----------- ---------
Balances at February 23, 1999
(unaudited)......................... 600,000 $1,106,478 $(1,633,074) $(526,596)
======= ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 111
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
DECEMBER 31, NINE MONTHS JANUARY 1, 1999
--------------------- ENDED THROUGH
1997 1998 SEPTEMBER 30, 1998 FEBRUARY 23, 1999
--------- --------- ------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net profit (loss).................. $(476,428) $(461,347) $(365,189) $(222,447)
Adjustments to reconcile net
profit (loss) to net cash used
in operating activities:
Non-cash contribution of
service by members........... 222,557 39,583 -- 102,659
Depreciation................... 322 26,606 17,826 9,964
Provision for doubtful
accounts..................... -- 9,135 -- --
Changes in operating assets and
liabilities:
Trade accounts receivable.... -- (17,683) -- 2,051
Accounts payable............. 7,991 (4,281) 9,491 (2,192)
Accrued royalties............ 2,320 6,054 --
Accrued liabilities.......... 294 6,813 18,178 3,165
--------- --------- --------- ---------
Net cash provided by (used
in) operating
activities................ (242,944) (395,120) (319,694) (106,800)
--------- --------- --------- ---------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (1,610) (127,551) (73,713) (12,978)
--------- --------- --------- ---------
Cash flows from financing
activities:
Net borrowings under line of
credit agreements.............. -- 293,983 117,513 (26,874)
Proceeds from long-term debt..... 60,544 547,834 547,834 150,000
Repayments of long-term debt..... -- (403,963) (396,340) (2,610)
Proceeds from capital
contributions.................. 183,482 84,817 124,400 --
--------- --------- --------- ---------
Net cash provided by
financing activities...... 244,026 522,671 393,407 120,516
--------- --------- --------- ---------
Net increase (decrease) in
cash...................... (528) -- -- 738
Cash -- beginning of period........ 528 -- -- --
--------- --------- --------- ---------
Cash -- end of period.............. $ -- $ -- $ -- $ 738
========= ========= ========= =========
Supplemental disclosure:
Cash paid for interest........... $ 2,444 $ 14,023 $ 10,204 $ 11,619
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 112
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO FEBRUARY 23, 1999, THE SIX MONTHS ENDED
JUNE 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH FEBRUARY 23, 1999 IS
UNAUDITED)
(1) ORGANIZATION
Lost Pelican, L.L.C. (the "Company") was formed on April 1, 1996 as
Cattlemen's Management Network as a limited liability company under the laws of
the state of Kansas and its affairs are governed by its Limited Liability
Company Agreement (the "Agreement"). The Company's income and losses are
allocated in accordance with the terms of the Agreement. On December 21, 1998,
the Company changed its name to CIN L.L.C. On February 24, 1999, the Company
changed its name to Lost Pelican, L.L.C. and sold its assets and trade names
("CIN" and "Cattlemen's Information Network") to eMerge Interactive, Inc.
("eMerge").
Prior to formation as an L.L.C., the Company's business was financed and
operated by Cattle Management Health Network, "CMHN", which was owned by the
majority members of the Company. The primary business of the Company is selling
access to its cattle feedlot performance measurements database.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using accelerated methods over the estimated useful lives
of the assets.
(b) REVENUE RECOGNITION
The Company recognizes revenue in accordance with the terms of the sale or
contract, generally as services are provided.
(c) INCOME TAXES
As a limited liability Company, the Company is classified as a partnership
for income tax purposes and is not directly subject to U.S. federal and most
state income taxes, including Kansas state income tax.
(d) USE OF ESTIMATES
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
(e) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, line of credit, long term
debt, accounts payable and accrued liabilities reflected in the financial
statements approximates fair value due to the short-term maturity of these
instruments or the interest rate fairly reflects the credit risk.
(f) INTERIM FINANCIAL INFORMATION
The financial statements as of February 23, 1999 and for the periods ended
September 30, 1998 and February 23, 1999 are unaudited but reflect only normal
and
F-33
<PAGE> 113
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recurring adjustments which are, in the opinion of management, necessary for the
fair presentation of financial position and results of operations. Operating
results for the periods ended September 30, 1998 and February 23, 1999 are not
necessarily indicative of the results that may be expected for the full year.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ FEBRUARY 23, ESTIMATED
1997 1998 1999 USEFUL LIVES
------ -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Office and computer equipment....... $1,610 $125,770 $138,748 5 - 7 years
Purchased software.................. -- 3,391 3,391 3 years
------ -------- --------
1,610 129,161 142,139
Less accumulated depreciation....... 322 26,928 36,892
------ -------- --------
Property and equipment, net......... $1,288 $102,233 $105,247
====== ======== ========
</TABLE>
(4) LINE OF CREDIT
During 1998, the Company entered into a $300,000 line of credit agreement,
guaranteed by the principal shareholders, with a bank that expires on September
15, 1999. Under the agreement, principal is payable on September 15, 1999, and
interest is payable monthly at 9.5%. Outstanding borrowings under this agreement
were $293,983 as of December 31, 1998 and $267,109 (unaudited) as of February
23, 1999.
(5) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- FEBRUARY 23,
1997 1998 1999
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Kansas Technology Enterprise
Corporation, including interest at 10% (see
note 6)....................................... $60,544 $ 60,544 $ 60,544
Variable rate note payable in monthly
installments of $3,814, including interest at
prime plus 1% (9.25% at December 31, 1998)
through October 1, 2002; secured by equipment... -- 143,871 141,260
Variable rate note payable, interest payable
monthly at 9.5% through September 15, 1999;
secured by equipment.......................... -- -- 150,000
------- -------- --------
60,544 204,415 351,804
Less current installments....................... 60,544 91,471 241,950
------- -------- --------
Long-term debt, excluding current
installments.................................. $ -- $112,944 $109,854
======= ======== ========
</TABLE>
The aggregate maturities of long-term debt for each of the four years
subsequent to December 31, 1998 are as follows: 1999, $91,471; 2000, $36,856;
2001, $40,413; and 2002, $35,675.
F-34
<PAGE> 114
LOST PELICAN, L.L.C.
D/B/A CATTLEMEN'S INFORMATION NETWORK
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENT
ROYALTY AGREEMENT
On September 6, 1996, the Company entered into a funding agreement with
Kansas Technology Enterprise Corporation (KTEC) for the development of a cattle
management network (the "Product"). The Company received $60,544 under this
agreement. Under the terms of this agreement, the Company will pay KTEC a
royalty of 3% on gross sales of the Product, until the award amount of $60,544
plus interest at 10% per annum is repaid. Interest begins to accrue on the date
KTEC makes its last payment on the project. Once the original obligation is met,
the Company will pay KTEC a royalty of 1% on future gross sales of the product
up to an additional $60,544 in royalty payments.
If the Company licenses, sells, or otherwise transfers the rights to
manufacture the Product to another Kansas firm, such that the primary point of
activity occurs in Kansas, the Company shall pay KTEC: (1) twenty five percent
of the proceeds of such sale, up to the award amount of $60,544 plus interest at
10%; and (2) an ongoing royalty on gross sales of the Product up to an
additional $60,544 in royalty payments. In the event such transfer of the
Product within Kansas involves the exchange of other assets or is unsuitable to
this type of repayment structure, then repayment terms may be subject to
renegotiation.
If the Company: (1) commercializes the Product out-of-state such that no
management, marketing or production activity occurs in Kansas; or (2) sells,
transfers, licenses, or otherwise disposes of the rights to the Product
out-of-state, such that no management, marketing or production activity occurs
in Kansas, the Company shall pay KTEC: (1) within thirty (30) days of such
transfer, the award amount of $60,544 plus interest at 10%; and (2) an ongoing
royalty of 2% on gross sales up to an additional $90,816. If significant
benefits to Kansas can occur as a result of such out-of-state transfer, this
repayment obligation may be subject to renegotiation. The Company does note
anticipate the acquisition by eMerge Interactive, Inc. (eMerge) as described in
note 8 to impact the agreement with KTEC.
(7) MEMBERS' EQUITY
Since inception of the Company, the Company's majority members have
contributed approximately $383,000 in services and paid expenses on behalf of
the business from other sources totaling approximately $503,000. Non-cash
contributions totaled $222,557 in 1997, $39,583 in 1998 and $102,659 (unaudited)
in 1999 and cash contributions totaled $183,482 in 1997, $84,817 in 1998 and
$-0- (unaudited) in 1999.
(8) SUBSEQUENT EVENT
On February 24, 1999, the Company assets were acquired by eMerge for
750,000 shares of eMerge's Class A common stock, $383,000 in cash, assumption of
liabilities of $600,000 and a commitment to pay $350,000 of the first net sales
of CIN products.
F-35
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
To the Board of Members
QDD Investment Company, L.L.C.:
We have audited the accompanying balance sheet of QDD Investment Company,
L.L.C. (d/b/a Professional Cattle Consultants, L.L.C.) as of December 31, 1998,
and the related statements of operations, members' 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 generally accepted auditing
standards. 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.
As discussed in Note 1 to the financial statements, on May 19, 1999, QDD
Investment Company, L.L.C. sold substantially all of its assets and trade names
to eMerge Interactive, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QDD Investment Company,
L.L.C. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Oklahoma City, Oklahoma
July 7, 1999
F-36
<PAGE> 116
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets -- trade accounts receivable, net......... $ 18,872 $ 46,875
-------- --------
Computer software and hardware:
Software (note 1)...................................... 182,394 220,825
Hardware............................................... 45,480 51,995
-------- --------
Total computer software and hardware, at
cost......................................... 227,874 272,820
Less accumulated depreciation and amortization......... 10,330 13,901
-------- --------
Net computer software and hardware............. 217,544 258,919
-------- --------
Total assets................................... $236,416 $305,794
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 29,135 $ 25,319
Related party payable (note 5)......................... 12,000 14,000
Notes payable (note 3)................................. 34,930 74,930
-------- --------
Total current liabilities...................... 76,065 114,249
Members' equity (note 4)................................. 160,351 191,545
Commitments and contingencies (notes 5, 6 and 8).........
-------- --------
Total liabilities and members' equity.......... $236,416 $305,794
======== ========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 117
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, NINE MONTHS ENDED THROUGH
1998 SEPTEMBER 30, 1998 MAY 19, 1999
------------ ------------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Service revenue..................... $332,730 $245,298 $154,901
-------- -------- --------
Operating expenses:
Cost of services.................. 152,158 128,398 67,752
General and administrative (note
4)............................. 162,428 102,138 79,683
-------- -------- --------
Total operating
expenses................ 314,586 230,536 147,435
-------- -------- --------
Operating income.......... 18,144 14,762 7,466
Other income (expense):
Advertising income (note 2)....... 36,548 27,000 --
Interest expense.................. (1,927) (1,110) (1,272)
-------- -------- --------
Net income................ $ 52,765 $ 40,652 $ 6,194
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 118
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1997.................................. $ 68,586
Net income.................................................. 52,765
Non-cash contribution of services by members (note 4)..... 39,000
--------
Balance, December 31, 1998.................................. 160,351
Net income (unaudited).................................... 6,194
Non-cash contributions of services by members (note 4)
(unaudited)............................................ 25,000
--------
Balance, May 19, 1999 (unaudited)........................... $191,545
========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 119
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, NINE MONTHS ENDED THROUGH
1998 SEPTEMBER 30, 1998 MAY 19, 1999
------------ ------------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 52,765 $ 40,652 $ 6,194
Adjustments to reconcile net income
to net cash provided by operating
activities:
Non-cash contribution of services
by members..................... 39,000 30,000 25,000
Depreciation and amortization
expense........................ 7,035 5,276 3,571
Changes in operating assets and
liabilities:
Accounts receivable............ 778 3,339 (28,003)
Accounts and related party
payable..................... 17,101 16,601 (1,816)
--------- -------- --------
Net cash provided by
operating activities...... 116,679 95,868 4,946
--------- -------- --------
Cash used in investing activities --
purchases of computer software and
hardware............................ (141,631) (95,868) (44,946)
--------- -------- --------
Cash flows from financing activities:
Payments on notes payable........... (10,000) (10,000) --
Borrowings on notes payable......... 34,952 10,000 40,000
--------- -------- --------
Net cash provided by
financing activities...... 24,952 -- 40,000
--------- -------- --------
Net increase in cash.................. -- -- --
Cash at beginning of period........... -- -- --
--------- -------- --------
Cash at end of period................. $ -- $ -- $ --
========= ======== ========
Supplemental cash flow information:
Cash payments of interest........... $ 1,927 $ 1,110 $ 1,272
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 120
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION INSOFAR AS IT RELATES TO MAY 19, 1999 OR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND FOR THE PERIOD JANUARY 1, 1999 THROUGH MAY 19, 1999 IS
UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
QDD Investment Company, L.L.C. (the Company) is a provider of performance
measurement information related to the United States cattle feedyard industry.
The Company's customers consist primarily of cattle feedyards located in the
United States, and to a lesser extent, other organizations involved in the
United States cattle industry.
In May 1999, the Company changed its name to QDD Investment Company, L.L.C.
On May 19, 1999, the Company sold substantially all of its assets and trade
names ("Professional Cattle Consultants, L.L.C." and "PCC") to eMerge
Interactive, Inc. ("eMerge") for $1,800,000 in cash. eMerge also assumed certain
of the Company's liabilities.
In the opinion of management, the accompanying unaudited financial
statements as of May 19, 1999 and for the nine months ended September 30, 1998
and for the period January 1, 1999 through May 19, 1999, reflect adjustments
(all of which were normal and recurring) which, in the opinion of management,
are necessary for a fair statement of the financial position and results for the
interim periods presented.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(b) COMPUTER SOFTWARE AND HARDWARE
Computer software and hardware is recorded at cost. Depreciation and
amortization of computer hardware and software is calculated using the
straight-line method over periods ranging from five to seven years.
In late 1997, the Company engaged a third party to develop and install a
performance measurement system. Costs related to the design, configuration,
coding, installation and testing of the system have been capitalized; all other
costs have been expensed. The Company plans to begin using the new performance
measurement system in late 1999.
The Company reviews long-lived assets, including computer software, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
F-41
<PAGE> 121
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts receivable and accounts
payable, related party payable and notes payable approximate fair value because
of the short maturity of those instruments.
(d) REVENUE RECOGNITION
The Company recognizes revenue as services are provided.
(e) ADVERTISING INCOME
In 1998, the Company contracted with an organization which placed
advertising on the Company's monthly and semi-annual newsletters for a fee of
$36,000. The contract terminated in December 1998 and was not renewed.
(f) INCOME TAXES
As a limited liability company, the Company is not directly subject to
income taxes. Income taxes, if any, are payable by the Company's members.
(g) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) on January 1, 1998. SFAS No.
130 establishes standards for reporting and display of "comprehensive income"
and its components in a set of financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company had no items of
comprehensive income as defined by SFAS No. 130 not included in the accompanying
statements of operations; therefore, statements of comprehensive income have not
been presented in the accompanying financial statements.
F-42
<PAGE> 122
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) NOTES PAYABLE
Notes payable at December 31, 1998 and May 19, 1999 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Term loan from a bank, bearing interest at 9.5%;
principal and interest are due on September 30, 1999
(maturity date)(a)..................................... $20,035 $ --
Term loan from a bank, bearing interest at 10%; principal
and interest are due on February 5, 1999 (maturity
date)(a)............................................... 14,895 --
Term loan from a bank, bearing interest at 10%; principal
and interest are due on July 15, 1999 (maturity
date)(a)............................................... -- 74,930
------- -------
$34,930 $74,930
======= =======
</TABLE>
- -------------------------
(a) On January 22, 1999, the Company renegotiated its two term notes, resulting
in the conversion of the two notes into a single term note, additional
borrowings, changing the maturity date and increasing the interest rate. The
term note is unsecured; however, it is guaranteed by a manager and owner of
the Company.
(4) MEMBERS' EQUITY
The Company operates as a limited liability company organized in the State
of Oklahoma until February 14, 2097, unless sooner terminated. Members' equity
is allocated to the members in accordance with the operating agreement of the
Company based on each members' capital account and each member's liability is
limited to its capital account.
During the year ended December 31, 1998, the nine months ended September
30, 1998 and for the period January 1, 1999 through May 19, 1999, the Company's
members contributed $39,000, $30,000 (unaudited), and $25,000 (unaudited),
respectively, in services to the Company. Services contributed on behalf of the
Company by its members are recorded as expenses and non-cash contributions in
the accompanying financial statements.
(5) RELATED PARTY TRANSACTIONS
The Company leases office space and equipment from one of its managers and
owners. The Company leases the space and equipment on a month-to-month basis.
Rent expense totaled $12,000 for the year ended December 31, 1998, $9,000 for
the nine months ended September 30, 1998 and $5,000 (unaudited) for the period
January 1, 1999 through May 19, 1999. Outstanding at December 31, 1998 and May
19, 1999 was $12,000 and $14,000 (unaudited), respectively, due to the manager
and owner of the Company for unpaid rent.
(6) LEASE OBLIGATIONS
The Company leases office equipment and a vehicle under operating leases,
which expire over the next two years. Rent expense approximated $11,000 for the
year ended December 31, 1998, $8,000 for the nine months ended September 30,
1998 and $5,000
F-43
<PAGE> 123
QDD INVESTMENT COMPANY, L.L.C.
D/B/A PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited) for the period January 1, 1999 through May 19, 1999. Future minimum
lease payments under noncancellable operating leases will approximate $12,000
and $2,500 in 1999 and 2000, respectively. As discussed in note 5, the Company
also leases office space from a related party.
(7) BUSINESS SEGMENT INFORMATION
The Company manages its business by services it provides, which resulted in
one operating segment during the year ended December 31, 1998 and for the period
January 1, 1999 through May 19, 1999. The Company is a provider of performance
measurement information related to the United States cattle feedyard industry.
All of the Company's revenues for the year ended December 31, 1998 and for
the period January 1, 1999 through May 19, 1999, were derived from customers in
the United States. One customer accounted for 38% of the Company's revenues for
the year ended December 31, 1998, and 34% (unaudited) and 38% (unaudited) of the
Company's revenues for the nine months ended September 30, 1998 and for the
period January 1, 1999 through May 19, 1999, respectively. The same customer
accounted for none and 95% (unaudited) of the Company's trade accounts
receivable balance at December 31, 1998 and May 19, 1999, respectively.
(8) YEAR 2000 RISKS
Existing computer programs of many businesses were developed with a
two-digit year identification without consideration of the upcoming change in
the century or millennium in the year 2000. The Company is in the process of
addressing its year 2000 readiness. In late 1997, the Company engaged a third
party to develop a new performance measurement system to replace its outdated
system and to handle the year 2000 issue. Final testing and use of the new
system is expected to occur in mid 1999.
Failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the year 2000 problem, resulting in part from the uncertainty of the
year 2000 readiness of third party suppliers, vendors and customers, the Company
is unable to determine at this time whether the consequences of year 2000
failures will have a material impact on the Company's results of operations,
liquidity and financial condition. The Company believes that, upon completion of
the new system, the possibility of interruptions of material consequences to
normal operations will be reduced. The Company is relying on the new system to
be year 2000 compliant and has not developed a contingency plan to minimize any
potential disruptions which could occur because of the year 2000.
F-44
<PAGE> 124
8,000,000 SHARES
[eMerge INTERACTIVE LOGO]
CLASS A
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
-------------------------
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discounts and commissions) payable in
connection with the sale of the Class A Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 24,117
NASD filing fee............................................. 9,175
Nasdaq filing fee........................................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 350,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... 96,708
----------
Total.................................................. $1,250,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation permits indemnification to
the fullest extent permitted by Delaware law. The Registrant's By-laws require
the Registrant to indemnify any person who was or is an authorized
representative of the Registrant, and who was or is a party or is threatened to
be made a party to any proceeding by reason of the fact that such person was or
is an authorized representative of the Registrant, against expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such third party proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Registrant and, with respect to any
criminal proceeding (including any action or investigation which could or does
lead to a criminal proceeding) had no reasonable cause to believe such conduct
was unlawful. The Registrant shall also indemnify any person who was or is an
authorized representative of the Registrant, and who was or is a party or is
threatened to be made a party to any proceeding by reason of the fact that such
person was or is an authorized representative of the Registrant against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Delaware Court
of Chancery or the court in which such proceeding was pending shall determine
that, despite the adjudication of liability but in view of all the circumstances
of the case, such authorized representative is fairly and reasonably entitled to
indemnity. Such indemnification is mandatory under the Registrant's By-laws as
to expenses actually and reasonably incurred to the extent that an authorized
representative of the Registrant has been successful on the merits or otherwise
in defense of any proceeding or in defense of any claim, issue or matter
therein. The determination of whether an individual is entitled to
indemnification may be made by a
II-1
<PAGE> 126
majority of disinterested directors, independent legal counsel in a written
legal opinion or the stockholders. Delaware law also permits indemnification in
connection with a proceeding brought by or in the right of the Registrant to
procure a judgment in its favor. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Securities and Exchange Act of 1934 and is therefore unenforceable. The
Registrant expects to obtain a directors and officers liability insurance policy
prior to the effective date of this Registration Statement.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933. Reference is made to Section 8.4 of the form
of underwriting agreement which is filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:
As of November 30, 1999, eMerge Interactive had sold to employees and
certain other persons an aggregate of 6,954,725 shares of class A common
stock, including class A common stock issued in connection with business
acquisitions, as follows:
In July 1998, eMerge Interactive issued 2,500,000 shares of class A
common stock in connection with the acquisition of 100% of the partnership
interests of NutriCharge, a South Dakota partnership, at a price of $.80
per share. In July 1998, eMerge Interactive issued 87,500 shares of its
class A common stock to the shareholders of STS Agriventures, Ltd., at a
price of $.80 per share. In February of 1999, eMerge Interactive issued
750,000 shares of class A common stock in connection with the acquisition
of assets, including CIN, LLC, at a price of $.96 per share. eMerge
Interactive issued 250,000 shares of class A common stock in connection
with the acquisition of 100% of the issued and outstanding stock of
Cyberstockyard, Inc. on March 29, 1999, at a price of $1.60 per share. In
August of 1999, eMerge Interactive issued 62,500 shares of class A common
stock at $6.40 per share, for 19% of the common stock of Turnkey Computer
Systems, Inc. All of such sales were made under the exemption from
registration provided under Section 4(2) of the Act. The issuance to the
stockholders of Cyberstockyard, Inc. was also made pursuant to Rule 504
under the Act.
As of November 30, 1999, eMerge Interactive had sold an aggregate of
14,499,162 shares of preferred stock, as follows:
In December 1998, we issued 2,400,000 shares of series B preferred
stock to XL Vision at a price equal to $2.00 per share, in exchange for the
cancellation of debt. In May of 1999, we issued 1,000,000 shares of series
C preferred stock to Safeguard 99 Capital L.P. and 100,000 shares to
purchasers associated with Applewood Associates, L.P. at a price of $5.00
per share. In November 1999, we issued 4,555,556 shares of series D
preferred stock to Internet Capital Group, Inc. at a purchase price of
$8.23 per share, payable in cash and a promissory note. In connection with
the sale of preferred stock, we also agreed issued to Internet Capital
Group a warrant to purchase up to 1,138,889 shares of class B common stock.
All of such sales were made under the exemption from registration provided
under Section 4(2) of the Act.
II-2
<PAGE> 127
Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation Plans,
eMerge Interactive has granted options to purchase a total of 3,423,375 shares
of common stock to its employees and certain other persons through November 30,
1999 at a weighted average exercise price of $2.99 per share. For more detailed
descriptions of eMerge Interactive's Equity Compensation Plans, see the section
entitled Management -- Equity Compensation in this registration statement. In
granting the options and selling the underlying securities upon exercise of the
options, eMerge Interactive is relying upon exemptions from registration set
forth in Rule 701 and Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.#
1.2 Form of Standby Stock Purchase Agreement.#
3.1 Second Amended and Restated Certificate of Incorporation of
eMerge Interactive.
3.2 Amended and Restated Bylaws of eMerge Interactive.
4.1 Form of Stock Certificate.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
10.1 Amended and Restated 1996 Equity Compensation Plan.
10.2 1999 Equity Compensation Plan.
10.3 Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada.+#
10.4 Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999.
10.5 Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
10.6 Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain.
10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz.
10.8 Stockholders Agreement dated July 29, 1998 among eMerge
Interactive and individuals designated as the former
shareholders of STS Agriventures, Ltd,.*
10.9 Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust.
10.10 Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc.
10.11 Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc.
10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
10.13 Letter of Agreement dated July 1, 1999 between eMerge
Interactive and Southern States.+#
10.14 Subscription Agreement letter for purchase of Series B
Junior Preferred Stock.
</TABLE>
II-3
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.15 Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock).
10.16 Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc.
10.17 Registration Rights Agreement dated July 18, 1997.
10.18 Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999.#
10.19 Stockholders' and Registration Rights Agreement dated
February 24, 1999.
10.20 Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1999.
10.21 (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999, (b) second Amended Revolving Note
dated October 25, 1999 and (c) Third Amended Revolving Note
dated December 6, 1999.
10.22 Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive.
10.23 Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled).
10.24 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard.*
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled).
10.26 Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholders' Agreement.
10.27 Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997.
10.28 Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company.+#
10.29 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc.
10.30 Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc.*
10.31 Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc.*
10.32 Cooperative Research and Development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated
August 4, 1999.#
10.33 Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999.#
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).#
24.1 Power of Attorney (included on signature page).
</TABLE>
II-4
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27.1 Financial Data Schedule.*
99.1 Form letter from eMerge Interactive, Inc. to holders of more
than 100 shares of Safeguard Scientifics, Inc. describing
the Directed Share Subscription Program.*
99.2 Form of letter from Adams, Harkness & Hill, Inc. to
Safeguard Scientifics, Inc. shareholders.#
99.3 Form of letter from eMerge Interactive, Inc. to Brokers
describing the Directed Share Subscription Program.*
99.4 Form of Subscription Form for Safeguard Subscription
Program.*
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We have requested confidential treatment of certain provisions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has
been filed separately with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the prospectus.
II-5
<PAGE> 130
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration statement
as of the time it was declared effective; and (3) that for the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by Safeguard, and
the terms of any subsequent reoffering thereof. If any public offering by the
underwriters is to be made on terms differing from those set forth on the cover
page of the prospectus, a post-effective amendment will be filed to set forth
the terms of such offering.
II-6
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Sebastian, Florida on December 10,
1999.
eMERGE INTERACTIVE, INC.
By: /s/ CHARLES L. ABRAHAM
-----------------------------------
Charles L. Abraham
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
- ---------- -------- ----
<S> <C> <C>
/s/ CHARLES L. ABRAHAM Chief Executive Officer December 10, 1999
- --------------------------------------------- and Director
Charles L. Abraham (Principal Executive
Officer)
/s/ T. MICHAEL JANNEY Chief Financial Officer December 10, 1999
- --------------------------------------------- (Principal Financial
T. Michael Janney and Accounting
Officer)
* Chairman of the Board December 10, 1999
- ---------------------------------------------
John S. Scott, Ph.D.
* Director December 10, 1999
- ---------------------------------------------
Douglas Alexander
* Director December 10, 1999
- ---------------------------------------------
E. Michael Forgash
* Director December 10, 1999
- ---------------------------------------------
Thomas C. Lynch
* Director December 10, 1999
- ---------------------------------------------
Christopher Moller, Ph.D.
* Director December 10, 1999
- ---------------------------------------------
John W. Poduska, Sr., Ph.D.
*/s/ T. MICHAEL JANNEY December 10, 1999
- ---------------------------------------------
T. Michael Janney
As Attorney-in-Fact
</TABLE>
II-7
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.#
1.2 Form of Standby Stock Purchase Agreement.#
3.1 Second Amended and Restated Certificate of Incorporation of
eMerge Interactive.
3.2 Amended and Restated Bylaws of eMerge Interactive.
4.1 Form of Stock Certificate.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
10.1 Amended and Restated 1996 Equity Compensation Plan.
10.2 1999 Equity Compensation Plan.
10.3 Master License Agreement dated July 29, 1998 between eMerge
Interactive and Her Majesty the Queen of Canada, as
represented by the Minister of Agriculture and Agri-Food
Canada.+#
10.4 Administrative Services Agreement dated December 15, 1997
between eMerge Interactive, Safeguard Scientifics, Inc. and
XL Vision, Inc., as amended on August 17, 1999.
10.5 Direct Charge Administrative Services Agreement dated April
15, 1997 between eMerge Interactive and XL Vision, Inc.
10.6 Asset Purchase Agreement dated February 24, 1999 between
eMerge Interactive, CIN, LLC and Dr. Scott Crain.
10.7 Stock Purchase Agreement dated March 22, 1999 between eMerge
Interactive, Cyberstockyard, Inc. and J. Scott Sanders,
David Sanders, Scott Calhoun and Dr. Duane Pankratz.
10.8 Stockholders Agreement dated July 29, 1998 among eMerge
Interactive, and individuals designated as the former
shareholders of STS Agriventures, Ltd.*
10.9 Purchase Agreement dated July 29, 1998 among eMerge
Interactive, NutriCharge, J Technologies, LLC, and the
Biegert Family Irrevocable Trust.
10.10 Asset Purchase Agreement dated January 15, 1999 between
eMerge Interactive and Sperry Marine, Inc.
10.11 Purchase and License Agreement dated January 15, 1999
between eMerge Interactive and Sperry Marine, Inc.
10.12 Asset Purchase Agreement dated May 19, 1999 between eMerge
Interactive and Professional Cattle Consultants, L.L.C.
10.13 Letter of Agreement dated July 1, 1999 between eMerge
Interactive and Southern States.+#
10.14 Subscription Agreement letter for purchase of Series B
Junior Preferred Stock.
10.15 Preferred Stock Purchase Agreement dated April 1, 1999
(Series C Preferred Stock).
10.16 Common Stock Purchase Agreement dated August 16, 1999
between eMerge Interactive and Turnkey Computer Systems,
Inc.
10.17 Registration Rights Agreement dated July 18, 1997.
10.18 Real Property Sublease between XL Vision and eMerge
Interactive, dated December 1999.#
10.19 Stockholders' and Registration Rights Agreement dated
February 24, 1999.
10.20 Joinder and Correction to Stockholders and Registration
Rights Agreement dated March 29, 1999.
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.21 (a) Revolving Note dated July 21, 1999 from eMerge
Interactive to Safeguard Delaware, Inc., Amended Revolving
Note dated August 3, 1999, (b) second Amended Revolving Note
dated October 25, 1999 and (c) Third Amended Revolving Note
dated December 6, 1999.
10.22 Revolving Note dated January 1, 1999 from XL Vision to
eMerge Interactive.
10.23 Promissory Note dated August 31, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled)
10.24 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard.*
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc. (cancelled)
10.26 Stockholders Agreement dated July 17, 1997 and Joinder to
Stockholders' Agreement.
10.27 Subordinated Purchase Money Note from eMerge Interactive to
XL Vision dated July 15, 1997.
10.28 Toll Processing Agreement dated August 16, 1999 between
eMerge Interactive and ADM Animal Health & Nutrition, a
division of Archer-Daniels-Midland Company.+#
10.29 Term Note dated October 25, 1999 from eMerge Interactive to
Safeguard Delaware, Inc.
10.30 Securities Purchase Agreement dated October 27, 1999 between
eMerge Interactive Technologies, LLC and Internet Capital
Group, Inc.*
10.31 Registration Rights Agreement dated October 27, 1999 between
eMerge Interactive and Internet Capital Group, Inc.*
10.32 Cooperative Research and Development Agreement between
USDA's Agricultural Research Service, eMerge and Iowa State
University of Science and Technology concerning Methods for
Detecting Fecal and Ingesta Contamination on Meat dated
August 4, 1999.#
10.33 Exclusive License Agreement between Iowa State University
Research Foundation, Inc., and eMerge dated August 3, 1999.#
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).#
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.*
99.1 Form letter from eMerge Interactive, Inc. to holders of more
than 100 shares of Safeguard Scientifics, Inc. describing
the Safeguard Share Subscription Program.*
99.2 Form of letter from Adams, Harkness & Hill, Inc. to
Safeguard Scientifics, Inc. shareholders.#
99.3 Form of letter from eMerge Interactive, Inc. to Brokers
describing the Directed Share Subscription Program.*
99.4 Form of Subscription Form for Safeguard Subscription
Program.*
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We have requested confidential treatment of certain provisions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933. The entire agreement has
been filed separately with the Securities and Exchange Commission.
<PAGE> 1
Exhibit 10.8
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (this "Agreement") is made on July 29,
1998, by and among EMERGE VISION SYSTEMS, INC., a Delaware corporation, with its
principal offices located at 10305 102nd Terrace, Sebastian, Florida 32958
("eVS"), the individuals designated as STS Stockholders in Schedule A (the "STS
Stockholders"), who are the former shareholders of STS Agriventures, Ltd., and
the entities designated as Nutri-Charge Stockholders in Schedule A (the
"Nutri-Charge Stockholders"), who are the former partners of Nutri-Charge
Partnership when the partnership was sold to eVS for eVS stock, (the STS
Stockholders and Nutri-Charge Stockholders, together with any Permitted
Transferee (as defined below) which may become a party to this Agreement
hereafter are, for so long as they are stockholders of eVS, collectively
referred to herein as the "Stockholders" or individually a "Stockholder.")
BACKGROUND
In partial consideration for the execution and delivery by eVS of
the Stock Purchase Agreement by and between eVS, the STS Stockholders and STS
Agriventures, Ltd. (the "Stock Purchase Agreement"), the STS Stockholders
have agreed to enter into this Agreement.
In partial consideration for the execution and delivery by eVS of
the Purchase Agreement by and between eVS, the Nutri-Charge Stockholders and
Nutri-Charge (the "Purchase Agreement"), the Nutri-Charge Stockholders have
agreed to enter into this Agreement.
The parties have determined that it is in the best interests of eVS
and the Stockholders to provide for certain rights and restrictions on the
future disposition of eVS's common stock, par value $0.01 per share (the "Common
Stock"), and various other matters set forth herein.
NOW, THEREFORE, in consideration of the agreements and mutual
promises and covenants set forth herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
ARTICLE 1
RESTRICTIONS ON TRANSFER OF SHARES
1.1. Restrictions on Stockholders. Until such time as eVS's Common Stock
is the subject of a Qualified Initial Public Offering (as hereinafter defined),
or as expressly provided in this Agreement or in the Purchase Agreement, no
Stockholder shall sell, assign, transfer, give, bequeath, devise, donate or
otherwise dispose of, or pledge, deposit or otherwise encumber, in any way or
manner whatsoever, whether voluntary or involuntary (all of the foregoing
hereinafter referred to as "transfer"), any legal or beneficial interest in any
of the shares of eVS's Common Stock (collectively, the "Shares") now or
hereafter owned (of record or beneficially) by such Stockholder except as
expressly provided in this Agreement and in accordance with its terms and
conditions.
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1.2. Certain Excluded Transfers. The provisions of Articles 1 and 2 of
this Agreement shall not apply to the transfer of shares by a Stockholder which
are not Restricted Shares (as defined in the Purchase Agreement) to a Permitted
Transferee, provided that the Permitted Transferee executes a copy of this
Agreement as a Stockholder. As used herein, "Permitted Transferee" means:
(a) in the case of any Stockholder who is a natural person, such
Individual's spouse or issue (in each case natural or adopted), any trust for
the benefit of such Individual or his/her spouse or issue, or any corporation or
partnership in which the direct or beneficial owner of all of the equity
interest is such Individual, spouse or issue or any trust for the benefit of
such persons;
(b) in the case of any Stockholder who is a natural person, the
heirs, trustees, executors, administrators or personal representatives upon the
death or incompetency of such person;
(c) in the case of a Stockholder other than a trust that is not a
natural person, any Controlled Affiliate (as hereinafter defined) of such
Stockholder; and
(d) in the case of a Stockholder that is a trust, any beneficiaries
of such Trust or successor Trust, and Controlled Affiliate (as hereinafter
defined) of a beneficiary of such Trust or successor Trust;
(e) any person or entity that takes such shares pursuant to a sale
in connection with a Qualified Initial Public Offering (as hereinafter defined)
of such shares, which shares shall no longer be subject to this Agreement;
(f) Jeffrey L. Biegert or John R. Johanns with the same rights as if
they were a Stockholder; and
(g) XL Vision, Inc. ("XLV") pursuant to the Put Option (as defined
in the Purchase Agreement).
"Controlled Affiliate" means, with respect to any person, a corporation,
partnership or other business association in which such person holds, directly
or indirectly, fifty percent (50%) or more of the outstanding capital stock or
other equity interests of such corporation, partnership or other business
association. In determining the fifty percent (50%) test John Johanns, his
spouse and his issue shall be considered one person. In determining the fifty
percent (50%) test Jeffrey Biegert, his spouse and his issue shall be considered
one person. An estate or trust of a deceased individual Stockholder shall be
considered the same as the deceased person for the fifty percent (50%) test
until such estate or trust is distributed.
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ARTICLE 2
STOCKHOLDER'S LIMITED RIGHT TO DISPOSE OF SHARES
2.1. Offer to Sell Shares. Except as otherwise provided in the Stock
Purchase Agreement and Articles 1 and 2 of this Agreement, if any Stockholder
shall at any time desire to sell all or any of such Stockholder's Shares, such
Stockholder (the "Selling Stockholder") shall first prepare a written offer (the
"Offer") to sell such Shares (the "Offered Shares") setting forth the proposed
date of the sale, the proposed price per Share, and the other terms and
conditions upon which the sale is proposed to be made. Such notice shall also
specify whether a Third Party Purchaser (as hereinafter defined) has made an
offer to acquire such Shares. The Selling Stockholder shall then transmit a copy
of the Offer to eVS. Within two (2) business days of receipt of the Offer, eVS
shall transmit a copy of the Offer to the Stockholders other than the Selling
Stockholder.
2.2. Option of eVS. Transmittal of the Offer to eVS by the Selling
Stockholder shall constitute an offer by the Selling Stockholder to sell the
Selling Stockholder's Offered Shares to eVS at the price and upon the terms set
forth in the Offer. For a period of ten (10) days after the submission of the
Offer to eVS, eVS shall have the option, exercisable by written notice to the
Selling Stockholder with a copy to each of the other Stockholders, to accept the
Selling Stockholder's Offer as to all or any part of the Selling Stockholder's
Offered Shares. Such notice shall state the number of Shares eVS will purchase,
if any, and the number of Offered Shares available to be purchased.
2.3. Option of Offeree Stockholders. In the event that eVS does not
exercise its option with respect to any or all of the Offered Shares in
accordance with Section 2.2, the Selling Stockholder, upon notice from eVS of
eVS's decision not to accept the Offer as to any or all of the Offered Shares
(or upon expiration of the fifteen-day option period referred to in Section 2.2
if eVS fails to give notice as aforesaid), shall be deemed to have offered in
writing to sell all, but not less than all, of its remaining Offered Shares
(those not purchased by eVS) to the Stockholders, as a group ("Offeree
Stockholders") at the price and upon the terms set forth in the Offer. For a
period of fifteen (15) days after such Offer to the Offeree Stockholders, the
Offeree Stockholders shall have the option, exercisable by written notice to the
Selling Stockholder with a copy to eVS and to each of the other Offeree
Stockholders, to accept the Offer as to the remaining Offered Shares. Each
Offeree Stockholder who exercises this option shall agree, by doing so, to
purchase that proportionate part of the remaining Offered Shares which the
number of Shares owned by such Offeree Stockholder bears to the total number of
Shares owned by all Offeree Stockholders (or in such other proportions as the
Offeree Stockholders may agree among themselves). In the event that one or more
of the Offeree Stockholders does not exercise its option in accordance with
Section 2.3, the Offeree Stockholders who exercised their options pursuant to
Section 2.3 shall have a further option for a period of five (5) additional days
following the expiration of the fifteen-day period set forth in Section 2.3 to
accept the Offer as to the then remaining Offered Shares, and each such Offeree
Stockholder who exercises this further option shall agree, by doing so, to
purchase that proportionate part of the then remaining Offered Shares, which the
number of Shares owned by such Offeree Stockholder bears to the total number of
Shares owned by all of the Offeree Stockholders exercising their option pursuant
to
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this Section 2.3 (or in such other proportions as such Offeree Stockholders may
agree among themselves).
2.4. Sale to Third Party Purchaser. If, at the end of the option periods
described in Sections 2.2 and 2.3 (the "Option Periods"), options have not been
exercised by eVS and/or the Offeree Stockholders to purchase all of the Offered
Shares, then the Selling Stockholder shall be free, subject to the co-sale
provisions of Section 3 hereof, for a period of thirty (30) days thereafter to
sell any or all of the Offered Shares as to which options have not been
exercised (the "Remaining Shares") to a third party purchaser (the "Third Party
Purchaser") at the price and upon the terms and conditions set forth in the
Offer, and on condition that such Third Party Purchaser executes a copy of this
Agreement as a Shareholder. If such Remaining Shares are not so sold within the
aforesaid thirty-day period, then the Selling Stockholder shall not be permitted
to sell such Remaining Shares without again complying with this Article 2.
ARTICLE 3
COME ALONG PROVISIONS
3.1. Come Along Right. If at any time holders of a majority of the
outstanding shares of Common Stock held by stockholders of the Company (the
"Majority Stockholders") propose to transfer substantially all of the shares of
the Common Stock held by them (other than to the public for cash pursuant to a
registration statement filed under the Securities Act) to a prospective
purchaser ("Acquiror"), then the Majority Stockholders shall notify each
Stockholder, in writing, of such offer and its terms and conditions. Upon
receipt of such notice, each Stockholder shall have the right to sell to the
Acquiror, that number of shares of Common Stock equal to the product attained by
multiplying (a) the number of shares of Common Stock the Acquiror proposes to
purchase, times (b) the quotient derived by dividing (i) the number of shares of
Common Stock held (or deemed to be held) by the Stockholders exercising the
Election under this Section by (ii) the total number of shares of Common Stock
held (or deemed to be held) by the Majority Stockholders and all Stockholders
exercising the Election under this Section. Each Stockholder's right to sell
pursuant to this Section 3.1 can be exercised by delivery of a written notice to
the Majority Stockholders within twenty (20) days following the delivery of the
notice to the Stockholders of the proposed sale to the Acquiror by the Majority
Stockholders.
3.2. Termination of Come Along Right. The provisions of this Article 3
shall terminate upon the consummation of a Qualified Public Offering.
ARTICLE 4
PURCHASE PRICE, TERMS AND SETTLEMENT
4.1. Purchase Price. The purchase price per Share and the terms of payment
shall be the price per Share contained in the Offer.
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4.2. Time; Date; Location. Settlement for the purchase of Shares by eVS or
by a Stockholder pursuant to the provisions of Article 2, shall be made within
thirty (30) days following the date of exercise of the last option exercised.
All settlements for the purchase and sale of Shares shall, unless otherwise
agreed to by all of the purchasers and sellers, be held at the principal
executive offices of eVS during regular business hours. The precise date and
hour of settlement shall be fixed by the purchaser or purchasers (within the
time limits proscribed in this Agreement), or in the event the purchasers fail
to agree, by the President of eVS, by notice in writing to the seller given at
least five (5) days in advance of the settlement date specified.
4.3. Certificates. At settlement, the stock certificate or certificates
representing the Shares being sold shall be delivered by the seller to the
purchaser or purchasers, duly endorsed for transfer or with executed stock
powers attached, with any necessary documentary and transfer tax stamps affixed
by the seller, free and clear of all liens, claims and encumbrances except for
the terms of this Stockholders Agreement.
4.4. Stockholders Agreement. The purchaser, if not already a Stockholder
hereunder, shall execute a copy of this Agreement as an additional Stockholder.
4.5. Authority. The seller, if a personal representative of a Stockholder,
shall, upon request of a purchaser, provide prior to the date of settlement,
evidence reasonably satisfactory to the purchaser of the seller's legal status
as personal representative of such Stockholder.
ARTICLE 5
REGISTRATION RIGHTS
5.1. Piggyback Registration Rights. Whenever eVS proposes to register any
Common Stock for eVS's own or others' account under the Securities Act of 1933
(the "1933 Act") for a public offering for cash, other than a registration
relating to employee benefit plans, eVS shall give each holder of Registrable
Securities (as hereinafter defined) written notice of eVS's intent to do so.
Upon the written request of any such holder given within thirty (30) days after
receipt of such notice, eVS will use eVS's reasonable efforts to cause to be
included in such registration all of the Registrable Securities that such holder
requests to be registered. If eVS is advised in writing in good faith by any
managing underwriter of the securities being offered pursuant to any
registration statement under this Article 5 that the number of shares to be sold
pursuant to such registration statement is greater than the number of such
shares that can be offered without adversely affecting the offering, then eVS
shall first register the shares sought to be registered by eVS for its own
account; second, eVS shall register the number of shares offered for the account
of the stockholders of eVS who are parties to a certain Registration Rights
Agreement dated as of ____________, 1997 as to which such stockholders exercise
piggyback registration rights pursuant to Section 2(a) of such agreement (the
"Existing Rights"); third, eVS shall register as many of the shares of
Registrable Securities as the underwriters will include in the registration,
reducing pro rata the number of shares offered for the accounts of holders of
Registrable Securities (based upon the number of Shares proposed to be sold
pursuant to such registration statement by each such holder) to a number deemed
satisfactory by such managing underwriter if
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all of the Registrable Securities can not be included. In the event of such a
limitation, shares of persons not having registration rights will not be
included in the registration unless all Registrable Securities requested to be
included in the registration have been included. Following the execution hereof,
eVS agrees to use its commercially reasonable best efforts to obtain the consent
of the holders of the Existing Rights to treat holders of Registrable Securities
pari passu with the holders of Existing Rights for the purposes of the
underwriter cutback provisions set forth above.
5.2. Definition of Registrable Securities. "Registrable Securities" means
the Shares, any shares of Common Stock or other capital stock of eVS received by
the holders of Shares as a stock dividend or other distribution with respect to
such Shares and any other shares of the capital stock of eVS now owned or
hereafter acquired by the holder of Shares.
5.3. Registration Procedures. All expenses incurred in connection with the
registrations under this Article 5 (including all registration, filing, listing,
qualification, printer's and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by eVS. If and whenever eVS is under
an obligation pursuant to this Article 5 to effect or use eVS's reasonable
efforts to effect a registration of any Registrable Securities, eVS shall: (a)
use eVS's reasonable efforts to prepare and file with the Commission as soon as
reasonably practicable, a registration statement with respect to the Registrable
Securities and use eVS's reasonable efforts to cause such registration to
promptly become and remain effective for a period of at least one hundred twenty
(120) days (or such shorter period during which holders shall have sold all
Registrable Securities that they requested to be registered); (b) use eVS's
reasonable efforts to register and qualify the Registrable Securities covered by
such registration statement under applicable state securities laws as the
holders shall reasonably request for the distribution of the Registrable
Securities; (c) provide a transfer agent for the Common Stock no later than the
effective date of the first registration of any Registrable Securities; (d) list
such Registrable Securities on any national securities exchange or The Nasdaq
Stock Market's National Market, or if the Common Stock is unable to be so
listed, use eVS's reasonable efforts to qualify the Registrable Securities for
inclusion on any other automated quotation system of the National Association of
Securities Dealers, Inc.; and (e) take such other actions as are reasonable or
necessary to comply with the requirements of the Act and the regulations
thereunder, or the reasonable request of any holder, with respect to the
registration and distribution of the Registrable Securities. eVS is not
obligated to effect registration or qualification under this Article 5 in any
jurisdiction requiring eVS to qualify to do business (unless eVS is otherwise
required to be so qualified) or to execute a general consent to service of
process.
5.4. Holdback Agreement. If eVS at any time shall register shares of
Common Stock under the 1933 Act (including any registration pursuant to Article
5) for sale to the public, then Stockholders shall not sell publicly, make any
short sale of, grant an option for the purchase of, or otherwise dispose
publicly of, any shares of Registrable Securities (other than those shares of
Common Stock included in such registration pursuant to Article 5) without the
prior written consent of eVS or the managing underwriter of the offering for a
period designated by eVS in writing to the holders of shares of Registrable
Securities, which period shall not begin more than ten (10) days prior to the
effectiveness of the registration statement pursuant to which such public offer
will be made and shall not last more than one hundred eighty (180) days after
the effective
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date of such registration statement; provided that Stockholders shall not be
obligated to refrain from any of the foregoing for a period that is greater than
the minimum period required of any executive officer or director of eVS or
person holding, or having the right or option to acquire equity securities
representing more than five percent (5%) of the equity securities of eVS or if
any such person is not so required.
5.5. Underwriting Arrangement. In connection with each registration
pursuant to Article 5 covering an underwritten public offering, eVS and each
participating holder agree to enter into a written agreement with the managing
underwriter in such form and containing such provisions as are reasonably
acceptable to each such participating holder and are customary in the securities
business for such an arrangement between such underwriter and companies of eVS's
size and investment stature.
5.6. Notification. eVS shall notify each holder of Registrable Securities
covered by any registration statement of any event that results in the
prospectus included in such registration statement, as then in effect,
containing an untrue statement of a material fact or omitting to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing.
5.7. Furnishing of Documents. At the request of any participating holder,
eVS will furnish to each underwriter, if any, and participating holders, a legal
opinion of its counsel and a "cold comfort" letter from its independent
certified public accountants, each in customary form and substance, at such time
or times as such documents are customarily provided in the type of offering
involved. As expeditiously as possible, eVS shall furnish to each participating
holder such reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the 1933 Act, and
such other documents as the participating holder may reasonably request in order
to facilitate the public sale or other disposition of the Registrable Securities
owned by the participating holders.
5.8. Indemnification and Contribution.
(a) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Article IV, eVS will indemnify and
hold harmless each Stockholder, and each other person, if any, who controls such
Stockholder within the meaning of the 1933 Act, and each employee, officer and
trustee of such Stockholder against any losses, claims, damages or liabilities,
joint or several, to which each such controlling person, employee, officer or
trustee may become subject under the 1933 Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
Registrable Securities was registered under the 1933 Act pursuant to Article 5,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse such Stockholder, and each such controlling person, employee, officer
or trustee for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided that eVS
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will not be liable in any such case if and to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by such Stockholder or any such controlling person,
employee, officer or trustee in writing specifically for use in such
registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Article 5, each Stockholder will
indemnify and hold harmless eVS, each person, if any, who controls eVS within
the meaning of the 1933 Act, officer of eVS who signs the registration
statement, director of eVS, underwriter and person who controls any underwriter
within the meaning of the 1933 Act, against all losses, claims, damages or
liabilities, joint or several, to which eVS or such officer, director,
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
under which such Registrable Securities was registered under the 1933 Act
pursuant to Article 5, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse eVS and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided that such Stockholder will be liable hereunder in
any such case if and only to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with information pertaining to such Stockholder, as such, furnished
in writing to eVS by such Stockholder specifically for use in such registration
statement or prospectus.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve the indemnifying party from any
liability which the indemnifying party may have to such indemnified party other
than under this Section 5 and shall only relieve the indemnifying party from any
liability which the indemnifying party may have to such indemnified party under
this Section 5 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and the indemnified party shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent the indemnifying party shall wish, to assume and undertake
the defense thereof with counsel satisfactory to such indemnified party, and,
after notice from the indemnifying party to such indemnified party of the
indemnifying party's election so to assume and undertake the defense thereof,
the indemnifying party shall not be liable to such indemnified party under this
Section 5 for any legal expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation and of liaison with counsel so selected; provided that, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there
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may be reasonable defenses available to the indemnified party which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, then the indemnified party shall have
the right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the 1933 Act in any case in which either: (i) any holder of
Registrable Securities exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 5 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the 1933 Act may be required on the part of any such selling holder or any
such controlling person in circumstances for which indemnification is provided
under this Section 5; then, and in each such case, eVS and such holder will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) as is appropriate to reflect the
relative fault of eVS and such holder in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as well
as the relative benefit received by eVS and such holder as a result of the
offering in question, it being understood that the parties acknowledge that the
overriding equitable consideration to be given effect in connection with this
provision is the ability of one party or the other to correct the statement or
omission which resulted in such losses, claims, damages or liabilities, and that
it would not be just and equitable if contribution pursuant hereto were to be
determined by pro rata allocation or by any other method of allocation that does
not take into consideration the foregoing equitable considerations; provided
that, in any such case: (A) no such holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered by such holder pursuant to such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) will be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation.
5.9. Removal of Legends, Etc. Notwithstanding anything herein to the
contrary, the restrictions imposed by Articles 3 on the transferability of any
Shares shall cease and terminate when: (a) any such Shares are sold or otherwise
disposed of in accordance with the intended method of disposition by the seller
or sellers thereof set forth in a registration statement or such other method
that does not require that the securities transferred bear the legend set forth
in Section 3.2 hereof; or (b) the holder of such Shares has met the requirements
for transfer pursuant to subparagraph (k) of Rule 144 (as amended from time to
time) promulgated by the Commission under the 1933 Act. Whenever the
restrictions imposed by Articles 3 hereof have terminated, a holder of a
certificate for such Shares as to which such restrictions have terminated shall
be entitled to receive from eVS, without expense, a new certificate not bearing
the restrictive legend set forth in Section 3.2 hereof and not containing any
other reference to the restrictions imposed by this Agreement.
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5.10. Changes in Common Stock. If, and as often as, there is any change in
the Common Stock by way of a stock split, stock dividend, combination or
reclassification, or through a merger, consolidation, reorganization or
recapitalization, or by any other means, then appropriate adjustment shall be
made in the provisions hereof so that the rights and privileges granted hereby
shall continue with respect to the Common Stock as so changed.
5.11. Preparation of Registration Statements. Whenever eVS is registering
any Common Stock under the 1933 Act and a holder of Registrable Securities is
selling any securities under such registration or determines that it may be a
controlling person under such 1933 Act, eVS will allow such holder and its
counsel to participate in the preparation of the registration statement, will
include in the registration statement such information as such holder may
reasonably request and will take all such other action as such holder may
reasonably request.
5.12. Transferability of Registration Rights. The registration rights
described in Sections 5.1 and 5.2 are transferable by the holders of Registrable
Securities to any person to whom such holder transfers Registrable Securities,
only with the consent of eVS.
5.13. No Registration in Canada. eVS is under no obligation to register
any of its Common Stock in Canada.
ARTICLE 6
BRING ALONG PROVISIONS
6.1. Bring Along Right. If the holders of at least a majority of the
outstanding shares of eVS's common stock approve in writing the sale of eVS to
any person or entity that is not an Affiliate of eVS, provided that, with
respect to such sale, the shares of stock within a class are all treated equally
(an "Approved Sale"), each Stockholder who does not exercise dissenter's and
appraisal rights (if any) with respect to the Approved Sale will consent to,
vote for and raise no objections against, and if the Approved Sale is structured
as a sale of stock, will agree to sell and be permitted to sell all of such
Stockholder's shares on the same terms and conditions approved by the holders of
a majority of the shares of eVS's common stock. Each Stockholder who is
participating in such sale will take all necessary and desirable actions as may
be reasonable requested by eVS in connection with the consummation of an
Approved Sale.
For purpose of this Section, the term "Affiliate" means any person
or entity either (i) in which eVS owns, directly or indirectly, at least 20% of
the voting control of or equity in and any other entity that directly or
indirectly through one or more intermediaries controls, is controlled by or is
under common control by eVS, (i) which owns shares of eVs common stock prior to
such Approved Sale, or (iii) which owns shares of an entity identified in clause
(i) above prior to such Approved Sale.
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6.2. Termination of Bring Along Right. The provisions of this Article 6
shall terminate with respect to the shares upon the consummation of a Qualified
Initial Public Offering.
6.3. Execution of Documents; Costs. Each Stockholder shall, in connection
with an Approved Sale, at the request of eVS and without further cost or expense
to eVS, and without further cost and expense to eVS, execute and deliver such
other instruments as may reasonably be requested in order to consummate the
Approved Sale. Each Stockholder shall bear its pro rata share of the reasonable
costs and expenses incurred of any Approved Sale to the extent such costs and
expenses are incurred for the benefit of all selling Stockholders and are not
otherwise paid by eVS or the acquiring party. Costs incurred by a Stockholder on
its own behalf will not be considered costs of the Approved Sale hereunder.
ARTICLE 7
[RESERVED]
ARTICLE 8
ADDITIONAL PROVISIONS
8.1. Copy of Agreement to Be Kept on File. eVS shall keep on file at its
principal executive offices, and will exhibit to any Stockholder or his or her
duly authorized representative at any and all reasonable times, an executed copy
of this Agreement and all amendments thereto.
8.2. Stock Certificates to Be Marked with Legend. All certificates
hereafter issued by eVS shall be marked with the following legend:
THIS CERTIFICATE REPRESENTS SECURITIES WHICH ARE
RESTRICTED AND WHICH ARE SUBJECT TO THE TERMS AND CONDITIONS OF A
STOCKHOLDERS AGREEMENT DATED JULY 29, 1998 BY AND AMONG EMERGE
VISION SYSTEMS, INC. ("EVS") AND THE STOCKHOLDERS IDENTIFIED THEREIN
(A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF EVS) AND THE
RIGHTS, PRIVILEGES AND OPTIONS THEREIN CONTAINED. NO SALE, TRANSFER,
ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THIS
CERTIFICATE OR ANY OF THE SECURITIES REPRESENTED THEREBY SHALL BE
MADE EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF SAID
AGREEMENT.
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8.3. Termination of Certain Provisions. The provisions of Articles 1, 2,
3, 4, and 6 and Section 8.2 of this Agreement shall terminate and be of no
further force and effect upon the closing of an underwritten, firm commitment
initial public offering pursuant to an effective registration statement under
the 1933 Act, covering the offer and sale by eVS of its Common Stock in which
the aggregate net proceeds to eVS exceed Ten Million Dollars (a "Qualified
Initial Public Offering").
8.4. Rights, Obligations and Remedies. The rights and obligations under,
and the remedies to enforce, this Agreement are joint and several as to eVS and
each of the Stockholders with each being completely free to enforce any or all
of the rights or obligations under this Agreement against any of the others with
or without the concurrence or joinder of any of the others. The Shares are
unique, and recognizing that the remedy at law for any breach or threatened
breach by a party hereto of the covenants and agreements set forth in this
Agreement would be inadequate and that any such breach or threatened breach
would cause such immediate and permanent damage as would be irreparable and the
exact amount of which would be impossible to ascertain, the parties hereto agree
that in the event of any breach or threatened breach of any such covenant or
agreement, in addition to any and all other legal and equitable remedies which
may be available, any party hereto may specifically enforce the terms of this
Agreement and may obtain temporary and/or permanent injunctive relief without
the necessity of proving actual damage by reason of any breach or threatened
breach hereof and, to the extent permissible under the applicable statutes and
rules of procedure, a temporary injunction may be granted immediately upon the
commencement of any such suit and without notice.
8.5. Subsequent Stockholders to Become Bound. Before any person or entity
not a party to this Agreement to whom transfers of Shares may be made hereunder,
may be entitled to become a Stockholder of eVS, such person or entity shall be
required first to execute and deliver to eVS an agreement pursuant to which such
person or entity agrees to be bound by all of the terms and conditions of this
Agreement (as it may have then been amended), and the failure of any such person
or entity to execute such agreement shall preclude such person or entity from
becoming a Stockholder of eVS.
8.6. Amendment, Modification and Termination. This Agreement may be
amended, modified or terminated, or any provision or requirement hereof waived,
at any time by an agreement in writing among eVS, the holders of [EIGHTY]
percent [(80%)] of the outstanding Shares on a fully diluted basis, the holders
of eighty percent (80%) of the Shares held by STS Stockholders and their
Permitted Transferees and the holders of eighty percent (80%) of the Shares held
by the Nutri-Charge Shareholders and their Permitted Transferees; provided that
if this Agreement is amended, modified or terminated without the unanimous
consent of the Stockholders, all Stockholders that are not a party to such
agreement shall be given prompt notice of such amendment, modification or
termination. Any such amendment or waiver shall be effective with respect to all
parties to this Agreement.
8.7. No Waiver. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
-12-
<PAGE> 13
8.8. Governing Law and Jurisdiction. This Agreement shall be governed by
and interpreted under the laws of the Commonwealth of Pennsylvania, without
giving effect to the principles of conflicts of law of any jurisdiction. In the
event that a party to this Agreement perceives the existence of a dispute with
the other party concerning any right or duty provided for herein, the parties
will, as soon as practicable, confer in an attempt to resolve the dispute. If
the parties are unable to resolve such dispute amicably, then the parties hereby
submit to the exclusive jurisdiction of and venue in the state and federal
courts located in the Eastern District of the Commonwealth of Pennsylvania with
respect to any and all disputes concerning the subject of, or arising out of,
this Agreement.
8.9. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person or sent overnight
delivery by Federal Express or by certified or registered mail, return receipt
requested, or telexed in the case of non-US. residents, and shall be deemed to
have been given when hand delivered, one (1) day after mailing when mailed by
overnight courier (e.g., Federal Express or Express Mail) or five (5) days after
mailing by registered or certified mail, as follows (provided that notice of
change of address shall be deemed given only when received):
<TABLE>
<S> <C>
If to eVS, to: With a required copy to:
eMerge Vision Systems, Inc. Pepper Hamilton LLP
10305 102nd Terrace 3000 Two Logan Square
Sebastian, Florida 32958 Eighteenth & Arch Streets
Attention: Chuck Abraham, President Philadelphia, PA 19103-2799
Fax Number: (561) 589-2049 Attention: Elam M. Hitchner, III, Esquire
Fax Number: (215) 981-4750
If to Stockholders, to:
Judith Ackland Dr. Richard W. Stanley
P.O. Box 197 3526 Spruce Drive
Shickley, NE 68436 Red Deer, Alberta
T4N 3N9
Larry Cox, C.P.A. Ian Turnbull
P.O. Box 88 Box 5351
Henderson, NE 68371 Lacombe, Alberta
T4L 1X1
Sylvia R. Doerksen Ann Turnbull
3526 Spruce Drive Box 5351
Red Deer, Alberta Lacombe, Alberta
T4N 3N9 T4L 1X1
Darryl Robinson
</TABLE>
-13-
<PAGE> 14
<TABLE>
<S> <C>
18 Blackfoot Place
Woodstock, Ontario
N4T 1E2
With a required copy to:
Frank Heinisch, Esquire Robert J. Warrender, Esquire
P.O. Box 311 Duhamel Manning Feehan
Geneva, NE 68361 Warrender Glass
2nd Floor
Jim Titus, Esquire 5233 49th Avenue
121 S. 13th Street, #601 Red Deer, Alberta
P.O. Box 81849 T4N 6G5
Lincoln, NE 68501-1849
</TABLE>
or to such other names or addresses as a party to this Agreement, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section 8.9.
8.10. Binding Nature of Agreement and No Assignment. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns, except that
no party may assign or transfer its rights or obligations under this Agreement
without the prior written consent of the other parties hereto, except by means
of transfers permitted by Articles 1 or 2.
8.11. Counterparts, Headings and Exhibits. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. The headings
used in this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement. All
Schedules and Exhibits hereto are hereby incorporated in this Agreement and made
a part hereof.
8.12. Integration. This Agreement, the Stock Purchase Agreement and the
Purchase Agreement embody the entire agreement and understanding among the
parties hereto and thereto supersede all prior agreements and understandings
relating to the subject matter hereof or thereof.
8.13. Severability. If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, then such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
8.14. Number of Days. In computing the number of days for purposes of this
Agreement, all days shall be counted, including Saturdays, Sundays and holidays;
provided that if the final day of any time period falls on a Saturday, Sunday or
holiday on which U.S. Federal
-14-
<PAGE> 15
banks are or may elect to be closed, then the final day shall be deemed to be
the next day which is not a Saturday, Sunday or such holiday.
-15-
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement on the date first above written.
EMERGE VISION SYSTEMS, INC.
By:/s/ Charles L. Abraham
----------------------
Name: Charles L. Abraham
------------------
Title: President & C.E.O.
------------------
THE STOCKHOLDERS:
J Technologies, LLC
By:
--------------------------------------
Heidi Johanns, member
/s/ Judith A. Ackland
-----------------------------------------
Judith Ackland, Co-Trustee of the Biegert
Family Irrevocable Trust dated June 11,
1998
/s/ Larry Cox
-----------------------------------------
Larry Cox, Co-Trustee of the Biegert
Family Irrevocable Trust dated June 11,
1998
-16-
<PAGE> 17
/s/ R. Stanley
--------------------------------------
Dr. Richard W. Stanley
/s/ S. Doerksen
--------------------------------------
Sylvia R. Doerksen
/s/ Ian Turnbull
--------------------------------------
Ian Turnbull
/s/ A. Turnbull
--------------------------------------
Ann Turnbull
/s/ Darryl Robinson
--------------------------------------
Darryl Robinson
-17-
<PAGE> 18
SCHEDULE A
Nutri-Charge Stockholders
<TABLE>
<CAPTION>
NAME & ADDRESS NUMBER OF SHARES OF eVS
- -------------- -----------------------
<S> <C>
J Technologies, LLC 1,000,000 shares
a South Dakota limited liability company
Attention, Jim Titus,
P.O. Box 81849
Lincoln, NE 68501-1849
Judith Ackland and Larry Cox, Co-Trustees, 1,000,000 shares
The Biegert Family Irrevocable Trust dated June 11, 1998
P.O. Box 197
Shickley, NE 68436
</TABLE>
STS Stockholders and Darryl Robinson
<TABLE>
<CAPTION>
NAME & ADDRESS NUMBER OF SHARES OF eVS
- -------------- -----------------------
<S> <C>
Dr. Richard W. Stanley 32,130 shares
3526 Spruce Drive
Red Deer, Alberta
T4N 3N9
Sylvia R. Doerksen 24,570 shares
3526 Spruce Drive
Red Deer, Alberta
T4N 3N9
Ian Turnbull 3,150 shares
Box 5351
Lacombe, Alberta
T4L 1X1
</TABLE>
-18-
<PAGE> 19
<TABLE>
<S> <C>
Ann Turnbull 3,150 shares
Box 5351
Lacombe, Alberta
T4L 1X1
Darryl Robinson 7,000 shares
18 Blackfoot Place
Woodstock, Ontario
N4T 1E2
</TABLE>
-19-
<PAGE> 1
Exhibit 10.24
TERM NOTE
(eMERGE INTERACTIVE, INC.)
$7,050,000 October 25, 1999
In consideration of the loan (hereinafter referred to as a "Loan")
Safeguard Delaware, Inc., a Delaware corporation (the "Lender"), has made to
eMerge Interactive, Inc., a Delaware corporation (the "Borrower"), and for value
received, the Borrower hereby promises to pay to the order of the Lender, at the
Lender's office located at 103 Springer Building, 3411 Silverside Road,
Wilmington, DE 19810, or at such other place in the continental United States as
the Lender may designate in writing, in lawful money of the United States, and
in immediately available funds, the principal sum of SEVEN MILLION FIFTY
THOUSAND DOLLARS ($7,050,000).
The unpaid principal balance of the Note shall be paid on the earliest
of: (1) the closing date of an underwritten public offering of the Company's
common stock, (2) the repayment of a Promissory Note dated October 25, 1999, to
Internet Capital Group, Inc. or (3) one year from the date hereof.
The Borrower hereby further promises to pay to the order of the Lender
interest on the outstanding principal amount from the date hereof, at an annual
rate equal to the announced prime rate of the pnc Bank, N.A. (the "Prime Rate")
plus one percent (1%). Such interest rate shall be changed when and as the Prime
Rate changes. In addition, the Borrower shall pay on demand interest on any
overdue payment of principal and interest (to the extent legally enforceable) at
the fluctuating Prime Rate plus three percent (3%).
Interest shall be payable when the unpaid principal balance of the Note
is paid.
All payments made on this Note (including, without limitation,
prepayments) shall be applied, at the option of the Lender, first to late
charges and collection costs, if any, then to accrued interest and then to
principal. Interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due
and payable upon maturity of this Note. After maturity or in the event of
default, interest shall continue to accrue on the Note at the rate set forth
above and shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid by the
Borrower upon notice to the Lender in whole at any time or in part from time to
time without any prepayment penalty or premium; provided, that upon such payment
any interest due to the date of such prepayment on such prepaid amount shall
also be paid.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable
<PAGE> 2
rate, and any excess payment of interest made by the Borrower at any time shall
be applied to the unpaid balance of any outstanding principal of this Note.
An event of default hereunder shall consist of:
(i) a default in the payment by the Borrower to the Lender of principal
or interest under this Note as and when the same shall become due and
payable;
(ii) an event of default by the Borrower under any other obligation,
instrument, note or agreement for borrowed money, beyond any applicable
notice and/or grace period;
(iii) institution of any proceeding by or against the Borrower under
any present or future bankruptcy or insolvency statute or similar law and,
if involuntary, if the same are not stayed or dismissed within sixty (60)
days, or the Borrower's assignment for the benefit of creditors or the
appointment of a receiver, trustee, conservator or other judicial
representative for the Borrower or the Borrower's property or the Borrower's
being adjudicated a bankrupt or insolvent.
Upon the occurrence of any event of default, interest shall accrue on
the outstanding balance of this Note at the Prime Rate plus three percent (3%),
the entire unpaid principal amount of this Note and all unpaid interest accrued
thereon shall, at the sole option of the Lender, without notice, become
immediately due and payable, and the Lender shall thereupon have all the rights
and remedies provided hereunder or now or hereafter available at law or in
equity.
Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $100,000 ("Summary
Proceeding"), arising out of or relating to this Note, or the breach,
termination or validity thereof, shall be litigated exclusively in the Superior
Court of the State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties hereto
hereby irrevocably and unconditionally (i) submits to the jurisdiction of the
Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence
any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead
or to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise inconvenient forum,
(v) waives, and agrees not to plead or to make, any claim that the Delaware
Superior Court lacks personal jurisdiction over it, (vi) waives its right to
remove any Summary Proceeding to the federal courts except where such courts are
vested with sole and exclusive jurisdiction by statute and (vii) understands and
agrees that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this Note and
waives any and all rights to any such jury trial or to seek punitive damages.
<PAGE> 3
In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $100,000 (a "Proceeding"), arising out of or relating to this Note or the
breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Note and the substantive law of the State of Delaware. The arbitration shall be
conducted at the Association's regional office located closest to the Lender's
principal place of business by three arbitrators, at least one of whom shall be
knowledgeable in general business matters and one of whom shall be an attorney.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither party shall institute a proceeding hereunder
unless at least 60 days prior thereto such party shall have given written notice
to the other party of its intent to do so.
Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to, temporary
restraining orders and preliminary injunctions to protect its rights and
interests but such remedies shall not be sought as a means to avoid or stay
arbitration or a Summary Proceeding.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs
and expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Notices required to be given hereunder shall be deemed validly given
(i) three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
If to the Lender: Safeguard Delaware, Inc.
<PAGE> 4
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attn: Michael W. Miles, Chief Financial Officer
If to the Borrower: eMerge Interactive, Inc.
10315 102nd Terrace
Sebastian, FL 32958
Attn: Michael Janney, Chief Financial Officer
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon the
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
The Note shall be governed by and interpreted in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Borrower, by its duly authorized officer
intending to be legally bound hereby, has duly executed this Term Note as of the
date first written above.
eMerge interactive, inc.
By:____________________________
Michael T. Janney
Chief Financial Officer
<PAGE> 1
Exhibit 10.30
eMerge Interactive, Inc.
Securities Purchase Agreement
October 27, 1999
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. Purchase and Sale of Securities.............................. 1
1.1 Sale and Issuance of Securities.............................. 1
1.2 Closing...................................................... 2
SECTION 2. Representations and Warranties of the Company to Investor.... 2
2.1 Organization and Standing; Certificate and Bylaws............ 3
2.2 Power and Authority.......................................... 3
2.3 Subsidiaries................................................. 3
2.4 Capitalization............................................... 3
2.5 Authorization; Enforceability................................ 4
2.6 Valid Issuance of Securities................................. 4
2.7 Offering..................................................... 5
2.8 Title to Properties; Liens and Encumbrances.................. 5
2.9 Intellectual Property........................................ 5
2.10 Material Contracts and Other Commitments..................... 6
2.11 Litigation................................................... 6
2.12 Taxes........................................................ 7
2.13 Insurance.................................................... 7
2.14 Employee Benefit Plans....................................... 7
2.15 Proprietary Information Agreements........................... 7
2.16 Registration Rights and Voting............................... 8
2.17 Consents..................................................... 8
2.18 Environmental and Safety Laws................................ 8
2.19 Related Party Transactions................................... 8
2.20 Broker's and Finders' Fees................................... 9
2.21 Compliance with Other Instruments............................ 9
2.22 Financial Statements......................................... 9
2.23 Permits...................................................... 9
2.24 Year 2000 Compliance......................................... 9
2.25 Employees.................................................... 10
2.26 Changes...................................................... 10
2.27 Undisclosed Liabilities...................................... 11
2.28 Certain Indebtedness......................................... 11
2.29 Corporate Documents.......................................... 12
2.30 Disclosure................................................... 12
SECTION 3. Representations and Warranties of JTL to Investor............ 12
3.1 Power and Authority.......................................... 12
3.2 Capitalization............................................... 12
3.3 Authorization; Enforceability................................ 12
</TABLE>
-i-
<PAGE> 2
<TABLE>
<S> <C>
3.4 Accuracy of Representations and Warranties................. 12
3.5 Broker's and Finders' Fees................................. 13
3.6 Organization and Standing.................................. 13
SECTION 4. Representations and Warranties of Investor................. 13
4.1 Investment Experience...................................... 13
4.2 Investment................................................. 13
4.3 Rule 144................................................... 13
4.4 Access to Information...................................... 13
4.5 Authorization; Enforceability.............................. 13
4.6 Broker's and Finders' Fees................................. 14
4.7 Non-Limitation............................................. 14
4.8 Legends.................................................... 14
4.9 Residence.................................................. 14
SECTION 5. Conditions of Investor's Obligations at Closing............ 14
5.1 Opinion of the Company's Counsel........................... 14
5.2 Registration Rights Agreement.............................. 14
5.3 Stockholder Agreement...................................... 15
5.4 HSR Approvals.............................................. 15
5.5 Opinion of JTL's Counsel................................... 15
SECTION 6. Conditions of Sellers' Obligations at Closing.............. 15
6.1 Note....................................................... 15
6.2 Pledge Agreement........................................... 15
6.3 HSR Approvals.............................................. 15
6.4 Registration Rights Agreement.............................. 15
6.5 Stockholder Agreement...................................... 15
6.6 Opinion of Investor's Counsel ............................. 15
SECTION 7. Certain Covenants.......................................... 16
7.1 Conduct Pending Closing.................................... 16
7.2 Approvals.................................................. 16
7.3 Registration of Securities................................. 16
7.4 Indemnification By Sellers................................. 17
7.5 Indemnification by Investor................................ 17
7.6 Securities Laws Compliance................................. 17
7.7 Proprietary Information Agreements......................... 17
7.8 Reservation of Shares...................................... 17
7.9 Books and Records.......................................... 18
7.10 Use of Proceeds............................................ 18
7.11 Investor Rights............................................ 18
7.12 Reports.................................................... 18
7.13 Certificate of the Company................................. 19
7.14 Certificate of JTL......................................... 19
7.15 Certificate of Investor.................................... 19
</TABLE>
-ii-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 8. Miscellaneous.............................................. 19
8.1 Termination................................................ 19
8.2 Entire Agreement; Successors and Assigns................... 20
8.3 Governing Law.............................................. 20
8.4 Counterparts............................................... 20
8.5 Headings................................................... 20
8.6 Notices.................................................... 20
8.7 Survival of Representations and Warranties................. 20
8.8 Amendment of Agreement..................................... 20
8.9 Expenses................................................... 20
8.10 Further Assurances......................................... 21
</TABLE>
-iii-
<PAGE> 4
EXHIBITS
--------
Exhibit A - Certificate of Incorporation
Exhibit B - Warrant
Exhibit C - Note
Exhibit D - Registration Statement
Exhibit E - Schedule of Exceptions
Exhibit F - Bylaws
Exhibit G - Registration Rights Agreement
Exhibit H - Stockholder Agreement
Exhibit I - Pledge Agreement
Exhibit J - Post-Closing Capitalization Table
Exhibit K - Opinion Letter of Counsel to the Company
Exhibit L - Opinion Letter of Counsel to JTL
Exhibit M - Opinion Letter of Counsel to Investor
-iv-
<PAGE> 5
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of October
27, 1999, by and among eMerge Interactive, Inc., a Delaware corporation (the
"Company"), J Technologies, LLC, a South Dakota limited liability company
("JTL"), and Internet Capital Group, Inc., a Delaware corporation (the
"Investor"). Each of JTL and the Company is referred to herein as a "Seller"
and, collectively, as "Sellers."
Background
A. The Board of Directors and stockholders of the Company have adopted and
filed with the Secretary of State of the State of Delaware the Second Amended
and Restated Certificate of Incorporation in the form attached hereto as Exhibit
A, which, among other matters, establishes the rights, preferences and
privileges of the Company's Series D Preferred Stock, par value $0.01 (the
"Series D Preferred"), the Company's Class A Common Stock, par value $0.01 (the
"Class A Common Stock") and the Company's Class B Common Stock, par value $0.01
(the "Class B Common Stock").
B. The Company desires to sell a common stock purchase warrant and shares
of Series D Preferred to Investor, and Investor desires to purchase a common
stock purchase warrant and shares of Series D Preferred from the Company, on the
terms and subject to the conditions set forth in this Agreement.
C. JTL desires to sell shares of Class A Common Stock to Investor and
Investor desires to purchase shares of Class A Common Stock from JTL, on the
terms and subject to the conditions set forth in this Agreement.
Terms
In consideration of the mutual covenants contained herein and intending to
be legally bound hereby, the parties hereto agree as follows:
SECTION 1.
Purchase and Sale of Securities.
1.1 Sale and Issuance of Securities. At the Closing the Company shall
issue to Investor and Investor shall purchase from the Company an aggregate of
4,555,556 shares of Series D Preferred (the "Company Shares") and a warrant in
the form attached hereto as Exhibit B (the "Warrant") to purchase 911,111 shares
of such class of the Company's Common Stock, par value $0.01 (the "Common
Stock") as is specified in the Warrant. The aggregate purchase price for the
<PAGE> 6
Company Shares and the Warrant shall be forty-one million dollars ($41,000,000)
(the "Company Purchase Price"). At the Closing JTL shall sell to Investor and
Investor shall purchase from JTL an aggregate of 1,000,000 shares of Class A
Common Stock (the "JTL Shares" and together with the Company Shares, the
"Shares") free and clear of all liens and encumbrances for an aggregate purchase
price of nine million dollars ($9,000,000) (the "JTL Purchase Price" and,
together with the Company Purchase Price, the "Purchase Price").
1.2 Closing.
(a) The closing under this Agreement (the "Closing") will take place
at 10:00 a.m., local time, on the second business day after all of the
conditions to closing identified in Sections 5 and 6 have been satisfied or
waived, at the offices of Dechert Price & Rhoads, 1717 Arch Street, 4000 Bell
Atlantic Tower, Philadelphia, PA 19103.
(b) At the Closing, each Seller shall deliver to Investor a
certificate evidencing the Shares that Investor is purchasing from such Seller,
accompanied by stock powers duly executed in blank or duly executed instruments
of transfer, if appropriate, and any other documents that are necessary to
transfer to Investor good title to the Shares, free and clear of all liens and
encumbrances. At the Closing the Company shall issue and deliver the Warrant to
Investor.
(c) At the Closing, Investor shall deliver the Purchase Price as
follows:
(i) delivery of nine million dollars ($9,000,000) to JTL by
wire transfer of immediately available funds to an account designated not less
than two business days before the Closing in writing by JTL;
(ii) delivery of eighteen million dollars ($18,000,000) to the
Company by wire transfer of immediately available funds to an account designated
not less than two days before the Closing in writing by the Company (the "Cash
Payment"), the Cash Payment and the Note delivered in accordance with clause
(iii) below shall be allocated equally among all the Company Shares and the
Warrant as payment of the Company Purchase Price; and
(iii) delivery of a non-negotiable promissory note of Investor
in favor of the Company in the aggregate principal amount of twenty-three
million dollars ($23,000,000) in the form attached hereto as Exhibit C (the
"Note").
(d) At the Closing, the closing certificates and other documents
required to be delivered pursuant to this Agreement shall be exchanged.
SECTION 2.
Representations and Warranties of the Company to Investor.
Except (i) as described in the draft Company registration statement on Form
S-1 dated October 27, 1999 attached hereto as Exhibit D (the "Registration
Statement"), or (ii) as set forth on
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the Schedule of Exceptions attached hereto as Exhibit E specifically identifying
the subparagraph of this Section 2 to which each such exception relates, the
Company hereby represents and warrants to Investor as of the date hereof as
follows:
2.1 Organization and Standing; Certificate and Bylaws. The Company is a
corporation duly organized, validly existing under, and by virtue of, the laws
of the State of Delaware, and is in good standing under such laws. The Company
has all requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as currently conducted and
as proposed to be conducted. The Company is duly qualified and authorized to
transact business and is in good standing as a foreign corporation in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on the Company. The Company has furnished Investor with copies of its
Certificate and Bylaws, as amended (attached hereto as Exhibit A and Exhibit F,
respectively). Such copies are true, correct and complete and contain all
amendments as of the date hereof.
2.2 Power and Authority. The Company has all requisite legal and
corporate power and authority to execute and deliver this Agreement, the
Registration Rights Agreement attached hereto as Exhibit G (the "Registration
Rights Agreement"), the Stockholder Agreement attached hereto as Exhibit H (the
"Stockholder Agreement"), the Warrant, the Note and the Pledge Agreement
attached hereto as Exhibit I (the "Pledge Agreement and, collectively with the
Stockholder Agreement, the Registration Rights Agreement, the Warrant and the
Note, the "Related Agreements"), to sell and issue the Company Shares hereunder,
to issue the Class A Common Stock and Class B Common Stock issuable upon
exercise of the Warrant (the "Underlying Warrant Stock"), to issue the Class B
Common Stock issuable upon conversion of the Company Shares (the "Underlying
Common Stock"), to issue the Class A Common Stock issuable upon conversion of
the Class B Common Stock underlying the Warrant and the Company Shares (the
"Conversion Stock") and to carry out and perform its obligations under the terms
of this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby.
2.3 Subsidiaries. The Company has no Subsidiaries or affiliated companies
and does not otherwise own or control, directly or indirectly, any equity
interest in any corporation, association or other business entity. The Company
is not a participant in any joint venture, partnership or similar arrangement.
As used herein, the term "Subsidiary" shall mean any corporation or other entity
more than 50% of the stock or other ownership interest of which (measured by
virtue of voting rights) in the aggregate is owned by the Company.
2.4 Capitalization. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, 92,711,110 of which have been designated
as shares of Class A Common Stock, of which 5,616,155 shares are issued and
outstanding, and 7,288,890 of which have been designated as shares of Class B
Common Stock, none of which are issued and outstanding, and 15,000,000 shares of
Preferred Stock, $0.01 par value, 6,500,000, of which have been designated
Series A Preferred, and 6,443,606 of which are issued and outstanding, 2,400,000
of which have been designated Series B Preferred, and 2,400,000 of which are
issued and outstanding, 1,300,000 of which have been designated Series C
Preferred, and 1,100,000 of which are issued and outstanding and 4,555,556 of
which have been designated Series D Preferred, and none of which are issued and
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outstanding. All such issued and outstanding shares, including the JTL Shares,
have been duly authorized and validly issued, are fully paid and nonassessable
and have been issued in compliance with federal and state securities law. The
Company has reserved 6,500,000 shares of Class A Common Stock for issuance upon
conversion of the Series A Preferred, 2,400,000 shares of Class A Common Stock
for issuance upon conversion of the Series B Preferred, 1,300,000 shares of
Class A Common Stock for issuance upon conversion of the Series C Preferred,
4,555,556 shares of Class B Common Stock for issuance upon conversion of the
Series D Preferred and 911,111 shares of Class A Common Stock and Class B Common
Stock for issuance upon exercise of the Warrant. The Company has reserved
1,588,595 shares of its Common Stock for issuance pursuant to exercise of
options granted under its 1996 Stock Option Plan (the "1996 Plan"), and
2,000,000 shares of its Class A Common Stock, 1,000,000 of which is subject to
Stockholder approval, for issuance pursuant to exercise of options granted under
its 1999 Stock Option Plan (the "1999 Plan" and, together with the 1996 Plan,
the "Plans"), which are the only stock option, stock purchase or similar
incentive or benefit plans currently in effect with respect to the Company. To
date, the Company has granted options for an aggregate of 2,478,200 shares of
its Class A Common Stock under the Plans, 466,030 of which have expired or been
terminated and 113,780 of which have been exercised by the holders thereof to
date. The Shares shall have the rights, preferences, privileges and
restrictions set forth in the Certificate. Except as contemplated herein, there
are no outstanding options, warrants, conversion rights, preemptive rights,
rights of first refusal, or similar rights currently outstanding to purchase or
otherwise acquire from the Company any securities of the Company, nor are there
any agreements or understandings with respect thereto. Schedule 2.4(a) sets
forth the holders of the Company's outstanding shares of capital stock and
options or other rights to purchase stock of the Company and the number of
outstanding shares of each class or series of capital stock, options or other
rights to purchase stock of the Company held by each such holder. With the
exception of the Stockholder Agreement, the Company is not a party or otherwise
subject to any agreement or understanding, and, to the Company's knowledge,
there is no agreement or understanding between any persons or entities, which
affects or relates to the voting or giving of written consents either by a
director of the Company or with respect to any capital stock of the Company.
Immediately after the Closing, the fully-diluted capitalization of the Company
will be as set forth in Exhibit J.
2.5 Authorization; Enforceability. All corporate action on the part of
the Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Related Agreements by the Company, the authorization, sale, issuance (or
reservation for issuance) and delivery of the Shares, the Warrant, the
Underlying Warrant Stock, the Underlying Common Stock, and the Conversion Stock
and the performance of all of the Company's obligations hereunder and under the
Related Agreements has been taken or will be taken prior to Closing. This
Agreement constitutes and as of the Closing the Related Agreements will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms.
2.6 Valid Issuance of Securities. The Company Shares, when issued, sold
and delivered in compliance with the provisions of this Agreement, will be duly
and validly issued, fully paid and nonassessable and issued in compliance with
applicable federal and state securities laws. The
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Warrant, when issued, sold and delivered in compliance with the provisions of
this Agreement, will constitute a valid and legally binding obligation of the
Company, enforceable in accordance with its terms. The Underlying Common Stock,
the Underlying Warrant Stock and the Conversion Stock have been duly and validly
reserved and, when issued in compliance with the provisions of the Certificate,
will be duly and validly issued and will be fully paid and nonassessable and
issued in compliance with applicable federal and state securities laws. The
Shares, the Warrant, the Underlying Warrant Stock, the Underlying Common Stock
and the Conversion Stock will be free and clear of any liens or encumbrances;
provided, however, that the Shares, the Warrant, the Underlying Warrant Stock,
the Underlying Common Stock and the Conversion Stock may be subject to
restrictions on transfer under state and/or federal securities laws. Except as
set forth in the Related Agreements, the Shares, the Warrant, the Underlying
Warrant Stock, the Underlying Common Stock and the Conversion Stock are
convertible are not subject to any preemptive rights, rights of first refusal or
restrictions on transfer.
2.7 Offering. Subject in part to the accuracy of Investor's
representations in Section 4, the offer, sale and issuance of the Shares in
conformity with the terms of this Agreement (and the issuance of the Warrant,
the Underlying Warrant Stock, the Underlying Common Stock and the Conversion
Stock) constitute transactions exempt from the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), and
from all applicable state securities or Blue Sky laws.
2.8 Title to Properties; Liens and Encumbrances. The Company has good and
valid title to all of its properties and assets, and is in compliance with the
lease of all properties leased by it, in each case subject to no mortgage,
pledge, lien, lease, encumbrance or charge, other than the lien of current taxes
not yet due and payable. The Company is not in default under or in breach of
any provision of its leases, and the Company holds valid leasehold interests in
the properties which it leases. The Company's properties and assets are in good
condition and repair.
2.9 Intellectual Property. The Company owns or possesses sufficient legal
rights to all patents, patent applications, trademarks, service marks, trade
names, copyrights, trade secrets, licenses, know-how, concepts, computer
programs, technical data, proprietary rights, proprietary processes and other
information necessary for or used in its business as now conducted and as
proposed to be conducted (each such item "Company Intellectual Property")
without any conflict with or, to the Company's knowledge, infringement of the
rights of others. The Company has not received any communications alleging, nor
does the Company have reason to believe, that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights, trade secrets, or other
proprietary rights or processes of any other person or entity, and to the
Company's knowledge, there is no reasonable basis therefor. To the Company's
knowledge, none of its employees, agents, consultants or contractors is
obligated under any contract (including licenses, covenants, or commitments of
any nature) or other agreement, or subject to any judgment, decree, or order of
any court or administrative agency, that would interfere with the use of such
person's or entity's best efforts to promote the interests of the Company, or
that would conflict with the Company's business as proposed to be conducted. To
the Company's knowledge, there has been no violation or
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infringement by a third party of any of the Company Intellectual Property.
Neither the execution nor the delivery of this Agreement or the Related
Agreements, nor the carrying on of the Company's business by the employees,
agents, consultants or contractors of the Company, nor the conduct of the
Company's business as currently proposed, will conflict with or result in a
material breach of the terms, conditions, or provisions of, or constitute a
default under, any contract, covenant, or instrument under which the Company or
any of such employees, agents, consultants or contractors is now obligated. The
Company has no plan to utilize, and does not believe it is or will be necessary
to utilize, any inventions of any of its employees (or people it currently
intends to hire) made prior to their employment or engagement by the Company.
2.10 Material Contracts and Other Commitments.
(a) Except for the Related Agreements, there are no material
agreements, understandings or proposed transactions between the Company and any
of its officers, directors, affiliates, or any affiliate thereof.
(b) Except for agreements explicitly contemplated by this Agreement or
the Related Agreements, there are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company or any of its
Subsidiaries is a party or by which it is bound that involve (i) obligations
(contingent or otherwise) of or payments to the Company or any of its
Subsidiaries in excess of $100,000, (ii) the license of any patent, copyright,
trade secret or other proprietary right to or from the Company or any of its
Subsidiaries, or (iii) the grant of rights to manufacture, produce, assemble,
license, market, or sell its products or services to any other person or affect
the Company's exclusive right to develop, manufacture, assemble, distribute,
market or sell its products or services.
(c) The Company has not since December 31, 1998 (i) declared or paid
any dividends or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or incurred any other liabilities in excess of $100,000, (iii) made any
loans or advances to any person, other than ordinary advances to employees for
travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the nonexclusive license of software to end-users
in the ordinary course of business.
(d) All the material contracts, agreements and instruments to which
the Company is a party are listed on the exhibit index to the Registration
Statement and such contracts, agreements and instruments are valid, binding and
in full force and effect in all material respects, and are valid, binding and
enforceable by the Company in accordance with their respective terms. The
Company is not in material default under any contract, and, to the Company's
knowledge, no other party to any such contract is in material default.
2.11 Litigation. There are (i) no actions, suits, proceedings, or
investigations pending or, to the Company's knowledge, threatened against the
Company or its properties before any court or governmental agency (nor is there
any basis therefor) which are reasonably likely to have a material adverse
effect on the Company, and (ii) no actions, suits, proceedings or investigations
are pending
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or, to the Company's knowledge, threatened against it or its employees that may
relate to their employment with or conduct on behalf of the Company, or that
question the validity of this Agreement, the Related Agreements or any action
taken or to be taken in connection herewith or therewith. The foregoing
includes, without limitation, any action, suit, proceeding, or investigation
pending or currently threatened involving the prior employment of any of the
Company's employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, their obligations under any agreements with prior employers, or
negotiations by the Company with potential backers of, or investors in, the
Company or its proposed business. The Company is not a party or subject to any
writ, order, decree, injunction or judgment of any court, governmental agency,
or instrumentality (nor, to the Company's knowledge, is there any reasonable
basis therefor). There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company currently intends to initiate.
2.12 Taxes. The Company has timely filed all tax returns and reports
(federal, state and local) as required by law, and such returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due. There are no agreements, waivers or other arrangements
providing for an extension of time with respect to the assessment of any tax or
deficiency against the Company, and there are no actions, suits, proceedings,
investigations or claims now pending against the Company with respect to any tax
or assessment or any matters under discussion with any federal, state, local or
foreign authority relating to any taxes or assessments, or any claims for
additional taxes or assessments asserted by any such authority, and there is no
basis for the assertion of any additional taxes as assessments against the
Company. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as an S corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has
it made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation, or amortization) that
would have a material effect on the business, properties, prospects, or
financial condition of the Company. The Company has never had any tax
deficiency proposed or assessed against it. The Company has never been audited
by governmental authorities. The Company has withheld or collected from each
payment made by it to each of its employees the amount of all taxes, including,
but not limited to, income taxes, Federal Insurance Contribution Act taxes and
Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
2.13 Insurance. The Company has in full force and effect fire, casualty
and liability insurance policies with recognized insurers. The Company believes
that this insurance is sufficient in amount as of the Closing Date, subject to
reasonable deductibles, relative to other companies of similar size in similar
industries.
2.14 Employee Benefit Plans. The Company does not have any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.15 Proprietary Information Agreements. Each current and former employee,
officer and director of the Company has executed an agreement with the Company
regarding confidentiality and
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proprietary information. To the Company's knowledge, none of its current or
former employees, officers or directors is in violation of such agreement. Each
current or former consultant to or material vendor of the Company that has had
access to the Company's confidential information has executed a written
agreement under which, among other things, each such consultant or material
vendor is obligated to maintain the confidentiality of the Company's
confidential information. To the Company's knowledge, none of its consultants or
material vendors are in violation of such agreement.
2.16 Registration Rights and Voting. Except as provided in the Registration
Rights Agreement, the Company is not under any obligation and has not granted
any rights to register under the Securities Act any of its currently outstanding
securities or any of its securities that may subsequently be issued. To the
Company's knowledge, except as contemplated in the Stockholder Agreement, no
stockholder of the Company has entered into any agreement with respect to the
voting of the Company's securities.
2.17 Consents. No consent, approval, qualification or authorization of, or
registration, designation, declaration or filing with any person, including, any
local, state or federal governmental authority, on the part of the Company is
required in connection with the valid execution, delivery or performance of this
Agreement or the Related Agreements, or the offer, sale or issuance of the
Shares, the Warrant, the Underlying Warrant Stock, the Underlying Common Stock
and the Conversion Stock, or the consummation of any transaction contemplated
hereby, except (i) such filings as have been made prior to the date hereof, (ii)
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and (iii) such additional post-closing filings as may
be required to comply with applicable state and federal securities laws, and
with applicable general corporation laws of the various states, each of which
will be filed with the proper authority by the Company in a timely manner.
2.18 Environmental and Safety Laws. The Company is not in material
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and no material expenditures are
or will be required in order to comply with any such existing statute, law, or
regulation.
2.19 Related Party Transactions. No employee, officer, stockholder or
director of the Company or member of his or her immediate family is indebted to
the Company, nor is the Company indebted (or committed to make loans or extend
or guarantee credit) to any of them, other than (i) for payment of salary for
services previously rendered, (ii) as reimbursement for reasonable expenses
incurred on behalf of the Company, or (iii) for other standard employee benefits
made generally available to all employees (not including stock option agreements
outstanding under any stock option plan approved by the Board of Directors of
the Company). To the Company's knowledge, none of such persons has any direct
or indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any firm
or corporation that competes with the Company, except that employees, officers
or directors of the Company and members of their immediate families may own
stock representing less than 1% equity ownership in publicly traded companies
that may compete with the
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Company. To the Company's knowledge, no officer, director, or stockholder or any
member of their immediate families is, directly or indirectly, interested in any
material contract with the Company (other than such contracts as relate to any
such person's ownership of capital stock or other securities of the Company).
2.20 Broker's and Finders' Fees. The Company has not incurred, and will
not incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.21 Compliance with Other Instruments. The Company is not in violation or
default of any provisions of its Certificate or Bylaws, or of any mortgage,
indenture, agreement, instrument, judgment, order, writ, decree or contract to
which it is a party or by which it is bound, or any provision of any federal or
state statute, rule or regulation applicable to the Company. The execution,
delivery and performance of and compliance with this Agreement and the Related
Agreements, and the consummation of the transactions contemplated hereby and
thereby, will not result in any such material violation or be in conflict with
or constitute, with or without the passage of time and giving of notice, either
a default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any of the properties or assets of the Company or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business, operations, properties or assets.
2.22 Financial Statements. The books of account and related records of the
Company fairly reflect in reasonable detail its assets, liabilities and
transactions. The following financial statements (collectively, the "Financial
Statements") are included in the Registration Statement: (i) audited statements
of income, cash flows and stockholders' equity of the Company for the fiscal
years ended December 31, 1996 through 1998, inclusive, and balance sheets of the
Company as at each of such dates (it being understood that the balance sheet of
the Company as at December 31, 1998 is hereinafter referred to as the "Balance
Sheet") and (ii) unaudited statements of income, cash flows and stockholders'
equity of the Company for the six-month period ended June 30, 1999 and a balance
sheet of the Company as at such date. The Financial Statements: (a) fairly
present in all material respects the financial condition, assets and liabilities
of the Company as at their respective dates and the results of operations and
cash flows for the periods covered thereby and (b) have been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject in the case of the unaudited Financial Statements to normal year-end
audit adjustments and the absence of related notes.
2.23 Permits. The Company has all material franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company, and
believes it can obtain, without undue burden or expense, any necessary authority
for the conduct of its business as currently planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses or other similar authority.
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2.24 Year 2000 Compliance. The Company's computer systems and software are
and will be, and the products developed, manufactured, sold or licensed by the
Company are and will be, able accurately to: (i) process any date rollover,
(ii) process calculations or computations regardless of the dates used in such
calculations whether before, on or after January 1, 2000, (iii) accept and
respond to two digit year date input in a manner that resolves any ambiguities
as to the century to which such two digit year date input relates in an
appropriate manner and (iv) store and display date data in a manner that is
unambiguous as to the century to which such two digit year date input relates.
Based upon a reasonable investigation made by the Company, none of the above-
referenced systems, software or products are reasonably expected to malfunction,
cease to function, generate incorrect data or provide incorrect results when
providing and/or receiving data in connection with any valid date, whether
occurring before, on or after January 1, 2000.
2.25 Employees. There is no strike, labor dispute or union organization
activity pending or, to the Company's knowledge, threatened between the Company
and its employees. None of the Company's employees belongs to any union or
collective bargaining unit. The Company has complied in all material respects
with all applicable state and federal equal opportunity and other laws related
to employment. To the Company's knowledge, none of its employees is currently
in violation of any judgment, decree, order, or agreement relating to the
relationship of any such employee with the Company or any other party, due to
either (i) the nature of the Company's business as conducted currently or
proposed to be conducted, or (ii) the use by the employee of his or her best
efforts with respect to the conduct of such business. The Company is not a
party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement that covers
executive officers and directors of the Company. To the Company's knowledge, no
officer or key employee intends to terminate his or her employment with the
Company, nor does the Company have a present intention to terminate the
employment of any officer or key employee. Subject to general principles
related to wrongful termination of employees, the employment of each officer and
employee of the Company is terminable at the will of the Company, with or
without cause.
2.26 Changes. Since June 30, 1999, other than immaterial and nonadverse
changes in the ordinary course of business, there has not been:
(a) any change in the assets, liabilities, financial condition, or
operating results of the Company;
(b) any damage, destruction or loss, whether or not covered by
insurance, affecting the business, properties, prospects, or financial condition
of the Company (as such business is currently conducted and as it is currently
proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance
or payment of any obligation by the Company affecting the business, properties,
prospects, or financial condition of
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the Company (as such business is currently conducted and as it is currently
proposed to be conducted);
(e) any entering into or change in the terms of any material contract
or arrangement by which the Company or any of its assets or properties is bound
or to which the Company or any of such assets or properties is subject;
(f) any change in any compensation arrangement or agreement with any
employee, officer, director or stockholder;
(g) any sale, assignment, or transfer of any Company Intellectual
Property;
(h) any resignation or termination of employment of any director,
officer or key employee of the Company, nor does the Company have any knowledge
of the impending resignation or termination of employment of any such person;
(i) any receipt of notice by the Company that there has been a loss
of, or material order cancellation by, any customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien
created by the Company with respect to any of its material properties or assets,
except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, stockholders, officers, or directors, or any members of their
immediate families, other than customary travel advances and other advances made
in the ordinary course of its business;
(l) any declaration, setting aside, or payment of any dividend or
other distribution of the Company's assets in respect of any of the Company's
capital stock, or any direct or indirect redemption, purchase, or other
acquisition of any of such stock by the Company;
(m) to the Company's knowledge after reasonable investigation, any
other event or condition of any character that might affect the business,
properties, prospects, or financial condition of the Company (as such business
is currently conducted and as it is currently proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of the things
described in this Section 2.26.
2.27 Undisclosed Liabilities. The Company does not have any material
liabilities or obligations of any nature, whether known or unknown, absolute,
accrued, contingent or otherwise and whether due or to become due except as and
to the extent set forth on the most recent balance sheet included in the
Registration Statement and the notes thereto.
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2.28 Certain Indebtedness. As of the date hereof, other than interest
accrued after September 30, 1999, the aggregate amount of debt owed to Safeguard
by the Company is $10,147,979 and the aggregate amount of debt owed to XL Vision
by the Company is $5,757,978.
2.29 Corporate Documents. The Certificate and Bylaws of the Company are in
the forms attached hereto as Exhibits A and F, respectively. The copy of the
minute books of the Company provided to counsel to Investor contains minutes of
all meetings of the Board of Directors and stockholders and all actions by
written consent without a meeting by the Board of Directors and stockholders
since the date of the Company's incorporation, and accurately reflects all
actions by the Board of Directors (and any committee thereof) and stockholders
with respect to all transactions referred to in such minutes in all material
respects. Neither the stockholders nor the Board of Directors of the Company
have taken any action relating to the merger, consolidation, sale of assets or
business, liquidation, dissolution or any other reorganization of the Company.
2.30 Disclosure. The Company has provided Investor with all access to of
the information which Investor has requested in connection with the execution of
this Agreement and the purchase of the Shares and the Warrant. No representation
or warranty of the Company contained in this Agreement, the Related Agreements
or any certificate or document furnished or to be furnished to Investor prior to
or at the Closing contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary in order to make
the statements contained herein or therein not misleading. The Registration
Statement does not contain any untrue statement of a material fact and does not
omit to state a material fact necessary in order to make the statements
contained therein not misleading.
SECTION 3.
Representations and Warranties of JTL to Investor.
JTL hereby represents and warrants to Investor as of the date hereof as
follows:
3.1 Power and Authority. JTL has all requisite legal power and authority
to execute and deliver this Agreement, to sell the JTL Shares and to carry out
and perform its obligations under the terms of this Agreement and the
transactions contemplated hereby.
3.2 Capitalization. JTL is the sole record and beneficial owner of the
shares of Class A Common Stock set forth opposite its name on Schedule 2.4, free
and clear of any lien, security interest, restriction, encumbrance or claim.
3.3 Authorization; Enforceability. All action on the part of JTL and its
officers and members necessary for the authorization, execution, delivery and
performance of this Agreement by JTL, the sale and delivery of the JTL Shares by
JTL and the performance of all of JTL's obligations hereunder has been taken.
This Agreement constitutes the valid and legally binding obligation of JTL,
enforceable in accordance with its terms.
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3.4 Accuracy of Representations and Warranties. To JTL's actual
knowledge, which need not be based on any inquiry, the representations and
warranties of the Company contained in this Agreement are true and accurate in
all respects.
3.5 Broker's and Finders' Fees. No broker, investment banker or other
person is entitled to any brokerage or finders' fees or agents' commissions or
any similar charges in connection with this Agreement or any transaction
contemplated hereby based on arrangements made by JTL.
3.6 Organization and Standing. JTL is a limited liability company duly
organized, validly existing under, and by virtue of, the laws of the State of
South Dakota, and is in good standing under such laws. The Company has all
requisite power and authority to own and operate its properties and assets, and
to carry on its business as currently conducted and as proposed to be conducted.
SECTION 4.
Representations and Warranties of Investor.
Investor represents and warrants to Sellers as follows:
4.1 Investment Experience. Investor has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Company such that Investor is capable of evaluating the
merits and risks of its investment in the Company and has the capacity to
protect its own interests. Investor is an "Accredited Investor" as defined in
Rule 501 of Regulation D promulgated under the Securities Act.
4.2 Investment. Investor is acquiring the Shares and the Warrant for
investment for Investor's own account, not as a nominee or agent, and not with
the view to, or for resale in connection with, any distribution thereof.
4.3 Rule 144. Investor acknowledges that the Shares, the Warrant, the
Underlying Warrant Stock, the Underlying Common Stock and the Conversion Stock
must be held indefinitely unless registered under the Securities Act or unless
an exemption from such registration is available. Investor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions, which may include, among other things, the existence of a
public market for the shares, the availability of certain current public
information about the Company, the resale occurring not less than one year after
a party has purchased and paid for the security to be sold, the sale being
effected through a "broker's transaction" or in transactions directly with a
"market maker" and the number of shares being sold during any three-month period
not exceeding specified limitations.
4.4 Access to Information. Investor's officers and agents have had an
opportunity to discuss the Company's management, prospects, business plan and
financial condition with the Company's management.
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<PAGE> 18
4.5 Authorization; Enforceability. Investor has all requisite legal and
corporate power and authority to execute and deliver this Agreement and the
Related Agreements and to carry out and perform its obligations under the terms
of this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby. This Agreement constitutes and as of the Closing each of
the Related Agreements will constitute a valid and legally binding obligation of
such Investor, enforceable in accordance with its terms.
4.6 Broker's and Finders' Fees. No broker, investment banker or other
person is entitled to any brokerage or finders' fees or agents' commissions or
any similar charges in connection with this Agreement or any transaction
contemplated hereby based on arrangements made by Investor.
4.7 Non-Limitation. The foregoing representations and warranties,
however, do not limit or modify the representations and warranties in Section 2
or Section 3 of this Agreement or the right of Investor to rely thereon.
4.8 Legends. It is understood that each certificate representing the
Shares, the Warrant, the Underlying Warrant Stock, the Underlying Common Stock
and the Conversion Stock shall bear the following legend or a substantially
similar legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE TRANSFERRED IN THE ABSENCE OF (i) A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS HAVING BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A
STOCKHOLDER AGREEMENT ENTERED INTO BY THE HOLDER OF THESE SHARES AND THE
COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY.
4.9 Residence. The office of Investor in which its investment decision
was made is located at the address set forth on the signature page to this
Agreement.
SECTION 5.
Conditions of Investor's Obligations at Closing.
The obligations of Investor under Section 1 of this Agreement are subject
to the fulfillment at or before the Closing of each of the following conditions,
any of which may be waived in writing by Investor:
14
<PAGE> 19
5.1 Opinion of the Company's Counsel. There shall have been delivered to
Investor an opinion of Morgan Lewis & Bockius, counsel to the Company, in
substantially the form attached hereto as Exhibit K.
5.2 Registration Rights Agreement. The Company shall have executed and
delivered the Registration Rights Agreement.
5.3 Stockholder Agreement. The Company shall have executed and delivered
the Stockholder Agreement.
5.4 HSR Approvals. Any applicable waiting period (and any extension
thereof) applicable to the consummation of the transactions contemplated hereby
under the HSR Act shall have expired or been terminated.
5.5 Opinion of JTL's Counsel. There shall have been delivered to Investor
an opinion of Morris & Titus, counsel to JTL, in substantially the form attached
hereto as Exhibit L.
SECTION 6.
Conditions of Sellers' Obligations at Closing.
The obligations of the Company under Section 1 of this Agreement are
subject to the fulfillment at or before Closing of each of the following
conditions, any of which may be waived in writing by the Company. The
obligations of JTL under Section 1 of this Agreement are subject to the
fulfillment at or before Closing of the condition set forth in Section 6.3,
which may be waived in writing by JTL.
6.1 Note. Investor shall have executed and delivered the Note.
6.2 Pledge Agreement. Investor shall have executed and delivered the
Pledge Agreement.
6.3 HSR Approvals. Any applicable waiting period (and any extension
thereof) applicable to the consummation of the transactions contemplated hereby
under the HSR Act shall have expired or been terminated.
6.4 Registration Rights Agreement. Investor shall have executed and
delivered the Registration Rights Agreement.
6.5 Stockholder Agreement. Investor shall have executed and delivered
the Stockholder Agreement.
15
<PAGE> 20
6.6 Opinion of Investor's Counsel. There shall have been delivered to
the Company an opinion of Dechert Price & Rhoads, in substantially the form
attached hereto as Exhibit M.
SECTION 7.
Certain Covenants.
7.1 Conduct Pending Closing. Each of the parties shall use its respective
best efforts to cause all of the conditions to its obligation to close to be
satisfied on or prior to the Closing. The Company shall use its best efforts to
conduct the business of the Company in the ordinary course consistent with past
practice and in such a manner that at the Closing the representations and
warranties of the Company contained in this Agreement shall be true and correct
as though such representations and warranties were made on, as of, and with
reference to such date. Each Seller will promptly notify Investor in writing of
any event or fact which represents or is likely to cause a breach of any of its
representations, warranties, covenants or agreements. The Company shall
promptly advise Investor in writing of the occurrence of any condition or
development of a nature that is or may be materially adverse to the business,
properties, operations, prospects, condition (financial or otherwise), assets or
liabilities of its business.
7.2 Approvals.
(a) Promptly after the execution of this Agreement, each of the
parties hereto shall prepare and make or cause to be made any required filings,
submissions and notifications under the laws of any domestic or foreign
jurisdiction, including under the HSR Act, to the extent that such filings are
necessary to consummate the transactions contemplated hereby and will use its
best efforts to take all other actions necessary to consummate the transactions
contemplated hereby in a manner consistent with applicable law. Each of the
parties hereto will furnish to the other parties such necessary information and
reasonable assistance as such other parties may reasonably request in connection
with the foregoing.
(b) Each party hereto shall promptly inform the other of any material
communication from the Federal Trade Commission, the Antitrust Division of the
United States Department of Justice or any other governmental body regarding any
of the transactions contemplated hereby. If any party hereto or any affiliate
thereof receives a request for additional information or documentary material
from any such governmental body with respect to the transactions contemplated
hereby, then such party shall endeavor in good faith to make, or cause to be
made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request.
7.3 Registration of Securities. The Company intends to file the
Registration Statement with the Securities and Exchange Commission and to effect
an underwritten public offering of its Class A Common Stock as soon as
practicable after the date hereof; provided, however, that the Company will not
proceed with such public offering in the event that its Board of Directors (in
its sole discretion) determines that existing market conditions make such offer
inadvisable. The Company shall promptly provide Investor with a true and
complete copy of the registration
16
<PAGE> 21
statement on Form S-1 filed with the Securities and Exchange Commission and all
supplements and amendments thereto.
7.4 Indemnification By Sellers. Each Seller hereby agrees to indemnify,
defend and hold harmless Investor from and against any loss, liability, claim,
obligation, damage, deficiency, costs and expenses, fines or penalties
(including without limitation reasonable attorney fees and other defense costs
or other response actions) of or to Investor (a) arising out of or resulting
from any misrepresentation or breach of representation or warranty of such
Seller contained in this Agreement or in any agreement or statement or
certificate furnished or to be furnished to Investor pursuant hereto or in
connection with the transactions contemplated hereby and (b) arising out of or
resulting from any breach or nonfulfillment of any covenant or agreement of such
Seller contained in this Agreement or in any agreement or statement or
certificate furnished or to be furnished to Investor pursuant hereto or in
connection with the transactions contemplated hereby.
7.5 Indemnification by Investor. Investor hereby agrees to indemnify and
hold harmless Sellers from and against any loss, liability, claim, obligation,
damage, deficiency, costs and expenses, fines or penalties (including without
limitation reasonable attorney fees and other defense costs or other response
actions) of or to Sellers (a) arising out of or resulting from any
misrepresentation or breach of representation or warranty of Investor contained
in this Agreement or in any agreement or statement or certificate furnished or
to be furnished to Sellers pursuant hereto or in connection with the
transactions contemplated hereby and (b) arising out of or resulting from any
breach or nonfulfillment of any covenant or agreement of Investor contained in
this Agreement or in any agreement or statement or certificate furnished or to
be furnished to Sellers pursuant hereto or in connection with the transactions
contemplated hereby.
7.6 Securities Laws Compliance. The Company shall make in a timely manner
any filings required by applicable federal or state securities or Blue Sky laws,
or those of any other applicable jurisdiction.
7.7 Proprietary Information Agreements. The Company shall require all
future officers, directors, employees and consultants of the Company and its
Subsidiaries to execute and deliver an agreement which provides protection from
misappropriation or assignment of the Company Intellectual Property.
7.8 Reservation of Shares. For so long as Investor shall have any right
to receive the Underlying Common Stock upon conversion of the Company Shares,
the Company shall reserve and keep available out of its authorized but unissued
Class B Common Stock the full number of shares of Underlying Common Stock
deliverable upon conversion of all the then outstanding Company Shares and
shall, at its own expense, take all such actions and obtain such permits and
orders as may be necessary to enable the Company lawfully to issue such
Underlying Common Stock upon conversion of the Company Shares. For so long as
the Warrant is outstanding, the Company shall reserve and keep available out of
its authorized but unissued Class A Common Stock and Series B Common Stock the
full number of shares of Underlying Warrant Stock deliverable upon execution of
the Warrant and shall, at its own expense, take all such actions and obtain such
permits and orders as may be necessary to enable the Company lawfully to issue
such Underlying Warrant Stock upon
17
<PAGE> 22
exercise of the Warrant. For so long as any of the Underlying Common Stock, the
Warrant and the Underlying Warrant Stock is outstanding, the Company shall
reserve and keep available out of its authorized but unissued Class A Common
Stock the full number of shares of Class A Common Stock deliverable upon
conversion of all shares of Underlying Common Stock and Underlying Warrant Stock
and shall, at its own expense, take all such actions and obtain such permits and
orders as may be necessary to enable the Company lawfully to issue such Class A
Common Stock upon conversion of Underlying Common Stock and the Underlying
Warrant Stock.
7.9 Books and Records. The Company shall maintain complete and accurate
records and books of account in which entries shall be made in accordance with
generally accepted accounting principles consistently applied, reflecting all
transactions of the Company and its Subsidiaries, if any.
7.10 Use of Proceeds. The Company agrees that, prior to a Public Offering,
it will not reduce its outstanding indebtedness by more than $4,500,000 and it
will not make any payments in excess of $1,000,000 in the aggregate with respect
to indebtedness incurred after the date hereof.
7.11 Investor Rights. Until the consummation of a Public Offering, the
Company shall permit Investor at Investor's expense to visit and inspect the
Company's properties, to examine its books of account and records and to discuss
the Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by Investor; provided, however, that the
Company shall not be obligated pursuant to this section to provide access to any
information that it reasonably considers to be a trade secret or similar
confidential information. For purposes of this Agreement, the term "Public
Offering" means the effectiveness of a registration statement filed by the
Company pursuant to the Securities Act (other than on Form S-4 or S-8 on any
successor forms thereto) covering the offer and sale of Class A Common Stock in
an underwritten public offering on a firm commitment basis in which the gross
proceeds of the offering will equal or exceed $10,000,000 (calculated before
deducting underwriters' discounts and commissions and other offering expenses),
and in which the public offering price per share of Class A Common Stock
(calculated before deducting underwriters' discounts and commissions) results in
a valuation of the total number of outstanding shares of capital stock of the
Company immediately prior to the closing of the public offering of at least
$30,000,000.
7.12 Reports. Until the consummation of a Public Offering, the Company
will provide Investor the following reports:
(a) Annual Reports. As soon as practicable after the end of each
fiscal year, and in any event within seventy-five (75) days thereafter,
consolidated balance sheets of the Company and its subsidiaries, if any, as of
the end of such fiscal year, and consolidated statements of income,
stockholders' equity and cash flows of the Company and its subsidiaries, if any,
for such year, prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal year, all in reasonable detail and audited (without
qualification as to scope) by independent auditors of national standing selected
by the Company.
18
<PAGE> 23
(b) Monthly and Quarterly Reports. As soon as practicable after the
end of each month and fiscal quarter, and in any event within thirty (30) days
thereafter, a consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of each such period, consolidated statements of income,
consolidated statements of changes in financial condition, a consolidated
statement of cash flow of the Company and its subsidiaries and a statement of
stockholders' equity for such period and for the current fiscal year to date,
and setting forth in each case in comparative form the figures for corresponding
periods in the previous fiscal year, and setting forth in comparative form the
budgeted figures, prepared in accordance with generally accepted accounting
principles (other than for accompanying notes), subject to changes resulting
from year-end audit adjustments, all in reasonable detail and signed by the
principal financial or accounting officer of the Company.
(c) Annual Budget. As soon as practicable, but in any event thirty
(30) days prior to the end of each fiscal year, a projected operating budget and
business plan for the next fiscal year, prepared on a monthly basis, including
balance sheets and sources and applications of funds statements for such months
and, as soon as prepared, any other budgets or revised budgets prepared by the
Company.
7.13 Certificate of the Company. At the Closing, the Company shall deliver
to Investor a certificate dated as of the date of the Closing, stating that (a)
the representations and warranties of the Company contained in Section 2 are
true on and as of the Closing with the same effect as if made on and as of the
Closing and (b) the Company has performed or fulfilled all agreements,
obligations and conditions contained in this Agreement required to be performed
or fulfilled by the Company before Closing.
7.14 Certificate of JTL. At the Closing, JTL shall deliver to Investor,
which delivery may be by facsimile, a certificate dated as of the date of the
Closing, stating that (a) the representations and warranties of JTL contained in
Section 3 are true on and as of the Closing with the same effect as if made on
and as of the Closing and (b) JTL has performed or fulfilled all agreements,
obligations and conditions contained in this Agreement required to be performed
or fulfilled by JTL before Closing.
7.15 Certificate of Investor. At the Closing, Investor shall deliver to
Sellers a certificate dated as of the date of the Closing, stating that (a) the
representations and warranties of Investor contained in Section 4 are true on
and as of the Closing with the same effect as if made on and as of the Closing
and (b) Investor has performed or fulfilled all agreements, obligations and
conditions contained in this Agreement required to be performed or fulfilled by
Investor before Closing.
SECTION 8.
Miscellaneous.
8.1 Termination. This Agreement may be terminated at any time prior to
Closing: (a) by mutual consent of Sellers and Investor and (b) by Investor or
the Company if the Closing shall not have occurred prior to December 31, 1999;
provided, that Investor or the Company may terminate
19
<PAGE> 24
this Agreement pursuant to this clause (b) only if the Closing shall not have
occurred by such date for a reason other than a failure by such party to satisfy
the conditions to Closing of the other party set forth herein. In the event of
termination of this Agreement by either Investor or the Company, as provided
above, this Agreement shall forthwith terminate and there shall be no liability
on the part of either Sellers or Investor, other than the obligation to
indemnify the other party pursuant to the terms of this Agreement for
liabilities arising from a breach of this Agreement prior to such termination.
8.2 Entire Agreement; Successors and Assigns. This Agreement and the
exhibits hereto constitute the entire agreement between Sellers and Investor
relative to the subject matter hereof. Any previous agreement between Investor
and Sellers is superseded by this Agreement. Subject to the exceptions
specifically set forth in this Agreement, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
executors, administrators, heirs, successors and assigns of the parties.
8.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
contracts entered into and wholly to be performed within the Commonwealth of
Pennsylvania by Pennsylvania residents.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
8.5 Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
8.6 Notices. Any notice required or permitted hereunder shall be given in
writing and shall be conclusively deemed effectively given upon personal
delivery, or delivery by overnight courier, or five days after deposit in the
United States mail, by registered or certified mail, postage prepaid, addressed
(i) if to the Company, as set forth below the Company's name on the signature
page of this Agreement, (ii) if to JTL, as set forth below JTL's name on the
signature page of this Agreement, and (iii) if to Investor, as set forth below
Investor's name on the signature page of this Agreement, or at such other
address as the Company, JTL or Investor may designate by ten (10) days' advance
written notice to the other parties.
8.7 Survival of Representations and Warranties. The representations and
warranties of the parties contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing. Sellers
acknowledge that their representations and warranties in this Agreement shall
not be affected or mitigated by any investigation conducted by Investor or its
representatives prior to Closing or any knowledge of Investor.
8.8 Amendment of Agreement. No provision of this Agreement may be amended
except by a written instrument signed by the parties.
8.9 Expenses. Each party will pay its own costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby;
provided, however, that all filing fees under the HSR Act shall be divided
equally between the Company and Investor.
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<PAGE> 25
8.10 Further Assurances. Each party shall cooperate and take such action
as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
21
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this Securities
Purchase Agreement as of the day and year first above written.
EMERGE INTERACTIVE, INC.
a Delaware corporation
By: /s/ Charles L. Abraham
-------------------------
Name: Charles L. Abraham
------------------------
Title: CEO
------------------------
Address: 10315 102/nd/ Terrace
Sebastian, FL 32958
J TECHNOLOGIES, LLC
By: /s/ John R. Johanns Jr.
------------------------
Name: John R. Johanns Jr.
------------------------
Title: Authorized Member
------------------------
Address: 940 Quail Hollow
Dakota Dunes, SD 57049
INTERNET CAPITAL GROUP, INC.
a Delaware corporation
By: /s/ Henry N. Nassau
------------------------
Name: Henry N. Nassau
------------------------
Title: Managing Director
------------------------
Address: 800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
22
<PAGE> 1
Exhibit 10.31
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of the 16th day of November, 1999 by and
among eMerge Interactive, Inc., a Delaware corporation (the "Company"), and
Internet Capital Group, Inc., a Delaware Corporation (the "Investor").
BACKGROUND
----------
The Investor is acquiring contemporaneously with the execution of this
Agreement shares of the Company's Series D Preferred Stock, which are
convertible into shares of the Company's Class B Common Stock, which are in turn
convertible into shares of the Company's Class A Common Stock and a Warrant for
shares of Class A Common Stock or, at the Warrant holder's election, shares of
Class B Common Stock which are convertible into shares of Class A Common stock.
The Company has agreed to provide the registration rights provided for in this
Agreement as an inducement for the Investor to purchase the Warrant and the
Series D Preferred Stock.
WITNESSETH:
-----------
The parties hereto, each intending to be legally bound and in exchange
for the mutual covenants herein, agree as follows:
1. Demand Registrations.
(a) Requests for Registration. At any time after the earlier of three
years after the date hereof or six months after the Company's initial public
offering, the Investor, provided that it holds at least 1,000,000 Registrable
Securities (defined below) subject to adjustment for stock splits, stock
dividends, stock combinations and transactions with similar effect, may demand
registration (a "Demand Registration") under the Securities Act of 1933, as
amended (the "1933 Act"), of all or any portion of the Registrable Securities
owned by the Investor. In order to accomplish such demand, the Investor shall
send written notice of the demand to the Company, and such notice shall specify
the number of Registrable Securities sought to be registered. The Company shall
only be required to effect two Demand Registrations, and shall only be required
to proceed with a Demand Registration requested by the Investor if the number of
Registrable Securities that the Investor shall have elected to include in such
Demand Registration pursuant to this Section 1 has an aggregate fair market
value, in the opinion of an investment banker selected by the Investor and
reasonably acceptable to the the Company, in excess of $5 million.
(b) Expenses. In a Demand Registration, the Company will pay the
Registration Expenses (defined below), but the Underwriting Commissions (defined
below) will be shared by
<PAGE> 2
the Company and those holders of Registrable Securities whose Registrable
Securities are included in the Demand Registration in proportion to any
securities included on their behalf.
(c) Priority on Demand Registrations. If a Demand Registration is
underwritten and the managing underwriters advise the Company in writing that in
their opinion the number of Registrable Securities requested to be included
exceeds the number that can be sold in such offering, at a price reasonably
related to fair value, the Company will include in such Demand Registration (i)
first, the Registrable Securities requested to be included in such Demand
Registration by the Investor; (ii) second, any securities that the Company
desires to include on its own behalf; and (iii) third, any shares of Common
Stock held by any other stockholder of the Company to whom registration is
offered; provided, however, that if a Demand Registration would cause an Initial
Public Offering, the Company would be entitled to include for registration on
its own behalf securities representing up to 30% of the Fully-Diluted Common
Stock as of immediately prior to the Initial Public Offering. A registration
shall not be considered to be a Demand Registration under Section 1(a), and the
Company shall pay the Registration Expenses of such registration, if (i) as a
result of the foregoing allocation, the Investor is not able to register and
sell in the Demand Registration at least 75% of the Registrable Securities
sought to be included in the Demand Registration by the Investor; (ii) the gross
proceeds of the securities included in the registration on behalf of the Company
constitute at least 20% of the total gross proceeds of the Demand Registration;
or (iii) the registration statement requested by the Investor does not become
effective for any reason.
(d) Selection of Underwriters. If any Demand Registration is
underwritten, the selection of investment banker(s) and manager(s) and the other
decisions regarding the underwriting arrangements for the offering will be made
by the Investor and be reasonably acceptable to the Company.
(e) Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous registration of securities of the Company in an
underwritten offering.
(f) Contemporaneous Demand. If any holder of the Company's securities
that is not a holder of Registrable Securities under this Agreement exercises
demand registration rights to have the Company register its securities under the
1933 Act (a "Non-Investor Registration") within a period of 30 days before or
after the time the Investor shall have requested a Demand Registration, then the
Investor's Demand Registration shall have priority over the Non-Investor
Registration except any request by Safeguard Scientifics, Inc. to the Company to
effect a Rights Offering (as such term is defined in the Registration Rights
Agreement dated July 17, 1997 among the Company and the stockholders that are
parties thereto), made within 30 days before or after the Investor shall have
requested a Demand Registration, shall have priority over the Demand
Registration during the Rights Exclusivity Period.
-2-
<PAGE> 3
2. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any
of its securities under the 1933 Act for its account or for the account of
others (other than the Company's Initial Public Offering, a Demand Registration
or a registration with respect to a Rights Offering, and the registration form
to be used may be used for the registration of Registrable Securities (a
"Piggyback Registration"), the Company will give prompt written notice to all
holders of Registrable Securities and will include in such Piggyback
Registration, subject to the allocation provisions below, all Registrable
Securities with respect to which the Company has received written requests for
inclusion within 30 days after the Company's mailing of such notice. The Company
shall not select a form of registration statement which imposes, for its use,
limitations on the maximum value or number of securities to be registered if
these limitations would preclude registration of the Registrable Securities that
the Company has been requested to include in such registration.
(b) Piggyback Expenses. In all Piggyback Registrations, the Company
will pay the Registration Expenses related to the Registrable Securities of the
Investor, but the Investor will pay the Underwriting Commissions related to
their Registrable Securities.
(c) Priority on Primary Registrations. If a Piggyback Registration is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number that
can be sold in such offering, at a price reasonably related to fair value, the
Company will allocate the securities to be included as follows: first, the
securities the Company proposes to sell on its own behalf; second, securities
requested to be included in such registration by the Investor and other
stockholders of the Company that hold registration rights as of the date hereof,
pro rata based on the number of shares that such person requested for inclusion
(it being understood that the Company will use its best efforts to obtain the
consent of the holders of such existing registration rights to treat the
Investor pari passu with such holders for the purposes of the underwriter
cutback provisions set forth above).
(d) Priority on Secondary Registrations. If a Piggyback Registration is
initiated as an underwritten secondary registration on behalf of holders of the
Company's securities (other than a Demand Registration pursuant to Section 1),
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number that can be sold in such offering, at a price reasonably
related to fair value, the Company will allocate the securities to be included
as follows: first, the securities requested to be included by the holders
initiating such registration; and second, Registrable Securities requested to be
included in such registration by the Investor.
-3-
<PAGE> 4
(e) Selection of Underwriters. If any Piggyback Registration is
underwritten, the selection of investment banker(s) and manager(s) and the other
decisions regarding the underwriting arrangements for the offering will be made
by the Company, if the registration is under Section 2(c), or if the
registration is under Section 2(d) by the holders initiating such registration
and reasonably acceptable to the Company.
3. Registration on Form S-3.
The Company shall use its best efforts to qualify for registration on
Form S-3 or any comparable or successor form or forms; and to that end, the
Company shall register (whether or not required by law to do so) its Common
Stock under the Securities Exchange Act of 1934, as amended, in accordance with
the provisions of that Act as soon as possible following the effective date of
the first registration of any of the Company's securities under the 1933 Act.
After the Company has so qualified, in addition to the rights contained in the
foregoing provisions of this Registration Rights Agreement, each holder of
Registrable Securities shall have the right to require registration of its
Registrable Securities on Form S-3 at the Company's expense and such
registration shall not be deemed a Demand Registration, provided that (a) the
Registrable Securities to be registered shall have a market value of at least $1
million and (b) the Company shall not be obligated to effect more than one such
registration during any 12-month period. When the Company receives notice of any
holder's request for a registration on Form S-3, it shall send notice of such
proposed registration to all other holders of Registrable Securities.
4. Holdback Agreements.
Neither the Company nor the Investor shall effect any public sale or
distribution of equity securities of the Company or any securities convertible
into or exchangeable or exercisable for such securities during the seven days
prior to and the 90 days after any underwritten Demand Registration,
underwritten Piggyback Registration or underwritten Rights Offering has become
effective (except as part of such underwritten registration).
5. Registration Procedures.
Whenever the Investor has requested that any Registrable Securities be
registered pursuant to Section 1 or 2 of this Agreement, the Company will, as
expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration
statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements
or term sheet thereto, the Company will furnish the Investor with
copies of all such documents proposed to be filed) as promptly as
practical;
-4-
<PAGE> 5
(b) prepare and file with the Securities and Exchange
Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of
not less than 120 days;
(c) furnish to the Investor such number of copies of such
registration statement, each amendment and supplement thereto and the
prospectus included in such registration statement (including each
preliminary prospectus and any term sheet associated therewith), and
such other documents as the Investor may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by the
Investor;
(d) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of
such jurisdictions as the managing underwriter(s) or the Investor may
reasonably request;
(e) notify the Investor at any time when a prospectus relating
thereto is required to be delivered under the 1933 Act within the
period that the Company is required to keep the registration statement
effective of the happening of any event as a result of which the
prospectus included in such registration statement, together with any
associated term sheet, contains an untrue statement of a material fact
or omits any fact necessary to make the statement therein not
misleading, and, at the request of the Investor, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact
or omit to state any fact necessary to make the statement therein not
misleading;
(f) cause all such Registrable Securities to be listed or
included on the Nasdaq Stock Market or on securities exchanges on which
similar securities issued by the Company are then listed or included;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such
registration statement;
(h) enter into such customary agreements (including an
underwriting agreement in customary form) and take such other customary
actions as may be reasonably necessary to expedite or facilitate the
disposition of such Registrable Securities;
-5-
<PAGE> 6
(i) obtain a "comfort" letter addressed to the Company from
its independent public accountants in customary form and covering such
matters of the type customarily covered by "comfort" letters;
(j) make available for inspection by the Investor, any
underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or other agent
retained by Investor or any underwriter, all financial and other
records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by Investor or any such underwriter,
attorney, accountant or agent in connection with such registration
statement;
(k) use its best efforts to cause the Registrable
Securities to be registered with or approved by such
governmental agencies or authorities as may be
necessary by virtue of the business of the Company to
enable Investor to consummate the disposition of the
Registrable Securities; and
(l) furnish, on the date that the Registrable Securities
are delivered to the underwriters for sale, an
opinion dated as of the such date of the counsel
representing the Company for the purpose of such
registration in customary form and covering such
matters as is customarily given to underwriters in an
underwritten public offering.
6. Indemnification.
(a) The Company hereby indemnifies, to the extent permitted by law, the
Investor and its officers, directors, employees and agents, and each person, if
any, who controls any of them within the meaning of the 1933 Act (each, an
"Indemnified Party") against all losses, claims, damages, liabilities and
expenses (including attorney fees) arising out of, resulting from, or related to
any violation or alleged violation by the Company of the 1933 Act, the 1934 Act,
any federal or state securities law, or any rule or regulation promulgated
thereunder, any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or associated
term sheet or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such Indemnified Party
expressly for use therein or by any Indemnified Party's failure to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such Indemnified Party with
a sufficient number of copies of the same. In connection with an underwritten
offering, the Company will indemnify the underwriters, their officers and
directors, and each person who
-6-
<PAGE> 7
controls such underwriters (within the meaning of the 1933 Act) to the same
extent as provided above with respect to the indemnification of any Indemnified
Party.
(b) In connection with any registration statement in which the Investor
is participating, each such holder will furnish to the Company in writing such
information as is reasonably requested by the Company for use in any such
registration statement or prospectus and will indemnify, to the extent permitted
by law, the Company, its directors and officers and each person who controls the
Company (within the meaning of the 1933 Act) against any losses, claims,
damages, liabilities and expenses (including attorney fees) resulting from any
untrue or alleged untrue statement of material fact or any omission or alleged
omission of a material fact required to be stated in the registration statement
or prospectus or any amendment thereof or supplement thereto or necessary to
make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in information so furnished in writing
by such holder specifically for use in preparing the registration statement.
Notwithstanding the foregoing, the liability of the Investor under this Section
7(b) shall be limited to an amount equal to the net proceeds actually received
by the Investor from the sale of Registrable Securities covered by the
registration statement.
-7-
<PAGE> 8
(c) Any person entitled to indemnification hereunder will (i) give
prompt notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. Any failure to give prompt notice shall deprive a party of
its right to indemnification hereunder only to the extent that such failure
shall have adversely affected the indemnifying party. If the defense of any
claim is assumed, the indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled, or elects
not, to assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) In order to provide for just and equitable contribution to joint
liability under the 1933 Act in any case in which either: (i) Investor, its
officers, directors, employees, agents or any controlling person of any of them,
makes a claim for indemnification pursuant to this Section 6 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of Investor, its officers, directors, employees, agents or any person
controlling them in circumstances for which indemnification is provided under
this Section 6; then, and in each such case, the Company and Investor will
contribute to the aggregate losses, claims, damages, liabilities or expenses to
which they may be subject (after contribution from others) as is appropriate to
reflect the relative fault of the Company and Investor in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as the relative benefit received by the Company
and Investor as a result of the offering in question, it being understood that
the parties acknowledge that the overriding equitable consideration to be given
effect in connection with this provision is the ability of one party or the
other to correct the statement or omission which resulted in such losses,
claims, damages or liabilities, and that it would not be just and equitable if
contribution pursuant hereto were to be determined by pro rata allocation or by
any other method of allocation that does not take into consideration the
foregoing equitable consideration; provided that, in any such case (A) Investor
will not be required to contribute any amount in excess of the public offering
price of all such Registrable Securities offered it pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
7. Participation in Underwritten Registrations.
-8-
<PAGE> 9
The Investor may not participate in any underwritten registration
hereunder unless such holder (a) agrees to sell such holder's securities on the
basis provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements under Sections 1(e) or 2(e), and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
8. Definitions.
(a) The term "Initial Public Offering" means the first public offering
under the 1933 Act of any of the Company's equity securities.
(b) The term "Registrable Securities" means (i) the ________ shares of
Class A Common Stock purchased by Investor pursuant to the Stock Purchase
Agreement dated ____________, 1999, (ii) the shares of Class A Common Stock
issuable upon the conversion of shares of Class B Common Stock of the Company
registered in the name of the Investor from time to time and (iii) any
securities received by way of a stock split or as a dividend with respect to
such shares of Class A common Stock and any security into which such Class A
Common Stock may hereafter be changed or for which such Class A Common Stock may
be exchanged (by way of reorganization, recapitalization, merger, consolidation
or otherwise). As to any particular Registrable Securities, such securities will
cease to be Registrable Securities when they have been (A) effectively
registered under the 1933 Act and disposed of in accordance with the
registration statement covering them, or (B) transferred pursuant to Rule 144
(or any similar provision then in force).
(c) The term "Registration Expenses" means all expenses incident to the
Company's performance of or compliance with this Agreement, including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws, printing expenses, messenger and delivery
expenses, expenses and fees for listing the securities to be registered on
exchanges or electronic quotation systems on which similar securities issued by
the Company are then listed, and fees and disbursements of counsel for the
Company and of all independent certified public accountants, underwriters (other
than Underwriting Commissions) and other persons retained by the Company
transfer agents' and registrars' fees and the fees and disbursements of counsel
for Investor related to the registration hereunder.
(d) The term "Underwriting Commissions" means all underwriting
discounts or commissions relating to the sale of securities of the Company, but
excludes any expenses reimbursed to underwriters.
9. Miscellaneous.
-9-
<PAGE> 10
(a) Termination of Other Agreements. This Agreement sets forth the
entire understanding of the parties hereto with respect to rights to the
registration of capital stock of the Company and supersedes all prior agreements
or understandings among the parties regarding such matters.
(b) Notices. Any notices required hereunder shall be deemed to be given
upon the earlier of the date when received at, or (i) the third business day
after the date when sent by certified or registered mail, (ii) the next business
day after the date sent by guaranteed overnight courier, or (iii) the date sent
by telecopier or delivered by hand, in each case, to the address of the
Company's corporate headquarters in the case of any notice to the Company, and
until changed by notice to the Company, the respective addresses of the
Investors on file with the Company in the case of any notice to the Investors.
(c) Amendments and Waivers. The provisions of this Agreement may be
amended or terminated and the Company may take any action herein prohibited, or
omit to perform any act herein required to be performed by it, if approved in
writing by the Investor and or by any agreement permitted by Section 9.
(d) Registration Rights. The Company agrees that it will not enter into
any agreement or arrangement which would grant any party a right to participate
in any registration that is superior to or contravention of the rights to
participate set forth in this Registration Rights Agreement.
(e) Binding Effect. This Agreement will bind and inure to the benefit
of the respective successors (including any successor resulting from a merger or
similar reorganization), assigns, heirs, and personal representatives of the
parties hereto. Without limiting the generality of the foregoing, in addition,
if the Investor liquidates or reorganizes such that its assets are transferred
to its own stockholders or partners or to another entity, such stockholders,
partners or entity shall succeed to all of the rights of the Investor hereunder.
(f) Governing Law. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the internal law, not
the law of conflicts, of the Commonwealth of Pennsylvania.
(g) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be considered to be an original instrument and
to be effective as of the date first written above. Each such copy shall be
deemed an original, and it shall not be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
-10-
<PAGE> 11
(h) Interpretation. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to one gender include
all genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or" and (d) "including" has the inclusive meaning frequently
identified with the phrase "but not limited to." The section and other headings
contained in this Agreement are for reference purposes only and shall not
control or affect the construction of this Agreement or the interpretation
thereof in any respect.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the Company has executed and delivered this
Agreement as of the date first written above.
eMerge Interactive, Inc.
By:
------------------------------
Title: Chief Executive Officer
Internet Capital Group, Inc.
By:
------------------------------
Title:
-12-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
eMerge Interactive, Inc.
We consent to the use of our reports dated April 13, 1999 on the financial
statements of Lost Pelican, L.L.C. as of December 31, 1997 and 1998 and for each
of the years in the two-year period ended December 31, 1998 and July 7, 1999 on
the financial statements of QDD Investment Company, L.L.C. as December 31, 1998
and for the year then ended, and December 6, 1999 on the consolidated financial
statements of eMerge Interactive, Inc. as of December 31, 1997 and 1998 and
September 30, 1999 and for each of the years in the three-year period ended
December 31, 1998 and for the nine months ended September 30, 1999, included
herein and to the references to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the prospectus.
/s/KPMG LLP
Orlando, Florida
December 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EMERGE INTERACTIVE, INC. AS OF AND FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1650
<SECURITIES> 0
<RECEIVABLES> 2790
<ALLOWANCES> 0
<INVENTORY> 655
<CURRENT-ASSETS> 6079
<PP&E> 2414
<DEPRECIATION> 703
<TOTAL-ASSETS> 16229
<CURRENT-LIABILITIES> 18587
<BONDS> 0
0
99
<COMMON> 56
<OTHER-SE> (3656)
<TOTAL-LIABILITY-AND-EQUITY> 16229
<SALES> 18339
<TOTAL-REVENUES> 18339
<CGS> 18282
<TOTAL-COSTS> 18282
<OTHER-EXPENSES> 10296
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459
<INCOME-PRETAX> (10683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10683)
<DISCONTINUED> 10
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10672)
<EPS-BASIC> (1.59)
<EPS-DILUTED> (1.59)
</TABLE>
<PAGE> 1
Exhibit 99.1
[LOGO]
SAFEGUARD SUBSCRIPTION PROGRAM FOR
EMERGE INTERACTIVE, INC.
FOR RECORD HOLDERS OF
100 OR MORE SHARES OF
SAFEGUARD SCIENTIFICS, INC.
COMMON STOCK
ON OCTOBER 20, 1999
Record holders of fewer than 100 shares of Safeguard Scientifics, Inc. common
stock on October 20, 1999 are not eligible to participate in this program.
IF YOU HAVE ANY QUESTIONS REGARDING THE SAFEGUARD SUBSCRIPTION PROGRAM, PLEASE
CALL SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE AT (888) SFE-1200.
PLEASE DO NOT CALL EMERGE INTERACTIVE WITH ANY QUESTIONS REGARDING THIS PROGRAM.
ONLY SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE OR A SAFEGUARD REPRESENTATIVE
WILL BE ABLE TO ANSWER YOUR QUESTIONS.
[LOGO]
<PAGE> 2
December ____, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of eMerge Interactive. We are permitting Safeguard Scientifics to
use the Safeguard Subscription Program so that we may offer you the opportunity
to buy our common stock at our initial public offering price. We will be
offering 2,850,000 shares and Safeguard Scientifics will be offering 650,000
shares under the program.
Set forth below is a detailed description of how the program will work
in connection with our offering. Please review this description and the attached
prospectus carefully in deciding whether or not you wish to invest.
Who can subscribe
ONLY RECORD HOLDERS OF 100 OR MORE SHARES OF SAFEGUARD COMMON STOCK AS
OF OCTOBER 20, 1999 ARE ELIGIBLE TO PURCHASE SHARES OF OUR COMMON STOCK IN THE
PROGRAM. Holders of fewer than 100 Safeguard shares will not be eligible to
participate in this program.
You may not transfer your subscription offer
The offer to purchase shares in this program may only be transferred by
involuntary operation of law such as death or certain dissolutions.
Number of shares for which you may subscribe
To determine how many shares of our common stock you are eligible to
purchase, divide the number of shares of Safeguard common stock that you owned
of record as of October 20, 1999 by 10 and round up to the nearest whole number.
For example, if you held between 991 and 1,000 shares of Safeguard common stock
as of this date, you may subscribe for 100 shares of our common stock. You would
have to have had at least 1,001 shares of Safeguard common stock to be eligible
to subscribe for 101 shares of our common stock. You may not subscribe for a
fractional share of our common stock.
Minimum Subscription Size
The minimum subscription that we will accept for any account is for 10
shares of our common stock. THEREFORE, RECORD HOLDERS OF FEWER THAN 100 SHARES
OF SAFEGUARD COMMON STOCK AS OF OCTOBER 20, 1999 WILL NOT BE ABLE TO PURCHASE
OUR SHARES UNDER THE PROGRAM. THIS LIMIT APPLIES TO EACH OF YOUR ACCOUNTS, NOT
THE AGGREGATE OF ALL OF YOUR ACCOUNTS. If as of October 20, 1999 you held 50
shares of Safeguard common stock in one account and another 50 shares in a
different account, we will not consider you to be the owner of 100 shares of
Safeguard common stock. Since none of your accounts contained at least 100
shares of Safeguard common stock, you would not be eligible to subscribe.
You are under no obligation to subscribe, but if you subscribe for any
shares it must be for at least 10 shares in each account. For example, if you
held 750 shares of Safeguard common stock in a single account as of October 20,
1999 and you choose to purchase our shares under the program, you may purchase
between 10 and 75 shares.
Subscription Price
The price per share under the program will be the same price that all
investors will pay in our initial public offering. The price per share in the
initial public offering will be determined by negotiations between us and the
2
<PAGE> 3
underwriters of our offering. The factors that we expect to consider in these
negotiations are described in the attached prospectus under the heading
"Underwriting." We currently anticipate that the offering price will be between
$_______ and $______ per share. We will inform you of the initial public
offering price as described below under "How to Subscribe."
Stock Purchase Agreement with Safeguard Scientifics
We intend to enter into a Stock Purchase Agreement with Safeguard. This
agreement will provide that if all 2,850,000 of the shares offered by us under
the program are not purchased by Safeguard stockholders, then Safeguard will
purchase the remaining shares at our initial public offering price. Safeguard
will be able to transfer all or part of its obligation to purchase these
remaining shares to third parties.
How to Subscribe
TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE FOLLOWING
PROCEDURES:
- Subscriptions and payments will only be accepted from
Safeguard shareholders after the SEC has declared our
registration statement effective and we have determined our
initial public offering price. Any subscriptions or payments
received before then will be returned to you. Once a
subscription and payment have been received and accepted, you
may not revoke your subscription. We expect to determine the
initial public offering price in January 2000, but various
factors could hasten or delay us. We will close the initial
public offering and stop accepting subscriptions four business
days after we determine the initial public offering price.
- Time will not permit us to notify you directly of our initial
public offering price and closing date. Instead, Safeguard
will take the following actions:
- publicize the offering price and the closing date on
its Web site (www.safeguard.com) and through a press
release;
- through its Web site, provide you with an opportunity
to request e-mail notification (either directly to
you or your designated representative);
- make every effort to notify each broker, bank, trust
company or other nominee that holds shares on behalf
of Safeguard stockholders of the offering price and
closing date; and
- make available an automated investor relations line
(888-SFE-1200) on a 24-hour basis through which you
can listen to the text of the press release or
request a faxed copy.
You will have to monitor these media to know when to place
your order and deliver payment.
ALSO, IF YOU DO NOT HOLD YOUR SAFEGUARD SHARES DIRECTLY, YOU
WILL NEED TO KEEP IN CLOSE CONTACT WITH YOUR BROKER, BANK,
TRUST COMPANY OR OTHER NOMINEE THAT HOLDS YOUR SAFEGUARD
SHARES ON YOUR BEHALF SINCE THEY WILL NEED TO PROCESS THE
SUBSCRIPTION FOR OUR SHARES AND PAYMENT ON YOUR BEHALF.
3
<PAGE> 4
- WE WILL STOP ACCEPTING ORDERS UNDER THE PROGRAM AT 5:00 P.M.
NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER WE
DETERMINE THE INITIAL PUBLIC OFFERING PRICE. Subscriptions and
payments that have not been received by ChaseMellon
Shareholder Services, L.L.C. by this deadline will not be
honored. For example, if we determine the initial public
offering price on a Thursday, ChaseMellon must receive all
orders and payments by 5:00 p.m. New York City time on the
following Wednesday. This deadline would be extended to the
following Thursday if there was an intervening holiday on
which the Nasdaq National Market was closed.
- To place an order for our shares under this program, you will
have to take the following actions:
- IF YOU HOLD YOUR SAFEGUARD SHARES IN YOUR OWN NAME
(THAT IS, IN CERTIFICATE FORM RATHER THAN IN A
BROKERAGE ACCOUNT)
You must complete and sign the subscription form
included with this prospectus and return it with full
payment to ChaseMellon. Your subscription form and
payment must be received by ChaseMellon before 5:00
p.m. New York City time on the fourth business day
after we determine the initial public offering price.
We will not honor any subscription form received by
ChaseMellon after that date.
We suggest, for your protection, that you deliver
your subscription form and payment to ChaseMellon by
overnight or express mail courier (or by facsimile
transmission if you intend to wire funds) as follows:
By Hand Delivery:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
By Overnight or Express Mail Courier:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
85 Challenger Road
Mail Drop Reorg
Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
ChaseMellon Shareholder Services, L.L.C.
Facsimile Transmission: (201) 296-4293
To confirm fax, call: (201) 296-4860
<TABLE>
<S> <C> <C>
Wire instructions: Wire to: The Chase Manhattan Bank, New York, NY
ABA #: 021000021
Attention: ChaseMellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./EMERGE Interactive
Reference: FBO [insert your name as it appears on the front of
your subscription form]
</TABLE>
You must pay the subscription price by valid check or
money order in U.S. dollars payable to "ChaseMellon
Shareholder Services, L.L.C." or by wire transfer. If
you choose to pay the subscription price by wire
transfer, you must fax a copy of your completed
subscription form to the facsimile number provided.
We suggest, for your protection, that you also call
the number provided to confirm that ChaseMellon
Shareholder Services received your fax. Until this
offering has closed, your payment will be held in
escrow by ChaseMellon Shareholder Services, L.L.C.
4
<PAGE> 5
ChaseMellon Shareholder Services will mail a copy of
the final prospectus to all direct Safeguard
shareholders who subscribe for shares in this
program.
- IF YOU HOLD YOUR SAFEGUARD SHARES THROUGH A BROKER,
BANK, TRUST COMPANY OR OTHER NOMINEE
We will provide to each broker, bank, trust company,
and other nominee who holds Safeguard shares for the
account of other persons copies of the preliminary
and final prospectus. Each of those entities will be
responsible for providing you with a copy of the
preliminary and final prospectus. Subscription forms
will not be distributed to Safeguard shareholders who
hold their shares in a brokerage account since the
subscription offer will be distributed to your
account electronically.
After we determine the initial public offering price,
you will have to contact the broker, bank, trust
company or other nominee that holds your Safeguard
shares if you wish to place an order and arrange for
payment. ChaseMellon Shareholder Services will be
unable to directly accept your subscription and
payment. All subscriptions and payments must be
submitted through the broker, bank, trust company or
other nominee that holds your Safeguard shares.
WE CAUTION YOU THAT BROKERS AND OTHER NOMINEES WILL
REQUIRE SOME TIME TO PROCESS SUBSCRIPTIONS FROM
SAFEGUARD STOCKHOLDERS. THEREFORE, THEY MOST LIKELY
WILL STOP ACCEPTING SUBSCRIPTIONS EARLIER THAN THE
FOURTH BUSINESS DAY AFTER WE DETERMINE THE INITIAL
PUBLIC OFFERING PRICE.
- Safeguard will decide all questions as to the validity, form
and eligibility (including times of receipt, beneficial
ownership and compliance with minimum exercise provisions).
Safeguard also will determine the acceptance of subscriptions
and the aggregate price. Alternative, conditional or
contingent subscriptions will not be accepted. Safeguard
reserves the absolute right to reject any subscriptions not
properly submitted. In addition, Safeguard may reject any
subscription if the acceptance of the subscription would be
unlawful. Safeguard also may waive any irregularities or
conditions in the subscription for our shares, and Safeguard's
interpretation of the terms and conditions of the program will
be final and binding.
- We are not obligated to give you notification of defects in
your subscription. We will not consider a subscription to be
made until all defects have been cured or waived. If your
subscription is rejected, your payment of the exercise price
will be promptly returned by ChaseMellon.
- Sales under the Safeguard Subscription Program will close on
the same business day as the closing of the sale of the other
shares offered to the public. If you purchase your shares
through a broker, bank, trust company or similar nominee, we
expect that your purchase will be reflected in your account
with the nominee as soon as practicable after the expiration
of the Safeguard Subscription Program. Otherwise, ChaseMellon
will mail a stock certificate to you as soon as practicable
after the expiration of the Safeguard Subscription Program.
Cancellation of Initial Public Offering
WE MAY CANCEL OUR INITIAL PUBLIC OFFERING AT ANY TIME UP UNTIL THE
CLOSING. IF THE INITIAL PUBLIC OFFERING IS CANCELED, SAFEGUARD WILL PUBLICIZE
THE CANCELLATION ON ITS WEB SITE AND THROUGH A PRESS RELEASE. THE PROGRAM GIVES
YOU NO RIGHTS TO PURCHASE SHARES OF OUR COMMON STOCK IF WE CANCEL OUR INITIAL
PUBLIC OFFERING AND ANY FUNDS PREVIOUSLY SUBMITTED BY YOU WILL BE RETURNED
PROMPTLY. SAFEGUARD AND/OR EMERGE INTERACTIVE ALSO MAY CANCEL OR MODIFY, IN
WHOLE OR IN PART, THE SAFEGUARD SUBSCRIPTION PROGRAM.
Federal Tax Consequences
We believe that you will not be considered to have received a taxable
distribution of property as a result of your having the opportunity to
participate in this offering. The Internal Revenue Service is not bound by this
position, and you are encouraged to consult with your tax advisors about the
federal, state and other tax consequences of the program.
5
<PAGE> 6
Risk Factors
Investing in our common stock involves certain risks which are
disclosed on page ____ of the attached preliminary prospectus.
Certain Restrictions
In managing the program, we and Safeguard will take reasonable steps to
comply with the laws of the different countries in which Safeguard stockholders
live. If compliance is too burdensome in one or more countries, Safeguard
stockholders residing in those countries will not be offered the opportunity to
purchase our shares under the program.
* * *
IF YOU HAVE ANY QUESTIONS REGARDING THE
SAFEGUARD SUBSCRIPTION PROGRAM, PLEASE CALL
SAFEGUARD'S AUTOMATED INVESTOR RELATIONS
LINE AT (888) SFE-1200.
PLEASE DO NOT CALL EMERGE INTERACTIVE WITH ANY QUESTIONS REGARDING THIS
PROGRAM. ONLY SAFEGUARD'S AUTOMATED INVESTOR RELATIONS LINE OR A
SAFEGUARD REPRESENTATIVE WILL BE ABLE TO ANSWER YOUR QUESTIONS.
Sincerely,
Charles L. Abraham
Chief Executive Officer
6
<PAGE> 1
[LOGO]
Exhibit 99.3
December ____, 1999
Dear Broker:
As you may know, we are undertaking an initial public offering of our shares of
common stock. We are permitting Safeguard Scientifics, Inc. to use the Safeguard
Subscription Program to offer Safeguard stockholders the opportunity to buy
shares of our common stock at the initial public offering price. The price per
share under this program will be the same price that all investors will pay in
our initial public offering.
The enclosed questions and answers will provide you with the key terms of the
Safeguard Subscription Program.
IF YOU HAVE ANY QUESTIONS REGARDING THE SAFEGUARD SUBSCRIPTION PROGRAM, PLEASE
CALL SAFEGUARD AT (888) SFE-1200. PLEASE DO NOT CALL EMERGE INTERACTIVE
REGARDING THIS PROGRAM. You also may find information about this program on
Safeguard's web site at www.safeguard.com.
Preliminary prospectuses for distribution to Safeguard stockholders are being
distributed through Corporate Investor Communications, Attention: Processing
Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201)
896-1900. Please call Corporate Investor Communications if you do not receive a
sufficient number of prospectuses for distribution to Safeguard stockholders.
You should provide a copy of the preliminary prospectus to each Safeguard
stockholder on whose behalf you hold shares who is eligible to participate in
this program.
Sincerely,
Charles L. Abraham
Chief Executive Officer
<PAGE> 2
SAFEGUARD SUBSCRIPTION PROGRAM
FOR EMERGE INTERACTIVE, INC.
Q: WHO IS ELIGIBLE TO PARTICIPATE IN THE SAFEGUARD SUBSCRIPTION PROGRAM
FOR EMERGE INTERACTIVE, INC.?
A: Only record holders of at least 100 shares of Safeguard stock on
October 20, 1999.
Q: HOW WAS THE OPPORTUNITY TO PURCHASE IPO SHARES ALLOCATED TO SAFEGUARD
STOCKHOLDERS?
A: Safeguard stockholders received a subscription offer to purchase 1
share of eMerge Interactive for each 10 shares of Safeguard owned on
October 20, 1999, subject to the minimum purchase requirement.
If a Safeguard stockholder owned at least 100 shares of Safeguard
common stock but the number of shares was not evenly divisible by 10,
Safeguard will round up the subscription offer to the next whole
number. The Depository Trust Company will notify its participants of
the date by which the roundup requests must be submitted.
The offer to purchase shares under the Safeguard Subscription Program
is nontransferable and cannot be combined among multiple accounts.
There will not be an oversubscription privilege under this program.
Q: IS THERE A MINIMUM PURCHASE REQUIREMENT?
A: The minimum subscription that will be accepted is for 10 shares of
eMerge Interactive common stock. Therefore, holders of fewer than 100
Safeguard shares as of October 20, 1999 will be unable to purchase
shares in the Safeguard Subscription Program for eMerge Interactive.
Q: HOW WILL I KNOW WHEN THE OFFERING PRICES AND WHAT THE EXPIRATION DATE
FOR THE OFFERING WILL BE?
A: When the offering is declared effective by the SEC and the offering
price is set, Safeguard will
- - issue a press release to the wire services
- - send you an e-mail alert if you signed up for this on its Web site at
www.safeguard.com
- - post this information on its Web site
- - update its automated investor relations line (888) SFE-1200 through
which you will be able to listen to the text of the press release
announcing the price and the expiration date or request a faxed copy of
the release
- - notify the New York Stock Exchange and request that they notify all of
their members
- - notify the Depository Trust Company, which will electronically notify
all of its participants
<PAGE> 3
Q: WHEN CAN SUBSCRIPTIONS AND PAYMENT BE SUBMITTED?
A: Subscriptions and payment will only be accepted by the offering agent
after the initial public offering price of the eMerge Interactive
common stock has been determined. ChaseMellon Shareholder Services,
L.L.C. is the offering agent.
Once a subscription and payment have been received and accepted by the
offering agent, the subscription may not be revoked.
THE OFFERING AGENT WILL STOP ACCEPTING SUBSCRIPTIONS AND PAYMENTS AT
5:00 P.M. NEW YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER THE IPO
PRICE HAS BEEN SET.
The Depository Trust Company will handle subscriptions on behalf of its
participants. When you subscribe for shares of eMerge Interactive
through DTC's automated subscription system, you will be required to
confirm that you are subscribing only on behalf of holders that meet
the minimum per account purchase requirement of 10 shares.
Q: WHEN WILL THE EMERGE INTERACTIVE SHARES PURCHASED IN THE SAFEGUARD
SUBSCRIPTION PROGRAM BE DISTRIBUTED?
A: The offering agent is expected to distribute the shares to The
Depository Trust Company approximately two to three business days
following the expiration of the Safeguard Subscription Program.
Q: WHAT ARE THE TAX CONSEQUENCES OF RECEIPT OF THE SUBSCRIPTION OFFER AND
ITS EXERCISE?
A: Safeguard shareholders should consult their own tax advisors about the
federal, state and other tax consequences of the program. Nevertheless,
we believe that, as a result of having the opportunity to participate
in the Safeguard Subscription Program, Safeguard shareholders will be
considered to have received neither a taxable distribution of property
nor an adjustment to the basis in their Safeguard shares. If a
Safeguard shareholder exercises the subscription offer, we believe the
basis in the shares of eMerge Interactive acquired upon exercise will
be the public offering price plus any processing fees incurred by the
shareholder in connection with the exercise of the subscription offer.
The Internal Revenue Service is not bound by this position.
<PAGE> 1
Exhibit 99.4
- -----------------------------
Subscription Number
<TABLE>
<S> <C> <C>
- ----------------------------- -------------------------------- ----------------------------
Shares of eMerge Interactive Share Subscription Offer Record Date Shares
Eligible to Subscribe
</TABLE>
SAFEGUARD SUBSCRIPTION PROGRAM
- --------------------------------------------------------------------------------
EMERGE INTERACTIVE, INC.
SUBSCRIPTION FORM
The shareholder named above has the right to purchase, pursuant to the terms and
conditions of the Safeguard Subscription Program, the number of fully paid and
non-assessable shares of common stock, $.01 par value, of eMerge Interactive,
Inc. indicated above at a subscription price that will be determined as outlined
below. THE SAFEGUARD SUBSCRIPTION PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY
TIME ON THE FOURTH BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING PRICE IS
DETERMINED. As described in the preliminary prospectus accompanying this
Subscription Form, each holder of at least 100 shares of Safeguard Scientifics,
Inc. common stock may subscribe for one share of eMerge Interactive common stock
for every 10 shares of Safeguard Scientifics common stock held as of October 20,
1999, in any account, rounded upward. THE MINIMUM SUBSCRIPTION THAT WE WILL
ACCEPT IS FOR 10 SHARES OF EMERGE INTERACTIVE PER ANY INDIVIDUAL ACCOUNT.
Therefore, holders with accounts containing fewer than 100 shares of Safeguard
common stock as of October 20, 1999, will not be able to subscribe for shares of
eMerge Interactive. The right to participate in this program and purchase shares
of eMerge Interactive is nontransferable except involuntarily by operation of
law (e.g. death or certain dissolutions). Should an involuntary transfer occur
by operation of law, please contact ChaseMellon Shareholder Services, L.L.C.,
the agent for the program, by telephone at 800-777-3674 for appropriate
instructions.
The subscription price per share under the program will be the same price that
all investors will pay in eMerge Interactive's initial public offering. The
price per share will be determined by negotiations between eMerge Interactive
and the underwriters of the offering. The factors to be considered in these
negotiations are described in the preliminary prospectus accompanying this
Subscription Form. eMerge Interactive currently anticipates that its initial
public offering price will be determined in January 2000 but various factors
could hasten or delay this determination. Time will not permit eMerge
Interactive to notify you directly of the subscription price and the expiration
date for this offering, but Safeguard Scientifics will take the actions
described in the accompanying preliminary prospectus to publicize this
information.
No offer to buy securities can be accepted, and no part of the subscription
price can be received, until the initial public offering price has been
determined and the registration statement, of which the preliminary prospectus
accompanying this Subscription Form is a part, has been declared effective. Any
Subscription Forms or payments received before then will be returned to you. All
persons electing to subscribe for shares of eMerge Interactive, Inc. must
complete the Election to Purchase on the reverse side of this Subscription Form
and return the Subscription Form, together with full payment of the subscription
price, to ChaseMellon at the addresses on the back of this Subscription Form.
Safeguard will decide all questions as to the validity, form, eligibility, and
acceptance of subscriptions, and Safeguard reserves the absolute right to reject
any subscriptions not properly submitted. Safeguard also may reject any
subscription if the acceptance of the subscription would be unlawful. Once the
Subscription Form and payment have been received and accepted, your subscription
may not be revoked by you. THE SUBSCRIPTION FORM AND FULL PAYMENT OF THE
SUBSCRIPTION PRICE MUST BE RECEIVED BY CHASEMELLON NO LATER THAN 5:00 P.M. NEW
YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING
PRICE IS DETERMINED. CHASEMELLON WILL NOT HONOR ANY SUBSCRIPTIONS RECEIVED AFTER
THAT TIME AND DATE. If you do not wish to subscribe for shares, you do not need
to return this Subscription Form. Before completing and returning this
Subscription Form, you are urged to read carefully the preliminary prospectus
mailed to you with this Subscription Form for a more complete explanation of the
offering and for information about eMerge Interactive. If eMerge Interactive
cancels the initial public offering, you will have no rights to purchase shares
of eMerge Interactive and any funds previously submitted by you will be
returned. eMerge Interactive and/or Safeguard also may cancel or modify, in
whole or in part, the Safeguard Subscription Program.
<PAGE> 2
YOU SHOULD NOT RETURN THIS SUBSCRIPTION FORM OR DELIVER ANY PAYMENT UNTIL AFTER
EMERGE INTERACTIVE HAS DETERMINED ITS INITIAL PUBLIC OFFERING PRICE. ANY
SUBSCRIPTION FORMS OR PAYMENT RECEIVED BEFORE THEN WILL BE RETURNED TO YOU. Once
the initial public offering price has been determined, Safeguard will take the
actions described in the preliminary prospectus to publicize the subscription
price and the date by which you must respond to the offer that has been made to
you under this program. If you wish to subscribe for shares at that time, you
should complete this Subscription Form and deliver payment of the subscription
price to ChaseMellon. CHASEMELLON MUST RECEIVE THE PROPERLY COMPLETED AND SIGNED
SUBSCRIPTION FORM AND FULL PAYMENT OF THE SUBSCRIPTION PRICE BY 5:00 P.M. NEW
YORK CITY TIME ON THE FOURTH BUSINESS DAY AFTER EMERGE INTERACTIVE DETERMINES
ITS INITIAL PUBLIC OFFERING PRICE. CHASEMELLON WILL STOP ACCEPTING SUBSCRIPTION
FORMS AFTER THAT TIME AND DATE. Once the Subscription Form and payment have been
received and accepted, your subscription may not be revoked by you. We suggest,
for your protection, that you deliver the completed Subscription Form and
payment of the subscription price to ChaseMellon Shareholder Services, L.L.C. by
overnight or express mail courier, or by facsimile transmission and wire
transfer. The addresses for ChaseMellon are as follows:
<TABLE>
<S> <C>
By Hand Delivery: By Overnight Delivery/Express Mail Courier
ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C.
Attn: Reorganization Dept. Attn: Reorganization Dept.
120 Broadway, 13th Floor 85 Challenger Road, Mail Drop -- Reorg
New York, NY 10271 Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
ChaseMellon Shareholder Services, L.L.C. Wire to: The Chase Manhattan Bank, New York, NY
Facsimile Transmission: (201) 296-4293 ABA # 021000021
To confirm fax, call: (201) 296-4860 Attention: ChaseMellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./eMerge Interactive
Reference: FBO[insert your name as it appears on the reverse side of this form]
</TABLE>
SUBSCRIPTION FORM -- ELECTION TO PURCHASE
Subject to the terms and conditions of the Safeguard Subscription Program
described in the preliminary prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to purchase shares of common stock
of eMerge Interactive, Inc. as indicated below.
<TABLE>
<S> <C> <C>
Number of shares purchased(1) (NOTE:
--------------------- SHARE MINIMUM REQUIRED
IN EACH ACCOUNT)(2)
Per share subscription price $
---------------------
Payment submitted
(payable to ChaseMellon Shareholder Services, L.L.C.) (3) $
---------------------
</TABLE>
1 You may only purchase up to the number of shares specified on the reverse
side of this form. If the amount submitted is not sufficient to pay the
subscription price for all shares that are stated to be purchased, or if the
number of shares being purchased is not specified, the number of shares
purchased will be assumed to be the maximum number that could be purchased
upon payment of such amount. Any remaining amount will be returned to the
purchaser.
2 Any order for less than the minimum purchase requirement will be rejected.
3 The subscription price must be paid by valid check or money order in U.S.
dollars payable to ChaseMellon Shareholder Services, L.L.C. or by wire
transfer as described above. The payment submitted should equal the total
shares purchased multiplied by the per share subscription price.
SHARES OF COMMON STOCK OF EMERGE INTERACTIVE, INC. WILL BE ISSUED PROMPTLY
FOLLOWING THE EXPIRATION OF THE SAFEGUARD SUBSCRIPTION PROGRAM. The shares will
be registered in the same manner set forth on the face of this Subscription
Form. If your shares are held in joint ownership, all joint owners must sign
this election to purchase. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title as such. If signing for a
corporation, an authorized officer must sign and provide title. If signing for a
partnership, an authorized partner must sign and indicate title.
Please provide a telephone number at which you can be reached in the event that
we have questions regarding the information that you have supplied.
Daytime Telephone Number ( )
-----------------------------------
Evening Telephone Number ( )
-----------------------------------
(IF JOINTLY OWNED, BOTH MUST SIGN)
<TABLE>
<S> <C>
SIGNATURE(S):
Dated: , 2000 -------------------------------------------------
--------------------------------------
-------------------------------------------------
NOTE: The above signature(s) must correspond with the name(s) as
written upon the face of this Subscription Form in every
particular without alteration.
</TABLE>
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE -- PAYER'S REQUEST FOR
TAXPAYER IDENTIFICATION NUMBER (TIN) FAILURE TO COMPLETE THIS
FORM MAY SUBJECT YOU TO 31% FEDERAL INCOME TAX WITHHOLDING.
<TABLE>
<S> <C>
Part 1: PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER IN THE SPACE TIN
PROVIDED AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW ------------------------------------------
Social Security or
Employer Identification Number
Part 2: Check the box if you are awaiting a TIN [ ]
</TABLE>
Part 3: CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the
number shown on this form is my correct taxpayer identification number (or a TIN
has not issued to me but I have mailed or delivered an application to receive a
TIN or intend to do so in the near future), (2) I am not subject to backup
withholding either because I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends or the IRS has notified me that I am
no longer subject to backup withholding, and (3) all other information provided
on this form is true, correct and complete.
Dated: , 2000 SIGNATURE:
--------------------- -------------------------------
You must cross out item (2) above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding, you received another notification
from the IRS that you are no longer subject to backup withholding, do not cross
out item (2).
