<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1999
REGISTRATION NO. 333-89815
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 OCTOBER 27, 1999
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 shares of class A common stock
in this offering and several stockholders identified in this prospectus are
selling an additional shares. As part of this offering, we are
offering 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. Safeguard or its designees will purchase any
shares of our class A common stock that are not purchased by Safeguard
shareholders under the directed share subscription program. Safeguard is an
underwriter with respect to the shares offered by us to the shareholders of
Safeguard. Safeguard is not an underwriter with respect to any other shares
offered by us and is not included in the term underwriter as used elsewhere in
this prospectus. See the section entitled Plan of Distribution -- Directed Share
Subscription Program. We expect the initial public offering price will be
between $ and $ per share.
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.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
Underwritten Public Offering --------- --------
<S> <C> <C>
Public Offering Price.................................. $ $
Underwriting Discounts................................. $ $
Proceeds to eMerge Interactive......................... $ $
Proceeds to Selling Stockholders....................... $ $
</TABLE>
<TABLE>
<CAPTION>
PER SHARE TOTAL
Directed Share Subscription Program --------- --------
<S> <C> <C>
Public Offering Price.................................. $ $
Management Fee......................................... $ $
Proceeds to eMerge Interactive......................... $ $
</TABLE>
<TABLE>
<CAPTION>
TOTAL
Aggregate Offering Proceeds --------
<S> <C> <C>
Proceeds to eMerge Interactive from Underwritten Public
Offering and Directed Share Subscription Program..... $
</TABLE>
At our request, the underwriters have reserved 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 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 9
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 24
Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 33
Management.................................................. 48
Related Party Transactions.................................. 54
Principal and Selling Stockholders.......................... 57
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Plan of Distribution........................................ 66
Legal Matters............................................... 69
Experts..................................................... 69
Additional Information...................................... 70
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
This summary may not contain all of the information that may be important
to you. You should read the entire prospectus before making a decision to
invest.
eMerge INTERACTIVE, INC.
OVERVIEW
We are a leading 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 solution through our
Internet-based information and transaction platform, our Web-enabled private
network, 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 family of integrated Web
sites and Web-enabled private network provide:
- Livestock procurement services consisting of cattle sales and auctions;
- Customer-specific daily feedlot operations analysis, comparative cattle
industry analysis and 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, the lack of integrated management information
systems and limited access to current and accurate data and day-to-day
management tools have resulted in sub-optimal cattle 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 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.
OUR SERVICES
Our suite of complementary products and services is designed to reduce
inefficiencies throughout the cattle production chain and therefore improve
cattle quality and overall productivity. We currently conduct live cattle sales
and auctions over our Web site. Additionally, through our online and Web-enabled
management information solutions we offer customers detailed pricing, operations
and benchmarking data on the cattle industry. Further, our customers can track
and monitor the performance of their cattle, manage their daily business
operations and access our other online products and services designed to enhance
overall cattle quality.
3
<PAGE> 5
OUR SOLUTION
We offer commerce, information and technology to cattle industry
participants. The key features of our solution include:
- Online cattle sales and auction service, which reduce the overall
handling of cattle, thereby reducing costs and improving quality;
- Management information solutions that provide a broad range of data and
analyses to help industry participants improve cattle management. Our
information solutions include general industry information such as
current industry news, commodities pricing and weather updates, as well
as personalized information based upon customers' individual preferences
and geographic location. In addition, we use our proprietary centralized
database to provide our customers with feed performance benchmarking
services, daily business management and monthly market analysis;
- Diagnostic and therapeutic technologies and products designed for
livestock, such as our restorative feed supplement product, NutriCharge;
and
- An online community designed to facilitate the exchange of information
among livestock producers, feedlots and packers, which includes access to
our in-house cattle industry experts.
OUR STRATEGY
Our strategy is to expand upon our position as a leading online
business-to-business solution for livestock-related commerce, content and
community. Key components of our strategy include:
- Leverage our position as a leading provider of online commerce, content
and community in the cattle industry to build demand for our products,
services and solutions;
- Expand community loyalty by offering comprehensive operational and
industry content;
- Leverage our strong customer relationships and industry expertise to
further establish our online marketplace;
- Develop additional products and services to complement our existing
offerings; and
- Expand our suite of offerings to new international markets and other
segments of the livestock industry.
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.
4
<PAGE> 6
THE OFFERING
Class A common stock offered by:
eMerge Interactive.......................... shares
The Selling Stockholders.................... shares
Common stock to be outstanding after the
offering......................................... 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 shares of common stock to be outstanding after
this offering, there are:
- 2,012,170 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
October 20, 1999 at a weighted average exercise price of $2.03 per share,
of which options to purchase 577,095 shares of class A common stock were
exercisable at a weighted average exercise price of $1.32 per share;
- 572,300 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of October 20, 1999;
and
- 911,111 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.
5
<PAGE> 7
THE DIRECTED SHARE 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
common shares of Safeguard on October 20, 1999 in a directed share subscription
program. The program is described in greater detail in the section of this
prospectus entitled Plan of Distribution -- Directed Share 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. The
outstanding shares of series A preferred stock, series B preferred stock and
series C preferred stock will convert into shares of class A common stock and
the outstanding shares of series D preferred stock will convert into 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 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 directed share subscription
program are purchased by shareholders of Safeguard Scientifics, Inc. and that
the underwriters will not exercise their over-allotment option.
Please see the section entitled Capitalization for more information
regarding the outstanding shares of eMerge Interactive common stock and options
to purchase eMerge Interactive common stock.
6
<PAGE> 8
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. Business activities related to our continuing operations began
in 1997. The historical data for the six months ended June 30, 1998 and 1999 and
the pro forma data for the year ended December 31, 1998 and the six months ended
June 30, 1999 are unaudited.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SIX MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
----------------- ----------------- 1998 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 $ 664 $ 2,578 $ 2,283 $ 2,745
Cost of revenue..................... -- 2,623 1,037 2,768 2,801 2,840
Operating expenses.................. 1,356 4,769 1,877 5,519 6,266 6,007
Interest expense/other income,
net............................... 141 332 162 289 315 300
Profit (loss) from continuing
operations........................ $(1,497) $(5,932) $(2,412) $(5,998) $(7,099) $(6,402)
======= ======= ======= ======= ======= =======
Profit (loss) from continuing
operations per common
share -- basic and diluted........ $ (4.89) $ (1.70) $ (0.93) $ (1.15) $ (1.74) $ (1.18)
======= ======= ======= ======= ======= =======
Weighted average number of common
shares outstanding -- basic and
diluted........................... 306 3,486 2,607 5,223 4,086 5,403
======= ======= ======= ======= ======= =======
</TABLE>
The following table summarizes our unaudited balance sheet data as of June
30, 1999.
The pro forma consolidated balance sheet data give effect to:
- The issuance of 4,555,556 shares of series D preferred stock, which will
automatically convert into shares of our class B common stock immediately
prior to the consummation of the offering, and a warrant to purchase
911,111 shares of class B common stock at an exercise price equal to the
initial public offering price, for $38.8 million under a securities
purchase agreement dated October 27, 1999, and the application of a
portion of the proceeds from that agreement 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 our class A common stock,
which will occur immediately prior to the consummation of the offering.
The pro forma as adjusted consolidated balance sheet data below give effect
to:
- The events described in the two preceding paragraphs; and
- The sale of 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.
7
<PAGE> 9
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................... $ 663 $14,163
Total assets................................... 11,928 25,428
Total indebtedness............................. 8,443 3,943
Total stockholders' equity..................... 777 18,777
</TABLE>
Total indebtedness includes amounts due to XL Vision totaling $8.0 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 September 30, 1999, approximately
$6.0 million was still owed to XL Vision, of which we intend to pay $4.5 million
with the net proceeds from the sale of series D preferred stock and a warrant to
purchase 911,111 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 October 20, 1999 was
approximately $7.1 million, and is to be repaid with the net proceeds of this
offering.
8
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before investing in
our class A common stock. The risks and uncertainties described below may not be
the only risks that we face. 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 HAVE A LIMITED OPERATING HISTORY IN OUR CURRENT LINE OF BUSINESS 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 feedlots 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.
THE INTERNET LIVESTOCK PRODUCTS AND SERVICES MARKET IS NEW AND UNCERTAIN AND OUR
BUSINESS MAY NOT DEVELOP AS WE ANTICIPATE.
The Internet market for livestock products and services has not yet
developed, and its development is subject to substantial uncertainty. We cannot
assure you that this market will 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.
WE RECENTLY COMPLETED SIGNIFICANT BUSINESS ACQUISITIONS AND WE MAY MAKE
ACQUISITIONS OF OTHER BUSINESSES AND TECHNOLOGIES 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. We acquired
substantially all of the assets of CIN, LLC in February 1999, and Professional
Cattle Consultants, L.L.C. in May 1999.
9
<PAGE> 11
We also acquired all of the issued and outstanding stock of Cyberstockyard, Inc.
in March 1999. If we fail to successfully integrate the operations of these
companies, or any companies acquired in the future, with our business, we may
not be able to operate efficiently or profitably and our business and the
results of our operations would be harmed.
These acquisitions may result in:
- Difficulties in assimilating technologies, products, personnel and
operations;
- Diversion of our management's attention;
- 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 OUR ONLINE CATTLE SALES AND AUCTION SERVICES DO NOT ACHIEVE COMMERCIAL
ACCEPTANCE, OUR OPERATING RESULTS WILL BE HARMED.
We will rely on the success of our online cattle sales and auction services
for a substantial portion 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. Any
failure to successfully gain commercial acceptance of these services would harm
our business and the results of our operations.
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 FINANCIAL CONDITION MAY
BE HARMED AND OUR BUSINESS WILL NOT ULTIMATELY BE FINANCIALLY VIABLE.
We have incurred significant net losses since inception. We reported a net
loss of approximately $5.5 million for the year ended December 31, 1997 and
approximately $7.8 million for the year ended December 31, 1998. We expect to
continue to incur significant losses in the future. As of June 30, 1999, we had
accumulated net losses totaling approximately $22.8 million. Our revenue may not
grow or may not even continue at its current level and, as a result, the results
of our operations may be harmed and our business may not be financially viable
in the future. To achieve profitability we must, among other things:
- Gain commercial acceptance of our online cattle sales and auction
services;
- Continue to expand the number of livestock industry participants using
our network;
- Continue to obtain access to data from feedlots to adequately address the
information needs of our customers;
- Respond to competitive developments;
- Increase our brand recognition;
- Successfully introduce new products and services; and
- Continue to upgrade and enhance our technologies to accommodate expanded
product and service offerings and increased customer traffic.
If we are unable to achieve any of these goals, our business may be harmed.
10
<PAGE> 12
A DECLINE IN THE DEMAND FOR BEEF OR A DECLINE IN THE PRICE OF HIGH QUALITY BEEF
RELATIVE TO LOWER QUALITY BEEF COULD HARM OUR BUSINESS.
We currently derive a majority 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. Furthermore, sales of NutriCharge are dependent on the price of
high grade beef relative to lower grade beef. The economic benefit to a customer
of using NutriCharge is based on receiving a substantial premium for higher
quality beef over lower grade beef. Because NutriCharge is designed to
counteract the negative effects of animal stress on the quality of beef, if the
price of high quality beef declines relative to that of lower grade beef, our
sales of NutriCharge could decline and our results of operations could be
harmed.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
We seek to grow by increasing transaction and subscription volume, adding
new products and services and by hiring additional employees. This 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 cannot
assure you that we will be able to effectively or successfully manage our
growth.
We depend upon XL Vision for accounting, management and administrative
resources. We are currently in the process of establishing our own corporate
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 CREATE, DEVELOP, LICENSE AND PROTECT PROPRIETARY CONTENT,
TECHNOLOGIES AND INTELLECTUAL PROPERTY, OUR BUSINESS AND COMPETITIVE POSITION
WILL BE HARMED. ANY LITIGATION RELATING TO OUR INTELLECTUAL PROPERTY COULD BE
COSTLY AND COULD PREVENT US FROM SELLING OUR PRODUCTS AND SERVICES IN THE
FUTURE.
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 and 31
pending U.S. trademark applications. 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. 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
11
<PAGE> 13
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.
In the sales transactions conducted through our Internet cattle sales and
auction services network, we typically purchase the cattle from the seller and
then resell the cattle to the buyer. In this process, we assume title to the
cattle for up to 48 hours. As a result, we assume all risk relating to the
cattle during that period, including that the cattle sale may not be completed
as anticipated. 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 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. We may also incorporate some of this technology into future
infrared products that we may develop. 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. Our inability to
maintain this license on commercially favorable terms or to replace the
technology if the license is terminated may harm our ability to sell our
NutriCharge product and future infrared products that may be developed.
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 a toll processing 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. 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. If ADM terminates our relationship without
12
<PAGE> 14
giving us the required 90 days' notice, 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 our key senior management,
technical and sales personnel. 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 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.
We may face product liability claims in connection with the sale and use of
our current and future products and services. We do not maintain product
liability insurance. A successful product liability claim brought against us
could harm our financial condition and reputation in the industry. Even if
unsuccessful, a product liability claim could result in costly litigation and
divert management's attention and resources.
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, many of which are beyond our control.
Therefore, you should not rely on period-to-period comparisons of results of
operations as an indication of our future performance. 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:
- Demand for our products and services;
- Our ability to retain existing customers and attract new customers;
- Product and price competition;
- 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 or our competitors;
- Continued purchases by our existing customers; and
- Significant downturns in our targeted markets.
As a result of these factors, our annual or 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.
13
<PAGE> 15
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 placed on feed during the third and fourth quarter of each
calendar year. 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 may need to be modified or upgraded to process information correctly
or risk system failure or miscalculations causing disruptions of normal business
activities. Based on our assessment to date, 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. 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 SECURITY SYSTEMS AND BACK-UP MECHANISMS ARE UNPROVEN, AND THEREFORE ARE
VULNERABLE TO DAMAGE OR INTERRUPTION WHICH WOULD HARM OUR ABILITY TO RELIABLY
SERVICE OUR CUSTOMERS.
Our systems and operations 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 have experienced minor
system interruptions in the past and may experience them again 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.
We are currently evaluating our business interruption insurance to determine
whether we have sufficient coverage to compensate us for losses that may occur
if any of our Internet-based services are interrupted.
14
<PAGE> 16
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. 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 commerce market does not grow or grows more slowly than
anticipated, our business, financial condition and results of operations will be
harmed.
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 network infrastructure necessary to sustain substantial growth in
usage of the Internet is not adequately developed and 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.
We may also need to devote substantial resources to updating our Web sites
and online services to support the growth of online commerce. If we fail to
adapt our products and services, we may be incompatible with new technologies or
be unable to accommodate new users.
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. 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 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.
15
<PAGE> 17
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. 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. Any imposition of liability
could negatively impact our reputation and result in increased insurance costs.
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.
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.
In addition, laws and regulations that apply to Internet communications,
commerce and advertising are becoming more prevalent. These regulations 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. A number of laws and regulations may also
be adopted covering e-commerce issues such as user privacy, pricing, content,
copyrights, distribution, antitrust matters, taxation and quality of products
and services. 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 consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over 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.
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 may develop Internet products or services that are
superior to, or have greater market acceptance, than
16
<PAGE> 18
our solutions. 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.
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 % 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.
Currently, one member of our board of directors is an officer of Safeguard
and a director of both Internet Capital Group and XL Vision, one member of our
board of directors is an executive officer of Safeguard, one member of our board
of directors is the Chief Executive Officer and the Chairman of the Board of XL
Vision, one member of our board of directors is a director of XL Vision and
Safeguard and one member of our board of directors is an executive officer of
Internet Capital Group. In addition, Internet Capital Group has the right to
elect another director to our board. Under the joint venture agreement,
Safeguard and Internet Capital Group have agreed to vote for two designees of
Safeguard and two 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.
The concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which could reduce the market price of our common
stock.
WE WILL HAVE BROAD DISCRETION IN USE OF THE PROCEEDS FROM THIS OFFERING AND
THEREFORE 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 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. 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.
17
<PAGE> 19
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;
- Approximately additional shares may be sold after the
expiration of 180-day lock-up agreements; and
- Approximately additional shares may be sold on the
exercise of stock options or warrants after the expiration of the 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.
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. Any
significant fluctuations in the future might result in a material decline in the
market price of our common stock. 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.
18
<PAGE> 20
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 $ 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 OUR STOCKHOLDERS.
Although our outstanding preferred stock will convert to common stock when
this offering is consummated, and we do not currently plan to issue any shares
of preferred stock, 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 preferred stock may result in the loss of voting control to others. As a
result, the market price of our common stock and the voting and any other rights
of the holders of our common stock may be harmed.
DELAWARE LAW MAY DETER POTENTIAL ACQUISITION BIDS FOR OUR BUSINESS, INCLUDING
BIDS WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS.
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 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.
19
<PAGE> 21
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.
20
<PAGE> 22
USE OF PROCEEDS
We expect to receive approximately $ million in net proceeds from the
sale of the shares of class A common stock in this offering, assuming
an initial public offering price of $ per share, underwriters' discount of
$ and our offering expenses of $ . We expect to receive
approximately $ 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 in
full amounts due to XL Vision and Safeguard. As of September 30, 1999,
approximately $6.0 million was owed to XL Vision, of which we intend to pay $4.5
million with the net proceeds from the sale of series D preferred stock and a
warrant to purchase 911,111 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. As of October 20, 1999, approximately $7.1 million
of principal was owed to Safeguard, which we intend to repay with the proceeds
of this offering.
In addition, we intend to use the net proceeds of this offering for payment
of a $1.4 million debt related to a 19% investment in Turnkey Computer Systems,
Inc., which is due and payable upon consummation of this offering. We also
intend to use the proceeds from this offering for working capital and other
general corporate purposes, including:
- Increased domestic and international sales and marketing expenditures;
- Increased research and development expenditures; and
- Capital expenditures made in the ordinary course of business.
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.
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.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of June 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 911,111 shares of class B common stock for $38.8
million in cash and a 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; and
- On a pro forma as adjusted basis to give effect to:
- The events described in the two preceding paragraphs; and
- The sale of the 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 $ per
share, after deducting underwriting discounts and commissions and
our estimated offering expenses.
22
<PAGE> 24
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>
JUNE 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total indebtedness.................................. $ 8,443 $ 3,943 $
-------- -------- --------
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 $0.01 per share,
100,000,000 shares authorized:
Class A common stock, 92,711,110 shares
designated; 5,563,780 shares issued and
outstanding actual; 15,507,386 shares issued
and outstanding pro forma; ________ shares
issued and outstanding pro forma as
adjusted..................................... 56 155
Class B common stock, 7,288,890 shares
designated; no shares issued and outstanding
actual; 4,555,556 shares issued and
outstanding pro forma and pro forma as
adjusted..................................... -- 46 46
Additional paid-in capital........................ 23,458 62,227
Accumulated deficit............................... (22,768) (22,768) (22,768)
Note receivable from Internet Capital Group,
Inc. .......................................... -- (20,815) (20,815)
Unearned compensation............................. (68) (68) (68)
-------- -------- --------
Total stockholders' equity................... 777 18,777
-------- -------- --------
Total capitalization...................... $ 9,220 $ 22,720 $
======== ======== ========
</TABLE>
This table does not include the following:
- 1,954,920 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
June 30, 1999 at a weighted average exercise price of $1.74 per share, of
which options to purchase 398,095 shares of class A common stock were
exercisable at a weighted average exercise price of $1.39 per share;
- 672,800 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of June 30, 1999;
- 911,111 shares of 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; and
- 50,000 shares of class A common stock issued in connection with our
investment in Turnkey Computer Systems, Inc. on August 16, 1999.
23
<PAGE> 25
DILUTION
As of June 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 911,111 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 automatic conversion of our preferred stock into shares of our common stock,
which will automatically occur immediately prior to the consummation of this
offering, was approximately $12.2 million or $0.61 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 June 30, 1999, our
net tangible book value, on a pro forma basis as adjusted for the sale of the
shares of our class A common stock, based on an assumed initial public
offering price of $ per share, and after deducting the underwriting
discounts and commissions and our estimated offering expenses, would have been
approximately $ per share. This represents an immediate increase of $
per share to existing stockholders and an immediate dilution of $ share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $
Pro forma net tangible book value per share at
June 30, 1999..................................................... $0.61
Increase in pro forma net tangible book value per share
attributable to new investors.........................
-----
Pro forma net tangible book value per share after the
offering.................................................
-----
Dilution per share to new investors........................ $
=====
</TABLE>
The following summarizes on a pro forma basis as of June 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 $ 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...... 20,062,942 $42,275,211 $2.11
New investors..............
---------- -------- ----------- --------
Total.................
========== ======== =========== ========
</TABLE>
The total consideration does not include the non-cash portion of the
consideration for the series D preferred stock and warrant described above.
The information set forth above does not include the following:
- 1,954,920 shares of class A common stock issuable upon the exercise of
outstanding options granted under our equity compensation plans as of
June 30, 1999 at a weighted average exercise price of $1.74 per share, of
which options to purchase 398,095 shares of class A common stock were
exercisable at a weighted average exercise price of $1.39 per share;
- 672,800 additional shares of class A common stock available for issuance
under our 1996 and 1999 equity compensation plans as of June 30, 1999;
- 911,111 shares of 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; and
- 50,000 shares of class A common stock issued in connection with our
investment in Turnkey Computer Systems, Inc. on August 16, 1999.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years
ended December 31, 1997 and 1998 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 six months ended June 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. 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>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, JUNE 30, DECEMBER 31, ENDED
----------------- ----------------- 1998 JUNE 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 $ 664 $ 2,578 $ 2,283 $ 2,745
Cost of revenue.............................. -- 2,623 1,037 2,768 2,801 2,840
Operating expenses:
Selling, general and administrative........ 628 3,660 1,331 4,069 4,815 4,521
Research and development................... 728 1,109 546 1,450 1,451 1,486
Total operating expenses................. 1,356 4,769 1,877 5,519 6,266 6,007
Interest expense/other income, net........... 141 332 162 289 315 300
Profit (loss) from continuing operations..... $(1,497) $(5,932) $(2,412) $(5,998) $(7,099) $(6,402)
======= ======= ======= ======= ======= =======
Profit (loss) per common share from
continuing operations -- basic and
diluted.................................... $ (4.89) $ (1.70) $ (0.93) $ (1.15) $ (1.74) $ (1.18)
======= ======= ======= ======= ======= =======
Weighted average number of common shares
outstanding -- basic and diluted........... 306 3,486 2,607 5,223 4,086 5,403
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
----- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash.................................................. $ -- $ -- $ 2 $ -- $ -- $ 663
Total assets.......................................... -- 6 260 2,165 6,602 11,928
Total indebtedness.................................... 411 1,747 3,636 8,040 5,572 8,443
Total stockholders' equity (deficit).................. (411) (1,742) (3,457) (6,875) 3 777
</TABLE>
25
<PAGE> 27
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
eMerge Interactive, Inc. is a leading 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
solution through our Internet-based information and transaction platform, our
Web-enabled private network, 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 sales of cattle through Cyberstockyard, NutriCharge,
equine imaging systems and our management information solutions service.
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 incubates imaging-related technology companies. Our initial focus
was on the transportation market in which we sold our navigational infrared
imaging system, the AMIRIS system. In 1997, we expanded our infrared
applications with the development of an equine imaging system used by
veterinarians primarily for the early detection of health problems in horses. In
July 1997, we also completed our first round of private financing and began our
direct relationship with Safeguard. Safeguard, XL Vision's largest stockholder,
was the largest single purchaser of our series A preferred stock.
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. 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 October 1999, we signed a securities purchase agreement with Internet Capital
Group, an affiliate of Safeguard, under which Internet Capital Group will become
one of our principal stockholders. Internet Capital Group is an Internet holding
company that invests in business-to-business electronic commerce companies.
ACQUISITIONS
In February 1999, we purchased substantially all of the tangible and
intangible assets of CIN, LLC. These assets included the Feedlot Information
System, a proprietary, patent pending, information system for cattle feedlots.
The purchase price for the assets consisted of 600,000 shares of our class A
common stock valued at $720,000, the assumption of up to $600,000 of
liabilities, a cash payment due in October 1999 of $383,000, and an agreement to
26
<PAGE> 28
pay the first $350,000 from Internet sales of third-party products over the Web
site. In addition, as part of this agreement, we agreed to assume a $177,000
liability related to employee bonuses and an outstanding research grant
obligation.
In March 1999, we acquired 100% of the common stock of Cyberstockyard, Inc.
for 200,000 shares of our class A common stock valued at $450,000. 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 $1.8 million in cash and the assumption of
approximately $30,000 in liabilities. 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
of each period. 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 six months ended June 30, 1999 was $6.4 million
compared to the actual loss from continuing operations of $6.0 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.
As a result of these acquisitions, the products and services we currently
offer and their related costs are substantially different from our historical
products and services and therefore our historical financial results should not
be considered indicative of future performance.
We have incurred significant net losses since our inception. At June 30,
1999, we had an accumulated deficit of $22.8 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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
We recognize revenue in accordance with the terms of the sale or contract,
generally as products are shipped or services are provided. We bear inventory
risk until the sale of our products and credit risk until full payment is
received from our customers. In cattle sales transactions, we purchase cattle
from the seller, take title at shipment and own as inventory until delivered to
and accepted by the buyer, typically a 24 to 48 hour period. We act as a
principal in purchasing cattle from our suppliers and selling them to our
customers so that we recognize revenue equal to the amount paid by our customers
for the cattle. Gross profit on sale transactions is determined by the fee that
we add to the purchase price of the cattle before we sell them.
Revenue increased 288% from $664,000 for the six months ended June 30, 1998
to $2.6 million for the six months ended June 30, 1999. This increase is due
primarily to the
27
<PAGE> 29
initiation of cattle sales as a result of our acquisition of Cyberstockyard,
Inc. in March 1999 and increased sales of our equine imaging systems, which we
began selling in March 1998. The remainder of the increase resulted from our
initial sales of NutriCharge and the sale of subscriptions to our comparative
feedlot analysis and market information service.
Cost of revenue consists primarily of the direct cost to acquire cattle,
NutriCharge and equine imaging systems components and indirect costs such as
manufacturing overhead, support personnel and site operations. Our gross loss
decreased from $373,000 for the six months ended June 30, 1998 to a gross loss
of $190,000 for the six months ended June 30, 1999. The decrease in gross loss
is due primarily to an increase in revenue.
Selling, general and administrative expenses increased 206% from $1.3
million for the six months ended June 30, 1998 to $4.1 million for the six
months ended June 30, 1999.
Our sales and marketing expenses consist primarily of salaries and related
costs, commissions for sales and marketing personnel, advertising, travel and
entertainment, trade shows and consulting fees. Our sales and marketing expenses
increased 256% from $723,000 for the six months ended June 30, 1998 to $2.6
million for the six months ended June 30, 1999 due primarily to the increased
staffing, related costs, advertising, and consulting 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 and
related costs for executives and administrative and professional service fees,
including administrative support fees to XL Vision and Safeguard. General and
administrative expenses increased 147% from $608,000 for the six months ended
June 30, 1998 to $1.5 million for the six months ended June 30, 1999. The
increase in expenses was primarily due to increases in the number of personnel
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 systems
and, to a lesser extent, depreciation on equipment used for development. Our
expenses increased 165% from $546,000 for the six months ended June 30, 1998 to
$1.5 million for the six months ended June 30, 1999 due to increased development
costs associated with our integration and expansion of the products acquired
through acquisitions in this period. 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 78% from $162,000 for the six
months ended June 30, 1998 to $289,000 for the six months ended June 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 six months of 1998 or the first six months of 1999. As of June 30, 1999,
we had approximately $20 million of federal income tax loss carry forwards that
can be used 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.
28
<PAGE> 30
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.
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.
29
<PAGE> 31
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, March 31, 1999 and June 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,
1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Revenue.......................... $ 323 $ 342 $ 442 $ 685 $ 605 $ 1,973
Cost of revenue.................. 459 578 649 937 540 2,228
Operating expenses............... 930 948 1,237 1,654 1,962 3,557
Interest expense/other income,
net............................ 77 85 85 85 127 162
Profit (loss) from continuing
operations..................... $(1,143) $(1,269) $(1,529) $(1,991) $(2,024) $(3,974)
======= ======= ======= ======= ======= =======
Profit (loss) from continuing
operations per common share --
basic and diluted.............. $ (0.44) $ (0.49) $ (0.38) $ (0.43) $ (0.41) $ (0.73)
======= ======= ======= ======= ======= =======
</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. As of October 27, 1999, we have raised approximately $27.6 million from
the sale of our common stock and preferred stock, not including $18.0 million,
which we expect to receive in cash, and $20.8 million, which we expect to
receive one year from the date the series D preferred stock and warrant purchase
is completed. At June 30, 1999, we had approximately $663,000 in cash and
indebtedness to XL Vision and its affiliates of $8.4 million. We plan to repay
$4.5 million of this outstanding debt balance from the cash proceeds of the sale
of our series D preferred stock upon completion of the series D preferred stock
and warrant purchase, which is expected to occur in November 1999.
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 $3.0
million for the six months ended June 30, 1999. Cash used in operating
activities from inception through June 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 $4.5 million for the six months ended June 30, 1999.
Net cash used in investing activities in these periods consisted mostly of
business acquisitions.
Net cash provided by financing activities was $1.9 million in 1996, $6.5
million in 1997, $9.8 million in 1998 and $8.2 million for the six months ended
June 30, 1999. Cash provided by financing activities consisted primarily of the
sale of our stock and borrowings from XL Vision.
30
<PAGE> 32
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 bear interest at the prime lending rate plus 1% and are payable on November
30, 1999.
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
50,000 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% 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% and is payable on demand. In October, we cancelled these
outstanding notes in exchange for a note in the amount of $7.1 million. The note
is due in full in one year, 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.
In October 1999, we agreed to issue 4,555,556 shares of series D preferred
stock and a warrant to purchase 911,111 shares of class B common stock to
Internet Capital Group for aggregate consideration of $38.8 million, pending
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976. We expect to receive $18.0 million of this amount in
cash and $23.0 million in the form of a non interest-bearing promissory note,
which is due one year from the date the series D preferred stock and warrant
purchase are completed. Interest on the promissory note was imputed at 9.5% and
amounts to $2.2 million over the life of the note. We expect to complete the
series D preferred stock and warrant purchase in November 1999.
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 and the net proceeds from this offering will
be sufficient to meet our working capital and capital expenditures needs for the
foreseeable future.
YEAR 2000 COMPLIANCE
We may realize exposure and risk if the systems on which we are dependent
to conduct our operations are not year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. 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. However, such upgrades and
replacements may not be
31
<PAGE> 33
completed on schedule or within estimated costs or may not successfully address
our year 2000 compliance issues. As of June 30, 1999, 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
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 production and operational facilities that support
our Web sites are not year 2000 compliant, portions of our Web sites may become
unavailable. We believe that we can quickly address any difficulties that may
arise. In the event that our web-hosting facilities are not year 2000 compliant,
our Web sites would be unavailable and we would not be able to deliver services
to our users. Our contingency plans include having sufficient numbers of
technical employees and consultants available in the event of a failure related
to production and operational facilities. If our present efforts to address the
year 2000 compliance issues are not successful, or if suppliers and other third
parties with which we conduct business do not successfully address such issues,
our business, operating results, financial position and cash flows could be
materially and adversely affected.
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 June 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.
32
<PAGE> 34
BUSINESS
OVERVIEW
eMerge Interactive, Inc. is a leading 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
solution through our Internet-based information and transaction platform, our
Web-enabled private network, 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
family of integrated Web sites and our Web-enabled private network provide:
- Livestock procurement services consisting of cattle sales and auctions;
- Customer-specific daily feedlot operations analysis, comparative cattle
industry analysis and 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, based on U.S.
Department of Agriculture statistics, the cattle industry is the largest segment
of the American agricultural economy, accounting for approximately $36 billion
in reported sales of live cattle in 1997. On an annual basis, the U.S. beef
production industry spends approximately $600 million in medication and $6
billion in feed. At the retail level, the cattle industry generates
approximately $54 billion in sales of beef and related by-products annually.
Furthermore, worldwide cattle production is three times greater than U.S.
production.
[PRODUCERS, FEEDLOTS, PACKERS GRAPHIC]
33
<PAGE> 35
INDUSTRY PARTICIPANTS
The U.S. beef production chain can be classified into three primary
segments: producers, feedlots, and packers.
Producers
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 in an average herd size of approximately
35 head for 12-18 months, are aggregated into larger herds and sold to
centralized feedlots to increase their weight and value.
Feedlots
Feedlots manage the health and growth of the cattle through an aggressive
regimen of feeding, which is designed to prepare the cattle for harvest. 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. Feedlots typically purchase cattle weighing 300 to 900 pounds and
are then generally fed for a period of 110 to 250 days. 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, many buyers are forced to
purchase cattle from livestock brokers without having the opportunity to
visually survey the cattle. In addition, this current method of exchange does
34
<PAGE> 36
not facilitate 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
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. It is estimated that sick animals yield approximately $60 per head less
than comparable healthy animals which represents a significant loss based on an
average price of $450 per head.
THE LACK OF CURRENT AND ACCURATE INFORMATION IMPACTS ANIMAL PERFORMANCE
Currently, the industry collects and analyzes 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
Few cattle producers receive data related to the feed performance and
quality grades of their animals, making herd management difficult.
Animal-specific health and medication information is rarely passed on to
subsequent buyers at or prior to the feedlot, often resulting in unnecessary
additional medication.
Feedlots
Most information currently used in livestock management is gathered at the
feedlot. 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, they are less effective in
daily decision-making.
Packers
Packers collect critical carcass and quality information such as weight,
dimension, yield and meat quality grade at the end of the cattle production
chain. 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 consequently very little health and
quality data is provided to feedlots or producers on these cattle.
35
<PAGE> 37
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 about
production techniques and product genetics disseminated by producers and
feedlots will minimize redundant medical treatments and enable more accurate
brand differentiation 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 platform 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. According to the Gallup and Agricultural
Publisher's Survey, it is estimated that over 22% of large producers in the beef
industry today are using the Internet for primary information in the conduct of
their daily business, and this figure is expected to increase to over 55% by the
year 2001.
THE eMerge INTERACTIVE SOLUTION
We combine content, community and commerce to create an online marketplace
for the cattle industry. We offer our comprehensive cattle solution through our
Internet-based information and transaction platform, our Web-enabled private
network, 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.
36
<PAGE> 38
BENEFITS TO CATTLE INDUSTRY PARTICIPANTS
<TABLE>
<CAPTION>
PRODUCER FEEDLOT PACKER
-------- ------- ------
<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 national market pricing that eventually reduces
the amount of commission fees paid by the cattle industry as a whole, and
thereby reduces the cost to produce cattle. Through this comprehensive online
marketplace, we also have the ability to sell additional products and services
that are designed to improve productivity within the livestock industry. For
example, to help our customers reduce the effects of pre-harvest stress in their
cattle, we offer NutriCharge, our proprietary restorative feed supplement.
PROPRIETARY INFORMATION SERVICES AND MANAGEMENT TOOLS
We provide the cattle industry with Web-enabled software applications and
management tools designed for the more efficient and profitable production of
cattle. Through our integrated suite of 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. Further,
through our information system, we collect and analyze cattle data, such as
feeding and medication history from a number of our customer's disparate
systems. These analyses are compiled into daily reports, which customers access
through their information systems and use to improve their daily management
decisions.
37
<PAGE> 39
As part of our comprehensive solution, we also provide an online community
for the cattle industry where users can actively communicate with our staff of
industry experts. 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 upon our position as a leading provider of
business-to-business electronic commerce products, services and solutions for
the livestock industry. Our business strategy includes the following key
elements:
LEVERAGE OUR LEADING MARKET POSITION TO BUILD BRAND AWARENESS AND FURTHER
ESTABLISH OUR ONLINE MARKETPLACE
We seek to combine our industry expertise with the first Internet-enabled
cattle information and commerce platform 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 and management tools to our customers. We believe our May 1999
acquisition of Professional Cattle 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.
38
<PAGE> 40
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 strategic relationships. We currently have strategic
relationships for the development of proprietary technology 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.
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 intend to expand beyond the United
States through strategic acquisitions or by expanding our capabilities and sales
personnel into the international market. We believe opportunities exist to apply
our solution in other regions of North and South America, Asia/Pacific and
Europe.
Extend Our Products and Services to the Retail Segment of the Beef Industry
As part of our comprehensive solution, 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 packer will allow
our customers to verify the source, history and quality of their beef, thereby
enabling them to develop a variety of brands of beef for retail purposes.
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 solution to
the swine and dairy markets.
THE eMerge INTERACTIVE EXPERIENCE
We offer our customers a comprehensive set of Internet-based business
solutions designed to address the needs of the livestock industry. Our products
and services can be accessed through our family of integrated Web sites. These
sites include:
- CattleInfoNet.com, our platform for our comprehensive solution;
- Cyberstockyard.com, our online cattle sales and auction site; and
- PCC-online.com, our cattle industry-specific information Web site.
In addition, through our Web-enabled private network, Feedlot Information
System, we offer our feedlot customers specific daily feedlot operations
analysis and management tools.
39
<PAGE> 41
THE eMerge MARKETPLACE
<TABLE>
<S> <C>
----------------------------------------------------------------------------------
CATTLEINFONET.COM
- Industry news
- Regional weather
- 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>
* Expected to be offered in December 1999
CATTLEINFONET.COM
CattleInfoNet.com is our industry-specific Web site that serves as the
platform for our comprehensive solution to cattle industry participants. This
site features content to facilitate cattle management, including industry news,
weather and 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 national market pricing data 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
40
<PAGE> 42
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.
MANAGEMENT INFORMATION SOLUTIONS
The Feedlot Information System
The Feedlot Information System, our Web-enabled private network, provides
feedlot customers daily information services. This secure application resides on
our customers' operating systems. 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 includes 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 Web-based 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
41
<PAGE> 43
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 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. Our system is used by veterinarians to detect heat as
one of the first indicators of inflammation or injury in horses and exotic
animals and is lightweight, portable and has a high degree of resolution and
sensitivity.
STRATEGIC RELATIONSHIPS AND PARTNERS
We have entered into agreements for the development of technology with a
division of the Canadian government. Under our license agreement, 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.
Please see the section entitled Intellectual Property for a description of the
license.
We have entered into a Research Support Agreement with another division of
the Canadian government, the Lethbridge Research Centre, under which we provide
one of our infrared imaging systems and technical support in exchange for a
right of first refusal to license any resulting technology on potential
applications of infrared thermography to livestock.
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
42
<PAGE> 44
and commercialization of technology developed and patented by them for the
detection of small, diluted quantities of mammalian fecal matter on animal
carcasses. When commercialized, we believe that this technology may reduce
safety inspection and processing costs at packing plants while reducing e-coli
contamination risks.
In August 1999, we entered into an agreement to acquire 19% of the common
stock of Turnkey Computer Systems, Inc., the leading provider of
administrative/accounting legacy systems to feedlots, for 50,000 shares of our
class A common stock valued at $400,000 and future cash payments of $1.4
million. In connection with this investment, we became Turnkey's exclusive
online provider of cattle and feed sales.
BUSINESS ACQUISITIONS
CIN, LLC
In February 1999, we purchased substantially all of the assets of CIN, LLC,
a company which developed, marketed, licensed and distributed software programs
for use in animal food sciences markets. In connection with this acquisition, we
issued 600,000 shares of our class A common stock valued at $720,000, the
assumption of up to $600,000 of liabilities, a cash payment due in October 1999
of $383,000, and an agreement to pay the first $350,000 from Internet sales of
third-party products over the Web site. In addition, as part of this agreement,
we agreed to assume a $177,000 liability related to employee bonuses and an
outstanding research grant obligation.
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. Cyberstockyard, Inc. was purchased for 200,000 shares of our class
A common stock valued at $450,000.
PROFESSIONAL CATTLE CONSULTANTS, L.L.C.
In May 1999, we purchased substantially all of the assets of Professional
Cattle Consultants, L.L.C. for $1.8 million in cash and the assumption of
approximately $30,000 in liabilities. 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.
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 $1.5 million for the six months
ended June 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.
43
<PAGE> 45
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.
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,
our products and services reach 159 of those feedlots, which account for 33% 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
44
<PAGE> 46
- 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 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 management
information solutions. 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 majority of our intellectual property rights are licensed to us by
third parties. For example, our 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
45
<PAGE> 47
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 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.
Our 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 purchase of our
inventory 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
46
<PAGE> 48
- 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 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, at
fair market value. We currently do not have a written lease agreement. 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.
47
<PAGE> 49
MANAGEMENT
This table sets forth information with respect to our executive officers
and directors as of October 27, 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 Chief Operating Officer
Marvin L. Slosman.................... 35 Executive Vice President, Sales and Marketing
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. Prior to July 1997,
Mr. Abraham held several positions with General Electric Medical Systems,
including Global Business Manager of the Global Vascular X-ray business 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 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 1982 until 1996, Mr. Mathews held several
positions with General Electric Medical Systems, including General Manager of
the Global Positron Emission Tomography business located in Waukesha, Wisconsin
and Uppsala, Sweden.
48
<PAGE> 50
Marvin L. Slosman has served as the Executive Vice President, Sales and
Marketing of eMerge Interactive since August 1998. From April 1996 until July
1998, Mr. Slosman was a Division Manager for Cordis, Johnson and Johnson. From
1989 until 1996, Mr. Slosman held several positions with General Electric
Corporation, including Vice President at GE Capital TMS and as well as a number
of positions with GE Medical Systems. Mr. Slosman currently serves on the board
of directors of ReMar, Inc.
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. and Who?Vision
Systems, Inc.
Douglas A. Alexander has served as a member of the board of directors of
eMerge Interactive since April 1999. Mr. Alexander is Chairman of the Board of
VerticalNet, Inc., a managing director of Internet Capital Group, Inc. 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
at Safeguard Scientifics, Inc. since January 1998. From June 1996 until December
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. Mr. Forgash also 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., US
Interactive, Inc., Who?Vision Systems, Inc. and XL Vision, Inc.
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. 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 and is currently Managing Director of TL
Ventures, a company which manages a series of private equity funds. Since 1994,
Dr. Moller has served as Managing Director of Technology Leaders III and
Technology Leaders II Management L.P. Dr. Moller is a director of Who?Vision
Systems, Inc., Adolor Corporation and OraPharma, Inc. Dr. Moller serves on the
medical advisory board of Lankenau Research Institute.
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 to 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., Union Pacific
Resources Group Inc. and XL Vision, Inc.
49
<PAGE> 51
KEY EMPLOYEES WITH SIGNIFICANT INDUSTRY EXPERIENCE
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 November 1996 to April 1999, Mr. Brink served as the
Executive Director of the American Gelbvieh Association, a leading
breedvalue-based marketer of fed cattle and the largest breed-coordinated
alliance in the United States. Prior to November 1996, Mr. Brink was the
Director of Research of Cattle-Fax.
Scott Crain, D.V.M. has served as the Executive Vice President,
Professional Services of eMerge Interactive since March 1999. Dr. Crain also
maintains 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. He has also
served as an Assistant Professor of Beef Cattle Management at the University of
Illinois, Vice President of Education and Research for the American Polled
Hereford Association, Executive Director of the American Gelbvieh Association.
BOARD COMMITTEES
We have established an audit committee and a compensation committee. 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 audit and internal control functions.
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. In each of October 1997 and March
1999, we granted Dr. Poduska options to purchase 25,000 shares of our common
stock under our 1996 Equity
50
<PAGE> 52
Compensation Plan at an exercise price of $1.00 and $2.00 per share,
respectively. In April 1999, we granted Mr. Alexander options to purchase 80,000
shares of our common stock under our 1996 Equity Compensation Plan at an
exercise price of $3.00 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 $70,000 per year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS COMPENSATION
- --------------------------- ------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles L. Abraham......... 1998 $ 86,159 $35,000 600,000 $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. The potential
realizable value is calculated based on an assumed initial public offering price
of $ per share.
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... 400,000 30.0% $1.00 7/1/08
100,000 7.6% $1.00 7/1/08
100,000 7.6% $1.00 10/30/08
</TABLE>
The following table sets forth information concerning year end option
values for fiscal 1998 for the executive officers named in the Summary
Compensation Table above. There were no option exercises by these officers in
fiscal 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles L. Abraham........... 150,000 450,000
Ottmar Dippold............... 12,500 37,500
</TABLE>
51
<PAGE> 53
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 600,000 shares of common stock at $1.00 per share, of which 25% or
150,000 shares, vest at the grant date 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.
Marvin L. Slosman holds the position of Executive Vice President, Sales and
Marketing and receives an annual salary of $140,000 and a bonus of up to $56,000
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 125,000
shares of common stock at $1.00 per share and 25,000 shares of common stock at
$3.00 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 $135,000 and a bonus of up to $33,750 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 125,000 shares of common stock
at $1.00 per share and 25,000 shares of common stock at $3.00 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 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 180,000 shares of our common
stock at $3.00 per share. These options vest 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 1,735,000 shares. No more than
500,000 shares in the aggregate may be granted to any individual in any calendar
year. As of October 20, 1999, there were 1,584,470 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 1,000,000 shares. No more than 500,000 shares in the
aggregate may be granted to any individual in any calendar year. As of October
20, 1999, there were 427,700 shares issuable upon the exercise of outstanding
options granted under the 1999 plan.
52
<PAGE> 54
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.
53
<PAGE> 55
RELATED PARTY TRANSACTIONS
EQUITY AND DEBT FINANCING AGREEMENTS AND LICENSE AGREEMENT WITH XL VISION
From our inception in September 1994 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.
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 in exchange for canceling debt of $4.8 million. 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 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.
In February 1999, we signed a license agreement with XL Vision, granting XL
Vision a license to use our 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. If XL Vision forms a new company, we will
negotiate a long-term license agreement. In addition, XL Vision is obligated to
give us at least 25% of the new company. We are obligated to transfer all
amounts up to 25% of the company to Lost Pelican, LLC, formerly CIN, LLC. The
license agreement terminates on November 30, 1999.
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 A 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 October 1999, we amended the note to extend the
maturity date until November 30, 1999.
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
54
<PAGE> 56
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 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.
ISSUANCE OF PREFERRED STOCK AND A WARRANT TO INTERNET CAPITAL GROUP, INC.
On October 27, 1999, we agreed to issue 4,555,556 shares of series D
preferred stock and a warrant to purchase 911,111 shares of class B common stock
for the aggregate consideration of $38.8 million to Internet Capital Group,
Inc., subject to the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we expect to occur
in November 1999.
We will receive $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 will grant
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,
55
<PAGE> 57
financial management, human resource management, legal services, insurance
programs, and administrative services. We pay a fee of 1.5% of the contribution
margin of cattle sales, as defined in the agreement, and 1.5% for all other
sales, up to $300,000 annually, which is divided equally between Safeguard and
XL Vision. 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.
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.
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 currently do not have a written lease. We lease
our facilities at fair market value.
56
<PAGE> 58
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of eMerge Interactive's common stock as of October 27, 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 October
27, 1999 and shares acquirable upon conversion of our preferred stock.
Applicable percentage ownership in the following table is based on 20,119,442
shares of common stock and preferred stock outstanding as of October 27, 1999,
which assumes that the 4,555,556 shares of series D preferred stock issuable
under our securities purchase agreement with Internet Capital Group, Inc. have
been issued and converted into common stock, and shares immediately
following the completion of this offering. To the extent that any shares are
issued upon exercise of options, warrants or other rights to acquire eMerge
Interactive's 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)........................ 6,466,667 30.7% 50.2%
800 The Safeguard Building 435
Devon Park Drive Wayne, PA 19087
XL Vision, Inc.(2)(3).............. 4,846,500 24.1 18.0
10315 102nd Terrace Sebastian, FL
32958
Safeguard XL Capital L.P.(4)(10)... 4,181,315 20.8 15.5
800 The Safeguard Building 435
Devon Park Drive Wayne, PA 19087
XL Partners, L.P.(3)............... 2,446,500 12.2 9.1
10315 102nd Terrace Sebastian, FL
32958
Safeguard 99 Capital
L.P.(4)(5)(10)................... 1,340,000 6.5 4.9
800 The Safeguard Building 435
Devon Park Drive Wayne, PA 19087
</TABLE>
57
<PAGE> 59
<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)........ 1,000,000 5.0 3.7
c/o Judith Ackland
P.O. Box 197
Shickley, NE 68436
NAMED EXECUTIVE OFFICERS AND
DIRECTORS:
Charles L. Abraham(9).............. 300,000 1.5 *
Ottmar Dippold..................... 22,500 * *
John S. Scott, Ph.D.(11)........... 20,000 * *
Douglas A. Alexander............... -- * *
E. Michael Forgash................. -- * *
Thomas C. Lynch.................... -- * *
Christopher Moller, Ph.D........... -- * *
John W. Poduska, Ph.D. (9)......... 52,750 * *
OTHER EXECUTIVE OFFICERS:
T. Michael Janney (9).............. 37,500 * *
Scott L. Mathews (9)............... 45,000 * *
Marvin L. Slosman (9).............. 68,750 * *
All directors and executive
officers as a group (10
persons)......................... 524,000 2.6 1.9
SELLING STOCKHOLDERS:
Technology Leaders II(7)........... 856,000 4.3 3.2
Technology Leaders I(8)............ 803,250 4.0 3.0
Scott Calhoun...................... 50,000 * *
Richard Stanley, D.V.M.(9)......... 29,270 * *
</TABLE>
- -------------------------
(1) The share numbers for Internet Capital Group represent 4,555,556 shares of
class B common stock and a warrant to purchase 911,111 shares of class B
common stock that will be acquired under a securities purchase agreement
dated October 27, 1999. Holders of class B common stock are entitled to two
and one-half votes per share. These numbers also include 1,000,000 shares
of class A common stock that will be acquired from J Technologies, LLC
under a securities purchase agreement on October 27, 1999.
(2) The share numbers for XL Vision, Inc. include 500,000 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 2,446,500 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
purchased by Safeguard Scientifics, Inc. that have not been purchased by
its shareholders in the directed share subscription program.
58
<PAGE> 60
(5) The share numbers for Safeguard 99 Capital L.P. include options to acquire
340,000 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 1,000,000 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 funds 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 partners of Technology Leaders II Management, L.P. are (i)
Technology Leaders Management, Inc., a wholly-owned subsidiary of
Safeguard, (ii) Robert E. Keith, Jr., Gary J. Anderson, M.D., Mark J.
DeNino and Christopher Moller, Ph.D., a director of eMerge Interactive, and
(iii) four other corporations (the TLA Corporations) owned by natural
persons, one of whom is a director of Safeguard. 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 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 funds 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 general partnership among Technology
Leaders Management, Inc. and the Managing Directors of Technology Leaders
Management, Inc., other than Mark J. DeNino, and (iii) 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
59
<PAGE> 61
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
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:
- 270,000 shares by Mr. Abraham;
- 43,750 shares by Mr. Poduska;
- 37,500 shares by Mr. Janney;
- 45,000 shares by Mr. Mathews
- 68,750 shares by Mr. Slosman; and
- 5,000 shares by Mr. Stanley.
(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 4,846,500 shares
held by XL Vision.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
100,000,000 shares of common stock, $.01 par value per share, consisting of
92,711,110 shares of class A common stock and 7,288,890 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 October 27, 1999, there were 20,119,442 shares of common stock
outstanding, assuming the conversion of the shares of preferred stock then
outstanding and assuming the issuance of 4,555,556 shares of series D preferred
stock and their conversion in accordance with a securities purchase agreement
dated October 27, 1999. After giving effect to the sale of the
shares of our class A common stock in this offering, there will be
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
61
<PAGE> 63
offering, after the conversion of all outstanding shares of series A, series B,
series C and series D preferred stock into 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
62
<PAGE> 64
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.
WARRANTS
We have agreed to issue a warrant to Internet Capital Group to purchase up
to 911,111 shares of class B common stock upon the completion of the series D
preferred stock purchase. The warrant will be 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.
63
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be shares of our common
stock outstanding. Of the 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.
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.
64
<PAGE> 66
STOCK OPTIONS
As of October 20, 1999, there were outstanding options to purchase an
aggregate of 2,012,170 shares of our common stock, at a weighted average
exercise price of $2.03 per share, of which 577,095 were exercisable at a
weighted average of $1.32 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 October 20, 1999, we had an additional 572,300 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.
WARRANTS
On October 27, 1999, we agreed to issue a warrant to Internet Capital Group
to purchase up to 911,111 shares of class B common stock upon completion of the
series D preferred stock purchase, which we expect to occur in November 1999.
This warrant will be 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.
65
<PAGE> 67
PLAN OF DISTRIBUTION
Of the shares offered by this prospectus, shares are
being offered by means of an underwritten public offering and shares
are being offered by means of a directed share subscription program to
shareholders of Safeguard Scientifics, Inc., one of our principal stockholders.
UNDERWRITTEN PUBLIC OFFERING
Subject to the terms and conditions of an executed underwriting agreement,
the underwriters named below, through their representatives Adams, Harkness &
Hill, Inc., First Union Securities, Inc. and FAC/Equities, a division of First
Albany Corporation, have severally agreed to purchase from eMerge Interactive
the following numbers of shares of class A common stock at the public offering
price, less the underwriting discounts and commissions set forth on the cover
page of this prospectus.
<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 shares to be purchased by the underwriters
shares will be purchased from us and shares will be purchased from the
selling stockholders. None of the shares offered by the selling stockholders
will be sold in the directed share subscription program.
The underwriting agreement provides that the underwriters' obligation to
purchase shares of class A common stock depend 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 to the underwriters' obligations 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 directed share 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.
The representatives of the underwriters have advised us that the
underwriters propose to offer to 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 certain brokers and dealers. After the initial offering,
the underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional
shares of class A common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the class A common stock offered hereby. To the
extent that the underwriters exercise the option, each of the underwriters will
become
66
<PAGE> 68
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of class A common stock as the number of shares of class A
common stock to be purchased by it in the above table bears to . We
will be obligated, pursuant to the option, to sell these shares to the
underwriters to the extent the option is exercised. If any additional shares of
class A common stock are purchased, the underwriters will offer the additional
shares on the same terms as those on which the primary shares are being offered.
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act of 1933, as
amended.
Each of our officers, directors, stockholders and optionholders have agreed
not to offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designated to, or could be expected to, result in the
disposition of, any class A common stock for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part
without the prior written consent of Adams, Harkness & Hill, Inc. The consent
may be given at any time without public notice. We have entered into a similar
agreement.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of the class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the class A common stock. Specifically, the
underwriters may over-allot shares of the class A common stock in connection
with this offering, thus creating a short position in the class A common stock
for their own account. Additionally, to cover these over-allotments or to
stabilize the market price of the class A common stock, the underwriters may bid
for, and purchase, shares of the class A common stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of the class A common stock at a
level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
At our request, the underwriters have reserved approximately
shares of our class A common stock for sale at the initial public offering price
to our employees, directors and certain other persons with relationships to
eMerge Interactive. The number of shares of our class A common stock available
for sale to the general public will be reduced to the extent that such persons
purchase such reserved shares. Any reserved shares which are not so orally
confirmed for purchase within one day of the pricing of the offering will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our class A
common stock. Consequently, the initial public offering price for our class A
common stock will be determined by negotiation among us and the representatives
of the underwriters. Among the factors to be considered in determining the
public offering price will be:
- Prevailing market conditions;
- Results of our operations in recent periods;
- The present stage of our development;
67
<PAGE> 69
- The market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us; and
- Estimates of our business potential.
DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares of our class A
common stock in a directed share subscription program to shareholders of
Safeguard, one of our principal stockholders. Safeguard's shareholders may
subscribe for one share of our 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 directed share subscription program.
Safeguard or its designees will purchase from us any of the shares offered
by us under the program that are not purchased by the shareholders of Safeguard.
Although these shares were purchased directly from us as part of a registered
offering, Safeguard is one of our affiliates and may only sell these shares in
accordance with Rule 144 restrictions in subsequent registered offerings. In
addition, Safeguard has agreed, subject to limited exceptions, not to offer,
sell or otherwise dispose of any shares of our common stock, including shares
purchased by it in the directed share subscription program, for a period of 180
days after the date of this prospectus other than in connection with this
offering. Sales under the directed share subscription program will close on the
closing of the sale of the other shares offered to the public. It is expected
that sales under the directed share subscription program will be reflected in
each purchaser's book-entry account at the Depository Trust Company, if any,
shortly after 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. Distribution of share certificates
purchased through the directed share subscription program will be made to the
purchasers as soon as practicable following closing of the sale of the shares to
the public.
Prior to this offering, Safeguard beneficially owned % of our common
stock. After this offering, Safeguard will beneficially own % of our common
stock, assuming that all shares are purchased by shareholders of
Safeguard, and will beneficially own approximately % of our common stock
assuming that none of the shares are purchased by the shareholders of
Safeguard or Safeguard's designees. The purchase price under the program,
whether paid by Safeguard, its shareholders or Safeguard's designees, will be
the same price per share as set forth on the cover page of this prospectus. For
purposes of this prospectus, when we present financial data that reflects this
offering, it is assumed that all shares offered under the directed
share subscription program are sold. The underwriters, as a group, will receive
a percentage management fee on all shares offered through the directed
share subscription program, including any shares actually purchased by Safeguard
or Safeguard's designees. 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.
68
<PAGE> 70
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....... $ $
</TABLE>
The total proceeds before expenses to be received by eMerge Interactive
from both the underwritten public offering and the directed share subscription
program will be $ .
The expenses of the directed share subscription program, exclusive of the
management fee to be paid to the underwriters, are estimated at $ 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........................................ $24,117
NASD filing fee............................................. 9,175
Offering agent fees......................................... 25,000
Miscellaneous...............................................
</TABLE>
Safeguard has consented to being designated an underwriter with respect to
the shares included in the directed share 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 direct shares 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 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 directed share 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 for each of
the years in the three-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 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
69
<PAGE> 71
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 in Washington, D.C., New
York, New York and Chicago, Illinois. 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.
70
<PAGE> 72
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> 73
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> 74
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> 75
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> 76
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> 77
<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> 78
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> 79
<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> 80
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
F-9
<PAGE> 81
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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
F-10
<PAGE> 82
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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.
F-20
<PAGE> 92
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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.
F-21
<PAGE> 93
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, 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.
F-22
<PAGE> 94
eMERGE INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
SHARES
[eMerge INTERACTIVE LOGO]
CLASS A
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
ADAMS, HARKNESS & HILL, INC.
FIRST UNION SECURITIES, INC.
FAC/EQUITIES
-------------------------
<PAGE> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discounts and commissions and
underwriters' non-accountable expense allowance) payable in connection with this
offering of the rights and the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $
NASD filing fee.............................................
NASDAQ filing fee...........................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses (including legal fees)...........
Transfer agent and rights agent and registrar fees and
expenses..................................................
Miscellaneous...............................................
--------
Total.................................................. $
========
</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> 118
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 October 25, 1999, eMerge Interactive had sold to employees and
certain other persons an aggregate of 5,563,780 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 2,000,000 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 $1.00
per share. eMerge Interactive issued 70,000 shares of its class A common
stock to the shareholders of STS Agriventures, Ltd., at a price of $1.00
per share. In February of 1999, eMerge Interactive issued 600,000 shares of
class A common stock to CIN, LLC for substantially all of its assets,
including CIN, LLC, at a price of $1.20 per share. eMerge Interactive
issued 200,000 shares of class A common stock for 100% of the issued and
outstanding stock of Cyberstockyard, Inc. on March 29, 1999, at a price of
$2.00 per share. In August of 1999, eMerge Interactive issued 50,000 shares
of class A common stock 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 October 25, 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 October 1999, we agreed to issue 4,555,556 shares of series D
preferred stock to Internet Capital Group, Inc. at a purchase price of
$9.00 per share, payable in cash and a promissory note, subject to the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. In connection with the sale of preferred stock,
we have also agreed to issue to Internet Capital Group a warrant to
purchase up to 911,111 shares of class B common stock. All
II-2
<PAGE> 119
of such sales were made under the exemption from registration provided
under Section 4(2) of the Act.
Pursuant to eMerge Interactive's 1996 and 1999 Equity Compensation Plans,
eMerge Interactive has granted options to purchase a total of 2,012,170 shares
of common stock to its employees and certain other persons through October 20,
1999 at a weighted average exercise price of $2.03 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.
II-3
<PAGE> 120
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting 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, STS Agriventures, Ltd, Dr. Richard Stanley,
Sylvia Doerksen, Ian Turnbull, Ann Turnbull and David
Robinson.#
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 Stockholders Agreement dated July 29, 1998.#
</TABLE>
II-4
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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 Revolving Note dated July 21, 1999 from eMerge Interactive
to Safeguard Delaware, Inc., Amended Revolving Note dated
August 3, 1999 and second Amended Revolving Note dated
October 25, 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.
10.24 Promissory Note dated September 13, 1999 from eMerge
Interactive to Safeguard Delaware, Inc.#
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc.
10.26 Stockholders Agreement dated July 18, 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.#
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 Directed Share Subscription Program.
99.2 Form of letter from Adams, Harkness & Hill, Inc. to
Safeguard Scientifics, Inc. shareholders.#
</TABLE>
II-5
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
99.3 Form of letter from eMerge Interactive, Inc. to Brokers
describing the Directed Share Subscription Program.
99.4 Form of Subscription Form for Directed Share Subscription
Program.
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We intend to request 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.
(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.
II-6
<PAGE> 123
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-7
<PAGE> 124
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 6,
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 6, 1999
- --------------------------------------------- and Director
Charles L. Abraham (Principal Executive
Officer)
/s/ T. MICHAEL JANNEY Chief Financial Officer December 6, 1999
- --------------------------------------------- (Principal Financial
T. Michael Janney and Accounting
Officer)
* Chairman of the Board December 6, 1999
- ---------------------------------------------
John S. Scott, Ph.D.
* Director December 6, 1999
- ---------------------------------------------
Douglas Alexander
* Director December 6, 1999
- ---------------------------------------------
E. Michael Forgash
* Director December 6, 1999
- ---------------------------------------------
Thomas C. Lynch
* Director December 6, 1999
- ---------------------------------------------
Christopher Moller, Ph.D.
* Director December 6, 1999
- ---------------------------------------------
John W. Poduska, Sr., Ph.D.
/s/ CHARLES L. ABRAHAM December 6, 1999
- ---------------------------------------------
Charles L. Abraham
As Attorney-in-Fact
</TABLE>
II-8
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting 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, STS Agriventures, Ltd, Dr. Richard Stanley,
Sylvia Doerksen, Ian Turnbull, Ann Turnbull and David
Robinson.#
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 Stockholders Agreement dated July 29, 1998.#
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> 126
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.21 Revolving Note dated July 21, 1999 from eMerge Interactive
to Safeguard Delaware, Inc., Amended Revolving Note dated
August 3, 1999 and second Amended Revolving Note dated
October 25, 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.
10.24 Promissory Note dated September 13, 1999 from eMerge
Interactive to Safeguard Delaware, Inc.#
10.25 Promissory Note dated October 6, 1999 from eMerge
Interactive to Safeguard Delaware, Inc.
10.26 Stockholders Agreement dated July 18, 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.#
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 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 Directed Share Subscription
Program.
</TABLE>
- -------------------------
* Filed herewith.
# To be filed by amendment.
+ We intend to request 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 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 6, 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>
